Ossen Innovation Co., Ltd.
Annual Report 2012

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549 FORM 20-F ¨¨REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 OR xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2012 OR ¨¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to _____________. OR ¨¨SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of event requiring this shell company report: Commission file number: 001-34999 Ossen Innovation Co., Ltd.(Exact name of Registrant as Specified in its Charter) British Virgin Islands(Jurisdiction of Incorporation or Organization) 518 Shangcheng Road, Floor 17, Shanghai, 200120, People’s Republic of China(Address of Principal Executive Offices) Feng PengTel: +86 (21) 6888-8886 Fax: +86 (21) 6888-8666518 Shangcheng Road, Floor 17, Shanghai, 200120, People’s Republic of China(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: Title of Each ClassName of Each Exchange On Which RegisteredOrdinary shares, par value US$0.01 per share *Nasdaq Global Market * Ordinary shares are not traded in the United States; rather they are deposited with JP Morgan Chase Bank, N.A., as Depositary. Each American DepositaryShare represents one (1) ordinary share. Securities registered or to be registered pursuant to Section 12(g) of the Act: None(Title of Class) Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None(Title of Class) The number of outstanding shares of each of the issuer’s classes of capital or common stock as of December 31, 2012 was: 19,901,959 ordinary shares,par value $0.01 per share. Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨¨ No x 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 theSecurities Exchange Act of 1934. Yes ¨¨ No x Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe 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 requirementsfor the past 90 days. Yes x No ¨¨ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required tobe submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files). Yes x No ¨¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer ¨¨ Accelerated filer ¨¨ Non-accelerated filer x Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing: xU.S. GAAP ¨¨ International Financial Reporting Standards as issued by the International AccountingStandards Board ¨¨ Other ¨¨ 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  OSSEN INNOVATION CO., LTD.FORM 20-F ANNUAL REPORT TABLE OF CONTENTS Page PART I Item 1.Identity of Directors, Senior Management and Advisers1Item 2.Offer Statistics and Expected Timetable1Item 3.Key Information1Item 4.Information On The Company15Item 4A.Unresolved Staff Comments34Item 5.Operating And Financial Review And Prospects34Item 6.Directors, Senior Management And Employees52Item 7.Major Shareholders And Related Party Transactions56Item 8.Financial Information58Item 9.The Offer And Listing58Item 10.Additional Information59Item 11.Quantitative And Qualitative Disclosures About Market Risk69Item 12.Description Of Securities Other Than Equity Securities70 PART II Item 13.Defaults, Dividend Arrearages And Delinquencies71Item 14.Material Modifications To The Rights Of Security Holders And Use Of Proceeds71Item 15.Controls And Procedures72Item 16.[Reserved]73Item 16A.Audit Committee Financial Expert73Item 16B.Code Of Ethics73Item 16C.Principal Accountant Fees and Services74Item 16D.Exemptions From The Listing Standards For Audit Committees74Item 16E.Purchases Of Equity Securities By The Issuer And Affiliated Purchasers74Item 16F.Change In Registrant’s Certifying Accountant74Item 16G.Corporate Governance74 PART III Item 17.Financial Statements74Item 18.Financial Statements74Item 19.Exhibits75  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 UnitedStates and all references to “ADSs” refer to our American Depositary Shares, each of which represents one ordinary share. This annual report containstranslations of Renminbi amounts into U.S. dollars at specified rates solely for the convenience of the reader. We make no representation that the Renminbi orU.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 rateor at all. On March 30, 2013, the cash buying rate announced by the People’s Bank of China was RMB6.148 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 1995that represent our beliefs, projections and predictions about future events. All statements other than statements of historical fact are “forward-lookingstatements,” including any projections of earnings, revenue or other financial items, any statements of the plans, strategies and objectives of management forfuture operations, any statements concerning proposed new projects or other developments, any statements regarding future economic conditions orperformance, any statements of management’s beliefs, goals, strategies, intentions and objectives, and any statements of assumptions underlying any of theforegoing. Words such as “may”, “will”, “should”, “could”, “would”, “predicts”, “potential”, “continue”, “expects”, “anticipates”, “future”, “intends”,“plans”, “believes”, “estimates” and similar expressions, as well as statements in the future tense, identify forward-looking statements. These statements are necessarily subjective and involve known and unknown risks, uncertainties and other important factors that could cause ouractual results, performance or achievements, or industry results, to differ materially from any future results, performance or achievements described in orimplied by such statements. Actual results may differ materially from expected results described in our forward-looking statements, including with respect tocorrect measurement and identification of factors affecting our business or the extent of their likely impact, and the accuracy and completeness of the publiclyavailable 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 ofwhether, or the times by which, our performance or results may be achieved. Forward-looking statements are based on information available at the time thosestatements 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 actualperformance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause suchdifferences include, but are not limited to, those factors discussed under the headings “Risk Factors”, “Operating and Financial Review and Prospects,” andelsewhere in this report. ITEM 1.IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS Not Applicable. ITEM 2.OFFER STATISTICS AND EXPECTED TIMETABLE Not Applicable. ITEM 3.KEY INFORMATION 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 statementsand their related notes and the section entitled “Operating and Financial Review and Prospects” included elsewhere in this annual report. The consolidatedstatements of income data for the fiscal years ended December 31, 2010, 2011 and 2012 and the balance sheet data as of December 31, 2011 and 2012 arederived from audited consolidated financial statements included elsewhere in this annual report. The consolidated statements of income data for the fiscal yearsended December 31, 2008 and 2009 and the balance sheet data as of December 31, 2008, 2009 and 2010 are not included in this annual report. Our historicalresults for any prior period are not necessarily indicative of results to be expected in any future period. 1 Year Ended December 31, 2012 2011 2010 2009 2008 Revenues $122,397,886 $118,616,971 $117,453,024 $101,087,796 $82,742,310 Cost of goods sold 111,611,457 96,588,173 92,298,319 86,559,925 70,532,733 Gross profit 10,786,429 22,028,799 25,154,705 14,527,871 12,209,577 Selling and distribution expenses 917,074 1,216,504 660,934 503,724 4,326,491 General and administrative expenses 3,950,934 2,747,514 1,796,995 2,243,672 1,316,606 Total Operating Expenses 4,868,008 3,964,018 2,457,929 2,747,396 5,643,097 Income from operations 5,918,421 18,064,781 22,696,776 11,780,475 6,566,480 Interest expenses, net (3,556,045) (3,480,766) (2,437,426) (1,496,712) (1,891,671)Other income, net 911,430 609,666 151,757 183,495 380,766 Income before income taxes 3,273,806 15,193,681 20,411,107 10,467,258 5,055,575 Income taxes (575,428) (2,139,029) (2,865,372) (740,053) (291,520)Net income 2,716,378 13,054,652 17,545,735 9,727,205 4,764,055 Less: Net Income attributable to non-controlling interest 335,099 1,506,947 2,897,397 1,714,670 809,437 Net income attributable to controlling interest 2,381,279 11,547,704 14,648,338 8,012,535 3,954,618 Other comprehensive income Foreign currency translation gain 703,573 3,102,645 1,649,960 31,146 420,883 Total other comprehensive income 703,573 3,102,645 1,649,960 31,146 420,883 Comprehensive Income $3,084,852 $14,650,349 $16,298,298 $8,043,681 $4,375,501 Weighted average shares outstanding 19,942,333 20,000,000 15,150,685 15,000,000 15,000,000 Earnings per share* 0.12 0.58 0.97 0.53 0.26 * Calculation is based on Net income attributable to controlling interest and the weighted average shares outstanding 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 togetherwith 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 inChina 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 anyother risks and uncertainties that are not presently foreseeable to us, actually occur, our business, financial condition, results of operations, liquidityand our future growth prospects could be materially and adversely affected. Risks Related to Our Business and Our Industry Our revenues are highly dependent on a limited number of customers and the loss of any one of our major customers could materially andadversely affect our growth and our revenues. During the years ended December 31, 2012, 2011 and 2010, our six largest customers contributed 78.1%, 64.2% and 74.4% 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 materialadverse 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 theexclusive 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 asubstantial reduction in the products that we provide to any customer and that may not be predictable. For example, our customers may decide to reducespending 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, adecrease 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 profitsand our revenues. 2 In addition, this customer concentration may subject us to perceived or actual leverage that our customers may have in negotiations with us, giventheir 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 wediversify and expand our customer base, our future success will significantly depend upon the timing and volume of business from our largest customers andthe financial and operational success of these customers. We have ceased doing business with some of our international customers because of anti-dumping duties imposed by foreign governments on ourproducts. In 2008, we sold approximately 32% of our products to customers in the United States and Europe. The Crispin Company, a US company, andIbercordones Pretensados S.L., a Spanish company, were two of our top three customers in 2008. However, in May 2009, the Council of the European Union imposed an anti-dumping duty on imports of certain prestressed wires and wire strandsoriginating in China. Dumping occurs when a foreign company sells a product at a price that is considered less than fair value in the country into which theproduct is imported. Following an anti-dumping investigation initiated in February 2008, the Council concluded that imports of these products originating inChina caused material injury to the European industry. The rate of the anti-dumping duty applicable to us has been set at 31.1% and the duty applicable to ourcompetitors generally has been set at 46.2%. On May 17, 2010, the U.S. Department of Commerce announced an affirmative final decision, imposing an anti-dumping rate of 193.55% forimports of certain prestressed concrete steel wire strands including the plain surface materials we had been selling to our U.S. customers, exported from Chinato the U.S. The U.S. Customs and Border Protection have been instructed to collect a cash deposit or bond based on this rate. As of the date of this filing,these anti-dumping measures remained in place. In anticipation of these rulings, we discontinued sales to these regions at the end of 2008 and turned to domestic PRC customers and internationalcustomers in the Asia Pacific region. In 2012, 2011 and 2010, we sold 8.6%, 6.3% and 3.0%, respectively, of our products to international customers. Untilthese anti-dumping measures are discontinued, we will be unable to sell our products to customers in the United States and Europe and as a result, thesemeasures will continue to have a negative impact on our business and results of operations. We have recently experienced, and expect to continue to experience, increased needs to finance our working capital requirements, which maymaterially and adversely affect our financial position and results of operations. Historically, we sold a significant portion of our products to international customers. In 2008, we collected approximately half of the revenuesgenerated by international sales by letter of credit, enabling us to convert our accounts receivable into cash more quickly, prepay our suppliers and reduce theamount of funds that we needed to finance our working capital requirements. However, at the end of 2008, as a result of the global economic crisis and inanticipation of the anti-dumping measures ultimately imposed by the U.S. and the European Union, we had to exit some of these international markets entirelyand turn to the domestic PRC customers, which generally pay approximately 90 days after receiving the materials at the construction site. If the Chinesecentral bank tightens credit policy, which happened from time to time in the past, such payment terms can be extended to an even longer period. These longerpayment terms have negatively impacted our short-term liquidity. Although we have been able to maintain adequate working capital primarily through short-term borrowings, any failure by our customers to settle outstanding accounts receivable in the future could materially and adversely affect our cash flow,financial condition and results of operations. Some of the terms of the agreements between Ossen and its affiliates may be less favorable to us than similar agreements negotiated betweenunaffiliated third parties. Historically, we purchased a significant amount of our raw materials from Shanghai Zhengfangxing Steel Co., Ltd., or Shanghai ZFX, an affiliate ofours. Specifically, we acquired 3.2%, 0% and 5.1% of our raw materials from Shanghai ZFX in the years ended December 31, 2012, 2011 and 2010,respectively. In addition, we have sold a significant amount of our products to Shanghai Zhaoyang New Metal Material Co., Ltd., an entity that owns a 30%interest in Shanghai Ossen Investment Holding (Group) Co., Ltd., of which Dr. Tang, our chairman, is president, and Shanghai Pujiang Cable Co., Ltd.,which was acquired by Ossen Group in September 2010. In the years ended December 31, 2012, 2011 and 2010 we generated 5.8%, 6.6% and 13% of ourtotal revenue from Shanghai Zhaoyang. In the years ended December 31, 2012 and 2011 we generated 0.4% and 11.0% of our total revenue from ShanghaiPujiang and its subsidiary, Zhejiang Pujiang. While we believe we benefit from these agreements, due to our relationship with these entities such agreements may not reflect the terms that wouldhave been reached by two unaffiliated parties negotiating at arm’s length. The transactions may be less favorable to us than would be the case if they werenegotiated with unaffiliated third parties. Conversely, to the extent that transactions with Shanghai ZFX or Shanghai Zhaoyang are more favorable to us thanarm’s length transactions, the significant decrease in purchases from Shanghai ZFX or sales to Shanghai Zhaoyang could harm our business. 3 As we expand our operations, we may need to establish a more diverse supplier network for our raw materials. The failure to secure a morediverse and reliable supplier network could have an adverse effect on our financial condition. We currently purchase almost all of our raw materials from a small number of suppliers. Purchases from our five largest suppliers amounted to97.6%, 100% and 99.9% of our raw material purchases in the years ended December 31, 2012, 2011 and 2010, respectively. As we increase the scale of ourproduction, we may need to establish a more diverse supplier network, while attempting to continue to leverage our purchasing power to obtain favorablepricing and delivery terms. However, in the event that we need to diversify our supplier network, we may not be able to procure a sufficient supply of rawmaterials 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 oneor 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, whichcould negatively affect our profitability. Any interruptions to, or decline in, the amount or quality of our raw materials supply could materially disrupt ourproduction 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 pricesdecline 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 awhole is cyclical and, at times, pricing and availability of steel can be volatile due to numerous factors beyond our control, including general domestic andinternational economic conditions, labor costs, sales levels, competition, levels of inventory held by us and other steel service centers, consolidation of steelproducers, higher raw material costs for steel producers, import duties and tariffs and currency exchange rates. This volatility can significantly affect theavailability and cost of raw materials for us. We, like many other steel manufacturers, maintain substantial inventories of steel to accommodate the short lead times and just-in-time deliveryrequirements of our customers. Accordingly, we purchase steel in an effort to maintain our inventory at levels that we believe to be appropriate to satisfy theanticipated needs of our customers based upon historic buying practices, supply agreements with customers and market conditions. Our commitments topurchase 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 topass 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, lowermargins and inventory valued at the lower of cost or market adjustments as we use existing steel inventory. Significant or rapid declines in steel prices orreductions in sales volumes could result in us incurring inventory or goodwill impairment charges. Therefore, changing steel prices could significantly impactour revenues, gross margins, operating income and net income. 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 aresubject to certain risks, including availability of raw materials, labor disputes, inclement weather, natural disasters, and general economic and politicalconditions, which might limit the ability of our suppliers to provide us with low cost, high quality merchandise on a timely basis. Furthermore, for these orother reasons, one or more of our suppliers might not adhere to our quality control standards, and we might not identify the deficiency. Our suppliers’ failureto supply quality materials at a reasonable cost on a timely basis could reduce our net sales, damage our reputation and have an adverse effect on our financialcondition. Our operations are cash intensive, and our business could be adversely affected if we fail to maintain sufficient levels of liquidity and workingcapital. Historically, we have spent a significant amount of cash on our operational activities, principally to procure raw materials for our products. We havefinanced our operations mainly through short-term bank loans and proceeds from bank acceptance notes in recent years. In addition, in December 2010, weconducted an initial public offering, the proceeds of which are being used to fuel our expansion. If we fail to continue to generate sufficient cash flow fromthese sources, we may not have sufficient liquidity to fund our operating costs and growth, and our business could be adversely affected. Our short-term loans are from Chinese banks and are generally secured by our fixed assets, receivables and/or guarantees by related parties. Theterm of almost all such loans is one year or less. Historically, we have rolled over such loans on an annual basis. However, we may not have sufficient fundsavailable 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 resultin the imposition of penalties, including increases in interest rates, legal actions against us by our creditors, or even insolvency. 4 Our ability to borrow from Chinese banks and the ability of our customers to borrow from Chinese banks are affected by the monetary policyimplemented by Chinese government from time to time. If credit policy is tightened in China, we and our customers may have difficulty to obtain or renewloans from Chinese banks. As a result, our liquidity level may be adversely impacted by issues such as longer receivable days from customers and reducedcredit lines from Chinese banks. We may issue debt and equity securities that are senior to our ordinary shares as to distributions and in liquidation, which could negatively affectthe value of our ordinary shares. If available liquidity is not sufficient to meet our operating and loan obligations as they come due, our plans include considering pursuing alternativefinancing arrangements, reducing expenditures as necessary, or limiting our plans for expansion to meet our cash requirements. However, there is no assurancethat, 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 extremely difficult and banking institutions have become stringent in their lendingrequirements. Accordingly, we cannot be sure of the availability or terms of any third party financing. If we are unable to raise additional financing, we maybe unable to implement our long-term business plan, develop or enhance our products, take advantage of future opportunities or respond to competitivepressures on a timely basis. In the alternative, if we raise capital by issuing equity or convertible debt securities, such issuances could result in substantial dilution to ourshareholders. In addition, such issuances could include issuances of senior notes, subordinated notes, preferred shares or common shares. In the event of ourliquidation, our lenders and holders of its debt or preferred securities would receive a distribution of our available assets before distributions to the holders ofour ADSs. Our decision to incur debt and issue securities in future offerings will depend on market conditions and other factors beyond our control. Wecannot predict or estimate the amount, timing or nature of future offerings and debt financings. Future offerings could reduce the value of shares of our ADSsand dilute your investment. Our inability to manage our growth may have a material adverse effect on our business, results of operations and financial condition. We have experienced significant growth since we began operations in 2004. Our revenues have grown from approximately $17.2 million in 2005 toapproximately $122.4 million in 2012. We expect our growth to continue to place significant demands on both our management and our resources. This requires us to continuously evolveand improve our operational, financial and internal controls across our organization. In particular, continued expansion increases the challenges we face in: ·recruiting, training and retaining sufficient skilled sales and management personnel; ·adhering to our high quality and process execution standards; ·maintaining high levels of customer satisfaction; ·creating and managing economies of scale; ·maintaining and managing costs to correspond with timeliness of revenue recognition; and ·developing and improving our internal administrative infrastructure, including our financial, operational and communication systems,processes and controls. Any inability to manage our growth may have a material adverse effect on our business, results of operations and financial condition. 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 competitorsare larger companies with greater financial resources than us. In addition, we expect that as demand in the PRC and in other foreign countries for high quality,prestressed materials continues to grow, new competitors will enter the market. Increased competition may adversely affect our future financial performance orreputation. Moreover, increased competition may result in potential or actual litigation between us and our competitors relating to such activities as competitivesales practices, relationships with key suppliers and customers or other matters. In 2012, we generated revenue of approximately $81.9 million, or 67.0% of our total revenue, from sales of our rare earth coated PC wires and PCstrands. We believe that we are the only prestressed steel material manufacturer in the PRC that currently manufactures rare earth coated prestressed steelmaterials for bridge construction. While we believe that our rare earth coating capabilities provide us with a competitive advantage among our competitors, it islikely that our competitors will seek to develop similar competing products in the near future. We intend to continue to expend research and development effortsto advance our rare earth coating applications even further. However, there can be no assurance that our initial competitive advantage will be retained and thatone 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. 5 We may lose our competitive advantage, and our operations may suffer, if we fail to prevent the loss or misappropriation of, or disputes over, ourintellectual property. We rely on a combination of patents, trademarks, trade secrets and confidentiality agreements to protect our intellectual property rights. While we arenot currently aware of any infringement on our intellectual property rights, our ability to compete successfully and to achieve future revenue growth willdepend, in significant part, on our ability to protect our proprietary technology. Despite many laws and regulations promulgated, and other efforts made, byChina 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 inmany Western countries, including the United States. Furthermore, enforcement of such laws and regulations in China has not been fully developed. Neitherthe administrative agencies nor the court systems in China are as equipped as their counterparts in developed countries to deal with violations or handle thenuances 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, which could have a materialadverse effect on our business, results of operations and financial condition. The misappropriation or duplication of our intellectual property could disrupt ourongoing business, distract our management and employees, reduce our revenues and increase our expenses. We may need to litigate to enforce our intellectualproperty 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 can vary significantly from quarter to quarter. This could cause the trading price ofour ordinary shares to decline. Our operating results may vary significantly from quarter to quarter. Therefore, we believe that period-to-period comparisons of our results ofoperations 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 ourquarterly results of operations may be below the expectations of market analysts and our investors, which could lead to a significant decline in the tradingprice of our ordinary shares. Factors which affect the fluctuation of our revenues, expenses and profits include: ·delays or cancellations of railway projects in China due to unexpected accidents or to financial or other issues confronting the Ministry ofRailways; ·changes in prices of our raw materials, with higher prices leading to reduced operating income; ·variations, expected or unexpected, in the duration, size, timing and scope of purchase orders; ·changes in our pricing policies or those of our competitors; ·changes in compensation, which may reduce our gross profit for the quarter in which they are effected; ·our inability to manage costs, including those related to our raw materials, personnel, infrastructure and facilities; ·exchange rate fluctuations; and ·general economic conditions. 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 operatingresults in any particular quarter. We may undertake strategic acquisitions, joint ventures and alliances, which may prove to be difficult to integrate and manage or may not besuccessful, and may result in increased expenses or write-offs. We may over time pursue strategic acquisitions, joint ventures and alliances to enhance our capabilities and expand our industry expertise andgeographic coverage. It is possible that we may not identify suitable acquisition candidates, alliances or joint venture partners, or if we do identify suitablecandidates or partners, we may not complete those transactions on terms commercially acceptable to us or at all. The inability to identify suitable acquisitiontargets, joint ventures or alliances, or our inability to complete such transactions on terms commercially acceptable to us or at all, may adversely affect ourability to compete and grow. 6 These types of transactions involve numerous risks, including: ·difficulties in integrating operations, systems, technologies, accounting methods and personnel; ·difficulties in supporting and transitioning clients of our acquired companies or strategic partners; ·disruption of our ongoing business; ·diversion of financial and management resources from existing operations; ·risks of entering new markets; ·potential loss of key employees; and ·inability to generate sufficient revenue to offset transaction costs and expenses. Furthermore, any such transaction that we attempt, whether or not completed, or any media reports or rumors with respect to any such transactions,may materially and adversely affect the value of our ordinary shares. We may finance future transactions through debt financing or the issuance of our equity securities or a combination of the foregoing. Acquisitionsfinanced with the issuance of our equity securities or convertible debt securities could be dilutive, which could affect the market price of our ADSs.Acquisitions financed with debt could require us to dedicate a substantial portion of our cash flow to principal and interest payments and could subject us torestrictive covenants. Acquisitions also frequently result in the recording of goodwill and other intangible assets that are subject to potential impairments in thefuture that could harm our financial results. Moreover, if we fail to properly evaluate acquisitions, alliances or investments, we may not achieve theanticipated benefits of those transactions, and we may incur costs in excess of what we had anticipated. Our success depends in large part upon our senior management and key personnel. Our inability to attract and retain these individuals couldmaterially and adversely affect our business, results of operations and financial condition. We are highly dependent on our senior management and other key employees, including our Chairman, Dr. Tang and our CEO, Mr. Hua. Our futureperformance will be dependent upon the continued service of members of our senior management and key employees. We do not maintain key man lifeinsurance for any of the members of our management team or other key personnel. Competition for senior management in our industry is intense, and we maynot be able to retain our senior management and key personnel or attract and retain new senior management and key personnel in the future, which couldmaterially 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 personalinjury. Since our products are ultimately incorporated into bridges, buildings, railways and other large structures, it is possible that users of these structuresor people installing our products could be injured or killed by such structures, whether as a result of defects, improper installation or other causes. Because wecontinue to expand our customer base, we are unable to predict whether product liability claims will be brought against us in the future or to predict the impactof any resulting adverse publicity on our business. The successful assertion of product liability claims against us could result in potentially significantmonetary damages and require us to make significant payments. We do not carry product liability insurance and may not have adequate resources to satisfy ajudgment 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 thatwe currently carry offers limited coverage compared with that offered in many other countries. Any business interruption or natural disaster could result insubstantial losses and diversion of our resources and materially and adversely affect our business, financial condition and results of operations. Our chairman owns a large percentage of our outstanding stock and could significantly influence the outcome of our corporate matters. Dr. Tang owns approximately 59.7% of our outstanding ordinary shares, reflecting a majority equity interest in our company. As our majorityshareholder, Dr. Tang is able to elect our board of directors, approve, and determine the outcome of all matters requiring the approval of the holders of amajority of our outstanding shares. This concentration of ownership in our shares by Dr. Tang limits your ability to influence corporate matters and may havethe effect of delaying or preventing a third party from acquiring control over us. In addition, sales of significant amounts of ordinary shares held by Dr. Tang,or the prospect of these sales, could adversely affect the market price of our ordinary shares. 7 If we are unable to maintain appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reportingobligations, result in the restatement of our financial statements, harm our operating results, subject us to regulatory scrutiny and sanction, andcause 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 havesignificant requirements for enhanced financial reporting and internal controls. We are required to document and test our internal control procedures in order tosatisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires annual management assessments of the effectiveness of our internalcontrols over financial reporting and, for many companies, a report by the independent registered public accounting firm addressing these assessments. Theprocess of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business andthe economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reportingobligations as a public company. In 2012, the SEC requested that we review our analysis of Rule 5-04(c) of Regulation S-X and as a result, we amended ourannual report for the year ended December 31, 2011 and filed a financial statement schedule with the amended annual report. In response to the SEC’scomment, we instituted corrective measures and evaluated the effectiveness of our disclosure controls and procedures, as defined under Exchange Act Rule13a-15(e), including Rule 5-04(c) of Regulation S-X and have included the financial statement schedule as required in this annual report. 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 maintainadequate controls over our financial processes and reporting in the future as we continue our growth. If we are unable to establish appropriate internal financialreporting controls and procedures, it could cause us to fail to comply with Sarbanes-Oxley and meet our reporting obligations, result in the restatement of ourfinancial statements, harm our operating results, subject us to regulatory scrutiny and sanction, and cause investors to lose confidence in our reportedfinancial information. We incur increased costs as a result of being a public company. As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. The rules andregulations to which public companies are subject, including the Sarbanes-Oxley Act of 2002, have increased our legal, accounting and financial compliancecosts since we went public in December 2010, and make certain corporate activities more time-consuming and costly. In addition, we now incur additionalcosts associated with our public company reporting requirements. Risks Related to Doing Business in China 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 governmentcould 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 thethings that could have this effect are: ·Level of government involvement in the economy; ·Control of foreign exchange; ·Methods of allocating resources; ·Balance of payments position; ·International trade restrictions; and ·International conflict. The Chinese economy differs from the economies of most countries belonging to the Organization for Economic Cooperation and Development, orOECD, in many ways. For example, state-owned enterprises still constitute a large portion of the Chinese economy, and weak corporate governance and thelack 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 asmight be expected if the Chinese economy were similar to those of the OECD member countries. 8 Future inflation in China may inhibit our ability to conduct business in China. In recent years, the Chinese economy has experienced periods of rapid expansion and highly fluctuating rates of inflation. According to the NationalBureau of Statistics of China, consumer price inflation in China was 2.6%, 5.4% and 3.3% in 2012, 2011 and 2010, respectively. These factors have led tothe adoption by the Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth andcontain inflation. High inflation may in the future cause the Chinese government to impose additional controls on credit or prices, or to take other action,which could inhibit economic activity in China, and thereby harm the market for our products and our company. Higher inflation in future could result inhigher raw materials prices and higher labor cost. If labor costs or the prices of the steel materials that we purchase increase and we are unable to pass along theincreased raw material or labor cost to our customers, our margins will decrease and negatively impact our profitability. In addition, if the Chinese governmentdecides to impose controls on credit and increases in interest rates, such measures would increase our borrowing cost and may affect our ability to obtain newcredit lines from banks. The PRC government exerts substantial influence over the infrastructure sector and the manner in which we must conduct our businessactivities. The PRC government has exercised, and continues to exercise, substantial control over virtually every sector of the Chinese economy throughregulation and state ownership, including the infrastructure sector 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,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 andexport tariffs, environmental regulations, land use rights, property, and other matters. We believe that our operations in China are in material compliance withall applicable legal and regulatory requirements. However, the central or local governments of the jurisdictions in which we operate may impose new, stricterregulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with suchregulations or interpretations. Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and toreturn to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect oneconomic 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 andresidents 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 processwithin 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 theUnited 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 andofficers 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 toexchange rate volatility. We are exposed to the risks associated with foreign exchange controls and restrictions in China, as our revenues are primarily denominated inRenminbi, 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 ofdividends, 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. Thesecapital account transactions must be approved by, or registered with, the PRC State Administration of Foreign Exchange, or SAFE. Further, capitalcontribution by an offshore shareholder to its PRC subsidiaries may require approval by the Ministry of Commerce in China or its local counterparts. Wecannot assure you that we are able to meet all of our foreign currency obligations to remit profits out of China 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 ofPayment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or Circular 142, to regulate the conversion by foreign investedenterprises, or FIEs, of foreign currency into Renminbi by restricting how the converted Renminbi may be used. Circular 142 requires that Renminbiconverted from the foreign currency-dominated capital of a FIE may be used only for purposes within the business scope approved by the applicablegovernment authority and may not be used for equity investments within the PRC unless specifically provided. In addition, SAFE strengthened its oversightover 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 changedwithout 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 Circular142 may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business. 9 Fluctuation in the value of the Renminbi and of the U.S. dollar may have a material adverse effect on investments in our ADSs. A significant portion of our revenues are denominated in Renminbi. Any significant revaluation of the Renminbi may have a material adverse effecton 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 inforeign 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 ourfinancial 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 materialadverse effect on the prices of our ADSs. Prior to 1994, the Renminbi experienced a significant net devaluation against most major currencies, and there was significant volatility in theexchange rate during certain periods. Upon the execution of the unitary managed floating rate system in 1994, the Renminbi was devalued by 50% against theU.S. dollar. Since 1994, the Renminbi to U.S. dollar exchange rate has largely stabilized. On July 21, 2005, the People’s Bank of China announced that theexchange rate of U.S. dollar to Renminbi would be adjusted from $1 to RMB8.27 to $1 to RMB8.11, and it ceased to peg the Renminbi to the U.S. dollar.Instead, the Renminbi would be pegged to a basket of currencies, whose components would be adjusted based on changes in market supply and demandunder a set of systematic principles. On September 23, 2005, the PRC government widened the daily trading band for Renminbi against non-U.S. dollarcurrencies from 1.5% to 3.0% to improve the flexibility of the new foreign exchange system. Since the adoption of these measures, the value of Renminbiagainst the U.S. dollar has fluctuated on a daily basis within narrow ranges, but overall has further strengthened against the U.S. dollar. In June 2010, thePeople’s Bank of China announced its intention to increase the flexibility of the Renminbi’s exchange rate. There remains significant international pressure onthe PRC government to further liberalize its currency policy, which could result in a further and more significant appreciation in the value of the Renminbiagainst the U.S. dollar. The Renminbi may be revalued further against the U.S. dollar or other currencies, or may be permitted to enter into a full or limitedfree float, which may result in an appreciation or depreciation in the value of the Renminbi against the U.S. dollar or other currencies. 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 bindingprecedential effect. Although progress has been made in the promulgation of laws and regulations dealing with economic matters, such as corporateorganization and governance, foreign investment, commerce, taxation and trade, China’s legal system remains less developed than the legal systems in manyother countries. Furthermore, because many laws, regulations and legal requirements have been recently adopted, their interpretation and enforcement by thecourts and administrative agencies may involve uncertainties. Sometimes, different government departments may have different interpretations. Licenses andpermits issued or granted by one government authority may be revoked by a higher government authority at a later time. Government authorities may decline totake action against unlicensed operators which may work to the disadvantage of licensed operators, including us. The PRC legal system is based in part ongovernment 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 afterthe violation. Changes in China’s legal and regulatory framework, the promulgation of new laws and possible conflicts between national and provincialregulations could adversely affect our financial condition and results of operations. In addition, any litigation in China may result in substantial costs anddiversion of resources and management attention. Our business and financial performance may be materially adversely affected if the PRC regulatory authorities determine that our acquisition ofOssen Materials constitutes a round-trip investment without MOFCOM approval. On August 8, 2006, six PRC regulatory agencies promulgated the Regulation on Mergers and Acquisitions of Domestic Companies by ForeignInvestors, 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 ofCommerce 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 anon-PRC entity that is established or controlled, directly or indirectly, by those same PRC individuals. Under the 2006 M&A Rules which was amended bythe Ministry of Commerce on June 22, 2009, any round-trip investment must be approved by MOFCOM, and any indirect arrangement or series ofarrangements 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 exchangebetween our predecessor, Ultra Glory, and our subsidiary, Ossen Materials Group, are part of an overall series of arrangements which constitute a round-tripinvestment. 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 alsopossible that the PRC regulatory authorities could invalidate our acquisition and ownership of our Chinese subsidiaries, and that these transactions require theprior approval of the China Securities Regulatory Commission, or CSRC, before MOFCOM approval is obtained. 10 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 ourChinese subsidiaries’ business as if we had direct ownership of our Chinese subsidiaries. All employee participants in our share incentive plans who are PRC citizens may be required to register with the SAFE. We may also faceregulatory 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 therespective requirements for foreign exchange transactions by PRC individuals under either current account or the capital account. In January 2007, the SAFEissued the Implementation Rules of the Administrative Measures for Individual Foreign Exchange, which, among other things, specified approval requirementsfor certain capital account transactions such as a PRC citizen’s participation in the employee stock ownership plans or stock option plans of an overseaspublicly-listed company. On March 28, 2007, the SAFE promulgated the Processing Guidance on Foreign Exchange Administration for Domestic IndividualsParticipating in Employee Stock Ownership Plans or Stock Option Plans of Overseas-Listed Companies, or the Stock Option Rule. Under the Stock OptionRule, PRC citizens who are granted stock options by an overseas publicly-listed company are required, through a qualified PRC domestic agent or PRCsubsidiary of such overseas publicly-listed company, to register with the SAFE and complete certain other procedures. We and our PRC citizen employees participating in our stock incentive plan are subject to the Stock Option Rule. Failure to comply with the StockOption Rule and other relevant rules will subject us or our PRC citizen employees participating in our stock incentive plan to fines and other legal oradministrative sanctions and impose restrictions on our execution of option plans, including the grant of options under such plans to our employees, whichcould adversely affect our business operations. Under the New Enterprise Income Tax Law, we may be classified as a “resident enterprise” of China. Such classification will likely result inunfavorable 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, anenterprise established outside of China with de facto management bodies within China is considered a resident enterprise, meaning that it can be treated in amanner 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, acircular issued by the State Administration of Taxation on April 22, 2009 clarified that dividends and other income paid by such resident enterprises will beconsidered to be PRC source income, subject to PRC withholding tax, currently at a rate of 10%, when recognized by non-PRC enterprise shareholders. Thisrecent 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 orpermit 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 taxconsequences 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 enterpriseincome tax reporting obligations. In our case, this would mean that income such as interest on offering proceeds and non-China source income would besubject 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 ourPRC subsidiaries would qualify as tax-exempt income, we cannot guarantee that such dividends will not be subject to a 10% withholding tax, as the PRCforeign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect to the processing of outbound remittances toentities that are treated as resident enterprises for PRC enterprise income tax purposes. Finally, it is possible that future guidance issued with respect to the newresident enterprise classification could result in a situation in which a 10% withholding tax is imposed on dividends we pay to our non-PRC shareholders andwith respect to gains derived by our non-PRC shareholders from transferring our shares. Any outbreak of the Bird Flu (H7N9), or another widespread public health problem in the PRC could adversely affect our operations. Recently, there have been reported cases of H7N9 Bird Flu in certain regions of China, where all of our manufacturing facilities are located. Ourbusiness is dependent upon our ability to continue to manufacture and distribute our products, and an outbreak of the Bird Flu, or another widespread publichealth problem in China, could have a negative effect on our operations. Any such outbreak could have an impact on our operations as a result of: lquarantines or closures of our manufacturing facilities, which would severely disrupt our operations;lthe sickness or death of our key officers and employees; andla general slowdown in the Chinese economy. Any of the foregoing events or other unforeseen consequences of public health problems could adversely affect our operations. 