UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
OR
For the fiscal year ended December 31, 2015
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 Peng
Tel: +86 (21) 6888-8886 Fax: +86 (21) 6888-8666
518 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 Class
Ordinary shares, par value US$0.01 per share *
Name of Each Exchange On Which Registered
NASDAQ Capital 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 Depositary Share 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,
2015 was: 19,828,790 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
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files).
Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer Accelerated filer Non-accelerated filer
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements
included in this filing:
U.S. GAAP International Financial Reporting Standards as issued by the International Accounting
Standards 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
OSSEN INNOVATION CO., LTD.
FORM 20-F ANNUAL REPORT
TABLE OF CONTENTS
PART I
Identity of Directors, Senior Management and Advisers
Offer Statistics and Expected Timetable
Key Information
Information On The Company
Item 1.
Item 2.
Item 3.
Item 4.
Item 4A. Unresolved Staff Comments
Item 5.
Item 6.
Item 7. Major Shareholders And Related Party Transactions
Financial Information
Item 8.
Item 9.
The Offer And Listing
Item 10. Additional Information
Item 11. Quantitative And Qualitative Disclosures About Market Risk
Item 12. Description Of Securities Other Than Equity Securities
Operating And Financial Review And Prospects
Directors, Senior Management And Employees
PART II
[Reserved]
Item 13. Defaults, Dividend Arrearages And Delinquencies
Item 14. Material Modifications To The Rights Of Security Holders And Use Of Proceeds
Item 15. Controls And Procedures
Item 16.
Item 16A. Audit Committee Financial Expert
Item 16B. Code Of Ethics
Item 16C. Principal Accountant Fees and Services
Item 16D. Exemptions From The Listing Standards For Audit Committees
Item 16E. Purchases Of Equity Securities By The Issuer And Affiliated Purchasers
Item 16F. Change In Registrant’s Certifying Accountant
Item 16G. Corporate Governance
Item 16H. Mine Safety Disclosure
PART III
Item 17. Financial Statements
Item 18. Financial Statements
Item 19. Exhibits
Page
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40
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PART I
CERTAIN INFORMATION
In this annual report on Form 20-F, unless otherwise indicated, “we,” “us,” “our,” the “Company” and
“Ossen” refer to Ossen Innovation Co., Ltd., a company organized in the British Virgin Islands, its predecessor
entities and its subsidiaries.
Unless the context indicates otherwise, all references to “China” and the “PRC” refer to the People’s
Republic of China, all references to “Renminbi” or “RMB” are to the legal currency of the People’s Republic of
China, all references to “U.S. dollars,” “dollars” and “$” are to the legal currency of the United States and all
references to “ADSs” refer to our American Depositary Shares, each of which represents one ordinary share. This
annual report contains translations of Renminbi amounts into U.S. dollars at specified rates solely for the
convenience of the reader. We make no representation that the Renminbi or U.S. dollar amounts referred to in this
report could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular
rate or at all. On April 16, 2016, the cash buying rate announced by the People’s Bank of China was RMB6.488 to
$1.00.
FORWARD-LOOKING STATEMENTS
This report contains “forward-looking statements” for purposes of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 that represent our beliefs, projections and predictions about future events.
All statements other than statements of historical fact are “forward-looking statements,” including any projections of
earnings, revenue or other financial items, any statements of the plans, strategies and objectives of management for
future operations, any statements concerning proposed new projects or other developments, any statements
regarding future economic conditions or performance, any statements of management’s beliefs, goals, strategies,
intentions and objectives, and any statements of assumptions underlying any of the foregoing. Words such as “may”,
“will”, “should”, “could”, “would”, “predicts”, “potential”, “continue”, “expects”, “anticipates”, “future”, “intends”,
“plans”, “believes”, “estimates” and similar expressions, as well as statements in the future tense, identify forward-
looking statements.
These statements are necessarily subjective and involve known and unknown risks, uncertainties and other
important factors that could cause our actual results, performance or achievements, or industry results, to differ
materially from any future results, performance or achievements described in or implied by such statements. Actual
results may differ materially from expected results described in our forward-looking statements, including with
respect to correct measurement and identification of factors affecting our business or the extent of their likely impact,
and the accuracy and completeness of the publicly available information with respect to the factors upon which our
business strategy is based or the success of our business.
Forward-looking statements should not be read as a guarantee of future performance or results, and will not
necessarily be accurate indications of whether, or the times by which, our performance or results may be achieved.
Forward-looking statements are based on information available at the time those statements are made and
management’s belief as of that time with respect to future events, and are subject to risks and uncertainties that
could cause actual performance or results to differ materially from those expressed in or suggested by the forward-
looking statements. Important factors that could cause such differences include, but are not limited to, those factors
discussed under the headings “Risk Factors”, “Operating and Financial Review and Prospects,” and elsewhere in
this report.
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable.
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable.
1
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 statements and their related notes and the section entitled “Operating and
Financial Review and Prospects” included elsewhere in this annual report. The consolidated statements of income
data for the fiscal years ended December 31, 2013, 2014 and 2015 and the balance sheet data as of December 31,
2014 and 2015 are derived from audited consolidated financial statements included elsewhere in this annual report.
The consolidated statements of income data for the fiscal years ended December 31, 2011 and 2012 and the balance
sheet data as of December 31, 2011, 2012 and 2013 are not included in this annual report. Our historical results for
any prior period are not necessarily indicative of results to be expected in any future period.
Selected Consolidated Statement of Income
Data
Revenues
Cost of goods sold
Gross profit
Selling and distribution expenses
General and administrative expenses
Total Operating Expenses
Income from operations
Financial expenses, net
Other income, net
Income before income taxes
Income taxes
Net income
Less: Net Income attributable to non-
controlling interest
Net income attributable to controlling interest
Other comprehensive income
Foreign currency translation gain (loss)
Total other comprehensive income (loss)
Comprehensive Income
2015
(Audited)
117,908,41
For the Year Ended December 31,
2014
(Audited)
123,571,45
2013
(Audited)
113,891,98
2012
(Audited)
122,397,88
$
6 $
5 $
9 $
6 $
102,197,99
110,250,87
102,353,95
111,611,45
2011
(Audited)
118,616,97
1
6
4
7
986,378
7 96,588,173
15,710,422 13,320,579 11,538,032 10,786,429 22,028,799
917,074 1,216,504
4,478,413 6,340,584 3,485,118 3,950,934 2,747,514
5,464,791 7,112,967 4,110,618 4,868,008 3,964,018
10,245,631 6,207,612 7,427,414 5,918,421 18,064,781
625,500
772,383
371,894
907,941
(2,823,952) (2,401,268) (2,696,966) (3,556,045) (3,480,766)
609,666
7,793,573 4,714,285 5,288,874 3,273,806 15,193,681
(575,428) (2,139,029)
6,613,406 4,135,558 4,069,844 2,716,378 13,054,652
(1,219,030)
(1,180,167)
911,430
558,426
(578,727)
716,602
276,682
426,440
335,099 1,506,947
5,896,804 3,858,876 3,643,404 2,381,279 11,547,704
(5,829,470)
779,135 1,647,348
703,573 3,102,645
(5,829,470)
703,573 3,102,645
67,334 4,638,011 5,290,752 3,084,852 14,650,349
779,135 1,647,348
Weighted average shares outstanding
19,862,537
19,901,959
19,901,959 19,942,333 20,000,000
Earnings per share*
0.30
0.19
0.18
0.12
0.58
* Calculation is based on net income attributable to controlling interest and the weighted average shares outstanding
2
Selected Balance Sheets Data
Cash and cash equivalents
Total current assets
Total long-term assets
Total assets
Total liabilities
Total shareholders’ equity
Total liabilities and shareholders’
equity
812,277 $
2014
(Audited)
2015
(Audited)
2011
(Audited)
684,592 $ 1,139,450 $ 1,996,764 $ 1,568,261
$
144,772,273 159,358,503 169,273,347 165,023,097 145,364,377
9,468,260 11,405,994 12,755,970 21,958,617 23,273,153
154,240,533 170,764,497 182,029,317 186,981,714 168,637,530
2013
(Audited)
December 31,
2012
(Audited)
50,106,311 67,355,476 83,534,989 94,204,578 79,270,536
104,134,222 103,409,021 98,494,328 92,777,136 89,366,994
154,240,533 170,764,497 182,029,317 186,981,714 168,637,530
3.B. Capitalization and Indebtedness
Not Applicable.
3.C. Reasons For The Offer And Use Of Proceeds
Not Applicable.
3.D. Risk Factors
An investment in our ADSs involves a high degree of risk. You should carefully consider the risks and
uncertainties described below together with all other information contained in this annual report, including the
matters discussed under the headings “Forward-Looking Statements” and “Operating and Financial Review and
Prospects” before you decide to invest in our ADSs. We are a holding company with substantial operations in China
and are subject to a legal and regulatory environment that in many respects differs from the United States. If any of
the following risks, or any other risks and uncertainties that are not presently foreseeable to us, actually occur, our
business, financial condition, results of operations, liquidity and our future growth prospects could be materially
and adversely affected.
Risks Related to Our Business and Our Industry
Our operations are cash intensive, and our business could be adversely affected if we fail to maintain sufficient
levels of liquidity and working capital.
As of December 31, 2015, we had $0.8 million of cash and cash equivalents. Historically, we have spent a
significant amount of cash on our operational activities, principally to procure raw materials for our products. Our
short-term loans are from Chinese banks and are generally secured by a portion of our fixed assets, land use right,
receivables and/or guarantees by related parties. The term of almost all such loans is one year or less. Historically,
we have rolled over such loans on an annual basis. However, we may not have sufficient funds available to pay all
of our borrowings upon maturity in the future. Failure to roll over our short-term borrowings at maturity or to
service our debt could result in the imposition of penalties, including increases in interest rates, legal actions against
us by our creditors, or even insolvency.
The ability of our customers and us to borrow from Chinese banks is affected by the monetary policy
implemented by Chinese government from time to time. Since 2013, the Chinese government has followed a
prudent monetary policy and local banks have generally maintained tighter lending policies. In 2015, the Chinese
government was still conservative in lending to certain industries, including the steel industry, and as a result we had
to repay a portion of our short-term bank loans in 2015, without being able to roll-over such loans into new short-
term loans. In addition, some of our customers delayed paying our accounts receivables, and our average Days Sales
Outstanding was approximately 150 days in 2013, 2014 and 2015. These longer payment terms have negatively
impacted our short-term liquidity. We anticipate that these extended payment terms and tighter lending policies will
continue in 2016.
3
Although we have been able to maintain adequate working capital primarily through cash from operations
and short-term borrowings, any failure by our customers to settle outstanding accounts receivable, or our inability to
borrow sufficient capital from local banks, in the future could materially and adversely affect our cash flow,
financial condition and results of operations.
In addition, since 2013, we have been required to provide cash deposits, instead of bank guarantee letters,
when we bid for projects, which results in further pressure on our working capital. Yet, during this time period, local
banks have generally maintained tighter lending policies than in the past, thereby limiting our ability to borrow
funds in order to win bids that we believe we otherwise could have won. Although our production facilities are
running at full capacity, the bids we are losing due to lack of up-front cash deposit may be more profitable than the
ones we are winning, which could negatively impact our overall revenue and profitability.
In September 2014, our subsidiary in Maanshan, Ossen Innovation Materials Co., Ltd., completed a private
placement of RMB 100 million (approximately $16.2 million) in aggregate principal amount of notes to certain
accredited investors in China. The notes bear a fixed interest rate of 10.75% per annum, payable annually in arrears,
and mature on September 2, 2016. Ossen Materials used the net proceeds from the offering to repay short-terms
loans and for general corporate and working capital purposes. The interest rate on these notes is higher than the
interest rates of our bank loans, thereby requiring us to generate additional income or raise additional funds in order
to repay these notes. The notes will mature on September 2, 2016. Our subsidiary intends to consummate another
notes offering in 2016 in order to repay the original notes; however, there is no guarantee that our subsidiary will be
successful in raising adequate funds in such offering on terms acceptable to us.
If existing sources of capital are insufficient to support our business, we may issue debt and equity securities that
are senior to our ordinary shares as to distributions and in liquidation, which could negatively affect the value of
our ordinary shares, or we may not be able to raise additional financing at all.
If available liquidity is not sufficient to meet our operating and loan obligations as they come due, our plans
include considering pursuing alternative financing arrangements, reducing expenditures as necessary, or limiting our
plans for expansion to meet our cash requirements. However, there is no assurance that, if required, we will be able
to raise additional capital, reduce discretionary spending or efficiently limit our expansion to provide the required
liquidity. Currently, the capital markets for small capitalization companies are difficult and banking institutions have
become stringent in their lending requirements. Accordingly, we cannot ensure the availability or terms of any third
party financing. If we are unable to raise additional financing, we may be unable to procure the raw materials we
need, implement our long-term business plan, develop or enhance our products, take advantage of future
opportunities or respond to competitive pressures on a timely basis.
Alternatively, if we raise capital by issuing equity or convertible debt securities, such issuances could result
in substantial dilution to our shareholders. In addition, we may issue senior notes, subordinated notes or preferred
shares that have preference over our common equity. In the event of our liquidation, any such lenders and holders of
our debt or preferred securities would receive a distribution of our available assets before distributions to the holders
of our ADSs. Our decision to incur debt and issue securities in future offerings will depend on market conditions
and other factors beyond our control. We cannot predict or estimate the amount, timing or nature of future offerings
and debt financings. Future offerings could reduce the value of shares of our ADSs or dilute your investment.
4
We face intense competition, and if we are unable to compete effectively we may not be able to maintain
profitability.
We compete with many other companies located in the PRC and internationally that manufacture materials
similar to ours. Many of our competitors are larger companies with greater financial resources than us. Intense
competition in a challenging economic environment in the PRC has, in the past, put pressure on our margins and
may adversely affect our future financial performance. Moreover, intense competition may result in potential or
actual litigation between us and our competitors relating to such activities as competitive sales practices,
relationships with key suppliers and customers or other matters.
In 2014 and 2015, we generated revenue of approximately $97.6 million and $85.0 million, respectively, or
79.0% and 72.1%, respectively, of our total revenue, from sales of our rare earth coated PC wires and PC strands.
We believe that we are the only prestressed steel material manufacturer in the PRC that currently manufactures rare
earth coated prestressed steel materials for bridge construction. While we believe that our rare earth coating
capabilities provide us with a competitive advantage among our competitors, it is likely that our competitors will
seek to develop similar competing products in the near future. Furthermore, in 2014 and 2015, gross margins for our
coated products was lower than the gross margins for our plain surface products due, in part, to pricing pressure. We
intend to continue to expand research and development efforts to advance our rare earth coating applications even
further. In particular, we continued to develop a rare earth coating application for zinc-aluminum alloy coated
products, which are more corrosion-resistant than zinc coated products in 2015. However, there can be no assurance
that our initial competitive advantage will be retained and that one or more competitors will not develop products
that are equal or superior to ours in quality and are better priced than our rare earth coated products.
Our revenues are highly dependent on a limited number of customers and the loss of any one of our major
customers could materially and adversely affect our growth and our revenues.
During the years ended December 31, 2015, 2014 and 2013, our six largest customers contributed 79.5%,
74.9% and 61.3% of our total sales, respectively. As a result of our reliance on a limited number of customers, we
may face pricing and other competitive pressures, which may have a material adverse effect on our profits and our
revenues. The volume of products sold for specific customers varies from year to year, especially since we are not
the exclusive provider for any customers. In addition, there are a number of factors, other than our performance, that
could cause the loss of a customer or a substantial reduction in the products that we provide to any customer and that
may not be predictable. For example, our customers may decide to reduce spending on our products or a customer
may no longer need our products following the completion of a project. The loss of any one of our major customers,
a decrease in the volume of sales to these customers or a decrease in the price at which we sell our products to them
could materially adversely affect our profits and our revenues.
In addition, this customer concentration may subject us to perceived or actual leverage that our customers
may have in negotiations with us, given their relative size and importance to us. If our customers seek to negotiate
their agreements on terms less favorable to us and we accept such unfavorable terms, such unfavorable terms may
have a material adverse effect on our business, financial condition and results of operations. Accordingly, unless and
until we diversify and expand our customer base, our future success will significantly depend upon the timing and
volume of business from our largest customers and the financial and operational success of these customers.
As we expand our operations, we may need to establish a more diverse supplier network for our raw materials.
The failure to secure a more diverse supplier network could have an adverse effect on our financial condition.
We currently purchase almost all of our raw materials from a small number of suppliers. Purchases from
our five largest suppliers amounted to 99.1%, 95.1% and 91.6% of our raw material purchases in the years ended
December 31, 2015, 2014 and 2013, respectively. In the event that we need to diversify our supplier network, we
may not be able to procure a sufficient supply of raw materials at a competitive price, which could have an adverse
effect on our results of operations, financial condition and cash flows.
5
Furthermore, despite our efforts to control our supply of raw materials and maintain good relationships
with our existing suppliers, we could lose one or more of our existing suppliers at any time. The loss of one or more
key suppliers could increase our reliance on higher cost or lower quality supplies, which could negatively affect our
profitability. Any interruptions to, or decline in, the amount or quality of our raw materials supply could materially
disrupt our production and adversely affect our business, financial condition and financial prospects.
Volatile steel prices can cause significant fluctuations in our operating results. Our revenues and operating
income could decrease if steel prices decline or if we are unable to pass price increases on to our customers.
Our principal raw material is high carbon steel wire rods that we typically purchase from multiple primary
steel producers. The steel industry as a whole is cyclical and, at times, pricing and availability of steel can be volatile
due to numerous factors beyond our control, including general domestic and international economic conditions,
labor costs, sales levels, competition, levels of inventory held by us and other steel service centers, consolidation of
steel producers, higher raw material costs for steel producers, import duties and tariffs and currency exchange rates.
This volatility can significantly affect the availability and cost of raw materials for us.
We, like many other steel manufacturers, maintain substantial inventories of steel to accommodate the short
lead times and just-in-time delivery requirements of our customers. Accordingly, we purchase steel in an effort to
maintain our inventory at levels that we believe to be appropriate to satisfy the anticipated needs of our customers
based upon historic buying practices, supply agreements with customers and market conditions. Our commitments
to purchase steel are generally at prevailing market prices in effect at the time we place our orders. We have no
long-term, fixed-price steel purchase contracts. When steel prices increase, competitive conditions will influence
how much of the price increase we can pass on to our customers. To the extent we are unable to pass on future price
increases in our raw materials to our customers, the revenues and profitability of our business could be adversely
affected.
When steel prices decline, customer demands for lower prices and our competitors' responses to those
demands could result in lower sale prices, lower margins and inventory valued at the lower of cost or market
adjustments as we use existing steel inventory. Significant or rapid declines in steel prices or reductions in sales
volumes could result in us incurring inventory or goodwill impairment charges. Therefore, changing steel prices
could significantly impact our revenues, gross margins, operating income and net income.
In 2015, China’s steel industry continued to experience a difficult environment and steel consumption
continued to drop. As a result, the average price of steel products, including our products and principal raw materials,
continued to decline in 2015 and reached a new low in nearly 20 years. China has lowered steel production by about
90 million tons in the recent years and will push to cut a further 100 million to 150 million tons over the next 5 years,
while strictly controlling steel capacity increases, according to the Chinese government statement announced in
January 2016. Although the average prices of our raw materials remain low due to these economic conditions, the
average selling prices of our products may also remain low, which could result in a decrease in our revenue, as we
experienced in 2015, and in our net profit. We expect steel supply will continue to outpace demand and steel prices
will remain at low levels in 2016.
We are subject to various risks and uncertainties that might affect our ability to procure quality raw materials.
Our performance depends on our ability to procure low cost, high quality raw materials on a timely basis
from our suppliers. Our suppliers are subject to certain risks, including availability of raw materials, labor disputes,
inclement weather, natural disasters, and general economic and political conditions, which might limit the ability of
our suppliers to provide us with low cost, high quality merchandise on a timely basis. Furthermore, for these or other
reasons, one or more of our suppliers might not adhere to our quality control standards, and we might not identify
the deficiency. Our suppliers’ failure to supply quality materials at a reasonable cost on a timely basis could reduce
our net sales or profits, damage our reputation and have an adverse effect on our financial condition.
We may lose our competitive advantage, and our operations may suffer, if we fail to prevent the loss or
misappropriation of, or disputes over, our intellectual property.
We rely on a combination of patents, trademarks, trade secrets and confidentiality agreements to protect our
intellectual property rights. While we are not currently aware of any infringement on our intellectual property rights,
our ability to compete successfully and to achieve future revenue growth will depend, in significant part, on our
ability to protect our proprietary technology. Despite many laws and regulations promulgated, as well as other
efforts made, by China over the past several years in an attempt to protect intellectual property rights, intellectual
property rights are not as certain in China as they would be in many Western countries, including the United States.
Furthermore, enforcement of such laws and regulations in China has not been fully developed. Neither the
administrative agencies nor the court systems in China are as equipped as their counterparts in developed countries
to deal with violations or handle the nuances and complexities between compliant technological innovation and non-
compliant infringement.
6
Our rare earth coating technology is protected through a combination of patents, trade secrets,
confidentiality agreements and other methods. However, our competitors may independently develop proprietary
methodologies similar to ours or duplicate our products, or develop alternatives, which could have a material
adverse effect on our business, results of operations and financial condition. The misappropriation or duplication of
our intellectual property could disrupt our ongoing business, distract our management and employees, reduce our
revenues and increase our expenses. We may need to litigate to enforce our intellectual property rights. Any such
litigation could be time consuming and costly and the outcome of any such litigation cannot be guaranteed.
Our revenues, expenses and profits are difficult to predict and vary significantly from quarter to quarter. This
could cause the trading price of our ordinary shares to decline.
Our operating results vary significantly from quarter to quarter. Therefore, we believe that period-to-period
comparisons of our results of operations are not necessarily meaningful and should not be relied upon as an
indication of our future performance. It is possible that in the future some of our quarterly results of operations may
be below the expectations of market analysts and our investors, which could lead to a significant decline in the
trading price of our ordinary shares. Factors which affect the fluctuation of our revenues, expenses and profits
include:
·
·
·
·
·
·
·
·
delays or cancellations of railway or infrastructure projects in China due to unexpected accidents
or to financial or other issues confronting the Ministry of Transport, China National Railway Co.,
or other PRC governmental agencies overseeing these industries;
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 operating results in any particular
quarter.
7
Our success depends in large part upon our senior management and key personnel. Our inability to attract and
retain these individuals could materially and adversely affect our business, results of operations and financial
condition.
We are highly dependent on our senior management and other key employees, including our Chairman, Dr.
Tang and our Chief Executive Officer, Mr. Hua. Our future performance will be dependent upon the continued
service of members of our senior management and key employees. We do not maintain key man life insurance for
any of the members of our management team or other key personnel. Competition for senior management in our
industry is intense, and we may not be able to retain our senior management and key personnel or attract and retain
new senior management and key personnel in the future, which could materially and adversely affect our business,
results of operations and financial condition.
We have limited insurance coverage and may incur losses resulting from product liability claims, business
interruption or natural disasters.
We are exposed to risks associated with product liability claims in the event that the use of our products
results in property damage or personal injury. Since our products are ultimately incorporated into bridges, buildings,
railways and other large structures, it is possible that users of these structures or people installing our products could
be injured or killed by such structures, whether as a result of defects, improper installation or other causes. Because
we continue to expand our customer base and because our products are used for long periods of time, we are unable
to predict whether product liability claims will be brought against us in the future or to predict the impact of any
resulting adverse publicity on our business. The successful assertion of product liability claims against us could
result in potentially significant monetary damages and require us to make significant payments. We do not carry
product liability insurance and may not have adequate resources to satisfy a judgment in the event of a successful
claim against us. As the insurance industry in China is still in its early stages of development, even the insurance
that we currently carry offers limited coverage compared with that offered in many other countries. Any business
interruption or natural disaster could result in substantial losses and diversion of our resources and materially and
adversely affect our business, financial condition and results of operations.
Our chairman owns a large percentage of our outstanding stock and could significantly influence the outcome of
our corporate matters.
Dr. Tang owns approximately 60.0% of our outstanding ordinary shares, reflecting a majority equity
interest in our company. As our majority shareholder, Dr. Tang is able to elect our board of directors, and determine
the outcome of all matters requiring the approval of the holders of a majority of our outstanding shares, including
the sale of our assets or an acquisition of assets. This concentration of ownership in our shares by Dr. Tang limits
your ability to influence corporate matters and may have the effect of delaying or preventing a third party from
acquiring control over us. In addition, sales of significant amounts of ordinary shares held by Dr. Tang, or the
prospect of these sales, could adversely affect the market price of our ordinary shares.
If we are unable to maintain appropriate internal financial reporting controls and procedures, it could cause us
to fail to meet our reporting obligations, result in the restatement of our financial statements, harm our operating
results, subject us to regulatory scrutiny and sanction, and cause investors to lose confidence in our reported
financial information.
Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent
fraud. As a public company, we have significant requirements for enhanced financial reporting and internal controls.
We are required to document and test our internal control procedures in order to satisfy the requirements of Section
404 of the Sarbanes-Oxley Act of 2002, which requires annual management assessments of the effectiveness of our
internal controls over financial reporting and, for many companies, a report by the independent registered public
accounting firm addressing these assessments. The process of designing and implementing effective internal
controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic
and regulatory environments and to expend significant resources to maintain a system of internal controls that is
adequate to satisfy our reporting obligations as a public company.
We cannot assure you that we will not in the future identify areas requiring improvement in our internal
control over financial reporting. In addition, we cannot assure you that the measures we will take to remediate any
areas in need of improvement will be successful or that we will implement and maintain adequate controls over our
financial processes and reporting in the future as we continue our growth. If we are unable to establish appropriate
internal financial reporting controls and procedures, it could cause us to fail to comply with Sarbanes-Oxley and
meet our reporting obligations, result in the restatement of our financial statements, harm our operating results,
subject us to regulatory scrutiny and sanction, and cause investors to lose confidence in our reported financial
information.
8
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 government could change these economic reforms or any of the legal systems at
any time. This could either benefit or damage our operations and profitability. Some of factors that could have this
effect include:
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Level of government involvement in the economy;
Control of foreign exchange;
Methods of allocating resources;
Balance of payments position;
International trade restrictions; and
International conflict.
The Chinese economy differs from most countries belonging to the Organization for Economic
Cooperation and Development, or OECD, in many ways. For example, state-owned enterprises still constitute a
large portion of the Chinese economy, and weak corporate governance and the lack of a flexible currency exchange
policy still prevail in China. As a result of these differences, we may not develop in the same way or at the same rate
as might be expected if the Chinese economy were similar to those of the OECD member countries.
The PRC government exerts substantial influence over the infrastructure and steel sectors and the manner in
which we must conduct our business activities.
The PRC government has exercised, and continues to exercise, substantial control over virtually every
sector of the Chinese economy through regulation and state ownership, including the infrastructure and steel sectors
where we have been doing our business. Any government decisions or actions to postpone, change or halt the
construction of certain types of infrastructure projects for any reason, such as the high speed railway accident in July
2011 in South China and the ongoing reduction of 100 million to 150 million tons of steel production announced in
2016, or any decisions the government might make to cut spending, could adversely impact our business and results
of operations.
In addition, our ability to operate in China may be harmed by changes in its laws and regulations, including
those relating to taxation, import and export tariffs, environmental regulations, land use rights, property, and other
matters. We believe that our operations in China are in material compliance with all applicable legal and regulatory
requirements. However, the central or local governments of the jurisdictions in which we operate may impose new,
stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on
our part to ensure our compliance with such regulations or interpretations. Accordingly, government actions in the
future, including any decision not to continue to support recent economic reforms and to return to a more centrally
planned economy or regional or local variations in the implementation of economic policies, could have a significant
effect on economic conditions in China or particular regions thereof.
9
You may have difficulty enforcing judgments against us.
Our assets are located, and our operations are conducted, in the PRC. In addition, substantially all of our
directors and officers are nationals and residents of the PRC and a substantial portion of their assets is located
outside the United States. As a result, it may be difficult to effect service of process within the United States upon
these persons. In addition, there is uncertainty as to whether the courts of the PRC would recognize or enforce
judgments of U.S. courts because China does not have any treaties or other arrangements that provide for the
reciprocal recognition and enforcement of foreign judgments with the United States. In addition, according to the
PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and
officers if they decide that the judgment violates basic principles of PRC law or national sovereignty, security, or the
public interest.
Most of our revenues are denominated in Renminbi, which is not freely convertible for capital account
transactions and may be subject to exchange rate volatility.
We are exposed to the risks associated with foreign exchange controls and restrictions in China, as our
revenues are primarily denominated in Renminbi, which is currently not freely exchangeable. The PRC government
imposes control over the convertibility between Renminbi and foreign currencies. Under the PRC foreign exchange
regulations, payments for “current account” transactions, including remittance of foreign currencies for payment of
dividends, profit distributions, interest and operation-related expenditures, may be made without prior approval but
are subject to procedural requirements. Strict foreign exchange control continues to apply to “capital account”
transactions, such as direct foreign investment and foreign currency loans. These capital account transactions must
be approved by, or registered with, the PRC State Administration of Foreign Exchange, or SAFE. Further, capital
contribution by an offshore shareholder to its PRC subsidiaries may require approval by the Ministry of Commerce
in China or its local counterparts. We cannot assure you that we are able to meet all of our foreign currency
obligations to remit profits out of China, to pay dividends, or to fund operations in China.
On August 29, 2008, SAFE promulgated the Circular on the Relevant Operating Issues concerning the
Improvement of the Administration of Payment and Settlement of Foreign Currency Capital of Foreign-Invested
Enterprises, or Circular 142, to regulate the conversion by foreign invested enterprises, or FIEs, of foreign currency
into Renminbi by restricting how the converted Renminbi may be used. Circular 142 requires that Renminbi
converted from the foreign currency-dominated capital of a FIE may be used only for purposes within the business
scope approved by the applicable government authority and may not be used for equity investments within the PRC
unless specifically provided. In addition, SAFE strengthened its oversight over the flow and use of Renminbi funds
converted from the foreign currency-dominated capital of a FIE. The use of such Renminbi may not be changed
without approval from SAFE, and may not be used to repay Renminbi loans if the proceeds of such loans have not
yet been used. Compliance with Circular 142 may delay or inhibit our ability to complete such transactions, which
could affect our ability to expand our business.
We have suffered currency exchange losses, and we may continue to suffer currency exchange losses if the RMB
continues to depreciate relative to the U.S. dollar, and fluctuations in the value of the RMB may have an adverse
effect on our shareholders’ investment.
Our reporting currency is the U.S. dollar. However, substantially all of our revenues are denominated in
RMB. Any significant revaluation of the Renminbi may have a material adverse effect on the U.S. dollar equivalent
amount of our revenues and financial condition as well as on the value of, and any dividends payable on, our
ordinary shares in foreign currency terms. For instance, a decrease in the value of Renminbi against the U.S. dollar
could reduce the U.S. dollar equivalent amounts of our financial results, the value of your investment in our ordinary
shares and the dividends we may pay in the future, if any, all of which may have a material adverse effect on the
prices of our ADSs.
In July 2005, China reformed its exchange rate regime by establishing a managed floating exchange rate
regime based on market supply and demand with reference to a basket of currencies. The RMB is no longer pegged
to the U.S. dollar and the exchange rate will have some flexibility. If the RMB depreciates relative to the U.S. dollar,
our revenues as expressed in our U.S. dollar financial statements will decline in value. Also, the RMB depreciation
will increase Chinese steel industry’s purchasing cost for importing iron ore, which in turn may increase the cost of
our raw materials. Conversely, RMB depreciation may benefit our export revenue and profit, as the price of our
exported products may increase as expressed in RMB. In addition, our currency exchange losses may be magnified
by PRC exchange control regulations that restrict our ability to convert RMB into U.S. dollars. On the other hand,
our proceeds from overseas financings and our sales from overseas markets will decrease in value if we choose not
to or are unable to convert the proceeds into RMB and the RMB appreciates against the U.S. dollar, which may
reduce the value of a shareholder’s investment in our ADSs.
10
On May 19, 2007, the central bank of China, the People’s Bank of China, announced a policy to expand the
maximum daily floating range of RMB trading prices against the U.S. dollar in the inter-bank spot foreign exchange
market from 0.3% to 0.5%. While the international reactions to the RMB revaluation and widening of the RMB’s
daily trading band have generally been positive, with the increased floating range of the RMB’s value against
foreign currencies, the RMB may appreciate or depreciate significantly in value against the U.S. dollar or other
foreign currencies in the long term, depending on the fluctuation of the basket of currencies against which it is
currently valued. On June 19, 2010, the PBOC announced that it has decided to proceed further with the reform of
the RMB exchange rate regime to enhance the flexibility of the RMB exchange rate, and that emphasis would be
placed on reflecting market supply and demand with reference to a basket of currencies. While so indicating its
intention to make the RMB’s exchange rate more flexible, the PBOC ruled out any sharp fluctuations in the currency
or a one-off adjustment. On April 16, 2012, the PBOC enlarged the floating band of RMB’s trading prices against
the U.S. dollar in the inter-bank spot foreign exchange market from 0.5% to 1% around the middle rate released by
the China Foreign Exchange Trade System each day. In February 2014, the center point of the currency’s official
trading band hit 6.1146, representing appreciation of more than 11.7% since June 19, 2010. On March 17, 2014, the
PBOC announced a policy to further expand the maximum daily floating range of RMB trading prices against the
U.S. dollar in the inter-bank spot foreign exchange market to 2%. In the long term, the RMB may depreciate more
significantly in value against the U.S. dollar or other foreign currencies, depending on the market supply and
demand with reference to a basket of currencies.
The Renminbi may be revalued further against the U.S. dollar or other currencies, or may be permitted to
enter into a full or limited free float, which may result in an appreciation or depreciation in the value of the
Renminbi against the U.S. dollar or other currencies. In addition, there are very limited hedging transactions
available in China to reduce our exposure to exchange rate fluctuations. While we may decide to enter into hedging
transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able
to successfully hedge our exposure, if at all. In addition, our currency exchange losses may be magnified by PRC
exchange control regulations that restrict our ability to convert RMB into U.S. dollars.
11
China’s legal system is different from those in some other countries.
China is a civil law jurisdiction. Under the civil law system, prior court decisions may be cited as
persuasive authority but do not have binding precedential effect. Although progress has been made in the
promulgation of laws and regulations dealing with economic matters, such as corporate organization and governance,
foreign investment, commerce, taxation and trade, China’s legal system remains less developed than the legal
systems in many other countries. Furthermore, because many laws, regulations and legal requirements have been
recently adopted, their interpretation and enforcement by the courts and administrative agencies may involve
uncertainties. Sometimes, different government departments may have different interpretations. Licenses and
permits issued or granted by one government authority may be revoked by a higher government authority at a later
time. Government authorities may decline to take action against unlicensed operators which may work to the
disadvantage of licensed operators, including us. The PRC legal system is based in part on government policies and
internal rules that may have a retroactive effect. We may not be aware of our violation of these policies and rules
until sometime after the violation. Changes in China’s legal and regulatory framework, the promulgation of new
laws and possible conflicts between national and provincial regulations could adversely affect our financial
condition and results of operations. In addition, any litigation in China may result in substantial costs and diversion
of resources and management attention.
Our business and financial performance may be materially adversely affected if the PRC regulatory authorities
determine that our acquisition of Ossen Materials constitutes a round-trip investment without MOFCOM
approval.
On August 8, 2006, six PRC regulatory agencies promulgated the Regulation on Mergers and Acquisitions
of Domestic Companies by Foreign Investors, or the 2006 M&A Rule, which became effective on September 8,
2006. According to the 2006 M&A Rule which was amended by the Ministry of Commerce on June 22, 2009, a
“round-trip investment” is defined as having taken place when a PRC business that is owned by PRC individuals is
sold to a non-PRC entity that is established or controlled, directly or indirectly, by those same PRC individuals.
Under the 2006 M&A Rules which was amended by the Ministry of Commerce on June 22, 2009, any round-trip
investment must be approved by MOFCOM, and any indirect arrangement or series of arrangements which achieves
the same end result without the approval of MOFCOM is a violation of PRC law.
However, the PRC regulatory authorities may take the view that the acquisition of shares in our PRC
operating subsidiaries and the share exchange between our predecessor, Ultra Glory, and our subsidiary, Ossen
Materials Group, are part of an overall series of arrangements which constitute a round-trip investment. If the PRC
regulatory authorities take this view, we cannot assure you we may be able to obtain the approval required from
MOFCOM. It is also possible that the PRC regulatory authorities could invalidate our acquisition and ownership of
our Chinese subsidiaries, and that these transactions require the prior approval of the China Securities Regulatory
Commission, or CSRC, before MOFCOM approval is obtained.
12
If these regulatory actions occur, we cannot assure you that we will be able to re-establish control of our
Chinese subsidiaries’ business operations, that any such contractual arrangements will be protected by PRC law, or
that we would receive as complete or effective an economic benefit and control of our Chinese subsidiaries’
business as if we had direct ownership of our Chinese subsidiaries.
PRC regulations relating to investments in offshore companies by PRC residents may subject our future PRC-
resident beneficial owners or our PRC subsidiaries to liability or penalties, limit our ability to inject capital into
our PRC subsidiaries or limit our PRC subsidiaries’ ability to increase their registered capital or distribute profits.
SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic
Residents’ Offshore Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or
SAFE Circular 37, on July 4, 2014, which replaced the former circular commonly known as “SAFE Circular 75”
promulgated by SAFE on October 21, 2005. SAFE Circular 37 requires PRC residents to register with local
branches of SAFE in connection with their direct establishment or indirect control of an offshore entity, for the
purpose of overseas investment and financing, with such PRC residents’ legally owned assets or equity interests in
domestic enterprises or offshore assets or interests, referred to in SAFE Circular 37 as a “special purpose vehicle.”
SAFE Circular 37 further requires amendment to the registration in the event of any significant changes with respect
to the special purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share transfer
or exchange, merger, division or other material event. In the event that a PRC shareholder holding interests in a
special purpose vehicle fails to fulfill the required SAFE registration, the PRC subsidiaries of that special purpose
vehicle may be prohibited from making profit distributions to the offshore parent and from carrying out subsequent
cross-border foreign exchange activities, and the special purpose vehicle may be restricted in its ability to contribute
additional capital into its PRC subsidiary. Moreover, failure to comply with the various SAFE registration
requirements described above could result in liability under PRC law for evasion of foreign exchange controls.
We believe that some of our shareholders are PRC residents under SAFE Circular 37. We do not have
control over the these shareholders and our other beneficial owners and cannot assure you that all of our PRC-
resident beneficial owners have complied with, and will in the future comply with, SAFE Circular 37 and
subsequent implementation rules. The failure of PRC-resident beneficial owners to register or amend their SAFE
registrations in a timely manner pursuant to SAFE Circular 37 and subsequent implementation rules, or the failure of
future PRC-resident beneficial owners of our company to comply with the registration procedures set forth in SAFE
Circular 37 and subsequent implementation rules, may subject such beneficial owners or our PRC subsidiaries to
fines and legal sanctions. Furthermore, SAFE Circular 37 is unclear how this regulation, and any future regulation
concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant
PRC government authorities, and we cannot predict how these regulations will affect our business operations or
future strategy. Failure to register or comply with relevant requirements may also limit our ability to contribute
additional capital to our PRC subsidiaries and limit our PRC subsidiaries’ ability to distribute dividends to us. These
risks could in the future have a material adverse effect on our business, financial condition and results of operations.
All employee participants in our share incentive plans who are PRC citizens may be required to register with the
SAFE. We may also face regulatory uncertainties that could restrict our ability to adopt additional option plans
for our directors and employees under PRC law.
In December 2006, the People’s Bank of China promulgated the Administrative Measures for Individual
Foreign Exchange, which set forth the respective requirements for foreign exchange transactions by PRC individuals
under either current account or the capital account. In January 2007, the SAFE issued the Implementation Rules of
the Administrative Measures for Individual Foreign Exchange, which, among other things, specified approval
requirements for certain capital account transactions such as a PRC citizen’s participation in the employee stock
ownership plans or stock option plans of an overseas publicly-listed company. On March 28, 2007, the SAFE
promulgated the Processing Guidance on Foreign Exchange Administration for Domestic Individuals Participating
in Employee Stock Ownership Plans or Stock Option Plans of Overseas-Listed Companies, or the Stock Option Rule.
Under the Stock Option Rule, PRC citizens who are granted stock options by an overseas publicly-listed company
are required, through a qualified PRC domestic agent or PRC subsidiary of such overseas publicly-listed company,
to register with the SAFE and complete certain other procedures. In February 2012, the SAFE promulgated the
Notice on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock
Incentive Plan of Overseas Publicly Listed Company, according to which, employees, directors, supervisors and
other management members participating in any share incentive plan of an overseas publicly listed company who
are PRC citizens or who are non-PRC citizens residing in China for a continuous period of not less than one year,
subject to limited exceptions, are required to register with SAFE through a domestic qualified agent, which could be
a PRC subsidiary of such overseas listed company, and complete certain other procedures. Failure to complete the
SAFE registrations may subject them to fines and legal sanctions and may also limit our ability to make payments
under our equity incentive plans or receive dividends or sales proceeds related thereto, or our ability to contribute
additional capital into our subsidiaries in China and limit our subsidiaries’ ability to distribute dividends to us. We
also face regulatory uncertainties that could restrict our ability to adopt additional equity incentive plans for our
directors and employees under PRC law.
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In addition, the PRC State Administration of Taxation has issued circulars concerning employee share
options or restricted shares. Under these circulars, employees working in the PRC who exercise share options, or
whose restricted shares vest, will be subject to PRC individual income tax. The PRC subsidiaries of an overseas
listed company have obligations to file documents related to employee share options or restricted shares with
relevant tax authorities and to withhold individual income taxes of those employees related to their share options or
restricted shares. If the employees fail to pay, or the PRC subsidiaries fail to withhold applicable income taxes, the
PRC subsidiaries may face sanctions imposed by the tax authorities or other PRC government authorities.
Under the New Enterprise Income Tax Law, we may be classified as a “resident enterprise” of China. Such
classification will likely result in unfavorable tax consequences to us and our non-PRC shareholders.
China passed a New Enterprise Income Tax Law, or the New EIT Law, which became effective on January
1, 2008. Under the New EIT Law, an enterprise established outside of China with de facto management bodies
within China is considered a resident enterprise, meaning that it can be treated in a manner similar to a Chinese
enterprise for enterprise income tax purposes. The implementing rules of the New EIT Law define de facto
management as “substantial and overall management and control over the production and operations, personnel,
accounting, and properties” of the enterprise. In addition, a circular issued by the State Administration of Taxation
on April 22, 2009 clarified that dividends and other income paid by such resident enterprises will be considered to
be PRC source income, subject to PRC withholding tax, currently at a rate of 10%, when recognized by non-PRC
enterprise shareholders. This recent circular also subjects such resident enterprises to various reporting requirements
with the PRC tax authorities.
Although substantially all of our management is currently located in the PRC, it remains unclear whether
the PRC tax authorities would require or permit our overseas registered entities to be treated as PRC resident
enterprises. We do not currently consider our company to be a PRC resident enterprise. However, if the PRC tax
authorities determine that we are a resident enterprise for PRC enterprise income tax purposes, a number of
unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income tax at a rate of
25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this
would mean that income such as interest on offering proceeds and non-China source income would be subject to
PRC enterprise income tax at a rate of 25%. Second, although under the New EIT Law and its implementing rules
dividends paid to us from our PRC subsidiaries would qualify as tax-exempt income, we cannot guarantee that such
dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which
enforce the withholding tax, have not yet issued guidance with respect to the processing of outbound remittances to
entities that are treated as resident enterprises for PRC enterprise income tax purposes. Finally, it is possible that
future guidance issued with respect to the new resident enterprise classification could result in a situation in which a
10% withholding tax is imposed on dividends we pay to our non-PRC shareholders and with respect to gains derived
by our non-PRC shareholders from transferring our shares.
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Restrictions under PRC law on our PRC subsidiaries' ability to pay dividends and make other distributions could
materially and adversely affect our ability to grow, make investments or acquisitions that could benefit our
business, pay dividends to you, and otherwise fund and conduct our business.
Our revenues are generated by our PRC subsidiaries. However, PRC regulations restrict the ability of our
PRC subsidiaries to pay dividends and make other payments to their offshore parent company. PRC legal
restrictions permit payments of dividends by our PRC subsidiaries only out of their accumulated after-tax profits, if
any, determined in accordance with PRC accounting standards and regulations. Our PRC subsidiaries are also
required under PRC laws and regulations to allocate at least 10% of their annual after-tax profits determined in
accordance with PRC GAAP to a statutory general reserve fund until the amounts in said fund reaches 50% of their
registered capital. Allocations to these statutory reserve funds can be used only for specific purposes and are not
transferable to us in the form of loans, advances, or cash dividends. Any limitations on the ability of our PRC
subsidiaries to transfer funds to us could materially and adversely limit our ability to grow, make investments or
acquisitions that could be beneficial to our business, pay dividends and otherwise fund and conduct our business.
Any failure to comply with PRC environmental laws may require us to incur significant costs.
We carry on our business in an industry that is subject to PRC environmental protection laws and
regulations. These laws and regulations require enterprises engaged in manufacturing and construction that may
cause environmental waste to adopt effective measures to control such waste. In addition, such enterprises are
required to pay fines, or to cease operations entirely under extreme circumstances, should they discharge waste
substances. The Chinese government may also change the existing laws or regulations or impose additional or
stricter laws or regulations, compliance with which may cause us to incur significant capital expenditures, which we
may be unable to pass on to our customers through higher prices for our products.
We must comply with the Foreign Corrupt Practices Act.
We are required to comply with the United States Foreign Corrupt Practices Act, which prohibits U.S.
companies from making prohibited payments to foreign officials for the purpose of obtaining or retaining business.
Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time to time in mainland
China. If any of our non-U.S. listed competitors that are not subject to the Foreign Corrupt Practices Act engage in
these practices, they may receive preferential treatment and secure business from government officials in a way that
is unavailable to us. Furthermore, although we inform our personnel that such practices are illegal, we cannot assure
you that our employees or other agents will not engage in illegal conduct for which we might be held responsible
under U.S. law. If our employees or other agents are found to have engaged in such practices, we could suffer severe
penalties.
Because our funds are held in banks that do not provide insurance, the failure of any bank in which we deposit
our funds could affect our ability to continue our business operations.
Banks and other financial institutions in the PRC do not provide insurance for funds held on deposit. The
Chinese government implemented the bank deposit insurance program on May 1, 2015. Financial institutions are
required to pay insurance premiums into a fund that is managed by an agency appointed by the State Council. The
program is designed to return bank clients' deposits if their bank suffers insolvency or bankruptcy. The
reimbursement is drawn from the new fund in the case of the deposit being RMB500,000 ($77,021 as of December
31, 2015) or less. However, the implementation and impact of this program are uncertain. As a result, in the event of
a bank failure, we may not have access to funds on deposit. Depending upon the amount of money we maintain in a
bank that fails, our inability to have access to our cash could impair our operations, and, if we are not able to access
funds to pay our suppliers, employees and other creditors, we may be unable to continue our business operations.
If relations between the United States and China worsen, investors may be unwilling to hold or buy our ordinary
shares and our share price may decrease.
15
At various times during recent years, the United States and China have had significant disagreements over
political and economic issues. Controversies may arise in the future between these two countries. Any political or
trade controversies between the United States and China, whether or not directly related to our business, could
reduce the price of our ordinary shares.
If we become directly subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese
companies, we may have to expend significant resources to investigate and resolve the matter which could harm
our business operations, stock price and reputation and could result in a loss of your investment in our stock,
especially if such matter cannot be addressed and resolved favorably.
In recent years, U.S. public companies that have substantially all of their operations in China, particularly
companies that have completed reverse merger transactions, have been the subject of intense scrutiny, criticism and
negative publicity by investors, financial commentators and regulatory agencies, such as the United States Securities
and Exchange Commission. Much of the scrutiny, criticism and negative publicity has centered around financial and
accounting irregularities and mistakes, a lack of effective internal controls over financial accounting, inadequate
corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of
the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese companies has
sharply decreased in value and, in some cases, has become virtually worthless. Many of these companies are now, or
were in the recent past, subject to shareholder lawsuits, SEC enforcement actions and are conducting internal and
external investigations into the allegations. If we become the subject of any unfavorable allegations, whether such
allegations are proven to be true or untrue, we will have to expend significant resources to investigate such
allegations and/or defend our Company. This situation will be costly and time consuming and distract our
management from growing our Company. If such allegations are not proven to be groundless, our Company and
business operations will be severely impacted and your investment in our stock could be rendered worthless.
The disclosures in our reports and other filings with the SEC and our other public pronouncements are not
subject to the scrutiny of any regulatory bodies in the PRC. Accordingly, our public disclosure should be
reviewed in light of the fact that no governmental agency that is located in China where substantially all of our
operations and business are located have conducted any due diligence on our operations or reviewed or cleared
any of our disclosures.
We are regulated by the SEC and our reports and other filings with the SEC are subject to SEC review in
accordance with the rules and regulations promulgated by the SEC under the Securities Act and the Exchange Act.
Unlike public reporting companies whose operations are located primarily in the United States, however,
substantially all of our operations are located in China. Since substantially all of our operations and business take
place in China, it may be more difficult for the Staff of the SEC to overcome the geographic and cultural obstacles
that are present when reviewing our disclosures. These same obstacles are not present for similar companies whose
operations or business take place entirely or primarily in the United States. Furthermore, our SEC reports and other
disclosures and public pronouncements are not subject to the review or scrutiny of any PRC regulatory authority.
For example, the disclosure in our SEC reports and other filings are not subject to the review of China Securities
Regulatory Commission, a PRC regulator that is tasked with oversight of the capital markets in China. Accordingly,
you should review our SEC reports, filings and our other public pronouncements with the understanding that no
local regulator has done any due diligence on our Company and with the understanding that none of our SEC reports,
other filings or any of our other public pronouncements has been reviewed or otherwise been scrutinized by any
local regulator.
The audit report included in this prospectus is prepared by auditors who are not inspected fully by the
Public Company Accounting Oversight Board, or the PCAOB, and, as such, our shareholders are deprived of the
benefits of such inspection.
As an auditor of companies that are publicly traded in the United States and a firm registered with the
PCAOB, BDO China Shu Lun Pan Certified Public Accountants LLP is required under the laws of the United States
to undergo regular inspections by the PCAOB. However, because we have substantial operations within the PRC, a
jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese
government authorities, our auditor and its audit work is not currently inspected fully by the PCAOB.
Inspections of other auditors conducted by the PCAOB outside China have at times identified deficiencies
in those auditors' audit procedures and quality control procedures, which may be addressed as part of the inspection
process to improve future audit quality. The lack of PCAOB inspections of audit work undertaken in China prevents
the PCAOB from regularly evaluating our auditor's audits and its quality control procedures. As a result,
shareholders may be deprived of the benefits of PCAOB inspections, and may lose confidence in our reported
financial information and procedures and the quality of our financial statements.
Risks Related to Our ADSs
We may not be able to sustain the trading market of our ADSs.
Our ADSs are listed for trading on the NASDAQ Capital Market. On September 17, 2015, we received a
letter from the NASDAQ Stock Market stating 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 for continued listing on the NASDAQ
Global Market (the “Minimum Bid Price Rule”). In accordance with NASDAQ Marketplace Rule 5810(c)(3)(A), we
were provided with a period of 180 calendar days, or until March 15, 2016, to regain compliance with the Minimum
Bid Price Rule. On March 17, 2016, we received a letter from the NASDAQ Stock Market stating that while we had
not regained compliance with the Minimum Bid Price Rule, we were eligible for an additional 180-day grace period,
until September 12, 2016, to regain compliance with the Minimum Bid Price Rule. However, we cannot be sure 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 do so, 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
security analysts’ 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, and you 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 could also greatly impair our ability to raise additional necessary capital through equity or debt financing.
16
The market price for our ADSs may be volatile.
The market price for our ADSs is highly volatile and subject to wide fluctuations in response to various
factors, including the following:
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·
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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;
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 over the past several
years, experienced significant price and volume fluctuations that are not related to the operating performance of
particular companies. These market fluctuations may also have a material adverse effect on the market price of our
ADSs. In the event that market price of our ADSs is below $1 for more than 30 consecutive business days we will
fail to meet the requirements of NASDAQ listing rules. Furthermore, in the past, following periods of volatility in
the market price of a public company’s securities, shareholders have frequently instituted securities class action
litigation against that company. Litigation of this kind could result in substantial costs and a diversion of our
management’s attention and resources.
17
We may be precluded from paying any dividends on our ADSs.
Under British Virgin Islands law, we may pay dividends if the directors declare that the company is able to
satisfy the provisions of Section 57 of the BVI Act. Pursuant to this provision, the company, immediately after the
distribution, must satisfy the solvency test, in so far as its assets exceeds its liabilities, and the company must be able
to pay its debts as they become due. Our ability to pay dividends will therefore depend on our ability to generate
sufficient profits. Even if we are able to pay dividends, we cannot give any assurance that we will declare dividends
of any amounts, at any rate or at all in the future. We have not paid any dividends in the past. Future dividends, if
any, will be at the discretion of our board of directors, subject to the approval of our shareholders, and will depend
upon our results of operations, our cash flows, our financial condition, the payment of our subsidiaries of cash
dividends to us, our capital needs, future prospects and other factors that our directors may deem appropriate. We
currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our
business.
You may not have the same voting rights as the holders of our ordinary shares and may not receive voting
materials in time to be able to exercise your right to vote.
Holders of our ADSs may not be able to exercise voting rights attaching to the shares represented by our
ADSs on an individual basis. Holders of our ADSs appoint the depositary or its nominee as their representative to
exercise the voting rights attached to the ordinary shares represented by the ADSs. You may not receive voting
materials in time to instruct the depositary to vote, and it is possible that you, or persons who hold their ADSs
through brokers, dealers or other third parties, will not have the opportunity to exercise your right to vote.
Your right to participate in any rights offering may be limited, which may cause dilution to your holdings, and
you may not receive cash dividends if it is impractical to make them available to you.
We may from time to time distribute rights to our shareholders, including rights to acquire our securities.
However, we cannot make rights available to you in the United States unless we register the rights, and the securities
to which the rights relate, under the Securities Act, or unless an exemption from registration is available. Under the
deposit agreement, the depositary will not make rights available to you unless both the rights and the underlying
securities to be distributed to ADS holders are either registered under the Securities Act or exempt from registration.
We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor
to cause such a registration statement to be declared effective and we may not be able to establish a necessary
exemption from registration under the Securities Act. Accordingly, you may be unable to participate in our rights
offerings and may experience dilution in your holdings as a result.
The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the
custodian receives on our ordinary shares or other deposited securities after deducting its fees and expenses. You
will receive these distributions in proportion to the number of ordinary shares your ADSs represent. However, the
depositary may, at its discretion, decide that it is inequitable or impractical to make a distribution available to
holders of ADSs. For example, the depositary may determine that it is not practicable to distribute certain property
through the mail, or that the value of certain distributions may be less than the cost of mailing them. In these cases,
the depositary may decide not to distribute such property to you.
You may be subject to limitations on transfer of your ADSs.
Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer
books at any time or from time to time when it deems expedient in connection with the performance of its duties. In
addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the
books of the depositary are closed, or at any time if we or the depositary deems it advisable to do so because of any
requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or
for any other reason.
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If we are classified as a passive foreign investment company, our U.S. shareholders may suffer adverse tax
consequences.
Generally, if for any taxable year, after applying certain look-through rules, 75% or more of our gross
income is passive income, or at least 50% of our assets (generally based on average value determined on a quarterly
basis) are held for the production of, or produce, passive income, we may be characterized as a passive foreign
investment company, or PFIC, for U.S. federal income tax purposes. This characterization could result in adverse
U.S. tax consequences to our U.S. shareholders, including gain realized on the disposition of our ADSs or ordinary
shares being treated as ordinary income rather than capital gain and in punitive interest charges being applied to
such sales proceeds. Rules similar to those applicable to dispositions apply to amounts treated as “excess
distributions.”
We do not believe that we were a PFIC for our 2015 taxable year. However, because the determination of
our PFIC status is based on such factual matters as the composition of our income and assets, the valuation of our
assets, and our market capitalization, there is no assurance that the United Stated Internal Revenue Service (“IRS”)
will agree with our position. In addition, there can be no assurance that we will not become a PFIC for the current
taxable year ending December 31, 2016 or in future taxable years. U.S. shareholders should consult with their own
U.S. tax advisors with respect to the U.S. tax consequences of investing in our ADSs or ordinary shares if we were
to become a PFIC. See “Taxation — United States Federal Income Taxation — Tax Consequences if We Are a
Passive Foreign Investment Company.”
If equity research analysts do not publish research or reports about our company or if they issue unfavorable
commentary or downgrade our ADSs, the price of our ADSs could decline.
The trading market for our ADSs relies in part on the research and reports that equity research analysts
publish about us and our company. We do not control these analysts. The price of our ADSs could decline if one or
more equity analysts downgrade our ordinary shares or if they issue other unfavorable commentary, or cease
publishing reports, about us or our company.
ITEM 4.
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 the BVI Business Companies Act, 2004, or the BVI Act. Our registered office is
located at Akara Bldg., 24 De Castro Street, Wickhams Cay 1, Road Town, Tortola, British Virgin Islands. The
telephone number of the registered office is +86 (21) 51192951. Our World Wide Web address is
http://www.osseninnovation.com. Information contained on our website does not constitute a part of this annual
report.
Our agent for service of process in the United States is CT Corporation System, 111 Eighth Avenue, New
York, New York 10011. The telephone number of our agent for service is (212) 894-8940.
Business Combination
On July 7, 2010, Ultra Glory and its sole shareholder entered into a share exchange agreement with Ossen
Innovation Group, a British Virgin Islands limited liability company organized on April 30, 2011 under the BVI Act
and the shareholders of Ossen Innovation Group. Pursuant to the share exchange agreement, Ultra Glory acquired
from the shareholders of Ossen Innovation Group all of the issued and outstanding shares of Ossen Innovation
Group, in exchange for an aggregate of 10,000,000 newly issued ordinary shares issued by Ultra Glory to the
shareholders of Ossen Innovation Group. In addition, the sole shareholder of Ultra Glory sold all of the 5,000,000
ordinary shares of Ultra Glory that were issued and outstanding prior to the business combination, to the
shareholders of Ossen Innovation Group for cash, at a price of $0.03 per share. As a result, the individuals and
entities that owned shares of Ossen Innovation Group prior to the business combination acquired 100% of the equity
of Ultra Glory, and Ultra Glory acquired 100% of the equity of Ossen Innovation Group. Ossen Innovation Group is
now a wholly owned subsidiary of Ultra Glory. In conjunction with the business combination, Ultra Glory filed an
amended charter, pursuant to which Ultra Glory changed its name to Ossen Innovation Co., Ltd., changed its fiscal
year end to December 31, changed the par value of its ordinary shares to $0.01 per share and increased its authorized
shares to 100,000,000. Upon the consummation of the business combination, we ceased to be a shell company.
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Capital Expenditures
We incurred capital expenditures of approximately $29,687, $81,441 and $16,361 for the years ended
December 31, 2015, 2014 and 2013, respectively, primarily in connection with maintenance and repair of current
production lines. These capital expenditures were financed by proceeds from bank financing and cash provided by
operating activities.
Our capacity expansion to add 30,000 tons of annual production capacity for rare earth coated products was
suspended in 2015 due to an extended unfavorable business climate, intense market competition and the uncertainty
of financial markets in China.
We expect that our capital expenditures in fiscal year 2016 will be incurred primarily in connection
with maintenance and repair of current production lines.
4B. Business Overview
Overview
We manufacture and sell an array of plain surface prestressed steel materials and rare earth coated and zinc
coated prestressed steel materials, which we believe is the most comprehensive array among our competitors in
China. Our materials are used in the construction of bridges, highways and other infrastructure projects in the PRC
and internationally. Our facilities are located in Maanshan City, Anhui Province and in Jiujiang City, Jiangxi
Province, in the People’s Republic of China. Based on our extensive experience in the industry, we believe that
Ossen is one of the leading enterprises in the PRC in the design, engineering, manufacture and sale of customized
prestressed steel materials used in the construction of bridges, highways, and other infrastructure projects in China.
During the year ended December 31, 2015, we generated revenue of approximately $85.0 million, or 72.1%
of our total revenue (as compared to $97.6 million, or 79.0% of our total revenue, in 2014), from sales of our rare
earth coated PC wires and PC strands. We believe that we are the only prestressed steel material manufacturer in the
PRC that currently manufactures rare earth coated materials for bridge construction.
While we believe that our rare earth coating capabilities provide us with a competitive advantage among
our competitors due to higher strength and higher quality, it is likely that our competitors will seek to develop
similar competing products in the near future. We intend to continue to expand research and development efforts to
advance our rare earth coating applications even further. In particular, we continued to develop a rare earth coating
application for zinc-aluminum alloy coated products in 2015, which are more corrosion-resistant than zinc coated
products. However, there can be no assurance that our initial competitive advantage will be retained and that one or
more competitors will not develop products that are equal or superior to ours in quality or are better priced than our
rare earth coated products. Furthermore, in both 2014 and 2015, the average margin for our coated products was
lower than the average margin for our plain surface products mainly because the average price of the raw materials
purchased for our coated products did not decline as steeply as the average price of the raw materials purchased for
our plain surface products in 2014 and 2015.
The primary characteristics of our rare earth coated products, which are used primarily in the construction
of new bridges and the renovation of older bridges in need of repair, are as follows:
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Superior corrosion resistance;
Superior toughness and plasticity;
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Endurance against extreme heat;
Smooth and appealing coating; and
Easily coated.
Our products are marketed under the “Ossen” brand name both domestically and internationally. We handle
all aspects of market research, product design, engineering, manufacturing, sales and marketing. We conduct our
manufacturing operations in our ISO 9001 manufacturing facilities in Maanshan City and Jiujiang City, in the PRC.
Our capacity expansion to add 30,000 tons of annual production capacity for rare earth coated products was
suspended in 2015 due to an extended unfavorable business climate, intense market competition and the uncertainty
of financial markets in China.
In 2013, the Chinese market began to adopt zinc-aluminum alloy coated PC wires and PC strands, which
have more corrosion-resistance and stronger protective effect than zinc coated PC wires and PC strands. Our
research and development department is currently developing a method to apply rare earth materials to the zinc-
aluminum alloy coating process. In 2014 and 2015, we have made progress in developing such product and we will
continue our research and development efforts in 2016.We anticipate that additional time will be necessary for such
products to pass government inspection and to gain acceptance in the market.
Ossen Materials, our operating subsidiary, was founded in 2004. In 2005, we expanded our manufacturing
capabilities by acquiring a facility in Jiujiang City in the PRC and forming Ossen Jiujiang. The founders of Ossen
were among the first in China to introduce and promote the use of prestressed steel materials in construction projects.
They have been involved in producing prestressed materials since 1994 and each has accumulated more than 20
years of experience in the prestressed materials industry.
We are affiliated with the Ossen Group, which is a Chinese conglomerate controlled by our Chairman, Dr.
Tang. The Ossen Group’s core businesses include steel manufacturing, real estate and other investments. There is no
active business relationship between our company and any of the other entities that comprise the Ossen Group other
than what we have disclosed in Items 4.C and 7.B below.
Competitive Advantages
Our management believes that the following competitive strengths differentiate us from other domestic and
international competitors and are the key factors to our success:
We are taking advantage of industry trends in the bridge infrastructure sectors in the PRC and other
international markets
In the last four years, China’s economic growth slowed and the demand for prestressed materials in the
infrastructure construction industry in the domestic PRC market decreased. However, we believe there is still much
room for growth in China’s infrastructure construction industry, and in particular the construction and restoration of
bridges in the PRC that would benefit from the quality and durability of our rare earth coated prestressed materials.
We believe that the Chinese central government will continue to stimulate economic growth by further
injecting capital into the economy by funding new infrastructure projects. While we do not believe that the Chinese
government will initiate another large scale, comprehensive capital injection, we believe that infrastructure spending
will be selectively targeted at developing regions in Central or Western China. Furthermore, through the “One Belt,
One Road” initiatives, announced in late 2013, investments are expected to be made during the next decade to
construct new bridges and new railroads. In late 2013, Chinese President Xi Jinping launched the New Silk Road
Economic Belt and the 21st Century Maritime Silk Road to deepen reform and further open up China to the rest of
the world. The plan, also known as “One Belt, One Road” initiatives, consists of a network of railways, highways
and other forms of infrastructure, as well as oil and gas pipelines, power grids, Internet networks and aviation routes
in the Eurasian area. In addition, the Asian Infrastructure Investment Bank launched in December 2015 is an
international financial institution proposed by the government of China. The purpose of the multilateral development
bank is to provide finance to infrastructure projects in the Asia region. We believe that these developments should
create additional bidding opportunities for us and we expect the market will recover gradually in 2016 and beyond.
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Leading provider of customized prestressed steel materials
Based on our extensive experience in the industry, we believe that Ossen is one of the leading enterprises in
the PRC in the design, engineering, manufacture and sale of customized prestressed steel materials used in the
construction of bridges, highways, and other infrastructure projects in China. We manufacture and sell an array of
plain surface prestressed steel materials and rare earth coated and zinc coated prestressed steel materials, which we
believe is the most comprehensive array among our competitors in China and which are used in the construction of
bridges, highways and other infrastructure projects in the PRC and internationally. Our facilities are located in
Maanshan City, Anhui Province and in Jiujiang City, Jiangxi Province, in the People’s Republic of China.
Strong in-house research and development capabilities
Our research and development team consists of members recognized as industry experts in China, and each
member of our senior management team has over 20 years of industry experience on average. We have built a
recognized brand name in the industry by introducing innovative solutions to the prestressed materials industry, and
particularly coated prestressed materials, in China and internationally. Our engineering team works closely with our
customers in order to understand their requirements. We have been able to introduce new equipment to enhance cost
saving and time reduction in the construction of bridges, highways, railways and buildings, as well as numerous
other projects.
Efficient proprietary production technology
We continually pursue technological improvements to our manufacturing processes via our strong in-house
development teams. We own twenty-nine patents granted by the State Intellectual Property Office of the PRC,
including four invention patents and twenty-five utility model patents as of April 1, 2016. In addition, we have
applied for four invention and two utility model patents, which are currently pending. These patents and patent
applications are intended to protect our technologies, including production processes of various wire ropes, pickling
methods for steel wire materials and devices designed for the production of steel wire. Our research and
development efforts have generated technological improvements that have been instrumental in controlling our
production costs and increasing our operational efficiency, most notably with respect to the development of our rare
earth coated materials.
Strong recognition from domestic and international customers for supplying materials for infrastructure projects
The solid reputation that our management team has developed over the past 20 years in the prestressed
material industry in China and in other countries such as Canada, the United States, Japan, South Korea, Bangladesh,
South Africa, Italy and Spain, including an established track record for consistently providing quality products at
competitive prices, has enabled us to develop a strong customer base and to be involved in major building projects.
We generated approximately 6.6% and 6.7%, respectively, of our revenue during the years ended
December 31, 2015 and 2014 from sales to customers in international markets (including primarily Japan, Vietnam,
South Korea, Japan, New Zealand, Australia, Bangladesh, and Costa Rica), primarily for use in the construction of
bridges. Due to the anti-dumping measures imposed by the United States and European Union and increased
demand for our products in the PRC market and these other markets, we do not intend to reestablish a presence in
the United States or the European Union at the levels we experienced in 2008 in the near future. However, if
opportunities arise in the U.S. or EU markets or in other international markets for us to win bids on projects or to
reengage with former customers or establish relationships with new customers, we would pursue such opportunities.
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Rigorous quality control standards
Consistent with our continuing commitment to quality, we impose rigorous quality control standards at
various stages of our production process. We strictly comply with various national and international quality
standards with respect to the manufacture of prestressed materials. Our certifications and accreditations include the
Japanese Industrial Standards (JIS) certification, United Kingdom Accreditation Service (UKAS), the Korean
Standards Association (KS) certification from South Korea and an ISO 9001 certification. We believe that these
certifications, together with the numerous national awards that we have been awarded demonstrate our commitment
to producing high-quality products as well as providing us with a competitive advantage over some of our
competitors in certain international markets and in China.
Experienced management and operational teams with domestic PRC international market knowledge
Our senior management team and key operating personnel have extensive management skills, relevant
operating experience and industry knowledge. In particular, Dr. Tang, our Chairman, is a Doctor of Economics,
Senior Engineer and Professor of Finance and Statistics at the School of East China Normal University, and has
extensive experience managing and operating companies in the prestressed steel industry. We believe our
management team’s experience and in depth knowledge of the market in China and internationally will enable us to
continue to successfully execute our expansion strategies. In addition, we believe our management team’s strong
track record will enable us to continue to take advantage of market opportunities that may arise.
Our Products
Our prestressed steel materials are categorized as plain surface products and coated products.
Plain Surface Products
Our plain surface products, which term refers to our uncoated plain surfaced and stabilized products, are
characterized as follows:
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Plain surface prestressed concrete, or PC, strands. These products consist of PC wires that are
twisted into a bundle and used in precast concrete plates on the riding surface of bridges. These
products are categorized based on size, strength and structure. Sizes range from 9.3mm to
17.8mm. Strength level ranges from 1570MPa (megapascal) to 2000MPa. The number of strands
in the products varies between 3 and 7.
Unbonded plain surface PC strands. These products consist of plain surface PC strands that are
coated with grease and extruded with high-density polyethylene. These products are used
primarily in the construction of bridges and buildings.
PC wires, also referred to as stabilized materials. These products are further divided among the
following three categories:
§ Plain surface PC wires. This product consists of an individual round wire used in the
construction of buildings.
§ Indented PC wires. This product consists of an individual round wire that contains an
indentation used in the construction of buildings.
§ Helical (spiral) rib PC wires. This product consists of an individual round wire whose surface is
pulled out into a helical rib pattern used in the construction of railway ties, or sleepers, and
buildings.
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PC wires are categorized based on size, strength and structure. Sizes range from 4.0mm to 9.0mm. Strength
level ranges from 1570MPa to 2000MPa. The number of strands in the products varies between 3 and 7.
Coated Prestressed Products
Our coated prestressed products included zinc coated PC products and rare earth coated PC products. Rare
earth coated products are plain surface materials that are zinc coated with a rare earth zinc-plating protective layer so
as to produce materials that are more corrosion-resistant and long-lasting. The purpose of galvanizing is to generate
a surface layer to protect the materials from erosion, abrasion and oxidization, without changing the elements of the
basic materials or weakening the basic material’s strength or other functionality through any techniques that utilize
physical chemistry or electrochemistry. The coating process can cause loss of strength in regular steel materials, but
the loss of strength in rare earth coated prestressed products is reduced.
For steel wires and strands, coating can provide a protective layer to improve the product’s corrosion-
resistant level and increase its life span. Traditional technology uses zinc as the coating material and such products
are called zinc coated PC wires and PC strands. The introduction of rare earth coating technology adds more benefits
to the final products. When rare earth is added into the coating material and form a new alloy with zinc, it increases
further the life span of the product. More importantly, it reduces the loss of strength compared to traditional zinc
coating process.
The coating process happens in an environment with very high temperature. Because of the high
temperature, there will be some loss of product strength during the coating process. For example, if the steel wires to
be used as raw material have a strength level of 2000 MPa (mega pascal), its strength level will lose about 300 MPa
after going through the traditional coating process. When zinc forms a new alloy with rare earth and is used as a
coating layer, the requirement of high temperature for processing could be lowered. Processing with lower
temperature results in less loss of product strength during the coating process. Therefore, the same raw material, if
using rare earth coating, could deliver higher strength final product. Compared with better corrosion-resistant level,
longer life span, higher strength level may be the most important benefit rare earth coated products bring to
customers, as compared to zinc coated products. Higher strength means less steel is needed to build the bridge. The
bridge cables could be slimmer, quantity of steel required for construction could be less and overall construction
cost could be reduced.
Applications of zinc coated PC wires and PC strands are similar to those of rare earth coated PC wires and
PC strands, primarily in the construction of bridges. The rare earth coated products could be considered as
“upgraded version” of zinc coated products. Margin is affected by market conditions. In general, gross margin of
rare earth coated products is 1%-5% higher than similar zinc coated products.
The application of rare earth coating technology enables our product to meet the higher standards of bridge
project. We are and will continue to allocate more resource on rare earth coated PC products.
Our rare earth coated products are characterized as the following:
Rare earth coated PC wires. These products are further divided as follows:
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Ф5.0 Series, used for suspension bridges.
Ф7.0 Series, used for cable-stayed bridges.
Rare earth coated PC strands, used for bridges and buildings.
Customers that purchase our prestressed materials also purchase other supporting products, such as
anchorage devices and ripple tubes, to complement our materials. These supplementary products are produced by
anchorage manufacturing factories that are unaffiliated with us.
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Competition
China is one of the world’s largest producers and markets for prestressed steel materials. In 2013, 2014 and
2015, our sales were predominantly to customers located in the PRC, and as a result, our primary competitors were
PRC domestic companies.
We believe that being located in China provides us with a number of competitive factors within our
industry, including the following:
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Pricing. Flexibility to control pricing of products and the ability to use economies of scale to
secure competitive pricing advantages;
Technology. Ability to manufacture products efficiently, utilize low-cost raw materials, and to
achieve better production quality; and
Barriers to entry. Technical knowledge, access to raw materials, local market knowledge and
established relationships with suppliers and customers
the development of
commercially viable production facilities and products.
to support
Competition among manufacturers of plain surface steel products in China can be characterized as
fragmented, with many large and small companies competing with each other. Our primary competitors for these
products are Baosteel Group Shanghai Ergang Co. Ltd., Jiangyin Fasten Steel Products Co., Ltd., Jiangyin Walsin
Steel Cable Co. Ltd., Jiangxi Xinhua Steel Cable Co. Ltd. and Silvery Dragon Co., Ltd.
Competition among PRC manufacturers of zinc coated prestressed products in China is limited to only four
companies. Our main competitors for these products are Baosteel Group Shanghai Ergang Co. Ltd., Shuangyou
Eaststeel and Jiangyin Walsin Steel Cable Co. Ltd. Furthermore, we believe that we are the only Chinese rare earth
coated prestressed material manufacturer. While we believe that our rare earth coating capabilities provide us with a
competitive advantage among our competitors, it is likely that our competitors will seek to develop similar
competing products in the near future. We intend to continue to expand research and development efforts to advance
our rare earth coating applications even further. In particular, we continued to develop a rare earth coating
application for zinc-aluminum alloy coated products, which are more corrosion-resistant than zinc coated products
in 2015. However, there can be no assurance that our initial competitive advantage will be retained and that one or
more competitors will not develop products that are equal or superior to ours in quality or are better priced than our
rare earth coated products.
