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, 2017
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)
Wei Hua
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 three (3) ordinary shares.
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, 2017 was: 19,791,110 ordinary
shares, par value $0.01 per share.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
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).
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):
Yes No
Large accelerated filer Accelerated filer Non-accelerated filer
Emerging growth company
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant
has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant
to Section 13(a) of the Exchange Act.
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its
Accounting Standards Codification after April 5, 2012.
Indicate by check mark 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
Item 1.
Item 2.
Item 3.
Item 4.
Item 4A.
Item 5.
Item 6.
Item 7.
Item 8.
Item 9.
Item 10.
Item 11.
Item 12.
Identity of Directors, Senior Management and Advisers
Offer Statistics and Expected Timetable
Key Information
Information On The Company
Unresolved Staff Comments
Operating And Financial Review And Prospects
Directors, Senior Management And Employees
Major Shareholders And Related Party Transactions
Financial Information
The Offer And Listing
Additional Information
Quantitative And Qualitative Disclosures About Market Risk
Description Of Securities Other Than Equity Securities
PART II
Defaults, Dividend Arrearages And Delinquencies
Item 13.
Material Modifications To The Rights Of Security Holders And Use Of Proceeds
Item 14.
Controls And Procedures
Item 15.
[Reserved]
Item 16.
Audit Committee Financial Expert
Item 16A.
Code Of Ethics
Item 16B.
Principal Accountant Fees and Services
Item 16C.
Exemptions From The Listing Standards For Audit Committees
Item 16D.
Purchases Of Equity Securities By The Issuer And Affiliated Purchasers
Item 16E.
Change In Registrant’s Certifying Accountant
Item 16F.
Item 16G.
Corporate Governance
Item 16H. Mine Safety Disclosure
PART III
Item 17.
Item 18.
Item 19.
Financial Statements
Financial Statements
Exhibits
Page
1
1
2
18
40
40
59
63
64
65
67
79
79
81
81
81
83
83
83
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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 May 10, 2018, the cash buying rate announced
by the People’s Bank of China was RMB 6.361 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, 2015, 2016 and 2017 and the balance sheet
data as of December 31, 2016 and 2017 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, 2013 and 2014 and the balance sheet data as of December
31, 2013, 2014 and 2015 are not included in this annual report. Our historical results for any prior period are not necessarily indicative of
results to be expected in any future period.
Selected Consolidated Statement of
Income Data
Revenues
Cost of goods sold
Gross profit
Selling and distribution expenses
General and administrative expenses
Total Operating Expenses
Income from operations
(Audited)
2017
(Audited)
For the Year Ended December 31,
2014
2015
2016
(Audited)
(Audited)
$132,375,915 $117,029,154 $117,908,416 $ 123,571,455 $113,891,989
117,721,799 100,932,528 102,197,994 110,250,876 102,353,957
14,654,116 16,096,626 15,710,422 13,320,579 11,538,032
625,500
3,485,118
4,110,618
7,427,414
772,383
734,159
4,478,413 6,340,584
6,376,383
7,110,542
5,464,791 7,112,967
8,986,084 10,245,631 6,207,612
598,832
6,002,121
6,600,953
8,053,163
2013
(Audited)
986,378
Financial expenses, net
Other income, net
Income before income taxes
Income taxes
Net income
Less: Net Income attributable to non-controlling interest
(1,610,337)
147,108
6,589,934
(691,556)
5,898,378
553,067
(2,827,138)
90,584
6,249,530
(926,048)
5,323,482
499,509
(2,823,952)
371,894
(2,401,268)
907,941
7,793,573 4,714,285
(1,180,167)
(578,727)
6,613,406 4,135,558
276,682
716,602
(2,696,966)
558,426
5,288,874
(1,219,030)
4,069,844
426,440
Net income attributable to controlling interest
Other comprehensive income
Foreign currency translation gain (loss)
5,345,311
4,823,973
5,896,804 3,858,876
3,643,404
6,606,207
(6,975,100)
(5,829,470)
779,135
1,647,348
Total other comprehensive income (loss)
Comprehensive Income (loss)
6,606,207
11,951,518
(6,975,100)
(2,151,127)
(5,829,470)
779,135
67,334 4,638,011
1,647,348
5,290,752
Weighted average shares outstanding
19,791,110 19,804,164 19,862,537 19,901,959 19,901,959
Earnings per share*
0.27
0.24
0.30
0.19
0.18
* Calculation is based on net income attributable to controlling interest and the weighted average shares outstanding, excluding foreign
currency translation gain (loss).