11 Restrictions under PRC law on our PRC subsidiaries' ability to pay dividends and make other distributions could materially and adversely affectour ability to grow, make investments or acquisitions that could benefit our business, pay dividends to you, and otherwise fund and conduct ourbusiness. Our revenues are generated by our PRC subsidiaries. However, PRC regulations restrict the ability of our PRC subsidiaries to pay dividends andmake other payments to their offshore parent company. PRC legal restrictions permit payments of dividends by our PRC subsidiaries only out of theiraccumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. Our PRC subsidiaries are also required underPRC laws and regulations to allocate at least 10% of their annual after-tax profits determined in accordance with PRC GAAP to a statutory general reserve funduntil the amounts in said fund reaches 50% of their registered capital. Allocations to these statutory reserve funds can be used only for specific purposes andare 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 uscould materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends andotherwise 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 requireenterprises 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 Chinesegovernment may also change the existing laws or regulations or impose additional or stricter laws or regulations, compliance with which may cause us to incursignificant 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 paymentsto foreign officials for the purpose of obtaining or retaining business. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur fromtime 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 ourpersonnel 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 heldresponsible 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 abilityto continue our business operations. Banks and other financial institutions in the PRC do not provide insurance for funds held on deposit. As a result, in the event of a bank failure, wemay 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 cashcould 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 ourbusiness 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 maydecrease. At various times during recent years, the United States and China have had significant disagreements over political and economic issues.Controversies may arise in the future between these two countries. Any political or trade controversies between the United States and China, whether or notdirectly related to our business, could reduce the price of our ordinary shares. If we become directly subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have toexpend significant resources to investigate and resolve the matter which could harm our business operations, stock price and reputation andcould result in a loss of your investment in our stock, especially if such matter cannot be addressed and resolved favorably. Recently, U.S. public companies that have substantially all of their operations in China, particularly companies that have completed reverse mergertransactions, have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory agencies, such asthe United States Securities and Exchange Commission. Much of the scrutiny, criticism and negative publicity has centered around financial and accountingirregularities and mistakes, a lack of effective internal controls over financial accounting, inadequate corporate governance policies or a lack of adherencethereto 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. listedChinese companies has sharply decreased in value and, in some cases, has become virtually worthless. Many of these companies are now subject toshareholder lawsuits, SEC enforcement actions and are conducting internal and external investigations into the allegations. It is not clear what effect this sector-wide scrutiny, criticism and negative publicity will have on our Company, our business and our stock price. If we become the subject of any unfavorableallegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate such allegations and/or defendour Company. This situation will be costly and time consuming and distract our management from growing our Company. If such allegations are not provento be groundless, our Company and business operations will be severely impacted and your investment in our stock could be rendered worthless. 12 Our auditor, like other independent registered public accounting firms operating in China, is not permitted to be subject to inspection by PublicCompany Accounting Oversight Board, and as such, investors may be deprived of the benefits of such inspection. Our independent registered public accounting firm that issues the audit reports included in our annual reports filed with the SEC, as an auditor ofcompanies that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board (United States), orPCAOB, is required by the laws of the United States to undergo regular inspections by PCAOB to assess its compliance with the laws of the United Statesand professional standards. Because our auditor is located in China, a jurisdiction where PCAOB is currently unable to conduct inspections without theapproval of the PRC authorities, our auditor, like other independent registered public accounting firms operating in China, is currently not inspected byPCAOB. Inspections of other firms that PCAOB has conducted outside of China have identified deficiencies in those firms’ audit procedures and qualitycontrol procedures, which may be addressed as part of the inspection process to improve future audit quality. The inability of PCAOB to conduct inspectionsof independent registered public accounting firms operating in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures orquality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections. The disclosures in our reports and other filings with the SEC and our other public pronouncements are not subject to the scrutiny of anyregulatory bodies in the PRC. Accordingly, our public disclosure should be reviewed in light of the fact that no governmental agency that islocated in China where substantially all of our operations and business are located have conducted any due diligence on our operations orreviewed 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 regulationspromulgated by the SEC under the Securities Act and the Exchange Act. Unlike public reporting companies whose operations are located primarily in theUnited States, however, substantially all of our operations are located in China. Since substantially all of our operations and business take place in China, itmay be more difficult for the Staff of the SEC to overcome the geographic and cultural obstacles that are present when reviewing our disclosures. These sameobstacles are not present for similar companies whose operations or business take place entirely or primarily in the United States. Furthermore, our SECreports and other disclosures and public pronouncements are not subject to the review or scrutiny of any PRC regulatory authority. For example, the disclosurein 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 ofthe capital markets in China. Accordingly, you should review our SEC reports, filings and our other public pronouncements with the understanding that nolocal 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 publicpronouncements has been reviewed or otherwise been scrutinized by any local regulator. 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: ·actual or anticipated fluctuations in our quarterly operating results and revisions to our expected results; ·changes in financial estimates by securities research analysts; ·conditions in the markets for our products; ·changes in the economic performance or market valuations of companies specializing in our industry or our customers or their industries; ·changes in market valuations of U.S. listed companies headquartered in China, and in particular small capitalization companies; ·announcements by us or our competitors of new products, acquisitions, strategic relationships, joint ventures or capital commitments; ·addition or departure of our senior management and key personnel; 13 ·fluctuations of exchange rates between the Renminbi and the U.S. dollar; ·litigation related to our intellectual property; ·release or expiry of transfer restrictions on our outstanding ordinary shares; and ·sales or perceived potential sales of our ADSs. In addition, the securities market has from time to time, and to an even greater degree since the last quarter of 2007, experienced significant price andvolume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also have a material adverseeffect 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 meetthe 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 adiversion of our management’s attention and resources. We may not be able to sustain the trading market of our ADSs. Our ADSs are listed for trading on the NASDAQ Global Market. On January 30, 2013, we received a letter from the NASDAQ Stock Marketstating that for the previous 30 consecutive business days, the closing bid price of our ADSs was below the minimum bid price of $1.00 per share forcontinued listing on the NASDAQ Global Market (the “Minimum Bid Price Rule”). In accordance with NASDAQ Marketplace Rule 5810(c)(3)(A), theCompany has been provided with a period of 180 calendar days, or until July 29, 2013, to regain compliance with the Minimum Bid Price Rule. If we areunable to regain compliance with the Minimum Bid Price Rule, we will apply for the transfer of our listing to the NASDAQ Capital Market, and if thetransfer is approved, we will be granted an additional 180-day period in which to regain compliance with the Minimum Bid Price Rule. However, we cannot besure that the price of our ADSs will comply with this requirement for continued listing on the NASDAQ Capital Market in the future. If we were not able to doso, our ADSs would be subject to delisting and would likely trade on the over-the-counter market. If our ADSs were to trade on the over-the-counter market,selling our ADSs could be more difficult because smaller quantities of our ADSs would likely be bought and sold, transactions could be delayed, and securityanalysts’ coverage of us may be reduced. In addition, broker-dealers have certain regulatory burdens imposed upon them, which may discourage broker-dealers from effecting transactions in our ADSs, further limiting the liquidity of our ADSs. As a result, the market price of our ADSs may be depressed, andyou may find it more difficult to sell our ADSs. Such delisting from the NASDAQ Capital Market and continued or further declines in our ADS price couldalso greatly impair our ability to raise additional necessary capital through equity or debt financing. 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 ofthe BVI Act. Pursuant to this provision, the company, immediately after the distribution, must satisfy the solvency test, in so far as its assets exceeds itsliabilities, 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 generatesufficient 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 thefuture. 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 ourshareholders, and will depend upon our results of operations, our cash flows, our financial condition, the payment of our subsidiaries of cash dividends tous, 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 availablefunds 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 exerciseyour 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 ourADSs appoint the depositary or its nominee as their representative to exercise the voting rights attached to the ordinary shares represented by the ADSs. Youmay 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, dealersor 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 dividendsif 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 availableto 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 fromregistration is available. Under the deposit agreement, the depositary will not make rights available to you unless both the rights and the underlying securitiesto be distributed to ADS holders are either registered under the Securities Act or exempt from registration. We are under no obligation to file a registrationstatement 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 toestablish a necessary exemption from registration under the Securities Act. Accordingly, you may be unable to participate in our rights offerings and mayexperience dilution in your holdings as a result. 14 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 orother deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your ADSsrepresent. However, the depositary may, at its discretion, decide that it is inequitable or impractical to make a distribution available to holders of ADSs. Forexample, the depositary may determine that it is not practicable to distribute certain property through the mail, or that the value of certain distributions may beless 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 timewhen it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers ofADSs 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 anyrequirement 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% ofour assets (generally based on average value determined on a quarterly basis) are held for the production of, or produce, passive income, we may becharacterized as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes. This characterization could result in adverse U.S. taxconsequences to our U.S. shareholders, including gain realized on the disposition of our ADSs or ordinary shares being treated as ordinary income rather thancapital 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 2012 taxable year. However, because the determination of our PFIC status is based on such factualmatters as the composition of our income and assets, the valuation of our assets, and our market capitalization, there is no assurance that the United StatedInternal Revenue Service (“IRS”) will agree with our position. In addition, there can be no assurance that we will not become a PFIC for the current taxable yearending December 31, 2013 or in future taxable years. U.S. shareholders should consult with their own U.S. tax advisors with respect to the U.S. taxconsequences of investing in our ADSs or ordinary shares if we were to become a PFIC. See “Taxation — United States Federal Income Taxation — TaxConsequences if We Are a Passive Foreign Investment Company.” If equity research analysts do not publish research or reports about our company or if they issue unfavorable commentary or downgrade ourADSs, 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 donot control these analysts. The price of our ADSs could decline if one or more equity analysts downgrade our ordinary shares or if they issue otherunfavorable commentary, or cease publishing reports, about us or our company. ITEM 4.INFORMATION ON THE COMPANY 4A. History and Development of the Company We were incorporated under the laws of the British Virgin Islands as Ultra Glory International Ltd., or Ultra Glory, in 2010. We operate under theBVI Business Companies Act, 2004, or the BVI Act. Our registered office is located at Akara Bldg., 24 De Castro Street, Wickhams Cay 1, Road Town,Tortola, British Virgin Islands. The telephone number of the registered office is +86 (21) 51192951. Our World Wide Web address ishttp://www.osseninnovation.com. Information contained on our website does not constitute a part of this annual report. Our agent for service of process in the United States is CT Corporation System, 111 Eighth Avenue, New York, New York 10011. The telephonenumber of our agent for service is (212) 894-8940. 15 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 Islandslimited liability company organized on April 30, 2010 under the BVI Act and the shareholders of Ossen Innovation Group. Pursuant to the share exchangeagreement, Ultra Glory acquired from the shareholders of Ossen Innovation Group all of the issued and outstanding shares of Ossen Innovation Group, inexchange for an aggregate of 10,000,000 newly issued ordinary shares issued by Ultra Glory to the shareholders of Ossen Innovation Group. In addition, thesole 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, tothe 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 OssenInnovation Group prior to the business combination acquired 100% of the equity of Ultra Glory, and Ultra Glory acquired 100% of the equity of OssenInnovation Group. Ossen Innovation Group is now a wholly owned subsidiary of Ultra Glory. In conjunction with the business combination, Ultra Gloryfiled 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 businesscombination, we ceased to be a shell company. Capital Expenditures We incurred capital expenditures of approximately $32,982, $0.2 million and $7.6 million for the years ended December 31, 2012, 2011 and 2010,respectively, primarily in connection with purchase of plant and equipment and land use rights. The capital expenditures of $7.6 million in the year endedDecember 31, 2010 consist primarily of prepayments for the purchase of manufacturing equipment from Europe for our expansion plan. These capitalexpenditures were financed by proceeds from our initial public offering and from bank financing. Our capacity expansion to add 30,000 tons of annual production capacity for rare earth coated products was delayed due to unfavorable businessclimate in China in 2011 and 2012. However, we will continue our expansion plan and expect to complete the installation and start operation of our newproduction lines in the first half of 2014, pending our ability to expand our business and the general business environment in China at that time. We expectthat our capital expenditures in fiscal year 2013 will be incurred primarily in connection with purchase of manufacturing equipment for the construction of ournew facility as well as the expansion of existing factory buildings to accommodate new production lines. 4B. Business Overview Overview We manufacture and sell an array of plain surface prestressed steel materials and rare earth coated and zinc coated prestressed steel materials, whichwe believe is the most comprehensive array among our competitors in China. Our materials are used in the construction of bridges, highways and otherinfrastructure projects in the PRC and internationally. Our facilities are located in Maanshan City, Anhui Province and in Jiujiang City, Jiangxi Province, inthe People’s Republic of China. Historically, we and our customers have had a greater than 90% success rate with respect to winning projects on which eitherwe or our customers have bid. Based on our extensive experience in the industry, we believe that Ossen is one of the leading enterprises in the PRC in thedesign, engineering, manufacture and sale of customized prestressed steel materials used in the construction of bridges, highways, and other infrastructureprojects in China. During the year ended December 31, 2012, we generated revenue of approximately $81.9 million, or 67% of our total revenue, from sales of our rareearth coated PC wires and PC strands. We believe that we are the only prestressed steel material manufacturer in the PRC that currently manufactures rareearth coated materials for bridge construction. Revenues generated by sales of coated products (including rare earth coated and zinc coated products in theaggregate) for the year ended December 31, 2012 comprised approximately 75.7% of our total revenue. 88.5% of our revenues generated by coated productsales in the year ended December 31, 2012 were generated by sales of rare earth coated products and the remaining 11.5% were generated by sales of zinccoated products. Our plan is to continue to increase sales of our rare earth coated products to manufacturers of steel cables for bridges and other infrastructureprojects, both in the PRC and internationally, in order to increase our revenues and profits. While we believe that our rare earth coating capabilities provide us with a competitive advantage among our competitors, it is likely that ourcompetitors will seek to develop similar competing products in the near future. We intend to continue to expend research and development efforts to advanceour rare earth coating applications even further. However, there can be no assurance that our initial competitive advantage will be retained and that one or morecompetitors 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 these newly designed rare earth coated products, which are used primarily in the construction of new bridges and therenovation of older bridges in need of repair, are as follows: ·Superior corrosion resistance; ·Superior toughness and plasticity; ·Endurance against extreme heat; 16 ·Smooth and appealing coating; and ·Easily coated. According to a report issued by the Institute of Quantitative and Technical Economics, Chinese Academy of Social Sciences, or the CASS report,dated October 8, 2010, bridge and other infrastructure construction experienced significant growth in China through 2010, which trend is expected to continueuntil 2020. Under existing PRC governmental policies, significant investments are expected to be made during the next decade to construct more than 200 newbridges over dozens of Chinese rivers, including the Yangtze River, Yellow River, Songhua River, Jiangxi River, Xiang River, Han River, Minjiang River andPearl River. In addition, approximately 400 old bridges will need to be reinforced or expanded during that period. In addition, over the next decade, China isexpected to build four cross-sea bridges and tunnels, including the Bohai Bay Cross-Sea Bridge, the Hong Kong-Zhuhai-Macao Cross-Sea Bridge, theQiongzhou Strait Bridge and the Taiwan Strait Tunnel. Our management’s core strategy for the near future is to expand the production capacity for our rare earth PC strands and PC wires, which generatehigher margins than our other products, in order to continue to take advantage of current trends in the bridge and infrastructure industries in the PRC andother international markets, including in Southeast Asia and Australia, in the development and renovation of bridges and other infrastructure projects. Ourproducts are marketed under the “Ossen” brand name both domestically and internationally. We handle all aspects of market research, product design,engineering, manufacturing, sales and marketing. We conduct our manufacturing operations in our ISO 9001 manufacturing facilities in Maanshan City andJiujiang City, in the PRC. We are in the process of increasing our annual production capacity by 30,000 tons for our coated PC strands and PC wires. The expansion wasdelayed as a result of unfavorable business climate in China in 2011 and 2012, primarily driven by tightened credit environment, the funding difficultiesfaced by Ministry of Railways of China and the high speed railway accident in South China in July 2011. A portion of the proceeds from our initial publicoffering was used as down payment to purchase manufacturing equipment. We currently expect to complete the installation and start operation of our newproduction lines in the first half of 2014, pending our ability to expand business and the general business environment in China at that time. Ossen Materials, our operating subsidiary, was founded in 2004. In 2005, we expanded our manufacturing capabilities by acquiring a facility inJiujiang City in the PRC and forming Ossen Jiujiang. The founders of Ossen were among the first in China to introduce and promote the use of prestressedsteel materials in construction projects. The founders of Ossen have been involved in producing prestressed materials since 1994 and have accumulated morethan 18 years of experience in the prestressed materials industry. We are affiliated with the Ossen Group, which is a Chinese conglomerate controlled by our Chairman, Dr. Tang. The Ossen Group’s core businessesinclude steel manufacturing, real estate and other investments. There is no active business relationship between our company and any of the other entities thatcomprise the Ossen Group other than what we have disclosed in Item 7.B below. Our Growth Strategy We intend to expand our industry position while maximizing shareholder value and pursuing a growth strategy that includes increasing ourproduction capacity and strengthening our relationships with key customers, diversifying our customer base and pursuing strategic relationships andacquisition opportunities. Increasing our production capacity for our newly developed higher margin rare earth coated prestressed materials. We intend to expand our existing factory building in our Maanshan facility and to install new production lines which will be used for the productionof approximately 30,000 tons annually of higher margin, rare earth coated prestressed materials, including rare earth coated PC wires and PC strands. Weexpect it to be completed in the first half of 2014, pending our ability to expand our business and the general business environment in China at that time. We believe that the expansion of our production capacity will enable us to benefit from the continued growth in overall demand for prestressed steelmaterials in China, especially with respect to our rare earth coated materials, which are generally used in the construction of bridges with a long life span,which is an industry currently experiencing tremendous growth in the PRC. Growth in this industry is expected to continue through the next decade. During theyears ended December 31, 2012 and December 31, 2011, approximately 67% and 43%, respectively, of our revenue was generated from sales of our rare earthcoated materials. The demand for these materials is high in the PRC due to the suitability of these durable, high quality products in major infrastructureprojects. We intend to sell the added products to new and existing customers in China, Southeast Asia and Australia. Strengthening our relationships with key customers and diversifying our customer base. We intend to strengthen our relationships with key customers while further expanding our customer base. We plan to continue providing high-qualityand cost-competitive products to our existing customers and to use our existing customer network and strong industry reputation to expand into new regionswithin the PRC, beyond the 24 provinces and municipalities in which we currently sell our products, and internationally. We intend to continue to usecustomer feedback to improve the quality of our products and technical after-sales services and to strengthen our long-term base of domestic and internationalcustomers. 17 Pursuing strategic relationships and acquisition opportunities We intend to evaluate and pursue acquisition opportunities and strategic partner relationships which could enhance our product offerings, customerbase or geographic reach, or which could allow us to achieve economies of scale and operating efficiencies. We currently have no plans, agreements orcommitments with respect to any material acquisitions or strategic relationships. Competitive Advantages Our management believes that the following competitive strengths differentiate us from other domestic and international competitors and are the keyfactors to our success: We are taking advantage of industry trend in the bridge infrastructure sectors in the PRC and other international markets Due to the demand for prestressed materials in infrastructure construction in the domestic PRC market, and in particular the construction andrestoration of bridges in the PRC that would benefit from the quality and durability of our newly developed rare earth coated prestressed materials, we believethat our industry will grow significantly for at least the next ten years. Specifically, we expect the market for premium rare earth coated products, includingrare earth coated prestressed PC strands and PC wires, which are used primarily in the construction of bridges, to grow in the PRC during this period. Many reports indicate that our industry will experience significant growth in the coming years. For example, based on the 11th five-year plan forhighway and waterway transportation by the Ministry of Transportation of the PRC, the government plans to invest $730 billion in the national highwaynetwork from 2009 to 2013, which drives huge demand for prestressed materials. Similarly, the Railway Network Plan issued by the Ministry of Railways ofthe PRC has indicated that $290 billion will be invested in railway construction from 2009 to 2013, which further drives the demands for prestressedmaterials. In February 2012, after many railway projects had been temporarily halted as a result of the July 2011 high speed railway accident in South Chinaand the funding difficulties faced by Ministry of Railways, Chinese Premier Wen reassured the public about the government’s plan on railway networkconstruction in China, when he announced that the government will help raise the funds necessary to construct railways. Funding solutions will include fundsdirectly from government, bond issuances guaranteed by the government and introduction of private capital into the sector. In the second half of 2012, China’sNational Development and Reform Commission accelerated the approval of investment projects and most of these projects are railways, highways, airportsand other major infrastructure projects. On March 10, 2013, China’s State Council announced its plan to restructure the Ministry of Railways (MOR) to separate the administrative andsupervision function from the commercial arm. The responsibility for planning and policy-making for railway development is to move to the Ministry ofTransport (MOT). A newly created National Railways Bureau (NRB) under the MOT will be responsible for setting technical standards of railways andsupervising the safety of operations, quality of transport services and quality of railway projects. The MOR’s enterprise/commercial responsibilities will beincorporated into China National Railway Co.(CNRC), which was established on March 14, 2013 with registered capital of RMB1.04 trillion (USD $166.8billion) and will be administrated by the central government. CNRC is to be responsible for transport operations and railway development. CNRC will takeover all of MOR’s loans and bonds with the current favorable policies for the debt to continue. CRNC will continue to enjoy favorable tax and preferentialpolicies formerly granted to the MOR. Bonds issued for railway construction will continue to be supported by the government and China's 2011-2015 railwayconstruction programs will continue as planned. Therefore, we would expect the restructuring to have no impact on existing loans and bonds and banks tocontinue to lend and invest in CNRC bonds in future until further restructuring of CNRC to occur at which time the supporting policies, such as zero-riskweighting and tax-free status may be a subject for discussion. It is expected the reform of the MOR will bring more private investment and much neededefficiencies to the railway industry. In the long term, we expect the profitability and cash flow of the MOR’s suppliers, including Ossen Innovation, wouldbenefit from this reform as the one-buyer market is broken up and there is an increase of sources of funding. From now until 2020, we believe that 200 new bridges will be built on dozens of rivers in the PRC, including the Yangtze River, Yellow River,Songhua River, Jiangxi River, Xiangjiang River, Han River, Minjiang River and Pearl River. These bridge projects, combined with projects to reinforce orextend existing bridges in China, will require approximately 6 million tons of coated prestressed materials in the aggregate. The China National NuclearIndustry Group has estimated that the PRC government will invest approximately $60 billion by 2020 for nuclear power construction, which would requireapproximately two million tons of prestressed materials. Further, the ongoing building of a large number of rural roads, highways and buildings shouldcontinue to generate significant demands for prestressed materials. 18 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. Wemanufacture and sell an array of plain surface prestressed steel materials and rare earth coated and zinc coated prestressed steel materials, which we believe isthe most comprehensive array among our competitors in China and which are used in the construction of bridges, highways and other infrastructure projectsin the PRC and internationally. Our facilities are located in Maanshan City, Anhui Province and in Jiujiang City, Jiangxi Province, in the People’s Republic ofChina. Strong in-house research and development capabilities Our research and development team consists of members recognized as industry experts in China, and our management team has sixteen years ofindustry experience on average. We have built a recognized brand name in the industry by introducing innovative solutions to the prestressed materialsindustry, and particularly coated prestressed materials, in China and internationally. Our engineering team works closely with our customers in order tounderstand 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 have been grantedtwenty patents by the State Intellectual Property Office of the PRC, including three invention patent and seventeen utility model patents. In addition, we haveapplied for nine invention and utility model patents, which are currently pending. These patents and patent applications are intended to protect ourtechnologies, including production processes of various wire ropes, pickling methods for steel wire materials and devices designed for the production of steelwire. Our research and development efforts have generated technological improvements that have been instrumental in controlling our production costs andincreasing 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 18 years in the prestressed material industry in China and in othercountries such as Canada, the United States, South Korea, Bangladesh, South Africa, Italy and Spain, including an established track record for consistentlyproviding quality products at competitive prices, has enabled us to develop a strong customer base and to be involved in major building projects. Some of ourrecent projects are listed below under the heading “Recent Projects.” We generated approximately 8.6% of our revenue during the year ended December 31, 2012 from sales to customers in international markets(including primarily Australia, Bangladesh, Philippines, South Africa, Indonesia, Vietnam and South Korea), primarily for use in the construction ofbridges. Due to increased demand for our products in the PRC market and these other markets, we do not intend to reestablish a presence in the United Statesor 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 otherinternational markets for us to win bids on projects or to reengage with former customers or establish relationships with new customers, we would pursuesuch opportunities. Rigorous quality control standards Consistent with our continuing commitment to quality, we impose rigorous quality control standards at various stages of our production process. Westrictly comply with various national and international quality standards with respect to the manufacture of prestressed materials. Our certifications andaccreditations include the United Kingdom Accreditation Service (UKAS), the British Standards Institution (BSI) certification, the Korean StandardsAssociation (KS) certification from South Korea, the Market Access certification from the Spanish Ministry of Industry and an ISO 9001 certification. Webelieve that these certifications, together with the numerous national awards that we have been awarded demonstrate our commitment to producing high-qualityproducts as well as providing us with a competitive advantage over some of our competitors in certain international markets and in China. Experienced management and operational teams with domestic PRC international market knowledge Our senior management team and key operating personnel have extensive management skills, relevant operating experience and industry knowledge.In particular, Dr. Tang, our Chairman, is a Doctor of Economics, Senior Engineer and Professor of Finance and Statistics at the School of East ChinaNormal University, and has extensive experience managing and operating companies in the prestressed steel industry. We believe our management team’sexperience and in depth knowledge of the market in China and internationally will enable us to continue to successfully execute our expansion strategies. Inaddition, we believe our management team’s strong track record will enable us to continue to take advantage of market opportunities that may arise. 19 Our Products Our prestressed steel materials are categorized as plain surface products and coated products. Plain Surface Products Our plain surface products, which term refers to our uncoated plain surfaced and stabilized products, are characterized as follows: ·Plain surface prestressed concrete, or PC, strands. These products consist of PC wires that are twisted into a bundle and used as precastconcrete plates on the riding surface of bridges. These products are categorized based on size, strength and structure. Sizes range from9.3mm to 17.8mm. Strength level ranges from 1570MPa (megapascal) to 2000MPa. The number of strands in the products varies between3 and 7. ·Unbonded plain surface PC strands. These products consist of plain surface PC strands that are coated with grease and extruded withhigh-density polyethylene. These products are used primarily in the construction of bridges and buildings. ·PC wires, also referred to as stabilized materials. These products are further divided among the following three categories: §Plain surface PC wires. This product consists of an individual round wire used in the construction of buildings. §Indented PC wires. This product consists of an individual round wire that contains an indentation used in the construction ofbuildings. §Helical (spiral) rib PC wires. This product consists of an individual round wire whose surface is pulled out into a helical ribpattern used in the construction of railway ties, or sleepers, and buildings. PC wires are categorized based on size, strength and structure. Sizes range from 4.0mm to 9.0mm. Strength level ranges from 1570MPa to 2000MPa.The number of strands in the products varies between 3 and 7. Coated Prestressed Products Our coated prestressed products included zinc coated PC products and rare earth coated PC products. Rare earth coated products are plain surfacematerials that are zinc coated with a rare earth zinc-plating protective layer so as to produce materials that are more corrosion-resistant and long-lasting. Thepurpose of galvanizing is to generate a surface layer to protect the materials from erosion, abrasion and oxidization, without changing the elements of the basicmaterials or weakening the basic material’s strength or other functionality through any techniques that utilize physical chemistry or electrochemistry. Thecoating 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 earthcoating technology adds more benefits to the final products. When rare earth is added into the coating material and form a new alloy with zinc, it increasesfurther 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 productstrength 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 levelwill 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, therequirement of high temperature for processing could be lowered. Processing with lower temperature results in less loss of product strength during the coatingprocess. Therefore, the same raw material, if using rare earth coating, could deliver higher strength final product. Compared with better corrosion-resistantlevel, longer life span, higher strength level may be the most important benefit rare earth coated products bring to customers, as compared to zinc coatedproducts. Higher strength means less steel is needed to build the bridge. The bridge cables could be slimmer, quantity of steel required for construction couldbe less and overall construction cost could be reduced. Applications of zinc coated PC wires and PC strands are similar to those of rare earth coated PC wires and PC strands, primarily in the constructionof bridges. The rare earth coated products could be considered as “upgraded version” of zinc coated products. Margin is affected by market conditions. Ingeneral, gross margin of rare earth coated products is 1%-5% higher than similar zinc coated products. The application of rare earth coating technology enables our product to meet the higher standards of bridge project. We are and will continue to allocatemore resource on rate earth coated PC products. 20 Our rare earth coated products are characterized as the following: Rare earth coated PC wires. These products are further divided as follows: ·Ф5.0 Series, used for suspension bridges. ·Ф7.0 Series, used for cable-stayed bridges. Rare earth coated PC strands, used for bridges and buildings. Customers that purchase our prestressed materials also purchase other supporting products, such as anchorage devices and ripple tubes, tocomplement 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 2011 and 2012, our sales were predominantly tocustomers located in the PRC, and as a result, our primary competitors were PRC domestic companies. We believe that being located in China provides us with a number of competitive factors within our industry, including the following: ·Pricing. Flexibility to control pricing of products and the ability to use economies of scale to secure competitive pricing advantages; ·Technology. Ability to manufacture products efficiently, utilize low-cost raw materials, and to achieve better production quality; and ·Barriers to entry. Technical knowledge, access to raw materials, local market knowledge and established relationships with suppliers andcustomers 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 smallcompanies competing with each other. Our primary competitors for these products are Baosteel Group Shanghai Ergang Co. Ltd., Jiangyin Fasten SteelProducts Co., Ltd., Jiangyin Walsin Steel Cable Co. Ltd and Shuangyou Eaststeel. Competition among PRC manufacturers of zinc coated prestressed products in China is limited to only four companies. Our main competitors forthese products are Baosteel Group Shanghai Ergang Co. Ltd., Shuangyou Eaststeel and Jiangyin Walsin Steel Cable Co. Ltd. Furthermore, we believe that weare the only Chinese rare earth coated prestressed material manufacturer. While we believe that our rare earth coating capabilities provide us with a competitiveadvantage among our competitors, it is likely that our competitors will seek to develop similar competing products in the near future. We intend to continue toexpend research and development efforts to advance our rare earth coating applications even further. However, there can be no assurance that our initialcompetitive 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 betterpriced 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 productquality, timely delivery and high value. We believe that we have the following advantages over many of our competitors: ·the performance and cost effectiveness of our products; ·our ability to manufacture and deliver products in required volumes, on a timely basis, and at competitive prices; ·superior quality and reliability of our products; ·our after-sale support capabilities, from both an engineering and an operational perspective; ·effectiveness of customer service and our ability to send experienced operators and engineers as well as a seasoned sales force to assist ourcustomers; and ·overall management capability. 21 Seasonality Demand for our products remains fairly consistent throughout the year. Our Raw Materials and Supply Raw Materials High carbon steel wire rods are the primary raw material required to manufacture prestressed steel materials. The quality and cost of the rods wepurchase differ between our plain surface products and our rare earth and zinc coated products. Rare earth and zinc coated products require higher-priced rodsthat are higher in purity and durability. The price for certain rods needed for coated products is approximately $200 per ton higher than rods needed for plainsurface 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 wepurchase substantial quantities from these suppliers, we are often able to procure these products at competitive prices. We usually enter into a one-yearpurchase 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 priorto the delivery of these supplies to us, based upon the prevailing market prices at such time. As we increase the scale of our production, we may need toestablish a more diverse supplier network while attempting to continue to leverage our purchasing power to obtain favorable pricing and delivery and paymentterms. Historically, we purchased a significant percentage of our raw materials from an affiliated entity, Shanghai Z.F.X. Steel Co., Ltd., or Shanghai ZFX,a supplier of steel wire rods, which is controlled by our chairman, Dr. Tang. In fiscal years 2012, 2011 and 2010 we purchased approximately 3.2%, 0% and5.1% of our raw materials from Shanghai ZFX, respectively. As we expand our rare earth business, we anticipate that our purchases from Shanghai ZFX willremain at a minimal level and we will continue to purchase the bulk of our supplies from unaffiliated suppliers in the future, as we did in 2011 and 2012. The suppliers that are unaffiliated with us that supplied us with a significant percentage of our raw materials for the past three years wereZhangjiagang Free Trade Zone, Jiangsu Shagang Group Co., Ltd. and Jiangyin Runde Logistics Co., Ltd., and all are based in China. Purchases from our five largest suppliers amounted to 97.6%, 100% and 99.9% of our raw material purchases in 2012, 2011 and 2010,respectively. We are not dependent on any one of our suppliers, as we are able to source raw materials from alternative vendors should the need arise. We have notexperienced 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, as they have done since the third quarter of 2010, competitiveconditions will influence how much of the price increase we can pass on to our customers. When steel prices decline, as they did in the past from time to time,customer demands for lower prices and our competitors' responses to those demands could result in lower sale prices, lower margins and inventory valued atlower of cost or market adjustments as we use existing steel inventory. In 2010 and 2011, the impact of steel price fluctuation on our results of operations wasimmaterial. In 2012, our average raw material price decreased because China’s steel price decreased as a result of the soft demand in domestic market and highinventory of the industry and we manufactured and sold products which required lower grade and lower price raw materials compared to 2011. We anticipate moderate growth in the demand for steel in 2013 due to the gradual increase in home sales since June 2012, infrastructure constructionremaining stable and expected growth of machinery and automotive industries. As a result, we expect both steel price and average selling prices of our productswill increase slightly, which is not expected to significantly impact our profitability in 2013. Manufacturing Process Equipment Our production facilities use innovative equipment and machinery imported from France and Italy and is of the highest quality in metal wiredrawing, wire stranding, zinc plating and finishing. Our production lines produce prestressed steel materials that meet quality standards mandated bynumerous countries, including Spain, the United Kingdom and South Korea. 