We believe that we differentiate ourselves because we have built a recognized brand name in the industry
and because we offer superior product quality, timely delivery and high value. We believe that we have the
following advantages over many of our competitors:
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the performance and cost effectiveness of our products;
our ability to manufacture and deliver products in required volumes, on a timely basis, and at
competitive prices;
superior quality and reliability of our products;
our after-sale support capabilities, from both an engineering and an operational perspective;
effectiveness of customer service and our ability to send experienced operators and engineers as
well as a seasoned sales force to assist our customers; and
overall management capability.
Seasonality
Demand for our products remains fairly consistent throughout the year.
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Our Raw Materials and Supply
Raw Materials
High carbon steel wire rods are the primary raw material required to manufacture prestressed steel
materials. The quality and cost of the rods we purchase differ between our plain surface products and our rare earth
and zinc coated products. Rare earth and zinc coated products require higher-priced rods that are higher in purity and
durability. The price for certain rods needed for coated products is higher than rods needed for plain surface
products.
Our Supply Sources
We select our suppliers by assessing criteria such as the quality of materials supplied, the duration of the
supplier’s business relationship with us, pricing, delivery reliability and response time to orders placed by us. To
minimize purchasing costs, we use a limited number of suppliers. Because we purchase substantial quantities from
these suppliers, we are often able to procure these products at competitive prices. We usually enter into a one-year
purchase agreement with each supplier and then order on a spot basis for each delivery. We negotiate pricing with
our suppliers on an arm’s length basis prior to the delivery of these supplies to us, based upon the prevailing market
prices at such time.
The suppliers that supplied us with a significant percentage of our raw materials for the past three years
were Zhangjiagang Free Trade Zone, Jiangsu Shagang Group Co., Ltd., Jiangyin Runde Logistics Co., Ltd., and
Shanghai Chemical Industry Supply and Marketing Co., Ltd. and all are based in China.
Purchases from our five largest suppliers amounted to 99.1%, 95.1% and 91.6% of our raw material
purchases in 2015, 2014 and 2013, respectively.
We are not dependent on any one of our suppliers, as we are able to source raw materials from alternative
vendors should the need arise. We have not experienced significant production disruptions due to a supply shortage
from our suppliers, nor have we had any major dispute with a material supplier.
Volatility of Price of Raw Materials
We have no long-term, fixed-price steel purchase contracts. When steel prices increase competitive
conditions will influence how much of the price increase we can pass on to our customers. To the extent we are
unable to pass on future price increases in our raw materials to our customers, the revenues and profitability of our
business could be adversely affected. When steel prices decline, customer demands for lower prices and our
competitors' responses to those demands could result in lower sale prices, lower margins and inventory valued at the
lower of cost or market adjustments as we use existing steel inventory. Significant or rapid declines in steel prices or
reductions in sales volumes could result in us incurring inventory or goodwill impairment charges. Therefore,
changing steel prices could significantly impact our revenues, gross margins, operating income and net income. In
2015, China’s steel industry continued to experience a difficult environment and steel consumption continued to
drop. As a result, the average price of steel products, including our products and principal raw materials, continued
to decline in 2015 and reached a new low in nearly 20 years. China has lowered steel production by about 90 million
tons in the recent years and will push to cut a further 100 million to 150 million tons over the next 5 years, while
strictly controlling steel capacity increases, according to the Chinese government statement announced in January
2016. Although the average prices our raw materials remain low due to these economic conditions, the average
selling prices of our products may also remain low, which could result in a decrease in our revenue, as we
experienced in 2015, and net profit. We expect steel supply will continue to outpace demand and steel prices will
remain at low levels in 2016.
Manufacturing Process
Equipment
Our production facilities use innovative equipment and machinery imported from France and Italy and, we
believe, is of the highest quality in metal wire drawing, wire stranding, zinc plating and finishing. Our production
lines produce prestressed steel materials that meet quality standards mandated by numerous countries, including
Japan, the United Kingdom and South Korea.
We own cutting edge technologies in over 20 high-tech fields, including oil-immersion preservation
technology, new coating production technology, skin pass coating technology, coating stabilization technology, rare
earth alloy plating technology, new high-temperature phosphorization heating technology, new material traction
technology, rare earth alloy technology, new fixed scoring technology, new high-temperature low-speed thread
stripping technology, and double coating stabilization, among others. We believe that we are the leading company in
our industry with respect to the implementation of innovative technologies in the manufacture of prestressed steel
materials.
26
Production Process
The production of our products involves various steps, including inspection, pickling, washing, rinsing,
phosphatizing, boronizing, surface treatment, plating, baking, coating, cooling, polishing, inspection and packaging.
The technology and procedures used in the above processes vary among the different products that we manufacture
and depend upon the product specifications prescribed by a particular customer.
Generally, the manufacturing process involves the following:
· Cleaning steel wire rods or other similar raw materials by chemical pickling, mechanical de-scaling or
a similar process. The materials are then cold drawn and reduced until the desired diameter and
resistance characteristics are achieved. This process is what provides the material with its strength.
·
In the production of strands, the individual wires (either 3 or 7 wires) are braided together to form a
strand.
· The final step is to subject the steel material to a thermo-chemical process which endows the material
with mechanical properties, such as low relaxation, which enable the material to last over time.
Production Lines
We currently have 18 production lines, consisting of the following:
· Two surface treatment production lines, one located in our Maanshan facility and one in our Jiujiang
facility, each composed of an acid pickling bath, rinsing bath, high pressure water rinsing bath,
phosphating bath, saponification (boronizing) bath and cleaning bath.
· Seven wire drawing production lines, four located in our Maanshan facility and three in our Jiujiang
facility, each composed of a pay-off machine, drawn can and take-up machine. Each of our half-
finished products is processed on a wire drawing production line.
· Three PC strand stabilization treatment production lines, two located in our Maanshan facility and one
in our Jiujiang facility, each composed of stranding machines, straightening wheels, jockey wheels,
medium frequency furnace, cooling tank, take-up and pay-off machines, a wire arraying machine and
a layer winding machine. The PC strand stabilization product lines in our Jiujiang facility produce
plain surface PC strands and zinc coated PC strands of various specifications.
· One zinc galvanization production line, located in our Jiujiang facility, composed of a pay-off
machine, degreasing furnace, acid rinsing pickling tank, assistant plating tank, drying furnace,
galvanizing furnace, drawing tower and take-up machine. Half-finished products needed for different
series of zinc coated PC wires and strands are produced on this line.
· Two surface finishing production lines, both located in our Jiujiang facility, each composed of a pay-
off machine, a finishing machine and a take-up machine. These production lines are used to produce
half-finished products of zinc coated PC wires and strands.
· Two PC wire stabilization treatment production lines, both located in our Jiujiang facility, each
composed of a pay-off machine, jockey wheel, straightening machine, indent marking machine,
medium frequency furnace, cooling tank, towing machine, shearing machine and take-up machine.
Zinc coated PC wires, round PC wires, indented PC wires and helical rib PC wires are produced on
these production lines.
· One unbonded PC strand production line, located in our Jiujiang facility, composed of a pay-off
machine, oiling machine, high-density polyethylene plastic injection machine, water tank, towing
machine and take-up machine. This production line is used to produce different series of unbonded
plain surface PC strands and unbonded zinc coated PC strands.
27
Quality Control
Consistent with our continuing commitment to quality, we impose rigorous quality control standards at
various stages in the production process. In addition, our facilities are equipped with first-class testing equipment,
such as a tensile strength tester and a relaxation tester, which guarantee the high quality and safety of our products.
We strictly comply with various national and international quality standards with respect to the
manufacture of pre-stressed materials. Our certifications and accreditations include the Japanese Industrial Standards
(JIS) certification, United Kingdom Accreditation Service (UKAS), the Korean Standards Association (KS)
certification from South Korea and an ISO 9001 certification.
Our procedure when discovering any product quality problem in the production process includes immediate
shut down for inspection. Once the problem is solved, we continue with production. If a problem occurs with a
product, the product inspector stamps a nonconformity seal and hangs a nonconformity label on the problematical
product. The nonconforming product is moved to a separate area and is not transferred to the next procedure. We do
not deliver nonconforming products to users.
Sales, Marketing and Distribution
Sales and Marketing
We have been successful to date in maintaining long-term relationships with numerous customers by
satisfying their commercial needs. In addition, our marketing team monitors the market and responds accordingly in
order to increase our customer base. We have a dedicated marketing and sales team of 9 employees that proactively
follows up on new sales leads.
Our marketing team develops strategies for the short-term and long-term by obtaining first-hand
information about our products’ market positioning, monitoring national macro-economic policies, inquiring about
current and future markets needs, following the progress of existing projects and the satisfaction of existing
customers. In addition, our technicians and marketing specialists regularly visit governmental departments,
construction development companies, design institutes, supervision institutions, national construction quality
inspection institutions and builders to promote new products. We have also joined the PRC national bridge
exhibition for marketing purposes.
Bidding Process
Many of the projects in our industry are awarded through a competitive bidding process among qualified
bidders. The evaluation of proposals is undertaken objectively, consistently and without bias towards particular
bidders. Qualified bidders are evaluated against a predetermined set of criteria, and contracts are almost never
awarded on the basis of price alone. A contract is awarded to the bidder or bidders that provide what is considered a
proposal that offers the best value to the purchaser, as determined by the predetermined criteria set by the purchaser.
The criteria vary depending on the type of contract. Examples of criteria include price, technical merit, flexibility to
future changes to requirements, speed of product delivery, sustainability and quality. During the bid evaluation
process, our marketing team and members of our management respond to various inquiries and our company
undergoes various assessments, including compliance, technical, commercial bid and qualification assessments.
Since 2013, approximately one-third of the coated product projects and all of the plain surface product
projects on which we bid have required an up-front, refundable cash deposit. However, during this time period, local
banks have generally maintained tighter lending policies than in the past, thereby limiting our ability to win bids that
we believe we otherwise could have won. We selectively put down cash deposit for projects that we believed we
could win and generate higher profit.
28
Distribution
Both of our manufacturing plants are equipped with facilities for cargo lifting, shipment and distribution.
Products for domestic customers are distributed to the destination designated by our customers. Products for
international customers are delivered either to carriers at various ports of exit in China or delivered to a designated
destination overseas.
Technical After-Sales Services
Our team of experienced engineers and technicians provides after-sales services to our customers. After the
delivery of our materials, our engineers train our customers to install and identify and address safety and
maintenance concerns. After a sale of our product, we introduce and advertise the company brand position,
distribute a guide application method process, issue regulation manuals, and explain and solve general and difficult
problems. All technical after-sales services are provided to our customers free of charge.
Our Customers
We sell the vast majority of our products domestically in China. Since our inception, we have also exported
our products to foreign countries, including the United States, Canada, Spain, Japan, South Korea, Taiwan, Australia,
South Africa and Saudi Arabia, among others. Our customers are diverse in nature, as we sell our products directly
to end users, to other manufacturers and to distributors, in each case depending on the nature of the product and the
utilization of the product.
While we value our relationship with each of our customers, we believe that generally the loss of any
particular customer, including our largest customers, would not materially impact our business in the long-term.
Many of our customer contracts relate to designated infrastructure projects which are performed during a defined
period of time, and are not necessarily long-term in nature. Accordingly, if any of our customers were to discontinue
purchasing our products, we would actively seek new customers, which we have been successful doing in the past.
In 2015, 2014 and 2013, sales to our six largest customers, in the aggregate, accounted for approximately
79.5%, 74.9% and 61.3% of our total sales, respectively. The following table provides the name of each customer
that contributed to 10% of our revenues in each of 2013, 2014 and 2015 and the percentage of our revenues
generated from such customers during these periods.
Name of Customer
2015 Revenues
(%)
2014 Revenues 2013 Revenues
(%)
(%)
Zhangjiagang Shajing Iron and Steel Trading Co., Ltd.**
22.7%
*
Jiangsu Jinrun Steel Cable Co., Ltd.
Zhangjiagang Zhenyu Logistics & Warehousing Co., Ltd.
*
*
14.4%
*
Wuhan Weikaer Steel Wire Product Co., Ltd.
12.1%
20.2%
Zhejiang Kexin Engineering Material Co., Ltd.
Wuhan Steel & Iron Jiangbei Group Metal Products Co., Ltd.
Wuhan Xianggang Metal Products Co., Ltd.
* Less than 10% of our annual revenues.
*
15.1%
16.2%
12.5%
16.5%
*
16%
11%
10%
*
*
*
*
** Zhangjiagang Ruifeng Iron and Steel Co., Ltd. changed its name to Zhangjiagang Shajing Iron and Steel Trading
Co., Ltd. in 2013.
29
The following table describes the breakdown of our sales in 2015, 2014 and 2013 between our domestic
and international customers.
Domestic Sales
International Sales
Total Sales
Research and Development
For the Year Ended December 31,
2015
2014 2013
$110,109,028 $115,256,175 $107,273,543
7,799,388
8,315,280 6,618,446
$117,908,416 $123,571,455 $113,891,989
Our research and development efforts are focused on three objectives:
·
Superior product safety and quality;
· Reduction of operating costs; and
·
Sustaining growth through the development of new products.
We have a research and development team at each of our facilities. In total, nineteen employees are
dedicated to research and development. We spent $3.4 million, $3.9 million and $1.3 million in 2015, 2014 and
2013, respectively, on our research and development activities to customize products for new or existing customers
and develop new products such as rare earth zinc-aluminum coated products. The nature of our research and
development activities needed for our product development is generally not cash intensive. In addition, a portion of
the work is conducted by organizations and universities with which we have a collaborative relationship.
We regularly train the members of our research and development department in order to consistently
enhance our research and development capabilities in the field of coating technology. We have developed a business
model that involves a very close interrelationship between our research and development department and our
product development and marketing departments. As a result, we focus our research and development activities on
projects that would enable us to branch out our products into new desired markets. In addition, we conduct research
and development activities that enable us to increase our market share in existing markets in the PRC and
internationally. We also focus certain of our research and development activities on higher margin products that can
be sold to customers in international markets.
Specifically, we have entered into cooperation agreements with Jiujiang Institute pursuant to which the
institute assists us in our efforts to improve the comprehensive function and manufacturing technique of our high
strength, anti-erosion zinc coated prestressed strands. These high strength products, which have high endurance
against erosion, are sold domestically and internationally. In addition, we are cooperating with other steel
manufacturers in research efforts regarding zinc coated PC wires, which serve as raw materials for our zinc coated
PC strands, indented PC wires and helical rib PC wires with high performance and are designed for our international
customers.
30
We entered into an agreement with the Shanghai Machinery Manufacturing Technology Research Institute
in 2000 and pursuant to this agreement, we established a joint laboratory to design high strength, indented PC wire
and zinc coated PC wire according to our specifications or requirements of our customers. These customized
products designed by our joint laboratory can reduce customer costs by improving the efficiency of the use of raw
materials. This cooperation is a mutually beneficial and there is no fee for the research and laboratory results.
We believe that our research and development activities and production technology for rare-earth zinc
coated materials have contributed significantly to our growth. By using rare earth zinc-plating technology, we are
able to lower the temperature for the stabilizing treatment during the production process and thereby minimize the
loss of strength during the stabilizing process. As a result, this technology reduces the level of strength required of
our raw materials under circumstances of unvaried finished product strength requirement and enables us to produce
materials with greater strength under circumstances in which the strength of raw materials remains firm. We believe
that we are the only enterprise which can produce rare-earth zinc coated pre-stressing materials of 1,860 megapascal
strength level and 15.20 mm diameter in the world, as a result of our rare earth zinc-plating technology. We will
continue our research and development efforts to improve the strength and stability of such product.
We plan to continue our research and development efforts to strengthen our leading position in our industry.
In 2014, we developed 12.7 mm 2060 mPa ultra high strength and low relaxation prestressed strands. Our research
and development team also upgraded the heating method of acid pickling process, the circulating cooling water
system of steel wire stabilization production line, and the winding system of coated steel wire. In addition, we are
working on developing a production line with annual output of 5,000 tons of ultra high strength steel wire and strand
and have broken through several technical difficulties to date. We also own or lease various technologies that
improve the quality of our products and reduce our operating costs, including coating polished technology,
stabilizing treatment technology for dual tension gear zinc coated prestressing material, warning technology for
missing plating of coating production line, stranded wire greasing technology, water cut-off technology by strander
infrared temperature detection and other core technologies.
Since 2013, the Chinese market began to adopt zinc-aluminum alloy coated PC wires and PC strands,
which have more corrosion-resistance and stronger protective effect than zinc coated PC wires and PC strands. Zinc-
aluminum alloy layer (coating containing 5% Al and 95% Zn) has better plastic, adhesion, and corrosion resistance,
and thus its corrosion resistance property is unchanged before and after the deformation. Its resistance to
atmospheric etching characteristics is better than zinc and rare earth coated products, and still has good coating
properties. The alloy layer of such products has long-term stability. Although we are able to produce zinc-aluminum
alloy coated PC wires and PC strands, we are trying to develop the method to apply rare earth in zinc-aluminum
alloy coating process, which will result in less loss of product strength during the coating process and higher
strength final product.
31
Intellectual Property
We rely on a combination of patents, trademarks, domain names and confidentiality agreements to protect
our intellectual property. Our manufacturing processes are based on technology developed primarily in-house by our
research and development and engineering personnel.
With respect to proprietary know-how that is not patentable and processes for which patents are difficult to
enforce, we rely on, among other things, trade secret protection and confidentiality agreements to safeguard our
interests. All of our research and development personnel have entered into confidentiality and proprietary
information agreements with us. These agreements address intellectual property protection issues and require our
associates to assign to us all of the inventions, designs and technologies they develop during the course of
employment with us. We are not aware of any material infringement of our intellectual property rights.
Patents
As of April 1, 2016, we have twenty-nine patents registered with the State Intellectual Property Office of
the PRC, including four invention patents and twenty-five utility model patents. In addition, we have applied for an
additional four invention and two utility model patents as of April 1, 2016.
During 2015 and the first quarter of 2016, four pending utility model patents and one pending invention
patent were approved, and, seven pending patent applications were rejected by the State Intellectual Property Office.
Actual examination times for patent applications in China vary, but examinations of similar patent
applications have taken approximately one year. These patents and patent applications are intended to protect the
production processes of various wire ropes, pickling methods of materials of steel wire and devices designed for the
steel wire production. The term of all of the utility model patents is ten years from the filing of the application and
the term of all of the invention patents is twenty years from the filing of the application. We currently do not have
any patents registered or pending in any jurisdiction outside of the PRC.
The following table provides the name, the application number or patent number, the name of the applicant
or patent holder and the status of our registered invention patents and each of our invention patent applications, and
the expiration date of our registered invention patent:
Name
Application No.
/Patent No.
Stabilizing Process of Indented Wire
Method to Change the Length of Waste of
Stranded Wire Joint
ZL200710157149.0
ZL200910144241.2
Production Process of Zinc Coated Steel Wire
Re-processing Technology of Galvanized Steel
Wire
ZL201010105179.9
ZL201310137387.0
Applicant
/Patent
Holder
Ossen
Jiujiang
Ossen
Materials
Ossen
Jiujiang
Ossen
Jiujiang
Status
Expiration
Date
Registered 11/22/2027
Registered 7/26/2029
Registered 2/2/2030
Registered 4/18/2033
The following table provides the name, the application number or patent number, the name of the applicant
or patent holder and the status of each of our registered utility model patents and utility model patent applications,
and the expiration dates of our registered utility model patents:
Name
Application No.
/Patent No.
Applicant
/Patent
Holder
Status
Expiration
Date
Oiling Device for PC Strand
ZL200820185079.x
Ossen
Materials
Registered 08/21/2018
32
Name
Application No.
/Patent No.
Infrared Safety Control Device for Lift Truck
ZL200820185081.7
Device Designed to Control Smoke by
Temperature
ZL200820185082.1
Device Designed to Control Water
Temperature When Phosphatizing the
PC Strand
Device for Testing Center Steel Wire
Broken for Stranded Wire
Device Designed to Test Temperature
of Steel Wire When Drawing
the Stranded Wire
ZL200920233724.5
ZL200920233725.x
ZL200920233726.4
Steel Wire Joint Machine with Pressure
Detecting Function
ZL200920233728.3
Automatic Paper Rolling Device of
Asphalt Paper
ZL200920233729.8
Aerial Overhaul Platform for Forklift
ZL200920233730.0
Skid Used When Packing PC Strand
ZL200920233731.5
Inductive Water Saving Device
ZL201220218155.4
Anti-Impact Gear
ZL201220217756.3
Lock Device for PC Strand Production
Wheel
ZL201220218156.9
New Dies for Wire Drawing
ZL201320723167.7
Energy-saving Device for Acid Mist
Drainage
ZL201320722838.8
Cold Assembly Mould
ZL201420023335.0
Prestressed Strand Spreader
ZL201420023447.6
Applicant
/Patent
Holder
Ossen
Materials
Ossen
Materials
Ossen
Materials
Ossen
Materials
Ossen
Materials
Ossen
Materials
Ossen
Materials
Ossen
Materials
Ossen
Materials
Ossen
Materials
Ossen
Materials
Ossen
Materials
Ossen
Materials
Ossen
Materials
Ossen
Materials
Ossen
Materials
Status
Expiration
Date
Registered 08/21/2018
Registered 08/21/2018
Registered 07/29/2019
Registered 07/29/2019
Registered 07/29/2019
Registered 07/29/2019
Registered 07/29/2019
Registered 07/29/2019
Registered 07/29/2019
Registered 06/25/2021
Registered 06/23/2021
Registered 06/25/2021
Registered 12/24/2022
Registered 12/24/2022
Registered 1/14/2024
Registered 1/14/2024
Furnace for Zinc Coating Process
ZL201320200197.4
Actinomycetes Machine Discharge Line
Protection Devices
ZL201320200077.4
Ossen
Jiujiang
Ossen
Jiujiang
Registered 4/18/2023
Registered 4/18/2023
33
Strand Actinomycetes Devices
ZL201320200171.X
Ossen
Jiujiang
Registered 4/18/2023
Cooling Device with Distilled
Water for Medium Frequency
Furnace
ZL201320199776.1 Ossen
Registered 4/18/2023
Jiujiang
U-shape Hot Galvanizing Furnace
ZL201420532006.9 Ossen
Registered 9/16/2024
Plastic Particle Drying Mixer
ZL201420798062.7 Ossen
Registered 12/16/2024
Jiujiang
Jiujiang
Multi-functional Line Traction Machine for Steel
Wire Stabilization Processing Production Line
ZL201420798307.6 Ossen
Registered 12/16/2024
Jiujiang
Dust Removing Device for Surface Treatment for
Drawing Steel Wire
ZL201420798232.1 Ossen
Registered 12/16/2024
Jiujiang
Trademarks
We have been granted a total of five trademarks, three of which are registered trademarks in the PRC and
two of which are registered with the World Intellectual Property Organization (WIPO) in accordance with Madrid
Agreement. The five trademarks which are described in the table below were transferred by Shanghai Ossen
Investment Co., Ltd. to Ossen Materials in 2008 and 2009.
Name of Trademark
Application No.
/Trademark No.
Applicant
/Trademark
Holder
Status
A Figurative Trademark (Registered under Madrid
Agreement )
0973552
“OSSEN” (Registered under Madrid Agreement )
0945308
A Figurative Trademark (PRC Domestic Registered)
4396898
“OSSEN” (PRC Domestic Registered)
4396895
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需要删除该图像，然后重新将其插入。
“
” (PRC Domestic Registered)
4396896
Registered
Registered
Registered
Registered
Registered
Ossen
Innovation
Materials
Ossen
Innovation
Materials
Ossen
Innovation
Materials
Ossen
Innovation
Materials
Ossen
Innovation
Materials
Environmental Matters
The Environmental Protection Law, promulgated by the National People’s Congress on December 26, 1989,
is the primary law for environmental protection in China. The law establishes basic principles for coordinated
advancement of economic growth, social progress and environmental protection, and defines the rights and duties of
governments at all levels. Local environmental protection bureaus may set stricter local standards than the national
standards and enterprises are required to comply with the stricter of the two sets of standards. Due to the nature of
our business, we produce certain amounts of waste water, gas and solid waste materials during the course of our
production. We believe that we are in compliance in all material respects with applicable PRC laws and regulations.
All of our products meet the relevant environmental requirements under PRC laws and during the three years ended
December 31, 2015, 2014 and 2013, we were not subject to any fines or legal action involving non-compliance with
any relevant environmental regulation, nor are we aware of any threatened or pending action, including by any
environmental regulatory authority.
34
Governmental Regulations
Business license
Any company that conducts business in the PRC must have a business license that covers a particular type
of work. Our business license covers our present business of manufacturing, processing, procuring and selling
metallic materials, metallic products, new alloy materials, rare earth application products, building materials, general
machinery and related products. Prior to expanding our business beyond that of our business license, we are required
to apply and receive approval from the PRC government.
Employment laws
We are subject to laws and regulations governing our relationship with our employees, including: wage and
hour requirements, working and safety conditions, citizenship requirements, work permits and travel restrictions.
These include local labor laws and regulations, which may require substantial resources for compliance. China’s
National Labor Law, which became effective on January 1, 1995, and China’s National Labor Contract Law, which
became effective on January 1, 2008, permit workers in both state and private enterprises in China to bargain
collectively. The National Labor Law and the National Labor Contract Law provide for collective contracts to be
developed through collaboration between the labor union (or worker representatives in the absence of a union) and
management that specify such matters as working conditions, wage scales, and hours of work. The laws also permit
workers and employers in all types of enterprises to sign individual contracts, which are to be drawn up in
accordance with the collective contract.
Patent protection in China
The PRC has domestic laws for the protection of copyrights, patents, trademarks and trade secrets. The
PRC is also signatory to some of the world’s major intellectual property conventions, including:
· Convention establishing the World Intellectual Property Organization (WIPO Convention) (June 4, 1980);
· Paris Convention for the Protection of Industrial Property (March 19, 1985);
· Patent Cooperation Treaty (January 1, 1994); and
· The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) (November 11, 2001).
Patents in the PRC are governed by the China Patent Law and its Implementing Regulations, each of which
went into effect in 1985. Amended versions of the China Patent Law and its Implementing Regulations came into
effect in 2001 and 2003, respectively.
The PRC is signatory to the Paris Convention for the Protection of Industrial Property, in accordance with
which any person who has duly filed an application for a patent in one signatory country shall enjoy, for the
purposes of filing in the other countries, a right of priority during the period fixed in the convention (12 months for
inventions and utility models, and 6 months for industrial designs).
The Patent Law covers three kinds of patents - patents for inventions, utility models and designs. The
Chinese patent system adopts the principle of first to file, which means that a patent may be granted only to the
person who first files an application. Consistent with international practice, the PRC allows the patenting of
inventions or utility models that possess the characteristics of novelty, inventiveness and practical applicability only.
For a design to be patentable it cannot be identical with, or similar to, any design which, before the date of filing,
has been publicly disclosed in publications in the country or abroad or has been publicly used in the country, and
should not be in conflict with any prior right of another.
35
Value added tax
Pursuant to the Provisional Regulation of China on Value Added Tax and their implementing rules, all
entities and individuals that are engaged in the sale of goods, the provision of repairs and replacement services and
the importation of goods in China are generally required to pay VAT at a rate of 17.0% of the gross sales proceeds
received, less any deductible VAT already paid or borne by the taxpayer. Furthermore, when exporting goods, the
exporter is entitled to a portion, or in some instances all, of the VAT refund that the exporter previously paid.
Foreign currency exchange
Under the PRC foreign currency exchange regulations applicable to us, the Renminbi is convertible for
current account items, including the distribution of dividends, interest payments, and trade and service-related
foreign exchange transactions. Conversion of Renminbi for capital account items, such as direct investment, loan,
security investment and repatriation of investment, however, is still subject to the approval of the PRC State
Administration of Foreign Exchange, or SAFE. Foreign-invested enterprises may buy, sell and/or remit foreign
currencies only at those banks authorized to conduct foreign exchange business, after providing valid commercial
documents and, in the case of capital account item transactions, obtaining approval from SAFE. Capital investments
by foreign-invested enterprises outside of China are also subject to limitations, which include approvals by the
Ministry of Commerce, SAFE and the State Reform and Development Commission.
Mandatory statutory reserve and dividend distributions
Under applicable PRC regulations, foreign-invested enterprises in China may pay dividends out of their
accumulated profits only, if any, as determined in accordance with PRC accounting standards and regulations. In
addition, a foreign-invested enterprise in China is required to set aside at least 10% of its after-tax profit based on
PRC accounting standards each year for its general reserve until the cumulative amount of such reserve reaches 50%
of its registered capital. These reserves are not distributable as cash dividends. The board of directors of a foreign-
invested enterprise has the discretion to allocate a portion of its after-tax profits to staff welfare and bonus funds,
which may not be distributed to equity owners except in the event of liquidation.
Employees
As of December 31, 2015, 2014 and 2013 we had 204, 201 and 209 full-time employees. As of March 31,
2016 we had 204 full-time employees.
The following table shows the breakdown in numbers and percentages of employees by department as of
December 31, 2015:
Functions
Manufacturing
Technology
Research & Development
Quality Control
General Administration, Purchasing, Sales and Marketing
Total
36
Number of
employees
% of total
108
24
19
6
47
204
53%
12%
9%
3%
23%
100%
We have not experienced any significant labor disputes and consider our relationship with our employees to
be good. Our employees are not covered by any collective bargaining agreement.
We have established an employee welfare plan in accordance with the relevant PRC laws and regulations.
Our total expenses for this plan were approximately $231,014, $197,832 and $182,474 in 2015, 2014 and 2013,
respectively.
As we continue to expand our business, we believe it is critical to hire and retain top talent, especially in
the areas of marketing, metal surface treatment, materials science, and technology engineering. We believe we have
the ability to attract and retain high quality engineering talent in China based on our competitive salaries, annual
performance-based bonus system, and equity incentive program for senior employees and executives. In addition,
we have a training program for entry-level engineers that allows them to work closely with an experienced mentor to
gain valuable hands-on experience and provide other professional development opportunities, including seminars
where experienced engineers give lectures on specific engineering topics and new methods that can be applied to
various projects.
Legal Proceedings
From time to time, we may be involved in various claims and legal proceedings arising in the ordinary
course of business. We are not currently a party to any such claims or proceedings which, if decided adversely to us,
would either, individually or in the aggregate, have a material adverse effect on our business, financial condition,
results of operations or cash flows.
4C. Organizational Structure
We are affiliated with the Ossen Group, which is a Chinese conglomerate controlled by our Chairman, Dr.
Tang. The Ossen Group’s core businesses include steel manufacturing, real estate and other investments.
Our Shareholders
Dr. Tang, our chairman, owns 100% of the shares of Effectual Strength Enterprises Ltd., a British Virgin
Islands company, which currently owns approximately 60.0% of our outstanding ordinary shares. The spouse of our
chief executive officer, Wei Hua, owns 100% of the shares of Fascinating Acme Development Ltd., which owns
approximately 3.0% of our outstanding ordinary shares. The spouse of the chief executive officer of Ossen Material
Research (formerly Shanghai ZFX), which is an affiliated company of ours that supplies us with raw materials, owns
100% of the shares of Gross Inspiration Development Ltd., which owns approximately 3.0% of our outstanding
ordinary shares. In December 2011, 5 million shares were issued in our initial public offering. Currently we have
approximately 30.2% of our ordinary shares, or 5,988,290 shares, trading on NASDAQ in the form of ADS’s. The
holders of the remaining approximately 3.8% of our shares are investors that are residents of the PRC and are
unaffiliated with Ossen.
Our Subsidiaries
British Virgin Islands Companies
Ossen Innovation Group, our wholly owned subsidiary, is the sole shareholder of two holding companies
organized in the British Virgin Islands: Ossen Group (Asia) Co., Ltd., or Ossen Asia, and Topchina Development
Group Ltd., or Topchina. All of the equity of Ossen Asia and Topchina had been held by Dr. Tang, our Chairman,
since inception. In May 2010, Dr. Tang transferred these shares to Ossen Innovation Group in anticipation of the
public listing of our company’s shares in the United States.
Ossen Asia is a British Virgin Islands limited liability company organized on February 7, 2002. Ossen Asia
has one direct operating subsidiary in China, Ossen Innovation Materials Co. Ltd., or Ossen Materials. Ossen Asia
owns 81% of the equity of Ossen Materials.
Topchina is a British Virgin Islands limited liability company organized on November 3, 2004. Ossen
Materials and Topchina directly own an operating subsidiary in China, Ossen (Jiujiang) New Materials Co., Ltd., or
Ossen Jiujiang. As of December 31, 2015, Ossen Materials owns 20.5% of the equity of Ossen Jiujiang and
Topchina owns 79.5%.
37
Ossen Materials
Ossen Materials was formed in China on October 27, 2004 as a Sino-foreign joint venture limited liability
company under the name Ossen (Maanshan) Steel Wire and Cable Co., Ltd. On May 8, 2008, Ossen Materials was
restructured from a Sino-foreign joint venture limited liability company to a corporation. The name of the entity was
changed at that time to Ossen Innovation Materials Co., Ltd.
Ossen Asia owns 81% of the equity of Ossen Materials. The remaining 19% is held in the aggregate by
four Chinese entities, two of which are controlled by Chinese governmental entities, one of which is controlled by
Zhonglu Co. Ltd., a company whose shares are listed on the Shanghai Stock Exchange, and one of which is
controlled by Chinese citizens.
Through Ossen Materials, we have manufactured and sold plain surface PC strands, rare earth coated PC
steel wires and PC wires in our Maanshan City facility since 2004. The primary markets for the products
manufactured at our Maanshan facility are Anhui Province, Jiangsu Province, Zhejiang Province and Shanghai City,
each in the PRC.
Ossen Jiujiang
On April 6, 2005, Shanghai Ossen Investment Holdings (Group) Co., Ltd., or Ossen Shanghai, acquired a
portion of the bankruptcy assets of Jiujiang Steel & Iron Company, including equipment, land use rights and
inventory, for approximately RMB 20,000,000 (approximately $2.9 million). Ossen Jiujiang was formed by Ossen
Shanghai in the PRC as a Sino-foreign joint venture limited liability company on April 13, 2005. Ossen Shanghai
then transferred the newly acquired assets to Ossen Jiujiang. At its inception, Ossen Jiujiang was owned by two
entities: 33.3% of its equity was held by Ossen Asia and 66.7% by Ossen Shanghai. In June 2005, Ossen Shanghai
transferred its entire interest in Ossen Jiujiang to Topchina in exchange for approximately $2.9 million. In October
2007, Topchina transferred 41.7% of the equity in Ossen Jiujiang to Ossen Asia for no consideration. On December
17, 2007, Ossen Asia transferred all of its shares in Ossen Jiujiang to Ossen Materials.
On November 19, 2010, the Department of Commerce of Jiujiang City approved an increase in the
registered capital of Ossen Jiujiang by approximately $29.2 million, which capital must be paid in full by November
2013. On November 5, 2012, the Department of Commerce of Jiujiang City approved a decrease in the registered
capital of Ossen Jiujiang by approximately $9.2 million. As of December 31, 2014, Topchina paid approximately
$20 million of the increased registered capital to Ossen Jiujiang. As a result, 79.5% of Ossen Jiujiang is currently
held by Topchina and 20.5% by Ossen Materials. On April 9, 2014, Ossen (Jiujiang) Steel Wire & Cable Co., Ltd.
changed its name to Ossen (Jiujiang) New Materials Co., Ltd.
Through Ossen Jiujiang, we manufacture zinc or rare earth coated PC wires and strands, plain surface PC
strands, unbonded PC strands, helical rib PC wires, sleeper PC wires and indented PC wires. The primary markets
for the PC strands manufactured in our Jiujiang facility are Jiangxi Province, Hubei Province, Hunan Province,
Fujian Province and Sichuan Province, each in the PRC.
Organizational Structure Chart
The following chart reflects our organizational structure:
38
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4D. Property, Plants and Equipment
Under PRC law, land is owned by the state. “Land use rights” are granted to an individual or entity after
payment of a land use right fee is made to the applicable state or rural collective economic organization. Land use
rights allow the holder the right to use the land for a specified long-term period.
We have land-use rights for facilities at two locations in the PRC, one in Maanshan City, Anhui Province
and one in Jiujiang City, Jiangxi Province, which are utilized for production, research and development and
employee living quarters. We have paid all amounts relating to these properties. The land-use rights for our
Maanshan facility expires in 2058 and the rights for our Jiujiang facilities expire at different intervals, ranging from
2055 to 2057. Our facilities cover an aggregate of approximately 106,136 square meters.
As of December 31, 2015, our production facility in Maanshan City had a total gross floor area of
approximately 47,356 square meters and we employed 45 production personnel at that facility. Our Maanshan
facility contained seven production lines with an annual production of approximately 93,600 tons in 2015. As of
December 31, 2015, our production facility in Jiujiang City had a total gross floor area of approximately 58,780
square meters and we employed 63 production personnel at that facility. Our Jiujiang facility contained eleven
production lines with an annual production of approximately 94,300 tons in 2015. Historically, we have not
experienced any form of disruption in our production facilities. The total tonnage we manufactured was more than
140,000 tons because a portion of our sold products were intermediate products.