2
2017
(Audited)
2016
(Audited)
December 31,
2015
(Audited)
2014
(Audited)
2013
(Audited)
950,225 $
217,631 $
$
684,592 $ 1,139,450
144,640,849 132,259,554 144,772,273 159,358,503 169,273,347
9,468,260 11,405,994 12,755,970
152,518,906 140,443,752 154,240,533 170,764,497 182,029,317
8,184,198
7,878,057
812,277 $
37,568,527 37,997,958 50,106,311 67,355,476 83,534,989
114,950,379 102,445,794 104,134,222 103,409,021 98,494,328
152,518,906 140,443,752 154,240,533 170,764,497 182,029,317
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
3.B. Capitalization and Indebtedness
Not Applicable.
3.C. Reasons For The Offer And Use Of Proceeds
Not Applicable.
3.D. Risk Factors
An investment in our ADSs involves a high degree of risk. You should carefully consider the risks and uncertainties described below
together with all other information contained in this annual report, including the matters discussed under the headings “Forward-Looking
Statements” and “Operating and Financial Review and Prospects” before you decide to invest in our ADSs. We are a holding company with
substantial operations in China and are subject to a legal and regulatory environment that in many respects differs from the United States. If
any of the following risks, or any other risks and uncertainties that are not presently foreseeable to us, actually occur, our business, financial
condition, results of operations, liquidity and our future growth prospects could be materially and adversely affected.
Risks Related to Our Business and Our Industry
The proposed sale of our existing business and proposed acquisition of a new business in the medical technology industry have not been
consummated, and there is no guarantee that such transactions will be consummated.
On July 19, 2017, we entered into a Share Exchange Agreement (the "SEA") with the shareholders (the “Selling Shareholders”) of
America-Asia Diabetes Research Foundation (the "Foundation"), a California corporation that owns 90.27% of the equity interests of San
MediTech (Huzhou) Co. Ltd. ("San MediTech"), a China-based medical device company engaged in the research, development and marketing
of glucose control products. Pursuant to the SEA, we agreed to acquire all of the issued and outstanding equity interests of the Foundation in
exchange for 81,243,000 of our ordinary shares (the "Acquisition"). Upon completion of the Acquisition, we would indirectly own 90.27% of
San MediTech. San MediTech's proprietary Dynamic Glucose Monitoring System ("DGMS") provides continuous, real-time monitoring of
glucose level in diabetes patients, with two patents granted in China and several patents pending both in China and the U.S. DGMS has been
approved by the China Food and Drug Administration and has entered into clinical trials in the U.S. for DGMS.
In connection with the Acquisition, we agreed to sell our existing pre-stressed steel manufacturing business, including all existing
liabilities, immediately following the completion of the Acquisition. An entity affiliated with Dr. Liang Tang, our Chairman, agreed to acquire
all of the equity of our wholly-owned subsidiary, which indirectly owns all of our existing operating subsidiaries, in exchange for the forfeiture
and cancellation of all 11,850,000 ordinary shares currently held by Dr. Tang (the “Sale Transaction”).
3
The Selling Shareholders breached the SEA and as a result, the SEA and the Sale Transaction have been terminated. We may consider
a transaction similar to the Sale Transaction along with the acquisition of another business in the future, although no such plans currently exist
and there is no guarantee that we will be successful in consummating any such transaction. Any such transaction would be subject to the
satisfaction of various closing conditions, including shareholder approval. Furthermore, in the event that such transactions are consummated,
the interests of our existing shareholders may be substantially diluted.