22 We own cutting edge technologies in over 20 high-tech fields, including oil-immersion preservation technology, new coating production technology,skin pass coating technology, coating stabilization technology, rare earth alloy plating technology, new high-temperature phosphorization heating technology,new material traction technology, rare earth alloy technology, new fixed scoring technology, new high-temperature low-speed thread stripping technology, anddouble coating stabilization, among others. We believe that we are the leading company in our industry with respect to the implementation of innovativetechnologies in the manufacture of prestressed steel materials. Production Process The production of our products involves various steps, including inspection, pickling, washing, rinsing, phosphatizing, boronizing, surfacetreatment, plating, baking, coating, cooling, polishing, inspection and packaging. The technology and procedures used in the above processes vary among thedifferent products that we manufacture and depend upon the product specifications prescribed by a particular customer. Generally, the manufacturing process involves the following: ·Cleaning steel wire rods or other similar raw materials by chemical pickling, mechanical de-scaling or a similar process. The materials arethen cold drawn and reduced until the desired diameter and resistance characteristics are achieved. This process is what provides thematerial with its strength. ·In the production of strands, the individual wires (either 3 or 7 wires) are braided together to form a strand. ·The final step is to subject the steel material to a thermo-chemical process which endows the material with mechanical properties, such aslow relaxation, which enable the material to last over time. Production Lines We currently have 18 production lines, consisting of the following: ·Two surface treatment production lines, one located in our Maanshan facility and one in our Jiujiang facility, each composed of an acidpickling bath, rinsing bath, high pressure water rinsing bath, phosphating bath, saponification (boronizing) bath and cleaning bath. ·Seven wire drawing production lines, four located in our Maanshan facility and three in our Jiujiang facility, each composed of a pay-offmachine, drawn can and take-up machine. Each of our half-finished products is processed on a wire drawing production line. ·Three PC strand stabilization treatment production lines, two located in our Maanshan facility and one in our Jiujiang facility, eachcomposed of stranding machines, straightening wheels, jockey wheels, medium frequency furnace, cooling tank, take-up and pay-offmachines, a wire arraying machine and a layer winding machine. The PC strand stabilization product lines in our Jiujiang facility produceplain surface PC strands and zinc coated PC strands of various specifications. ·One zinc galvanization production line, located in our Jiujiang facility, composed of a pay-off machine, degreasing furnace, acid rinsingpickling tank, assistant plating tank, drying furnace, galvanizing furnace, drawing tower and take-up machine. Half-finished productsneeded for different series of zinc coated PC wires and strands are produced on this line. ·Two surface finishing production lines, both located in our Jiujiang facility, each composed of a pay-off machine, a finishing machine anda take-up machine. These production lines are used to produce half-finished products of zinc coated PC wires and strands. ·Two PC wire stabilization treatment production lines, both located in our Jiujiang facility, each composed of a pay-off machine, jockeywheel, straightening machine, indent marking machine, medium frequency furnace, cooling tank, towing machine, shearing machine andtake-up machine. Zinc coated PC wires, round PC wires, indented PC wires and helical rib PC wires are produced on these productionlines. ·One unbonded PC strand production line, located in our Jiujiang facility, composed of a pay-off machine, oiling machine, high-densitypolyethylene plastic injection machine, water tank, towing machine and take-up machine. This production line is used to produce differentseries of unbonded plain surface PC strands and unbonded zinc coated PC strands. 23 Quality Control Consistent with our continuing commitment to quality, we impose rigorous quality control standards at various stages in the production process. Inaddition, our facilities are equipped with first-class testing equipment, such as a tensile strength tester and a relaxation tester, which guarantee the high qualityand safety of our products. We strictly comply with various national and international quality standards with respect to the manufacture of pre-stressed materials. Ourcertifications and accreditations include the United Kingdom Accreditation Service (UKAS), the British Standards Institution (BSI) certification, the KoreanStandards Association (KS) certification from South Korea, Market Access certification from the Spanish Ministry of Industry and an ISO 9001certification. Our procedure when discovering any product quality problem in the production process includes immediate shut down for inspection. Once theproblem is solved, we continue with production. If a problem occurs with a product, the product inspector stamps a nonconformity seal and hangs anonconformity label on the problematical product. The nonconforming product is moved to a separate area and is not transferred to the next procedure. We donot 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 12employees 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 markets needs, following the progress of existing projects and the satisfactionof 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 thePRC national bridge exhibition for marketing purposes. Bidding Process Many of the projects in our industry are awarded through a competitive bidding process among qualified bidders. The evaluation of proposals isundertaken objectively, consistently and without bias towards particular bidders. Qualified bidders are evaluated against a predetermined set of criteria, andcontracts are almost never awarded on the basis of price alone. A contract is awarded to the bidder or bidders that provide what is considered a proposal thatoffers the best value to the purchaser, as determined by the predetermined criteria set by the purchaser. The criteria vary depending on the type of contract.Examples of criteria include price, technical merit, flexibility to future changes to requirements, speed of product delivery, sustainability and quality. Duringthe bid evaluation process, our marketing team and members of our management respond to various inquiries and our company undergoes variousassessments, including compliance, technical, commercial bid and qualification assessments. Distribution Both of our manufacturing plants are equipped with facilities for cargo lifting, shipment and distribution. Products for domestic customers aredistributed to the destination designated by our customers. Products for international customers are delivered either to carriers at various ports of exit in Chinaor 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 engineerstrain our customers to install and identify and address safety and maintenance concerns. After a sale of our product, we introduce and advertise the companybrand position, distribute a guide application method process, issue regulation manuals, and explain and solve general and difficult problems. Our Customers We sell the majority of our products domestically in China. Since our inception, we have also exported our products to foreign countries, includingthe United States, Canada, Spain, South Korea, Taiwan, Australia, South Africa and Saudi Arabia, among others. Our customers are diverse in nature, aswe 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 ofthe product. 24 The customers whose purchases comprised a significant percentage of our sales in 2012, 2011 or 2010 were Shanghai Zhaoyang New Metal Material(China), Jiangyin Jingchen Logistics Distribution Exchange Co., Ltd. (China), and Zhangjiagang Ruifeng Iron and Steel Co. (China). Shanghai ZhaoyangNew Metal Material (China) owns a 30% interest in Shanghai Ossen Investment Holding (Group) Co., Ltd., of which Dr. Tang, our chairman, is president.Shanghai Pujiang was acquired in September 2010 by one of our affiliates, Ossen Shanghai. While we value our relationship with each of our customers, we believe that generally the loss of any particular customer, including our largestcustomers, would not materially impact our business in the long-term. Many of our customer contracts relate to designated infrastructure projects which areperformed during a defined period of time, and are not necessarily long-term in nature. Accordingly, if any of our customers were to discontinue purchasingour products, we would actively seek new customers, which we have been successful doing in the past. In 2012, 2011 and 2010, sales to our six largest customers, in the aggregate, accounted for approximately 78.1%, 64.2% and 74.4% of our totalsales, respectively. The following table provides the name of each customer that contributed to 10% of our revenues in each of 2010, 2011 and 2012 and therevenues generated from such customer during these periods. Name of Customer 2012 Revenues 2011 Revenues 2010 Revenues (%) (%) (%) Shanghai Zhaoyang New Metal Material Co., Ltd. * * 13 Zhangjiagang Ruifeng Iron and Steel Co., Ltd. 39 25 32 Jiangyin Jingchen Logistics Distribution Exchange Co., Ltd. 21 15 18 * Less than 10% of our annual revenues. The following table describes the breakdown of our sales in 2012, 2011 and 2010 between our domestic and international customers. Year Ended December 31, 2012 2011 2010 Domestic Sales $111,925,870 $111,130,918 $113,873,505 International Sales 10,472,016 7,486,053 3,579,519 Total Sales $122,397,886 $118,616,971 $117,453,024 Recent Projects The following list is a sample of some of the recent projects in which our prestressed steel materials were used in both the domestic and theinternational markets: Jing-Bao Expressway, PRC Guizhou Qingshuijiang Bridge,PRC Anhui Wuyan Expressway, PRC Maanshan Yangtze River Bridge, PRC Shennongjia Airport ExpresswayBridge, PRC Anhui Huangshan WenfengBridge, PRC Beijing-Fuzhou Railway Project JiangxiSection, PRC Ningbo-Hangzhou High SpeedRailway, PRC Baekseok Bridge, South Korea Binh Loi Bridge, Vietnam Anhui Xuming Expressway, PRC Hunan Changxiang Expressway, PRC Jiangxi Congren Bridge, PRC Hunan Tongping Expressway,PRC Nantong Dingbaohe Bridge, PRC China-Burma Gas Pipeline Project Anhui 205 State Road, PRC Hunan Hengshan Grand Bridge,PRC Fujian Ningwu Expressway, PRC Anhui Jiuhua River Grand Bridge,PRC 25 Research and Development Our research and development efforts are focused on three objectives: ·Superior product safety and quality; ·Reduction of operating costs; and ·Sustaining growth through the development of new products. We have a research and development team at each of our facilities. In total, nineteen employees are dedicated to research and development. We spent$1.1 million, $0.8 million and $0.6 million in 2012, 2011 and 2010 respectively, on our research and development activities. The nature of our research anddevelopment activities needed for our product development is generally not cash intensive. In addition, a portion of the work is conducted by organizations anduniversities 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 developmentcapabilities in the field of coating technology. We have developed a business model that involves a very close interrelationship between our research anddevelopment department and our product development and marketing departments. As a result, we focus our research and development activities on projectsthat would enable us to branch out our products into new desired markets. In addition, we conduct research and development activities that enable us toincrease our market share in existing markets in the PRC and internationally. We also focus certain of our research and development activities on highermargin 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 thecomprehensive function and manufacturing technique of our high strength, anti-erosion zinc coated prestressed strands. These high strength products, whichhave high endurance against erosion, are sold domestically and internationally. In addition, we are cooperating with other steel manufacturers in researchefforts 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 highperformance and are designed for our international customers. We entered into an agreement with the Shanghai Machinery Manufacturing Technology Research Institute in 2000 and pursuant to this agreement, weestablished a joint laboratory to design high strength, indented PC wire and zinc coated PC wire according to our specifications or requirements of ourcustomers. These customized products designed by our joint laboratory can reduce customer costs by improving the efficiency of the use of raw materials.This cooperation is a mutually beneficial and there is no fee for the research and laboratory results. We believe that our research and development activities and production technology for rare-earth zinc coated materials have contributed significantlyto our growth. By using rare earth zinc-plating technology, we are able to lower the temperature for the stabilizing treatment during the production process andthereby minimize the loss of strength during the stabilizing process. As a result, this technology reduces the level of strength required of our raw materialsunder circumstances of unvaried finished product strength requirement and enables us to produce materials with greater strength under circumstances inwhich the strength of raw materials remains firm. We believe that we are the only enterprise which can produce rare-earth zinc coated pre-stressing materials of1,860 megapascal strength level and 15.20 mm diameter in the world, as a result of our rare earth zinc-plating technology. We will continue our research anddevelopment 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. For example, we are developing rare earthcoated prestressed materials that are larger (up to 15.24 mm and 1,860 mPa) and can withstand greater levels of pressure as well as new greased prestressedmaterials of 12.7 mm and 1,860 mPa. Currently, we are in the stage of testing these products and collecting experimental data. We also own or lease varioustechnologies that improve the quality of our products and reduce our operating costs, including coating polished technology, stabilizing treatment technologyfor 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. We will continue to focus on developing fundamental coating technology and applications for the following technologies in the future: ·Rare earth coating technology; ·Surface finishing/ polishing technology; ·Dual tension gear wire stabilizing treatment process; ·Connector production technology without shutdown; ·New technology on constant high temperature constant tension stabilizing treatment; and 26 ·High speed stabilizing treatment technology. Intellectual Property We rely on a combination of patents, trademarks, domain names and confidentiality agreements to protect our intellectual property. Ourmanufacturing 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 confidentialityand proprietary information agreements with us. These agreements address intellectual property protection issues and require our associates to assign to us allof the inventions, designs and technologies they develop during the course of employment with us. We are not aware of any material infringement of ourintellectual property rights. Patents As of December 31, 2012, we had twenty patents registered with the State Intellectual Property Office of the PRC, including three invention patentsand seventeen utility model patents, compared to twenty-four patents with two invention patents and twenty-two utility model patents on December 31, 2011.In addition, we have applied for an additional nine invention and utility model patents as of March 31, 2013. During 2012, six pending patents were approved including one invention patent and five utility model patents, and five pending patent applicationswere rejected by the State Intellectual Property Office. In addition, we gave up ten utility model patents because the annual patent fee increases and weselectively gave up outdated patents and decided to maintain a certain amount of new patent applications every year. 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 anddevices 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 theinvention 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 thePRC. The following table provides the name, the application number or patent number, the name of the applicant or patent holder and the status of ourregistered invention patents and each of our invention patent applications, and the expiration date of our registered invention patent: Name Application No./Patent No. Applicant/PatentHolder Status ExpirationDate Stabilizing Process of Indented Wire 2007101571490 Ossen Jiujiang Registered 11/22/2027Method to Change the Length of Waste of Stranded Wire Joint 200910144241.2 Ossen Materials Registered 8/9/2031Production Process of Zinc Coated Steel Wire 2010101051799 Ossen Jiujiang Registered - 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 ofour 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/PatentHolder Status ExpirationDateHanging Box Used in Phosphate Bath of Stranded Wire ZL200820185077.0 Ossen Materials Registered 08/21/2018 Oiling Device for PC Strand ZL200820185079. x Ossen Materials Registered 08/21/2018 Water Cut-off Device to Test Infrared Temperature of StrandingMachine ZL200820185080.2 Ossen Materials Registered 08/21/2018 27 Name Application No./Patent No. Applicant/PatentHolder Status ExpirationDateInfrared Safety Control Device for Lift Truck ZL200820185081.7 Ossen Materials Registered 08/21/2018 Device Designed to Control Smoke by Temperature ZL200820185082.1 Ossen Materials Registered 08/21/2018 Device Designed to Control Water Temperature WhenPhosphatizing the PC Strand 200920233724.5 Ossen Materials Registered 07/29/2019 Device for Testing Center Steel Wire Broken for Stranded Wire 200920233725.x Ossen Materials Registered 07/29/2019 Device Designed to Test Temperature of Steel Wire WhenDrawing the Stranded Wire 200920233726.4 Ossen Materials Registered 07/29/2019 Steel Wire Joint Machine with Pressure Detecting Function 200920233728.3 Ossen Materials Registered 07/29/2019 Automatic Paper Rolling Device of Asphalt Paper 200920233729.8 Ossen Materials Registered 07/29/2019 Aerial Overhaul Platform for Forklift 200920233730.0 Ossen Materials Registered 07/29/2019 Skid Used When Packing PC Strand 200920233731.5 Ossen Materials Registered 07/29/2019 Inductive Water Saving Device 201120218155.4 Ossen Materials Registered 06/25/2021 Anti-Impact Gear 201120217756.3 Ossen Materials Registered 06/23/2021 Lock Device for PC Strand Production Wheel 201120218156.9 Ossen Materials Registered 06/25/2021 New Dies for Wire Drawing 201220723167.7 Ossen Materials Registered - Energy-saving Device for Acid Mist Drainage 201220722838.8 Ossen Materials Registered - 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 WorldIntellectual Property Organization (WIPO) in accordance with Madrid Agreement. The five trademarks which are described in the table below were transferredby Shanghai Ossen Investment Co., Ltd. to Ossen Materials in 2008 and 2009. Name of Trademark Application No./Trademark No. Applicant/TrademarkHolder Status A Figurative Trademark (Registered under Madrid Agreement ) 0973552 Ossen InnovationMaterials Registered “OSSEN” (Registered under Madrid Agreement ) 0945308 Ossen InnovationMaterials Registered A Figurative Trademark (PRC Domestic Registered) 4396898 Ossen InnovationMaterials Registered “OSSEN” (PRC Domestic Registered) 4396895 Ossen InnovationMaterials Registered “” (Domestic Registered) 4396896 Ossen InnovationMaterials Registered 28 Environmental Matters The Environmental Protection Law, promulgated by the National People’s Congress on December 26, 1989, is the primary law for environmentalprotection in China. The law establishes basic principles for coordinated advancement of economic growth, social progress and environmental protection, anddefines the rights and duties of governments at all levels. Local environmental protection bureaus may set stricter local standards than the national standardsand 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 wastewater, gas and solid waste materials during the course of our production. We believe that we are in compliance in all material respects with applicable PRClaws and regulations. All of our products meet the relevant environmental requirements under PRC laws and during the three years ended December 31, 2012,2011 and 2010, we were not subject to any fines or legal action involving non-compliance with any relevant environmental regulation, nor are we aware of anythreatened 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 coversour present business of manufacturing, processing, procuring and selling metallic materials, metallic products, new alloy materials, rare earth applicationproducts, building materials, general machinery and related products. Prior to expanding our business beyond that of our business license, we are required toapply 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 safetyconditions, citizenship requirements, work permits and travel restrictions. These include local labor laws and regulations, which may require substantialresources for compliance. China’s National Labor Law, which became effective on January 1, 1995, and China’s National Labor Contract Law, whichbecame effective on January 1, 2008, permit workers in both state and private enterprises in China to bargain collectively. The National Labor Law and theNational Labor Contract Law provide for collective contracts to be developed through collaboration between the labor union (or worker representatives in theabsence of a union) and management that specify such matters as working conditions, wage scales, and hours of work. The laws also permit workers andemployers 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’smajor 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. Amendedversions 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 anapplication 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 theconvention (12 months for inventions and utility models, and 6 months for industrial designs). 29 The Patent Law covers three kinds of patents - patents for inventions, utility models and designs. The Chinese patent system adopts the principle offirst 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 allowsthe patenting of inventions or utility models that possess the characteristics of novelty, inventiveness and practical applicability only. For a design to bepatentable 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 orabroad 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 thesale of goods, the provision of repairs and replacement services and the importation of goods in China are generally required to pay VAT at a rate of 17.0% ofthe gross sales proceeds received, less any deductible VAT already paid or borne by the taxpayer. Furthermore, when exporting goods, the exporter is entitled toa 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 thedistribution 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 Administrationof Foreign Exchange, or SAFE. Foreign-invested enterprises may buy, sell and/or remit foreign currencies only at those banks authorized to conduct foreignexchange business, after providing valid commercial documents and, in the case of capital account item transactions, obtaining approval from SAFE. Capitalinvestments by foreign-invested enterprises outside of China are also subject to limitations, which include approvals by the Ministry of Commerce, SAFE andthe 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, asdetermined in accordance with PRC accounting standards and regulations. In addition, a foreign-invested enterprise in China is required to set aside at least10% 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 itsregistered capital. These reserves are not distributable as cash dividends. The board of directors of a foreign-invested enterprise has the discretion to allocate aportion 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, 2012, 2011 and 2010 we had 235, 238 and 238 full-time employees. As of March 30, 2013 we had 233 full-time employees. Theoverall number of employees decreased significantly after December 31, 2009 because of improvements in our production management. The number ofmanufacturing employees decreased from 250 to 127, from December 31, 2009 to December 31, 2010 as a result. There was no change in the number ofemployees in 2011 as compared to 2010. The number of manufacturing employees increased from 127 to 128, from December 31, 2011 to December 31,2012. The following table shows the breakdown in numbers and percentages of employees by department as of December 31, 2012: Functions Number ofemployees % of total Manufacturing 128 54%Technology 25 11%Research & Development 19 8%Quality Control 10 4%General Administration, Purchasing, Sales and Marketing 53 23%Total 235 100% We have not experienced any significant labor disputes and consider our relationship with our employees to be good. Our employees are not coveredby 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 wereapproximately $111,690, $92,139 and $71,224 in 2012, 2011 and 2010, respectively. 30 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 surfacetreatment, materials science, and technology engineering. We believe we have the ability to attract and retain high quality engineering talent in China based onour competitive salaries, annual performance-based bonus system, and equity incentive program for senior employees and executives. In addition, we have atraining program for entry-level engineers that allows them to work closely with an experienced mentor to gain valuable hands-on experience and provide otherprofessional development opportunities, including seminars where experienced engineers give lectures on specific engineering topics and new methods that canbe applied to various projects. Legal Proceedings From time to time, we may be involved in various claims and legal proceedings arising in the ordinary course of business. We are not currently aparty to any such claims or proceedings which, if decided adversely to us, would either, individually or in the aggregate, have a material adverse effect on ourbusiness, financial condition, results of operations or cash flows. 4C. Organizational Structure We are affiliated with the Ossen Group, which is a Chinese conglomerate controlled by our Chairman, Dr. Tang. The Ossen Group’s core businessesinclude steel manufacturing, real estate and other investments. Our Shareholders Dr. Tang, our chairman, owns 100% of the shares of Effectual Strength Enterprises Ltd., a British Virgin Islands company, which currently ownsapproximately 59.7% of our outstanding ordinary shares. The spouse of our chief executive officer, Wei Hua, owns 100% of the shares of Fascinating AcmeDevelopment Ltd., which owns 3.0% of our outstanding ordinary shares. The spouse of the chief executive officer of Shanghai ZFX, which is an affiliatedcompany of ours that supplies us with raw materials, owns 100% of the shares of Gross Inspiration Development Ltd., which owns approximately 3.0% ofour outstanding ordinary shares. In December 2010, 5 million shares were issued in our initial public offering. On November 30, 2011, we announced a sharerepurchase program and as of December 31, 2012, a total of 98,041 shares of our ADS’s have been purchased. As a result, currently we have 24.6% of ourordinary shares, or 4,901,959 shares, trading on NASDAQ in the form of ADS’s. The holders of the remaining approximately 9.7% of our shares areinvestors that are residents of the PRC and are unaffiliated with Ossen. On November 30, 2011, we announced a share repurchase program for up to a total of 500,000 shares of our ADS’s through May 2012 inaccordance with applicable requirements of Rule 10b5-1 and/or Rule 10b-18 under the U.S. Securities Exchange Act of 1934, as amended. In May 2012 theshare repurchase program was further extended for another 12 months. In December 2012, we did a review of the share repurchase program and decided tosuspend the program to conserve capital. As of December 31, 2012, a total of 98,041 shares of our ADS’s have been purchased under the repurchase program. 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 beenheld by Dr. Tang, our Chairman, since inception. In May 2010, Dr. Tang transferred these shares to Ossen Innovation Group in anticipation of the publiclisting of our company’s shares in the United States. Ossen Asia is a British Virgin Islands limited liability company organized on February 7, 2002. Ossen Asia has one direct operating subsidiary inChina, Ossen Innovation Materials Co. Ltd., or Ossen Materials. Ossen Asia owns 81% of the equity of Ossen Materials. Topchina is a British Virgin Islands limited liability company organized on November 3, 2004. Ossen Materials and Topchina directly own anoperating subsidiary in China, Ossen (Jiujiang) Steel Wire & Cable Co., Ltd., or Ossen Jiujiang. As of December 31, 2011, Ossen Materials owns 20.5% ofthe equity of Ossen Jiujiang and Topchina owns 79.5%. Ossen Materials Ossen Materials was formed in China on October 27, 2004 as a Sino-foreign joint venture limited liability company under the name Ossen(Ma’anshan) Steel Wire and Cable Co., Ltd. On May 8, 2008, Ossen Materials was restructured from a Sino-foreign joint venture limited liability company toa corporation. The name of the entity was changed at that time to Ossen Innovation Materials Co., Ltd. 31 Ossen Asia owns 81% of the equity of Ossen Materials. The remaining 19% is held in the aggregate by four Chinese entities, two of which arecontrolled by Chinese governmental entities, one of which is controlled by Zhonglu Co. Ltd., a company whose shares are listed on the Shanghai StockExchange, and one of which is controlled by Chinese citizens. Through Ossen Materials, we have manufactured and sold plain surface PC strands, zinc coated PC steel wires and PC wires in our Maanshan Cityfacility since 2004. The primary markets for the products manufactured at our Maanshan facility are Anhui Province, Jiangsu Province, Zhejiang Provinceand 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 ofJiujiang Steel & Iron Company, including equipment, land use rights and inventory, for approximately RMB 20,000,000 (approximately $2.9 million). OssenJiujiang was formed by Ossen Shanghai in the PRC as a Sino-foreign joint venture limited liability company on April 13, 2005. Ossen Shanghai thentransferred 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 Asiaand 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, OssenAsia 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 byapproximately $29.2 million, which capital must be paid in full by November 2012. As of December 31, 2011, Topchina paid approximately $20 million ofthe 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. Once theincreased registered capital is fully paid, Topchina will own 85% of Ossen Jiujiang and Ossen Materials will own 15%. Through Ossen Jiujiang, we manufacture zinc or rare earth coated PC wires and strands, plain surface PC strands, unbonded PC strands, helicalrib 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. 32 Organizational Structure Chart The following chart reflects our organizational structure: 33 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 tothe 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-userights for our Maanshan facility expires in 2058 and the rights for our Jiujiang facilities expire at different intervals, ranging from 2055 to 2057. Our facilitiescover an aggregate of approximately 106,136 square meters. As of December 31, 2012, our production facility in Maanshan City had a total gross floor area of approximately 47,356 square meters and weemployed 61 production personnel at that facility. Our Maanshan facility contained seven production lines with an annual production of approximately82,777 tons in 2012. As of December 31, 2012, our production facility in Jiujiang City had a total gross floor area of approximately 58,780 square metersand we employed 67 production personnel at that facility. Our Jiujiang facility contained eleven production lines with an annual production of approximately55,444 tons in 2012. Historically, we have not experienced any form of disruption in our production facilities. We believe that our current property rights are sufficient for our current operations. However, to continue growth, we are expanding our Maanshanfacility. Our growth strategy is to increase our production capacity from 140,000 tons annually to 170,000 tons annually following the expansion of ourMaanshan facility and the installation of new coated products production lines. Our plan is to expand the existing building and to install new production lineswhich will be used for the production of approximately 30,000 tons annually of higher margin rare earth coated prestressed materials, including rare earthcoated PC wires and PC strands. A portion of the proceeds from our initial public offering was used as down payment to purchase manufacturing equipment.We currently expect to complete the installation and start operation of our new production lines in the first half of 2014, pending our ability to expand ourbusiness and the general business environment in China at that time. 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 financialstatements and other financial data that appear elsewhere in this annual report. In addition to historical information, the following discussion containsforward-looking statements based on current expectations that involve risks and uncertainties. Actual results and the timing of certain events may differsignificantly from those projected in such forward-looking statements due to a number of factors, including those set forth in “Risk Factors” andelsewhere in this report. Our consolidated financial statements are prepared in conformity with U.S. GAAP. 5A. Operating Results Overview General We manufacture and sell an array of plain surface prestressed steel materials and rare earth coated and zinc coated prestressed steel materials, whichwe believe is the most comprehensive array among our competitors in China. Our materials are used in the construction of bridges, highways and otherinfrastructure projects in the PRC and internationally. Our facilities are located in Maanshan City, Anhui Province and in Jiujiang City, Jiangxi Province, inthe People’s Republic of China. Historically, we and our customers have had a greater than 90% success rate with respect to winning projects on which eitherwe or our customers have bid. Based on our extensive experience in the industry, we believe that Ossen is one of the leading enterprises in the PRC in thedesign, engineering, manufacture and sale of customized prestressed steel materials used in the construction of bridges, highways, and other infrastructureprojects in China. 34 On July 7, 2010, Ultra Glory and its sole shareholder entered into a share exchange agreement with Ossen Innovation Group, a British Virgin Islandslimited liability company organized on April 30, 2010 under the BVI Act and the shareholders of Ossen Innovation Group. Pursuant to the share exchangeagreement, Ultra Glory acquired from the shareholders of Ossen Innovation Group all of the issued and outstanding shares of Ossen Innovation Group, inexchange for an aggregate of 10,000,000 newly issued ordinary shares issued by Ultra Glory to the shareholders of Ossen Innovation Group. In addition, thesole 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, tothe 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 OssenInnovation Group prior to the business combination acquired 100% of the equity of Ultra Glory, and Ultra Glory acquired 100% of the equity of OssenInnovation Group. Ossen Innovation Group is now a wholly owned subsidiary of Ultra Glory. In conjunction with the business combination, Ultra Gloryfiled 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 businesscombination, we ceased to be a shell company. Important Factors Affecting our Results of Operations and Existing Trends International and Domestic Markets Our results of operations depend in part on the proportion of international sales to domestic sales that we attain during a particular financial reportingperiod. Sales to international customers have historically generated profit margins that are approximately 2% to 5% higher than sales to domestic customers. Inaddition, we have historically collected a significant percentage of revenues generated by international sales by letter of credit, which enables us to convertaccounts receivable into cash more quickly. Our domestic customers generally pay approximately 90 days after receiving the materials at the construction site.The payment terms, however, could be extended longer if the Chinese central bank tightens credit policy. In 2008, we sold 37.6% of our products tointernational customers. However, in 2012, 2011 and 2010, we sold only 8.6%, 6.3% and 3.0%, respectively, of our products to international customers, as aresult of the global economic and financial crisis and the imposition of anti-dumping duties by the U.S. and the European Union. According to the CASS report, bridge and other infrastructure construction is currently experiencing significant growth in China, which trend isexpected to continue until 2020. Under existing PRC governmental policies, significant investments are expected to be made during the next decade to constructmore than 200 new bridges over dozens of Chinese rivers, including the Yangtze River, Yellow River, Songhua River, Jiangxi River, Xiang River, Han River,Minjiang River and Pearl River. In addition, approximately 400 old bridges will need to be reinforced or expanded during that period. In addition, over the nextdecade, China is expected to build four cross-sea bridges and tunnels, including the Bohai Bay Cross-Sea Bridge, the Hong Kong-Zhuhai-Macao Cross-SeaBridge, the Qiongzhou Strait Bridge and the Taiwan Strait Tunnel. The Railway Network Plan issued by the Ministry of Railways of the PRC has indicated that $290 billion will be invested in railway constructionfrom 2009 to 2013, which will drive the domestic demand for prestressed materials. As a result of the July 2011 high speed railway accident in South China,many railway projects were temporarily halted and the Ministry of Railways faced funding difficulties. In February 2012, Chinese Premier Wen reassured thepublic about the government’s plan on railway network construction in China when he announced that the government will help raise the funds necessary toconstruct railways. Funding solutions will include funds directly from the government, bond issuances guaranteed by the government and introduction ofprivate capital into the sector. On March 10, 2013, China’s State Council announced its plan to restructure the Ministry of Railways (MOR), to separate theadministrative and supervision function from the commercial arm. The responsibility for planning and policy-making for railway development is to move tothe Ministry of Transport (MOT). A newly created National Railways Bureau (NRB) under the MOT will be responsible for setting technical standards ofrailways and supervising the safety of operations, quality of transport services and quality of railway projects. The MOR’s enterprise/commercialresponsibilities will be incorporated into China National Railway Co. (“CNRC”), which was established on March 14, 2013. CNRC will continue to enjoyfavorable tax and other preferential policies formerly granted to the MOR. Bonds issued for railway construction will continue to be supported by thegovernment and China's 2011-2015 railway construction programs will go-ahead as planned. It is expected the reform of the MOR will bring more privateinvestment and much needed efficiencies to the railway industry. We expect the profitability and cash flow of the MOR’s suppliers, including OssenInnovation, would improve as the one-buyer market is broken up and there is an increase of sources of funding. We generated approximately 6.0% and 8.4% of our revenue in 2011 and 2012 from sales to customers in the Asia Pacific region, including primarilyVietnam, Bangladesh, Philippines, Indonesia, South Korea and Australia, primarily for use in the construction of bridges. Due to increased demand for ourproducts in the PRC market and these other markets, we do not intend to reestablish a presence in the United States or the European Union at the levels weexperienced 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 onprojects or to reengage with former customers or establish relationships with new customers, we would pursue such opportunities. 35 Product Mix and Industry Trends Our results of operations also depend on the product mix that we attain during a particular financial reporting period. We produce and sell productsaccording to customer orders. The sales prices of our rare earth coated products are generally higher than the prices of our plain surface, stabilized and zinccoated products. Since the increase in our expenses in developing and selling rare earth coated materials is less than the increased sales prices, these productsgenerate higher revenues. Between 2009 and 2011, in general the average gross margin of our plain surface and stabilized products has been approximately 10-15% and theaverage gross margin of our coated products (including rare earth coated and zinc coated products) has been approximately 20-30%. In 2012, the average grossmargin of plain surface products was approximately 7% and the average gross margin of our coated products, including rare earth coated and zinc coatedproducts, was approximately 11%. Although sales volume of our products increased in 2012 compared to 2011, the market was still in recovery stage and thedemand for our higher margin, higher strength coated products were still low. We sold lower margin products to meet market demand and customer orders togenerate more revenue as compared to 2011, which consequently impacted our profitability in 2012. We expect that gross margin on our coated products will gradually recover in 2013 as market conditions improve and continue to expand as a resultof the large overall demand in the Chinese market. In the second half of 2012, China’s National Development and Reform Commission accelerated theapproval of investment projects and most of these projects are railways, highways, airports and other major infrastructure projects. Most of these projects willrequire higher strength PC wires and PC strands and we expect the sales of our higher strength rare earth coated PC wires and PC strands with higher grossmargin will benefit from these approved projects. In addition, gross margins for our rare earth coated products are generally higher than zinc coated productsbecause rare earth coating technology enables us to produce base on lower grade raw materials, which increases gross margin. However, there is alsopossibility for the gross margin on our coated products, including rare earth, to decrease in the future in the event that more competitors that successfullydevelop products of the same quality as our coated products at a lower cost penetrate our market or if demand for our coated product weakens because the PRCgovernment scales back spending on infrastructure projects or for other reasons. As an overall percentage of sales, sales of our coated products increased from 4% in 2008 to 51.7% in 2010, 48% in 2011 and 75.7% in 2012.89.9% and 88.5% of our coated product sales in the years ended December 31, 2011 and December 31, 2012 were sales of rare earth coated products and theremaining 10.1% and 11.5%, respectively, were zinc coated products. Our plan is to continue to increase sales of our rare earth coated products tomanufacturers of steel cables for bridges and other infrastructure projects, both in the PRC and internationally, in order to increase our revenues and profits. One of our affiliates, Ossen Shanghai, acquired Shanghai Pujiang Cable Co., Ltd. in September 2010 and its subsidiary Zhejiang Pujiang CableCo., Ltd., or Shanghai Pujiang, a downstream manufacturer of cables for use in bridge construction in the PRC. In the bridge construction industry, cablemanufacturers are asked to bid on new projects. Manufacturers of prestressed materials, such as us, who provide the raw materials for the bridge cables,either participate indirectly in the bidding process through the cable manufacturers or participate directly. Since we are now affiliated with one of the leadingcable manufacturers in the PRC, we anticipate that we will have more opportunities to participate in bids for bridge projects. We expect sales of our rare earthcoated products and our profits to increase as a result of this acquisition. In 2012, Zhejiang Pujiang, a subsidiary of Shanghai Pujiang, contributedapproximately 0.4% of our total revenue. See “Business – Our Growth Strategy – Strengthening our relationships with key customers, and diversifying ourcustomer base” below. 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 awhole is cyclical and, at times, pricing and availability of steel can be volatile due to numerous factors beyond our control, including general domestic andinternational economic conditions, labor costs, sales levels, competition, levels of inventory held by us and other steel service centers, consolidation of steelproducers, higher raw material costs for steel producers, import duties and tariffs and currency exchange rates. This volatility can significantly affect theavailability and cost of raw materials for us. We, like many other steel service centers, maintain substantial inventories of steel to accommodate the short lead times and just-in-time deliveryrequirements of our customers. Accordingly, we purchase steel in an effort to maintain our inventory at levels that we believe to be appropriate to satisfy theanticipated needs of our customers based upon historic buying practices, supply agreements with customers and market conditions. Our key suppliersusually dedicate portions of their inventories as reserves to meet our manufacturing requirements. These key suppliers are generally provided a prepaymentand in return, they give us a discount of approximately $40 per ton on average. When market condition and our profitability improve, we expect to graduallyreduce prepayment and purchase at prevailing market prices in effect at the time we place our orders to improve our cash position and liquidity. We have no long-term, fixed-price steel purchase contracts. When steel prices increase, competitive conditions will influence how much of the priceincrease 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 andprofitability of our business could be adversely affected. 