39
We believe that our current property rights are sufficient for our current operations.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not Applicable
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion and analysis should be read in conjunction with our consolidated financial
statements, the notes to those financial statements and other financial data that appear elsewhere in this annual
report. In addition to historical information, the following discussion contains forward-looking statements based on
current expectations that involve risks and uncertainties. Actual results and the timing of certain events may differ
significantly from those projected in such forward-looking statements due to a number of factors, including those set
forth in “Risk Factors” and elsewhere in this report. Our consolidated financial statements are prepared in
conformity with U.S. GAAP.
5A. Operating Results
Overview
General
We manufacture and sell an array of plain surface prestressed steel materials and rare earth coated and zinc
coated prestressed steel materials, which we believe is the most comprehensive array among our competitors in
China. Our materials are used in the construction of bridges, highways and other infrastructure projects in the PRC
and internationally. Our facilities are located in Maanshan City, Anhui Province and in Jiujiang City, Jiangxi
Province, in the People’s Republic of China. Based on our extensive experience in the industry, we believe that
Ossen is one of the leading enterprises in the PRC in the design, engineering, manufacture and sale of customized
prestressed steel materials used in the construction of bridges, highways, and other infrastructure projects in China.
40
Important Factors Affecting our Results of Operations and Existing Trends
Migration of Our Business to the Domestic PRC Market
Our results of operations depend in part on the proportion of international sales to domestic sales that we
attain during a particular financial reporting period. Sales to international customers have historically generated
profit margins that are approximately 2% to 5% higher on average than sales to domestic customers. In addition, we
have historically collected a significant percentage of revenues generated by international sales by letter of credit,
which enables us to convert accounts receivable into cash more quickly. In 2013 and 2014, the Chinese government
followed a prudent monetary policy, and in 2015, the Chinese government was still conservative in lending to
certain industries, including steel industry and our domestic customers. As a result, our domestic customers paid
approximately 150 days after the materials were delivered in last three years, on average. The payment terms,
however, could be extended longer if the Chinese government further tightens credit policy for steel industry.
Our current business model is to continue focusing on the domestic PRC market, while selectively pursuing
international opportunities when appropriate. Under existing PRC governmental policies, especially the newly
announced “One Belt, One Road” initiatives, significant investments are expected to be made during the next decade
to construct many new bridges and new railroads.
We generated approximately 6.6%, 6.7% and 5.8%, respectively, of our revenue during the years ended
December 31, 2015, 2014 and 2013 from sales to customers in international markets including primarily Vietnam,
South Korea, Japan, New Zealand, Australia, Bangladesh, and Costa Rica, primarily for use in the construction of
bridges. In October 2013, we were awarded a Japanese Industrial Standards (JIS) certificate. This certification
allows us to sell our SWPR7BL prestressed concrete strands in Japan. We then successfully completed a renovation
project for our dedicated epoxy pre-stressed strand. This renovation allowed us to secure more high-value, high
margin orders, particularly from the Japanese marketplace. In 2015, our major Japanese customer won the bid for
the construction of Tokyo New National Stadium for 2020 Tokyo Olympic Game and we are one of two suppliers to
provide plain surface prestressed steel products to this Japanese customer. As a result of this, we anticipate that our
export of plain surface prestressed steel products to the Japanese market will increase in 2016 compared to 2015.
Due to the anti-dumping measures imposed by the United States and European Union and increased demand for our
products in these other markets, we do not intend to reestablish a presence in the United States or the European
Union at the levels we experienced in 2008 in the near future. However, if opportunities arise in the U.S. or EU
markets or in other international markets for us to win bids on projects or to reengage with former customers or
establish relationships with new customers, we would pursue such opportunities.
Product Mix and Industry Trends
Our results of operations also depend in part on the product mix that we attain during a particular financial
reporting period. We produce and sell products according to customer orders. The sales prices of our rare earth
coated products are generally higher than the prices of our plain surface, stabilized and zinc coated products. Gross
margins for our rare earth coated products were historically higher than our other products because rare earth coating
technology enables us to produce base on lower grade raw materials, which increases gross margin. Since the
introduction in 2009 of our rare earth coated materials, which undergo a coating process that reduces the loss in
strength and performance that prestressed materials otherwise undergo during our manufacturing processes, we have
lowered the standards for strength and performance requirements for the raw materials used in our rare earth coated
products.
However, the margins for our plain surface products surpassed the margins for our coated products in 2014
and 2015. In 2013, 2014 and 2015, the average gross margin of plain surface products was approximately 7.9%,
11.9% and 17.5% and the average gross margin of our coated products, including rare earth coated and zinc coated
products, was approximately 10.4%, 10.6% and 12.7%, respectively. The increase in average gross margin of plain
surface PC strands was mainly due to the decrease of purchase price of raw materials of plain surface PC strands and
the increase of overseas sales of plain surface PC strands, which normally have higher gross profit margin than
domestic sales, in 2014 and 2015. The average gross margin of coated products, including zinc coated products and
rare earth coated products, was lower than plain surface products mainly because the average price of the raw
materials purchased for our coated products did not decline as steeply as the average price of the raw materials
purchased for our plain surface products in 2014 and 2015.
As an overall percentage of sales, sales of our coated products decreased from 87.1% in 2014 to 81.0% in
2015. 90.7% and 89.0%, respectively, of our coated product sales in the years ended December 31, 2014 and
December 31, 2015 were sales of rare earth coated products and the remaining 9.3% and 11.0%, respectively, were
zinc coated products.
Favorable price and terms for supply of principal raw materials
Our principal raw material is high carbon steel wire rods that we typically purchase from multiple primary
steel producers. The steel industry as a whole is cyclical and, at times, pricing and availability of steel can be volatile
due to numerous factors beyond our control, including general domestic and international economic conditions,
labor costs, sales levels, competition, levels of inventory held by us and other steel service centers, consolidation of
steel producers, higher raw material costs for steel producers, import duties and tariffs and currency exchange rates.
This volatility can significantly affect the availability and cost of raw materials for us.
41
We, like many other steel manufacturers, maintain substantial inventories of steel to accommodate the short
lead times and just-in-time delivery requirements of our customers. Accordingly, we purchase steel in an effort to
maintain our inventory at levels that we believe to be appropriate to satisfy the anticipated needs of our customers
based upon historic buying practices, supply agreements with customers and market conditions. Our key suppliers
usually dedicate portions of their inventories as reserves to meet our manufacturing requirements. These key
suppliers are generally provided a prepayment and in return, they give us discounts compared to prevailing market
prices.
We have no long-term, fixed-price steel purchase contracts. When steel prices increase, competitive
conditions will influence how much of the price increase we can pass on to our customers. To the extent we are
unable to pass on future price increases in our raw materials to our customers, the net sales and profitability of our
business could be adversely affected.
When steel prices decline, customer demands for lower prices and our competitors' responses to those
demands could result in lower sale prices and, consequently, lower margins. Significant or rapid declines in steel
prices or reductions in sales volumes could result in us incurring inventory or goodwill impairment charges.
Changing steel prices therefore could significantly impact our net sales, gross margins, operating income and net
income. In 2010 and 2011, the impact of steel price fluctuation on our results of operations was immaterial. In 2012,
our average raw material price decreased because China’s steel price decreased as a result of the soft demand in
domestic market and high inventory of the industry and we manufactured and sold products which required lower
grade and lower price raw materials compared to 2011. In the past three years, steel supply continued to outpace
demand as China’s economic growth slowed and growth in steel demand in China remained weak. The price of all
of our principal raw materials decreased in 2014 and 2015 due to the market condition of steel industry in China.
However, since raw materials purchased for our rare earth and zinc coated products are produced by only a select
few steel manufacturers, the average price of these raw materials was not as volatile as other steel products, and the
decline is not as much as those that are mass produced such as raw materials for plain surface products.
We currently purchase almost all of our new materials from a very small number of suppliers. Purchases
from our five largest suppliers amounted to 99.1%, 95.1% and 91.6% of our total raw material purchases in 2015,
2014 and 2013, respectively. To date, we have been able to obtain favorable pricing and delivery terms from these
suppliers. However, if we were to increase the scale of our production, we may need to further diversify our supplier
network and, as a result, may not be able to obtain favorable pricing and delivery terms from new suppliers.
Slow Growth of the Chinese Economy
We operate our manufacturing facilities in China and derive the majority of our revenues from sales to
customers in China. As such, economic conditions in China affect virtually all aspects of our operations, including
the demand for our products, the availability and prices of our raw materials and our other expenses. In 2013 and
2014, the Chinese government continued its prudent monetary policy and China’s economy growth was at a single-
digit level. Domestic demand for, and consumption of, prestressed steel products has decreased as a result of
slowdown of Chinese economy growth. In 2015, China’s economy growth continued to weaken and China’s steel
industry continued to experience a difficult environment. In addition, China’s stock markets suffered from massive
volatility and the stock market lost more than 30% over three weeks in 2015. As a result, the average price of steel
products, including our principal raw materials, continued to decline in the period and reached a new low in 20 years.
While almost the average price of every steel product decreased in 2015, the demand of our products recovered
slightly and as a result we sold more products in 2015 compared to 2014. China has lowered steel production by
about 90 million tons in recent years and will push to cut a further 100 million to 150 million tons over the next 5
years, while strictly controlling steel capacity increases, according to the Chinese government announcement in
January 2016.We anticipate that the demand for our materials in China will recover gradually as the Chinese
government cut the steel production capacity and carries out its plans to further develop the transportation
infrastructure in the PRC. However, any adverse changes in economic conditions or regulatory environment in
China may have a material adverse 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 are subject to the PRC enterprise income tax, or EIT. According to the
relevant laws and regulations in the PRC, foreign invested enterprises established prior to January 1, 2008 are
entitled to full exemption from income tax for two years beginning with the first year in which such enterprise is
profitable and a 50% income tax reduction for the subsequent three years. Ossen Materials was entitled to an EIT
exemption during the two years ended December 31, 2006 and was subject to a 50% income tax reduction during
the three years ended December 31, 2009. Ossen Jiujiang was entitled to the EIT exemption during the two years
ended December 31, 2008, and a 50% income tax reduction during the three years ended December 31, 2012.
Ossen Materials was subject to a 15% tax rate through 2012 as the result of its being designated a high-tech
enterprise. In 2012, Ossen Materials renewed its status of high-tech enterprise, and would be subject to a 15% tax
rate through 2015. In 2015, Ossen Materials renewed its status of high-tech enterprise again, and will be subject to a
15% tax rate through 2018. Ossen Jiujiang was subject to a 15% tax rate through 2011 as the result of its being
designated a high-tech enterprise. Since January 1, 2012, Ossen Jiujiang has enjoyed a tax rate of 15% as it is
considered as a high-tech enterprise. In 2015, Ossen Jiujiang successfully renewed its status of high-tech enterprise,
and will be subject to a 15% tax rate through 2018. In the event that our income tax obligations increase over time,
our net income will be affected.
42
Foreign currency translation
Our financial statements are expressed in U.S. dollars but the functional currency of our operating
subsidiaries is RMB. Our results of operations are translated at average exchange rates during the relevant financial
reporting periods, assets and liabilities are translated at the unified exchange rate at the end of these periods and
equity is translated at historical exchange rates. Adjustments resulting from the process of translating the local
currency financial statements into U.S. dollars are included in determining comprehensive income.
Description of Selected Income Statement Items
Revenues. We generate revenue from sales of our prestressed steel products, including plain surface
products and rare earth coated products. We also derive an insignificant amount of revenue from providing services
to select customers. Service revenues account for less than 2% of total revenues for all periods presented and is
recognized upon delivery and acceptance of the finished products by the customer, or when pick up occurs.
Cost of goods sold. Cost of goods sold includes direct and indirect production costs, as well as freight and
handling costs for products sold.
Selling expenses. Selling expenses consist of sales commissions, payroll, traveling expenses, transportation
expenses and advertising expenses. For example, we typically pay our international distribution customers a
commission ranging from 0.5% to 5% of invoiced amounts (including VAT) actually paid to us.
General and administrative expenses. General and administrative expenses consist primarily of research
and development expense, management and office salaries and employee benefits, deprecation for office facility and
office equipment, travel and entertainment, legal and accounting, consulting fees and other office expenses.
Financial expenses. Financial expenses consist of interest expense on bank loans, interest income.
Other Income. Our other income consisted of government grants and revenue from sales of scrap materials.
Income Taxes. Ossen Materials and Ossen Jiujiang have been recognized by their respective local
government agencies as high-tech enterprises. As a result, both subsidiaries were subject to an income tax rate of 15%
under relevant PRC income tax laws in 2013, 2014 and 2015.
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.
2015
Revenues
117,908,416
Cost of Goods Sold 102,197,994
15,710,422
Gross profit
Selling expenses
986,378
General and
administrative
expenses
Total operating
expenses
Income from
operation
4,478,413
5,464,791
10,245,631
% of Revenue
2014
For the Year Ended December 31,
% of Revenue
2013
% of Revenue
100.0% 123,571,455
86.7% 110,250,876
13.3% 13,320,579
772,383
0.8%
100.0% 113,891,989
89.2% 102,353,957
10.8% 11,538,032
625,500
0.6%
3.8% 6,340,584
5.1% 3,485,118
4.6% 7,112,967
5.8% 4,110,618
8.7% 6,207,612
5.0% 7,427,414
100.0%
89.9%
10.1%
0.5%
3.1%
3.6%
6.5%
Financial expenses,
net
Other income, net
Income before
income taxes
Income Taxes
Net Income
(2,823,952 )
371,894
7,793,573
(1,180,167 )
6,613,406
716,602
Less: net income
attributable to non-
controlling interest
Net income
attributable to
controlling interest 5,896,804
Other
comprehensive
income- Foreign
currency translation
gain (loss)
Total other
comprehensive
income (loss)
Comprehensive
Income
(5,829,470 )
(5,829,470 )
67,334
-2.4% (2,401,268)
907,941
0.3%
-1.9% (2,696,966)
558,426
0.7%
6.6% 4,714,285
-1.0%
(578,727)
5.6% 4,135,558
3.8% 5,288,874
-0.5% (1,219,030)
3.3% 4,069,844
-2.4%
0.5%
4.6%
-1.1%
3.6%
0.6%
276,682
0.2%
426,440
0.4%
5.0% 3,858,876
3.1% 3,643,404
3.2%
-4.9%
779,135
0.6% 1,647,348
1.4%
-4.9%
779,135
0.6% 1,647,348
0.1% 4,638,011
3.8% 5,290,752
1.4%
4.6%
43
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Revenues. During the year ended December 31, 2015, we had revenues of approximately $117.9 million as
compared to revenues of approximately $123.6 million during year ended December 31, 2014, a decrease of
approximately $5.7 million, or 4.6%. The decrease in our revenues during the year ended December 31, 2015 was
mainly attributable to a decrease in sales of rare earth coated PC wires and PC strands, partially offset by an increase
in sales of plain surface products and spare raw materials and service revenue.
The following table provides a breakdown of our revenues during the years ended December 31, 2015 and
2014, respectively:
Year ended December 31,
2015
Revenue ($) % of Total Revenue
2014
Revenue ($) % of Total Revenue
Difference
Products:
Plain surface PC strands 16,394,864
Zinc coated PC wires
and PC strands
Rare earth coated PC
wires and PC strands
Others
Total
85,007,683
6,046,843
117,908,416
10,459,026
13.9% 12,198,665
9.9%
34.4%
8.9% 10,030,458
8.1%
4.3%
72.1% 97,566,192
5.1% 3,776,140
100% 123,571,455
79.0%
3.1%
100%
-12.9%
60.1%
-4.6%
In 2015, the demand for our products, including both plain surface products and coated products, recovered
slightly compared to 2014, as we sold more products in 2015. However, revenues of our rare earth coated products
decreased due to lower prices compared to 2014. The domestic PRC steel industry was still difficult due to the
downturn and overcapacity of the whole industry, with resulting in lower prices on most steel products compared to
2014, affecting all of our products, and in particular our higher strength rare earth coated products. As a result, the
sales of rare earth coated PC wires and PC strands decreased by $12.6 million, or 12.9%, to $85.0 million for the
year of 2015.
The sales of zinc coated PC wires and PC strands were $10.5 million during the year ended December 31,
2015, an increase of 4.3%, compared to the year ended December 31, 2014. The slight increase of sales generated by
zinc coated products in 2015 was primarily due to the increase in demand, partially offset by the price decline in
2015.
The sales of plain surface PC strands and PC wires were $16.4 million during the year ended December 31,
2015, an increase of $4.2 million, or 34.4%, compared to the year ended December 31, 2014. This increase of sales
generated by plain surface PC strands and PC wires was primarily due to the recovery of the demand, partially offset
by the price decline in 2015.
Other sales were $6.0 million during the year ended December 31, 2015, an increase of $2.3 million, or
60.1%, compared to the year ended December 31, 2014. This increase was primarily due to the 49.9% increase of
service revenue and the 82.7% increase in revenue generated by selling spare raw materials in 2015 compared to
2014.
Gross Profit and Gross Margin. Our gross profit increased 17.9% to approximately $15.7 million during
the year ended December 31, 2015, from approximately $13.3 million for the same period in 2014. For the years
ended December 31, 2015 and 2014, our gross margin was 13.3% and 10.8%, respectively. The increase of gross
margin was primarily due to the decrease of average price of raw materials. The gross margin of plain surface
products increased approximately 6.0% due to average price of its raw material decreased significantly. The gross
margin of rare earth coated products increased only slightly mainly because average price of its raw material, high
carbon steel wire, declined less as compared to the decline in prices of our other raw materials.
Selling Expenses. Selling expenses was $1.0 million for the year ended December 31, 2015, as compared to
$0.8 million for the year ended December 31, 2014, an increase of 27.7%. This increase was attributable primarily
due to higher transportation cost associated with new overseas' customers and higher commission fees.
General and Administrative Expenses. General and administrative expenses totaled $4.5 million for the
year ended December 31, 2015, as compared to $6.3 million for the year ended December 31, 2014, a decrease of
29.4%. The decrease in 2015 was primarily due to the collection of account receivables which reduced bad debt
provision and the decrease of research and development expenses.
44
Operating Income. As a result of the foregoing, operating income for the year ended December 31, 2015
was approximately $10.2 million, an increase of 65.0% as compared to approximately $6.2 million for the same
period in 2014. This increase was primarily due to the increase in gross profit and the decrease in general and
administrative expenses. As a percentage of net sales, operating income increased from 5.0% to 8.7% during the
year ended December 31, 2015.
Income Taxes. We incurred income tax expenses of $1.2 million and $0.6 million in the fiscal years ended
December 31, 2015 and 2014, respectively. Ossen Materials and Ossen Jiujiang were subject to a 15% tax rate as the
result of being designated as high-tech enterprises through 2018.
Net Income. As a result of the foregoing, our net income was approximately $6.6 million for the year ended
December 31, 2015, as compared to approximately $4.1 million for the year ended December 31, 2014, an increase
of 59.9%.
Net Income Attributable to Non-controlling Interest. We own 81% of Ossen Materials and 96.1% of Ossen
Jiujiang in the aggregate. Net income attributable to non-controlling interest represents the net income attributable to
the holders of the remaining shares.
Foreign Currency Income (Loss). For the year ended December 31, 2015, foreign currency exchange loss
was $5.8 million, compared to foreign currency exchange gain of $0.8 million, for the year ended December 31,
2014.
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
Revenues. During the year ended December 31, 2014, we had revenues of approximately $123.6 million as
compared to revenues of approximately $113.9 million during year ended December 31, 2013, an increase of
approximately $9.7 million, or 8.5%. The increase in our revenues during the year ended December 31, 2014 was
mainly attributable to an increase in sales of rare earth coated PC wires and PC strands.
The following table provides a breakdown of our revenues during the years ended December 31, 2014 and
2013, respectively:
Year ended December 31,
2014
Revenue ($) % of Total Revenue
2013
Revenue ($) % of Total Revenue
Change from
2013 to 2014
12,198,665
Products:
Plain surface PC
strands
Zinc coated PC wires
and PC strands
Rare earth coated PC
wires and PC strands 97,566,192
3,776,140
Others
123,571,455
Total
10,030,458
9.9% 11,874,856
8.1% 10,025,847
79.0% 90,563,991
3.1%
1,427,295
100% 113,891,989
45
10.4%
8.8%
79.5%
1.3%
100%
1.9%
0.5%
7.8%
164.6%
8.5%
The market for our higher strength rare earth coated products was in the slow recovery process and the
demand for our higher strength and higher margin rare earth coated products slightly improved compared to 2013
but was still at low level in 2014. However, the demand for lower strength coated materials was at a higher level
compared to higher strength coated materials and we used lower grade raw materials for some of our rare earth
coated products to improve margins without sacrificing product strength or quality. As a result, we sold these
products at a more competitive price than our competitors due to lower cost of raw materials and we were able to
increase the sales of rare earth coated PC wires and PC strands by $7.0 million, or 7.8%, to $97.6 million for the
year of 2014.
The sales of zinc coated PC wires and PC strands were $10.0 million during the year ended December 31,
2014, an increase of 0.5%, compared to the year ended December 31, 2013. The slight increase of sales generated by
zinc coated products in 2014 was primarily due to the slow recovery of the market in 2014.
The sales of plain surface PC strands and PC wires were $12.2 million during the year ended December 31,
2014, an increase of $0.3 million, or 1.9%, compared to the year ended December 31, 2013. This increase of sales
generated by plain surface PC strands and PC wires was primarily due to new international markets developed,
especially Japan, which normally has higher gross margin compared to the domestic market.
Other sales were $3.8 million during the year ended December 31, 2014, an increase of $2.3 million, or
164.6%, compared to the year ended December 31, 2013. This increase was primarily due to more spare raw
materials sold in 2014 compared to 2013 and the increase of service revenue.
Cost of Goods Sold. Cost of goods sold was approximately $110.3 million during the year ended December
31, 2014, as compared to approximately $102.4 million during the year ended December 31, 2013, representing an
increase of 7.8%, or approximately $7.9 million. This increase primarily resulted from the increase of revenues and
partially offset by the decrease of average price of raw materials. As a percentage of revenues, cost of goods sold
decreased from 89.9% to 89.2% during the year ended December 31, 2014.
Gross Profit and Gross Margin. Our gross profit is equal to the difference between our revenues and our
cost of goods sold. Our gross profit increased 15.4% to approximately $13.3 million during the year ended
December 31, 2014, from approximately $11.5 million for the same period in 2013. For the years ended December
31, 2014 and 2013, our gross margin was 10.8% and 10.1%, respectively. The increase of gross margin was
primarily due to the decrease of average price of raw materials and new international market developed, especially
Japan, which normally has higher gross margin compared to domestic market.
Selling Expenses. Selling expenses totaled $0.8 million for the year ended December 31, 2014, as compared
to $0.6 million for the year ended December 31, 2013, an increase of 23.5%. This increase was attributable primarily
due to higher transportation cost associated with new overseas' customers and higher commission fees.
General and Administrative Expenses. General and administrative expenses totaled $6.3 million for the
year ended December 31, 2014, as compared to $3.5 million for the year ended December 31, 2013, an increase of
81.9%. The increase in 2014 was primarily due to increase in research and development expenses. The increase in
research and development expenses was primarily due to the cost associated with the development of products for
new customers and rare earth zinc-aluminum coated products.
46
Operating Income. As a result of the foregoing, operating income for the year ended December 31, 2014
was approximately $6.2 million, a decrease of 16.4% as compared to approximately $7.4 million for the same period
in 2013. This decrease was primarily due to a $2.7 million increase in research and development expenses and a
$0.5 million increase in bad-debt provision. As a percentage of net sales, operating income decreased from 6.5% to
5.0% during the year ended December 31, 2014.
Income Taxes. We incurred income tax expenses of $0.6 million and $1.2 million in the fiscal years ended
December 31, 2014 and 2013, respectively. Ossen Materials was subject to a 15% tax rate through 2014 as the result
of its being designated a high-tech enterprise. In 2012, Ossen Materials renewed its status 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 it is considered as a high-tech enterprise by the PRC government. We intend to renew both subsidiaries’
status of high-tech enterprise and continue to be subject to a 15% tax rate before they are expired, but there can be
no assurance our renewal of tax status will be successful.
Net Income. As a result of the foregoing, our net income totaled approximately $4.1 million for the year
ended December 31, 2014, as compared to approximately $4.1 million for the year ended December 31, 2013, an
increase of 1.6%.
Net Income Attributable to Non-controlling Interest. We own 81% of Ossen Materials and 96.1% of Ossen
Jiujiang in the aggregate. Net income attributable to non-controlling interest represents the net income attributable to
the holders of the remaining shares.
Foreign Currency Translation. Our financial statements are expressed in U.S. dollars but the functional
currency of our operating subsidiaries is RMB. Our results of operations are translated at average exchange rates
during the relevant financial reporting periods, assets and liabilities are translated at the unified exchange rate at the
end of these periods and equity is translated at historical exchange rates. Adjustments resulting from the process of
translating the local currency financial statements into U.S. dollars are included in determining comprehensive
income.
Critical Accounting Policies and Estimates
Our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. Our
financial statements reflect the selection and application of accounting policies, which require management to make
significant estimates and judgments. See Note 2 to our consolidated financial statements for “Summary of
Significant Accounting Policies.” We believe that the following paragraphs reflect the most critical accounting
policies that currently affect our financial condition and results of operations.
Use of Estimates
The preparation of the consolidated and combined financial statements in conformity with generally
accepted accounting principles in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses
during the reporting periods. Management makes these estimates using the best information available at the time the
estimates are made. Actual results could differ from those estimates.
Revenue Recognition
In accordance with the ASC Topic 605, “Revenue Recognition”, the Company recognizes revenue when
persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s
price to the buyer is fixed or determinable, and collectability is reasonable assured.
The Company derives revenues from the processing, distribution and sale of own products. The Company
recognizes its revenues net of value-added taxes (“VAT”). The Company is subject to VAT which is levied on the
rate of 17% on the invoiced value of sales. Output VAT is borne by customers in addition to the invoiced value of
sales and input VAT is borne by the Company in addition to the invoiced value of purchases to the extent not
refunded for export sales.
47
The Company will recognize revenue for domestic sales based on the terms defined in the contract as long
as risk of loss has transferred to the customers and each of the criteria under ASC 605 have been met. Contracts
terms may require the Company to deliver the finished goods to the customers’ location or the customer may pick up
the finished goods at the Company’s factory. International sales are recognized when shipment clears customs and
leaves the port.
The Company also derives an insignificant amount of revenue from providing services to select customers.
Service revenues accounted for less than 2% of total revenues for all periods presented and was recognized when
services were rendered.
Contracts with distributors do not offer any chargeback or price protection. The Company experienced no
product returns and recorded no reserve for sales returns for the years ended December 31, 2015, 2014 and 2013.
Research and Development
Research and development costs are expensed as incurred and totaled approximately $3,404,333,
$3,914,918 and $1,260,440 for the years ended December 31, 2015, 2014 and 2013, respectively. Research and
development costs are included in general and administrative expenses in the accompanying statements of
operations. Research and development costs are incurred on a project specific basis.
Income Taxes
The Company accounts for income taxes following the liability method pursuant to FASB ASC 740
“Income Taxes”. Under this method, deferred tax assets and liabilities are determined based on the difference
between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in
the period in which the differences are expected to reverse. The Company records a valuation allowance to offset
deferred tax assets if, based on the weight of available evidence, it is more-likely-than-not that some portion, or all,
of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rate is recognized in
income in the period that includes the enactment date.
The Company also follows FASB ASC 740, which addresses the determination of whether tax benefits
claimed or expected to be claimed on a tax return should be recorded in the financial statements. The Company may
recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be
sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits
recognized in the financial statements from such a position should be measured based on the largest benefit that has
a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance
on recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires
increased disclosures. As of December 31, 2015, the Company did not have a liability for unrecognized tax benefits.
The Company has not provided for income taxes on accumulated earnings amounting $50,258,265 that are
subject to the PRC dividend withholding tax as of December 31, 2015, since these earnings are intended to be
permanently reinvested.
Fair Value of Financial Instruments
The Company applies the provisions of ASC 820, Fair Value Measurements and Disclosures, to the
financial instruments that are required to be carried at fair value. Fair value is the price that would be received to sell
an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants at the measurement date. The Company uses a three-
tier fair value hierarchy based upon observable and non-observable inputs that prioritizes the information used to
develop our assumptions regarding fair value. Fair value measurements are separately disclosed by level within the
fair value hierarchy. FASB ASC 820 (formerly SFAS No. 157 Fair Value Measurements) establishes a three-tier fair
value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy prioritizes the inputs into
three levels based on the extent to which inputs used in measuring fair value are observable in the market
48
These tiers include:
Level 1—defined as observable inputs such as quoted prices in active markets for identical assets or liabilities;
Level 2—defined as inputs other than quoted prices in active markets that are either directly or indirectly
observable; and
Level 3—defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to
develop its own assumptions.
The company’s financial instruments primarily consist of cash and cash equivalents, restricted cash,
accounts receivable, notes receivable, accounts payable, other payables and accrued liabilities, short-term bank loans,
and bond payable.
The carrying value of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, and
other current assets and liabilities approximate fair value because of the short term nature of these items. The
estimated fair values of short-term bank loans were not materially different from their carrying value as presented
due to the short maturities and that the interest rates on the borrowing approximate those that would have been
available for loans of similar remaining maturity and risk profile. As the carrying amounts are reasonable estimates
of the fair value, these financial instruments are classified within Level 1 of the fair value hierarchy.
Bond payable whose value is derived from a similar bond that is publicly traded whose price is evaluated
where the inputs to the valuation are primarily based upon readily observable pricing information. Bond payable is
classified within Level 2 of the fair value hierarchy. The balance of bond payable, which was measured and
disclosed at fair value, was $15,273,177 and $15,972,837 at December 31, 2015 and 2014, respectively.
Accounts Receivable
Accounts receivable are carried at net realizable value. The Company reviews its accounts receivables on a
periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual
balances. In evaluating the collectability of individual receivable balances, the Company considers many factors,
including the age of the balance, customer’s historical payment history, its current credit-worthiness and current
economic trends. Accounts are written off after exhaustive efforts at collection. If accounts receivable are to be
provided for, or written off, they would be recognized in the consolidated statement of operations within operating
expenses. Balance of allowance of doubtful accounts was $738,101 and $1,874,330 at December 31, 2015 and 2014,
respectively.
Inventories
Inventories are stated at the lower of cost or net realizable value, which is based on estimated selling prices
less any further costs expected to be incurred for completion and disposal. Cost of raw materials is calculated using
the weighted average method and is based on purchase cost. Work-in-progress and finished goods costs are
determined using the weighted average method and comprise direct materials, direct labor and an appropriate
proportion of overhead. The Company considers a provision for excess, obsolete, or slow-moving inventory based
on changes in customer demand, technology developments or other economic factors. At December 31, 2015 and
2014, 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 $55,730,089 and $56,327,390 at December 31, 2015 and 2014,
respectively. Among the balance of $55,730,089, the aging of $36,278,463 was within 60 days, $13,054,423 was
between 60-90 days and $6,397,203 was over 90 days. No allowance was provided for the prepayments balance at
December 31, 2015.
49
In 2015, the PRC steel industry was still in a process of reducing inventory. We were able to receive raw
materials delivered by our suppliers in 2015 at a discounted price, locked in by prepayments. We expect to continue
gradually reducing our balance of advance to suppliers once market conditions improve.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost less accumulated depreciation, and include expenditure
that substantially increases the useful lives of existing assets.
Depreciation is provided over their estimated useful lives, using the straight-line method. Estimated useful
lives are as follows:
Plant, buildings and improvements
Machinery and equipment
Motor vehicles
Office Equipment
5 ~ 20 years
5 ~ 20 years
5 years
5 ~ 10 years
When assets are sold or retired, their costs and accumulated depreciation are eliminated from the
consolidated financial statements and any gain or loss resulting from their disposal is recognized in the period of
disposition as an element of other income. The cost of maintenance and repairs is charged to income as incurred,
whereas significant renewals and betterments are capitalized.
Land Use Rights
According to the PRC laws, the government owns all the land in the PRC. Companies or individuals are
authorized to possess and use the land only through land use rights granted by the Chinese government. The land use
rights granted to the Company are being amortized using the straight-line method over the lease term of fifty years.
Impairment of Long-Lived Assets
Long-lived assets are evaluated for impairment periodically whenever events or changes in circumstances
indicate that their related carrying amounts may not be recoverable in accordance with FASB ASC 360, “Property,
Plant and Equipment”.
In evaluating long-lived assets for recoverability, the Company uses its best estimate of future cash flows
expected to result from the use of the asset and eventual disposition in accordance with FASB ASC 360-10-15. To
the extent that estimated future, undiscounted cash inflows attributable to the asset, less estimated future,
undiscounted cash outflows, are less than the carrying amount, an impairment loss is recognized in an amount equal
to the difference between the carrying value of such asset and its fair value. Assets to be disposed of and for which
there is a committed plan of disposal, whether through sale or abandonment, are reported at the lower of carrying
value or fair value less costs to sell.
No impairment loss is subsequently reversed even if facts and circumstances indicate recovery. There was
no impairment loss recognized for the years ended December 31, 2015, 2014 and 2013.
Related Party
In general, related parties exist when there is a relationship that offers the potential for transactions at less
than arm’s-length, favorable treatment, or the ability to influence the outcome of events different from that which
might result in the absence of that relationship. A related party may be any of the followings: a) affiliate, a party that
directly or indirectly controls, is controlled by, or is under common control with another party; b) principle owner,
the owner of record or known beneficial owner of more than 10% of the voting interest of an entity; c) management,
persons having responsibility for achieving objectives of the entity and requisite authority to make decision; d)
immediate family of management or principal owners; e) a parent company and its subsidiaries; d) other parties that
has ability to significant influence the management or operating policies of the entity.
50
FASB issued authoritative guidance that clarifies considerations relating to the consolidation of certain
entities. The guidance requires identification of the Company’s participation in variable interest entities (“VIE”),
which are defined as entities with a level of invested equity that is not sufficient to fund future activities to permit
them to operation on a standalone basis, or whose equity holders lack certain characteristics of a controlling
financial interest. That, for entities identified as a VIE, the guidance sets forth a model to evaluate potential
consolidation based on an assessment of which party to a VIE, if any, bears a majority of the exposure to expected
losses, or stand to gain from majority of its expected returns. The guidance also sets forth certain disclosure
regarding interests in a VIE that are deemed significant even if consolidation is not required. This item is discussed
in further detail in Note 10 – Related Party Transactions.
Recently Issued Accounting Pronouncements
In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606):
Deferral of the Effective Date, which defers the effective date of ASU 2014-09 for all entities by one year. Public
business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in
ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods
within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after
December 15, 2016, including interim reporting periods within that reporting period. Currently, the Company is
evaluating the impact of our pending adoption of ASU 2014-09 and ASU 2015-14 on its consolidated financial
statements and has not yet determined the method by which it will adopt the standard in year 2018.
In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of
Inventory” (“ASU 2015-11”). The amendments in this update require an entity to measure inventory within the
scope of ASU 2015-11 (the amendments in ASU 2015-11 do not apply to inventory that is measured using last-in,
first-out or the retail inventory method. The amendments apply to all other inventory, which includes inventory that
is measured using first-in, first-out or average cost) at the lower of cost and net realizable value. Net realizable value
is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion,
disposal, and transportation. Subsequent measurement is uncharged for inventory measured using last-in, first-out or
the retail inventory method. The amendments in ASU 2015-11 more closely align the measurement of inventory in
U.S. GAAP with the measurement of inventory in International Financial Reporting Standards (“IFRS”). ASU 2015-
11 is effective for public business entities for fiscal years beginning after December 15, 2016, including interim
periods within those fiscal years. The amendments in ASU 2015-11 should be applied prospectively with earlier
application permitted as of the beginning of an interim or annual reporting period. The adoption of this guidance is
not expected to have a material impact on our consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes (Topic
740):changes to the balance sheet classification of deferred taxes. These changes simplify the presentation of
deferred income taxes by requiring all deferred income tax assets and liabilities to be classified as noncurrent in a
classified balance sheet. The amendments in ASU 2015-17 are effective for financial statements issued for annual
periods beginning after December 15, 2016, and interim periods within those annual periods. The adoption of this
guidance is not expected to have a material impact on our consolidated financial statements.
51
5B. Liquidity and Capital Resources
The major sources of our liquidity for 2013, 2014 and 2015 were income from operations and bank
borrowings, including loans from banks and bank acceptance notes. In 2014, in addition to bank borrowings, our
subsidiary in Maanshan, Ossen Materials, completed a private placement of approximately $16.2 million in
aggregate principal amount of notes to certain accredited investors in China. The notes bear a fixed interest rate of
10.75% per annum, payable annually in arrears, and mature on September 2, 2016. After deducting placement agent
fees and other offering expenses, Ossen Materials received net proceeds of approximately $15.4 million. We expect
to finance our operations and working capital needs 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 $0.8 million at
December 31, 2015, as compared to $0.7 million at December 31, 2014 and $1.1 million at December 31, 2013. Our
restricted cash was approximately $8.8 million at December 31, 2015, as compared to $17.6 million at December 31,
2014 and $31.8 million at December 31, 2013. For the years ended December 31, 2013, 2014 and 2015, we used a
significant portion of our cash reserve to purchase raw materials to satisfy our production needs and to maintain
satisfactory levels of inventory. In addition, since 2013, we have been required to provide cash deposits, instead of
bank guarantee letters, when we bid for projects, which results in further pressure on our working capital. Yet,
during this time period, local banks have generally maintained tighter lending policies than in the past, thereby
limiting our ability to borrow funds in order to win bids that we believe we otherwise could have won. Although our
production facilities are running at full capacity, the bids we are losing due to lack of up-front cash deposit may be
more profitable than the ones we are winning, which could negatively impact our overall revenue and profitability.