Our chairman owns a large percentage of our outstanding stock and could significantly influence the outcome of our corporate matters.
Dr. Tang owns approximately 59.9% 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.
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, 2017, we had approximately $1.0 million of cash and cash equivalents. Historically, we have spent a significant
amount of cash on our operational activities, principally to procure raw materials for our products. Our short-term loans are from Chinese
banks and are generally secured by a portion of our fixed assets, land use right, receivables and/or guarantees by related parties. The term of
almost all such loans is one year or less. Historically, we have rolled over such loans on an annual basis. However, we may not have sufficient
funds available to pay all of our borrowings upon maturity in the future. Failure to roll over our short-term borrowings at maturity or to service
our debt could result in the imposition of penalties, including increases in interest rates, legal actions against us by our creditors, or even
insolvency.
Although we have been able to maintain adequate working capital primarily through cash from operations and short-term borrowings,
any failure by our customers to settle outstanding accounts receivable, or our inability to borrow sufficient capital from local banks, in the
future could materially and adversely affect our cash flow, financial condition and results of operations.
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, The People’s Bank of China (PBOC) maintained a
prudent and neutral monetary policy and local banks have generally maintained tight lending policies, 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.
4
If existing sources of capital are insufficient to support our business, we may issue debt and equity securities that are senior to our ordinary
shares as to distributions and in liquidation, which could negatively affect the value of our ordinary shares, or we may not be able to raise
additional financing at all.
If available liquidity is not sufficient to meet our operating and loan obligations as they come due, our plans include considering
pursuing alternative financing arrangements, reducing expenditures as necessary, or limiting our plans for expansion to meet our cash
requirements. However, there is no assurance that, if required, we will be able to raise additional capital, reduce discretionary spending or
efficiently limit our expansion to provide the required liquidity. Currently, the capital markets for small capitalization companies are difficult
and banking institutions have become stringent in their lending requirements. Accordingly, we cannot ensure the availability or terms of any
third party financing. If we are unable to raise additional financing, we may be unable to procure the raw materials we need, implement our
long-term business plan, develop or enhance our products, take advantage of future opportunities or respond to competitive pressures on a
timely basis.
Alternatively, if we raise capital by issuing equity or convertible debt securities, such issuances could result in substantial dilution to
our shareholders. In addition, we may issue senior notes, subordinated notes or preferred shares that have preference over our common equity.
In the event of our liquidation, any such lenders and holders of our debt or preferred securities would receive a distribution of our available
assets before distributions to the holders of our ADSs. Our decision to incur debt and issue securities in future offerings will depend on market
conditions and other factors beyond our control. We cannot predict or estimate the amount, timing or nature of future offerings and debt
financings. Future offerings could reduce the value of shares of our ADSs or dilute your investment.
We face intense competition, and if we are unable to compete effectively we may not be able to maintain profitability.
We compete with many other companies located in the PRC and internationally that manufacture materials similar to ours. Many of
our competitors are larger companies with greater financial resources than us. Intense competition in a challenging economic environment in
the PRC has, in the past, put pressure on our margins and may adversely affect our future financial performance. Moreover, intense competition
may result in potential or actual litigation between us and our competitors relating to such activities as competitive sales practices, relationships
with key suppliers and customers or other matters.
In 2016 and 2017, we generated revenue of approximately $101.4 million and $112.4 million, respectively, or 86.6% and 84.9%,
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. We intend to continue to expand research and development efforts to
advance our rare earth coating applications even further, including improving the products’ corrosion-resistant level and increasing the products’
strength and life span. In particular, we continued to develop a rare earth coating application for zinc-aluminum alloy coated products, which
are more corrosion-resistant than zinc coated products in 2017. However, there can be no assurance that our initial competitive advantage will
be retained and that one or more competitors will not develop products that are equal or superior to ours in quality and are better priced than
our rare earth coated products.
Our revenues are highly dependent on a limited number of customers and the loss of any one of our major customers could materially and
adversely affect our growth and our revenues.