36 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 goodwillimpairment charges. Changing steel prices therefore could significantly impact our net sales, gross margins, operating income and net income. In 2010 and2011, the impact of steel price fluctuation on our results of operations was immaterial. In 2012, our average raw material price decreased because China’s steelprice decreased as a result of the soft demand in domestic market and high inventory of the industry and we manufactured and sold products which requiredlower grade and lower price raw materials compared to 2011. We currently purchase almost all of our new materials from a very small number of suppliers. Purchases from our five largest suppliers amounted to97.6%, 100% and 99.9% of our total raw material purchases in 2012, 2011 and 2010, respectively. To date, we have been able to obtain favorable pricingand delivery terms from these suppliers. However, as we continue to increase the scale of our production, we may need to further diversify our suppliernetwork and, as a result, may not be able to obtain favorable pricing and delivery terms from new suppliers. We acquired 3.2%, 0% and 5.1% of our raw materials from Shanghai ZFX in the years ended December 31, 2012, 2011 and 2010, respectively.Shanghai ZFX procures materials from the limited number of high quality manufacturers and suppliers of our raw materials in the PRC. However, since theintroduction in 2009 of our rare earth coated materials, which undergo a coating process that reduces the loss in strength and performance that prestressedmaterials otherwise undergo during our manufacturing processes, we have lowered the standards for strength and performance requirements for our rawmaterials. As a result, we have been able to expand our supplier base to include suppliers of products with lower levels of strength and performance and havenot relied as heavily on supplies from Shanghai ZFX. As sales of our rare earth coated materials increase, we expect that the percentage of purchases fromShanghai ZFX will remain at minimal level in the near future. Production capacity In order to capture additional market share for our products, we have expanded over the past several years, and plan to continue to expand, ourproduction capacity. Increased capacity has had, and could continue to have, a significant effect on our results of operations, by allowing us to produce andsell more products to generate higher revenues and profits. Our net proceeds from the December 2010 initial public offering were used to increase ourproduction capacity. To date, we have spent $7.9 million as prepayments for the purchase of manufacturing equipment. Our growth strategy is to increase ourproduction capacity from 140,000 tons annually to 170,000 tons annually following the expansion of our Maanshan facility and the installation of new coatedproducts production lines. Our plan is to expand the existing building and to install new production lines which will be used for the production ofapproximately 30,000 tons annually of higher margin rare earth coated prestressed materials, including rare earth coated PC wires and PC strands. As ofDecember 31, 2012, we had production capacity of 140,000 tons annually, which was same as December 31, 2011. For 2012, most of our production capacity was utilized and approximately 91% of coated products sold in 2012 were rare earth coated products.Based on existing and anticipated trends in our industry, we believe that utilization in 2013 will reflect 2012 utilization rates, and we anticipate adding 30,000tons of annual production capacity for rare earth coated products in the first half of 2014 as a result of our capacity expansion plan, pending our ability toexpand our business and the general business environment in China at that time. 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, economicconditions in China affect virtually all aspects of our operations, including the demand for our products, the availability and prices of our raw materials andour other expenses. Domestic demand for, and consumption of, prestressed steel products has increased substantially as a result of this growth. We anticipatethat the demand for our materials in China will continue to increase as the Chinese government carries out its stimulus plan and other plans to further developthe transportation infrastructure in the PRC. However, any adverse changes in economic conditions or regulatory environment in China may have a materialadverse effect on our future performances. 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 aresubject to the PRC enterprise income tax, or EIT. According to the relevant laws and regulations in the PRC, foreign invested enterprises established prior toJanuary 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 wassubject 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 yearsended December 31, 2008, and a 50% income tax reduction during the three years ended December 31, 2011. Ossen Materials was subject to a 15% tax rate through 2012 as the result of its being designated a high-tech enterprise. In 2012, Ossen Materialsrenewed its status of high-tech enterprise, and will be subject to a 15% tax rate through 2015. Ossen Jiujiang was subject to a 15% tax rate through 2011 asthe result of its being designated a high-tech enterprise. Starting from January 1, 2012, Ossen Jiujiang enjoys a tax rate of 15% as it is considered as a high-tech enterprise. As our income tax obligations increase over time, our net income will be affected. 37 Costs of being a public company Prior to our initial public offering, Ossen did not operate as a public company. Compliance with our obligations as a public company will requiresignificant management time and continued increases in general administrative expenses, including insurance, legal and financial compliance costs. 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 operationsare translated at average exchange rates during the relevant financial reporting periods, assets and liabilities are translated at the unified exchange rate at the endof these periods and equity is translated at historical exchange rates. Adjustments resulting from the process of translating the local currency financialstatements 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. Wealso derive an insignificant amount of revenue from providing services to select customers. Service revenues account for less than 2% of total revenues for allperiods 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. Forexample, we typically pay our international distribution customers a commission ranging from 0.6% to 1.4% of invoiced amounts (including VAT) actuallypaid to us. General and administrative expenses. General and administrative expenses consist primarily of employee remuneration, payroll taxes and benefits,general office expenses and depreciation. We expect administrative expenses to continue to increase as we incur additional expenses related to costs ofcompliance with securities laws and other regulations, including increased audit and legal fees and investor relations expenses. Financial expenses. Financial expenses consist of interest expense on bank loans, interest income and other bank charges Other Income . Our other income consisted of government grants and revenue from sales of scrap materials in 2012, 2011 and 2010 Income Taxes . Ossen Materials and Ossen Jiujiang have been recognized by their respective local government agencies as high-tech enterprises. As aresult, both subsidiaries were subject to an income tax rate of 15% under relevant PRC income tax laws in 2012. As our income tax obligations increase over time, our net income will be affected. 38 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. (All amounts in U.S. dollars, except for percentages) For Year Ended December 31, 2012 % of Revenue 2011 % of Revenue 2010 % of Revenue Revenues $122,397,886 100.0% $118,616,971 100.0% $117,453,024 100.0%Cost of Goods Sold 111,611,457 91.2% 96,588,172 81.4% 92,298,319 78.6%Gross profit 10,786,429 8.8% 22,028,799 18.6% 25,154,705 21.4%Selling expenses 917,074 0.7% 1,216,504 1.0% 660,934 0.6%General and administrative expenses 3,950,934 3.2% 2,747,514 2.3% 1,796,995 1.5%Total operating expenses 4,868,008 4.0% 3,964,018 3.3% 2,457,929 2.1%Income from operation 5,918,421 4.8% 18,064,781 15.2% 22,696,776 19.3%Interest expenses, net (3,556,045) -2.9% (3,480,766) -2.9% (2,437,426) -2.1%Other income, net 911,430 0.7% 609,666 0.5% 151,757 0.1%Income before income taxes 3,273,806 2.7% 15,193,681 12.8% 20,411,107 17.4%Income Taxes (575,428) -0.5% (2,139,029) -1.8% (2,865,372) -2.4%Net Income 2,716,378 2.2% 13,054,652 11.0% 17,545,735 14.9% Less: net income attributable to non-controllinginterest 335,099 0.3% 1,506,947 1.3% 2,897,397 2.5%Net income attributable to controlling interest 2,381,279 1.9% 11,547,705 9.7% 14,648,338 12.5%Other comprehensive income- Foreign currencytranslation gain 703,573 0.6% 3,102,645 2.6% 1,649,960 1.4%Total other comprehensive income 703,573 0.6% 3,102,645 2.6% 1,649,960 1.4%Comprehensive Income $3,084,852 2.5% $14,650,350 12.4% $16,298,298 13.9% Year Ended December 31, 2012 Compared to Year Ended December 31, 2011 Revenues . During the year ended December 31, 2012, we had revenues of approximately $122.4 million as compared to revenues of approximately$118.6 million during year ended December 31, 2011, an increase of approximately $3.8 million, or 3.2%. The growth in our revenues during the year endedDecember 31, 2012 was attributable to increase in sales of zinc coated PC wires and PC strands and rare earth coated PC wires and PC strands, and othersales income, as partially offset by decrease in sales of plain surface PC strands and no sales of stabilized PC wires. The following table provides a breakdown of our revenues during the years ended December 31, 2012 and 2011, respectively: Year ended December 31, 2012 2011 Change from Revenue ($) % of Total Revenue Revenue ($) % of Total Revenue 2011 to 2012 Products: Plain surface PC strands 19,565,010 16.0% 30,203,244 25% -35.2%Zinc coated PC wires and PC strands 10,683,590 8.7% 5,702,423 5% 87.4%Stabilized PC wires 0 0% 26,547,790 22% -100%Rare earth coated PC wires and PC strands 81,948,454 67.0% 50,845,973 43% 61.2%Others 10,200,832 8.3% 5,317,541 4.5% 91.8%Total 122,397,886 100% 118,616,971 100% 3.2% The reasons for the change in our product mix from 2011 to 2012 were as follows: Stabilized PC wires, including plain surface PC wires, indented PC wires and Helical (spiral) rib PC wires, are lower margin products compared to rare earthcoated or zinc coated products. They are used in the construction of buildings, railway ties, and sleepers. It is our plan to decrease stabilized PC wires in ourproduct mix. However, we do not plan to phase out completely the manufacturing and sale of stabilized PC wires in favor of higher margin rare earth coatedproducts. Stabilized PC wires are products developed during the middle stages of our production process prior to coating. They serve as the raw materials forour coated products. Therefore, we need to manufacture stabilized PC wires in order to manufacture our coated products, including rare earth coated products.Stabilized PC wires have wide applications, as middle stage products or finished products, and therefore are in great demand in the market. From time to timein order to optimize the utilization of our manufacturing facilities we produce stabilized PC wires for sale. We do not intend to phase out the sale of this productcategory in the future. 39 For steel wires and strands, coating can provide a protective layer to improve the product’s corrosion-resistant level and increase its life span. Traditionaltechnology uses zinc as the coating material and such products are called zinc coated PC wires and PC strands. The introduction of rare earth coatingtechnology 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 thelife span of the product. More importantly, it improves the product strength. The coating process happens in an environment with very high temperature. Because of the high temperature, there will be some loss of product strengthduring 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 loseabout 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 requirementof high temperature for processing could be lowered. Processing with lower temperature results in less loss of product strength. Therefore, the same rawmaterial, if using rare earth coating, could deliver higher strength final product. Compared with better corrosion-resistant level, longer life span, higher strengthlevel may be the most important benefit rare earth coated products bring to customers, as compared to zinc coated products. Higher strength means less steel isneeded to build the bridge. The bridge cables could be slimmer, quantity of steel required for construction could be less and overall construction cost could bereduced. Applications of zinc coated PC wires and PC strands are similar to those of rare earth coated PC wires and PC strands, primarily in the construction ofbridges. The rare earth coated products could be considered as “upgraded version” of zinc coated products. Margin is affected by market conditions. Ingeneral, gross margin of rare earth coated products is 1%-5% higher than similar zinc coated products. In 2012, China continued its prudent monetary policy and many infrastructure projects were still suspended for construction due to funding difficulties. Thedemand for our higher strength and higher margin rare earth coated products was still low in 2012. The demand for lower strength coated materials was at ahigher level and we decided to utilize our capacity to produce lower strength rare earth coated products to meet market demand and customer orders andgenerate more revenue in 2012. With our rare earth coating technology, we were able to produce these products with lower grade raw materials compared totraditional technology. As a result, we sold these products at a more competitive price than our competitors due to lower cost of raw materials. During 2012, we generated approximately 67% of our revenue from sales of our rare earth coated products, increased 61.2% to $81.9 million from $50.8million in 2011. With the improvement of market condition in 2013, we expect demand for our higher strength rare earth coated products will graduallyrecover in the near future due to their anti-corrosion and other beneficial properties, including their long life span. In addition, because of the higher strength ofthe individual rare earth coated PC strands and wires, fewer wires and strands are required for these projects, thereby decreasing the overall cost to ourcustomers. As a result, we expect that revenue generated by sales of our rare earth coated products will increase on a year over year basis in the near future. Sales of zinc coated products increased 87.4% from $5.7 million in 2011 to $10.7 million in 2012. As a percentage of total revenue, revenue contribution fromzinc coated PC wires and PC strands increased slightly from 5% in 2011 to 8.7% in 2012. The increase of sales generated by zinc coated products in 2012was primarily due to overall higher demand in the market. Sales of plain surface PC strands contributed approximately 16.0% of total revenue, decreased 35.2% from $30.2 million to $19.6 million due to our strategyto focus on rare earth coated and zinc coated products. In addition, we sold no stabilized PC wires in 2012. The $10.2 million “Others” revenue in 2012 was generated by sales of spare raw materials which increased 91.8% compared to 2011 when someinfrastructure projects that use our coated products were resumed. As a result, we purchased more spare raw materials in anticipation of more production ofcoated products and sold some of the raw materials to the market. Cost of Goods Sold. Cost of goods sold was approximately $111.6 million during the year ended December 31, 2012, as compared toapproximately $96.6 million during the year ended December 31, 2011, representing an increase of 15.6%, or approximately $15.0 million. As a percentageof revenues, cost of goods sold increased from 81.4 % to 91.2 % during the year ended December 31, 2012. This increase primarily resulted fromapproximately 22% increase in sales volume, partially offset by the decrease in the average price of raw materials in 2012. In addition, the percentage ofincrease in sales volume was higher than the increase in total sales because the unit price decreased in 2012 compared to 2011. Gross Profit and Gross Margin. Our gross profit is equal to the difference between our revenues and our cost of goods sold. Our gross profitdecreased 51.0% to approximately $10.8 million during the year ended December 31, 2012, from approximately $22.0 million for the same period in 2011.For the years ended December 31, 2012 and 2011, our gross margin was 8.8% and 18.6%, respectively. The decrease of gross margin was primarily due tothe change in our product mix and we produced lower margin products to generate more revenue. Selling Expenses . Selling expenses totaled $0.9 million for the year ended December 31, 2012, as compared to $1.2 million for the year endedDecember 31, 2011, a decrease of 24.6%. This decrease was attributable primarily to a decrease in commissions of sales agency during 2012. General and Administrative Expenses. G&A expenses totaled $4.0 million for the year ended December 31, 2012, as compared to $2.7 million forthe year ended December 31, 2011, an increase of 43.8%. In 2011, we received a one-time refund of approximately $0.8 million related to our IPO in 2010 fromour ADR bank and underwriter, which partially offset our general and administrative expenses in 2011. Excluding this reason, this increase in 2012 wasprimarily due to approximately $0.4 million increase in cost associated with research and development compared to 2011. 40 Operating Income. As a result of the foregoing, operating income for the year ended December 31, 2012 was approximately $5.9 million, a decreaseof 67.2% as compared to approximately $18.1 million for the same period in 2011. This was primarily due to lower overall gross margin in 2012 compared to2011. As a percentage of net sales, operating income decreased from 15.2% to 4.8% during the year ended December 31, 2012. Income Taxes . We incurred income tax expenses of $0.6 million and $2.1 million in fiscal years ended December 31, 2012 and 2011, respectively.Ossen Materials was subject to a 15% tax rate through 2012 as the result of its being designated a high-tech enterprise. In 2012, Ossen Materials renewed itsstatus of high-tech enterprise, and will be subject to a 15% tax rate through 2015. Starting from January 1, 2012, Ossen Jiujiang enjoys a tax rate of 15% as itis considered as a high-tech enterprise by the PRC government. Net Income . As a result of the foregoing, our net income totaled approximately $2.7 million for the year ended December 31, 2012, as compared toapproximately $13.1 million for the year ended December 31, 2011, a decrease of 79.2%. Net Income Attributable to Non-controlling Interest. We own 81% of Ossen Materials and 96.1% of Ossen Jiujiang in the aggregate. Net incomeattributable to non-controlling interest represents the net income attributable to the holders of the remaining shares. Foreign Currency Translation. Our financial statements are expressed in U.S. dollars but the functional currency of our operating subsidiary isRMB. Our results of operations are translated at average exchange rates during the relevant financial reporting periods, assets and liabilities are translated at theunified exchange rate at the end of these periods and equity is translated at historical exchange rates. Adjustments resulting from the process of translating thelocal currency financial statements into U.S. dollars are included in determining comprehensive income. Year Ended December 31, 2011 Compared to Year Ended December 31, 2010 Revenues . During the year ended December 31, 2011, we had revenues of approximately $118.6 million as compared to revenues of approximately$117.5 million during year ended December 31, 2010, an increase of approximately $1.2 million, or 1.0%. The growth in our revenues during the year endedDecember 31, 2011 was attributable to increase in sales of zinc coated products, stabilized PC wires and other sales income, as partially offset by decrease insales of plain surface PC products and rare earth coated PC products. The decrease in our sales of plain surface and rare earth coated PC products was mainlydue to the suspension of railway related projects nationwide in China in the 2nd half of 2011 as a result of the high speed railway accident in South China inJuly 2011 and the resulting funding difficulties faced by the Ministry of Railway of China. The following table provides a breakdown of our revenues during the years ended December 31, 2011 and 2010, respectively: Year ended December 31, 2011 2010 Revenue ($) % of TotalRevenue Revenue ($) % of TotalRevenue Change from2010 to 2011 Products: Plain surface PC strands 30,203,244 25% 40,247,880 34% -25%Zinc coated PC wires and PC strands 5,702,423 5% 2,964,414 3% 92%Stabilized PC wires 26,547,790 22% 16,322,560 14% 63%Rare earth coated PC wires and PC strands 50,845,973 43% 57,729,470 49% -12%Others 5,317,541 4.5% 188,701 0.2% 2718%Total 118,616,971 100% 117,453,024 100% 1.0% The reasons for the change in our product mix from 2010 to 2011, with sales of stabilized PC wires increasing significantly and sales of plain surface andrare earth coated PC wires and PC strands decreasing significantly were as follows: Sales of stabilized PC wires in 2011 was $26.5 million, an increase of $10.2 million, or 63%, from the same period a year ago. As a percentage of totalrevenue, stabilized PC wires contributed 22% of total revenue in 2011 compared to 14% in 2010. Our stabilized PC wires, which are products that aredeveloped during the middle stages of our production process prior to coating, generally contribute significantly lower levels of revenue from sales. StabilizedPC wires are lower margin products compared to rare earth coated or zinc coated products. During the second half of 2011, especially after the high speedrailway accident in South China in July, the Ministry of Railways of China suspended virtually all railway related projects across the country as a result ofnationwide railway safety check as well as the funding difficulties it faced. Such suspension, accompanied by tightened credit environment in China duringthe same period of time, has materially and adversely impacted our business. Our sales of rare earth coated PC products, which are used to construct bridges,and our plain surface PC products, which are used to construct highways, railways and approaching bridges, decreased significantly in 2011 as compared to2010. 41 As a result, our demand for stabilized PC wires to manufacture rare earth coated products decreased as well. Accordingly we sold more stabilized PC wires toother parties and generated more revenue from such sales as compared to 2010. Although lower percentage of revenue attributable to stabilized PC wires was the trend of the Company’s business development, we do not plan to phase outcompletely the manufacturing and sale of stabilized PC wires in favor of higher margin rare earth coated products. Stabilized PC wires are products developedduring the middle stages of our production process prior to coating. They serve as the raw materials for our coated products. Therefore, we need tomanufacture stabilized PC wires in order to manufacture our coated products, including rare earth coated products. Stabilized PC wires have wideapplications, as middle stage products or finished products, and therefore are in great demand in the market. From time to time in order to optimize theutilization of our manufacturing facilities we produce stabilized PC wires for sale. We do not intend to phase out sale of this product category in future. We believe the negative impact from the incidents in 2011 to our business is temporary. We expect that revenue generated by sales of our rare earth coatedproducts will continue to increase, especially after we install new rare earth coated material production lines in our facility. We plan to fill more orders for rareearth coated materials from the PRC and international markets, where demand for use of these products in the construction and restoration of bridges isexpected to continue to grow in the future. During 2011 we generated approximately 43% of our revenue from sales of our rare earth coated products. Demand for our rare earth coated PC wires and PCstrands, which are new products that we began selling in the second half of 2009, has been very high in the PRC, and we expect this trend will resume andcontinue in the near future. Our customers that are in the bridge construction and restoration industry in the PRC and overseas have reported that they preferrare earth coated products to zinc coated products because of the anti-corrosion and other beneficial properties of the rare earth coated products, including theirlong life span. In addition, because of the high strength of the individual rare earth coated PC strands and wires, fewer wires and strands are required for theseprojects, thereby decreasing the overall cost to our customers. The $5.3 million “Others” revenue in 2011 consisted of $2.1 million revenue from coating services performed for third parties and $3.2 million revenue fromsales of spare raw materials. Coating services performed for third parties is not considered to be a recurring item in future. Sales of spare raw materialsincreased dramatically in the second half of 2011 when market conditions deteriorated and many infrastructure projects that use our coated products werehalted. As a result of the shrinking demand, we had to sell some of the raw materials in anticipation of less production of coated products. Cost of Goods Sold . Cost of goods sold was approximately $96.6 million during the year ended December 31, 2011, as compared toapproximately $92.3 million during the year ended December 31, 2010, representing an increase of 4.6%, or approximately $4.3 million. As a percentage ofrevenues, cost of goods sold increased from 78.6% to 81.4% during the year ended December 31, 2011. This increase resulted from the decrease in sales ofhigher margin rare earth coated products and increase in sales of lower margin stabilized PC wires products in 2011. Gross Profit and Gross Margin. Our gross profit is equal to the difference between our revenues and our cost of goods sold. Our gross profitdecreased 12.4% to approximately $22.0 million during the year ended December 31, 2011, from approximately $25.2 million for the same period in 2010.The decrease was primarily attributable to decreased sales volume of our higher margin products and decrease in our sales price in order to fulfill the salesorder in an adverse market environment during the second half of 2011. For the years ended December 31, 2011 and 2010, our gross margin was 18.6% and 21.4%, respectively. The reason for this decrease in grossmargin is that we decreased our sales of higher margin rare earth coated PC products in 2011 as compared with 2010 and decreased our sales price in order tofulfill sales orders during the adverse market environment during second half of 2011. Selling Expenses . Selling expenses totaled $1.2 million for the year ended December 31, 2011, as compared to $0.7 million for the year endedDecember 31, 2010, an increase of 84.1%. This increase was attributable primarily to our increased sales efforts and expanded sales channels during 2011. General and Administrative Expenses . G&A expenses totaled $2.7 million for the year ended December 31, 2011, as compared to $1.8 million forthe year ended December 31, 2010, an increase of 52.9%. This increase was primarily due to our increased cost associated with research and development. Operating Income. As a result of the foregoing, operating income for the year ended December 31, 2011 was approximately $18.1 million, adecrease of 20.4% as compared to approximately $22.7 million for the same period in 2010. As a percentage of net sales, operating income decreased from19.3% to 15.2% during the year ended December 31, 2011. 42 Income Taxes . We incurred income tax expenses of $2.1 million and $2.9 million in fiscal years ended December 31, 2011 and 2010, respectively.The 50% income tax reduction for Ossen Materials ended December 31, 2010. Ossen Jiujiang is still subject to 50% income tax reduction, which will end onDecember 31, 2011. Ossen Materials is subject to a 15% tax rate through 2011 as the result of its being designated a high-tech enterprise, and Ossen Jiujiangwill be subject to a 15% tax rate through 2012 as a result of its being designated a high-tech enterprise as well. Net Income . As a result of the foregoing, our net income totaled approximately $13.1 million for the year ended December 31, 2011, as compared toapproximately $17.5 million for the year ended December 31, 2010, a decrease of 25.6%. Net Income Attributable to Non-controlling Interest. We own 81% of Ossen Materials and 96.1% of Ossen Jiujiang in the aggregate. Net incomeattributable to non-controlling interest represents the net income attributable to the holders of the remaining shares. Foreign Currency Translation. Our financial statements are expressed in U.S. dollars but the functional currency of our operating subsidiary isRMB. Our results of operations are translated at average exchange rates during the relevant financial reporting periods, assets and liabilities are translated at theunified exchange rate at the end of these periods and equity is translated at historical exchange rates. Adjustments resulting from the process of translating thelocal currency financial statements into U.S. dollars are included in determining comprehensive income. Critical Accounting Policies and Estimates Our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. Our financial statements reflect the selection andapplication of accounting policies, which require management to make significant estimates and judgments. See Note 2 to our consolidated financialstatements, “Summary of Significant Accounting Policies.” We believe that the following paragraphs reflect the most critical accounting policies that currentlyaffect our financial condition and results of operations. Use of Estimates The preparation of the consolidated and combined financial statements in conformity with generally accepted accounting principles in the UnitedStates of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reportingperiods. Management makes these estimates using the best information available at the time the estimates are made. Actual results could differ from thoseestimates. Revenue Recognition In accordance with the ASC Topic 605, “Revenue Recognition”, the Company recognizes revenue when persuasive evidence of an arrangement exists,delivery has occurred or services have been rendered, the seller’s price to the buyer is fixed or determinable, and collectability is reasonable assured. The Company derives revenues from the processing, distribution and sale of own products. The Company recognizes its revenues net of value-addedtaxes (“VAT”). The Company is subject to VAT which is levied on the rate of 17% on the invoiced value of sales. Output VAT is borne by customers inaddition 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 forexport sales. The Company will recognize revenue for domestic sales based on the terms defined in the contract as long as risk of loss has transferred to thecustomers and each of the criteria under ASC 605 have been met. Contracts terms may require the Company to deliver the finished goods to the customers’location or the customer may pick up the finished goods at the Company’s factory. International sales are recognized when shipment clears customs and leavesthe port. The Company also derives an insignificant amount of revenue from providing services to select customers. Service revenues account for less than2% of total revenues for all periods presented and is recognized upon delivery and acceptance of the finished products by the customer, or when pick upoccurs. Contracts with distributors do not offer any chargeback or price protection. The Company experienced no product returns and recorded no reserve forsales returns for the years ended December 31, 2012, 2011, 2010 and 2009. 43 Research and Development Research and development costs are expensed as incurred and totaled approximately $1,132,224, $755,746 and $595,477 for the years endedDecember 31, 2012, 2011 and 2010, respectively. Research and development costs are included in G&A in the accompanying statements of operations.Research and development costs are incurred on a project specific basis. Income Taxes The Company accounts for income taxes following the liability method pursuant to FASB ASC 740 “Income Taxes”. Under this method, deferred taxassets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates thatwill 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, basedon 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 taxesof 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 returnshould 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 thatthe tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in thefinancial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized uponultimate settlement. ASC 740 also provides guidance on recognition, classification, interest and penalties on income taxes, accounting in interim periods andrequires increased disclosures. As of December 31, 2012, the Company did not have a liability for unrecognized tax benefits. The Company has not provided for income taxes on accumulated earnings amounting $38,296,269 that are subject to the PRC dividend withholding tax asof December 31, 2012, since these earnings are intended to be permanently reinvested. Fair Value of Financial Instruments FASB ASC 820 (formerly SFAS No. 157 Fair Value Measurements) establishes a three-tier fair value hierarchy, which prioritizes the inputs used inmeasuring fair value. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable inthe market These tiers include: · Level 1—defined as observable inputs such as quoted prices in active markets; · 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, accounts receivable, notes receivable, accounts payable, notes payable,other payables, short-term bank loans. Cash and cash equivalents include money market securities and commercial paper that are considered to be highly liquid and easily tradable. These securitiesare valued using inputs observable in active markets for identical securities and are therefore classified as Level 1 within the fair value hierarchy. As of the balance sheet dates, the estimated fair values of financial instruments were not materially different from their carrying value as presented due to theshort maturities of these instruments and that the interest rates on the borrowing approximate those that would have been available for loans of similarremaining maturity and risk profile. Accounts Receivable Accounts receivable are carried at net realizable value. The Company reviews its accounts receivables on a periodic basis and makes general and specificallowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Companyconsiders 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 theconsolidated statement of operations within operating expenses. Balance of allowance of doubtful accounts was $1,277,091 and $384,311 at December 31,2012 and 2011, respectively. In 2012, the company revised the percentage used to estimate bad debts. The change provides a better indication of collectionexperience. The effect of the change was to decrease 2012 net income by $0.2 million, or $0.009 per share. 44 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 forcompletion and disposal. Cost of raw materials is calculated using the weighted average method and is based on purchase cost. Work-in-progress and finishedgoods costs are determined using the weighted average method and comprise direct materials, direct labor and an appropriate proportion of overhead. TheCompany considers a provision for excess, obsolete, or slow-moving inventory based on changes in customer demand, technology developments or othereconomic factors. At December 31, 2012 and 2011, the Company has no reserve for inventories. Advance to Suppliers Advance to Suppliers represents interest-free cash paid in advance to suppliers for purchases of raw materials. The balance of advance to suppliers was$77,948,496 and $41,391,174 at December 31, 2012 and 2011, respectively. Among the balance of $77,948,496, the aging of $65,373,551 was within60 days, $7,084,338 was between 60-90 days and $5,490,597 was over 90 days. No allowance was provided for the prepayments balance at December 31,2012. In 2012, steel industry was in a process of reducing inventory and our management forecasted steel price will gradually rise in next few years. To takeadvantage of this situation, we negotiated with our key suppliers and locked a discount rate with the prepayments. Our average raw material price locked bythe agreement will be approximately $40 per ton lower than prevailing market price. We expect to gradually reduce our balance of advance to supplier in 2013as steel price recovers and market conditions improve. Property, Plant, and Equipment Property, plant, and equipment are stated at cost less accumulated depreciation, and include expenditure that substantially increases the useful lives of existingassets. 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 lossresulting 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 incomeas incurred, whereas significant renewals and betterments are capitalized. Land Use Rights According to the PRC laws, the government owns all the land in the PRC. Companies or individuals are authorized to possess and use the land only throughland use rights granted by the Chinese government. The land use rights granted to the Company are being amortized using the straight-line method over thelease 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 notbe 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 andeventual disposition in accordance with FASB ASC 360-10-15. To the extent that estimated future, undiscounted cash inflows attributable to the asset, lessestimated future, undiscounted cash outflows, are less than the carrying amount, an impairment loss is recognized in an amount equal to the differencebetween 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 saleor 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 endedDecember 31, 2012, 2011 and 2010. 45 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 abilityto 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 orknown beneficial owner of more than 10% of the voting interest of an entity; c) management, persons having responsibility for achieving objectives of theentity and requisite authority to make decision; d) immediate family of management or principal owners; e) a parent company and its subsidiaries; d) otherparties 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 theCompany’s participation in variable interest entities (“VIE”), which are defined as entities with a level of invested equity that is not sufficient to fund futureactivities to permit them to operation on a standalone basis, or whose equity holders lack certain characteristics of a controlling financial interest. That, forentities 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 amajority of the exposure to expected losses, or stand to gain from majority of its expected returns. The guidance also sets forth certain disclosure regardinginterests in a VIE that are deemed significant even if consolidation is not required. This item is discussed in further detail in Note 10 – Related PartyTransactions. 46 Recently Issued Accounting Pronouncements The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any suchpronouncements may be expected to cause a material impact on its financial condition or the results of its operations. In February 2013, the Financial Accounting Standards Board issued ASU 2013-02, Comprehensive Income: Reporting of Amounts Reclassified Out ofAccumulated Other Comprehensive Income (“ASU 2013-02”). ASU 2013-02 does not change the current requirements for reporting net income or othercomprehensive income in financial statements. However, it requires an entity to provide information about the amounts reclassified out of accumulated othercomprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in thenotes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amountreclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not requiredunder U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP thatprovide additional detail about those amounts. ASU 2013-02 is effective prospectively for reporting periods beginning after December 15, 2012 for publicentities. Early adoption is permitted. The Company does not expect that the adoption of ASU 2013-02 will have a material impact on its consolidated financialstatements. In December 2011, the FASB issued Accounting Standards Update (“ASU”) 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets andLiabilities, which required entities to disclose both gross and net information about both instruments and transactions eligible for offset in the statement offinancial position and instruments and transactions subject to an agreement similar to a master netting agreement. The objective of the disclosure is to facilitatecomparison between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements onthe basis of International Financial Reporting Standards ("IFRS"). This ASU is effective for fiscal years, and interim periods within those years, beginning onor after January 1, 2013. Retrospective presentation for all comparative periods presented is required. The adoption of ASU 2011-11 is not expected to havematerial impact on the Company’s consolidated financial statements. In July 2012, the FASB issued ASU 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment, which allows companies to perform a qualitativeassessment to determine whether further impairment testing of indefinite-lived intangible assets is necessary, similar in approach to the goodwill impairmenttest. The new guidance allows an entity the option to first assess qualitatively whether it is more likely than not (that is, a likelihood of more than 50 percent)that an indefinite-lived intangible asset is impaired, thus necessitating that it perform the quantitative impairment test. An entity is not required to calculate thefair value of an indefinite-lived intangible asset and perform the quantitative impairment test unless the entity determines that it is more likely than not that theasset is impaired. The new guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Earlyadoption is permitted for annual and interim impairment tests performed as of a date before July 27, 2012, if the financial statements for the most recentannual or interim period have not yet been issued. The Company believes that its adoption of ASU 2012-02 will not have any material impact on itsconsolidated financial statements. In October 2012, the FASB issued ASU 2012-04, Technical Corrections and Improvements, which made certain technical corrections and “conforming fairvalue amendments” to the FASB Accounting Standards Codification. The amendments affect various codification topics and apply to all reporting entitieswithin the scope of those topics. These provisions of the amendment are effective upon issuance, except for amendments that are subject to transition guidance,which will be effective for fiscal periods beginning after December 15, 2012. The Company believes that its adoption of ASU 2012-04 will not have anymaterial impact on its consolidated financial statements. In January 2013, the FASB issued ASU 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities,which clarified that the scope of ASU 2011-11, Disclosures about Offsetting Assets and Liabilities, would apply to derivatives including bifurcated embeddedderivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset inaccordance with Section 210-20-45 or Section 815-10-45 or are subject to a master netting arrangement or similar agreement. This ASU is effective for fiscalyears, and interim periods within those years, beginning on or after January 1, 2013. Retrospective presentation for all comparative periods presented isrequired. The adoption of ASU 2013-01 is not expected to have material impact on the Company’s consolidated financial statements. 5B. Liquidity and Capital Resources The major sources of our liquidity for fiscal years 2012, 2011 and 2010 were bank borrowings, including loans from banks and bank acceptancenotes. In addition, in December 2010, we issued 5 million shares in the form of American Depositary Receipts for net proceeds of approximately $20.3million, which proceeds are being used to fund the capacity expansion of our coated PC products. We expect to finance our operations and working capitalneeds in the near future from cash generated from operations and short-term borrowings. Our cash and cash equivalents, which are denominated in RMB, were approximately $2.0 million at December 31, 2012, as compared to $1.6million at December 31, 2011 and $12.3 million at December 31, 2010. We believe that our cash reserves, together with expected cash flow from operationsand 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. 47 In December 2010, we issued 5 million shares in the form of American Depositary Receipts. The $20.3 million of net proceeds from this offering arebeing used to fund the capacity expansion of our rare earth coated PC products. The capacity expansion was delayed due to among other reasons, the inabilityof our European supplier to fulfill the contract but we will continue our expansion plan and expect to complete the installation and start operation of our newproduction lines around the end of 2013.We currently estimate that the entire cost of this expansion will be approximately $22 million. We intend to fund anyexcess construction costs, as well as any unanticipated costs that may arise in relation to our expansion, from short-term bank loans or cash from operations. Accounts Receivable Our domestic customers generally pay approximately 90 days after receiving the materials at their construction site. As a result, our accountsreceivable increased significantly in 2011 and 2010. In 2012, we increased efforts to collect and monitor accounts receivable and as a result, our accountsreceivable decreased to $45.7 million at December 31, 2012 from $48.0 million at December 31, 2011. We have collected 34.6% of the $45.7 million ofaccounts receivable outstanding as of December 31, 2012 in cash as of the date of this filing. See note 2 to our audited financial statements for a schedule ofour valuation account. We do not expect our accounts receivable to decrease to 2008 levels until we significantly increase our international sales, which is notcurrently our business plan for the near future. During 2012, our international customers were located primarily in Asia and Australia, but not in Europe orthe United States. We expect that trend to continue in the near future since demand for our higher margin rare earth coated products is high in the PRC and isexpected to continue to grow. However, if opportunities arise in the U.S. or EU markets or in other international markets for us to win bids on projects or toreengage with former customers or establish relationships with new customers, we would pursue such opportunities. The average Days Sales Outstanding (“DSO”) of 2012 is 140 days. The DSO as of December 31, 2012 was 136 days. This was primarily related tothe difficult market conditions as a result of the funding problems faced by the Ministry of Railways in China. After 2011 high speed train incident, China’shigh speed railway construction scaled back dramatically and approximately 70% projects were suspended. In addition, due to the rapid development of highspeed railway in recent years, total debt of the Ministry of Railway (MOR) was approximately RMB2.6 trillion at the end of 2012, which significantlyhindered its funding ability. Consequently, MOR delayed payment to its suppliers and significantly increased their account receivables balance and time tocollect revenue after sales. As of Date Account Receivables Balance (in US Dollars) <60 days 60-90 days 90-180 days >180 days Dec. 31, 2012 45,734,381 23,701,867 4,173,095 211,229 17,648,190 Approximately 45.2%, or $8.0 million of $17.6 million of accounts receivable aged over 180 days as of December 31, 2012 were from the Ministry ofRailway. As of March 31, 2013, we have collected approximately $15.8 million or 34.6% of the $45.7 million of accounts receivable outstanding as ofDecember 31, 2012 in cash. Major Customers During the years ended December 31, 2012, 2011 and 2010, our six largest customers contributed 78.1%, 64.2% and 74.4% of our total sales,respectively. See “Business—Our Customers” above. As a result of our reliance on a limited number of customers, we may face pricing and other competitivepressures, which may have a material adverse effect on our profits and our revenues. The volume of products sold for specific customers varies from year toyear, especially since we are not the exclusive provider for any customers. In addition, there are a number of factors, other than our performance, that couldcause 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, ourcustomers 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 productsfollowing 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 priceat 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, giventheir 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 wediversify and expand our customer base, our future success will significantly depend upon the timing and volume of business from our largest customers andthe financial and operational success of these customers. 