In 2013, 2014 and 2015, we were able to generate net profits and positive cash flow from operating activities. We
believe that our cash reserves, together with expected cash flow from operations and short-term loans, are sufficient
to allow us to continue to operate for the next 12 months In addition, we intend to consummate another bond
offering to repay these notes but there is no guarantee that we will be successful in such offering. For details of our
bank loans and notes payables please see “Bank Loans and Bank Acceptance Notes” below.
We had $8.4 million of accounts receivable aged over 180 days as of December 31, 2015. As of February
29, 2016, we have collected approximately $0.7 million of such receivables. The remaining approximately $7.7
million of uncollected accounts receivable are mainly from construction companies that have long-term business
relationship with us. Due to the longer cycle of some of their construction projects, we have offered them a longer
payment term to accommodate their situation. Based on our historical experience, most of these projects are
government sponsored programs and we are confident that we will be able to collect the balance when the projects
are completed.
We received net proceeds of $20.3 million from our initial public offering in December 2010. Our intention
was to use the proceeds to increase our production capacity for rare earth coated products. However, our capacity
expansion plan was delayed due to among other reasons, the inability of our European supplier to fulfill the contract
in 2011 and 2012, and the new technology development in our industry. Furthermore, due to tight lending conditions
in the PRC since 2011, we used the proceeds to help financing our working capital.
52
Accounts Receivable
In 2014 and 2015, the accounts receivable collection period of our domestic customers generally was
approximately 150 days after receiving the materials at their construction site. As of December 31, 2014, our
accounts receivable increased to $53.8 million from $48.2 million at December 31, 2013. The increase was
primarily due to the prudent monetary policy maintained by the Chinese government in 2014, which impacted the
timing of our customers’ payments to us. Our accounts receivable decreased to $43.2 million at December 31, 2015
from $53.8 million at December 31, 2014 as a result of the collection of long aging accounts receivable during 2015.
The average Days Sales Outstanding (“DSO”) of 2014 and 2015 were 151 days and 150 days, respectively.
The DSO as of December 31, 2014 and 2015 were 159 days and 133 days, respectively. The decrease in DSO as of
December 31, 2015 was primarily due to the collection of long aging accounts receivable during 2015.
The following table describes the aging of our accounts receivable during 2014 and 2015:
As of Date
December 31, 2015
December 31, 2014
Account Receivables
Balance (in US
Dollars)
<60 days 60-90 days 90-180 days >180 days
43,247,974 25,039,184 3,166,578 6,622,723 8,419,489
53,764,414 16,547,314 12,798,090 11,177,912 13,241,098
As of February 29, 2016, we have collected approximately $10.3 million or 23.8% of the $43.2 million of
accounts receivable outstanding as of December 31, 2015 in cash. See Note 2 to our audited financial statements for
a schedule of our valuation account.
Major Customers
During the years ended December 31, 2015, 2014 and 2013, our six largest customers contributed 79.5%,
74.9% and 61.3% of our total sales, respectively. See “Business—Our Customers” above. As a result of our reliance
on a limited number of customers, we may face pricing and other competitive pressures, which may have a material
adverse effect on our profits and our revenues. The volume of products sold for specific customers varies from year
to year, especially since we are not the exclusive supplier for any customers. In addition, there are a number of
factors, other than our performance, that could cause an unpredictable loss of a customer or substantial reduction in
the business. For example, our customers may decide to reduce spending on our products due to insufficient funding
or delay of the project, or a customer may no longer need our products following the completion of a project. The
loss of any one of our major customers, a decrease in the volume of sales to these customers or a decrease in the
price at which we sell our products to them could materially adversely affect our profits and our revenues.
In addition, this customer concentration may subject us to perceived or actual leverage that our customers
may have in negotiations with us, given their relative size and importance to us. If our customers seek to negotiate
their agreements on terms less favorable to us and we accept such unfavorable terms, such unfavorable terms may
have a material adverse effect on our business, financial condition and results of operations. Accordingly, unless and
until we diversify and expand our customer base, our future success will significantly depend upon the timing and
volume of business from our largest customers and the financial and operational success of these customers.
53
Bank Loans and Bank Acceptance Notes
At December 31, 2015, we had approximately $17.7 million of short-term bank loans and $12.5 million of
bank acceptance notes outstanding, as compared to approximately $18.7 million of short-term bank loans and $26.5
million of bank acceptance notes outstanding at December 31, 2014 and $27.3 million and $51.0 million at
December 31, 2013, respectively. The decreased balance in 2015 was primarily due to the fact that the Chinese
government was still conservative in lending to certain industries including steel industry and our domestic
customers.
Our notes payable of $12.5 million at December 31, 2015 represented the amount of bank acceptance notes
our suppliers received from us for our purchases of raw materials. These notes were issued by financial institutions,
typically by banks, that entitle our suppliers to receive the full face amount from the bank or financial institution at
maturity. Our notes payable are interest-free and range from six months to one year from the date of issuance. These
notes are subject to bank charges of 0.05% of the principal amount as commission on each issuance and in total are
secured by $8.8 million restricted cash as of December 31, 2015. Bank acceptance notes are commonly used in
domestic China due to their enhanced credibility and the liquidity it provides to the bearer. The bearer always has
the option to cash the bank acceptance notes before maturity at its issuing bank and receive a discounted amount in
cash. We expect that bank acceptance notes will continue to account for a material portion of our total receivables
and payables in the near future.
Short-term bank loans were obtained from local banks in China. All short-term bank loans are repayable
within one year and are secured by a portion of our property, plant and equipment and land use rights, or guaranteed
by related parties. None of our short-term bank loans have financial covenants. However, each loan contains a
covenant that restricting our use of the funds to either purchases of raw materials or working capital.
The weighted average annual interest rate of our short-term bank loans was 6.18%, 7.14% and 7.00% as of
December 31, 2015, 2014 and 2013, respectively. Interest expense was $1.0 million, $1.9 million and $2.7 million
for the years ended December 31, 2015, 2014 and 2013, respectively.
Due to the Chinese government’s policy to reduce the country’s steel capacity, Chinese banks further
tightened lending to steel companies. We were also affected by this policy and we had to repay a portion of our short
term bank loans in 2015 without being able to roll-over such loans into new short-term loans. However, we did not
experience difficulties in the rollover of the remaining short-term bank loans that we use to fund our daily operations
in 2015. In 2014, our subsidiary, Ossen Innovation Materials Co., Ltd., raised RMB 100 million (approximately
$16.2 million) in Chinese debt market which will mature in September 2016. We intend to consummate another
bond offering to repay this one but there is no guarantee that we will be successful in such offering. We anticipate
rollovers of most current facilities that are set to mature in 2016 and anticipate a slight reduction in the availability
of short-term bank loans but we do not anticipate any difficulties to fund our operations. Three of our affiliates,
namely Ossen Material Research (formerly Shanghai ZFX), Shanghai Ossen, and Ossen Shanghai, have provided
guarantees for certain of our short-term bank loans for no consideration. There can be no assurance that Shanghai
Zhaoyang, Ossen Material Research, Ossen Shanghai, and Shanghai Ossen will be willing or able to continue to
provide similar guarantees on this basis with respect to future borrowings.
Working Capital
Our working capital was approximately $94.7 million at December 31, 2015, as compared to $108.0
million at December 31, 2014 and $85.7 million at December 31, 2013.
The working capital decrease of $13.3 million in 2015 as compared with 2014 was due primarily to the
increase in the current portion of bond payable.
54
Inventories
We, like many other steel manufacturers, maintain substantial inventories of steel to accommodate the
short lead times and just-in-time delivery requirements of our customers. Accordingly, we purchase steel in an effort
to maintain our inventory at levels that we believe to be appropriate to satisfy the anticipated needs of our customers
based upon historic buying practices, supply agreements with customers and market conditions.
Cash Flows
Our cash flow from operations in 2015 was positive primarily due to a decrease in accounts receivable.
Years Ended December 31, 2015 and 2014
The following table sets forth a summary of our net cash flow information for the periods indicated:
Year Ended December 31,
2015
2014
Net cash provided by operating activities
$ 12,441,861 $ 1,804,435
Net cash used in investing activities
(29,687)
(80,985)
Net cash used in financing activities
(4,431,100) (3,500,632)
Operating Activities
Net cash provided by operating activities was approximately $12.4 million in 2015, as compared to $1.8
million of net cash provided by operating activities in 2014. This increase in cash provided by operating activities
was the result of a $2.5 million increase in net income due to improved gross margin and reduced SG&A expenses,
a $10.5 million decrease in accounts receivable due to increased efforts to collect long aging accounts receivable, a
$1.9 million decrease in notes receivable because our customers used more cash for payment, partially offset by a
$7.1 million increase in inventories due to raw materials purchased for preparation of new projects.
Investing Activities
Net cash used in investing activities was $29,687 in 2015, as compared to $80,985 of net cash provided by
investing activities in 2014 as the result of less spending in maintenance and repair of production lines in 2015.
Financing Activities
Net cash used in financing activities in 2015 was approximately $4.4 million, as compared to
approximately $3.5 million of net cash used in financing activities in 2014. The increase in cash used in financing
activities was the result of a decrease of proceeds from short-term bank loans and a decrease of proceeds from notes
payable, partially offset by a decrease in restricted cash and a decrease in repayments of short-term bank loans.
Years Ended December 31, 2014 and 2013
The following table sets forth a summary of our net cash flow information for the periods indicated:
Year Ended December 31,
2014
2013
Net cash provided by operating activities
$ 1,804,435 $ 10,011,383
Net cash provided by (used in) investing activities
(80,985) 8,055,576
Net cash used in financing activities
(3,500,632) (22,060,165)
55
Operating Activities
Net cash provided by operating activities was approximately $1.8 million in 2014, as compared to $10.0
million of net cash provided by operating activities in 2013. This decrease in cash provided by operating activities
was the result of a $5.6 million increase in accounts receivable as in line with the increase in revenues, a $5.7
million increase in advance to suppliers to secure the supply of raw materials for production, a $7.5 million increase
in notes receivable due to our customers prefer to use bank acceptance notes for payment, a $2.3 million decrease in
customer deposits due to less customers advanced payment, partially offset by a $12.9 million decrease in notes
receivable from related party which was all collected at the end of 2014.
Investing Activities
Net cash used in investing activities was $80,985 in 2014, as compared to $8.1 million of net cash provided
by investing activities in 2013 as the result of an $8.1 million withdrawal for prepayment for equipments of
expansion plan in 2013.
Financing Activities
Net cash used in financing activities in 2014 was approximately $3.5 million, as compared to
approximately $22.1 million of net cash used in financing activities in 2013. The decrease in cash used in financing
activities was the result of an increase in proceeds from bond payable, a decrease in restricted cash, and a decrease
in repayments of short-term bank loans and long-term bank loans, partially offset by a decrease of proceeds from
short-term bank loans and a decrease of proceeds from notes payable.
Governmental Regulations
See the discussion under the heading “Governmental Regulations” in Item 4 above for a discussion of
governmental policies or factors that could materially 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, 2015 we guaranteed $16.9 million, $32.3 million and $7.7 million short-term debt for
Shanghai Pujiang, Ossen Material Research and Ossen Shanghai respectively. We also guaranteed $34.1 million,
$12.3 million and $1.5 million of notes payable for the three companies respectively. We do not have any other off-
balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures
or capital resources that is material to our investors.
56
5.F. Tabular Disclosure of Contractual Obligations
Our contractual obligations consist of short-term and long-term debt obligations. The following table sets
forth a breakdown of our contractual obligations as of December 31, 2015:
Payments due by period
CONTRACTUAL OBLIGATIONS
Total
1-3 years 3-5 years
Less than
1 year
More than
5 years
Short-term debt obligations (1)
Interest Commitments – Short term bank
loans
Interest Commitments – Bond payable
Total
45,465,576 45,465,576
792,740
792,740
1,383,043 1,383,043
47,641,359 47,641,359
-
-
-
-
-
-
-
-
-
-
-
-
(1) Attributable to short-term bank loans, bank acceptance notes and principal payment of a bond issued by our
subsidiary in 2014, which is due in September 2016.
ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
6.A. Directors, Executive Officers and Key Employees
The following table sets forth the name, age, positions and a brief description of the business experience of
each of our directors, executive officers and key employees as of the date hereof.
Name
Liang Tang
Wei Hua
Feng Peng
Junhong Li
Xiaobing Liu
Yingli Pan
Zhongcai Wu
Position(s)
Age
Chairman of the Board
Chief Executive Officer and
Director
Chief Financial Officer
Director
Director
Director
Director
49
54
43
50
57
62
67
There are no family relationships among our directors and officers. There are no arrangements or
understandings with major shareholders, customers, suppliers or others, pursuant to which any person referred to
above was selected as a director or member of senior management, except as disclosed in Note 10 in the
“accompanying consolidated financial statements”. The address of each of our directors and executive officers is c/o
Ossen Innovation Co., Ltd., 518 Shangcheng Road, Floor 17, Shanghai, 200120, People’s Republic of China.
Executive Officers and Directors
Dr. Liang Tang was appointed as our Chairman following our business combination. Dr. Tang has been the
Chairman and President of Ossen Materials, our subsidiary, since 2008. Dr. Tang has also been President of
Shanghai Ossen Investment Holding (Group) Co., Ltd. since 2001. He has more than 20 years of experience in the
steel industry. Prior to joining our Company in 2004, from 1994 until 1998, Dr. Tang was the President of
Zhongmin Group of PRC Ministry of Civil Affairs. From 1988 until 1994, Dr. Tang was Head of Enterprise
Administrative Division of the Shanghai Municipal Metallurgical Industry Bureau. Prior to that date, Dr. Tang was
the Deputy Director of Enterprise Management at Baosteel Group Shanghai Ergang Co., Ltd., a competitor of ours.
Dr. Tang is involved in many charity affairs and social organizations including China Committee of Corporate
Citizenship and China Chamber of Metallurgy Industry. Dr. Tang has received the title of Shanghai Leader by the
Shanghai Municipal Government, Outstanding Innovation Entrepreneur by the Symposium on Chinese Enterprise
Innovation and the Royal Knight Medal of Spain by the King of Spain. Dr. Tang received a bachelor’s degree from
Shanghai University, a Masters degree in International Finance from Peking University and an MBA from Fordham
University. Dr. Tang also received a doctoral degree in world economics from East China Normal University.
57
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 of Ossen Jiujiang since 2007. Since 2000, he has been the Assistant Chief
Executive Officer for the Steel Department of Ossen Group. Before joining Ossen Group in 2000, from 1988 until
2000, Mr. Hua was a vice supervisor of the department of technology and quality supervision at Baosteel Group
Shanghai Ergang Co., Ltd. From 1985 until 1988, Mr. Hua worked at Shanghai No. 5 steel factory. He graduated
from Shanghai University with a degree in Business Management.
Mr. Feng Peng was appointed as our Chief Financial Officer in March 2013. On March 23, 2016, Mr. Peng
was nominated as the director of the Board by the Board of USANA Health Sciences, Inc. (NYSE: USNA) for
election at the Annual Shareholder Meeting, which will be hold on May 2, 2016. Mr. Peng served as Senior Vice
President at MZ Group from August 2007 until September 2013. 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
detailed intelligence on investor expectations, perceptions and concerns, industry analysis, compliance, and
reporting and disclosure requirements. Prior to working at MZ Group, he served in various capacities at Thomson
Financial and Citigroup. Mr. Peng has been trained in both Finance and Accounting. Mr. Peng graduated from New
Jersey Institute of Technology in Computer Science, earning a Master of Science degree. Mr. Peng earned a
bachelor’s degree in Automation Control from Shanghai Jiao Tong University in Shanghai, China in 1995. Mr. Peng
is certified Senior International Finance Manager (SIFM) in China. Mr. Peng is fluent in English and Mandarin.
Mr. Junhong Li has been one of our directors since July 2010. Mr. Li has been the Senior Partner and
Deputy Chief Accountant at Continental Certified Public Accountants since 2008. Prior to joining Continental
Certified Public Accountants in 2008, from 2007 until 2008, Mr. Li was the Executive Director and Chief Financial
Officer of ZMAY Holdings Limited. From 2004 until 2007, Mr. Li was Chief Financial Officer of Zhongmin On
Line Technology Co. Ltd. Mr. Li has more than 20 years of experience in mergers and acquisitions, reorganizations
and management consulting. Mr. Li received a bachelor’s degree from Central University of Finance and Economics
and he is qualified as a certified public accountant.
Mr. Xiaobing Liu has been one of our directors since July 2010. Mr. Liu has served as Chairman of the
Board of Huachen Trust since 2009. From 2005 until 2009, Mr. Liu was Chairman of the Board of Directors of
Shanghai Dingfeng Technology Co., Ltd. Since 2002, he has also been an independent director of Southern Building
Material Co., Ltd. Mr. Liu graduated from the University of Shanghai for Science and Technology with a bachelor’s
degree in optical instruments.
Ms. Yingli Pan has been one of our directors since July 2010. Professor Pan has been a professor in the
Department of Finance at Antai College of Economics & Management of Shanghai since 2005. Prior to being
appointed professor at Antai College of Economics & Management of Shanghai in 2005, from 1994 until 2005,
Professor Pan was a professor in the Finance Department at East China Normal University. Professor Pan received a
bachelor’s degree in economics from East China Normal University, a master’s degree in economics from Shanghai
University of Finance and Economics and a doctoral degree in economics from East China Normal University.
Mr. Zhongcai Wu has been one of our directors since July 2010. Mr. Wu has been Chief Engineer in the
Communications Department of Yunnan Province since 2002. Mr. Wu received a bachelor’s degree in road and
bridge engineering from Hunan University.
Each of our directors will serve as a director until our next annual general meeting and until their
successors are duly elected and qualified.
58
6.B. Compensation
For the year ended December 31, 2015, the aggregate cash compensation that we paid to our executive
officers and directors was approximately $86,300. For the year ended December 31, 2014, the aggregate cash
compensation that we paid to our executive officers and directors was approximately $86,300. There are no service
contracts between us and any of our directors, except for those directors who are also our executive officers.
Pursuant to PRC law, 25% of our executive officers’ salaries have been set aside for pension and retirement.
Employment Agreements
We have entered into an employment agreement with Dr. Liang Tang. Dr. Tang is employed as Chairman
of the Board of our Company. The term of his agreement expires on December 31, 2016. We compensate Dr. Tang
at an annual rate of approximately $14,106. We may terminate the employment agreement for cause as specified in
the agreement. Dr. Tang may terminate the employment agreement with thirty days written notice. The employment
agreement may be renewed upon the mutual agreement of the parties.
We have entered into an employment agreement with Mr. Feng Peng. Mr. Peng is employed as Chief
Financial Officer of our Company. The term of his agreement is from March 1, 2013 until March 1, 2014 and the
agreement may be automatically renewed for one year terms thereafter. As of the date hereof, the term of the
agreement has been automatically extended to March 2017. 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 the first annual meeting of the shareholders, directors are elected for a term of
office to expire at the next succeeding annual meeting of the shareholders after their election. Each director will hold
office until the expiration of his or her term of office and until his or her successor has been elected and qualified, or
until his or her earlier death, resignation or removal by the shareholders or a resolution passed by the majority of the
remaining directors.
In the interim between annual meetings of shareholders, or special meetings of shareholders called for the
election of directors, any vacancy on the board of directors may be filled by the vote of a majority of the remaining
directors then in office, although less than a quorum, or by the sole remaining director. A director elected to fill a
vacancy resulting from death, resignation or removal of a director will serve for the remainder of the full term of the
director whose death, resignation or removal will have caused such vacancy and until his successor will have been
elected and qualified.
Director Remuneration Upon Termination
The directors may receive such remuneration as our board of directors may determine from time to time.
The compensation committee will assist the directors in reviewing and approving the compensation structure for the
directors. Currently, our directors are not entitled to receive any remuneration upon termination of employment.
59
Audit Committee
Our audit committee consists of Junhong Li, Yingli Pan and Xiaobing Liu, each of whom satisfies the
independence requirements of Rule 10A-3 under the Securities Exchange Act of 1934, as amended, which we refer
to as the Exchange Act, and Rule 5605 of the NASDAQ rules. The audit committee oversees our accounting and
financial reporting processes and audits of the financial statements of our company. The audit committee is
responsible for, among other things:
·
·
·
·
·
·
selecting our independent auditors and pre-approving all audit and non-audit services permitted to be
performed by our independent auditors;
reviewing with our independent auditors any audit problems or difficulties and management’s
response;
reviewing and approving all proposed related party transactions, as defined in Item 404 of Regulation
S-K;
discussing our annual audited financial statements with management and our independent auditors;
reviewing major issues as to the adequacy of our internal controls and any special audit steps adopted
in light of material control deficiencies; and
meeting separately and periodically with management and our independent auditors.
Compensation Committee
Our compensation committee consists of Xiaobing Liu, Yingli Pan and Junhong Li, each of whom satisfies
the independence requirements of Rule 5605 of the NASDAQ rules. The compensation committee assists the Board
in reviewing and approving the compensation structure, including all forms of compensation relating to our directors
and executive officers. Our Chief Executive Officer may not be present at any committee meeting during which his
compensation is deliberated. The compensation committee is responsible for, among other things:
·
·
reviewing and approving the total compensation package for our senior executives; and
reviewing periodically, and approving, any long-term incentive compensation or equity plans,
programs or similar arrangements, annual bonuses, employee pension and welfare benefit plans.
Corporate Governance and Nominating Committee
Our corporate governance and nominating committee consists of Yingli Pan, Zhongcai Wu and Xiaobing
Liu, each of whom satisfies the independence requirements of Rule 5605 of the NASDAQ rules. The corporate
governance and nominating committee assists the board in selecting individuals qualified to become members of our
board and in determining the composition of the board and its committees. The corporate governance and
nominating committee is responsible for, among other things:
·
·
identifying and recommending to the board qualified candidates to be nominated for the election or re-
election to the board of directors and committees of the board of directors, or for appointment to fill
any vacancy;
reviewing annually with the board of directors the current composition of the board of directors with
regards to characteristics such as independence, age, skills, experience and availability of service to
us; and
·
advising the board of directors periodically with regard to significant developments in the law and
practice of corporate governance as well as our compliance with these laws and practices, and making
recommendations to the board of directors on all matters of corporate governance and on any remedial
actions to be taken, if needed.
60
6.D. Employees
See the section entitled “Employees” in Item 4.B above.
6.E. Share Ownership
As of April 14, 2016, 19,828,790 of our ordinary shares were outstanding. Holders of our ordinary shares
are entitled to vote together as a single class on all matters submitted to shareholders for approval. No holder of
ordinary shares has different voting rights from any other holders of ordinary shares. We are not aware of any
arrangement that may, at a subsequent date, result in a change of control of our company. Approximately 5,988,290
of our ordinary shares represented by American Depositary Receipts are held by an aggregate of 1 record holder in
the United States.
Beneficial ownership is determined in accordance with the rules and regulations of the SEC. The
percentages of shares beneficially owned in the table below are based on 19,828,790 ordinary shares outstanding as
of April 14, 2016.
The following table sets forth information with respect to the beneficial ownership of our common shares
as of April 14, 2016 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
Directors, Executive Officers and 5% Shareholders (1) :
Liang Tang
Wei Hua (2)
Feng Peng
Junhong Li
Xiaobing Liu
Yingli Pan
Zhongcai Wu
Number of
Shares
Percentage
11,889,500
60.0%
600,000
3.0%
-
-
-
-
-
-
-
-
-
-
(1) Beneficial ownership is determined in accordance with the rules and regulations of the SEC. Percentage of
beneficial ownership of each listed person is based on ordinary shares outstanding as of the date of this filing,
including ordinary shares convertible from all outstanding preferred shares, and the ordinary shares
underlying any options and warrants exercisable by such person within 60 days of the date of this filing.
Percentage of beneficial ownership of each listed person is based on ordinary shares outstanding as of April
14, 2016 and the ordinary shares underlying any options and warrants exercisable by such person within 60
days of the date of this filing.
(2) The spouse of our chief executive officer, Wei Hua, owns 100% of the shares of Fascinating Acme
Development Ltd., which owned 3% of the shares of Ossen Innovation Group prior to the business
combination, and owns 3% of our shares since the business combination. Mr. Hua may be deemed to
beneficially own these shares under SEC rules and regulations.
61
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 to acquire 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 stock options to our officers, directors, and
executive, managerial, professional or administrative employees or our subsidiaries or joint ventures, and to our
consultants. 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, with incentives to: (a) enter into and remain in
our service, (b) acquire a proprietary interest in our success, (c) maximize their performance and (d) enhance our
long-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 board of directors for that purpose. The administrator has full power and authority
to administer, construe and interpret the 2010 Plan. Grants under the 2010 Plan will 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 terms of 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 immediately and vested options may be exercised during the three-month
period following termination, after which they will expire. If the employee terminates 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 to be effective after the 2010 Plan’s termination. We do not have intention to
extend the plan or enter into a new plan in 2015.
Our board of directors has the authority to amend, alter, suspend or terminate the 2010 Plan or any
outstanding stock option. The consent of an option 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
62
Several of our subsidiaries and affiliates which are, or at one time were, controlled by our chairman,
transferred shares with other entities controlled by Dr. Tang. See the discussion under Item 4.C above for a
description of these transactions.
Issuance of Shares to Related Parties
The spouse of our chief executive officer, Wei Hua, owns 100% of the shares of Fascinating Acme
Development Ltd., which owns 3% of our outstanding ordinary shares. The spouse of the chief executive officer of
Ossen Material Research, which is an affiliated company of ours that supplies us with raw materials, owns 100% of
the shares of Gross Inspiration Development Ltd., which owns 3% of our outstanding ordinary shares.
Purchases from a Related Party
Historically, we have purchased a significant percentage of our raw materials from an affiliated entity,
Ossen Material Research (formerly Shanghai ZFX), an agent that supplies steel wire rods to prestressed concrete
manufacturers in China such as our company. Ossen Material Research is controlled by our chairman, Dr. Tang.
Ossen Material Research is a member of the Ossen Group, whose relationship to us is described above under the
heading “Business – Overview.”
Ossen Material Research procures materials from the limited number of high quality manufacturers and
suppliers of our raw materials in the PRC. However, since the introduction in 2009 of our rare earth coated materials,
which undergo a coating process that reduces the loss in strength and performance that prestressed materials
otherwise undergo during our manufacturing processes, we have lowered the standards for strength and performance
requirements for our raw materials. As a result, we have been able to expand our supplier base to include suppliers
of products with lower levels of strength and performance and have not relied on supplies from Ossen Material
Research.
We acquired 0%, 0% and 1.9% of our raw materials from Ossen Material Research in the years ended
December 31, 2015, 2014 and 2013, respectively.
Guarantees
During the years ended December 31, 2015, 2014 and 2013 , Shanghai Ossen, an affiliate of ours, and
Ossen Material Research (formerly Shanghai ZFX), an affiliate of ours, and Ossen Shanghai, an affiliate of ours,
provided guarantees for certain of our short-term and long-term bank loans. The term of each of the short-term loans
is within one year. The term of the long-term loans is within three years. The purpose of these loans is to fund our
working capital needs. Local banks have required guaranties pursuant to their standard regulations. Shanghai Ossen
Investment Co., Ltd. is a member of the Ossen Group, whose relationship to us is described above under the heading
“Business – Overview.”
Shanghai Ossen guaranteed loans in the amount of $0 in 2015, $4.9 million in 2014 and $0 in 2013. Ossen
Material Research guaranteed loans in the amount of $11.9 million, $8.1 million and $9.2 million in 2015, 2014 and
2013, respectively. Ossen Material Research guaranteed notes payable in the amount of $0, $14.8 million and $3.2
million in 2015, 2014 and 2013, respectively. Ossen Shanghai guaranteed loans in the amount of $2.5 million in
2015, $1.6 million in 2014 and 1.9 million in 2013. These guarantees in 2015, 2014 and 2013 were provided for no
consideration. In addition, in 2015, 2014 and 2013, we guaranteed loans in the amount of $16.9 million, $15.5
million and $11.3 million and notes payable in the amount of $34.1 million, $21.3 million and $17.6 million for
Shanghai Pujiang, we guaranteed loans in the amount of $32.3 million, $4.9 million and $4.8 million and notes
payable in the amount of $12.3 million, $0 and $0 for Ossen Material Research, and we guaranteed loans in the
amount of $7.7 million, $0 and $0 million and notes payable in the amount of $1.5 million, $0 and $0 for Ossen
Shanghai.
63
There can be no assurance that Ossen Material Research, Shanghai Ossen and Ossen Shanghai will be
willing or able to continue to provide similar guarantees on this basis with respect to future borrowings. The loans
that have come due have been repaid by us in full.
The terms of the loan guarantees between the guarantor and the bank provide for the following: if the
borrower does not repay its loan, the bank may seek the principal and interest of the loan from the guarantor; the
guarantee period is typically one or two years from the date the guaranteed loan is due, as determined by the lending
bank; the bank may change the terms of the loan with the borrower without receiving the consent of the guarantor;
the guarantor indemnifies the bank for actual damage or loss because of any fraudulent misrepresentations made by
the guarantor and if the guarantor causes the contract to become invalid, the guarantor indemnifies the bank for
damages and losses.
7.C. Interests of Experts and Counsel
Not applicable.
ITEM 8.
FINANCIAL INFORMATION
Consolidated Statements and Other Financial Information
The financial statements required by this item may be found at the end of this report on 20-F, beginning on
page F-1.
Legal Proceedings
We are not currently, and have not recently been, a party to any material legal or administrative
proceedings. We are not aware of any material legal or administrative proceedings threatened against us. From time
to time, we are subject to various legal or administrative proceedings arising in the ordinary course of our business.
Dividends
We have never declared or paid any dividend on our ordinary shares and we do not anticipate paying any
dividends on our ordinary shares in the future. We currently intend to retain all future earnings to finance our
operations and to expand our business.
No Significant Changes
No significant changes to our financial condition have occurred since the date of the annual financial
statements contained herein.
ITEM 9.
THE OFFER AND LISTING
9.A. Offer and Listing Details
Our ADS’s are listed for trading on the NASDAQ Capital Market under the symbol “OSN.” The shares
began trading at $4.50 per ADS on December 21, 2010 on the NASDAQ Global Market. The listing of our ADS’s
was transferred to the NASDAQ Capital Market on July 30, 2013. The trading price for the ADSs was $0.92 on
April 15, 2016.
64
The table below sets forth for the periods indicated the high and low closing market prices of our ADS’s as
reported on NASDAQ:
2013
2014
2015
2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
First Quarter
High
Low
0.99 $
0.84 $
0.80 $
1.56 $
1.37 $
1.16 $
1.38 $
1.19 $
0.80 $
0.98 $
1.14 $
1.00 $
0.80
0.57
0.50
0.60
1.08
0.77
0.79
0.71
0.63
0.63
0.71
0.79
$
$
$
$
$
$
$
$
$
$
$
$
$
1.09 $
0.75
The table below sets forth the high and low closing market prices for our shares on NASDAQ during the
most recent six-month period:
2015
2016
October
November
December
January
High
Low
$
$
$
1.00 $
0.98 $
0.98 $
0.85
0.86
0.76
$
1.09 $
0.75
February
March
9.B. Plan of Distribution
Not Applicable.
65
$
$
0.82 $
0.92 $
0.76
0.75
9.C. Markets
Our ADS’s are currently traded on the NASDAQ Capital Market.
9.D. Selling Shareholders
Not Applicable.
9.E. Dilution
Not Applicable.
9.F. Expenses of the Issuer
Not Applicable.
ITEM 10.
ADDITIONAL INFORMATION
10.A. Share Capital
Not Applicable.
10.B. Memorandum and Articles of Association
We are a British Virgin Islands exempted company with limited liability and our affairs are governed by
our memorandum and articles of association and the BVI Business Companies Act, 2004 (as amended from time to
time) which is referred to as the BVI Act below. The following description of certain provisions of our
memorandum and articles of association does not propose to be complete and is qualified in its entirety by our
memorandum and articles of association.
Ordinary Shares
Certificates representing our ordinary shares are issued in registered form. Our shareholders who are
nonresidents of the British Virgin Islands may freely hold and vote their shares. We are currently authorized to issue
100,000,000 ordinary shares. We do not have the power to issue bearer shares.
Charter
Our charter documents consist of our amended and restated memorandum of association and our amended
and restated articles of association, or the memorandum and articles of association. We may amend our
memorandum and articles of association generally by a special resolution of our shareholders.
Corporate Powers
Ultra Glory was incorporated under the BVI Act on January 21, 2010. Pursuant to our memorandum of
association, the objects for which we were established are unrestricted and we have full power and authority to carry
out any objects not prohibited by the BVI Act, as the same may be revised from time to time, or any other law of the
British Virgin Islands, except that we have no power to carry on banking or trust business, business as an insurance
or reinsurance company, insurance agent or insurance broker, the business of company management, the business of
providing the registered office or the registered agent for companies incorporated in the British Virgin Islands, or
business as a mutual fund, mutual fund management or mutual fund administrator, unless we obtain certain licenses
under the laws of the British Virgin Islands.
66
Board Composition
Pursuant to our memorandum and articles of association, the business of our company is managed by our
board of directors. Commencing with the first annual meeting of the shareholders, directors are elected for a term of
office to expire at the next succeeding annual meeting of the shareholders after their election. Each director will hold
office until the expiration of his or her term of office and until his or her successor has been elected and qualified, or
until his or her earlier death, resignation or removal by the shareholders or a resolution passed by the majority of the
remaining directors.
In the interim between annual meetings of shareholders, or special meetings of shareholders called for the
election of directors, any vacancy on the board of directors may be filled by the vote of a majority of the remaining
directors then in office, although less than a quorum, or by the sole remaining director. A director elected to fill a
vacancy resulting from death, resignation or removal of a director will serve for the remainder of the full term of the
director whose death, resignation or removal will have caused such vacancy and until his successor will have been
elected and qualified.
There is no cumulative voting by shareholders for the election of directors. We do not have any age-based
retirement requirement and we do not require our directors to own any number of shares to qualify as a director.
Board Meetings
Board meetings may be held at the discretion of the directors at such times and in such manner as the
directors may determine upon not less than three days notice having been given to all directors. Decisions made by
the directors at meetings shall be made by a majority of the directors. There must be at least a majority of the
directors (with a minimum of two) at each meeting.
Directors Interested in a Transaction
A director must, immediately after becoming aware of the fact that he is interested in a transaction entered
into or to be entered into by us, disclose such interest to the board of directors. A director who is interested in a
transaction entered into, or to be entered into, by the company, may vote on a matter related to the transaction,
attend a meeting of directors at which a matter relating to the transaction arises and be included among the directors
present at the meeting for the purposes of a quorum and sign a document on behalf of the company, or do any other
thin in his capacity as a director, that relates to the transaction. A director is not required to disclose his interest in a
transaction or a proposed transaction to our board of directors if the transaction or proposed transaction is between
the director and us, or the transaction or proposed transaction is or is to be entered into the ordinary course of our
business and on usual terms and conditions.
The directors may exercise all powers of our company to borrow money, mortgage or charge our
undertakings and property, issue debentures, debenture shares and other securities whenever money is borrowed or
as security for any debt, liability or obligation of the company or of any third party.
Our directors may, by resolution, fix the compensation of directors in respect of services rendered or to be
rendered in any capacity to us.
A director may attend and speak at any meeting of the shareholders and at any separate meeting of the
holders of any class of our shares.
Rights of Shares
We are currently authorized to issue 100,000,000 ordinary shares. The shares are made up of one class and
one series, namely ordinary shares with a par value of $0.01 per share. The ordinary shares have one vote each and
have the same rights with regard to dividends paid by the company and distributions of the surplus assets of the
company.
We may purchase, redeem or acquire our shares, provided that we obtain the consent of the member whose
shares are being purchased, redeemed or otherwise acquired.
67
Issuance of Shares; Variation of Rights of Shares
Our articles of association provide that directors may, without limiting or affecting any right of holders of
existing shares, offer, allot, grant options over or otherwise dispose of our unissued shares to such persons at such
times and for such consideration and upon such terms and conditions as the directors may determine.
Without prejudice to any special rights previously conferred on the holders of any existing shares or class
of shares, we may issue shares, with such preferred, deferred or other special rights or such restrictions, whether in
regard to dividend, voting or otherwise, as the directors from time to time may determine.
If we issue shares of more than one class, we will further amend and restate our Memorandum and Articles
of Association to reflect the rights attached to any class (unless otherwise provided by the terms of issue of the
shares of that class) as may be varied with the consent in writing of the holders of not less than three-fourths of the
issued shares of that class and the holders of not less than three-fourths of the issued shares of any other class of
shares which may be affected by such variation. The rights conferred upon the holders of the shares of any class
issued with preferred or other rights will not, unless otherwise expressly provided by the terms of issue of the shares
of that class, be deemed to be varied by the creation or issue of further shares ranking pari passu therewith.