48 Bank Loans and Bank Acceptance Notes At December 31, 2012, we had approximately $50.7 million of short-term bank loans and $36.9 million of bank acceptance notes outstanding, ascompared to $48.0 million and $24.8 million at December 31, 2011 and $38.3 million and $26.0 million at December 31, 2010, respectively. The increasedbalance in 2010, 2011 and 2012 was due to expanded operations and increased needs to support working capital. As our domestic sales in China, as percentage of total sales, increased significantly in 2010, 2011 and 2012, our use of bank acceptance notes as asettlement vehicle also increased. Our notes payable of $36.9 million at December 31, 2012 represented the amount of bank acceptance notes our suppliersreceived from us for our purchases of raw materials. These notes are issued by financial institutions, typically by banks, that entitle our suppliers to receivethe 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 dateof issuance. These notes are subject to bank charges of 0.05% of the principal amount as commission on each issuance and in total are secured by $25.4million restricted cash as of December 31, 2012. Bank acceptance notes are commonly used in domestic China due to their enhanced credibility and theliquidity 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 adiscounted amount in cash. We expect that bank acceptance notes will continue to account for a material portion of our total receivables and payables in thenear future. Short-term bank loans are obtained from local banks in China. All short-term bank loans are repayable within one year and are secured by property,plant and equipment and land use rights owned by us, or guaranteed by related parties. None of our short-term bank loans have financial covenants.However, each loan contains a covenant restricting our use of the funds received to either purchases of raw materials or working capital. The weighted average annual interest rate of our short-term bank loans was 6.75%, 7.54% and 5.6% as of December 31, 2012, 2011 and 2010,respectively. Interest expense was $3.7million, $2.9 million and $1.9 million for the years ended December 31, 2012, 2011 and 2010 respectively. We have not experienced any difficulties in the acquisition and rollover of the short-term bank loans that we use to fund our daily operations. Weanticipate rollovers of all current facilities that are set to mature in 2012 and do not anticipate a reduction in the availability of short-term bank loans to fundour operations and meet our growth objectives. Three of our affiliates, namely Shanghai Zhaoyang, Shanghai ZFX and Shanghai Ossen, have providedguarantees for certain of our short-term bank loans for no consideration. There can be no assurance that Shanghai Zhaoyang, Shanghai ZFX and ShanghaiOssen will be willing or able to continue to provide similar guarantees on this basis with respect to future borrowings. Working Capital Our working capital was approximately $70.8 million at December 31, 2012, as compared to $70.8 million at December 31, 2011 and $48.8 millionat December 31, 2010. The working capital was flat in 2012 as compared with 2011 was due primarily to a $5.6 million increase in restricted cash and a $36.5 millionincrease in prepayments, offset by a $10.5 million decrease in note receivable, a $7.4 million decrease in inventories a $4.6 million decrease in other currentassets, and a $12.1 million increase in notes payable. Inventories We, like many other steel manufacturers, maintain substantial inventories of steel to accommodate the short lead times and just-in-time deliveryrequirements of our customers. Accordingly, we purchase steel in an effort to maintain our inventory at levels that we believe to be appropriate to satisfy theanticipated needs of our customers based upon historic buying practices, supply agreements with customers and market conditions. Cash Flows Our revenue increased only 3.2% in 2012 compared to 2011 and 1.0% in 2011 compared to 2010 because of unfavorable market condition andChina’s slowing economy growth in last two years. We have needed to raise or borrow capital from outside sources to fund our working capital and revenuegrowth. As a result, our cash flow from operations has generally been negative. However, with increased earnings ability and improvement of marketconditions, we expect that our cash position should improve in the coming years. 49 Years Ended December 31, 2012 and 2011 The following table sets forth a summary of our net cash flow information for the periods indicated: (All amounts in U.S. dollars) Year Ended December 31, 2012 2011 (Audited) (Audited) Net cash used in operating activities $(8,767,390) $(20,143,383) Net cash used in investing activities (32,982) (162,229) Net cash provided by financing activities 8,159,102 7,668,492 Operating Activities Net cash used in operating activities was approximately $8.8 million in 2012, as compared to $20.1 million in 2011. This decrease in cash used inoperating activities was the result of slightly improved market condition allowing our customers to pay down our accounts receivable. Our accounts receivabledecreased $2.3 million in 2012, compared to a $34.7 million increase in accounts receivable in 2011. This was partially offset by increase in advance tosuppliers of $36.7 million in 2012, compared to $16.3 million increase in advance to suppliers in 2011. Investing Activities Net cash used in investing activities was $32,982 in 2012, as compared to $0.2 million in 2011. The decrease in cash used in investing activitieswas the result of our further postponing the capacity expansion to 2013. Financing Activities Net cash provided by financing activities in 2012 was approximately $8.2 million, as compared to approximately $7.7 million in 2010. The slightincrease in cash provided by financing activities was the result of increase in proceeds of notes payable to pay for advances to suppliers. Years Ended December 31, 2011 and 2010 The following table sets forth a summary of our net cash flow information for the periods indicated: (All amounts in U.S. dollars) Year Ended December 31, 2011 2010 (Audited) (Audited) Net cash used in operating activities $(20,143,383) $(25,011,255) Net cash used in investing activities (162,229) (7,635,703) Net cash provided by financing activities 7,668,492 35,614,404 Operating Activities Net cash used in operating activities was approximately $20.1 million in 2011, as compared to $25.0 million in 2010. This decrease in cash used inoperating activities was primarily attributable to a $10.7 million decrease in inventories in 2011 as compared to a $17.7 million increase in inventories in 2010and a $9.8 million decrease in notes receivable in 2011 as compared to $17.5 million increase in notes receivable in 2010. Such decrease reflected the difficultmarket environment in the second half of 2011 as construction of many infrastructure projects in China was halted due to funding difficulties and the highspeed railway accident. 50 Investing Activities Net cash used in investing activities was approximately $0.2 million in 2011, as compared to $7.6 million in 2010. The decrease in cash used ininvesting activities was the result of our postponing the capacity expansion to 2012. Financing Activities Net cash provided by financing activities for the year ended December 31, 2011 was approximately $7.7 million, as compared to approximately$35.6 million in 2010. The decrease in cash provided by financing activities in 2011 as compared to 2010 was primarily due to the IPO proceeds received in2010. Governmental Regulations See the discussion under the heading “Governmental Regulations” in Item 4 above for a discussion of governmental policies or factors that couldmaterially affect our business. 5C. Research and Development, Patents and Licenses, etc. See the discussion under the headings “Research and Development”, “Intellectual Property” and “Patents” in Item 4 above. 5D. Trend Information See discussion in Parts A and B of this item. 5.E. Off-Balance Sheet Arrangements As of December 31, 2012 we guarantee $15.9 million of short term debt and $12.9 million of notes payable of Shanghai Pujiang. We do not haveany other off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financialcondition, 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 debt obligations and capital commitments. The following table sets forth a breakdown of ourcontractual obligations as of December 31, 2012: Payments due by period Less than More than CONTRACTUAL OBLIGATIONS Total 1 year 1-3 years 3-5 years 5 years Short-term debt obligations (1) $87,612,736 $87,612,736 - - Interest Commitments – Short term bank loans 1,582,097 1,582,097 Long-term debt obligations (2) $4,438,386 4,438,386 $ - - Interest Commitments – Long term bank loans 168,890 168,890 Capital Commitments (3) $7,925,689 $3,994,547 $1,331,516 - - Total $101,727,798 $97,796,656 $1,331,516 - - (1) Attributable to short-term bank loans and bank acceptance notes. (2) Attributable to long-term bank loans. (3) Attributable to the purchase of new production lines. 51 ITEM 6.DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 6.A. Directors, Executive Officers and Key Employees The following table sets forth the name, age, positions and a brief description of the business experience of each of our directors, executive officersand key employees as of the date hereof. Name Position(s) Age Liang Tang Chairman of Board 45 Wei Hua Chief Executive Officer and Director 50 Feng Peng Chief Financial Officer 39 Junhong Li Director 46 Xiaobing Liu Director 53 Yingli Pan Director 58 Zhongcai Wu Director 63 There are no family relationships among our directors and officers. There are no arrangements or understandings with major shareholders,customers, suppliers or others, pursuant to which any person referred to above was selected as a director or member of senior management, except as disclosedin Note 10 in the “accompanying consolidated financial statements”. The address of each of our directors and executive officers is c/o Ossen Innovation Co.,Ltd., 518 Shangcheng Road, Floor 17, Shanghai, 200120, People’s Republic of China. Executive Officers and Directors Dr. Liang Tang was appointed as our Chairman following our business combination. Dr. Tang has been the Chairman and President of OssenMaterials, our subsidiary, since 2008. Dr. Tang has also been President of Shanghai Ossen Investment Holding (Group) Co., Ltd. since 2001. He has morethan 20 years of experience in the steel industry. Prior to joining our Company in 2004, from 1994 until 1998, Dr. Tang was the President of ZhongminGroup of PRC Ministry of Civil Affairs. From 1988 until 1994, Dr. Tang was Head of Enterprise Administrative Division of the Shanghai MunicipalMetallurgical Industry Bureau. Prior to that date, Dr. Tang was the Deputy Director of Enterprise Management at Baosteel Group Shanghai Ergang Co., Ltd.,a competitor of ours. Dr. Tang is involved in many charity affairs and social organizations including China Committee of Corporate Citizenship and ChinaChamber of Metallurgy Industry. Dr. Tang has received the title of Shanghai Leader by the Shanghai Municipal Government, Outstanding InnovationEntrepreneur by the Symposium on Chinese Enterprise Innovation and the Royal Knight Medal of Spain by the King of Spain. Dr. Tang received a bachelor’sdegree from Shanghai University, a Masters degree in International Finance from Peking University and an MBA from Fordham University. Dr. Tang alsoreceived a doctoral degree in world economics from East China Normal University. Mr. Wei Hua was appointed as a director of ours following our business combination. Mr. Hua has served as Chairman of the Board of Directors ofOssen Jiujiang since 2007. Since 2000, he has been the Assistant Chief Executive Officer for the Steel Department of Ossen Group. Before joining OssenGroup in 2000, from 1988 until 2000, Mr. Hua was a vice supervisor of the department of technology and quality supervision at Baosteel Group ShanghaiErgang Co., Ltd. From 1985 until 1988, Mr. Hua worked at Shanghai No. 5 steel factory. He graduated from Shanghai University with a degree in BusinessManagement. Mr. Feng Peng was appointed as our Chief Financial Officer in March 2013. Mr. Peng served as Senior Vice President at MZ Group from August2007 until September 2012. He has 6 years experience with U.S. listed Chinese companies. He has conducted extensive financial and industry due diligence,performed analysis on companies’ financial statements, and provided management teams of client companies with extensive coaching, including detailedintelligence on investor expectations, perceptions and concerns, industry analysis, compliance, and reporting and disclosure requirements. Prior to working atMZ Group, he served in various capacities at Thomson Financial and Citigroup. Mr. Peng has been trained in both Finance and Accounting. Mr. Penggraduated from New Jersey Institute of Technology in Computer Science, earning a Master of Science degree. Mr. Peng earned a bachelor’s degree inAutomation Control from Shanghai Jiao Tong University in Shanghai, China in 1995. Mr. Peng is fluent in English and Mandarin. 52 Mr. Junhong Li has been one of our directors since July 2010. Mr. Li has been the Senior Partner and Deputy Chief Accountant at ContinentalCertified Public Accountants since 2008. Prior to joining Continental Certified Public Accountants in 2008, from 2007 until 2008, Mr. Li was the ExecutiveDirector and Chief Financial Officer of ZMAY Holdings Limited. From 2004 until 2007, Mr. Li was Chief Financial Officer of Zhongmin On LineTechnology Co. Ltd. Mr. Li has more than 20 years of experience in mergers and acquisitions, reorganizations and management consulting. Mr. Li received abachelor’s degree from Central University of Finance and Economics and he is qualified as a certified public accountant. Mr. Xiaobing Liu has been one of our directors since July 2010. Mr. Liu has served as Chairman of the Board of Huachen Trust since 2009. From2005 until 2009, Mr. Liu was Chairman of the Board of Directors of Shanghai Dingfeng Technology Co., Ltd. Since 2002, he has also been an independentdirector of Southern Building Material Co., Ltd. Mr. Liu graduated from the University of Shanghai for Science and Technology with a bachelor’s degree inoptical instruments. Ms. Yingli Pan has been one of our directors since July 2010. Professor Pan has been a professor in the Department of Finance at Antai College ofEconomics & Management of Shanghai since 2005. Prior to being appointed professor at Antai College of Economics & Management of Shanghai in 2005,from 1994 until 2005, Professor Pan was a professor in the Finance Department at East China Normal University. Professor Pan received a bachelor’s degreein economics from East China Normal University, a master’s degree in economics from Shanghai University of Finance and Economics and a doctoral degreein economics from East China Normal University. Mr. Zhongcai Wu has been one of our directors since July 2010. Mr. Wu has been Chief Engineer in the Communications Department of YunnanProvince since 2002. Mr. Wu received a bachelor’s degree in road and bridge engineering from Hunan University. Each of our directors will serve as a director until our next annual general meeting and until their successors are duly elected and qualified. 6.B. Compensation For the year ended December 31, 2012, the aggregate cash compensation that we paid to our executive officers and directors was approximately $125,000. For the year ended December 31, 2011, the aggregate cash compensation that we paid to our executive officers and directors was approximately$130,000. There are no service contracts between us and any of our directors, except for those directors who are also our executive officers. Pursuant to PRClaw, 25% of our executive officers’ salaries have been set aside for pension and retirement. Employment Agreements We have entered into an employment agreement with Dr. Liang Tang. Dr. Tang is employed as Chairman of the Board of our Company. The term ofhis agreement expires on December 31, 2013. We compensate Mr. Tang at an annual rate of approximately $14,106. We may terminate the employmentagreement for cause as specified in the agreement. Mr. Tang may terminate the employment agreement with thirty days written notice. The employmentagreement may be renewed upon the mutual agreement of the parties. We have entered into an employment agreement with Mr. Feng Peng. Mr. Peng is employed as Chief Financial Officer of our Company. The term ofhis agreement is from March 1, 2013 until March 1, 2014 and the agreement may be automatically renewed for one year terms thereafter. We compensate Mr.Peng at an annual rate of approximately $69,000. We may terminate the agreement for cause as specified in the agreement. Each executive officer has agreed to hold in confidence any confidential information that he has obtained about the Company. 6.C. Board Practices Terms of Directors and Officers Expiration of Term of Directors Pursuant to our memorandum and articles of association, the business of our company is managed by our board of directors. Commencing with thefirst 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 theirelection. 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 hisor 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 theboard 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 remainingdirector. 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 directorwhose death, resignation or removal will have caused such vacancy and until his successor will have been elected and qualified. 53 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 thedirectors in reviewing and approving the compensation structure for the directors. Currently, our directors are not entitled to receive any remuneration upontermination of employment. Audit Committee Our audit committee consists of Junhong Li, Yingli Pan and Xiaobing Liu, each of whom satisfies the independence requirements of Rule 10A-3under the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act, and Rule 5605 of the Nasdaq rules. The audit committeeoversees 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 independentauditors; ·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 controldeficiencies; and ·meeting separately and periodically with management and our independent auditors. Compensation Committee Our compensation committee consists of Xiaobing Liu, Yingli Pan and Junhong Li, each of whom satisfies the independence requirements of Rule5605 of the Nasdaq rules. The compensation committee assists the Board in reviewing and approving the compensation structure, including all forms ofcompensation relating to our directors and executive officers. Our Chief Executive Officer may not be present at any committee meeting during which hiscompensation 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, annualbonuses, employee pension and welfare benefit plans. Corporate Governance and Nominating Committee Our corporate governance and nominating committee consists of Yingli Pan, Zhongcai Wu and Xiaobing Liu, each of whom satisfies theindependence requirements of Rule 5605 of the Nasdaq rules. The corporate governance and nominating committee assists the board in selecting individualsqualified to become members of our board and in determining the composition of the board and its committees. The corporate governance and nominatingcommittee 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 andcommittees 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 asindependence, 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 wellas our compliance with these laws and practices, and making recommendations to the board of directors on all matters of corporategovernance and on any remedial actions to be taken, if needed. 54 6.D. Employees See the section entitled “Employees” in Item 4.B above. 6.E. Share Ownership As of March 30, 2013, 19,901,959 of our ordinary shares were outstanding. Holders of our ordinary shares are entitled to vote together as a singleclass 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 6,061,459 of our ordinaryshares 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 tablebelow are based on 19,901,959 ordinary shares outstanding as of March 30, 2013. The following table sets forth information with respect to the beneficial ownership of our common shares as of March 30, 2013 by: ·each of our directors and executive officers; and ·each person known to us to beneficially own more than 5% of our outstanding ordinary shares. Unless otherwise noted below, the address for each listed shareholder, director or executive officer is 518 Shangcheng Road, Floor 17, Shanghai,200120, People’s Republic of China. Name Number Percent Directors, Executive Officers and 5%Shareholders (1) : Liang Tang 11,889,500 59.7% Wei Hua (2) 600,000 3.0% Feng Peng - - Junhong Li - - Xiaobing Liu - - - - - - Yingli Pan - - - - - - Zhongcai Wu - - - - - - *Less than 1% (1)Beneficial ownership is determined in accordance with the rules and regulations of the SEC. Percentage of beneficial ownership of each listed personis based on ordinary shares outstanding as of the date of this filing, including ordinary shares convertible from all outstanding preferred shares, andthe ordinary shares underlying any options and warrants exercisable by such person within 60 days of the date of this filing. Percentage of beneficialownership of each listed person is based on ordinary shares outstanding as of March 30, 2013 and the ordinary shares underlying any options andwarrants exercisable by such person within 60 days of the date of this filing. (2)The spouse of our chief executive officer, Wei Hua, owns 100% of the shares of Fascinating Acme Development Ltd., which owned 4% of the sharesof Ossen Innovation Group prior to the business combination, and owns 4% of our shares since the business combination. Mr. Hua may be deemedto beneficially own these shares under SEC rules and regulations. 55 Stock Option Plan On July 26, 2010, our board of directors adopted the Ossen Innovation Co., Ltd. 2010 Stock Option Plan, or the 2010 Plan. To date, an option toacquire 150,000 ordinary shares was issued to our former chief financial officer, Yilun Jin, under the 2010 Plan. The 2010 Plan allows us to grant stockoptions to our officers, directors, and executive, managerial, professional or administrative employees of ours or our subsidiaries or joint ventures, and to ourconsultants. We refer to these individuals collectively as key persons. Up to ten percent of our outstanding ordinary shares may be issued under the 2010 Plan.The purpose of the 2010 Plan is to provide certain key persons, on whose initiative and efforts the successful conduct of our business depends, withincentives to: (a) enter into and remain in our service, (b) acquire a proprietary interest in our success, (c) maximize their performance and (d) enhance ourlong-term performance (whether directly or indirectly through enhancing the long-term performance of a subsidiary, joint venture or consultant. The administrator of the 2010 Plan is the compensation committee of our board of directors, or may be any other committee appointed by the boardof directors for that purpose. The administrator has full power and authority to administer, construe and interpret the 2010 Plan. Grants under the 2010 Planwill be governed by individualized grant agreements and may be subject to either time-based or performance-based vesting provisions. The administrator establishes the terms of stock options, subject to certain parameters set forth in the 2010 Plan. The following are the general termsof stock options: ·The exercise price must be at least equal to the par value of shares. ·The term of a stock option may not exceed ten years from the date of grant. ·Unless the administrator determines otherwise, if an option holder terminates employment, his or her unvested options expire immediatelyand vested options may be exercised during the three-month period following termination, after which they will expire. If the employeeterminates employment due to death or disability, the three month period is extended to one year. ·Stock options generally may not be transferred, except to immediate family members. The 2010 Plan will automatically terminate on the fifth anniversary of the 2010 Plan’s adoption. However, outstanding stock options will continue tobe effective after the 2010 Plan’s termination. Our board of directors has the authority to amend, alter, suspend or terminate the 2010 Plan or any outstanding stock option. The consent of anoption holder is necessary for any amendment that would adversely affect an outstanding option. 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 controlledby Mr. Tang. See the discussion under Item 4.C above for a description of these transactions. Issuance of Shares to Related Parties The spouse of our chief executive officer, Wei Hua, owns 100% of the shares of Fascinating Acme Development Ltd., which owns 3% of ouroutstanding ordinary shares. The spouse of the chief executive officer of Shanghai ZFX, which is an affiliated company of ours that supplies us with rawmaterials, owns 100% of the shares of Gross Inspiration Development Ltd., which owns 3% of our outstanding ordinary shares. Purchases from a Related Party Historically, we have purchased a significant percentage of our raw materials from an affiliated entity, Shanghai Zhengfangxing Steel Co., Ltd., orShanghai ZFX, an agent that supplies steel wire rods to prestressed concrete manufacturers in China such as our company. Shanghai ZFX is controlled byour chairman, Dr. Tang. Shanghai ZFX is a member of the Ossen Group, whose relationship to us is described above under the heading “Business –Overview.” 56 Shanghai ZFX procures materials from the limited number of high quality manufacturers and suppliers of our raw materials in the PRC. However,since the introduction in 2009 of our rare earth coated materials, which undergo a coating process that reduces the loss in strength and performance thatprestressed materials otherwise undergo during our manufacturing processes, we have lowered the standards for strength and performance requirements forour raw materials. As a result, we have been able to expand our supplier base to include suppliers of products with lower levels of strength and performanceand have not relied as heavily on supplies from Shanghai ZFX. We acquired 3.2%, 0% and 5.1% of our raw materials from Shanghai ZFX in the years ended December 31, 2012, 2011 and 2010 , respectively. Weexpect that we will continue to purchase the bulk of our supplies from unaffiliated suppliers in the future, as we did in 2012. Specifically, as we expand ourrare earth business, we anticipate that our purchases from Shanghai ZFX will remain at or near their levels in 2012. The contracts between us and Shanghai ZFX are typically for one year and generally specify the name of the products, specifications, price andquantity. Pursuant to the contracts, we must take delivery of the materials within a specified number of days. If we disagree with the quality of the materialsreceived, we must notify Shanghai ZFX in writing within thirty days of receipt of the materials. The materials may be paid for by cash or bank acceptancenotes. If we determine a change is necessary to the method of taking delivery, product ordered, steel or product specifications or quantity, we must notifyShanghai ZFX in writing at least thirty days in advance. We or Shanghai ZFX may rescind the contract/purchase order, which must be negotiated to themutual agreement of both parties. Management believes the transactions referenced above were on terms at least as favorable to us as we could have obtained from unaffiliated parties. Sales to a Related Party We have sold a certain amount of our products to Shanghai Zhaoyang New Metal Material Co., Ltd., an entity that owns a 30% interest in ShanghaiOssen Investment Holding (Group) Co., Ltd., of which Dr. Tang, our chairman, is president. In 2012, 2011 and 2010, we generated approximately 5.8%,6.6% and 13% of our revenues from sales to Shanghai Zhaoyang New Metal Material Co., Ltd. In 2012 we also generated approximately 0.4% of our revenue from sales to Zhejiang Pujiang, a subsidiary Shanghai Ossen acquired in September2010. Accounts Receivable As of December 31, 2012, we did not have accounts receivable from related parties. Guarantees During the years ended December 31, 2012, 2011 and 2010 , Shanghai Zhaoyang, an affiliate of ours, Shanghai Ossen, an affiliate of ours, andShanghai ZFX, 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 iswithin 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 haverequired guaranties pursuant to their standard regulations. Shanghai Ossen Investment Co., Ltd. is a member of the Ossen Group, whose relationship to us isdescribed above under the heading “Business – Overview.” Shanghai Ossen guaranteed loans in the amount of $7.9 million in 2012, $18.7 million in 2011 and $11.6 million in 2010. Shanghai ZFXguaranteed loans in the amount of $30.6 million, $32.4 million and $26.3 million in 2012, 2011 and 2010, respectively. Shanghai ZFX guaranteed notespayable in the amount of $26.2 million and $12.8 million in 2012 and 2011. Shanghai Zhaoyang guaranteed loans in the amount of $4.8 million in 2012.Shanghai Zhaoyang guaranteed notes payable in the amount of $3.2 million in 2012. These guarantees were provided for no consideration. In addition, in2012 we guaranteed loans in the amount of $15.9 million and notes payable in the amount of $12.9 million for Shanghai Pujiang. There can be no assurance that Shanghai Zhaoyang, Shanghai ZFX and Shanghai Ossen will be willing or able to continue to provide similarguarantees 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 mayseek 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, asdetermined by the lending bank; the bank may change the terms of the loan with the borrower without receiving the consent of the guarantor; the guarantorindemnifies the bank for actual damage or loss because of any fraudulent misrepresentations made by the guarantor and if the guarantor causes the contract tobecome invalid, the guarantor indemnifies the bank for damages and losses. 57 7.C. Interests of Experts and Counsel Not applicable. ITEM 8.FINANCIAL INFORMATION Consolidated Statements and Other Financial Information The financial statements required by this item may be found at the end of this report on 20-F, beginning on page F-1. Legal Proceedings We are not currently, and have not recently been, a party to any material legal or administrative proceedings. We are not aware of any material legal oradministrative proceedings threatened against us. From time to time, we are subject to various legal or administrative proceedings arising in the ordinary courseof 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 thefuture. We currently intend to retain all future earnings to finance our operations and to expand our business. No Significant Changes No significant changes to our financial condition have occurred since the date of the annual financial statements contained herein. ITEM 9.THE OFFER AND LISTING 9.A. Offer and Listing Details Our ADS’s are listed for trading on the Nasdaq Global Market under the symbol “OSN.” The shares began trading at $4.50 per ADS on December21, 2010. The trading price for the ADSs was $0.85 on March 27, 2013. The table below sets forth for the quarterly periods indicated the high and low closing market prices of our ordinary shares as reported on theNasdaq Global Market: High Low 2010 Fourth Quarter $5.00 $4.21 (beginning December 21, 2010) 2011 First Quarter $4.98 $3.36 Second Quarter $3.87 $2.21 Third Quarter $3.94 $1.38 Fourth Quarter $1.64 $0.75 2012 First Quarter $1.30 $0.82 Second Quarter $1.37 $0.81 Third Quarter $1.05 $0.88 Fourth Quarter $1.02 $0.75 58 The table below sets forth the high and low closing market prices for our shares on Nasdaq during the most recent six-month period: High Low 2012 October $1.01 $0.90 November $0.96 $0.75 December $1.02 $0.81 2013 January $0.99 $0.80 February $0.97 $0.86 March $0.91 $0.80 9.B. Plan of Distribution Not Applicable. 9.C. Markets Our ordinary shares are currently traded on the Nasdaq Global Market. 9.D. Selling Shareholders Not Applicable. 9.E. Dilution Not Applicable. 9.F. Expenses of the Issuer Not Applicable. ITEM 10.ADDITIONAL INFORMATION 10.A. Share Capital Not Applicable. 10.B. Memorandum and Articles of Association We are a British Virgin Islands exempted company with limited liability and our affairs are governed by our memorandum and articles of associationand 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 certainprovisions of our memorandum and articles of association does not propose to be complete and is qualified in its entirety by our memorandum and articles ofassociation. 59 Ordinary Shares Certificates representing our ordinary shares are issued in registered form. Our shareholders who are nonresidents of the British Virgin Islands mayfreely 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 thememorandum and articles of association. We may amend our memorandum and articles of association generally by a special resolution of our shareholders. Corporate Powers Ultra Glory was incorporated under the BVI Act on January 21, 2010. Pursuant to our memorandum of association, the objects for which we wereestablished 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 timeto 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 orreinsurance company, insurance agent or insurance broker, the business of company management, the business of providing the registered office or theregistered agent for companies incorporated in the British Virgin Islands, or business as a mutual fund, mutual fund management or mutual fundadministrator, 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 thefirst 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 theirelection. 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 hisor 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 theboard 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 remainingdirector. 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 directorwhose 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 notrequire 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 thanthree 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 atleast 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, disclosesuch 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 matterrelated 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 themeeting 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 thetransaction. 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 proposedtransaction 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 usualterms 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. 60 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 apar 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 anddistributions 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 orotherwise 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 optionsover or otherwise dispose of our unissued shares to such persons at such times and for such consideration and upon such terms and conditions as thedirectors 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 suchpreferred, deferred or other special rights or such restrictions, whether in regard to dividend, voting or otherwise, as the directors from time to time maydetermine. If we issue shares of more than one class, we will further amend and restate our Memorandum and Articles of Association to reflect the rightsattached 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 ofnot 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 shareswhich 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, unlessotherwise 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 paripassu 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 timedetermined 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 fewerthan 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 themeeting. 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 noticeprovides 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 voteon 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 orseries, together with an absolute majority of the remaining votes, have waived notice of the meeting and, for this purpose, presence of a shareholder at themeeting 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 hasnot 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 quorumconsists 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 sharesentitled 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 ordecrease 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 anyshareholders they think fit if they are satisfied, on reasonable grounds, that we will, immediately after the distribution, satisfy the solvency test as set forth inthe 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. 61 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 anythreatened, pending or completed proceedings, whether civil, criminal, administrative or investigative, by reason of the fact that the person is or was a directorof 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, jointventure, trust or other enterprise, against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonablyincurred 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 differencesbetween 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 theBritish Virgin Islands are similar, and the flexibility available under British Virgin Islands law has enabled us to adopt memorandum of association andarticles of association that will provide shareholders with rights that do not vary in any material respect from those they would enjoy if we were incorporatedunder the Delaware General Corporation Law, or Delaware corporate law. Set forth below is a summary of some of the differences between provisions of theBVI 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 twocomponents: 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 personwould exercise under similar circumstances. Under this duty, a director must inform himself of, and disclose to stockholders, all material informationreasonably available regarding a significant transaction. The duty of loyalty requires that a director act in a manner he reasonably believes to be in the bestinterests of the corporation. He must not use his corporate position for personal gain or advantage. This duty prohibits self-dealing by a director and mandatesthat the best interest of the corporation and its stockholders take precedence over any interest possessed by a director, officer or controlling stockholder and notshared 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 honestbelief 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 thefiduciary 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, shallact 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 shallexercise 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 Islandslaw 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. UnderBritish Virgin Islands law, no article or regulation shall be amended, rescinded or altered, and no new article shall be made, without the approval of themembers 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 ofstockholders of a corporation, may be taken by written consent of the holders of outstanding stock having not less than the minimum number of votes thatwould be necessary to take such action at a meeting. As permitted by British Virgin Islands law, shareholders’ consents need only a majority of shareholderssigning to take effect. Our memorandum of association and articles of association provide that, other than changes to our memorandum of association andarticles of association, shareholders may approve corporate matters by way of a resolution consented to at a meeting of shareholders or in writing by a majorityof 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 ofshareholders. 62 Shareholder Proposals Under Delaware corporate law, a shareholder has the right to put any proposal before the annual meeting of shareholders, provided it complies withthe 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 thegoverning documents, but shareholders may be precluded from calling special meetings. British Virgin Islands law and our memorandum of association andarticles 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 atleast 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 beingsold. 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 shareholdersholding 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 majorityof the corporation’s outstanding shares. Delaware corporate law allows a Delaware corporation to include in its certificate of incorporation a supermajorityvoting requirement in connection with dissolutions initiated by the board. As permitted by British Virgin Islands law and our memorandum of association andarticles 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 noliabilities 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 suchstock provided there remains outstanding shares with full voting power. Such stock may be made redeemable for cash, property or rights, as specified in thecertificate 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, andour memorandum of association and articles of association, shares may be repurchased, redeemed or otherwise acquired by us. Our directors must determinethat 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 ofsuch class, unless the certificate of incorporation provides otherwise. As permitted by British Virgin Islands law, and our memorandum of association andarticles 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 inwriting 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 otherclass 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 ofthe outstanding shares entitled to vote, unless the certificate provides otherwise. As permitted by British Virgin Islands law and our memorandum ofassociation 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 oftwo or more constituent companies into one of the constituent companies, and a consolidation means the uniting of two or more constituent companies into anew company. In order to merge or consolidate, the directors of each constituent company must approve a written plan of merger or consolidation which mustbe 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 consolidationcontains any provision which, if proposed as an amendment to the memorandum association or articles of association, would entitle them to vote as a class orseries 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 areentitled to vote at the meeting or consent to the written resolution to approve the plan of merger or consolidation. 63 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 stockledger, 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 ofmembers, 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 thecompany, 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 atransaction 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 unlessthe 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 notvoidable 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 ofmembers. As permitted by British Virgin Islands law and our memorandum of association and articles of association, a director interested in a particulartransaction 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 hasspecifically elected not to be governed by such statute by amendment to its certificate of incorporation, it is prohibited from engaging in certain businesscombinations with an “interested shareholder” for three years following the date that such person becomes an interested shareholder. An interested shareholdergenerally 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 effectof 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 notapply if, among other things, prior to the date on which such shareholder becomes an interested shareholder, the board of directors approves either thebusiness combination or the transaction that resulted in the person becoming an interested shareholder. This encourages any potential acquirer of a Delawarepublic 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 incorporationspecifically provides for it. Cumulative voting potentially facilitates the representation of minority shareholders on a board of directors since it permits theminority 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 toelecting such director. There are no prohibitions to cumulative voting under the laws of the British Virgin Islands, but our memorandum of association andarticles 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 companyor management that shareholders may consider favorable, including provisions that authorize our board of directors to issue preference shares in one or moreseries 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. 64 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: · Foreign Currency Administration Rules of 1996, as amended; and · Administrative Rules of the Settlement, Sale and Payment of Foreign Exchange of 1996. As we disclosed in the risk factors above, Renminbi is not a freely convertible currency at present. Under the current PRC regulations, conversion ofRenminbi 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 PRCsecurities 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 accounttransactions at banks in China with authority to conduct foreign exchange business by complying with certain procedural requirements, such as presentmentof valid commercial documents. For capital-account transactions involving foreign direct investment, foreign debts and outbound investment in securities andderivatives, approval from SAFE is a pre-condition. Capital investments by foreign-invested enterprises outside China are subject to limitations andrequirements 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 isbased upon laws and relevant interpretations thereof in effect as of the date hereof, all of which are subject to change, possibly with retroactive effect. Thissummary 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 alsodoes 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 theacquisition, 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 VirginIslands 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 theBritish 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 personsresident in the British Virgin Islands with respect to any of our shares, debt obligation or other securities. There are currently no withholding taxes or exchangecontrol regulations in the British Virgin Islands applicable to us or our shareholders. Currently, there is no income tax treaty, convention or reciprocal tax treatyregarding withholdings currently in effect between the United States and the British Virgin Islands. We will only be liable to pay payroll tax with respect toemployees 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 theBritish 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-investedenterprises to non-PRC investors were exempt from PRC withholding tax. In addition, any dividends payable, or distributions made, by us to holders orbeneficial 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 asof January 1, 2008. Under the new tax law, enterprises established under the laws of non-PRC jurisdictions but whose “de facto management body” are locatedin China are considered “resident enterprises” for PRC tax purposes. Under the implementation regulations issued by the State Council relating to the new taxlaw, “de facto management body” is defined as the body that has material and overall management control over the business, personnel, accounts andproperties of an enterprise. In April 2009, the PRC State Administration of Taxation promulgated a circular to clarify the definition of “de facto managementbody” for enterprises incorporated overseas with controlling shareholders being PRC enterprises. It remains unclear how the tax authorities will treat anoverseas enterprise invested or controlled by another overseas enterprise and ultimately controlled by PRC individual residents as is in our case. We arecurrently not treated as a PRC resident enterprise by the relevant tax authorities. Since substantially all of our management is currently based in China andmay 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 taxas to our worldwide income at a uniform income tax rate of 25%. In addition, the new tax law provides that dividend income between qualified “residententerprises” is exempt from income tax. 65 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 VirginIslands 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 tothe 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 theterritory 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 itsimplementation 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 theADSs 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 areconsidered 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 ourADSs 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 fromsources 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 willconstitute income derived from sources within China is currently unclear. In addition, gains on the disposition of our shares should not be subject to PRCwithholding tax. However, these conclusions are not entirely free from doubt. In addition, it is possible that these rules may change in the future, possibly withretroactive 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 orordinary shares with respect to all categories of investors that acquire our ADSs or ordinary shares, some of which (such as financial institutions, regulatedinvestment companies, real estate investment trusts, tax-exempt organizations, insurance companies, persons holding our ADSs or ordinary shares as part of ahedging, integrated, conversion, straddle or constructive sale transaction, traders in securities that have elected the mark-to-market method of accounting fortheir securities, persons liable for alternative minimum tax, persons who are investors in pass-through entities, grantor trusts, persons who own, directly orindirectly under applicable constructive ownership rules, 10% or more (by voting power) of our ADSs or ordinary shares, persons who received our ADSs orordinary shares pursuant to the exercise of an option or otherwise as compensation, certain former citizens and long-term residents of the United States, dealersin securities or currencies and investors whose functional currency is not the U.S. dollar) may be subject to special rules. This discussion addresses onlyholders who purchase our ADSs or ordinary shares and hold such ADSs or ordinary shares as a capital asset (i.e., generally for investment). Moreover, thisdiscussion is based on the Internal Revenue Code of 1986, as amended (or the Code), existing and proposed Treasury regulations promulgated under theCode, 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 subjectto change, possibly with retroactive effect. Investors should consult their own tax advisors regarding the tax consequences arising in their own particularsituation under U.S. federal, state, local or foreign law or the United States – PRC income tax treaty with respect to the acquisition, ownership or dispositionof 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 orordinary 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 acorporation) created or organized under the laws of the United States or any political subdivision thereof, or the District of Columbia, (iii) an estate the incomeof 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 primaryjurisdiction 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 trusthas 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 (otherthan a partnership) that is not a U.S. Holder is referred to below as a “Non-U.S. Holder.” 66 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 orordinary 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 partnerin 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 ordinaryshares 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 taxprinciples. 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 inour 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 beentitled 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 31,2012), provided that such dividends meet the requirements of "qualified dividend income." For this purpose, qualified dividend income includes dividendspaid 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 whichdividends are paid is readily tradable on an established securities market in the U.S. (such as the Nasdaq Global Market). Dividends that fail to meet suchrequirements, 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 qualifieddividend (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 beginningon 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), anyperiod 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 adeep-in-the-money or otherwise nonqualified option to buy, or has otherwise diminished its risk of loss by holding other positions with respect to, suchordinary 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) tomake related payments with respect to positions in property substantially similar or related to the ADS or ordinary share with respect to which the dividend ispaid. 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 orordinary 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 aqualified dividend into account in determining its deductible investment interest (which is generally limited to its net investment income) only if it elects to doso; 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 ourADSs 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 taxbasis 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 ofthe 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 capitallosses 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 grossincome in any taxable year consists of “passive income” (including dividends, interest, gains from the sale or exchange of investment property and certainrents 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 areheld for the production of passive income. We do not believe that we were a PFIC for our 2012 taxable year. However, because the determination of our PFIC status is based on such factualmatters as the composition of our income and assets the valuation of our assets, and our market capitalization, there is no assurance that the United StatedInternal Revenue Service (“IRS”) will agree with our position for the 2012 taxable year or any prior taxable year. In addition, there can be no assurance that wewill not become a PFIC for the current taxable year ending December 31, 2013 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 ofwhether 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 liableto 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 anydistributions 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 distributionsreceived 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 anygain 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 beenrecognized ratably over the U.S. Holder’s holding period of our ADSs or ordinary shares. 67 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 “qualifiedelecting fund” (“QEF”) election for all taxable years that the holder has held our ADSs or ordinary shares and if we comply with certain reportingrequirements. 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 prorata 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 havemade 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 undistributedincome. Distributions of income that had been previously taxed will result in a corresponding reduction in the basis of the ADSs or ordinary shares and willnot 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 taxabledisposition 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 necessaryinformation 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 Global Market) a U.S. Holder may make a mark-to-market election. Under a “mark-to-market” election, in any taxableyear 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 taxbasis 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’sadjusted 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 theamount 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 itsADSs 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 orother 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 theADSs 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 theU.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 ordinaryshares to be considered “regularly traded,” or that our ADSs or ordinary shares will continue to trade on the Nasdaq Global Market. Accordingly, there are noassurances 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 yearand 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 certainexceptions 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 rulesin 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. federalincome 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 ofU.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 (“effectivelyconnected income”) (and, if an income tax treaty applies, the income is attributable to a permanent establishment maintained by the Non-U.S. Holder in theUnited 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 otherdisposition of our ADSs or ordinary shares, unless either: ·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 ·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 andcertain other conditions are met. 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 thetaxation of U.S. Holders, unless exempt under an applicable income tax treaty. In addition, effectively connected income of a corporate Non-U.S. Holder maybe 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. 68 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 sharesand 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 taxadvisors 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 backupwithholding at a rate of up to 28% with respect to dividends paid on, or proceeds from the disposition of, our ADSs or ordinary shares unless the U.S. Holderprovides proof of an applicable exemption or correct taxpayer identification number and otherwise complies with applicable requirements of the backupwithholding rules. A U.S. Holder of our ADSs or ordinary shares who provides an incorrect taxpayer identification number may be subject to penaltiesimposed 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 thedisposition of, our ADSs or ordinary shares, provided that the Non-U.S. Holder provides its taxpayer identification number, certifies to its foreign status, orestablishes another exemption to the information reporting or back-up withholding requirements. 10.F. Dividends and Paying Agents Not Applicable. 10.G. Statement by Experts Not Applicable. 10.H. Documents on Display The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and will file reports, registrationstatements and other information with the SEC. The Company’s reports, registration statements and other information can be inspected on the SEC’s websiteat www.sec.gov and such information can also be inspected and copies ordered at the public reference facilities maintained by the SEC at the followinglocation: 100 F Street NE, Washington, D.C. 20549. You may also visit us on the world wide web at http://www.osseninnovation.com. However, informationcontained on our website does not constitute a part of this annual report. 10.I. Subsidiary Information Not Applicable. ITEM 11.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Financial instruments that expose us to concentrations of credit risk primarily consist of cash and accounts receivables. The maximum amount ofloss 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 inour consolidated balance sheets. As of December 31, 2012, 2011 and 2010, substantially all of our cash included bank deposits in accounts maintained within the PRC where thereis 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 anylosses 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 courseof 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 ininterest bearing bank deposits and denominated in RMB. To the extent that we may need to raise debt financing in the future, upward fluctuations in interestrates would increase the cost of new debt. We do not currently use any derivative instruments to manage our interest rate risk. 69 Commodity price risk Certain raw materials used by us are subject to price volatility caused by supply conditions, political and economic variables and otherunpredictable factors. The primary purpose of our commodity price management activities is to manage the volatility associated with purchases ofcommodities 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 significantlyfrom 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 anyhedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may enter into hedging transactions in the future, theavailability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreigncurrency 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 ofinflation may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentageof net revenues if the selling prices of our products do not increase proportionately with these increased costs. ITEM 12.DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES The depositary may charge each person to whom ADSs are issued, including, without limitation, issuances against deposits of shares, issuances inrespect of share distributions, rights and other distributions, issuances pursuant to a stock dividend or stock split declared by us or issuances pursuant to amerger, exchange of securities or any other transaction or event affecting the ADSs or deposited securities, and each person surrendering ADSs for withdrawalof 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 respectof 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 surrenderingADSs 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 stockregarding the ADRs or the deposited securities or a distribution of ADSs), whichever is applicable: ·a fee of US$1.50 per ADR or ADRs for transfers of certificated or direct registration ADRs; ·a fee of up to US$0.05 per ADS for any cash distribution made pursuant to the deposit agreement; ·a fee of up to US$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 recorddate or record dates set by the depositary during each calendar year and shall be payable in the manner described in the next succeedingprovision); ·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 controlregulations or any law or regulation relating to foreign investment) in connection with the servicing of the shares or other depositedsecurities, the delivery of deposited securities or otherwise in connection with the depositary’s or its custodian’s compliance with applicablelaw, rule or regulation (which charge shall be assessed on a proportionate basis against holders as of the record date or dates set by thedepositary and shall be payable at the sole discretion of the depositary by billing such holders or by deducting such charge from one ormore cash dividends or other cash distributions); ·stock transfer or other taxes and other governmental charges; ·cable, telex and facsimile transmission and delivery charges incurred at your request in connection with the deposit or delivery of shares; ·transfer or registration fees for the registration of transfer of deposited securities on any applicable register in connection with the deposit orwithdrawal of deposited securities; and 70 ·expenses of the depositary in connection with the conversion of foreign currency into U.S. dollars. We will pay all other charges and expenses of the depositary and any agent of the depositary (except the custodian) pursuant to agreements from timeto 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 madeavailable 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) ourreimbursable expenses related to the ADR program are not known at this time. The depositary collects its fees for issuance and cancellation of ADSs directlyfrom investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees formaking distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. Thedepositary 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 toholders 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 thedepositary. PART II ITEM 13.DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES Not Applicable. ITEM 14.MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS Use of Proceeds We completed our initial public offering of 5,000,000 ordinary shares, in the form of ADSs, at $4.50 per ADS in December 2010, after our ordinaryshares and ADRs were registered under the Securities Act. The aggregate price of the offering amount registered and sold was $22.5 million, of which wereceived $20.3 million. The effective date of our registration statement on Form F-1 (File number: 333-168496) was December 20, 2010. Global HunterSecurities, LLC and Knight Capital Markets LLC acted as joint book-runners of our initial public offering. The amount of expenses incurred by us in connection with the issuance and distribution of the registered securities in our initial public offeringtotaled $2.155 million, including $1.575 million for underwriting discounts and commissions and approximately $0.58 million for other expenses. None ofthe payments were direct or indirect payments to our directors, officers, general partners of our associates, persons owning 10% or more of any class of ourshares, or any of our affiliates. We received net proceeds of $20.3 million from our initial public offering. Our intention was to use the proceeds to increase our production capacityfor rare earth coated products. To date, we have spent $7.9 million as prepayments for the purchase of manufacturing equipment. The expansion waspostponed as a result of unfavorable business climate in China in 2011 and 2012, primarily driven by tightened credit environment, the funding difficultiesfaced by Ministry of Railways of China and the high speed railway accident in South China in July 2011. Our current plan is to complete installation of thenew production lines in the first half of 2014, pending our ability to expand our business and the general business environment in China at that time. We intend to use cash generated from operations and bank borrowings to fund any remaining costs related to the expansion of our facilities. 71 ITEM 15.CONTROLS AND PROCEDURES (a)Disclosure Controls and Procedures Under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, weconducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities ExchangeAct of 1934, as amended. In 2012, the SEC requested that we review our analysis of Rule 5-04(c) of Regulation S-X and as a result, we amended our annualreport for the year ended December 31, 2011 and filed a financial statement schedule with the amended annual report. In response to the SEC’s comment, weinstituted corrective measures and will evaluated the effectiveness of our disclosure controls and procedures, as defined under Exchange Act Rule 13a-15(e),including Rule 5-04(c) of Regulation S-X and have included the financial statement schedule as required in this annual report. Although we believe thefinancial statement schedule does not change or impact our consolidated financial statements, due to omission of filing of the financial statement schedule, ourprincipal executive officer and principal financial officer have concluded that our disclosure controls and procedures were not effective as of the end of theperiod covered by this annual report. (b)Management’s Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such item is defined in Rules13a-15(f) and 15d-15(f) under the Exchange Act, for our company. Internal control over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparation of consolidated financial statements in accordance with U.S. GAAP and includesthose policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions anddispositions of a company’s assets, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidatedfinancial statements in accordance with generally accepted accounting principles, and that a company’s receipts and expenditures are being made only inaccordance with authorizations of a company’s management and directors, and (3) provide reasonable assurance regarding prevention or timely detection ofunauthorized acquisition, use, or disposition of a company’s assets that could have a material effect on the consolidated financial statements. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of ourfinancial statements would be prevented or detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that controlsmay become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management has conducted an assessment, including testing of the design and the effectiveness of our internal control over financial reporting asof December 31, 2012. In making its assessment, management used the criteria in Internal Control — Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission. The Company identified deficiencies related to corporate governance, management’s application of disclosure requirements for SEC reporting anddocumentation of our financial statement reporting process. Such deficiencies are common for companies of our size who are new to the U.S. capital market.Our current internal accounting department responsible for financial reporting of the Company, on a consolidated basis, is relatively new to U.S. GAAP andthe related internal control procedures required of U.S. public companies. Although our accounting staffs are professional and experienced in accountingrequirements and procedures generally accepted in the PRC, management has determined that they require additional training and assistance in U.S. GAAPmethods and SEC reporting. In addition, the SEC requested that we review our analysis of Rule 5-04(c) of Regulation S-X and as a result, we amended ouryear ended December 31, 2011 annual report and have filed a financial statement schedule with this annual report. Although we believe the financial statementschedule does not change or impact our consolidated financial statements, due to omission of filing of the financial statement schedule, our principal executiveofficer and principal financial officer determined that our disclosure controls and procedures were not effective as of December 31, 2011. The Company hasinstituted corrective measures and will evaluate the effectiveness of our disclosure controls and procedures, as defined under Exchange Act Rule 13a-15(e),including Rule 5-04(c) of Regulation S-X and will file the financial statement schedule as required. Based on this assessment, management concluded that our internal controls over financial reporting were not effective as of December 31, 2012 dueto the material weakness in the Company’s internal controls over financial reporting. (c)Attestation Report of Independent Registered Public Accounting Firm We are a non-accelerated filer under the rules of the Securities and Exchange Commission. Accordingly, we are not required to include in this annualreport an attestation report of our independent registered public accounting firm. (d)Changes in Internal Control over Financial Reporting There were no changes in our internal controls over financial reporting during our fiscal year ended December 31, 2012 that have materially affected,or are reasonably likely to materially affect, our internal control over financial reporting. 72 (e)Remediation Initiatives As a result of the foregoing material weaknesses, as of December 31, 2012, the Company’s audit committee of its Board of Directors has undertakento further review internal controls along with management and in cooperation with outside consultants in order to remediate all existing material weaknessesand internal control deficiencies. Management intends to take the following further specific actions to address the deficiencies that are identified during the fiscal year 2012 andstrengthen our internal control over financial reporting: lto review documented policies, procedures and controls related to the key processes we use to identify material information, prepare regulatoryfilings and other public documents, and communicate information to external parties to ensure they are complete and effective; lto review documented controls and procedures to ensure they are properly implemented and effective to enhance the overall completeness,accuracy, consistency and timeliness of our disclosures; lto identify and assess key risks that may impact our ability to disclose material information and prepare regulatory filings that are complete,accurate, consistent and timely; lto enhance open and candid communication between all parties involved in operations, governance and financial and regulatory reporting, and astrong control and governance environment; lto create positions and allocate sufficient resources to achieve an effective disclosure controls and procedures; and lto establish direct reporting procedures from the Chief Accounting Officer to the Chief Financial Officer to ensure a better overview of theCompany’s financial reporting system by the CFO. Our management, including our Chief Executive Officer and our Chief Financial Officer, does not expect that our disclosure controls and proceduresor our internal controls will prevent or detect 100% of all errors and fraud that may occur. A control system, no matter how well conceived and operated, canprovide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the factthat there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems,no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. Andmanagement believes that the steps we are taking are necessary for remediation of the material weaknesses identified above, and we will continue to monitor theeffectiveness of these steps and to make any changes that our management deems appropriate. ITEM 16.RESERVED ITEM 16A.AUDIT COMMITTEE FINANCIAL EXPERT Our audit committee consists of Junhong Li, Yingli Pan and Xiaobing Liu. Our board of directors has determined that Junhong Li, Yingli Pan andXiaobing Liu are “independent directors” within the meaning of Nasdaq Stock Market Rule 5605(a)(2) and meet the criteria for independence set forth in Rule10A−3(b) of the Exchange Act. Junhong Li meets the criteria of an audit committee financial expert as set forth under the applicable rules of the SEC. ITEM 16B.CODE OF ETHICS Our board of directors has adopted a code of business conduct and ethics. The purpose of the code is to promote ethical conduct and deterwrongdoing. The policies outlined in the Code are designed to ensure that our directors, executive officers and employees act in accordance with not only theletter but also the spirit of the laws and regulations that apply to our business. We expect our directors, executive officers and employees to exercise goodjudgment, to uphold these standards in their day-to-day activities, and to comply with all applicable policies and procedures in the course of their relationshipwith the company. Any amendment to or waivers of the Code for members of our board of directors and our executive officers that are required to be disclosedby the rules of the SEC or Nasdaq will be disclosed on our website at http://www.osseninnovation.com within four business days following the amendment orwaiver. During fiscal year 2012, no amendments to or waivers from the Code were made or given for any of our executive officers. 73 Our code of business conduct and ethics are publicly available on our website at http://www.osseninnovation.com. ITEM 16C.PRINCIPAL ACCOUNTANT FEES AND SERVICES Year EndedDecember 31, 2012 Year EndedDecember 31, 2011 Audit fees* $285,000 $510,000 *Audit Fees – This category includes the audit of our annual financial statements, review of financial statements included in our quarterly reports andservices that are normally provided by the independent registered public accounting firm in connection with engagements for those years and services that arenormally provided by our independent registered public accounting firm in connection with statutory audits and Securities and Exchange Commissionregulatory filings or engagements. The policy of our audit committee and our board of directors is to pre-approve all audit and non-audit services provided by our principal auditors, includingaudit services, audit-related services, and other services as described above, other than those for de minimis services which are approved by the auditcommittee or our board of directors prior to the completion of the services. ITEM 16D.EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES Not Applicable. ITEM 16E.PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS Not Applicable. ITEM 16F.CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANTNot Applicable. ITEM 16G.CORPORATE GOVERNANCE Our ADSs are listed on the Nasdaq Global Market, or Nasdaq. As such, we are subject to corporate governance requirements imposed by Nasdaq.Under Nasdaq rules, listed non-US companies such as ourselves may, in general, follow their home country corporate governance practices in lieu of some ofthe Nasdaq corporate governance requirements. A Nasdaq-listed non-US company is required to provide a general summary of the significant differences to itsUS investors either on the company website or in its annual report distributed to its US investors. We are committed to a high standard of corporategovernance. As such, we endeavor to comply with the Nasdaq corporate governance practices and there is no significant difference between our corporategovernance practices and what the Nasdaq requires of domestic U.S. companies. PART III ITEM 17.FINANCIAL STATEMENTS Not applicable. ITEM 18.FINANCIAL STATEMENTS The consolidated financial statements and related notes required by this item are contained on pages F-1 through F-41. 74 ITEM 19.EXHIBITS ExhibitNumber Description of Documents 1.1 Amended and Restated Memorandum of Association (1) 1.2 Amended and Restated Articles of Association (1) 2.1 Form of American Depositary Receipt (included in Exhibit 2.3) 2.2 Form of Ordinary Share Certificate (1) 2.3 Form of Deposit Agreement (3) 4.1 Share Exchange Agreement between Ultra Glory International Ltd., the shareholder of Ultra Glory International Ltd., Ossen InnovationMaterials Group Co., Ltd. and the Shareholders of Ossen Innovation Materials Group Co., Ltd., dated July 7, 2010 (2) 4.2 Form of Sales Contract between Ossen Innovation Materials Co. Ltd. and Shanghai Zhaoyang New Metal Material Co., Ltd. (2) 4.5 Form of Sales Contract between Ossen Innovation Materials Co., Ltd. and Zhangjiagang Ruifeng Iron and Steel Co., Ltd. (2) 4.6 Form of Coating Processing Agreement between Ossen Innovation Materials Co., Ltd. and Zhangjiagang Ruifeng Iron and Steel Co., Ltd. (2) 4.7 Form of Purchase Contract between Ossen Innovation Materials Co., Ltd. and Zhangjiagang Free Trade Zone B.M. International TradingCo., Ltd. (2) 4.8 Form of Sales Contract between Shanghai Z.F.X. Steel Co., Ltd. and Ossen Innovation Materials Co. Ltd. (2) 4.9 Form of Purchase Contract between Ossen Innovation Materials Co., Ltd. and Zhangjiagang Free Trade Zone JinDe Trading Co., Ltd. (2) 4.10 Form of Purchase Contract between Ossen Innovation Materials Co., Ltd. and Jiangsu Shagang Group Co., Ltd. (2)4.11 Employment Contract by and between Ossen Innovation Co., Ltd. and Liang Tang, dated November 24, 2010 (2) 4.12 Form of Stabilization Processing Agreement between Shanghai Zhaoyang New Metal Material Co., Ltd. and Ossen Innovation Materials Co.,Ltd. (2) 4.13 Form of Loan Contract between Ossen Innovation Materials Co., Ltd. and Feicuiyuan Branch, Huishang Bank (2) 4.14 Form of Loan Guarantee Contract between Shanghai Ossen Investment Co., Ltd. and Feicuiyuan Branch, Huishang Bank (2) 4.15 Form of Loan Guarantee Contract between Shanghai Z.F.X. Steel Co., Ltd. and Feicuiyuan Branch, Huishang Bank (2) 4.16 Cooperation Agreement between Ossen (Jiujiang) Steel Wire & Cable Co., Ltd., Shanghai Machinery Manufacturing Technology ResearchInstitute, Organization Department of Jiujiang Committee of CPC and Jiujiang Bureau of Science and Technology, dated January 2008 (2) 4.17 Employment Agreement, dated March 1, 2013, entered into by the Company and Feng Peng. * 8.1 Subsidiaries of the Registrant (2) 12.1 CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 * 12.2 CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 * 13.1 CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 * 13.2 CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 * 75 * Attached as an exhibit hereto. (1)Incorporated by reference to our Registration Statement on Form F-1/A, filed on September 29, 2010. (2)Incorporated by reference to our Shell Company Report on Form 20-F, filed on July 12, 2010. (3)Incorporated by reference to our Registration Statement on Form F-6, filed on December 3, 2010. 76 SIGNATURES The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersignedto sign this annual report on its behalf. OSSEN INNOVATION CO., LTD. /s/ Wei Hua Name: Wei Hua Title: Chief Executive Officer Date: April 29, 2013 77 OSSEN INNOVATION CO., LTD. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS 1 OSSEN INNOVATION CO., LTD. AND SUBSIDIARIES CONTENTS PAGEF-1REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE YEAR ENDEDDECEMBER 31, 2012 AND 2011 PAGEF-3-F-4CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2012 AND 2011 PAGEF-5CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME FOR THEYEARS ENDED DECEMBER 31, 2012, 2011 AND 2010 PAGEF-6CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEARSENDED DECEMBER 31, 2012, 2011 AND 2010 PAGEF-7-F-8CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2012,2011 AND 2010 PAGEF-9 –F-51NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  REPORT OF INDEPENDENT REGISTERED PUBLIC ACOUNTING FIRM Board of Directors and ShareholdersOssen Innovation Co., Ltd.Shanghai, China We have audited the accompanying consolidated balance sheets of Ossen Innovation Co., Ltd. as of December 31, 2012 and 2011 and the related consolidatedstatements of operations and other comprehensive income, shareholders’ equity, and cash flows for the three years then ended. In connection with our audits ofthe financial statement, we have also audited the financial statement schedules listed in the accompanying index. These consolidated financial statements andschedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements andschedules based on our audit. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is notrequired to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal controlover financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion onthe effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on atest basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ossen Innovation Co.,Ltd. as of December 31, 2012 and 2011 and the results of its operations and its cash flows for the three years then ended in conformity with accountingprinciples generally accepted in the United States of America. Also, in our opinion, the financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, presentfairly, in all material respects, the information set forth therein. /s/ BDO China Dahua CPA Co., Ltd. Shenzhen, People’s Republic of ChinaApril 29, 2013 F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACOUNTING FIRM Board of Directors and ShareholdersOssen Innovation Co. Ltd.Shanghai, China The audits referred to in our report dated April 29, 2013 relating to the consolidated financial statements of Ossen Innovation Co., Ltd., which is contained inItem 18 of this Form 20-F also included the audit of the financial statement schedules listed in the accompanying index. These financial statement schedulesare the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly,in all material respects, the information set forth therein. /s/ BDO China Dahua CPA Co., Ltd. Shenzhen, People’s Republic of ChinaApril 29, 2013 F-2 OSSEN INNOVATION CO., LTD AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2012 AND 2011 December,31 2012 2011 ASSETS Current assets Cash and cash equivalents $1,996,764 $1,568,261 Restricted cash 25,407,499 19,764,900 Note receivable-bank acceptance note 394,079 10,851,616 Accounts receivable, net of allowance for doubtful accounts of $1,277,091 and $384,311 as of December 31, 2012and 2011, respectively 45,734,381 48,049,722 Inventories 9,807,044 17,222,664 Advance to suppliers 77,948,496 41,391,174 Other current assets 1,904,626 6,495,241 Notes receivable from related party – bank acceptance notes 1,830,208 - Accounts receivable from related party - 20,799 Total current assets 165,023,097 145,364,377 Property, plant and equipment, net 9,707,587 11,022,916 Land use rights, net 4,317,669 4,380,708 Prepayment for plant and equipment 7,933,361 7,869,529 TOTAL ASSETS $186,981,714 $168,637,530 See accompanying notes to the consolidated financial statements F-3 OSSEN INNOVATION CO., LTD AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2012 AND 2011 (Continued) December,31 2012 2011 LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities Notes payable-bank acceptance notes $36,933,710 $24,848,628 Short-term bank loans 50,679,026 47,966,209 Long term bank loans – current portion 4,438,386 - Accounts payables 572,305 948,475 Customer deposits 384,602 459,915 Taxes payable 391,353 4,792 Other payables and accrued liabilities 805,196 324,423 Total current liabilities 94,204,578 74,552,442 Long term bank loans - 4,718,094 TOTAL LIABILITIES 94,204,578 79,270,536 EQUITY Shareholders' Equity Ordinary shares, $0.01 par value: 100,000,000 shares authorized; 20,000,000 shares issued; and 19,901,959 and20,000,000 shares outstanding as of December 31, 2012 and 2011, respectively 200,000 200,000 Additional paid-in capital 33,971,455 33,884,656 Statutory reserve 4,179,027 3,884,808 Retained earnings 38,311,527 36,224,467 Treasury stock, at cost: 98,041 and 0 shares as of as of December 31, 2012 and 2011, respectively (96,608) - Accumulated other comprehensive income 5,999,214 5,295,641 TOTAL SHAREHOLDERS’ EQUITY 82,564,615 79,489,572 Non-controlling interest 10,212,521 9,877,422 TOTAL EQUITY 92,777,136 89,366,994 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $186,981,714 $168,637,530 See accompanying notes to the consolidated financial statements F-4 OSSEN INNOVATION CO., LTD AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOMEFOR THE YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010 Year Ended December 31, 2012 2011 2010 REVEUNUES $122,397,886 $118,616,971 $117,453,024 COST OF GOODS SOLD 111,611,457 96,588,172 92,298,319 GROSS PROFIT 10,786,429 22,028,799 25,154,705 Selling expenses 917,074 1,216,504 660,934 General and administrative expenses 3,950,934 2,747,514 1,796,995 Total Operating Expenses 4,868,008 3,964,018 2,457,929 INCOME FROM OPERATIONS 5,918,421 18,064,781 22,696,776 Financial expenses, net (3,556,045) (3,480,766) (2,437,426)Other income, net 911,430 609,666 151,757 INCOME BEFORE INCOME TAX 3,273,806 15,193,681 20,411,107 INCOME TAX (557,428) (2,139,029) (2,865,372)NET INCOME 2,716,378 13,054,652 17,545,735 LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST 335,099 1,506,947 2,897,397 NET INCOME ATTRIBUTABLE TO OSSEN INNOVATION CO.,LTD ANDSUBSIDIARIES 2,381,279 11,547,705 14,648,338 OTHER COMPREHENSIVE INCOME Foreign currency translation gain 703,573 3,102,645 1,649,960 TOTAL OTHER COMPREHENSIVE INCOME 703,573 3,102,645 1,649,960 COMPREHENSIVE INCOME $3,084,852 $14,650,350 $16,298,298 EARNINGS PER ORDINARY SHARE Basic and diluted $0.12 $0.58 $0.97 WEIGHTED AVERAGE ORDINARY SHARES OUTSTANDING Basic and diluted 19,942,333 20,000,000 15,150,685 See accompanying notes to the consolidated financial statements F-5 OSSEN INNOVATION CO., LTD AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITYFOR THE YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010 Total Ossen Innovation Co., Ltd. Shareholders’ Equity Accumulated Ordinary Shares$0.01 Par Value Additional Paid-in Treasury stock OtherComprehensive Statutory Retained NonControlling Shares Amount Capital Shares Amount Income Reserve Earnings Interest Total Balance at January 1, 2010 15,000,000 $150,000 $100,000 - $- $543,036 $1,093,331 $12,819,901 $5,473,078 $20,179,346 Net income - - - - - - - 14,648,338 2,897,397 17,545,735 Transfer to statutory reserve - - - - - - 1,581,126 (1,581,126) - - Issuance of ordinary shares 5,000,000 50,000 20,295,000 - - - - - - 20,345,000 Share-based compensation to employee - - 19,096 - - - - - - 19,096 IPO expense compensation - - 12,924,000 - - - - - - 12,924,000 Foreign currency translation adjustment - - - - - 1,649,960 - - - 1,649,960 Balance at December 31, 2010 20,000,000 200,000 33,338,096 - - 2,192,996 2,674,457 25,887,113 8,370,475 72,663,137 Net income - - - - - - - 11,547,705 1,506,947 13,054,652 Transfer to statutory reserve - - - - - - 1,210,351 (1,210,351) - - Share-based compensation to employee - - 105,605 - - - - - - 105,605 IPO expense compensation - - 440,955 - - - - - - 440,955 Foreign currency translation adjustment - - - - - 3,102,645 - - - 3,102,645 Balance at December 31, 2011 20,000,000 200,000 33,884,656 - - 5,295,641 3,884,808 36,224,467 9,877,422 89,366,994 Net income - - - - - - - 2,381,279 335,099 2,716,378 Transfer to statutory reserve - - - - - - 294,219 (294,219) - - Common shares repurchase - - - (98,041) (96,608) - - - - (96,608)Share-based compensation to employee - - 86,799 - - - - - - 86,799 Foreign currency translation adjustment - - - - - 703,573 - - 703,573 Balance at December 31, 2012 20,000,000 $200,000 $33,971,455 (98,041) $(96,608) $5,999,214 $4,179,027 $38,311,527 $10,212,521 $92,777,136 See accompanying notes to the consolidated financial statements F-6 OSSEN INNOVATION CO., LTD. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 2012 2011 2010 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $2,716,378 $13,054,652 $17,545,735 Adjustments to reconcile net income to net cash provided by/ (used in) operating activities: Depreciation and amortization 1,601,197 2,007,263 1,838,794 Share-based compensation expense 86,799 105,605 19,096 Changes in operating assets and liabilities: (Increase) Decrease In: Accounts receivable 2,315,342 (34,717,230) 1,824,595 Inventories 7,415,620 10,727,118 (17,742,920)Advance to suppliers (36,557,323) (16,318,824) (5,238,789)Other current assets 4,590,616 3,151,939 (2,378,426)Notes receivable - bank acceptance notes 10,457,537 6,785,312 (17,486,720)Notes receivable from related party - bank acceptance notes (1,830,208) 3,024,895 (1,196,661)Account receivable from related party 20,799 686,688 (707,487)Increase (Decrease) In: Accounts payable (376,169) (1,545,190) 2,253,390 Customer deposits (75,312) (373,853) (4,355,991)Income tax payable 386,561 (657,793) 552,092 Other payables and accrued expenses 480,773 229,913 62,037 Net cash used in operating activities (8,767,390) (20,143,383) (25,011,255) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of plant and equipment (32,856) (156,288) (73,466)Prepayment for purchases of plant and equipment (1,584) (5,941) (7,562,237)Disposal of property, plant and equipment 1,458 - - Net cash used in investing activities (32,982) (162,229) (7,635,703) See accompanying notes to the consolidated financial statements F-7 OSSEN INNOVATION CO., LTD. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) Year Ended December 31, 2012 2011 2010 CASH FLOWS FROM FINANCING ACTIVITIES: Increase in restricted cash (5,642,598) (5,965,883) (1,974,804)Proceeds from short-term bank loans 68,716,602 75,184,567 57,578,620 Repayments of short-term bank loans (66,384,299) (65,543,772) (46,603,583)Proceeds from long-term bank loans - 4,718,094 - Repayments of long-term bank loans (316,877) - - Proceeds from notes payable-bank acceptance notes 76,842,639 50,433,168 50,216,280 Repayment of notes payable-bank acceptance notes (64,959,757) (51,598,637) (43,947,109)Repurchase of common share (96,608) - - Proceeds from issuance of ordinary shares to public, net of issuance cost - - 20,345,000 IPO compensation - 440,955 - Net cash provided by financing activities 8,159,102 7,668,492 35,614,404 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (641,270) (12,637,120) 2,967,446 Effect of exchange rate changes on cash 1,069,773 1,882,399 946,069 Cash and cash equivalents at beginning of period 1,568,261 12,322,982 8,409,467 CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,996,764 $1,568,261 $12,322,982 SUPPLEMENTARY CASH FLOW INFORMATION Cash paid during the periods: Income taxes paid $310,355 $2,863,026 $2,355,451 Interest paid $3,676,992 $2,998,929 $1,949,982 Non-cash transactions: Appropriation to statutory reserve $294,219 $1,210,351 $1,581,126 Debt forgiven by shareholder $- $- $12,924,000 See accompanying notes to the consolidated financial statements F-8 NOTE 1 – ORGANIZATION AND PRINCIPAL ACTIVITIES Ossen Innovation Co., Ltd., (“Ossen Innovation” or the “Company”) formerly known as Ultra Glory International, Ltd., or Ultra Glory, is a British VirginIslands limited liability company organized on January 21, 2010 under the BVI Business Companies Act, 2004 (the “BVI Act”). Ultra Glory was a blankcheck company formed for the purpose of acquiring, through a share exchange, asset acquisition or other similar business combination, an operatingbusiness. Business Combination On July 7, 2010, Ultra Glory and its sole shareholder entered into a share exchange agreement with Ossen Innovation Materials Group, Co., Ltd, or OssenInnovation Group, a British Virgin Islands limited liability company organized on April 30, 2010 under the BVI Act and the shareholders of Ossen InnovationGroup. Pursuant to the share exchange agreement, Ultra Glory acquired from the shareholders of Ossen Innovation Group all of the issued and outstandingshares of Ossen Innovation Group, in exchange for an aggregate of 10,000,000 newly issued ordinary shares issued by Ultra Glory to the shareholders ofOssen 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 andoutstanding 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, theindividuals and entities that owned shares of Ossen Innovation Group prior to the business combination acquired 100% of the equity of Ultra Glory, and UltraGlory acquired 100% of the equity of Ossen Innovation Group. Ossen Innovation Group is now a wholly owned subsidiary of Ultra Glory. In conjunctionwith 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 and increased its authorized shares to 100,000,000. Upon the consummation of the business combination, thecompany ceased to be a shell company. Ossen Innovation, together with its subsidiaries, is referred to as the “Company,” unless specific reference is made to acompany or entity. The effect of the share exchange and the share sale is such that effectively a reorganization of the entities has occurred for accounting purposes and is deemedto be a reverse acquisition. Subsequent to the share exchange the financial statements presented are those of a combined Ossen Innovation Group and itssubsidiaries, as if the share exchange had been in effect retroactively for all periods presented. F-9 NOTE 1 – ORGANIZATION AND PRINCIPAL ACTIVITIES (CONTINUED) The share exchange acquisition is accounted for as a “reverse acquisition” since, immediately following completion of the transaction, the shareholders ofOssen Innovation Group have had effective control of Ultra Glory. For accounting purposes, Ossen Innovation Group is deemed to be the accounting acquirerin the transaction and, consequently, the transaction is treated as a recapitalization of Ultra Glory, i.e., a capital transaction involving the issuance of sharesby Ultra Glory for the shares of Ossen Innovation Group. Accordingly, the combined assets, liabilities and results of operations of Ossen Innovation Groupand its subsidiaries, became the historical financial statements of Ultra Glory at the closing of the share exchange, and Ultra Glory’s assets (primarily cashand cash equivalents), liabilities and results of operations is consolidated with those of Ossen Innovation Group beginning on the share exchange date. Nostep-up in basis or intangible assets or goodwill is recorded in this transaction. As this transaction is being accounted for as a reverse acquisition, all directcosts of the transaction is charged to additional paid-in capital. All professional fees and other costs associated with transaction were expensed. The 15,000,000shares of Ultra Glory, subsequent to the July 7, 2010 share exchange, are presented as if they are outstanding for all periods presented, as these are held 100%by the equity owners of Ossen Innovation Group as of the share exchange and the share sale. The Company’s Shareholders Dr. Tang, the Company’s chairman, owns 100% of the shares of Effectual Strength Enterprises Ltd., a British Virgin Islands company, which currentlyowns 59.7% of the Company’s outstanding ordinary shares. The spouse of the Company’s chief executive officer, Wei Hua, owns 100% of the shares ofFascinating Acme Development Ltd., which owns 3.0% of the Company’s outstanding ordinary shares. The spouse of the chief executive officer of ShanghaiZFX, which is an affiliated company of the Company that supplies the Company with raw materials, owns 100% of the shares of Gross InspirationDevelopment Ltd., which owns 3.0% of the Company’s outstanding ordinary shares. Another 25% of the Company’s ordinary shares, or 5 million shares,were issued in the Company’s initial public offering in December 2010 and 4,901,959 of those shares are currently trading on NASDAQ in the form ofADS’s. The holders of the remaining 9.7% of the Company’s shares are investors that are residents of the People’s Republic of China (“PRC”) and areunaffiliated with Ossen. F-10 NOTE 1 – ORGANIZATION AND PRINCIPAL ACTIVITIES (CONTINUED) The Company’s Subsidiaries British Virgin Islands Companies Ossen Innovation Group, the Company’s 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 beenheld by Dr. Tang since inception. In May 2010, Dr. Tang transferred these shares to Ossen Innovation Group in anticipation of the public listing of ourCompany’s shares in the United States. Ossen Asia is a British Virgin Islands limited liability company organized on February 7, 2002. Ossen Asia has one direct operating subsidiary in China,Ossen Innovation Materials Co. Ltd., or Ossen Materials. Ossen Asia owns 81% of the equity of Ossen Materials. Topchina is a British Virgin Islands limited liability company organized on November 3, 2004. Ossen Materials and Topchina directly own an operatingsubsidiary in China, Ossen (Jiujiang) Steel Wire & Cable Co., Ltd., or Ossen Jiujiang. Ossen Materials owns 20.46% of the equity of Ossen Jiujiang andTopchina owns 79.54%. 