Shareholders Meetings
Under our memorandum and articles of association, we are required to hold an annual meeting of
shareholders each year at such date and time determined by our directors. Meetings of shareholders may be called
pursuant to board resolution or the written request of shareholders holding more than 30% of the votes of our
outstanding voting shares. Written notice of meetings of shareholders must be given to each shareholder entitled to
vote at a meeting not fewer than 10 days prior to the date of the meeting, with certain limited exceptions. The
written notice will state the place, time and business to be conducted at the meeting. The shareholders listed in our
share register on the date prior to the date the notice is given shall be entitled to vote at the meeting, unless the
notice provides a different date for determining the shareholders who are entitled to vote.
A meeting of shareholders held without proper notice will be valid if shareholders holding 90% majority of
the total number of shares entitled to vote on all matters to be considered at the meeting, or 90% of the votes of each
class or series of shares where shareholders are entitled to vote thereon as a class or series, together with an absolute
majority of the remaining votes, have waived notice of the meeting and, for this purpose, presence of a shareholder
at the meeting is deemed to constitute a waiver. The inadvertent failure of the directors to give notice of a meeting to
a shareholder, or the fact that a shareholder has not received notice, will not invalidate a meeting.
Shareholders may vote in person or by proxy. No business may be transacted at any meeting unless a
quorum of shareholders is present. A quorum consists of the presence in person or by proxy of holders entitled to
exercise at least 50% of the voting rights of the shares of each class or series of shares entitled to vote as a class or
series thereon and the same proportion of the votes of the remaining shares entitled to vote thereon.
Changes in the Maximum Number of Shares the Company is Authorized to Issue
Subject to the provisions of the BVI Act, we may, by a resolution of shareholders, amend our memorandum
and articles of association to increase or decrease the number of shares authorized to be issued. Our directors may,
by resolution, authorize a distribution by us at a time, of an amount, and to any shareholders they think fit if they are
satisfied, on reasonable grounds, that we will, immediately after the distribution, satisfy the solvency test as set forth
in the BVI Act, which requires that the value of a company’s assets exceeds its liabilities, and the company is able to
pay its debts as they fall due.
Indemnification
Subject to the provisions of the BVI Act, we may indemnify any person who (a) is or was a party or is
threatened to be made a party to any threatened, pending or completed proceedings, whether civil, criminal,
administrative or investigative, by reason of the fact that the person is or was a director of our company; or (b) is or
was, at our request, serving as a director of, or in any other capacity is or was acting for, another company or a
partnership, joint venture, trust or other enterprise, against all expenses, including legal fees, and against all
judgments, fines and amounts paid in settlement and reasonably incurred in connection with legal, administrative or
investigative proceedings.
68
Material Differences Between U.S. Corporate Law and British Virgin Islands Corporate Law
The BVI Act differs from laws applicable to U.S. corporations and their shareholders. Set forth below is a
summary of the material differences between the provisions of the BVI Act applicable to us and the laws applicable
to companies incorporated in the United States and their shareholders.
Differences in Corporate Law
We were incorporated under, and are governed by, the laws of the British Virgin Islands. The corporate
statutes of the State of Delaware and the British Virgin Islands are similar, and the flexibility available under British
Virgin Islands law has enabled us to adopt memorandum of association and articles of association that will provide
shareholders with rights that do not vary in any material respect from those they would enjoy if we were
incorporated under the Delaware General Corporation Law, or Delaware corporate law. Set forth below is a
summary of some of the differences between provisions of the BVI Act applicable to us and the laws applicable to
companies incorporated in Delaware and their shareholders.
Director’s Fiduciary Duties
Under Delaware corporate law, a director of a Delaware corporation has a fiduciary duty to the corporation
and its stockholders. This duty has two components: the duty of care and the duty of loyalty. The duty of care
requires that a director act in good faith, with the care that an ordinarily prudent person would exercise under similar
circumstances. Under this duty, a director must inform himself of, and disclose to stockholders, all material
information reasonably available regarding a significant transaction. The duty of loyalty requires that a director act
in a manner he reasonably believes to be in the best interests of the corporation. He must not use his corporate
position for personal gain or advantage. This duty prohibits self-dealing by a director and mandates that the best
interest of the corporation and its stockholders take precedence over any interest possessed by a director, officer or
controlling stockholder and not shared by the stockholders generally. In general, actions of a director are presumed
to have been made on an informed basis, in good faith and in the honest belief that the action taken was in the best
interests of the corporation. However, this presumption may be rebutted by evidence of a breach of one of the
fiduciary duties. Should such evidence be presented concerning a transaction by a director, a director must prove the
procedural fairness of the transaction, and that the transaction was of fair value to the corporation.
British Virgin Islands law provides that every director of a British Virgin Islands company, in exercising
his powers or performing his duties, shall act honestly and in good faith and in what the director believes to be in the
best interests of the company. Additionally, the director shall exercise the care, diligence, and skill that a reasonable
director would exercise in the same circumstances taking into account, but without limitation, the nature of the
company, the nature of the decision, the position of the director and the nature of his responsibilities. In addition,
British Virgin Islands law provides that a director shall exercise his powers as a director for a proper purpose and
shall not act, or agree to the company acting, in a manner that contravenes British Virgin Islands law or the
memorandum association or articles of association of the company.
Amendment of Governing Documents
Under Delaware corporate law, with very limited exceptions, a vote of the stockholders is required to
amend the certificate of incorporation. Under British Virgin Islands law, no article or regulation shall be amended,
rescinded or altered, and no new article shall be made, without the approval of the members pursuant to a special
resolution, unless the memorandum of association and articles of association provide otherwise.
Written Consent of Directors
Under Delaware corporate law, directors may act by written consent only on the basis of a unanimous vote.
Under British Virgin Islands law, directors’ consents need only a majority of directors signing to take effect.
69
Written Consent of Shareholders
Under Delaware corporate law, unless otherwise provided in the certificate of incorporation, any action to
be taken at any annual or special meeting of stockholders of a corporation, may be taken by written consent of the
holders of outstanding stock having not less than the minimum number of votes that would be necessary to take such
action at a meeting. As permitted by British Virgin Islands law, shareholders’ consents need only a majority of
shareholders signing to take effect. Our memorandum of association and articles of association provide that, other
than changes to our memorandum of association and articles of association, shareholders may approve corporate
matters by way of a resolution consented to at a meeting of shareholders or in writing by a majority of shareholders
entitled to vote thereon. Changes to our memorandum of association and articles of association require the approval
of 66 2/3% of the votes of shareholders.
Shareholder Proposals
Under Delaware corporate law, a shareholder has the right to put any proposal before the annual meeting of
shareholders, provided it complies with the notice provisions in the governing documents. A special meeting may be
called by the board of directors or any other person authorized to do so in the governing documents, but
shareholders may be precluded from calling special meetings. British Virgin Islands law and our memorandum of
association and articles of association provide that our directors shall call a meeting of the shareholders if requested
in writing to do so by shareholders entitled to exercise at least 30% of the voting rights in respect of the matter for
which the meeting is requested.
Sale of Assets
Under Delaware corporate law, a vote of the stockholders is required to approve the sale of assets only
when all or substantially all assets are being sold. In the British Virgin Islands, shareholder approval is required
when more than 50% of the company’s total assets by value are being disposed of or sold.
Dissolution; Winding Up
Under Delaware corporate law, unless the board of directors approves the proposal to dissolve, dissolution
must be approved by shareholders holding 100% of the total voting power of the corporation. Only if the dissolution
is initiated by the board of directors may it be approved by a simple majority of the corporation’s outstanding shares.
Delaware corporate law allows a Delaware corporation to include in its certificate of incorporation a supermajority
voting requirement in connection with dissolutions initiated by the board. As permitted by British Virgin Islands law
and our memorandum of association and articles of association, we may be voluntarily liquidated under Part XII of
the BVI Act by resolution of directors and resolution of shareholders if we have no liabilities and we are able to pay
our debts as they fall due.
Redemption of Shares
Under Delaware corporate law, any stock may be made subject to redemption by the corporation at its
option or at the option of the holders of such stock provided there remains outstanding shares with full voting power.
Such stock may be made redeemable for cash, property or rights, as specified in the certificate of incorporation or in
the resolution of the board of directors providing for the issue of such stock. As permitted by British Virgin Islands
law, and our memorandum of association and articles of association, shares may be repurchased, redeemed or
otherwise acquired by us. Our directors must determine that immediately following the redemption or repurchase we
will be able to satisfy our debts as they fall due and the value of our assets exceeds our liabilities.
Variation of Rights of Shares
Under Delaware corporate law, a corporation may vary the rights of a class of shares with the approval of a
majority of the outstanding shares of such class, unless the certificate of incorporation provides otherwise. As
permitted by British Virgin Islands law, and our memorandum of association and articles of association, if our share
capital is divided into more than one class of shares, we may vary the rights attached to any class only with the
consent in writing of holders of not less than three-fourths of the issued shares of that class and holders of not less
than three-fourths of the issued shares of any other class of shares which may be affected by the variation.
70
Removal of Directors
Under Delaware corporate law, a director of a corporation with a classified board may be removed only for
cause with the approval of a majority of the outstanding shares entitled to vote, unless the certificate provides
otherwise. As permitted by British Virgin Islands law and our memorandum of association and articles of
association, directors may be removed by resolution of directors or resolution of shareholders, with or without cause.
Mergers
Under the BVI Act, two or more companies may merge or consolidate in accordance with the statutory
provisions. A merger means the merging of two or more constituent companies into one of the constituent
companies, and a consolidation means the uniting of two or more constituent companies into a new company. In
order to merge or consolidate, the directors of each constituent company must approve a written plan of merger or
consolidation which must be authorized by a resolution of shareholders.
Shareholders not otherwise entitled to vote on the merger or consolidation may still acquire the right to vote
if the plan of merger or consolidation contains any provision which, if proposed as an amendment to the
memorandum association or articles of association, would entitle them to vote as a class or series on the proposed
amendment. In any event, all shareholders must be given a copy of the plan of merger or consolidation irrespective
of whether they are entitled to vote at the meeting or consent to the written resolution to approve the plan of merger
or consolidation.
Inspection of Books and Records
Under Delaware corporate law, any shareholder of a corporation may for any proper purpose inspect or
make copies of the corporation’s stock ledger, list of shareholders and other books and records. Under the BVI Act,
members, upon giving written notice to us, are entitled to inspect the register of members, the register of directors
and minutes of resolutions of members, and to make copies of these documents and records.
Conflict of Interest
The BVI Act provides that a director shall forthwith, after becoming aware that he is interested in a
transaction entered into or to be entered into by the company, disclose that interest to the board of directors of the
company. The failure of a director to disclose that interest does not affect the validity of a transaction entered into by
the director or the company. A transaction entered into by us, in respect of which a director is interested, is voidable
by us unless the director’s interest was disclosed to the board prior to the company’s entry into the transaction or
was not required to be disclosed. A transaction is not voidable if the material facts of the director’s interest are
known by the members entitled to vote or if the transaction is approved or ratified by a resolution of members. As
permitted by British Virgin Islands law and our memorandum of association and articles of association, a director
interested in a particular transaction may vote on it, attend meetings at which it is considered, and sign documents on
our behalf which relate to the transaction.
Transactions with Interested Shareholders
Delaware corporate law contains a business combination statute applicable to Delaware public corporations
whereby, unless the corporation has specifically elected not to be governed by such statute by amendment to its
certificate of incorporation, it is prohibited from engaging in certain business combinations with an “interested
shareholder” for three years following the date that such person becomes an interested shareholder. An interested
shareholder generally is a person or group who or that owns or owned 15% or more of the target’s outstanding
voting stock within the past three years. This has the effect of limiting the ability of a potential acquirer to make a
two-tiered bid for the target in which all shareholders would not be treated equally. The statute does not apply if,
among other things, prior to the date on which such shareholder becomes an interested shareholder, the board of
directors approves either the business combination or the transaction that resulted in the person becoming an
interested shareholder. This encourages any potential acquirer of a Delaware public corporation to negotiate the
terms of any acquisition transaction with the target’s board of directors.
71
British Virgin Islands law has no comparable provision.
Independent Directors
There are no provisions under Delaware corporate law or under the BVI Act that require a majority of our
directors to be independent.
Cumulative Voting
Under Delaware corporate law, cumulative voting for elections of directors is not permitted unless the
company’s certificate of incorporation specifically provides for it. Cumulative voting potentially facilitates the
representation of minority shareholders on a board of directors since it permits the minority shareholder to cast all
the votes to which the shareholder is entitled on a single director, which increases the shareholder’s voting power
with respect to electing such director. There are no prohibitions to cumulative voting under the laws of the British
Virgin Islands, but our memorandum of association and articles of association do not provide for cumulative voting.
Anti-takeover Provisions in Our Memorandum of Association and Articles of Association
Some provisions of our memorandum of association and articles of association may discourage, delay or
prevent a change in control of our company or management that shareholders may consider favorable, including
provisions that authorize our board of directors to issue preference shares in one or more series and to designate the
price, rights, preferences, privileges and restrictions of such preference shares.
10.C. Material Contracts
We have not entered into any material contracts other than in the ordinary course of business and other than
those described in this annual report.
10.D. Exchange Controls
British Virgin Islands
There are currently no exchange control regulations in the British Virgin Islands applicable to us or our
shareholders.
The PRC
China regulates foreign currency exchanges primarily through the following rules and regulations:
·
·
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 of Renminbi is permitted in China for routine current-account foreign
exchange transactions, including trade and service related foreign exchange transactions, payment of dividends and
service of foreign debts. Conversion of Renminbi for most capital-account items, such as direct investments,
investments in PRC securities markets and repatriation of investments, however, is still subject to the approval of
SAFE.
Pursuant to the above-mentioned administrative rules, foreign-invested enterprises may buy, sell and/or
remit foreign currencies for current account transactions at banks in China with authority to conduct foreign
exchange business by complying with certain procedural requirements, such as presentment of valid commercial
documents. For capital-account transactions involving foreign direct investment, foreign debts and outbound
investment in securities and derivatives, approval from SAFE is a pre-condition. Capital investments by foreign-
invested enterprises outside China are subject to limitations and requirements in China, such as prior approvals from
the PRC Ministry of Commerce or SAFE.
72
10.E. Taxation
The following summary of the material British Virgin Islands, PRC and U.S. tax consequences of an
investment in our ADSs or ordinary shares is based upon laws and relevant interpretations thereof in effect as of the
date hereof, all of which are subject to change, possibly with retroactive effect. This summary is not intended to be,
nor should it be construed as, legal or tax advice and is not exhaustive of all possible tax considerations. This
summary also does not deal with all possible tax consequences relating to an investment in our ADSs or ordinary
shares, such as the tax consequences under state, local, non-U.S., non-PRC, and non-British Virgin Islands tax laws.
Investors should consult their own tax advisors with respect to the tax consequences of the acquisition, ownership
and disposition of our ADSs or ordinary shares.
British Virgin Islands Taxation
All dividends, interests, rents, royalties, compensations and other amounts paid by us are exempt from all
forms of taxation in the British Virgin Islands and any capital gains realized with respect to any of our shares, debt
obligations, or other securities are not subject to any form of taxation in the British Virgin Islands. No estate,
inheritance, succession or gift tax, rate, duty, levy or other charge is payable under BVI law by persons who are not
persons resident in the British Virgin Islands with respect to any of our shares, debt obligation or other securities.
There are currently no withholding taxes or exchange control regulations in the British Virgin Islands applicable to
us or our shareholders. Currently, there is no income tax treaty, convention or reciprocal tax treaty regarding
withholdings currently in effect between the United States and the British Virgin Islands. We will only be liable to
pay payroll tax with respect to employees employed and working in the British Virgin Islands. We do not currently
have, and do not intend to have in the near future, any employees in the British Virgin Islands.
People’s Republic of China Taxation
Under the former Income Tax Law for Enterprises with Foreign Investment and Foreign Enterprises, any
dividends payable by foreign-invested enterprises to non-PRC investors were exempt from PRC withholding tax. In
addition, any dividends payable, or distributions made, by us to holders or beneficial owners of our shares would not
be subject to any PRC tax, provided that such holders or beneficial owners, including individuals and enterprises,
were not deemed to be PRC residents under the PRC tax law and were not otherwise subject to PRC tax.
On March 16, 2007, the PRC National People’s Congress approved and promulgated a new PRC Enterprise
Income Tax Law, which took effect as of January 1, 2008. Under the new tax law, enterprises established under the
laws of non-PRC jurisdictions but whose “de facto management body” are located in China are considered “resident
enterprises” for PRC tax purposes. Under the implementation regulations issued by the State Council relating to the
new tax law, “de facto management body” is defined as the body that has material and overall management control
over the business, personnel, accounts and properties of an enterprise. In April 2009, the PRC State Administration
of Taxation promulgated a circular to clarify the definition of “de facto management body” for enterprises
incorporated overseas with controlling shareholders being PRC enterprises. It remains unclear how the tax
authorities will treat an overseas enterprise invested or controlled by another overseas enterprise and ultimately
controlled by PRC individual residents as is in our case. We are currently not treated as a PRC resident enterprise by
the relevant tax authorities. Since substantially all of our management is currently based in China and may remain in
China in the future, we may be treated as a “resident enterprise” for the PRC tax purposes, in which case, we will be
subject to PRC income tax as to our worldwide income at a uniform income tax rate of 25%. In addition, the new tax
law provides that dividend income between qualified “resident enterprises” is exempt from income tax.
Moreover, the new tax law provides that an income tax rate of 10% is normally applicable to dividends
payable for earnings derived since January 1, 2008 to non-PRC investors who are “non-resident enterprises,” to the
extent such dividends are derived from sources within China. We are a British Virgin Islands holding company and
substantially all of our income is derived from dividends, if any, we receive from our operating subsidiaries located
in China. Thus, dividends payable to us by our subsidiaries in China may be subject to the 10% withholding tax if
we are considered as a “non-resident enterprise” under the new tax law.
73
Moreover, non-resident individual investors may be required to pay PRC individual income tax at a rate of
20% on interests or dividends payable to the investors or any capital gains realized from the transfer of ADSs or
ordinary shares if such gains are deemed income derived from sources within the PRC. Under the Individual Income
Tax Law or the IIT Law, non-resident individual refers to an individual who has no domicile in China and does not
stay in the territory of China or who has no domicile in China and has stayed in the territory of China for less than
one year. Pursuant to the IIT Law and its implementation rules, for purposes of the PRC capital gains tax, the
taxable income will be the balance of the total income obtained from the transfer of the ADSs or ordinary shares
minus all the costs and expenses that are permitted under PRC tax laws to be deducted from the income. Therefore,
if we are considered as a PRC "resident enterprise" and dividends we pay with respect to our ADSs or ordinary
shares and the gains realized from the transfer of our ADSs or ordinary shares are considered income derived from
sources within the PRC by relevant competent PRC tax authorities, such gains earned by non-resident individuals
may also be subject to PRC withholding tax at a rate of 20%.
Under the currently available guidance of the new tax law, dividends payable by us to our shareholders
should not be deemed to be derived from sources within China and therefore should not be subject to withholding
tax at 10%, or a lower rate if reduced by a tax treaty or agreement. However, what will constitute income derived
from sources within China is currently unclear. In addition, gains on the disposition of our shares should not be
subject to PRC withholding tax. However, these conclusions are not entirely free from doubt. In addition, it is
possible that these rules may change in the future, possibly with retroactive effect.
United States Federal Income Taxation
The following is a discussion of the material U.S. federal income tax considerations that may apply to an
investor with respect to the acquisition, ownership and disposition of our ADSs or ordinary shares. This discussion
does not purport to address all of the tax consequences of owning our ADSs or ordinary shares with respect to all
categories of investors that acquire our ADSs or ordinary shares, some of which (such as financial institutions,
regulated investment companies, real estate investment trusts, tax-exempt organizations, insurance companies,
persons holding our ADSs or ordinary shares as part of a hedging, integrated, conversion, straddle or constructive
sale transaction, traders in securities that have elected the mark-to-market method of accounting for their securities,
persons liable for alternative minimum tax, persons who are investors in pass-through entities, grantor trusts,
persons who own, directly or indirectly under applicable constructive ownership rules, 10% or more (by voting
power) of our ADSs or ordinary shares, persons who received our ADSs or ordinary shares pursuant to the exercise
of an option or otherwise as compensation, certain former citizens and long-term residents of the United States,
dealers in securities or currencies and investors whose functional currency is not the U.S. dollar) may be subject to
special rules. This discussion addresses only holders who purchase our ADSs or ordinary shares and hold such
ADSs or ordinary shares as a capital asset (i.e., generally for investment). Moreover, this discussion is based on the
Internal Revenue Code of 1986, as amended (or the Code), existing and proposed Treasury regulations promulgated
under the Code, published rulings, and administrative and judicial interpretations of the Code, all as currently in
effect as of the date of hereof, all of which are subject to change, possibly with retroactive effect. Investors should
consult their own tax advisors regarding the tax consequences arising in their own particular situation under U.S.
federal, state, local or foreign law or the United States – PRC income tax treaty with respect to the acquisition,
ownership or disposition of our ADSs or ordinary shares.
For purposes of this discussion, the term “U.S. Holder” means (except as described in the preceding
paragraph) a beneficial owner of our ADSs or ordinary shares that is, for United States federal income tax purposes,
(i) an individual U.S. citizen or resident, (ii) a corporation (or other entity taxable as a corporation) created or
organized under the laws of the United States or any political subdivision thereof, or the District of Columbia, (iii)
an estate the income of which is subject to U.S. federal income taxation regardless of its source or (iv) a trust if
either (x) a court within the United States is able to exercise primary jurisdiction over the administration of the trust
and one or more U.S. persons have the authority to control all substantial decisions of the trust or (y) the trust has a
valid election in effect under applicable Treasury Regulations to be treated as a U.S. person. A beneficial owner of
our ADSs or ordinary shares (other than a partnership) that is not a U.S. Holder is referred to below as a “Non-U.S.
Holder.”
74
If a partnership, or an entity treated for U.S. federal income tax purposes as a partnership, such as a limited
liability company, holds our ADSs or ordinary shares, the tax treatment of a partner in such partnership will depend
on the status of the partner and upon the activities of the partnership. A partner in such a partnership holding our
ADSs or ordinary shares, you should consult its tax advisor.
United States Federal Income Taxation of U.S. Holders
Distributions
Subject to the discussion of Passive Foreign Investment Companies, or PFICs, below, distributions made
by us with respect to our ADSs or ordinary shares to a U.S. Holder will constitute dividends to the extent of our
current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Distributions in
excess of our earnings and profits will be treated first as a nontaxable return of capital to the extent of the U.S.
Holder’s tax basis in our ADSs or ordinary shares, and thereafter as capital gain. Because we are not a U.S.
corporation, U.S. Holders that are corporations will generally not be entitled to claim a dividends-received deduction
with respect to any distributions they receive from us.
Subject to the discussion of PFICs below, dividends paid on our ADSs or ordinary shares that are received
by U.S. Holders that are individuals, estates or trusts will be taxed at the rate applicable to long-term capital gains (a
maximum rate of 15% for taxable years beginning on or before December 31, 2013), provided that such dividends
meet the requirements of "qualified dividend income." For this purpose, qualified dividend income includes
dividends paid by a non-U.S. corporation if certain holding period and other requirements are met, and the stock of
the non-U.S. corporation with respect to which dividends are paid is readily tradable on an established securities
market in the U.S. (such as the NASDAQ Capital Market). Dividends that fail to meet such requirements, and
dividends received by corporate U.S. Holders, are taxed at ordinary income rates. No dividend received by a U.S.
Holder will be a qualified dividend (i) if the U.S. Holder held the ordinary share with respect to which the dividend
was paid for less than 61 days during the 121-day period beginning on the date that is 60 days before the ex-
dividend date with respect to such dividend, excluding for this purpose, under the rules of Code Section 246(c), any
period during which the U.S. Holder has an option to sell, is under a contractual obligation to sell, has made and not
closed a short sale of, is the grantor of a deep-in-the-money or otherwise nonqualified option to buy, or has
otherwise diminished its risk of loss by holding other positions with respect to, such ordinary share (or substantially
identical securities); or (ii) to the extent that the U.S. Holder is under an obligation (pursuant to a short sale or
otherwise) to make related payments with respect to positions in property substantially similar or related to the ADS
or ordinary share with respect to which the dividend is paid. If we were to be a "passive foreign investment
company" (as such term is defined in the Code) for any taxable year, dividends paid on our ADSs or ordinary shares
in such year or in the following taxable year would not be qualified dividends. In addition, a non-corporate U.S.
Holder will be able to take a qualified dividend into account in determining its deductible investment interest (which
is generally limited to its net investment income) only if it elects to do so; in such case the dividend will be taxed at
ordinary income rates.
Sale, Exchange or Other Disposition of ADSs or ordinary shares
Subject to the discussion of PFICs below, a U.S. Holder will recognize taxable gain or loss upon a sale,
exchange or other taxable disposition of our ADSs or ordinary shares in an amount equal to the difference between
the amount realized by the U.S. Holder from such disposition and the U.S. Holder’s tax basis in such stock. Such
gain or loss will be treated as long-term capital gain or loss if the U.S. Holder’s holding period is greater than one
year at the time of the disposition. Long-term capital gains of non-corporate U.S. Holders may be eligible for
reduced rates of taxation. A U.S. Holder’s ability to deduct capital losses is subject to certain limitations.
Tax Consequences If We Are A Passive Foreign Investment Company
We will be a passive foreign investment company (a “PFIC”) if, after applying certain pass-through rules,
either: (i) 75% or more of our gross income in any taxable year consists of “passive income” (including dividends,
interest, gains from the sale or exchange of investment property and certain rents and royalties); or (ii) at least 50%
of our assets in any taxable year (averaged over the year and generally determined on a quarterly basis) produce or
are held for the production of passive income.
75
We do not believe that we were a PFIC for our 2015 taxable year. However, because the determination of
our PFIC status is based on such factual matters as the composition of our income and assets the valuation of our
assets, and our market capitalization, there is no assurance that the United Stated Internal Revenue Service (“IRS”)
will agree with our position for the 2015 taxable year or any prior taxable year. In addition, there can be no
assurance that we will not become a PFIC for the current taxable year ending December 31, 2015 or in future
taxable years.
If we were to be treated as a PFIC for any taxable year during the period in which a U.S. Holder owns our
ADSs or ordinary shares (and regardless of whether we remain a PFIC for subsequent taxable years), each U.S.
Holder who is treated as owning our stock for purposes of the PFIC rules would be liable to pay U.S. federal income
tax at the highest applicable income tax rates on ordinary income upon the receipt of “excess distributions” (i.e., the
portion of any distributions received by the U.S. Holder on our ADSs or ordinary shares in a taxable year in excess
of 125 percent of the average annual distributions received by the U.S. Holder in the three preceding taxable years,
or, if shorter, the U.S. Holder’s holding period for the ADSs or ordinary shares) and on any gain from the
disposition of our ADSs or ordinary shares, plus interest on a portion of such amounts, as if such excess distributions
or gain had been recognized ratably over the U.S. Holder’s holding period of our ADSs or ordinary shares.
The above rules relating to the taxation of excess distributions and dispositions will not apply to a U.S.
Holder who has made a timely “qualified electing fund” (“QEF”) election for all taxable years that the holder has
held our ADSs or ordinary shares and if we comply with certain reporting requirements. Instead, each U.S. Holder
who has made a timely QEF election is required for each taxable year that we are a PFIC to include in income a pro
rata share of our ordinary earnings as ordinary income and a pro rata share of our net capital gain as long term
capital gain, regardless of whether we have made any distributions of the earnings or gain. The U.S. Holder’s basis
in our ADSs or ordinary shares will be increased to reflect taxed but undistributed income. Distributions of income
that had been previously taxed will result in a corresponding reduction in the basis of the ADSs or ordinary shares
and will not be taxed again once distributed. A U.S. Holder making a QEF election will generally recognize capital
gain or loss on the sale, exchange or other taxable disposition of our ADSs or ordinary shares. If we determine that
we are a PFIC for any taxable year, we may provide each U.S. Holder with all necessary information in order to
make the QEF election described above.
Alternatively, if we were to be treated as a PFIC for any taxable year and provided that our ADSs or
ordinary shares are treated as “marketable stock” (e.g., “regularly traded” on the NASDAQ Capital Market) a U.S.
Holder may make a mark-to-market election. Under a “mark-to-market” election, in any taxable year that we are a
PFIC, any excess of the fair market value of the ADSs or ordinary shares at the close of any taxable year over the
U.S. Holder’s adjusted tax basis in the ADSs or ordinary shares is included in the U.S. Holder’s income as ordinary
income. In addition, the excess, if any, of the U.S. Holder’s adjusted tax basis at the close of any taxable year over
the fair market value of the ADSs or ordinary shares is deductible in an amount equal to the lesser of the amount of
the excess or the amount of the net mark-to-market gains that the U.S. Holder included in income in prior years. A
U.S. Holder’s tax basis in its ADSs or ordinary shares would be adjusted to reflect any such income or loss. For any
taxable year that we are a PFIC, gain realized on the sale, exchange or other disposition of our ADSs or ordinary
shares would be treated as ordinary income, and any loss realized on the sale, exchange or other disposition of the
ADSs or ordinary shares would be treated as ordinary loss to the extent that such loss does not exceed the net mark-
to-market gains previously included by the U.S. Holder. There can be no assurances that there will be sufficient
trading volume with respect to the ADSs or ordinary shares for the ADSs or ordinary shares to be considered
“regularly traded,” or that our ADSs or ordinary shares will continue to trade on the NASDAQ Capital Market.
Accordingly, there are no assurances that our ADSs or ordinary shares will be marketable stock for these purposes.
A U.S. Holder who holds our ADSs or ordinary shares during a period when we are a PFIC will be subject
to the foregoing rules for that taxable year and all subsequent taxable years with respect to that U.S. Holder’s
holding of our ADSs or ordinary shares, even if we cease to be a PFIC, subject to certain exceptions for U.S.
Holders who made a timely mark-to-market or QEF election. U.S. Holders are urged to consult their tax advisors
regarding the PFIC rules in the event that we are a PFIC, including as to the advisability and consequences of
making a QEF or mark-to-market election.
76
U.S. Federal Income Taxation of Non-U.S. Holders
Except as described in “Backup Withholding and Information Reporting” below, non-U.S. Holders will
generally not be subject to U.S. federal income tax or withholding tax on the payment of dividends on, and the
proceeds from the disposition of, our ADSs or ordinary shares unless, in the case of U.S. federal income taxes, the
income is effectively connected with the conduct by the Non-U.S. Holder of a trade or business in the United States
(“effectively connected income”) (and, if an income tax treaty applies, the income is attributable to a permanent
establishment maintained by the Non-U.S. Holder in the United States or, in the case of an individual, the income is
attributable to a fixed place of business).
Non-U.S. Holders will generally not be subject to U.S. federal income tax or withholding tax on any gain
realized upon the sale, exchange or other disposition of our ADSs or ordinary shares, unless either:
·
·
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 and certain 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 the taxation of U.S. Holders, unless exempt under an applicable income tax
treaty. In addition, effectively connected income of a corporate Non-U.S. Holder may be subject to an additional
branch profits tax at a rate of 30%, or at a lower rate as may be specified by an applicable income tax treaty.
Non-U.S. Holders may be subject to tax in jurisdictions other than the United States on dividends received
from us on our ADSs or ordinary shares and on any gain realized upon the sale, exchange or other disposition of our
ADSs or ordinary shares. Non-U.S. Holders should consult with their own tax advisors regarding such other
jurisdictions.
Backup Withholding and Information Reporting
U.S. Holders (other than certain exempt recipients) may be subject to information reporting requirements
with respect to the payment of dividends on, or proceeds from the disposition of, our ADSs or ordinary shares. In
addition, a U.S. Holder may be subject, under certain circumstances, to backup withholding at a rate of up to 28%
with respect to dividends paid on, or proceeds from the disposition of, our ADSs or ordinary shares unless the U.S.
Holder provides proof of an applicable exemption or correct taxpayer identification number and otherwise complies
with applicable requirements of the backup withholding rules. A U.S. Holder of our ADSs or ordinary shares who
provides an incorrect taxpayer identification number may be subject to penalties imposed by the IRS.
Non-U.S. Holders are generally not subject to information reporting or backup withholding with respect to
dividends paid on, or proceeds from the disposition of, our ADSs or ordinary shares, provided that the Non-U.S.
Holder provides its taxpayer identification number, certifies to its foreign status, or establishes another exemption to
the information reporting or back-up withholding requirements.
10.F. Dividends and Paying Agents
Not Applicable.
10.G. Statement by Experts
Not Applicable.
77
10.H. Documents on Display
The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as
amended, and will file reports, registration statements and other information with the SEC. The Company’s reports,
registration statements and other information can be inspected on the SEC’s website at www.sec.gov and such
information can also be inspected and copies ordered at the public reference facilities maintained by the SEC at the
following location: 100 F Street NE, Washington, D.C. 20549. You may also visit us on the World Wide Web at
http://www.osseninnovation.com. However, information contained on our website does not constitute a part of this
annual report.
10.I. Subsidiary Information
Not Applicable.
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 of loss due to credit risk in the event of other parties failing to perform their
obligations is represented by the carrying amount of each financial asset as stated in our consolidated balance sheets.
As of December 31, 2015, 2014 and 2013, substantially all of our cash included bank deposits in accounts
maintained within the PRC where there is currently no rule or regulation in place for obligatory insurance to cover
bank deposits in the event of bank failure. However, we have not experienced any losses in such accounts and we
believe we are not exposed to any significant risks on our cash in bank accounts.
We are exposed to various types of market risks, including changes in foreign exchange rates, commodity
prices and inflation in the normal course of business.
Interest rate risk
We are subject to risks resulting from fluctuations in interest rates on our bank balances. A substantial
portion of our cash is held in China in interest bearing bank deposits and denominated in RMB. To the extent that
we may need to raise debt financing in the future, upward fluctuations in interest rates would increase the cost of
new debt. We do not currently use any derivative instruments to manage our interest rate risk.
Commodity price risk
Certain raw materials used by us are subject to price volatility caused by supply conditions, political and
economic variables and other unpredictable factors. The primary purpose of our commodity price management
activities is to manage the volatility associated with purchases of commodities in the normal course of business. We
do not speculate on commodity prices.
Foreign exchange risk
The RMB is not a freely convertible currency. The PRC government may take actions that could cause
future exchange rates to vary significantly from current or historical exchange rates. Fluctuations in exchange rates
may adversely affect the value of any dividends we declare.
Very limited hedging transactions are available in China to reduce our exposure to exchange rate
fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to
foreign currency exchange risk. While we may enter into hedging transactions in the future, the availability and
effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure at all.
In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that
restrict our ability to convert RMB into foreign currencies.
78
Inflation risk
Inflationary factors such as increases in the cost of our products and overhead costs may adversely affect
our operating results. A high rate of inflation may have an adverse effect on our ability to maintain current levels of
gross margin and selling, general and administrative expenses as a percentage of net revenues if the selling prices of
our products do not increase proportionately with these increased costs.
ITEM 12.
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 in respect of share distributions, rights and other distributions, issuances
pursuant to a stock dividend or stock split declared by us or issuances pursuant to a merger, exchange of securities or
any other transaction or event affecting the ADSs or deposited securities, and each person surrendering ADSs for
withdrawal of deposited securities or whose ADRs are cancelled or reduced for any other reason, $5.00 for each 100
ADSs (or any portion thereof) issued, delivered, reduced, cancelled or surrendered, as the case may be. The
depositary may sell (by public or private sale) sufficient securities and property received in respect of a share
distribution, rights and/or other distribution prior to such deposit to pay such charge.
The following additional charges shall be incurred by the ADR holders, by any party depositing or
withdrawing shares or by any party surrendering ADSs or to whom ADSs are issued (including, without limitation,
issuance pursuant to a stock dividend or stock split declared by us or an exchange of stock regarding the ADRs or
the deposited securities or a distribution of ADSs), whichever is applicable:
·
·
·
·
·
·
·
·
a fee of $1.50 per ADR or ADRs for transfers of certificated or direct registration ADRs;
a fee of up to $0.05 per ADS for any cash distribution made pursuant to the deposit agreement;
a fee of up to $0.05 per ADS per calendar year (or portion thereof) for services performed by the
depositary in administering the ADRs (which fee may be charged on a periodic basis during each
calendar year and shall be assessed against holders of ADRs as of the record date or record dates set
by the depositary during each calendar year and shall be payable in the manner described in the next
succeeding provision);
reimbursement of such fees, charges and expenses as are incurred by the depositary and/or any of
the depositary’s agents (including, without limitation, the custodian and expenses incurred on behalf
of holders in connection with compliance with foreign exchange control regulations or any law or
regulation relating to foreign investment) in connection with the servicing of the shares or other
deposited securities, the delivery of deposited securities or otherwise in connection with the
depositary’s or its custodian’s compliance with applicable law, rule or regulation (which charge
shall be assessed on a proportionate basis against holders as of the record date or dates set by the
depositary and shall be payable at the sole discretion of the depositary by billing such holders or by
deducting such charge from one or more cash dividends or other cash distributions);
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 or withdrawal of deposited securities; and
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 time to time between us and the depositary. The charges described above
may be amended from time to time by agreement between us and the depositary.