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 (Ma’anshan) SteelWire and Cable Co., Ltd. On May 8, 2008, Ossen Materials was restructured from a Sino-foreign joint venture limited liability company to a corporation. Thename of the entity was changed at that time to Ossen Innovation Materials Co., Ltd. Ossen Asia owns 81% of the equity of Ossen Materials. The remaining 19% is held in the aggregate by four Chinese entities, two of which are controlled byChinese governmental entities, one of which is controlled by Zhonglu Co. Ltd., a company whose shares are listed on the Shanghai Stock Exchange, and oneof which is controlled by Chinese citizens. Through Ossen Materials, the Company has manufactured and sold plain surface PC strands, galvanized PC steel wires and PC wires in the Company’sMaanshan City, PRC, facility since 2004. The primary products manufactured in this facility are the Company’s plain surface PC strands. The primarymarkets for the products manufactured at the Company’s Maanshan facility are Anhui Province, Jiangsu Province, Zhejiang Province and Shanghai City,each in the PRC. F-11 NOTE 1 – ORGANIZATION AND PRINCIPAL ACTIVITIES (CONTINUED) Ossen Jiujiang On April 6, 2005, Shanghai Ossen Investment Holdings (Group) Co., Ltd., or Ossen Shanghai, acquired a portion of the bankruptcy assets of JiujiangTianlong Galvanized Prestressing Steel Strand LLC, including equipment, land use rights and inventory for approximately $2.9 million. Ossen Jiujiang wasformed by Ossen Shanghai in the PRC as a Sino-foreign joint venture limited liability company on April 13, 2005. Ossen Shanghai then transferred the newlyacquired 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% byOssen Shanghai. In June 2005, Ossen Shanghai transferred its entire interest in Ossen Jiujiang to Topchina in exchange for approximately $2.9 million. InOctober 2007, Topchina transferred 41.7% of the equity in Ossen Jiujiang to Ossen Asia for no consideration. On December 17, 2007, Ossen Asia transferredall of its shares in Ossen Jiujiang to Ossen Materials for no consideration. On December 27, 2010, the paid-in capital of Ossen Jiujiang increased fromapproximately $6,048,509 (RMB 50,000,000) to approximately $26,048,509 (RMB 183,271,074) and was injected by cash of approximately $20,000,000(RMB 133,271,074) from its shareholder Topchina. Since then, 20.46% of the equity interest of Ossen Jiujiang has been held by Ossen Materials and79.54% by Topchina. Through Ossen Jiujiang, the company manufactures galvanized PC wires, plain surface PC strands, galvanized PC strands, unbonded PC strands, helicalrib PC wires, sleeper PC wires and indented PC wires. The primary products manufactured in this facility are the company’s galvanized PC wires. Theprimary markets for the PC strands manufactured in the company’s Jiujiang facility are Jiangxi Province, Wuhan Province, Hunan Province, Fujian Provinceand Sichuan Province, each in the PRC. F-12 NOTE 1 – ORGANIZATION AND PRINCIPAL ACTIVITIES (CONTINUED) At December 31, 2012, the subsidiaries of Ossen Innovation Co., Ltd were as follows: Name Domicile and Date of Incorporation Paid-in Capital Percentage of Effective Ownership Principal Activities Ossen Innovation Materials Group,Co., Ltd. (“Ossen Innovation Group”) BVIApril 30, 2010 USD- 100% Investments holdings Ossen Group (Asia) Co., Ltd. ("OssenAsia") BVIFebruary 7, 2002 USD- 100% Investments holdings Topchina Development Group Ltd.("Topchina") BVINovember 3, 2004 USD- 100% Investments holdings Ossen Innovation Materials Co., Ltd.("Ossen Materials") The PRCOctober 27, 2004 RMB75,000,000 81% Design, engineering, manufactureand sale of customized prestressed steelmaterials Ossen (Jiujiang) Steel Wire & CableCo., Ltd. ("Ossen Jiujiang") The PRCApril 13, 2005 RMB183,271,074 96.11% Design, engineering, manufactureand sale of customized prestressed steelmaterials F-13 NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of Ossen Innovation Co., Ltd. and its subsidiaries and have been prepared in accordance withU.S. generally accepted accounting principles ("U.S. GAAP"). Intercompany accounts and transactions have been eliminated upon consolidation. Use of Estimates The preparation of the consolidated and combined financial statements in conformity with generally accepted accounting principles in the United States ofAmerica requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Managementmakes these estimates using the best information available at the time the estimates are made. Actual results could differ from those estimates. Non-controlling Interest Non-controlling interests in the Company’s subsidiaries are recorded in accordance with the provisions of Financial Accounting Standards Board (“FASB”)Accounting Standards Codification 810 Consolidation (“ASC 810”) and are reported as a component of equity, separate from the parent’s equity. Purchase orsale of equity interests that do not result in a change of control are accounted for as equity transactions. Results of operations attributable to the non-controllinginterest are included in our consolidated results of operations and, upon loss of control, the interest sold, as well as interest retained, if any, will be reported atfair value with any gain or loss recognized in earnings. F-14 NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Foreign Currency Translation The accompanying consolidated financial statements are presented in United States dollars (“US$” or “$”). The functional currency of the Company isRenminbi (“RMB”). The consolidated financial statements are translated into United States dollars from RMB at year-end exchange rates as to assets andliabilities and average exchange rates as to revenues and expenses. Capital accounts are translated at their historical exchange rates when the capital transactionsoccurred. The resulting transaction adjustments are recorded as a component of shareholders’ equity. Gains and losses from foreign currency transactions areincluded in net income. 2012 2011 2010 Year end RMB: US$ exchange rate 6.3086 6.3585 6.6118 Average yearly RMB: US$ exchange rate 6.3116 6.4640 6.7788 The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. Norepresentation is made that the RMB amounts could have been, or could be, converted into US$ at the rates used in translation. Revenue Recognition In accordance with the ASC Topic 605, “Revenue Recognition”, the Company recognizes revenue when persuasive evidence of an arrangement exists, deliveryhas occurred or services have been rendered, the seller’s price to the buyer is fixed or determinable, and collectability is reasonable assured. The Company derives revenues from the processing, distribution and sale of own products. The Company recognizes its revenues net of value-added taxes(“VAT”). The Company is subject to VAT which is levied on the rate of 17% on the invoiced value of sales. Output VAT is borne by customers in addition tothe invoiced value of sales and input VAT is borne by the Company in addition to the invoiced value of purchases to the extent not refunded for export sales. The Company will recognize revenue for domestic sales based on the terms defined in the contract as long as risk of loss has transferred to the customers andeach of the criteria under ASC 605 have been met. Contracts terms may require the Company to deliver the finished goods to the customers’ location or thecustomer 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 also derives an insignificant amount of revenue from providing services to select customers. Service revenues account for less than 2% of totalrevenues for all periods presented and is recognized upon delivery and acceptance of the finished products by the customer, or when pick up occurs.Contracts with distributors do not offer any chargeback or price protection. The Company experienced no product returns and recorded no reserve for salesreturns for the years ended December 31, 2012, 2011 and 2010. F-15 NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Cost of Sales Cost of revenue includes direct and indirect production costs, as well as freight in and handling costs for products sold. Research and Development Research and development costs are expensed as incurred and totaled approximately $1,132,256, $755,746 and $595,477 for the years ended December31, 2012, 2011 and 2010, respectively. Research and development costs are included in G&A in the accompanying statements of operations. Research anddevelopment costs are incurred on a project specific basis. Retirement Benefits Retirement benefits in the form of contributions under defined contribution retirement plans to the relevant authorities are charged to operations as incurred.Retirement benefits of $213,617, $112,960 and $144,418 were charged to operations for the years ended December 31, 2012, 2011 and 2010, respectively. Stock-Based Compensation Stock-based compensation includes 1) stock options and common stock awards granted to employees and directors for services, and are accounted for underFASB ASC 718 “Compensation - Stock Compensation”, and 2) common stock awards granted to consultants which are accounted for under FASB ASC505-50 “Equity - Equity-Based Payments to Non-Employees”. Common stock awards are granted to directors for services provided. All grants of common stock awards and stock options to employees and directors arerecognized in the financial statements based on their grant date fair values. The Company has elected to recognize compensation expense using the straight-linemethod for all common stock awards and stock options granted with service conditions that have a graded vesting schedule, with a corresponding charge toadditional paid-in capital. F-16 NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Common stock awards issued to consultants represent common stock granted to non-employees in exchange for services at fair value. The measurement datesfor such awards are set at dates that the contracts are entered into as the awards are non-forfeitable and vest immediately. The measurement date fair value isthen recognized over the service period as if the Company has paid cash for such service. The Company does not have significant grants to consultants forany of the period presented. The Company estimates fair value of common stock awards based on the number of shares granted and the quoted price of the Company’s common stock onthe date of grant. The fair value of stock options is estimated using the Black-Scholes model. The Company’s expected volatility assumption is based on the historical volatilityof the Company’s stock. The expected life assumption is presumed to be the mid-point between the vesting date and the end of the contractual term, as ispermitted for “plain vanilla” employee stock options. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve ineffect at the time of grant. FASB ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in the subsequent period if actual forfeitures differ frominitial estimates. Forfeiture rate is estimated based on historical and future expectation of employee turnover rate and are adjusted to reflect future change incircumstances and facts, if any. Share-based compensation expense is recorded net of estimated forfeitures such that expense was recorded only for those stockoptions and common stock awards that are expected to vest. Income Taxes The Company accounts for income taxes following the liability method pursuant to FASB ASC 740 “Income Taxes”. Under this method, deferred tax assetsand 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 ineffect 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 theweight 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 achange in tax rate is recognized in income in the period that includes the enactment date. F-17 NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The Company also follows FASB ASC 740, which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax returnshould 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 thatthe tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in thefinancial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized uponultimate settlement. ASC 740 also provides guidance on recognition, classification, interest and penalties on income taxes, accounting in interim periods andrequires increased disclosures. As of December 31, 2012, the Company did not have a liability for unrecognized tax benefits. The Company has not provided for income taxes on accumulated earnings amounting $38,296,269 that are subject to the PRC dividend withholding tax asof December 31, 2012, since these earnings are intended to be permanently reinvested. Value-Added Tax (“VAT”) Enterprises or individuals, who sell commodities, engage in repair and maintenance or import or export goods in the PRC are subject to a value added tax inaccordance with Chinese Laws. The VAT standard rate is 17% of the gross sale price. A credit is available whereby VAT paid on the purchases of semi-finished products or raw materials used in the production of the Company’s finished products can be used to offset the VAT due on the sales of the finishedproducts. Statutory Reserve In accordance with the PRC Regulations on Enterprises with Foreign Investment, an enterprise established in the PRC with foreign investment is required toprovide for certain statutory reserves, namely (i) General Reserve Fund, (ii) Enterprise Expansion Fund and (iii) Staff Welfare and Bonus Fund, which areappropriated from net profit as reported in the enterprise’s PRC statutory accounts. A wholly-owned foreign enterprise (“WOFE”) is required to allocate at least10% 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 EnterpriseExpansion Fund and Staff Welfare and Bonus Fund are at the discretion of the board of directors for all foreign invested enterprises. The aforementionedreserves can only be used for specific purposes and are not distributable as cash dividends. As a result, $294,219, $1,210,351 and $1,581,126 have been appropriated to the accumulated statutory reserves by the Company’s PRC subsidiaries forthe years ended December 31, 2012, 2011 and 2010, respectively. F-18 NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Comprehensive Income Comprehensive income is defined as the change in equity during the year from transactions and other events, excluding the changes resulting from investmentsby owners and distributions to owners, and is not included in the computation of income tax expense or benefit. Accumulated comprehensive income consistsof foreign currency translation. The Company presents comprehensive income (loss) in accordance with ASC Topic 220, “Comprehensive Income”. ASCTopic 220 states that all items that are required to be recognized under accounting standards as components of comprehensive income (loss) be reported in theconsolidated financial statements and the components of net income and other comprehensive income presented in one continuous statement. Cash and Cash Equivalents For financial reporting purposes, the Company considers all highly liquid investments purchased with original maturity of three months or less to be cashequivalents. The Company maintains no bank account in the United States of America. The Company maintains its bank accounts in Mainland China andHong Kong. Balances at financial institutions or state-owned banks within the Mainland China are not covered by insurance. However, the Company has notexperienced any losses in such accounts and believes it is not exposed to any significant risks on its cash in bank accounts. According to the rules of HongKong Deposit Protection Board, in case a member bank of Deposit Protection Scheme (“DPS”) fails, the DPS will pay compensation up to a maximum ofHK$500,000 to each depositor of the failed Scheme member. Restricted Cash 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 timeas the bank acceptance notes have been fulfilled or expired, normally within twelve month period. F-19 NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Fair Value of Financial Instruments FASB ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy prioritizes the inputs intothree 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; • 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, accounts receivable, notes receivable, accounts payable, notes payable,other payables, short-term bank loans. Cash and cash equivalents include money market securities and commercial paper that are considered to be highly liquid and easily tradable. These securitiesare valued using inputs observable in active markets for identical securities and are therefore classified as Level 1 within the fair value hierarchy. As of the balance sheet dates, the estimated fair values of financial instruments were not materially different from their carrying value as presented due to theshort maturities of these instruments and that the interest rates on the borrowing approximate those that would have been available for loans of similarremaining maturity and risk profile. Earnings per share The Company calculates earnings per share in accordance with ASC Topic 260, “Earnings per Share.” Basic earnings per share is computed by dividing thenet income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed similar to basic earningsper share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potentialcommon stock equivalents had been issued and if the additional common shares were dilutive. F-20 NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Accounts Receivable Accounts receivable are carried at net realizable value. The Company reviews its accounts receivables on a periodic basis and makes general and specificallowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Companyconsiders 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 theconsolidated statement of operations within operating expenses. The allowance of doubtful accounts was $1,277,091 and $384,311 at December 31, 2012and 2011, respectively. In 2012, the company revised the percentage used to estimate bad debts. The change provides a better indication of collectionexperience. The effect of the change was to decrease 2012 net income by $0.2 million, or $0.009 per share. 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 forcompletion and disposal. Cost of raw materials is calculated using the weighted average method and is based on purchase cost. Work-in-progress and finishedgoods costs are determined using the weighted average method and comprise direct materials, direct labor and an appropriate proportion of overhead. AtDecember 31, 2012 and 2011, the Company has no reserve for inventories. Advance to Suppliers Advance to Suppliers represents interest-free cash paid in advance to suppliers for purchases of raw materials. The balance of advance to suppliers was$77,948,496 and $41,391,174 at December 31, 2012 and 2011, respectively. Among the balance of $77,948,496, the aging of $65,373,551 was within60 days, $7,084,338 was between 60-90 days and $5,490,597 was over 90 days. No allowance was provided for the prepayments balance at December 31,2012. Customer Deposits Customer deposits consist of amounts paid to the Company in advance for the sale of products in the PRC. The Company receives these amounts andrecognizes them as a current liability until the revenue can be recognized when the goods are delivered. The balance of customer deposits was $384,602 and$459,915 at December 31, 2012 and 2011, respectively. Prepayment for Property, Plant, and Equipment Prepayment for property, plant, and equipment represents cash paid in advance to suppliers for purchases of property, plant, and equipment for capacityexpansion. The balance of prepayment for property, plant and equipment was $7,933,361 and $7,869,529 at December 31, 2012 and 2011, respectively. F-21 NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 existingassets. Depreciation is provided over their estimated useful lives, using the straight-line method. Estimated useful lives are as follows: Plant, buildings and improvements5 ~ 20 years Machinery and equipment5 ~ 20 years Motor vehicles5 years Office Equipment5 ~ 10 years When assets are sold or retired, their costs and accumulated depreciation are eliminated from the consolidated financial statements and any gain or lossresulting 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 incomeas incurred, whereas significant renewals and betterments are capitalized. Land Use Rights According to the PRC laws, the government owns all the land in the PRC. Companies or individuals are authorized to possess and use the land only throughland use rights granted by the Chinese government. The land use rights granted to the Company are being amortized using the straight-line method over thelease 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 notbe 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 andeventual disposition in accordance with FASB ASC 360-10-15. To the extent that estimated future, undiscounted cash inflows attributable to the asset, lessestimated future, undiscounted cash outflows, are less than the carrying amount, an impairment loss is recognized in an amount equal to the differencebetween 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 saleor abandonment, are reported at the lower of carrying value or fair value less costs to sell. There was no impairment loss recognized for the years endedDecember 31, 2012, 2011 and 2010. F-22 NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 abilityto 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 orknown beneficial owner of more than 10% of the voting interest of an entity; c) management, persons having responsibility for achieving objectives of theentity and requisite authority to make decision; d) immediate family of management or principal owners; e) a parent company and its subsidiaries; d) otherparties 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 theCompany’s participation in variable interest entities (“VIE”), which are defined as entities with a level of invested equity that is not sufficient to fund futureactivities to permit them to operation on a standalone basis, or whose equity holders lack certain characteristics of a controlling financial interest. That, forentities identified as a VIE, the guidance sets forth a model to evaluate potential consolidation based on a assessment of which party to a VIE, if any, bears amajority of the exposure to expected losses, or stand to gain from majority of its expected returns. The guidance also sets forth certain disclosure regardinginterests in a VIE that are deemed significant even if consolidation is not required. This item is discussed in further detail in Note 10 – Related PartyTransactions. F-23 NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Recently Issued Accounting Pronouncements The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any suchpronouncements may be expected to cause a material impact on its financial condition or the results of its operations. In February 2013, the Financial Accounting Standards Board issued ASU 2013-02, Comprehensive Income: Reporting of Amounts Reclassified Out ofAccumulated Other Comprehensive Income (“ASU 2013-02”). ASU 2013-02 does not change the current requirements for reporting net income or othercomprehensive income in financial statements. However, it requires an entity to provide information about the amounts reclassified out of accumulated othercomprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in thenotes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amountreclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not requiredunder U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP thatprovide additional detail about those amounts. ASU 2013-02 is effective prospectively for reporting periods beginning after December 15, 2012 for publicentities. Early adoption is permitted. The Company does not expect that the adoption of ASU 2013-02 will have a material impact on its consolidated financialstatements. In December 2011, the FASB issued Accounting Standards Update (“ASU”) 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets andLiabilities, which required entities to disclose both gross and net information about both instruments and transactions eligible for offset in the statement offinancial position and instruments and transactions subject to an agreement similar to a master netting agreement. The objective of the disclosure is to facilitatecomparison between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements onthe basis of International Financial Reporting Standards ("IFRS"). This ASU is effective for fiscal years, and interim periods within those years, beginning onor after January 1, 2013. Retrospective presentation for all comparative periods presented is required. The adoption of ASU 2011-11 is not expected to havematerial impact on the Company’s consolidated financial statements. In July 2012, the FASB issued ASU 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment, which allows companies to perform a qualitativeassessment to determine whether further impairment testing of indefinite-lived intangible assets is necessary, similar in approach to the goodwill impairmenttest. The new guidance allows an entity the option to first assess qualitatively whether it is more likely than not (that is, a likelihood of more than 50 percent)that an indefinite-lived intangible asset is impaired, thus necessitating that it perform the quantitative impairment test. An entity is not required to calculate thefair value of an indefinite-lived intangible asset and perform the quantitative impairment test unless the entity determines that it is more likely than not that theasset is impaired. The new guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Earlyadoption is permitted for annual and interim impairment tests performed as of a date before July 27, 2012, if the financial statements for the most recentannual or interim period have not yet been issued. The Company believes that its adoption of ASU 2012-02 will not have any material impact on itsconsolidated financial statements. F-24 In October 2012, the FASB issued ASU 2012-04, Technical Corrections and Improvements, which made certain technical corrections and “conforming fairvalue amendments” to the FASB Accounting Standards Codification. The amendments affect various codification topics and apply to all reporting entitieswithin the scope of those topics. These provisions of the amendment are effective upon issuance, except for amendments that are subject to transition guidance,which will be effective for fiscal periods beginning after December 15, 2012. The Company believes that its adoption of ASU 2012-04 will not have anymaterial impact on its consolidated financial statements. In January 2013, the FASB issued ASU 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities,which clarified that the scope of ASU 2011-11, Disclosures about Offsetting Assets and Liabilities, would apply to derivatives including bifurcated embeddedderivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset inaccordance with Section 210-20-45 or Section 815-10-45 or are subject to a master netting arrangement or similar agreement. This ASU is effective for fiscalyears, and interim periods within those years, beginning on or after January 1, 2013. Retrospective presentation for all comparative periods presented isrequired. The adoption of ASU 2013-01 is not expected to have material impact on the Company’s consolidated financial statements. F-25 NOTE 3 – CONCENTRATIONConcentration of major customers and suppliers: Year ended December 31, 2012 2011 2010 Major customers with revenues of more than 10%of the Company’s sales Company A (3rd Party) $47,193,174 39% $29,905,914 25% $37,685,302 32%Company B (3rd Party) 25,522,442 21% 18,024,885 15% 21,213,241 18%Company C (Related Party) - - - - 14,701,440 13%Total Revenues $72,715,616 60% $47,930,799 40% $73,599,982 63% Year ended December 31, 2012 2011 2010 Major suppliers with purchases of more than 10%of the Company’s purchases Company X (3rd Party) $39,484,102 44% $11,261,250 17% $50,156,639 49%Company Y (3rd Party) - - 15,225,509 22% 25,665,687 25%Company Z (3rd Party) 30,028,975 33% 27,622,232 41% 15,397,496 15%Company U (3rd Party) 11,010,434 12% 9,045,436 13% - - Total Purchase $80,523,511 89% $63,154,427 93% $91,219,822 89% Accounts receivable related to the Company’s major customers comprised 56% and 45% of all accounts receivable as of December 31, 2012 and 2011,respectively. Accounts payable related to the Company’s major suppliers comprised nil of all accounts payable as both of December 31, 2012 and 2011. F-26 NOTE 4 – ACCOUNTS RECEIVABLE Accounts receivable is net of allowance for doubtful accounts. December 31, 2012 2011 Accounts receivable $47,011,472 $48,434,033 Less: allowance for doubtful accounts (1,277,091) (384,311)Accounts receivable, net $45,734,381 $48,049,722 Changes in the allowance for doubtful accounts are as follows: December 31, 2012 2011 Beginning balance $384,311 $37,347 Provision for doubtful accounts 892,780 346,964 Ending balance $1,277,091 $384,311 F-27 NOTE 5 – INVENTORIES December 31, 2012 2011 Raw materials $2,739,029 $10,339,201 Work-in-progress 72,228 231,746 Finished goods 6,995,787 6,651,717 Inventories $9,807,044 $17,222,664 F-28 NOTE 6 – NOTES RECEIVABLE Bank acceptance notes: December 31, 2012 2011 Due January 7, 2013, subsequently settled on due date $394,079 $- Due June 5, 2012, subsequently settled on due date - 1,572,698 Due June 5, 2012, subsequently settled on due date - 1,572,698 Due June 5, 2012, subsequently settled on due date - 2,359,047 Due June 5, 2012, subsequently settled on due date - 786,349 Due May 23, 2012, subsequently settled on due date - 1,572,698 Due May 20, 2012, subsequently settled on due date - 786,349 Due February 20, 2012, subsequently settled on due date - 1,258,158 Due February 20, 2012, subsequently settled on due date - 943,619 Total $394,079 $10,851,616 Notes receivable are received from customers for the purchase of the Company’s products and are issued by financial institutions that entitle the Company toreceive the full face mount from the financial institution at maturity, which bears no interest and generally ranges from three to six months from the date ofissuance. F-29 NOTE 7 – OTHER CURRENT ASSETS Other current assets consist of the following: December 31, 2012 2011 Refundable deposits with suppliers $1,585,138 $6,290,792 Deposits for open project bids 120,838 125,816 Other receivables 198,650 78,633 $1,904,626 $6,495,241 F-30 NOTE 8 – PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following: December 31, 2012 2011 At Cost: Plant and buildings $4,236,885 $4,197,345 Machinery and equipment 15,160,917 15,038,443 Motor vehicles 317,512 292,675 Office equipment 113,381 112,007 19,828,695 19,640,470 Less: Accumulated depreciation Buildings (1,577,757) (1,298,556)Machinery and equipment (8,178,929) (6,981,542)Motor vehicles (260,263) (237,728)Office equipment (104,159) (99,728) (10,121,108) (8,617,554)Property, plant and equipment, net $9,707,587 $11,022,916 Depreciation expense for the years ended December 31, 2012, 2011 and 2010 was $1,503,554, $1,911,923 and $1,747,880, respectively. As of December31, 2012 and 2011, a net book value of $1,518,706 and $4,131,509, respectively, of property were used as collateral for the Company’s short-term andlong-term bank loans. F-31 NOTE 9 – LAND USE RIGHTS Land use rights consist of the following: December 31, 2012 2011 Cost of land use rights $4,884,596 $4,846,263 Less: Accumulated amortization (566,927) (465,555)Land use rights, net $4,317,669 $4,380,708 Amortization expense for the years ended December 31, 2012, 2011 and 2010 was $97,643, $95,341 and $90,914, respectively. As of December 31, 2012and 2011, a net book value of $2,747,396 and $2,786,405, respectively, were used as collateral for the Company’s short-term bank loans. Amortization expense for the next five years and thereafter is as follows: 2013 $97,692 2014 97,692 2015 97,692 2016 97,692 2017 97,692 Thereafter 3,829,209 Total $4,317,669 F-32 NOTE 10 – RELATED PARTY TRANSACTIONS (a)Names and Relationship of Related Parties: Existing Relationship with the CompanyDr. Tang Chairman and controlling shareholder of the CompanyShanghai Zhengfangxing Steel Co., Ltd. (“ZFX”) Under common control of Dr. TangShanghai Ossen Investment Co., Ltd. (“SOI”) Under common control of Dr. TangShanghai Ossen Investment Holdings (Group) Co., Ltd. (“Ossen Shanghai) Dr. Tang is the PresidentShanghai Zhaoyang New Metal Material Co., Ltd. (“Zhaoyang”) Zhaoyang owns a 30% interest in Ossen ShanghaiShanghai Pujiang Cable Co., Ltd. (“Shanghai Pujiang”)Zhejiang Pujiang Cable Co., Ltd. (“Zhejiang Pujiang”) Subsidiary of Ossen Shanghai since September 2010 Subsidiary of Shanghai Pujiang since December 2010 F-33 NOTE 10 – RELATED PARTY TRANSACTIONS (CONTINUED) (b)Summary of Balances with Related Party: December 31, 2012 2011 Notes receivable from related party: Zhejiang Pujiang, due January 7, 2013, subsequently settled on due date $1,830,208 $- $1,830,208 $- The interest-free, unsecured notes were provided to a related party to assist with their working capital need. December 31, 2012 2011 Accounts receivable from related party: Shanghai Pujiang $- $10,369 Zhejiang Pujiang - 10,430 $- $20,799 Shanghai Pujiang and Zhejiang Pujiang are customers of the Company. The balance of account receivable from related party arises from the sales of ourproducts to Shanghai Pujiang and Zhejiang Pujiang. The balance of accounts receivable from related party was all collected subsequently. F-34 NOTE 10 – RELATED PARTY TRANSACTIONS (CONTINUED) (c)Summary of Related Party Transactions: December 31, 2012 2011 2010 ZFX ZFX provided guarantee for the bank loans borrowed by the Company $9,985,370 $26,105,707 $26,316,581 ZFX provided guarantee together with SOI for the short-term bank loansborrowed by the Company $4,755,413 $4,718,094 $- ZFX provided guarantee together with Zhaoyang for the short-term bankloans borrowed by the Company $4,755,413 $- $- ZFX provided guarantee together with Dr. Tang and his wife, for the short-term bank loans borrowed by the Company $11,095,964 $1,572,698 $- ZFX provided guarantee for the notes payable issued by the bank $22,984,497 $3,145,396 $- ZFX provided guarantee together with Zhaoyang for the notes payableissued by the bank $3,170,275 $9,672,092 $- The Company provided guarantee for the short-term bank loans borrowedby ZFX $- $2,395,047 $- ZFX sold raw materials to the Company $2,999,097 $- $5,199,891 SOI SOI provided guarantee for the short-term bank loans borrowed by theCompany $3,170,275 $12,376,238 $11,645,845 SOI provided guarantee together with ZFX for the short-term bank loansborrowed by the Company $4,755,413 $4,718,094 $- SOI provided guarantee together with Dr. Tang and his wife, for the short-term bank loans borrowed by the Company $- $1,572,698 $- F-35 (d)Summary of Related Party Transactions (Continued): Zhaoyang Zhaoyang provided guarantee for the notes payable issued by the bank $- $7,784,855 $- Zhaoyang provided guarantee together with ZFX for the short-term bankloans borrowed by the Company $4,755,413 $- $- Zhaoyang provided guarantee together with ZFX for the notes payableissued by the bank $3,170,275 $9,672,092 $- Zhaoyang purchased products from the Company $7,136,843 $7,775,696 $14,701,440 ShanghaiPujiang Shanghai Pujiang purchased products from the Company $- $12,931,551 $2,292,532 The Company provided guarantee for the short-term bank loans borrowedby Shanghai Pujiang $15,851,377 $13,367,933 $- The Company provided guarantee for the notes payable issued byShanghai Pujiang $12,866,563 $- $- ZhejiangPujiang Zhejiang Pujiang purchased products from the Company $440,107 $102,622 $- In accordance with ASC 810-10, “Consolidation”, the Company first evaluated that none of the related parties met the scope exceptions as outlined in theguidance. The Company then had to determine if it hold any variable interest in the related parties. The Company determined to have a variable interest inShanghai Pujiang because the Company guarantees $15,851,377 of the outstanding short term debt and $12,866,563 of notes payable of Shanghai Pujiang.In addition, the Company sold $440,107 of materials to Zhejiang Pujiang during the year ended December 31, 2012. Next, the Company evaluated ifShanghai Pujiang or Zhejiang Pujiang are variable interest entities. Using both qualitative and quantitative analysis, the Company determined ShanghaiPujiang and Zhejiang Pujiang were not variable interest entity as defined in ASC 810. The Company determined Dr. Tang to be the primary beneficiaryShanghai Pujiang and Zhejiang Pujiang because Dr. Tang is most closely associated with the Shanghai Pujiang and Zhejiang Pujiang. Dr. Tang had the powerto direct the activities of Shanghai Pujiang and Zhejiang Pujiang that most significantly impact it’s economic performance and has the obligation to absorblosses of Shanghai Pujiang and Zhejiang Pujiang that could potentially be significant or the right to receive benefits from the related parties that couldpotentially be significant. The Company also evaluated the remaining related parties and affiliated entities under ASC 810 and because the Company does not guarantee the debt, theholders of the equity were at risk and therefore determined to be the primary beneficiary. F-36 NOTE 11 – OTHER PAYABLES AND ACCRUED EXPENSES Other payables and accrued expenses consist of the following: December 31, 2012 2011 Other taxes payable $775,995 $304,988 Accrued payroll & welfare 14,587 9,491 Others 14,614 9,944 $805,196 $324,423 F-37 NOTE 12 – NOTES PAYABLE Bank acceptance notes: December 31, 2012 2011 Due Jun 17, 2013, $792,569 $- Due Jun 17, 2013, 1,585,138 - Due Jun 6, 2013, 792,569 - Due Jun 6, 2013, 792,569 - Due May 19, 2013 396,284 - Due May 19, 2013 396,284 - Due May 19, 2013 792,569 - Due May 19, 2013 1,585,138 - Due May 16, 2013 792,569 - Due May 6, 2013 396,284 - Due May 6, 2013 792,569 - Due May 6, 2013 1,585,138 - Due May 6, 2013 396,284 - Due April 23, 2013, subsequently repaid on due date 1,585,138 - Due April 23, 2013, subsequently repaid on due date 1,585,138 - Due March 28, 2013, subsequently repaid on due date 792,569 - Due March 28, 2013, subsequently repaid on due date 1,585,138 - Due March 24, 2013, subsequently repaid on due date 3,170,275 - Due March 21, 2013, subsequently repaid on due date 1,585,138 - Due March 12, 2013, subsequently repaid on due date 1,585,138 - Due March 11, 2013, subsequently repaid on due date 1,585,138 - Due March 10, 2013, subsequently repaid on due date 1,585,138 - Due March 6, 2013, subsequently repaid on due date 1,585,138 - Due March 6, 2013, subsequently repaid on due date 1,585,138 - Due February 3, 2013, subsequently repaid on due date 1,268,110 - Due February 3, 2013, subsequently repaid on due date 1,268,110 - Due January 19, 2013, subsequently repaid on due date 1,268,110 - Due January 19, 2013, subsequently repaid on due date 1,268,110 - Due January 12, 2013, subsequently repaid on due date 1,268,110 - Due January 12, 2013, subsequently repaid on due date 1,268,110 - F-38 NOTE 12 – NOTES PAYABLE (CONTINUED) Bank acceptance notes: December 31, 2012 2011 Due June 21, 2012, subsequently repaid on due date - 786,349 Due June 21, 2012, subsequently repaid on due date - 786,349 Due June 19, 2012, subsequently repaid on due date - 786,349 Due June 19, 2012, subsequently repaid on due date - 786,349 Due June 19, 2012, subsequently repaid on due date - 1,572,698 Due May 25, 2012, subsequently repaid on due date - 1,572,698 Due May 1, 2012, subsequently repaid on due date - 1,572,698 Due May 1, 2012, subsequently repaid on due date - 786,349 Due April 30, 2012, subsequently repaid on due date - 6,133,523 Due April 28, 2012, subsequently repaid on due date - 786,349 Due April 28, 2012, subsequently repaid on due date - 629,079 Due March 23, 2012, subsequently repaid on due date - 786,349 Due March 23, 2012, subsequently repaid on due date - 786,349 Due February 24, 2012, subsequently repaid on due date - 786,349 Due February 24, 2012, subsequently repaid on due date - 786,349 Due February 4, 2012, subsequently repaid on due date - 786,349 Due January 28, 2012, subsequently repaid on due date - 629,079 Due January 28, 2012, subsequently repaid on due date - 629,079 Due January 20, 2012, subsequently repaid on due date - 786,349 Due January 20, 2012, subsequently repaid on due date - 786,349 Due January 8, 2012, subsequently repaid on due date - 629,079 Due January 8, 2012, subsequently repaid on due date - 629,079 Due January 5, 2012, subsequently repaid on due date 629,079 Total $36,933,710 $24,848,628 The interest-free notes payable, ranging from six months to one year from the date of issuance, are secured by $25,407,499 and $19,764,900 restricted cashas of December 31, 2012 and 2011, respectively. The related party guarantees the notes payable as Note 10. All the notes payable are subject to bank charges of 0.05% of the principal amount as commission on each loan transaction. Bank charges for notes payable,included in financial expenses under the statements of operations, were $38,421, $25,217 and $24,488 for the years ended December 31, 2012, 2011 and2010, respectively. F-39 NOTE 13 – SHORT TERM BANK LOANS Short-term loans are summarized as follows: Bank Name Interest Rate per Annum December 31, 2012 2011 Due December 13,2013, guaranteed by ZFX and Zhaoyang Agricultural Bank of China (“ABC”) Jiu LongBranch 6.45% $4,755,413 $- Due November 7,2013 Anhui Commercial Bank (“ACB”) Fei CuiBranch 6.80% 1,585,138 - Due October 24,2013, collateral by LUR Anhui Rural Commercial Bank (“ARCB”)Ma An Shan Branch 7.20% 3,170,275 - Due October 17,2013, guaranteed by SOI ARCB Ma An Shan Branch 7.20% 3,170,275 - Due September 25,2013, guaranteed by ZFX and SOI ACB Fei Cui Branch 6.80% 1,585,138 - Due September 20,2013 guaranteed by ZFX and Dr Tang China Everbright Bank (“CEB”) Ma An ShanBranch 7.54% 792,569 - Due August 19,2013 Industrial and Commercial Bank of China(“ICBC”) Ma An Shan Branch 6.60% 1,585,138 - Due July 23,2013, ICBC Jiu Jiang Ba Li Hu Branch 6.31% 1,743,652 - Due June 15,2013, guaranteed by ZFX Bank of China (“BOC”) Jiu Jiang Branch 5.88% 1,268,096 - Due June 4,2013, guaranteed by ZFX and Dr Tang CEB Ma An Shan Branch 7.54% 4,755,413 - Due May 29, 2013 CEB Ma An Shan Branch 6.56% 1,505,881 - Due May 8,2013 BOC Ma An Shan Branch 7.82% 5,662,112 - Due May 7,2013, guaranteed by ZFX and SOI BOC Ma An Shan Branch 7.82% 1,585,138 - Due April 28,2013, ICBC Jiu Jiang Ba Li Hu Branch 6.31% 1,426,624 - Due April 1,2013, guaranteed by ZFX and SOI subsequently repaid on due date BOC Ma An Shan Branch 7.82% 1,585,138 - Due March 31,2013, guaranteed by ZFX and Dr Tang subsequently repaid on due date China Construction Bank (“CCB”) Ma AnShan Branch 5.44% 2,377,707 - Due March 9 ,2013, guaranteed by ZFX subsequently repaid on due date BOC Jiu Jiang Branch 5.88% 1,108,612 - F-40 NOTE 13 – SHORT TERM BANK LOANS (CONTINUED) Bank Name Interest Rate per Annum December 31, 2012 2011 Due March 1, 2013, subsequently repaid on due date CEB Ma An Shan Branch 6.56% $1,505,881 $- Due February 18,2013, guaranteed by ZFX and Dr Tang subsequently repaid on due date CCB Ma An Shan Branch 5.44% 1,585,138 - Due February 5, 2013, guaranteed by ZFX, subsequently repaid on due date BOC Ma An Shan Branch 6.60% 3,170,275 - Due January 13, 2013, guaranteed by ZFX and Dr Tang subsequently repaid on due date China Merchants Bank (“CMB”) Ma An ShanBranch 7.20% 1,585,138 - Due January 9,2013, subsequently repaid on due date ICBC Ma An Shan Branch 6.60% 3,170,275 - Due December 16, 2012, guaranteed by ZFX and Zhaoyang subsequently repaid on due date ABC Jiu Long Branch 7.32% - 4,718,094 Due October 20, 2012, guaranteed by SOI and Zhaoyang subsequently repaid on due date ARCB Ma An Shan Branch 7.87% - 3,145,396 Due October 17, 2012, guaranteed by SOI and Zhaoyang subsequently repaid on due date ARCB Ma An Shan Branch 7.87% - 3,145,396 Due October 12, 2012, subsequently repaid on due date ACB Fei Cui Branch 7.22% - 1,572,698 Due September 30, 2012, guaranteed by SOI and ZFX subsequently repaid on due date ACB Fei Cui Branch 6.56% - 1,572,698 Due September 29, 2012, guaranteed by ZFX subsequently repaid on due date CEB Ma An Shan Branch 8.53% - 786,349 Due September 28, 2012, guaranteed by ZFX subsequently repaid on due date CEB Ma An Shan Branch 8.53% - 786,349 Due September 22, 2012, guaranteed by ZFX subsequently repaid on due date CEB Ma An Shan Branch 7.87% - 1,572,698 Due July 25, 2012, subsequently repaid on due date ICBC Jiu Jiang Ba Li Hu Branch 8.65% - 1,415,428 Due June 6, 2012, guaranteed by ZFX subsequently repaid on due date CEB Ma An Shan Branch 7.26% - 4,718,094 Due June 6, 2012, subsequently repaid on due date CCB Ma An Shan Branch 10.00% - 2,988,126 F-41 NOTE 13 – SHORT TERM BANK LOANS (CONTINUED) Bank Name Interest Rate per Annum December 31, 2012 2011 Due May 22, 2012, guaranteed by SOI and ZFX subsequently repaid on due date BOC Ma An Shan Branch 7.22% $- $1,572,698 Due May 17, 2012, guaranteed by SOI and ZFX subsequently repaid on due date BOC Ma An Shan Branch 7.54% - 1,572,698 Due April 18, 2012, subsequently repaid on due date CCB Ma An Shan Branch 6.10% - 1,572,698 Due April 4, 2012, subsequently repaid on due date ICBC Ma An Shan Branch 6.94% - 3,145,396 Due March 27, 2012, guaranteed by ZFX subsequently repaid on due date BOC Jiu Jiang Branch 7.32% - 786,316 Due March 10, 2012, guaranteed by ZFX subsequently repaid on due date CCB Ma An Shan Branch 5.45% - 3,302,666 Due March 10, 2012 subsequently repaid on due date ICBC Jiu Jiang Ba Li Hu Branch 8.31% - 1,729,968 Due March 5, 2012, guaranteed by ZFX subsequently repaid on due date BOC Jiu Jiang Branch 7.32% - 314,525 Due February 17, 2012 subsequently repaid on due date ICBC Ma An Shan Branch 6.94% - 1,572,698 Due February 11, 2012 guaranteed by SOI and ZFX, subsequently repaid on due date BOC Ma An Shan Branch 7.54% - 1,572,698 Due February 6, 2012, guaranteed by ZFX, subsequently repaid on due date BOC Ma An Shan Branch 7.87% - 3,145,396 Due January 15, 2012,guaranteed by ZFX subsequently repaid on due date BOC Jiu Jiang Branch 7.32% - 1,257,126 Total $50,679,026 $47,966,209 All short term bank loans are obtained from local banks in China and are repayable within one year. The weighted average annual interest rate of the short-term bank loans was 6.75% and 7.54% as of December 31, 2012 and 2011, respectively. Interestexpense, included in the financial expenses in the statement of operations, was $3,335,158, $2,998,929 and $1,949,982 for the years ended December 31,2012, 2011 and 2010, respectively. The Company was in compliance of their financial covenants at December 31, 2012 and 2011, respectively. F-42 NOTE 14 – LONG TERM BANK LOANS Bank Name Interest Rate per Annum December 31, 2012 2011 Due August 8, 2013, guaranteed by ZFX, collateral by Fixes assets CCB Jiu Jiang Branch 7.31% 4,438,386 4,718,094 Total long-term bank loans 4,438,386 4,718,094 Less: current portion 4,438,386 - Long-term bank loans, less current portion $- $4,718,094 Interest expense, included in the financial expenses in the statement of operations, was $341,834, $133,938 and nil for the years ended December 31, 2012,2011 and 2010, respectively. F-43 NOTE 15 – STOCK-BASED COMPENSATION On July 26, 2010, the Company’s Board of Directors adopted the 2010 Stock Option Plan, or the 2010 Plan. To date, other than the option to acquire 150,000ordinary shares issued to our former chief financial officer (“CFO”), no shares have been issued under the 2010 Plan. The 2010 Plan will automaticallyterminate on the fifth anniversary of the 2010 Plan’s adoption. However, outstanding stock options will continue to be effective after the 2010 Plan’stermination. The Company’s board of directors has the authority to amend, alter, suspend or terminate the 2010 Plan or any outstanding stock option. Theconsent of an option holder is necessary for any amendment that would adversely affect an outstanding option. Stock options issued to employees The Company’s former CFO was granted a stock option to purchase up to 150,000 ordinary shares pursuant to the Company’s 2010 Plan. 150,000 shareswere outstanding and exercisable as of December 31, 2012. F-44 NOTE 15 – STOCK-BASED COMPENSATION (CONTINUED) The Company calculated the estimated fair value of the options of the grant date using the Black-Scholes Option Pricing Model with the followingassumptions: Grant Date October 26, 2010 Risk-free interest rate 1.93%Expected term 5.0 Expected volatility 40.98%Expected dividend yield 0.00%Fair value of share option 1.41 The model requires the input of subjective assumptions including the expected stock price volatility and the expected dividend yield. The Company useshistorical experience of employee turnover and future expectation to estimate forfeiture rate. For expected volatilities, the Company has made reference tohistorical volatilities of the Company’s stock. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury Billsyield in effect at the time of grant. The total fair value of the options granted to the former CFO at the respective grant date was $211,500. The Company recorded $86,799, $105,605 and$19,096 compensation cost for years ended December 31, 2012, 2011 and 2010, with corresponding credits to additional paid-in capital. Compensation costof all stock option awards are recorded in general and administrative expenses. The expected forfeiture rate of the stock options granted as of December 31, 2012 is 0%. The former CFO’s options will be forfeited on May 31, 2013, threemonths after the termination date of the CFO on February 28, 2013. The Company’s unamortized stock option expense as of December 31, 2012 is nil. The following table summarizes the stock option activities of the Company: Activity Weighted AverageExercise Price Outstanding as of January 1, 2011 150,000- $5.00 Exercised - $- Cancelled/Forfeited - $- Outstanding as of December 31, 2011 150,000 $5.00 Exercised - $- Cancelled/Forfeited - $- Vested and expected to vest as of December 31, 2012 150,000 $5.00 F-45 NOTE 16 – EARNINGS PER SHARES Basic earnings per share are computed by dividing income attributable to holders of ordinary shares by the weighted average number of ordinary sharesoutstanding 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 orconverted into ordinary shares. The following table sets forth the computation of basic and diluted earnings per share for the periods indicated: December 31, 2012 2011 2010 Net income attribute to the Company $2,381,279 $11,547,705 $14,648,338 Weighted average ordinary shares outstanding - basic and diluted 19,942,333 20,000,000 15,150,685 Basic and diluted earnings per share $0.12 $0.58 $0.97 For the year ended December 31, 2012, 150,000 stock option issued to CFO are excluded because such option would be of anti-dilutive. F-46 NOTE 17 – STOCK REPURCHASE PROGRAM In November 2011, the Company’s Board of Directors approved a share repurchase program for up to a total of 500,000 shares of the Company's AmericanDepositary Receipts ("ADSs") through May 2012. Shares may be repurchased in the open market at prevailing market prices and/or in negotiated transactionsoff the market from time to time as market conditions warrant in accordance with applicable requirements of Rule 10b5-1 and/or Rule 10b-18 under the U.S.Securities Exchange Act of 1934, as amended. During the year ended December 31, 2012, the Company repurchased 98,041 shares of common stock fromthe secondary market. In connection with the transaction, the Company paid approximately $96,608. F-47 NOTE 18 – INCOME TAX BVI Ossen Innovation Co., Ltd, Ossen Innovation Group, Ossen Asia and Topchina are registered in the British Virgin Island and are exempt from income tax. The PRC Starting from January 1, 2010, Ossen Materials enjoys a tax rate of 15% as it is considered as a High and New Technology Enterprise by the PRCgovernment. Ossen Jiujiang was entitled to the CIT exemption during the two years ended December 31, 2008, was subject to a 50% income tax reductionduring the three years ended December 31, 2011. Starting from January 1, 2012, Ossen Jiujiang enjoys a tax rate of 15% as it is considered as a High andNew Technology Enterprise by the PRC government. Enterprises established under the laws of foreign countries or regions and whose “place of effective management” is located within the PRC territory areconsidered PRC resident enterprises and subject to the PRC income tax at the rate of 25% on worldwide income. The definition of “place of effectivemanagement" refers to an establishment that exercises, in substance, overall management and control over the production and business, personnel,accounting, properties, etc. of an enterprise. As of December 31, 2012, no detailed interpretation or guidance has been issued to define “place of effectivemanagement”. Furthermore, as of December 31, 2012, the administrative practice associated with interpreting and applying the concept of “place of effectivemanagement” is unclear. If the Company’s non-PRC incorporated entities are deemed PRC tax residents, such entities would be subject to PRC tax TheCompany has analyzed the applicability of this law, as of December 31, 2012, and the Company has not accrued for PRC tax on such basis. The Companywill continue to monitor changes in the interpretation or guidance of this law. PRC tax law also imposes a 10% withholding income tax, subject to reduction based on tax treaty where applicable, for dividends distributed by a foreigninvested enterprise to its immediate holding company outside China. Such dividends were exempted from PRC tax under the previous income tax law andregulations. The foreign invested enterprise is subject to the withholding tax starting from January 1, 2008. There were no dividends distributed in the yearsended December 31, 2012 and 2011. F-48 NOTE 18 – INCOME TAX-(CONTINUED) Income tax expenses consist of the following: Year Ended December 31, 2012 2011 2010 Current $696,694 $2,190,005 $2,865,372 Deferred (139,266) (50,976) - Income tax expenses $557,428 $2,139,029 $2,865,372 Reconciliation from the expected income tax expenses calculated with reference to the statutory tax rate in the PRC of 25% is as follows: Year Ended December 31, 2012 2011 2010 Computed "expected" income tax expenses $818,452 $3,798,420 $5,102,777 Effect on tax incentive / holiday (383,472) (1,740,969) (2,310,384)Non-deductable expense 122,448 81,578 72,979 Income tax expenses $557,428 $2,139,029 $2,865,372 Components of net deferred tax assets are as follows: December 31, 2012 2011 2010 Provision of doubtful accounts $191,564 $51,821 $- The deferred tax assets balance of $191,564, $51,821 and $ nil at December 31, 2012, 2011 and 2010 respectively are included in Other Current Assets inthe accompanying consolidated balance sheets. F-49 NOTE 19 – GEOGRAPHICAL SALES AND SEGMENTS Information for the Company’s sales by geographical area for the years ended December 31, 2012, 2011 and 2010 are as follows: Year Ended December 31, 2012 2011 2010 Domestic Sales $111,925,870 $111,130,918 $113,873,505 International Sales 10,472,016 7,486,053 3,579,519 $122,397,886 $118,616,971 $117,453,024 The Company operates one business segment for the years ended December 31, 2012, 2011 and 2010. F-50 NOTE 20 – SUBSEQUENT EVENTS We have evaluated all events or transactions that occurred after December 31, 2012 up through the date we issued the consolidated financial statements. F-51 OSSEN INNOVATION CO., LTD. SCHEDULE 1CONDENSED FINANCIAL STATEMENTSFOR YEARS ENDED DECEMBER 31, 2012 AND 2011  OSSEN INNOVATION CO., LTDCONDENSED BALANCE SHEETS AS OF DECEMBER 31, 2012 AND 2011 December 31, 2012 2011 ASSETS Current Assets Cash $46,368 $616,654 Accounts receivable from related party 20,000,000 20,000,000 Total Current Assets 20,046,368 20,616,654 Long term investment in subsidiaries 46,523,676 43,238,081 TOTAL ASSETS $66,570,044 $63,854,735 LIABILITIES AND SHAREHOLDERS’ EQUITY TOTAL LIABILITIES 0 0 EQUITY Shareholders' Equity Share Capital 50,000 50,000 Additional paid-in capital 20,735,955 20,735,955 Statutory reserve 0 0 Retained earnings 45,875,656 43,065,332 Accumulated other comprehensive income 5,042 3,448 Treasury stock (96,609) 0 TOTAL SHAREHOLDERS’ EQUITY 66,570,044 63,854,735 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $66,570,044 $63,854,735  OSSEN INNOVATION CO., LTD CONDENSED STATEMENTSOF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011 Year Ended December 31, 2012 2011 REVENUES $0 $0 COST OF GOODS SOLD 0 0 GROSS PROFIT 0 0 Selling expenses 0 0 General and administrative expenses (473,060) (169,516)Total Operating Expenses (473,060) (169,516) LOSS FROM OPERATIONS (473,060) (169,516)Financial expenses, net (619) (413)Investment in subsidiaries 2,942,190 11,823,627 INCOME BEFORE INCOME TAX 2,468,511 11,653,698 INCOME TAX 0 0 NET INCOME 2,468,511 11,653,698  OSSEN INNOVATION CO., LTD CONDENSED STATEMENTSOF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2012 AND 2011 Year Ended Year Ended December 31,2012 December 31,2011 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $2,468,511 $11,653,698 Adjustments to reconcile net income to net cash provided by operating activities: Equity in earnings of subsidiaries (2,942,190) (11,382,044)Net cash used in operating activities (473,679) 271,654 CASH FLOWS FROM INVESTING ACTIVITIES: Net cash used in investing activities 0 0 CASH FLOWS FROM FINANCING ACTIVITIES: IPO expense compensation 0 Treasury stock purchased (96,609) 0 Net cash provided by financing activities (96,609) 0 INCREASE IN CASH (570,288) 271,654 Effect of exchange rate changes on cash 2 0 Cash at beginning of period 616,654 345,000 CASH AT END OF PERIOD $46,368 616,654  EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the “Agreement”) is effective as of March 1, 2013 (the “Effective Date”), between Ossen Innovation Co.,Ltd., a British Virgin Islands company with its principal place of business located at 518 Shangcheng Road, Floor 17, Shanghai, 200120, People’s Republicof China (the “Company”), and Feng Peng (the “Executive”). WHEREAS, the Company desires to employ the Executive as its Chief Financial Officer, and Executive desires to accept such employment on termsand conditions hereinafter set forth. NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, the Company and the Executive agree asfollows: 1. TERM. The Company offers to employ the Executive, and the Executive agrees to be employed by the Company, in accordance withthe terms and subject to the conditions of this Agreement commencing on the Effective Date and terminating on the first anniversary of the Effective Date (the“Term”), unless terminated prior thereto in accordance with the provisions of Section 10 herein. The Term shall be automatically renewed for successive one(1) year terms, unless either party gives the other party written notice of its intention not to renew the Agreement no later than 90 days prior to the expiration ofthe then current term. A determination by the Company not to renew this Agreement without “Cause” shall be deemed a termination of employment forpurposes of Section 10(d) herein and the terms thereof shall apply. 2. POSITION AND DUTIES. Executive agrees to be employed by the Company during the Term upon the terms and subject to theconditions set forth in this Agreement. Executive shall serve as the Chief Financial Officer of the Company and shall report to the Board of Directors of theCompany (the “Board of Directors”). Throughout the Term, Executive shall faithfully and diligently perform Executive’s duties in conformity with thedirections of the Company and serve the Company to the best of Executive’s ability. Executive shall devote his full business time and best efforts to thebusiness and affairs of the Company. In his capacity as the Chief Financial Officer of the Company, Executive shall have such duties and responsibilities asmay be prescribed by the Board of Directors. 3. BUSINESS OPPORTUNITIES. The Executive covenants and agrees that for so long as he is employed by the Company, theExecutive shall inform the Company of each and every business opportunity related to the business of the Company of which the Executive becomes aware,and that the Executive will not, directly or indirectly, exploit any such opportunity for the Executive’s own account, nor will the Executive render any servicesto any other person or business, acquire any interest of any type in any other business or engage in any activities that conflict with the Company’s bestinterests or which is in competition with the Company. The Executive affirms that no obligation exists between the Executive and any other entity whichwould prevent or impede the Executive’s immediate and full performance of every obligation of this Agreement.  4. HOURS OF WORK. The Executive’s normal days and hours of work shall coincide with the Company’s regular businesshours. The nature of the Executive’s employment with the Company requires flexibility in the days and hours that the Executive must work, and maynecessitate that the Executive work on other or additional days and hours. The Company reserves the right to require the Executive, and the Executive agrees,to work during other or further days or hours than the Company’s normal business hours. 5. LOCATION. The location of the Executive’s employment with Company shall be Shanghai and New York. 6. BASE SALARY; BONUS. a. In consideration of the Executive’s services under this Agreement, the Company shall pay or cause to pay, and the Executive agrees toaccept, during the one year period following the Effective Date (the “First Year”), a monthly base salary of RMB35,834 (approximately USD 5,750), less allapplicable taxes and other appropriate deductions, paid on the last day of each calendar month. Following the First Year, the Executive’s base salary shall bereviewed annually by the Board of Directors of the Company. The decision to increase or decrease the Executive’s base salary and the amount of any suchincrease or decrease are within the sole discretion of the Company’s Compensation Committee and the Board of Directors. b. At the end of each year, the Compensation Committee and the Board of Directors shall evaluate the Executive’s performance for theprior year and determine whether or not to grant the Executive an annual cash bonus. The decision whether or not to grant the Executive’s annual cash bonus,and the amount of any such bonus, are within the sole discretion of the Company’s Compensation Committee and the Board of Directors. 7. REIMBURSEMENT OF EXPENSES; VACTION; INSURANCE. a. During the Term, in accordance with the Company’s expense reimbursement policy, the Executive shall be entitled to reimbursementfor reasonable expenses (including, without limitation, reasonable travel expenses) paid or incurred by him, in connection with and related to the performanceof his duties and responsibilities hereunder for the Company. All requests by Executive for reimbursement for such expenses must be supported byappropriate invoices, vouchers, receipts or such other supporting documentation in such form and containing such information as the Company may fromtime to time require, evidencing that the Executive, in fact, incurred or paid said expenses. b. The Executive shall be entitled to an annual paid vacation for 4 weeks per calendar year (as prorated for partial years), such vacationsto be taken at such time or times as mutually agreed upon by the Company and the Executive. The carry-over of vacation days shall be in accordance with theCompany’s policy applicable to senior executives from time to time in effect. c. During his employment pursuant to this Agreement, the Executive shall be entitled to participate in all employee benefit plans andprograms to the same extent generally available to similarly situated employees of the Company, in accordance with the terms of such plans and programs,including but not limited to, pension, unemployment and health benefits, and other benefits as required by local laws and regulations of the People’s Republicof China. - 2 - 8. TERMINATION. a. DEATH OR RESIGNATION. If the Executive dies or resigns during the Term, this Agreement shall automatically terminate on thedate of the Executive’s death or resignation and, following the date of the Executive’s death or resignation, the Company shall have no further obligations orliability to the Executive or his heirs, administrators or executors with respect to compensation and benefits specified in Sections 6, 7 and 8 herein thereafter,except for the obligation to pay the Executive (i) any earned but unpaid base salary and other benefits through the Executive’s date of death or resignation, (ii)for any unused accrued and unforfeited vacation, and (iii) subject to Section 8 herein, for any unreimbursed business expenses incurred by the Executiveprior to his death or resignation. b. DISABILITY. At any time during the Term, the Company may terminate this Agreement and the Executive’s employment with theCompany because of the Executive’s “Disability,” by written notice to the Executive. For purposes of this Agreement, “Disability” shall mean, if at the end ofany calendar month during the Term, the Executive, as a result of mental or physical illness or injury, is or has been unable to perform his duties under thisAgreement, with or without reasonable accommodation, for a period of 90 consecutive days. If this Agreement is terminated because of the Executive’s“Disability,” the Company shall have no further obligations or liability to the Executive or his heirs, administrators or Executors with respect to compensationand benefits specified in Sections 6, 7 and 8 herein thereafter, except for the obligation to pay the Executive (i) any earned but unpaid base salary through thedate of termination for “Disability,” at the rate then in effect, and other benefits (ii) for any unused accrued and unforfeited vacation, and (iii) subject toSection 8 herein, for any unreimbursed business expenses incurred by the Executive prior to his last date of employment with the Company. The Companyshall deduct, from all payments made hereunder, all applicable taxes and other appropriate deductions. c. TERMINATION FOR “CAUSE.” At any time during the Term, the Company may terminate this Agreement and the Executive’semployment with the Company, at any time, for “Cause.” For purposes of this Agreement, “Cause” shall mean any of the following: (i) the neglect or failure orrefusal of Executive to perform Executive’s duties hereunder (other than as a result of total or partial incapacity due to physical or mental illness), asdetermined by the Board of Directors or the Compensation Committee in their sole discretion; (ii) the engaging by Executive in gross negligence or misconductwhich is injurious to the Company or any of its affiliates, monetarily or otherwise; (iii) perpetration of an intentional and knowing fraud against or affectingthe Company or any of its affiliates or any customer, client, agent, or employee thereof; (iv) any willful or intentional act that could reasonably be expected toinjure the reputation, business, or business relationships of the Company or any of its affiliates or Executive’s reputation or business relationships;(v) Executive’s material failure to comply with, and/or a material violation by Executive of, the internal policies of the Company or any of its affiliates and/orprocedures or any laws or regulations applicable to Executive’s conduct as an employee of the Company; (vi) Executive’s conviction (including conviction on anolo contendere plea) of a felony or any crime involving fraud, dishonesty or moral turpitude; (vii) the breach of a covenant set forth in Sections 10, 11 or 12herein; or (viii) any other material breach by Executive of this Agreement; provided, however, that, if susceptible of cure, a termination by the Company underSections 9(c)(i), 10(c)(v) or 10(c)(viii) herein shall be effective only if, within 14 days following delivery of a written notice by the Company to Executive thatthe Company is terminating his employment for Cause, Executive has failed to cure the circumstances giving rise to Cause. If this Agreement and theExecutive’s employment is terminated for “Cause,” following the Executive’s last date of employment with the Company, the Company shall have no furtherobligations or liability to the Executive or his heirs, administrators or Executors with respect to compensation and benefits thereafter, except for the obligation topay the Executive (i) any earned but unpaid base salary through the Executive’s last date of employment, at the rate then in effect, (ii) for any unused accruedand unforfeited vacation, and (iii) subject to Section 8 herein, for any unreimbursed business expenses incurred by the Executive prior to the last date ofemployment with the Company. The Company shall deduct, from all payments made hereunder, all applicable taxes and other appropriate deductions. - 3 - d. TERMINATION WITHOUT CAUSE. The Company may terminate Executive’s employment hereunder at any time for any reasonor no reason by giving Executive ninety (90) days prior written notice of the termination, provided that in the event that the Company terminates Executive’semployment without “Cause,” the Executive shall not be subject to the covenants listed in Section 13 herein. Following any such notice, the Company mayreduce or remove any and all of Executive’s duties, positions and titles with the Company. If this Agreement and the Executive’s employment with theCompany is terminated without “Cause,” following the Executive’s last date of employment with the Company, the Company shall have no further obligationsor liability to the Executive or his heirs, administrators or executors with respect to compensation and benefits thereafter, except for the obligation to pay theExecutive (i) any earned but unpaid base salary through the Executive’s last date of employment, at the rate then in effect, (ii) for any unused accrued andunforfeited vacation, and (iii) subject to Section 8 herein, for any unreimbursed business expenses incurred by the Executive prior to his last date ofemployment with the Company. The Company shall deduct, from all payments made hereunder, all applicable taxes and other appropriate deductions. 9. PROPRIETARY INFORMATION. a. Executive acknowledges that during the course of his employment with the Company he will necessarily have access to and make useof proprietary information and confidential records of the Company and its affiliates. Executive covenants that he shall not during the Term or at any timethereafter, directly or indirectly, use for his own purpose or for the benefit of any person or entity other than the Company, nor otherwise disclose, anyproprietary information to any individual or entity, unless such disclosure has been authorized in writing by the Company or is otherwise required bylaw. Executive acknowledges and understands that the term “proprietary information” includes, but is not limited to: (a) the software products, programs,applications, and processes utilized by the Company or any of its affiliates; (b) the name and/or address of any customer or vendor of the Company or any ofits affiliates or any information concerning the transactions or relations of any customer or vendor of the Company or any of its affiliates with the Company orsuch affiliate or any of its or their partners, principals, directors, officers or agents; (c) any information concerning any product, technology, or procedureemployed by the Company or any of its affiliates but not generally known to its or their customers, vendors or competitors, or under development by or beingtested by the Company or any of its affiliates but not at the time offered generally to customers or vendors; (d) any information relating to the computersoftware, computer systems, pricing or marketing methods, sales margins, cost of goods, cost of material, capital structure, operating results, borrowingarrangements or business plans of the Company or any of its affiliates; (e) any information which is generally regarded as confidential or proprietary in anyline of business engaged in by the Company or any of its affiliates; (f) any business plans, budgets, advertising or marketing plans; (g) any informationcontained in any of the written or oral policies and procedures or manuals of the Company or any of its affiliates; (h) any information belonging to customersor vendors of the Company or any of its affiliates or any other person or entity which the Company or any of its affiliates has agreed to hold in confidence; (i)any Inventions (as defined in Section 11 herein) covered by this Agreement; and (j) all written, graphic and other material relating to any of theforegoing. Executive acknowledges and understands that information that is not novel or copyrighted or patented may nonetheless be proprietaryinformation. The term “proprietary information” shall not include information generally available to and known by the public or information that is orbecomes available to Executive on a non-confidential basis from a source other than the Company, any of its affiliates, or the directors, officers, employees,partners, principals or agents of the Company or any of its affiliates (other than as a result of a breach of any obligation of confidentiality). - 4 - b. Executive shall not during the Term or at any time thereafter (irrespective of the circumstances under which Executive’s employment bythe Company terminates), except as required by law, directly or indirectly publish, make known or in any fashion disclose any confidential records to, orpermit any inspection or copying of confidential records by, any individual or entity other than in the course of such individual’s or entity’s employment orretention by the Company. Upon termination of employment for any reason or upon request by the Company, Executive shall deliver promptly to theCompany all property and records of the Company or any of its affiliates, including, without limitation, all confidential records. For purposes hereof,“confidential records” means all correspondence, reports, memoranda, files, manuals, books, lists, financial, operating or marketing records, magnetic tape,or electronic or other media or equipment of any kind which may be in Executive’s possession or under his control or accessible to him which contain anyproprietary information. All property and records of the Company and any of its affiliates (including, without limitation, all confidential records) shall be andremain the sole property of the Company or such affiliate during the Term and thereafter. c. The Executive affirms that he did not and does not possess, and has not relied and will not rely upon the protected trade secrets orconfidential or proprietary information of the Executive’s prior employer(s) in providing services to the Company. 10. OWNERSHIP AND ASSIGNMENT OF INVENTIONS. a. The Executive acknowledges that, in connection with his duties and responsibilities relating to his employment with the Company, theExecutive and/or other employees of the Company working with the Executive, without the Executive or under the Executive’s supervision, may have created,conceived of, made, prepared, worked on or contributed to, and/or may create, conceive of, make, prepare, work on or contribute to, the creation of, or mayhave been or may be asked by the Company and/or its affiliates or customers to create, conceive of, make, prepare, work on or contribute to the creation of,without limitation, lists, business diaries, business address books, documentation, ideas, concepts, inventions, designs, works of authorship, computerprograms, audio/visual works, developments, proposals, works for hire or other materials (“Inventions”). To the extent that any such Inventions related orrelate to any actual or reasonably anticipated business of the Company or any of its affiliates or customers, or falls within, is suggested by or results from anytasks assigned to the Executive for or on behalf of the Company or any of its affiliates or customers, the Executive expressly acknowledges that all of hisactivities and efforts relating to any Inventions, whether or not performed during the Executive’s or the Company’s regular business hours, are within thescope of the Executive’s employment with the Company and that the Company owns all right, title and interest in and to all Inventions, including, to the extentthat they exist, all intellectual property rights thereto, including, without limitation, copyrights, patents and trademarks in and to all Inventions. TheExecutive also acknowledges and agrees that the Company owns and is entitled to sole ownership of all rights and proceeds to all Inventions. - 5 - b. The Executive expressly acknowledges and agrees to assign to the Company, and hereby assigns to the Company, all of the Executive’sright, title and interest in and to all Inventions, including, to the extent they exist, all intellectual property rights thereto, including, without limitation,copyrights, patents and trademarks in and to all Inventions. c. In connection with all Inventions, the Executive agrees to disclose any Invention promptly to the Company and to no other person orentity. The Executive further agrees to execute promptly, at the Company’s request, specific written assignments of the Executive’s right, title and interest inany Inventions, and do anything else reasonably necessary to enable the Company to secure or obtain a copyright, patent, trademark or other form ofprotection in or for any Invention in the United States or other countries. The Executive further agrees that the Company is not required to designate theExecutive as an author of or contributor to any Invention or to secure the Executive’s permission to change or otherwise alter any Invention. d. The Executive acknowledges that all rights, waivers, releases and/or assignments granted herein and made by the Executive are freelyassignable by the Company and are made for the benefit of the Company and its affiliates, subsidiaries, licensees, successors and assigns. e. The Executive agrees to waive, and hereby does waive, for the benefit of all persons, any and all right, title and interest in the nature of“moral rights” or “droit moral” granted to the Executive in any country in the world. 11. NON-COMPETITION AND NON-SOLICITATION. Because of the nature of the Company’s business, and because, as a result ofhis employment with the Company, the Executive has been and will continue to be exposed to proprietary information, the Executive acknowledges that theCompany would sustain grievous harm in the event that he were to disclose proprietary information, engage in business activities that compete with theBusiness, appropriate or divert business or customers of the Company or its affiliates and/or induce employees or consultants of the Company or its affiliatesto leave the employment of the Company or its affiliates. The Executive acknowledges that the Company has a legitimate business interest in protecting itselffrom the aforementioned harm and in the protection and maintenance of the proprietary information and of the good will and customer relationships of theCompany and its affiliates. Therefore, the Executive hereby agrees and covenants to be bound by the non-competition and non-solicitation restrictions set forthherein below, which restrictions the Executive agrees and acknowledges are reasonable and necessary and do not impose undue hardship or burdens on theExecutive. - 6 - a. The Executive agrees that, during his employment with the Company and for a period of six (6) months following the termination ofhis employment with the Company, he and his affiliates shall not directly or indirectly own, manage, operate, control, be employed by, consult for, be anofficer of, participate in, contract with or be connected in any capacity or any manner with any person or entity whose business activities directly or indirectly(whether through related persons, entities or otherwise) compete with the Company anywhere, including but not limited to, the People’s Republic of China andthe United States, in which the Company or its affiliates conducts its business; provided, however, that the Executive shall not be prevented from owning aninterest in a publicly traded company so long as the fair market value of such interest at the date of acquisition is less than US$1,000,000. b. The Executive agrees that during the period of his employment with the Company and for a period of six (6) months following thetermination of his employment with the Company, for any reason, he will not, anywhere, including but not limited to, the People’s Republic of China and theUnited States, in which the Company or its affiliates conducts its business, directly or indirectly recruit, induce, divert, supervise, employ, manage, hire orentice, or cause to be recruited, induced, diverted, supervised, employed, managed, hired or enticed, any employee, consultant or independent contractor of theCompany or its affiliates to leave or terminate the employment or other relationship thereof, for any reason. c. The Executive agrees that during the period of his employment with the Company and for a period of six (6) months following thetermination of his employment with the Company, he will not, anywhere, including but not limited to, the People’s Republic of China and the United States,in which the Company or its affiliates conducts its business, directly or indirectly appropriate, call on, induce, divert or solicit, or assist another toappropriate, call on, induce, divert or solicit any actual or potential business or customer away from the Company or its affiliates, or attempt to do any of theforegoing, or otherwise induce or attempt to induce any actual or potential business or customer of the Company or its affiliates, to terminate or adverselymodify its relationship with the Company or its affiliates, or to enter into a relationship with or conduct business with the Company or its affiliates, whichactual or potential business or customer the Executive was involved with or had a relationship with or whose identity became known to the Executive inconnection with the Executive’s employment with the Company. d. If any of the restrictive covenants set forth in Sections 12(a), (b) and (c) herein is held to be invalid, illegal or unenforceable (in wholeor in part), such restrictive covenant shall be deemed modified to the extent, but only to the extent, of such invalidity, illegality or unenforceability, and a courtof competent jurisdiction shall have the power to modify, any such restrictive covenant to the extent necessary to render such provision enforceable, and theremaining restrictive covenant shall not be affected thereby. e. In the event of a violation of any of the restrictive covenants set forth in Sections 12(a), (b) and (c) herein, if the Executive is preventedby a court, arbitrator or other judicial body from committing any further violation, whether by a temporary restraining order, injunction or otherwise, the timeperiods set forth in Sections 12(a), (b) and (c) herein shall be computed by commencing the periods on the date of the order of such court, arbitrator or otherjudicial body and continuing from that date for the full period provided. - 7 - f. The Executive shall have the right to request a waiver of all or part of the restrictive covenants contained in Sections 12(a), (b) and (c)herein by providing the Board of Directors or the Compensation Committee with a written request for such waiver that contains all relevant details. The Boardof Directors or the Compensation Committee may, in its sole discretion, waive all or part of the restrictive covenants contained in Sections 12(a), (b) and (c)herein on such terms and conditions, and to such extent, as it, in its sole discretion, deems appropriate. Such waiver must be in writing. g. The parties acknowledge that this Agreement would not have been entered into, that the benefits described in Sections 6, 7 and 8 hereinwould not have been promised to the Executive by the Company, in the absence of the Executive’s covenants and promises set forth in Sections 12(a), (b) and(c) herein. 12. DISPUTE RESOLUTION. The Executive and the Company agree that any dispute or claim, whether based on contract, tort,discrimination, retaliation, or otherwise, relating to, arising from, or connected in any manner with this Agreement or with the Executive’s employment withCompany shall be resolved exclusively through final and binding arbitration under the auspices of the Hong Kong Chamber of Commerce (“HKCC”) inaccordance with the commercial arbitration rules and supplementary procedures for international commercial arbitration of the HKCC. The arbitration shallbe held in Hong Kong. There shall be three arbitrators: one arbitrator shall be chosen by each party to the dispute and those two arbitrators shall choose thethird arbitrator. Each party shall cooperate with the other in making full disclosure of and providing complete access to all information and documentsrequested by the other party in connection with the arbitration proceedings. Arbitration shall be the sole, binding, exclusive and final remedy for resolving anydispute between the parties. The arbitrators shall have jurisdiction to determine any claim, including the arbitrability of any claim, submitted to them. Thearbitrators may grant any relief authorized by law for any properly established claim. The interpretation and enforceability of this Section 14 shall begoverned and construed in accordance with the United States Federal Arbitration Act, 9 U.S.C. §§1, et seq. More specifically, the parties agree to submit tobinding arbitration any claims for unpaid wages or benefits, or for alleged discrimination, harassment, or retaliation, arising under Title VII of the CivilRights Act of 1964, the Equal Pay Act, the National Labor Relations Act, the Age Discrimination in Employment Act, the Americans With Disabilities Act,the Executive Retirement Income Security Act, the Civil Rights of 1991, the Family and Medical Leave Act, the Fair Labor Standards Act, Sections 1981through 1988 of Title 42 of the United States Code, COBRA, and any other federal, state, or local law, regulation, or ordinance, and any common lawclaims, claims for breach of contract, or claims for declaratory relief. The Executive acknowledges that the purpose and effect of this Section 13 is solely toelect private arbitration in lieu of any judicial proceeding he might otherwise have available to him in the event of an employment-related dispute between himand the Company. Therefore, the Executive hereby waives his right to have any such employment-related dispute heard by a court or jury, as the case may be,and agrees that his exclusive procedure to redress any employment-related claims will be arbitration. - 8 - 13. MISCELLANEOUS. a. Telephones, stationery, postage, e-mail, the internet and other resources made available to the Executive by the Company, are solely forthe furtherance of the Company’s business. b. All issues concerning, relating to or arising out of this Agreement and from the Executive’s employment by the Company, including,without limitation, the construction and interpretation of this Agreement, shall be governed by and construed in accordance with the internal laws of the Stateof New York, without giving effect to that State’s principles of conflicts of law. c. The Executive and the Company agree that any provision of this Agreement deemed unenforceable or invalid may be reformed topermit enforcement of the objectionable provision to the fullest permissible extent. Any provision of this Agreement deemed unenforceable after modificationshall be deemed stricken from this Agreement, with the remainder of the Agreement being given its full force and effect. d. The Company shall be entitled to equitable relief, including injunctive relief and specific performance as against the Executive, for theExecutive’s threatened or actual breach of Sections 10, 11 or 12 herein, as money damages for a breach thereof would be incapable of precise estimation,uncertain, and an insufficient remedy for an actual or threatened breach of Sections 10, 11 or 12 herein. The Executive and the Company agree that anypursuit of equitable relief in respect of Sections 10, 11 or 12 herein shall have no effect whatsoever regarding the continued viability and enforceability ofSection 13 herein. e. Any waiver or inaction by the Company for any breach of this Agreement shall not be deemed a waiver of any subsequent breach ofthis Agreement. f. The Executive and the Company independently have made all inquiries regarding the qualifications and business affairs of the otherwhich either party deems necessary. The Executive affirms that he fully understands this Agreement’s meaning and legally binding effect. Each party hasparticipated fully and equally in the negotiation and drafting of this Agreement. Each party assumes the risk of any misrepresentation or mistakenunderstanding or belief relied upon by his or it in entering into this Agreement. g. The Company and the Executive agree that the Executive’s obligations to the Company during the Executive’s employment with theCompany, as well as any other obligation of the Executive under this Agreement, may be assigned to any successor in interest to the Company or any divisionor affiliate of the Company in its sole discretion and without additional consideration or prior notice to the Executive, but that nothing requires the Company todo so. The Executive’s obligations under this Agreement are personal in nature and may not be assigned by the Executive to any other person or entity. h. The Company and the Executive acknowledge and agree that future alterations to the Executive’s work hours, working title,management or supervisory responsibilities, number of subordinate employees, sales or promotional budgets, reporting relationships within the Company orwith businesses affiliated with the Company, management responsibilities or duties, or similar changes or alterations may occur periodically during theExecutive’s employment with the Company. The Company and the Executive agree that the Company, in its sole discretion, may implement such alterationsor adjustments for any or no reason and that any such action shall not constitute a breach of this Agreement so long as the Company continues to perform itsremaining obligations as provided by this Agreement. - 9 - i. This instrument constitutes the entire Agreement between the parties regarding its subject matter. When signed by all parties, thisAgreement supersedes and nullifies all prior or contemporaneous conversations, negotiations, or agreements, oral and written, regarding the subject matter ofthis Agreement. In any future construction of this Agreement, this Agreement should be given its plain meaning. This Agreement may be amended only by awriting signed by the Company and the Executive. j. Notwithstanding the termination of this Agreement and of the Executive’s employment with the Company for any reason, Sections 10,11 or 12 herein shall continue in full force and effect in accordance with their terms following such termination. k. This Agreement may be executed in counterparts, a counterpart transmitted via facsimile, and all executed counterparts, when takentogether, shall constitute sufficient proof of the parties’ entry into this Agreement. The parties agree to execute any further or future documents which may benecessary to allow the full performance of this Agreement. This Agreement contains headings for ease of reference. The headings have no independentmeaning. THE EXECUTIVE STATES THAT HE HAS FREELY AND VOLUNTARILY ENTERED INTO THIS AGREEMENT AND THAT HE HASREAD AND UNDERSTOOD EACH AND EVERY PROVISION THEREOF. THIS AGREEMENT IS EFFECTIVE UPON THE EXECUTION OF THISAGREEMENT BY BOTH PARTIES. [Signature page follows] IN WITNESS WEREOF, the Company has caused this Agreement to be duly executed on its behalf by an individual thereunto duly authorized andExecutive has duly executed this Agreement, each as of the date and year first written above. OSSEN INNOVATION CO., LTD. Name: Feng Peng_______________By:________________________ Name:Wei Hua Title:Chief Executive Officer - 10 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TOEXCHANGE ACT RULE 13A-14(A)/15D-14(A)AS ADOPTED PURSUANT TO SECTION 302OF THE SARBANES-OXLEY ACT OF 2002 I, Wei Hua, certify that: 1. I have reviewed this annual report on Form 20-F of Ossen Innovation Co., Ltd.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure thatmaterial information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly duringthe period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance withgenerally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of thedisclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter(the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’sinternal control over financial reporting; and 5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely toadversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting. Date: April 29, 2013 /s/ Wei Hua Wei Hua Chief Executive Officer(Principal Executive Officer)  EXHIBIT 12.2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO EXCHANGE ACT RULE 13A-14(A)/15D-14(A)AS ADOPTED PURSUANT TO SECTION 302OF THE SARBANES-OXLEY ACT OF 2002 I, Feng Peng, certify that: 1. I have reviewed this annual report on Form 20-F of Ossen Innovation Co., Ltd.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure thatmaterial information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly duringthe period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance withgenerally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of thedisclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter(the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’sinternal control over financial reporting; and 5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely toadversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting. Date: April 29, 2013 /s/ Feng Peng Feng Peng Chief Financial Officer(Principal Financial Officer)  EXHIBIT 13.1 CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICERPURSUANT TO 18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TO SECTION 906 OFTHE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Ossen Innovation Co., Ltd. (the "Registrant") on Form 20-F for the year ended December 31, 2012, as filedwith the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned certifies pursuant to 18 U.S.C. 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002, that: 1.The Report, fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended;and 2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theRegistrant. Date: April 29, 2013 /s/ Wei Hua Wei Hua (Principal Executive Officer)  EXHIBIT 13.2 CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICERPURSUANT TO 18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TO SECTION 906 OFTHE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Ossen Innovation Co. Ltd. (the "Registrant") on Form 20-F for the year ended December 31, 2012, as filedwith the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned certifies pursuant to 18 U.S.C. 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002, that: 1.The Report, fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended;and 2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theRegistrant. Date: April 29, 2013 /s/ Feng Peng Feng Peng (Principal Financial Officer) 

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