79
Our depositary has agreed to reimburse us for certain expenses we incur that are related to establishment
and maintenance of the ADR program, including investor relations expenses and exchange application and listing
fees. Neither the depositary nor we can determine the exact amount to be made available to us because (i) the
number of ADSs that will be issued and outstanding, (ii) the level of fees to be charged to holders of ADSs and (iii)
our reimbursable expenses related to the ADR program are not known at this time. The depositary collects its fees
for issuance and cancellation of ADSs directly from investors depositing shares or surrendering ADSs for the
purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions
to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to
pay the fees. The depositary may collect its annual fee for depositary services by deduction from cash distributions,
or by directly billing investors, or by charging the book-entry system accounts of participants acting for them. The
depositary will generally set off the amounts owing from distributions made to holders of ADSs. If, however, no
distribution exists and payment owing is not timely received by the depositary, the depositary may refuse to provide
any further services to holders that have not paid those fees and expenses owing until such fees and expenses have
been paid.
At the discretion of the depositary, all fees and charges owing under the deposit agreement are due in
advance and/or when declared owing by the depositary.
ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not Applicable.
PART II
ITEM 14.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE
OF PROCEEDS
Not Applicable.
80
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, we conducted an evaluation of our disclosure controls and procedures, as
such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as
amended. Our principal executive officer and principal financial officer have concluded that our disclosure controls
and procedures were not effective as of the end of the period 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 Rules 13a-15(f) and 15d-15(f) under the Exchange Act, for our company.
Internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of consolidated financial statements in accordance with U.S.
GAAP and includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of a company’s assets, (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in
accordance with generally accepted accounting principles, and that a company’s receipts and expenditures are being
made only in accordance with authorizations of a company’s management and directors, and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized 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 our financial statements would be prevented or detected. Also, projections
of any evaluation of effectiveness to future periods are subject to the risks that controls may 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 as of December 31, 2015. In making its assessment, management used the
criteria in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control — Integrated Framework (2013).
The Company identified deficiencies related to corporate governance, management’s application of
disclosure requirements for SEC reporting and documentation 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 and the related internal control procedures required of U.S. public companies.
The Company identified deficiencies related to management’s application of disclosure requirements for
SEC reporting and documentation of our financial statement reporting process. Although our accounting staff
employees are professional and experienced in accounting requirements and procedures generally accepted in the
PRC, management has determined that they require additional training and assistance in U.S. GAAP methods and
SEC reporting.
Based on this assessment, management concluded that our internal controls over financial reporting were
not effective as of December 31, 2015 due to the deficiencies related to management’s application of disclosure
requirements for SEC reporting and documentation of our financial statement reporting process.
(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 annual report 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, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
81
(e)
Remediation Initiatives
In 2016, the Company’s audit committee of its Board of Directors further reviewed internal controls along
with management and in cooperation with outside consultants in order to remediate all prior material weaknesses
and internal control deficiencies.
Management took the following further specific actions to address the prior deficiencies that were identified
in 2015 in order to strengthen our internal control over financial reporting:
l
l
l
reviewed documented policies, procedures and controls related to the key processes we use to identify
material information, prepare regulatory filings and other public documents, and communicate
information to external parties to ensure they are complete and effective;
reviewed documented controls and procedures to ensure they are properly implemented and effective to
enhance the overall completeness, accuracy, consistency and timeliness of our disclosures;
identified and assessed key risks that may impact our ability to disclose material information and prepare
regulatory filings that are complete, accurate, consistent and timely;
l enhanced open and candid communication between all parties involved in operations, governance and
financial and regulatory reporting, and a strong control and governance environment;
l created positions and allocate sufficient resources to achieve an effective disclosure controls and
procedures; and
l established direct reporting procedures from the Chief Accounting Officer to the Chief Financial Officer
to ensure a better overview of the Company’s financial reporting system by the CFO.
Our management, including our Chief Executive Officer and our Chief Financial Officer, does not expect
that our disclosure controls and procedures or our internal controls will prevent or detect 100% of all errors and
fraud that may occur. A control system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must
reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their
costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within our company have been detected.
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 and Xiaobing Liu are “independent directors” within the meaning of
NASDAQ Stock Market Rule 5605(a)(2) and meet the criteria for independence set forth in Rule 10A−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 deter wrongdoing. The policies outlined in the Code are designed to ensure that our
directors, executive officers and employees act in accordance with not only the letter but also the spirit of the laws
and regulations that apply to our business. We expect our directors, executive officers and employees to exercise
good judgment, to uphold these standards in their day-to-day activities, and to comply with all applicable policies
and procedures in the course of their relationship with 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 disclosed by 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 or waiver. During fiscal year 2015, no amendments to or waivers from the Code were
made or given for any of our executive officers.
82
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 Ended
December 31, 2014
Year Ended
December 31, 2015
Audit fees*
$
255,000 $
235,000
*Audit Fees – This category includes the audit of our annual financial statements, review of financial statements
included in our quarterly reports and services that are normally provided by the independent registered public
accounting firm in connection with engagements for those years and services that are normally provided by our
independent registered public accounting firm in connection with statutory audits and Securities and Exchange
Commission regulatory 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, including audit services, audit-related services, and other services as described
above, other than those for de minimis services which are approved by the audit committee 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
On May 6, 2015, we announced a share repurchase program for up to a total of 500,000 shares of our
ADS’s through May 2016 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. As of December 31, 2015, a total of 73,169 shares of our ADS’s
have been purchased under the repurchase program.
The following tables set forth some additional information about our repurchases made in the fiscal year
ended December 31, 2015. The ordinary shares underlying the repurchased ADSs have been canceled pursuant to
BVI law.
Issuer Repurchases in the Year Ended December 31, 2015
(a) Total Number
of
ADSs Purchased
Average Price Paid
per
ADS
Total Number of
ADSs
Purchased as Part of
Publicly Announced
Program(1)
Maximum Number (or
Approximate Dollar
Value) of ADSs that
May
Yet be Purchased
Under
the Program
47,623 $
13,640 $
-
0.726
0.951
-
47,623
61,263
61,263
452,377
438,737
438,737
Period
Month #1
(May 2015)
Month #2
(June 2015)
Month #3
(July 2015)
Month #4
(August 2015)
Month #5
(September 2015
)
Month #6
(October 2015)
Month #7
(November 2015
)
Month #8
(December 2015
)
Total
-
-
-
-
7,496 $
0.946
61,263
438,737
61,263
68,759
438,737
431,241
3,580 $
0.944
72,339
427,661
830 $
73,169 $
0.888
0.803
83
73,169
73,169
426,831
426,831
ITEM 16F.
CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
None.
ITEM 16G.
CORPORATE GOVERNANCE
Our ADSs are listed on the NASDAQ Capital 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 of the NASDAQ
corporate governance requirements. A NASDAQ -listed non-US company is required to provide a general summary
of the significant differences to its US investors either on the company website or in its annual report distributed to
its US investors. We are committed to a high standard of corporate governance. As such, we endeavor to comply
with the NASDAQ corporate governance practices and there is no significant difference between our corporate
governance practices and what the NASDAQ requires of domestic U.S. companies.
ITEM 16H.
MINE SAFETY DISCLOSURE
Not applicable.
ITEM 17.
FINANCIAL STATEMENTS
Not applicable.
PART III
84
ITEM 18.
FINANCIAL STATEMENTS
The consolidated financial statements and related notes required by this item are contained on pages F-1
through F-44.
ITEM 19.
EXHIBITS
Exhibit
Number
Description of Documents
1.1
1.2
2.1
2.2
2.3
4.1
4.2
4.3
8.1
12.1
12.2
13.1
13.2
101
Amended and Restated Memorandum of Association (1)
Amended and Restated Articles of Association (1)
Form of American Depositary Receipt (included in Exhibit 2.3)
Form of Amended and Restated Ordinary Share Certificate (1)
Form of Deposit Agreement (3)
Share Exchange Agreement between Ultra Glory International Ltd., the shareholder of Ultra Glory
International Ltd., Ossen Innovation Materials Group Co., Ltd. and the Shareholders of Ossen
Innovation Materials Group Co., Ltd., dated July 7, 2011 (2)
Employment Contract by and between Ossen Innovation Co., Ltd. and Liang Tang, dated January 1,
2014 (4)
Employment Agreement, dated March 1, 2013, entered into by the Company and Feng Peng. (5)
Subsidiaries of the Registrant*
CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 **
CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 **
Interactive Data File (XBRL).*
* Filed as an exhibit hereto.
** Furnished as an exhibit hereto.
(1)
Incorporated by reference to our Registration Statement on Form F-1/A, filed on September 29, 2011.
(2)
Incorporated by reference to our Shell Company Report on Form 20-F, filed on July 12, 2011.
(3)
Incorporated by reference to Post-Effective Amendment No. 1 to our Registration Statement on Form F-6,
filed on January 6, 2016.
(4)
Incorporated by reference to our Annual Report on Form 20-F, filed on April 29, 2014.
(5)
Incorporated by reference to our Annual Report on Form 20-F, filed on April 30, 2013.
85
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 undersigned to sign this annual report on its behalf.
SIGNATURES
Date: April 21, 2016
OSSEN INNOVATION CO., LTD.
/s/ Wei Hua
Name: Wei Hua
Title: Chief Executive Officer
86
OSSEN INNOVATION CO., LTD.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
OSSEN INNOVATION CO., LTD. AND SUBSIDIARIES
CONTENTS
PAGE
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
FOR THE YEAR ENDED DECEMBER 31, 2015 AND 2014
PAGE
F-2-F-3
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2015 AND 2014
PAGE
F-4
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31,
2015, 2014 AND 2013
PAGE
F-5
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’
EQUITY FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
PAGE
F-6-F-7
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS
ENDED DECEMBER 31, 2015, 2014 AND 2013
PAGE
F-8 –F- 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
F-41 –F- 43 SCHEDULE I — CONDENSED PARENT COMPANY FINANCIAL
INFORMATION FOR THE YEARS ENDED DECEMBER 31, 2015, 2014, AND
2013
REPORT OF INDEPENDENT REGISTERED PUBLIC ACOUNTING FIRM
Board of Directors and Shareholders
Ossen Innovation Co., Ltd.
Shanghai, China
We have audited the accompanying consolidated balance sheets of Ossen Innovation Co., Ltd. as of December 31,
2015 and 2014 and the related consolidated statements of operations and other comprehensive income, shareholders’
equity, and cash flows for each of the three years in the period ended December 31, 2015. In connection with our
audits of the financial statements, we have also audited the financial statement schedules listed in the accompanying
index. These financial statements and schedules are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements 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 that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. The Company is not required to have, nor were
we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal
control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of Ossen Innovation Co., Ltd. as of December 31, 2015 and 2014 and the results of its operations
and its cash flows for each of the three years in the period ended December 31, 2015 in conformity with accounting
principles 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, present fairly, in all material respects, the information set forth therein.
/s/ BDO China Shu Lun Pan Certified Public Accountants LLP
Shanghai, People’s Republic of China
April 20, 2016
F-1
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2015 AND 2014
ASSETS
Current assets
Cash and cash equivalents
Restricted cash
Note receivable-bank acceptance note
Accounts receivable, net of allowance for doubtful accounts of $738,101 and
$1,874,330 at December 31, 2015 and 2014, respectively
Inventories
Advance to suppliers
Other current assets
Total current assets
Property, plant and equipment, net
Land use rights, net
TOTAL ASSETS
December 31,
2015
2014
$
812,277 $
8,780,443
8,010,228
684,592
17,572,732
9,925,155
43,247,974
27,276,221
55,730,089
915,041
53,764,414
20,137,901
56,327,390
946,319
144,772,273 159,358,503
7,174,646
4,231,348
$ 154,240,533 $ 170,764,497
5,557,176
3,911,084
See accompanying notes to the consolidated financial statements
F-2
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2015 AND 2014 (Continued)
Current Liabilities
Notes payable-bank acceptance notes
Short-term bank loans
Accounts payables
Customer deposits
Taxes payable
Other payables and accrued liabilities
Due to related party
Due to shareholder
Bond payable - current portion
Total current liabilities
Bond payable
TOTAL LIABILITIES
December 31,
2015
2014
$
12,477,471 $
17,714,928
1,899,400
309,147
414,250
1,669,670
65,769
282,499
15,273,177
50,106,311
-
50,106,311
26,521,315
18,711,357
3,217,076
588,005
552,459
1,622,958
69,469
100,000
-
51,382,639
15,972,837
67,355,476
EQUITY
Shareholders' Equity
Ordinary shares, $0.01 par value: 100,000,000 shares authorized; 20,000,000
shares issued; 19,828,790 and 19,901,959 shares outstanding as of December 31,
2015 and 2014, respectively
Additional paid-in capital
Statutory reserve
Retained earnings
Treasury stock, at cost: 171,210 and 98,041 shares as of December 31, 2015 and
2014, respectively
Accumulated other comprehensive income
TOTAL SHAREHOLDERS’ EQUITY
Non-controlling interest
TOTAL EQUITY
200,000
33,971,455
5,631,373
50,258,265
200,000
33,971,455
5,021,752
44,971,082
(155,343)
2,596,227
92,501,977
11,632,245
(96,608)
8,425,697
92,493,378
10,915,643
104,134,222 103,409,021
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$ 154,240,533 $ 170,764,497
See accompanying notes to the consolidated financial statements
F-3
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME FOR THE
YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
REVEUNUES
COST OF GOODS SOLD
GROSS PROFIT
Selling expenses
General and administrative expenses
Total Operating Expenses
INCOME FROM OPERATIONS
Financial expenses, net
Other income, net
INCOME BEFORE INCOME TAX
INCOME TAX
NET INCOME
LESS: NET INCOME ATTRIBUTABLE TO
NONCONTROLLING INTEREST
NET INCOME ATTRIBUTABLE TO OSSEN
INNOVATION CO.,LTD AND SUBSIDIARIES
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation gain (loss)
TOTAL OTHER COMPREHENSIVE INCOME
(LOSS)
COMPREHENSIVE INCOME
EARNINGS PER ORDINARY SHARE
Basic and diluted
WEIGHTED AVERAGE ORDINARY SHARES
OUTSTANDING
Year Ended December 31,
2015
2014
2013
$ 117,908,416 $ 123,571,455 $
110,250,876
13,320,579
772,383
6,340,584
7,112,967
102,197,994
15,710,422
986,378
4,478,413
5,464,791
10,245,631
(2,823,952)
371,894
7,793,573
(1,180,167)
6,613,406
6,207,612
(2,401,268)
907,941
4,714,285
(578,727)
4,135,558
113,891,989
102,353,957
11,538,032
625,500
3,485,118
4,110,618
7,427,414
(2,696,966)
558,426
5,288,874
(1,219,030)
4,069,844
716,602
276,682
426,440
5,896,804
3,858,876
3,643,404
(5,829,470)
779,135
1,647,348
(5,829,470)
$
67,334
779,135
4,638,011
$
1,647,348
5,290,752
$
$
0.30
$
0.19
$
0.18
Basic and diluted
19,862,537
19,901,959
19,901,959
See accompanying notes to the consolidated financial statements
F-4
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
Total Ossen Innovation Co., Ltd. Shareholders’ Equity
Ordinary Shares Additional
Accumulated
Other
Non
$0.01 Par Value
Paid-in Treasury stock Comprehensive Statutory Retained Controlling
Shares Amount Capital Shares Amount
Income
Reserve Earnings
Interest
Total
Balance
at
January
1, 2013
Net
income
Transfer
to
statutory
reserve
Foreign
currency
translation
adjustmen
t
Balance
at
December
31, 2013
Net
income
Transfer
to
statutory
reserve
Foreign
currency
translation
adjustmen
t
Balance
at
December
31, 2014
Net
income
Transfer
to
statutory
reserve
Common
shares
repurchase
Foreign
currency
translation
adjustmen
t
Balance
at
December
31, 2015
20,000,00
200,00
0 $
-
0 $
-
-
-
33,971,45
5 (98,041) $ (96,608) $
4,179,02
5,999,214 $
7 $
38,311,52
7 $ 10,212,521 $ 92,777,136
-
-
-
-
-
- 3,643,404
426,440 4,069,844
-
-
- 436,672
(436,672)
-
-
-
-
-
-
-
1,647,348
-
- 1,647,348
20,000,00
0
-
200,00
0
-
-
-
33,971,45
5 (98,041)
(96,608)
7,646,562
9
4,615,69
41,518,25
9 10,638,961 98,494,328
-
-
-
-
-
- 3,858,876
276,682 4,135,558
-
-
- 406,053
(406,053)
-
-
-
-
-
-
-
779,135
-
-
779,135
20,000,00
0
-
-
-
200,00
0
-
-
-
33,971,45
5 (98,041)
(96,608)
8,425,697
2
5,021,75
44,971,08
2 10,915,643
103,409,02
1
-
-
-
-
-
- 5,896,804
716,602 6,613,406
-
-
- 609,621
(609,621)
-
- (73,169)
(58,735)
-
-
-
(58,735)
-
-
-
-
-
(5,829,470)
-
-
(5,829,470)
20,000,00
200,00
0 $
0 $
33,971,45
5
(171,21
(155,34
5,631,37
0) $
3) $
2,596,227 $
3 $
50,258,26
5 $ 11,632,245 $
104,134,22
2
See accompanying notes to the consolidated financial statements
F-5
OSSEN INNOVATION CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization
Share-based compensation expense
Changes in operating assets and liabilities:
(Increase) Decrease In:
Accounts receivable
Inventories
Advance to suppliers
Other current assets
Notes receivable - bank acceptance notes
Notes receivable from related party - bank acceptance notes
Increase (Decrease) In:
Accounts payable
Customer deposits
Income tax payable
Other payables and accrued expenses
Due to related party
Due to shareholder
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of plant and equipment
Withdraw for purchases of plant and equipment
Disposal of property, plant and equipment
Net cash used in investing activities
Year Ended December 31,
2014
2015
2013
$
6,613,406 $
4,135,558 $
4,069,844
1,416,060
1,531,278
-
1,564,973
-
10,516,441
(7,138,320)
597,301
31,278
1,914,927
-
(1,317,676)
(278,858)
(138,209)
46,712
(3,700)
182,499
12,441,861
(5,564,338 )
(1,387,131 )
(5,712,575 )
2,501,567
(7,503,574 )
12,915,099
(2,465,695)
(8,943,726)
27,333,681
(1,543,260)
(2,027,502)
(11,084,891)
2,713,132
(2,320,266 )
319,918
73,209
52,558
50,000
1,804,435
(68,361)
2,523,669
(158,812)
744,552
16,911
50,000
10,011,383
(29,687)
-
-
(29,687)
(81,441 )
-
456
(80,985 )
(16,361)
8,071,937
-
8,055,576
See accompanying notes to the consolidated financial statements
F-6
OSSEN INNOVATION CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013 (Continued)
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease (Increase) in restricted cash
Proceeds from short-term bank loans
Repayments of short-term bank loans
Repayments of long-term bank loans
Proceeds from notes payable-bank acceptance notes
Repayment of notes payable-bank acceptance notes
Repurchase of common share
Proceeds from bond payable
Net cash used in financing activities
Year Ended December 31,
2014
2015
2013
8,792,289
18,462,625
(18,462,625)
-
36,202,800
(49,367,454)
(58,735)
-
(4,431,100)
14,210,938
28,475,194
(37,261,825 )
-
55,811,380
(80,682,428 )
-
15,946,109
(3,500,632 )
(6,376,171)
41,531,691
(66,189,540)
(4,581,002)
98,467,000
(84,912,143)
-
-
(22,060,165)
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
Effect of exchange rate changes on cash
Cash and cash equivalents at beginning of period
CASH AND CASH EQUIVALENTS AT END OF PERIOD $
7,981,074
(7,853,389)
684,592
812,277 $
(1,777,182 )
1,322,324
1,139,450
684,592 $
(3,993,206)
3,135,892
1,996,764
1,139,450
SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid during the periods:
Income taxes paid
Interest paid
Non-cash transactions:
Appropriation to statutory reserve
$
$
$
1,301,687 $
3,353,344 $
722,948 $
1,977,014 $
1,095,357
2,865,902
609,621 $
406,053 $
436,672
See accompanying notes to the consolidated financial statements
F-7
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
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 Virgin Islands limited liability company organized on January 21, 2010 under the
BVI Business Companies Act, 2004 (the “BVI Act”). Ultra Glory was a blank check company formed for the
purpose of acquiring, through a share exchange, asset acquisition or other similar business combination, an
operating business.
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 Ossen Innovation Group, a British Virgin Islands limited liability company
organized on April 30, 2010 under the BVI Act and the shareholders of Ossen Innovation Group. Pursuant to the
share exchange agreement, Ultra Glory acquired from the shareholders of Ossen Innovation Group all of the issued
and outstanding shares of Ossen Innovation Group, in exchange for an aggregate of 10,000,000 newly issued
ordinary shares issued by Ultra Glory to the shareholders of Ossen Innovation Group. In addition, the sole
shareholder of Ultra Glory sold all of the 5,000,000 ordinary shares of Ultra Glory that were issued and outstanding
prior to the business combination, to the shareholders of Ossen Innovation Group for cash, at a price of $0.03 per
share. As a result, the individuals and entities that owned shares of Ossen Innovation Group prior to the business
combination acquired 100% of the equity of Ultra Glory, and Ultra Glory acquired 100% of the equity of Ossen
Innovation Group. Ossen Innovation Group is now a wholly owned subsidiary of Ultra Glory. In conjunction with
the business combination, Ultra Glory filed an amended charter, pursuant to which Ultra Glory changed its name to
Ossen Innovation Co., Ltd., changed its fiscal year end to December 31 and increased its authorized shares to
100,000,000. Upon the consummation of the business combination, the company ceased to be a shell company.
Ossen Innovation, together with its subsidiaries, is referred to as the “Company,” unless specific reference is made
to a company 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 deemed to be a reverse acquisition.
F-8
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
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 of Ossen Innovation Group have had effective control of Ultra Glory. For
accounting purposes, Ossen Innovation Group is deemed to be the accounting acquirer in the transaction and,
consequently, the transaction is treated as a recapitalization of Ultra Glory, i.e., a capital transaction involving the
issuance of shares by Ultra Glory for the shares of Ossen Innovation Group. Accordingly, the combined assets,
liabilities and results of operations of Ossen Innovation Group and its subsidiaries, became the historical financial
statements of Ultra Glory at the closing of the share exchange, and Ultra Glory’s assets (primarily cash and cash
equivalents), liabilities and results of operations is consolidated with those of Ossen Innovation Group beginning on
the share exchange date. No step-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 direct costs of the transaction is charged to additional
paid-in capital. All professional fees and other costs associated with transaction were expensed. The 15,000,000
shares 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, our chairman, owns 100% of the shares of Effectual Strength Enterprises Ltd., a British Virgin Islands
company, which currently owns approximately 60.0% of our outstanding ordinary shares. The spouse of our chief
executive officer, Wei Hua, owns 100% of the shares of Fascinating Acme Development Ltd., which owns
approximately 3.0% of our outstanding ordinary shares. The spouse of the chief executive officer of Ossen Material
Research (formerly Shanghai ZFX), which is an affiliated company of ours that supplies us with raw materials, owns
100% of the shares of Gross Inspiration Development Ltd., which owns approximately 3.0% of our outstanding
ordinary shares. In December 2011, 5 million shares were issued in our initial public offering. Currently we have
approximately 30.2% of our ordinary shares, or 5,988,290 shares, trading on NASDAQ in the form of ADS’s. The
holders of the remaining approximately 3.8% of our shares are investors that are residents of the PRC and are
unaffiliated with Ossen.
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 been held by Dr. Tang since inception.
In May 2010, Dr. Tang transferred these shares to Ossen Innovation Group in anticipation of the public listing of our
Company’s shares in the United States.
F-9
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
Ossen Asia is a British Virgin Islands limited liability company organized on February 7, 2002. Ossen Asia has one
direct operating subsidiary in China, Ossen Innovation Materials Co. Ltd., or Ossen Materials. Ossen Asia owns 81%
of the equity of Ossen Materials.
Topchina is a British Virgin Islands limited liability company organized on November 3, 2004. Ossen Materials and
Topchina directly own an operating subsidiary in China, Ossen (Jiujiang) Steel Wire & Cable Co., Ltd., or Ossen
Jiujiang. Ossen Materials owns 20.46% of the equity of Ossen Jiujiang and Topchina 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 (Maanshan) Steel Wire and Cable Co., Ltd. On May 8, 2008, Ossen Materials was
restructured from a Sino-foreign joint venture limited liability company to a corporation. The name of the entity was
changed at that time to Ossen Innovation Materials Co., Ltd.
Ossen Asia owns 81% of the equity of Ossen Materials. The remaining 19% is held in the aggregate by four Chinese
entities, two of which are controlled by Chinese governmental entities, one of which is controlled by Zhonglu Co.
Ltd., a company whose shares are listed on the Shanghai Stock Exchange, and one of which is controlled by Chinese
citizens.
Through Ossen Materials, the Company has manufactured and sold plain surface PC strands, galvanized PC steel
wires and PC wires in the Company’s Maanshan City, PRC, facility since 2004. The primary products manufactured
in this facility are the Company’s plain surface PC strands. The primary markets 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-10
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
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 Jiujiang Tianlong Galvanized Prestressing Steel Strand LLC, including equipment, land use
rights and inventory for approximately $2.9 million. Ossen Jiujiang was formed by Ossen Shanghai in the PRC as a
Sino-Foreign joint venture limited liability company on April 13, 2005. Ossen Shanghai then transferred the newly
acquired assets to Ossen Jiujiang. At its inception, Ossen Jiujiang was owned by two entities: 33.3% of its equity
was held by Ossen Asia and 66.7% by Ossen Shanghai. In June 2005, Ossen Shanghai transferred its entire interest
in Ossen Jiujiang to Topchina in exchange for approximately $2.9 million. In October 2007, Topchina transferred
41.7% of the equity in Ossen Jiujiang to Ossen Asia for no consideration. On December 17, 2007, Ossen Asia
transferred all of its shares in Ossen Jiujiang to Ossen Materials for no consideration. On December 27, 2010, the
paid-in capital of Ossen Jiujiang increased from approximately $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 and 79.54% by Topchina. On April 9, 2014, Ossen (Jiujiang) Steel Wire & Cable Co., Ltd. changed its
name to Ossen (Jiujiang) New Materials Co., Ltd.
Through Ossen Jiujiang, the company manufactures galvanized PC wires, plain surface PC strands, galvanized PC
strands, unbonded PC strands, helical rib PC wires, sleeper PC wires and indented PC wires. The primary products
manufactured in this facility are the company’s galvanized PC wires. The primary markets for the PC strands
manufactured in the company’s Jiujiang facility are Jiangxi Province, Wuhan Province, Hunan Province, Fujian
Province and Sichuan Province, each in the PRC.
F-
11
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
NOTE 1 – ORGANIZATION AND PRINCIPAL ACTIVITIES (CONTINUED)
At December 31, 2015, 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”)
BVI
April 30, 2010
USD
Ossen Group (Asia) Co., Ltd.
("Ossen Asia")
BVI
February 7, 2002
USD
Topchina Development Group
Ltd. ("Topchina")
BVI
November 3, 2004 USD
Ossen Innovation Materials Co.,
Ltd. ("Ossen Meterials")
The PRC
October 27, 2004
-
-
-
Ossen (Jiujiang) New Materials
Co., Ltd. (Formerly Ossen
(Jiujiang) Steel Wire & Cable
Co., Ltd.) ("Ossen Jiujiang")
The PRC
April 13, 2005
RMB 75,000,000
81%
RMB183,271,074
96.11%
F-12
Investments
holdings
100%
Investments
holdings
100%
Investments
holdings
100%
Design,
engineering,
manufacture and
sale
of customized
prestressed steel
materials
Design,
engineering,
manufacture and
sale
of customized
prestressed steel
materials
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
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 with U.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 of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and expenses during the reporting
periods. Management makes these estimates using the best information available at the time the estimates are made.
Actual results could differ from those estimates.
Non-controlling 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 or sale of equity interests that do not
result in a change of control are accounted for as equity transactions. Results of operations attributable to the non-
controlling interest are included in our consolidated results of operations and, upon loss of control, the interest sold,
as well as interest retained, if any, will be reported at fair value with any gain or loss recognized in earnings.
F-13
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Foreign Currency Translation
The accompanying consolidated financial statements are presented in United States dollars (“US$” or “$”). The
functional currency of the Company is Renminbi (“RMB”). The consolidated financial statements are translated into
United States dollars from RMB at year-end exchange rates as to assets and liabilities and average exchange rates as
to revenues and expenses. Capital accounts are translated at their historical exchange rates when the capital
transactions occurred. The resulting transaction adjustments are recorded as a component of shareholders’ equity.
Gains and losses from foreign currency transactions are included in net income.
Year end RMB: US$ exchange rate
Average yearly RMB: US$ exchange rate
2015
2014
2013
6.4917
6.2288
6.1460
6.1457
6.1943
6.1122
The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place
through authorized institutions. No representation is made that the RMB amounts could have been, or could be,
converted into US$ at the rates used in translation.
Revenue Recognition
In accordance with the ASC Topic 605, “Revenue Recognition”, the Company recognizes revenue when persuasive
evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price to the
buyer is fixed or determinable, and collectability is reasonable assured.
The Company derives revenues from the processing, distribution and sale of own products. The Company
recognizes its revenues net of value-added taxes (“VAT”). The Company is subject to VAT which is levied on the
rate of 17% on the invoiced value of sales. Output VAT is borne by customers in addition to the invoiced value of
sales and input VAT is borne by the Company in addition to the invoiced value of purchases to the extent not
refunded for export sales.
The Company will recognize revenue for domestic sales based on the terms defined in the contract as long as risk of
loss has transferred to the customers and each of the criteria under ASC 605 have been met. Contracts terms may
require the Company to deliver the finished goods to the customers’ location or the customer may pick up the
finished goods at the Company’s factory. International sales are recognized when shipment clears customs and
leaves the port.
The Company also derives an insignificant amount of revenue from providing services to select customers. Service
revenues account for less than 2% of total revenues for all periods presented and is recognized upon delivery and
acceptance of the finished products by the customer, or when pick up occurs. Contracts with distributors do not offer
any chargeback or price protection. The Company experienced no product returns and recorded no reserve for sales
returns for the years ended December 31, 2015, 2014 and 2013.
F-14
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
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.
Selling Expenses
Selling expenses include operating expenses such as sales commissions, payroll, traveling expenses, transportation
expenses and advertising expenses.
General and Administrative (“G&A”) Expenses
General and administrative expenses include management and office salaries and employee benefits, deprecation for
office facility and office equipment, travel and entertainment, legal and accounting, consulting fees and other office
expenses.
Research and Development
Research and development costs are expensed as incurred and totaled approximately $3,404,333, $3,914,918 and
$1,260,440 for the years ended December 31, 2015, 2014 and 2013, respectively. Research and development costs
are included in G&A in the accompanying statements of operations. Research and development costs are incurred on
a project specific basis.
Retirement Benefits
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 $148,232, $140,823and $133,230 were
charged to operations for the years ended December 31, 2015, 2014 and 2013, respectively.
Income Taxes
The Company accounts for income taxes following the liability method pursuant to FASB ASC 740 “Income Taxes”.
Under this method, deferred tax assets and liabilities are determined based on the difference between the financial
reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the
differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if,
based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax
assets will not be realized. The effect on deferred taxes of a change in tax rate is recognized in income in the period
that includes the enactment date.
F-15
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
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 return should be recorded in the financial statements. The Company may recognize
the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained
on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized
in the financial statements from such a position should be measured based on the largest benefit that has a greater
than fifty percent likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on
recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires
increased disclosures. As of December 31, 2015, the Company did not have a liability for unrecognized tax benefits.
The Company has not provided for income taxes on accumulated earnings amounting $50,258,265 that are subject
to the PRC dividend withholding tax as of December 31, 2015, 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 in accordance with Chinese Laws. The VAT standard rate is 17% of the gross
sale price. A credit is available whereby VAT paid on the purchases of semi-finished products or raw materials used
in the production of the Company’s finished products can be used to offset the VAT due on the sales of the finished
products.
Statutory Reserve
In accordance with the PRC Regulations on Enterprises with Foreign Investment, an enterprise established in the
PRC with foreign investment is required to provide for certain statutory reserves, namely (i) General Reserve Fund,
(ii) Enterprise Expansion Fund and (iii) Staff Welfare and Bonus Fund, which are appropriated from net profit as
reported in the enterprise’s PRC statutory accounts. A wholly-owned foreign enterprise (“WOFE”) is required to
allocate at least 10% of its annual after-tax profit to the General Reserve Fund until the balance of such fund has
reached 50% of its respective registered capital. A non-wholly-owned foreign invested enterprise is permitted to
provide for the above allocation at the discretion of its board of directors. Appropriations to the Enterprise
Expansion Fund and Staff Welfare and Bonus Fund are at the discretion of the board of directors for all foreign
invested enterprises. The aforementioned reserves can only be used for specific purposes and are not distributable as
cash dividends.
As a result, $609,621, $406,053 and $436,672 have been appropriated to the accumulated statutory reserves by the
Company’s PRC subsidiaries for the years ended December 31, 2015, 2014and 2013 respectively.
F-16
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
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 investments by owners and distributions to owners, and is not included in the
computation of income tax expense or benefit. Accumulated comprehensive income consists of foreign currency
translation. The Company presents comprehensive income (loss) in accordance with ASC Topic 220,
“Comprehensive Income”. ASC Topic 220 states that all items that are required to be recognized under accounting
standards as components of comprehensive income (loss) be reported in the consolidated financial statements.
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 cash equivalents. The Company maintains no bank account in the United
States of America. The Company maintains its bank accounts in Mainland China and Hong Kong. Balances at
financial institutions or state-owned banks within the Mainland China are not covered by insurance. However, the
Company has not experienced any losses in such accounts and believes it is not exposed to any significant risks on
its cash in bank accounts. According to the rules of Hong Kong Deposit Protection Board, in case a member bank of
Deposit Protection Scheme (“DPS”) fails, the DPS will pay compensation up to a maximum of HK$500,000 to each
depositor of the failed Scheme member.
Restricted Cash
Restricted cash represents amounts held by a bank as security for bank acceptance notes and therefore is not
available for the Company’s use until such time as the bank acceptance notes have been fulfilled or expired,
normally within twelve month period.
Fair Value of Financial Instruments
The Company applies the provisions of ASC 820, Fair Value Measurements and Disclosures, to the financial
instruments that are required to be carried at fair value. Fair value is the price that would be received to sell an asset
or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in
an orderly transaction between market participants at the measurement date. The Company uses a three-tier fair
value hierarchy based upon observable and non-observable inputs that prioritizes the information used to develop
our assumptions regarding fair value. Fair value measurements are separately disclosed by level within the fair value
hierarchy.
F-17
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
• Level 1—defined as observable inputs such as quoted prices in active markets for identical assets or liabilities;
• Level 2—defined as inputs other than quoted prices in active markets, that are either directly or indirectly
observable; and
• Level 3—defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to
develop its own assumptions.
The company’s financial instruments primarily consist of cash and cash equivalents, restricted cash, accounts
receivable, notes receivable, accounts payable, other payables and accrued liabilities, short-term bank loans, and
bond payable.
The carrying value of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, and other
current assets and liabilities approximate fair value because of the short term nature of these items. The estimated
fair values of short-term bank loans were not materially different from their carrying value as presented due to the
short maturities and that the interest rates on the borrowing approximate those that would have been available for
loans of similar remaining maturity and risk profile. As the carrying amounts are reasonable estimates of the fair
value, these financial instruments are classified within Level 1 of the fair value hierarchy.
The Company identified bond payable as a Level 2 instrument due to the fact that its value can be determined based
on similar bonds that are publicly traded and the inputs to the valuation are primarily based upon readily observable
pricing information. Since the bond payable’s inputs (term and interest rate) is observable, we transferred bond
payable from a Level 3 instrument to a Level 2 instrument The balance of bond payable, which was measured and
disclosed at fair value, was $15,273,177 and $15,972,837 at December 31, 2015 and 2014, respectively.
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 the net income by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is computed similar to basic earnings per share except that
the denominator is increased to include the number of additional common shares that would have been outstanding
if the potential ordinary shares equivalents had been issued and if the additional common shares were dilutive.
F-18
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
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 specific allowances when there is doubt as to the collectability of individual balances.
In evaluating the collectability of individual receivable balances, the Company considers many factors, including the
age of the balance, customer’s historical payment history, its current credit-worthiness and current economic trends.
Accounts are written off after exhaustive efforts at collection. If accounts receivable are to be provided for, or
written off, they would be recognized in the consolidated statement of operations within operating expenses.
Balance of allowance of doubtful accounts was $738,101 and $1,874,330 at December 31, 2015 and 2014,
respectively.
Inventories
Inventories are stated at the lower of cost or net realizable value, which is based on estimated selling prices less any
further costs expected to be incurred for completion and disposal. Cost of raw materials is calculated using the
weighted average method and is based on purchase cost. Work-in-progress and finished goods costs are determined
using the weighted average method and comprise direct materials, direct labor and an appropriate proportion of
overhead. At December 31, 2015 and 2014, 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 $55,730,089 and $56,327,390 at December 31, 2015 and 2014, respectively.
Among the balance of $55,730,089, the aging of $36,278,463 was within 60 days, $13,054,423 was between 60-90
days and $6,397,203 was over 90 days. No allowance was provided for the prepayments balance at December 31,
2015.
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 and recognizes them as a current liability until the revenue can be recognized
when the goods are delivered. The balance of customer deposits was $309,147 and $588,005 at December 31, 2015
and 2014, respectively.
F-19
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
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 existing assets.
Depreciation is provided over their estimated useful lives, using the straight-line method. Estimated useful lives are
as follows:
Plant, buildings and improvements
Machinery and equipment
Motor vehicles
Office Equipment
5 ~ 20 years
5 ~ 20 years
5 years
5 ~ 10 years
When assets are sold or retired, their costs and accumulated depreciation are eliminated from the consolidated
financial statements and any gain or loss resulting from their disposal is recognized in the period of disposition as an
element of other income. The cost of maintenance and repairs is charged to income as incurred, whereas significant
renewals and betterments are capitalized.
Land Use Rights
According to the PRC laws, the government owns all the land in the PRC. Companies or individuals are authorized
to possess and use the land only through land use rights granted by the Chinese government. The land use rights
granted to the Company are being amortized using the straight-line method over the lease term of fifty years.
Impairment of Long-Lived Assets
Long-lived assets are evaluated for impairment periodically whenever events or changes in circumstances indicate
that their related carrying amounts may not be recoverable in accordance with FASB ASC 360, “Property, Plant and
Equipment”.
In evaluating long-lived assets for recoverability, the Company uses its best estimate of future cash flows expected
to result from the use of the asset and eventual disposition in accordance with FASB ASC 360-10-15. To the extent
that estimated future, undiscounted cash inflows attributable to the asset, less estimated future, undiscounted cash
outflows, are less than the carrying amount, an impairment loss is recognized in an amount equal to the difference
between the carrying value of such asset and its fair value. Assets to be disposed of and for which there is a
committed plan of disposal, whether through sale or abandonment, are reported at the lower of carrying value or fair
value less costs to sell.
No impairment loss is subsequently reversed even if facts and circumstances indicate recovery. There was no
impairment loss recognized for the years ended December 31, 2015, 2014 and 2013.
F-20
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Segments and Related Information
ASC 280-10-50, “Operating Segments”, define the characteristics of an operating segment as a) being engaged in
business activity from which it may earn revenue and incur expenses, b) being reviewed by the company's chief
operating decision maker (CODM) for decisions about resources to be allocated and assess its performance and c)
having discrete financial information. Although we indeed look at our product to analyze the nature of our revenue,
other financial information, such as certain costs and expenses and net income are not captured or analyzed by these
categories. Therefore discrete financial information is not available by product line and we have no CODM to make
resource allocation decisions or assess the performance of the business based on these categories, but rather in the
aggregate. Based on this, Management believes that it operates in one business segment.
In the analysis of product lines as potential operating segments, management also considered ASC 280-10-50-11,
“Aggregation Criteria”, which allows for the aggregation of operating segments if the segments have similar
economic characteristics and if the segments are similar in each of the following areas:
•The nature of the products and services;
•The nature of the production processes;
•The type or class of customer for their products and services;
•The methods used to distribute their products or provide their services; and
•The nature of the regulatory environment, if applicable.
We are engaged in the business of manufacturing and selling steel materials. Our manufacturing process is
essentially the same for the entire Company and is performed in house at our facilities in China. Our customers
primarily consist of entities in the steel industry. The distribution of our products is consistent across the entire
Company. In addition, the economic characteristics of each customer arrangement are similar in that we maintain
policies at the corporate level.
F-21
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
Related Party
In general, related parties exist when there is a relationship that offers the potential for transactions at less than
arm’s-length, favorable treatment, or the ability to influence the outcome of events different from that which might
result in the absence of that relationship. A related party may be any of the followings: a) affiliate, a party that
directly or indirectly controls, is controlled by, or is under common control with another party; b) principle owner,
the owner of record or known beneficial owner of more than 10% of the voting interest of an entity; c) management,
persons having responsibility for achieving objectives of the entity and requisite authority to make decision; d)
immediate family of management or principal owners; e) a parent company and its subsidiaries; d) other parties that
has ability to significant influence the management or operating policies of the entity.
FASB issued authoritative guidance that clarifies considerations relating to the consolidation of certain entities. The
guidance requires identification of the Company’s participation in variable interest entities (“VIE”), which are
defined as entities with a level of invested equity that is not sufficient to fund future activities to permit them to
operation on a standalone basis, or whose equity holders lack certain characteristics of a controlling financial interest.
That, for entities identified as a VIE, the guidance sets forth a model to evaluate potential consolidation based on a
assessment of which party to a VIE, if any, bears a majority of the exposure to expected losses, or stand to gain from
majority of its expected returns. The guidance also sets forth certain disclosure regarding interests in a VIE that are
deemed significant even if consolidation is not required. This item is discussed in further detail in Note 10 – Related
Party Transactions.
Economic and Political Risks
The Company’s operations are conducted in the PRC. Accordingly, the Company’s business, financial condition and
results of operations may be influenced by the political, economic and legal environment in the PRC, and by the
general state of the PRC economy.
The Company’s operations in the PRC are subject to special considerations and significant risks not typically
associated with companies in North America and Western Europe. These include risks associated with, among
others, the political, economic and legal environment and foreign currency exchange. The Company’s results may
be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental
policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad,
and rates and methods of taxation, among other things.
F-22
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Exchange Risk
The Company cannot guarantee that the current exchange rate will remain steady, therefore there is a possibility that
the Company could post the same amount of profit for two comparable periods and because of a fluctuating
exchange rate actually post higher or lower profit depending on exchange rate of PRC Renminbi (RMB) converted
to U.S. dollars on the date. The exchange rate could fluctuate depending on changes in the political and economic
environments without notice.
Recently Issued Accounting Pronouncements
In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of
the Effective Date, which defers the effective date of ASU 2014-09 for all entities by one year. Public business
entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-
09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that
reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15,
2016, including interim reporting periods within that reporting period. Currently, the Company is evaluating the
impact of our pending adoption of ASU 2014-09 and ASU 2015-14 on its consolidated financial statements and has
not yet determined the method by which it will adopt the standard in year 2018.
In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of
Inventory” (“ASU 2015-11”). The amendments in this update require an entity to measure inventory within the
scope of ASU 2015-11 (the amendments in ASU 2015-11 do not apply to inventory that is measured using last-in,
first-out or the retail inventory method. The amendments apply to all other inventory, which includes inventory that
is measured using first-in, first-out or average cost) at the lower of cost and net realizable value. Net realizable value
is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion,
disposal, and transportation. Subsequent measurement is uncharged for inventory measured using last-in, first-out or
the retail inventory method. The amendments in ASU 2015-11 more closely align the measurement of inventory in
U.S. GAAP with the measurement of inventory in International Financial Reporting Standards (“IFRS”). ASU 2015-
11 is effective for public business entities for fiscal years beginning after December 15, 2016, including interim
periods within those fiscal years. The amendments in ASU 2015-11 should be applied prospectively with earlier
application permitted as of the beginning of an interim or annual reporting period. The adoption of this guidance is
not expected to have a material impact on our consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes (Topic
740):changes to the balance sheet classification of deferred taxes. These changes simplify the presentation of
deferred income taxes by requiring all deferred income tax assets and liabilities to be classified as noncurrent in a
classified balance sheet. The amendments in ASU 2015-17 are effective for financial statements issued for annual
periods beginning after December 15, 2016, and interim periods within those annual periods. The adoption of this
guidance is not expected to have a material impact on our consolidated financial statements.
F-23
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
NOTE 3 – CONCENTRATION
Concentration of major customers and suppliers:
2015
Year ended December 31,
2014
2013
Major customers with revenues of
more than 10% of the Company’s
sales
Company A (3rd Party)
Company B (3rd Party)
Company C (3rd Party)
Company D (3rd Party)
Company E (3rd Party)
Company F (3rd Party)
Company G (3rd Party)
Total Revenues
$26,720,983
19,159,563
-
-
14,280,544
17,831,266
-
$77,992,356
23% $
16%
-
-
-
-
17,880,306
-
12% 24,915,113
15% 20,361,459
15,503,953
66% $78,660,831
-
-
-
-
$18,570,574
-
14% 12,368,270
11,380,839
-
20%
-
17%
-
13%
64% $42,319,683
16%
-
11%
10%
-
-
-
37%
2015
Year ended December 31,
2014
2013
Major suppliers with purchases of
more than 10% of the Company’s
purchases
Company X (3rd Party)
Company Y (3rd Party)
Company Z (3rd Party)
Company U (3rd Party)
Company V (3rd Party)
Total Purchase
$ 22,137,683
36,094,431
-
11,729,136
30,382,342
$100,343,592
21% $20,021,833
35% 54,268,855
-
-
11%
-
29% 12,919,182
96% $87,209,870
-
19% $
51% 32,748,784
47,407,595
-
-
-
-
12%
82% $80,156,379
-
32%
46%
-
-
78%
Accounts receivable related to the Company’s major customers comprised 27% and 63% of all accounts receivable
as of December 31, 2015 and 2014, respectively.
Accounts payable related to the Company’s major suppliers comprised nil of all accounts payable as of December
31, 2015 and 2014, respectively.
F-24
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
NOTE 4 – ACCOUNTS RECEIVABLE
Accounts receivable is net of allowance for doubtful accounts.
Accounts receivable
Less: allowance for doubtful accounts
Accounts receivable, net
December 31,
2015
2014
$
$
43,986,075 $
(738,101 )
43,247,974 $
55,638,744
(1,874,330)
53,764,414
As of December 31, 2015 and 2014, a net book value of nil and $2,440,612, respectively, of accounts receivable
were used as collateral for the Company’s short-term bank loans.
Changes in the allowance for doubtful accounts are as follows:
December 31,
Beginning balance
Provision/(Reverse) for doubtful accounts
Ending balance
NOTE 5 – INVENTORIES
Raw materials
Work-in-progress
Finished goods
Inventories
F-25
2015
2014
$
$
1,874,330 $
(1,136,229 )
738,101 $
1,336,177
538,153
1,874,330
December 31,
2015
2014
$
$
26,474,521 $
168,612
633,088
27,276,221 $
16,521,066
153,666
3,463,169
20,137,901
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
NOTE 6 – NOTES RECEIVABLE
Bank acceptance notes:
Due May 20, 2016
Due March 22, 2016, subsequently settled on due date
Due March 22, 2016, subsequently settled on due date
Due January 28, 2016, subsequently settled on due date
Due January 3, 2016, subsequently settled on due date
Due June 25, 2015, subsequently settled on due date
Due April 30, 2015, subsequently settled on due date
Due April 16, 2015, subsequently settled on due date
Due March 26, 2015, subsequently settled on due date
Due March 10, 2015, subsequently settled on due date
Due February 28, 2015, subsequently settled on due date
Due January 17, 2015, subsequently settled on due date
Total
December 31,
2015
2014
$
2,618,727 $
1,540,429
1,540,429
770,214
1,540,429
-
-
-
-
-
-
$
8,010,228 $
-
-
-
-
-
325,414
1,627,075
1,627,075
1,464,366
1,627,075
1,627,075
1,627,075
9,925,155
Notes receivable are received from customers for the purchase of the Company’s products and are issued by
financial institutions that entitle the Company to receive the full face mount from the financial institution at maturity,
which bears no interest and generally ranges from three to six months from the date of issuance.
NOTE 7 – OTHER CURRENT ASSETS
Other current assets consist of the following:
Deposits for open project bids
VAT deductible
Guarantee fee
Other receivables
December 31,
2015
2014
$
$
- $
537,137
154,043
223,861
915,041 $
48,812
61,959
406,769
428,779
946,319
F-26
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
NOTE 8 – PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
At Cost:
Plant and buildings
Machinery and equipment
Motor vehicles
Office equipment
Less: Accumulated depreciation
Plant and buildings
Machinery and equipment
Motor vehicles
Office equipment
Construction- in-progress
Property, plant and equipment, net
December 31,
2015
2014
$
4,117,383 $
14,833,525
311,690
118,641
19,381,239
4,348,977
15,616,293
322,115
121,022
20,408,407
(2,314,191 )
(11,114,880 )
(286,410 )
(108,582 )
(13,824,063 )
-
5,557,176 $
(2,149,753)
(10,715,803)
(294,729)
(112,267)
(13,272,552)
38,791
7,174,646
$
Unrealized foreign exchange translation gain/(loss) for the year ended December 31, 2015, 2014 and 2013 was
($329,926), $66,536 and $198,318, respectively, which has been included in other comprehensive income.
Depreciation expense for the years ended December 31, 2015, 2014 and 2013 was $1,317,119, $1,430,997 and
$1,464,144, respectively. As of December 31, 2015 and 2014,
1) A net book value of nil and $792,795, respectively, of property were used as collateral for the Company’s notes
payable.
2) A net book value of $1,803,192 and $1,406,429, respectively, of property were used as collateral for the short-
term bank loan borrowed by a related party.
F-27
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
NOTE 9 – LAND USE RIGHTS
Land use rights consist of the following:
Cost of land use rights
Less: Accumulated amortization
Land use rights, net
December 31,
2015
2014
$
$
4,746,825 $
(835,741 )
3,911,084 $
5,013,824
(782,476)
4,231,348
Unrealized foreign exchange translation gain/(loss) for the year ended December 31, 2015, 2014 and 2013 was
($221,323), $33,781 and $81,008, respectively, which has been included in other comprehensive income.
Amortization expense for the years ended December 31, 2015, 2014 and 2013 was $98,941, $100,282 and $100,828,
respectively. As of December 31, 2015 and 2014,
1) A net book value of $2,491,924 and nil, respectively, were used as collateral for the Company’s short-term bank
loans.
2) A net book value of nil and $2,694,754, respectively, were used as collateral for the Company’s notes payable.
3) A net book value of $1,419,160 and $1,536,594, respectively, were used as collateral for the short-term bank
loan borrowed by a related party.
Amortization expense for the next five years and thereafter is as follows:
$
94,937
2016
94,937
2017
94,937
2018
94,937
2019
2020
94,937
Thereafter 3,436,399
$3,911,084
Total
F-28
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
NOTE 10 – RELATED PARTY TRANSACTIONS
(a) Names and Relationship of Related Parties:
Dr. Tang
Shanghai Ossen Material Research Insititute Co.,
Ltd. (Formerly Shanghai Zhengfangxing Steel Co.,
Ltd.) (“Ossen Material Research”)
Shanghai Ossen Investment Co., Ltd. (“SOI”)
Shanghai Ossen Investment Holdings (Group) Co.,
Ltd. (“Ossen Shanghai)
Shanghai Pujiang Cable Co., Ltd. (“Shanghai Pujiang”)
Zhejiang Pujiang Cable Co., Ltd. (“Zhejiang
Pujiang”)
Existing Relationship with the Company
Chairman and controlling shareholder of the Company
Under common control of Dr. Tang
Under common control of Dr. Tang
Under common control of Dr. Tang and Dr. Tang is the
President
Subsidiary of Ossen Shanghai since September 2010
Subsidiary of Shanghai Pujiang since December 2010
(b) Summary of Balances with Related Party:
Due to related party:
Ossen Material Research
December 31,
2015
2014
$
$
65,769 $
65,769 $
69,469
69,469
The balance of due to related party arises from the purchase of raw materials paid by Ossen Material Research on
behalf of the Company.
Due to shareholder:
Dr. Tang
December 31,
2015
2014
$
$
282,499 $
282,499 $
100,000
100,000
Dr. Tang is the chairman and controlling interest shareholder of the Company. From time to time, Dr. Tang paid
operating expenses on behalf of the Company to assist with the Company’s cash needs for business purposes.
F-29
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
NOTE 10 – RELATED PARTY TRANSACTIONS (CONTINUED)
(c) Summary of Related Party Transactions:
Ossen Material Research provided guarantee for
the bank loans borrowed by the Company
Ossen Material Research provided guarantee
together with Ossen Shanghai and Dr. Tang for the
short-term bank loans borrowed by the Company
Ossen Material Research provided guarantee
together with Dr. Tang for the short-term bank
loans borrowed by the Company
$
$
2015
December 31,
2014
2013
5,186,623 $
813,536 $
4,035,969
2,515,520 $
1,627,075 $
1,937,265
$
4,159,157 $
5,694,761 $
3,228,775
Ossen
Material
Research
Ossen Material Research provided guarantee for
the notes payable issued by the Company
The Company provided guarantee for the short-
term bank loans borrowed by Ossen Material
Research
The Company provided guarantee for the notes
payable issued by Ossen Material Research
Ossen Material Research sold raw materials to the
Company
$
- $
14,806,378 $
3,228,775
$
32,348,999 $
4,881,224 $
4,843,162
$
12,323,428 $
- $
-
$
- $
- $
2,056,102
SOI
SOI provided guarantee for the short-term bank
loans borrowed by the Company
SOI provided guarantee together with Dr. Tang for
the short-term bank loans borrowed by the
Company
$
$
- $
1,627,075 $
- $
3,254,149 $
-
-
F-30
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
(c) Summary of Related Party Transactions (Continued):
Ossen
Shanghai
Ossen Shanghai provided guarantee together with
Ossen Material Research and Dr. Tang for the
short-term bank loans borrowed by the Company
The Company provided guarantee for the short-
term bank loans borrowed by Ossen Shanghai
The Company provided guarantee for the notes
payable issued by Ossen Shanghai
$
$
$
2,515,520 $
1,627,075 $
1,937,265
7,702,143 $
1,540,429 $
- $
- $
-
-
Zhaoyang purchased products from the Company $
- $
- $
5,148,724
Zhaoyang
Shanghai Zhaoyang New Metal Material Co., Ltd. (“Zhaoyang”) was no longer the Company’s related
party following the Stock Transfer Agreement signed on March 31, 2013 with 30% interest in Ossen
Shanghai was transferred to Dr. Tang.
Shanghai
Pujiang
The Company provided guarantee for the short-
term bank loans borrowed by Shanghai Pujiang
$
16,944,714 $
15,457,208 $ 11,300,712
The Company provided guarantee for the notes
payable issued by Shanghai Pujiang
$
34,081,982 $
21,314,676 $ 17,550,330
F-31
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
(c) Summary of Related Party Transactions (Continued):
In accordance with ASC 810-10, “Consolidation”, the Company first evaluated that none of the related parties met
the scope exceptions as outlined in the guidance. The Company then had to determine if it hold any variable interest
in the related parties. The Company determined to have a variable interest in Shanghai Pujiang, Ossen Material
Research and Ossen Shanghai because the Company guarantees $16,944,714 of the outstanding short term debt and
$34,081,982 of notes payable of Shanghai Pujiang, $32,438,999 of the outstanding short term debt and $12,333,428
of notes payable of Ossen Material Research and $7,702,143 of the outstanding short term debt and $1,540,429 of
notes payable of Ossen Shanghai. Next, the Company evaluated if Shanghai Pujiang, Ossen Material Research or
Ossen Shanghai are variable interest entities. Using both qualitative and quantitative analysis, the Company does not
have the power to direct Shanghai Pujiang, Ossen Material Research and Ossen Shanghai’s activities that
significantly impact their economic performance and does not have the obligation to absorb losses or the right to
receive benefits from the entities. Thus, the Company is not the primary beneficiary of Shanghai Pujiang, Ossen
Material Research and Ossen Shanghai. As a result, the Company determined Shanghai Pujiang, Ossen Material
Research and Ossen Shanghai were not variable interest entities that require consolidation as defined in ASC 810.
The Company determined Dr. Tang to be the primary beneficiary of Shanghai Pujiang, Ossen Material Research and
Ossen Shanghai because Dr. Tang is most closely associated with the Shanghai Pujiang, Ossen Material Research
and Ossen Shanghai. Dr. Tang had the power to direct the activities of Shanghai Pujiang, Ossen Material Research
and Ossen Shanghai that most significantly impact its economic performance and has the obligation to absorb losses
of Shanghai Pujiang, Ossen Material Research and Ossen Shanghai that could potentially be significant or the right
to receive benefits from the related parties that could potentially be significant.
The Company also evaluated the remaining related parties and affiliated entities under ASC 810 and because the
Company does not guarantee the debt, the holders of the equity were at risk and therefore determined to be the
primary beneficiary and these entities are not variable interest entities that require consolidation.
NOTE 11 – OTHER PAYABLES AND ACCRUED EXPENSES
Other payables and accrued expenses consist of the following:
Other taxes payable
Accrued payroll & welfare
Accrued expense & liability
Interest payable
Others
December 31,
2015
111,584 $
14,175
967,234
551,987
24,690
1,669,670 $
2014
155,354
35,110
802,059
583,035
47,400
1,622,958
$
$
F-32
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
NOTE 12 – NOTES PAYABLE
Bank acceptance notes:
Due June 14, 2016
Due June 14, 2016
Due June 14, 2016
Due April 18, 2016
Due January 15, 2016, subsequently repaid on due date
Due January 14, 2016, subsequently repaid on due date
Due January 14, 2016, subsequently repaid on due date
Due January 14, 2016, subsequently repaid on due date
Due January 14, 2016, subsequently repaid on due date
Due May 27, 2015, subsequently repaid on due date
Due May 27, 2015, subsequently repaid on due date
Due May 27, 2015, subsequently repaid on due date
Due May 27, 2015, subsequently repaid on due date
Due May 11, 2015, subsequently repaid on due date
Due May 11, 2015, subsequently repaid on due date
Due April 10, 2015, subsequently repaid on due date
Due April 9, 2015, subsequently repaid on due date
Due March 25, 2015, subsequently repaid on due date
Due March 17, 2015, subsequently repaid on due date
Due March 17, 2015, subsequently repaid on due date
Due February 28, 2015, subsequently repaid on due date
Due February 27, 2015, subsequently repaid on due date
Due January 31, 2015, subsequently repaid on due date
Due January 29, 2015, subsequently repaid on due date
Due January 23, 2015, subsequently repaid on due date
Due January 23, 2015, subsequently repaid on due date
Due January 21, 2015, subsequently repaid on due date
Due January 21, 2015, subsequently repaid on due date
Total
December 31,
2015
1,540,429 $
1,540,429
1,540,429
1,386,383
1,540,429
1,540,429
1,540,429
1,078,300
770,214
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
12,477,471 $
2014
-
-
-
-
-
-
-
-
-
1,627,075
1,627,075
1,627,075
1,627,075
1,627,075
1,627,075
325,417
1,627,075
813,537
1,138,952
488,116
1,627,075
3,254,149
813,537
1,464,367
1,627,075
976,245
976,245
1,627,075
26,521,315
$
$
The interest-free notes payable, ranging from six months to one year from the date of issuance, are secured by
$8,780,443 and $17,572,732 restricted cash, as of December 31, 2015 and 2014, respectively. The property, land use
right and related party guarantee the notes payable as Note 8, 9 & 10.
All the notes payable are subject to bank charges of 0.05% of the principal amount as commission on each loan
transaction.
F-33
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
NOTE 13 – SHORT TERM BANK LOANS
Short-term loans are summarized as follows:
Due on December 24, 2016,
guaranteed by Dr. Tang
Due on December 2, 2016,
guaranteed by Ossen Material
Research and Dr. Tang
Due on December 1, 2016,
guaranteed by Ossen Material
Research and collateral by the
Company’s LUR
Due on November 3, 2016,
guaranteed by Ossen Material
Research and Dr. Tang
ue on June 29, 2016,
guaranteed by Ma An Shan
Pubang Financing guarantee co.,
Ltd, a 3rd party
Due on June 6, 2016,
guaranteed by Ossen Material
Research, Ossen Shanghai and
Dr. Tang,
ue on April 16, 2016,
guaranteed by Ma An Shan
Pubang Financing guarantee co.,
Ltd, a 3rd party, subsequently
repaid on due date
Bank Name
Interest Rate
per Annum
December 31,
2015
2014
Agricultural Bank of China
(“ABC”) Jiu Long Branch
China Construction Bank
(“CCB”) Jiu Jiang Branch
5.44% $ 2,772,771 $
4.40% 3,388,943
Anhui Rural Commercial Bank
(“ARCB”) Ma An Shan Branch
6.216% 5,186,623
ABC Jiu Long Branch
5.87%
770,214
Anhui Commercial Bank (“ACB”)
Fei Cui Branch
7.80% 1,540,429
ARCB Ma An Shan Branch
6.60% 2,515,520
-
-
-
-
ACB Fei Cui Branch
6.95% 1,540,429
F-34
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
NOTE 13 – SHORT TERM BANK LOANS (CONTINUED)
Bank Name
Interest Rate
per Annum
December 31,
2015
2014
Due on December 17, 2015,
guaranteed by Ossen Material
Research and Dr. Tang,
subsequently repaid on due date ABC Jiu Long Branch
Due on October 30, 2015,
guaranteed by Ossen Material
Research ,
subsequently repaid on due date ABC Jiu Long Branch
Due on October 28, 2015,
guaranteed by SOI,
subsequently repaid on due date ARCB Ma An Shan Branch
Due on October 28, 2015,
guaranteed by SOI and Dr.
Tang,
subsequently repaid on due date ARCB Ma An Shan Branch
Due on August 13, 2015,
guaranteed by Dr. Tang,
subsequently repaid on due date CCB Jiu Jiang Branch
7.00% $
- $ 3,254,149
7.80%
-
813,536
7.728%
- 1,627,075
7.416%
- 3,254,149
6.00%
- 4,067,686
Due on June 12, 2015,
guaranteed by Ossen Material
Research and Dr. Tang,
collateral by Accounts
receivable, subsequently repaid
on due date
Due on March 9, 2015,
guaranteed by Ossen Material
Research, Ossen Shanghai and
Dr. Tang, subsequently repaid
on due date
ue on January 2, 2015,
guaranteed by Ma An Shan
Pubang Financing guarantee co.,
Ltd, a 3rd party, subsequently
repaid on due date
Total
Bank of China (“BOC”)
Ma An Shan Branch
7.28%
- 2,440,612
China Everbright Bank (“CEB”)
Ma An Shan Branch
7.28%
- 1,627,075
ACB Fei Cui Branch
6.60%
- 1,627,075
$17,714,928 $18,711,357
All short term bank loans are obtained from local banks in China and are repayable within one year.
The average annual interest rate of the short-term bank loans was 6.182% and 7.138% as of December 31, 2015 and
2014, respectively. Interest expense, included in the financial expenses in the statement of operations, was
$1,017,345, $1,943,115 and $2,663,924 for the years ended December 31, 2015, 2014 and 2013, respectively. The
Company was in compliance of their financial covenants at December 31, 2015 and 2014, respectively.
F-35
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
NOTE 14 – BOND PAYABLE
Interest rate
December 31,
Level 1 Level 2 Level 3 Level 1 Level 2 Level 3
2015
2014
Due September 4, 2016
10.75%
- 15,273,177
Total bond payable
$
- 15,273,177
-
- $
-
-
- 15,972,837
- 15,972,837
On September 4, 2014, the Company issued Corporate Bond to borrow RMB 100,000,000 from Guo Yuan
Securities Co. Ltd. The maturity date is September 4, 2016 and the interest rate was 10.75%, no principal payments
are required prior to maturity. Interest expense, included in the financial expenses in the statement of operations,
was $2,172,228, $610,571 and nil for the years ended December 31, 2015, 2014 and 2013, respectively.
NOTE 15 – STOCK REPURCHASE PROGRAM
In May 2015, the Company’s Board of Directors approved a share repurchase program for up to a total of 500,000
shares of the Company's American Depositary Receipts ("ADSs") through May 2016. Shares may be repurchased in
the open market at prevailing market prices and/or in negotiated transactions off 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, 2015, the Company
repurchased 73,169 shares of ordinary shares from the secondary market. In connection with the transaction, the
Company paid approximately $58,735.
F-36
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
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 shares outstanding during the period.
Diluted earnings per ordinary share reflects the potential dilution that could occur if securities or other contracts to
issue ordinary shares were exercised or converted into ordinary shares.
The following table sets forth the computation of basic and diluted earnings per share for the periods indicated:
2015
December 31,
2014
2013
Net income attribute to the Company
$ 5,896,804 $ 3,858,876 $ 3,643,404
Weighted average ordinary shares outstanding - basic and diluted
19,862,537 19,901,959 19,901,959
Basic and diluted earnings per share
$
0.30 $
0.19 $
0.18
F-37
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
NOTE 17 – 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
According to the relevant laws and regulations in the PRC, foreign invested enterprises established prior to January
1, 2008 are entitled to full exemption from income tax for two years beginning with the first year in which such
enterprise is profitable and a 50% income tax reduction for the subsequent three years. Ossen Materials was entitled
to an exemption during the two years ended December 31, 2006 and was subject to a 50% income tax reduction
during the three years ended December 31, 2009. 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 PRC government. Ossen Jiujiang was
entitled to the CIT exemption during the two years ended December 31, 2008, was subject to a 50% income tax
reduction during 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 and New 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 are considered PRC resident enterprises and subject to the PRC income tax at the
rate of 25% on worldwide income. The definition of “place of effective management" 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, 2015, no detailed interpretation or guidance has been issued to
define “place of effective management”. Furthermore, as of December 31, 2015, the administrative practice
associated with interpreting and applying the concept of “place of effective management” is unclear. If the
Company’s non-PRC incorporated entities are deemed PRC tax residents, such entities would be subject to PRC tax
The Company has analyzed the applicability of this law, as of December 31, 2015, and the Company has not
accrued for PRC tax on such basis. The Company will 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 foreign invested enterprise to its immediate holding company outside China. Such
dividends were exempted from PRC tax under the previous income tax law and regulations. The foreign invested
enterprise is subject to the withholding tax starting from January 1, 2008. There were no dividends distributed in the
years ended December 31, 2015 and 2014.
F-38
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
NOTE 17 – INCOME TAX-(CONTINUED)
Income tax expenses consist of the following:
Current
Deferred
Income tax expenses
Year Ended December 31,
2014
745,338 $ 1,224,430
(166,611)
(5,400)
578,727 $ 1,219,030
2015
$ 1,018,143 $
162,024
$ 1,180,167 $
2013
Reconciliation from the expected income tax expenses calculated with reference to the statutory tax rate in the PRC
of 25% is as follows:
Computed "expected" income tax expenses
Effect on tax incentive / holiday
Non-deductable expense
Income tax expenses
Components of net deferred tax assets are as follows:
Provision of doubtful accounts
Provision of interest expense
2015
Year Ended December 31,
2014
$ 1,948,393 $ 1,178,571 $ 1,322,219
(645,720)
(726,615)
126,771
542,531
578,727 $ 1,219,030
(982,104)
213,878
$ 1,180,167 $
2013
2015
December 31,
2014
2013
$
$
110,715 $
82,798
193,513 $
281,150 $
87,455
368,605 $
200,427
-
200,427
The deferred tax assets balance of $193,513, $368,605 and $200,427 at December 31, 2015, 2014 and 2013
respectively are included in other current assets in the accompanying consolidated balance sheets.
F-39
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
NOTE 18 – GEOGRAPHICAL SALES AND SEGMENTS
Our management does not capture financial information or utilize operating segments to make decisions about the
business. Management believes that it operates in one business segment. However, our management does rely on
sales by geographical area as useful information in managing the business.
Information for the Company’s sales by geographical area for the years ended December 31, 2015, 2014 and 2013
are as follows:
2015
Year Ended December 31,
2014
2013
Domestic Sales
International Sales
NOTE 19 – SUBSEQUENT EVENTS
$ 110,109,028 $ 115,256,175 $ 107,273,543
6,618,446
$ 117,908,416 $ 123,571,455 $ 113,891,989
8,315,280
7,799,388
We have evaluated all events or transactions that occurred after December 31, 2015 up through the date we issued
the consolidated financial statements.
F-40
OSSEN INNOVATION CO., LTD. AND SUBSIDIARIES
SCHEDULE I
CONDENSED PARENT COMPANY FINANCIAL INFORMATION
OSSEN INNOVATION CO., LTD
CONDENSED BALANCE SHEETS AS OF DECEMBER 31, 2015 AND 2014
ASSETS
Current Assets
Cash
Due from related party
Total Current Assets
Investments in subsidiaries
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Other payables and accrued liabilities
Due to shareholder
Total Current Liabilities
TOTAL LIABILITIES
EQUITY
Shareholders' Equity
Ordinary shares, $0.01 par value: 100,000,000 shares authorized; 20,000,000
shares issued; 19,828,790 and 19,901,959 shares outstanding as of December 31,
2015 and 2014, respectively
Additional paid-in capital
Statutory reserve
Retained earnings
Accumulated other comprehensive income
Treasury stock, at cost: 171,210 and 98,041 shares as of December 31, 2015 and
2014, respectively
TOTAL SHAREHOLDERS’ EQUITY
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
F-41
$
$
$
$
$
December,31
2015
2014
81,493 $
20,000,000
20,081,493
73,637,980
93,719,473 $
23,762
20,000,000
20,023,762
73,371,675
93,395,437
934,997 $
282,499
1,217,496
1,217,496 $
802,059
100,000
902,059
902,059
200,000 $
33,971,455
5,631,373
50,258,265
2,596,227
200,000
33,971,455
5,021,752
44,971,082
8,425,697
(155,343 )
92,501,977
93,719,473 $
(96,608)
92,493,378
93,395,437
$
OSSEN INNOVATION CO., LTD. AND SUBSIDIARIES
SCHEDULE I
CONDENSED PARENT COMPANY FINANCIAL INFORMATION
OSSEN INNOVATION CO., LTD CONDENSED STATEMENTS
OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
REVENUES
COST OF GOODS SOLD
GROSS PROFIT
Selling expenses
General and administrative expenses
Total Operating Expenses
LOSS FROM OPERATIONS
Financial expenses, net
Equity in income of subsidiaries
INCOME BEFORE INCOME TAX
INCOME TAX
NET INCOME
OTHER COMPREHENSIVE INCOME
Foreign currency translation gain (loss)
TOTAL OTHER COMPREHENSIVE INCOME (LOSS)
COMPREHENSIVE INCOME
F-42
$
Year Ended December,31
2014
2013
2015
- $
-
-
-
(198,753)
(198,753)
(198,753)
272
6,095,829
5,896,804
-
5,896,804
- $
-
-
-
(201,439 )
(201,439 )
(201,439 )
219
4,060,534
3,858,876
-
3,858,876
-
-
-
-
(722,695)
(722,695)
(722,695)
263
4,366,362
3,643,404
-
3,643,404
(5,829,470)
(5,829,470)
67,334 $
779,135
779,135
4,638,011 $
1,647,348
1,647,348
5,290,752
$
OSSEN INNOVATION CO., LTD. AND SUBSIDIARIES
SCHEDULE I
CONDENSED PARENT COMPANY FINANCIAL INFORMATION
OSSEN INNOVATION CO., LTD CONDENSED
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 2015, 2014 AND 2013
Year Ended December,31
2014
2013
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in earnings of subsidiaries
Other payables and accrued liabilities
Due to shareholder
Net cash provided by / (used in) operating activities
$
5,896,804 $
3,858,876 $
3,643,404
(6,095,829)
132,938
182,499
116,412
(4,060,534 )
156,249
50,000
4,591
(4,366,362)
645,810
50,000
(27,148)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash provided by / (used in) investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Treasury stock purchased
Net cash provided by / (used in) financing activities
INCREASE / (DECREASE) IN CASH
Effect of exchange rate changes on cash
Cash at beginning of period
CASH AT END OF PERIOD
$
F-43
-
(58,735)
(58,735)
57,677
54
23,762
81,493 $
-
-
-
-
-
-
4,591
-
19,171
23,762 $
(27,148)
(49)
46,368
19,171
EXHIBIT 8.1
List of Subsidiaries of Ossen Innovation Co. Ltd.
Name
Country of Incorporation
Ossen Innovation Materials Group Co., Ltd.
British Virgin Islands
Ossen Group (Asia) Co., Ltd.
Topchina Development Group Ltd.
British Virgin Islands
British Virgin Islands
Ossen Innovation Materials Co. Ltd.
People’s Republic of China
Ossen (Jiujiang) New Materials Co., Ltd.
People’s Republic of China
EXHIBIT 12.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO
EXCHANGE ACT RULE 13A-14(A)/15D-14(A)
AS ADOPTED PURSUANT TO SECTION 302
OF 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 statements made, 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 financial condition, 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 Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the 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, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally 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 the disclosure 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 period covered by the annual report that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal 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 the registrant’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 to adversely 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 over financial reporting.
Date: April 21, 2016
/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 302
OF 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 statements made, 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 financial condition, 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 Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the 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, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally 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 the disclosure 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 period covered by the annual report that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal 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 the registrant’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 to adversely 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 over financial reporting.
Date: April 21, 2016
/s/ Feng Peng
Feng Peng
Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 13.1
In connection with the Annual Report of Ossen Innovation Co., Ltd. (the "Registrant") on Form 20-F for
the year ended December 31, 2015, as filed with the Securities and Exchange Commission on the date hereof (the
"Report"), the undersigned certifies pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, that:
1.
2.
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
The information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Registrant.
Date: April 21, 2016
/s/ Wei Hua
Wei Hua
(Principal Executive Officer)
CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 13.2
In connection with the Annual Report of Ossen Innovation Co. Ltd. (the "Registrant") on Form 20-F for the
year ended December 31, 2015, as filed with the Securities and Exchange Commission on the date hereof (the
"Report"), the undersigned certifies pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, that:
1.
2.
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
The information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Registrant.
Date: April 21, 2016
/s/ Feng Peng
Feng Peng
(Principal Financial Officer)