During the years ended December 31, 2017 and 2016, our six largest customers contributed 74.8% and 81.4% of our total sales,
respectively. As a result of our reliance on a limited number of customers, we may face pricing and other competitive pressures, which may
have a 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.
5
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 99.7% and 99.1% of our raw material purchases in the years ended December 31, 2017 and 2016, respectively. In the event that
we need to diversify our supplier network, we may not be able to procure a sufficient supply of raw materials at a competitive price, which
could have an adverse effect on our results of operations, financial condition and cash flows.
Furthermore, despite our efforts to control our supply of raw materials and maintain good relationships with our existing suppliers, we
could lose one or more of our existing suppliers at any time. The loss of one or more key suppliers could increase our reliance on higher cost or
lower quality supplies, which could negatively affect our profitability. Any interruptions to, or decline in, the amount or quality of our raw
materials supply could materially disrupt our production and adversely affect our business, financial condition and financial prospects.
Volatile steel prices can cause significant fluctuations in our operating results. Our revenues and operating income could decrease if steel
prices decline or if we are unable to pass price increases on to our customers.
Our principal raw material is high carbon steel wire rods that we typically purchase from multiple primary steel producers. The steel
industry as a whole is cyclical and, at times, pricing and availability of steel can be volatile due to numerous factors beyond our control,
including general domestic and international economic conditions, labor costs, sales levels, competition, levels of inventory held by us and
other steel service centers, consolidation of steel producers, higher raw material costs for steel producers, import duties and tariffs and currency
exchange rates. This volatility can significantly affect the availability and cost of raw materials for us.
We, like many other steel manufacturers, maintain substantial inventories of steel to accommodate the short lead times and just-in-
time delivery requirements of our customers. Accordingly, we purchase steel in an effort to maintain our inventory at levels that we believe to
be appropriate to satisfy the anticipated needs of our customers based upon historic buying practices, supply agreements with customers and
market conditions. Our commitments to purchase steel are generally at prevailing market prices in effect at the time we place our orders. We
have no long-term, fixed-price steel purchase contracts. When steel prices increase, competitive conditions will influence how much of the
price increase we can pass on to our customers. To the extent we are unable to pass on future price increases in our raw materials to our
customers, the revenues and profitability of our business could be adversely affected.
When steel prices decline, customer demands for lower prices and our competitors' responses to those demands could result in lower
sale prices, lower margins and inventory valued at the lower of cost or market adjustments as we use existing steel inventory. Significant or
rapid declines in steel prices or reductions in sales volumes could result in us incurring inventory or goodwill impairment charges. Therefore,
changing steel prices could significantly impact our revenues, gross margins, operating income and net income.
In 2017, China continued focusing on addressing the overcapacity in the steel industry and strengthening supply-side structural reform
to drive sustained growth. As of December 2017, China has lowered steel production by about 115 million tons, according to reports issued by
the Chinese government. We believe that the Chinese government will continue its efforts and target cutting 150 million tons of steel capacity
by the end of 2018, while strictly controlling steel capacity increases. As a result, the average price of steel products, including our products
and principal raw materials, increased in 2017. We expect steel demand will continue to slightly outpace supply due to the reduction of
overcapacity and average price of steel products will continue to rise in 2018. However, there can be no assurance that we will be able to raise
our prices to compensate for the increase in raw materials.
6
Sales to customers outside China and international developments expose us to risks inherent in international sales and increased
competition.
We generated approximately 4.1% and 4.2%, respectively, of our revenue during the years ended December 31, 2017 and 2016 from
sales to customers in international markets. As a result, we are subject to risks and challenges that we would otherwise not face if we conducted
our business only in China. For example, in 2009 and 2010, the European Union and the United States imposed anti-dumping duties on imports
of certain prestressed wires and wire strands originating in China. These measures had a negative impact on our business and results of
operations. In the first quarter of 2018, the United States government announced stiff tariffs on imports of steel and aluminum from certain
countries, including China. Although we have not generated any sales from the United States since the anti-dumping duties were imposed in
2010, these measures may also have a negative impact on our business and results of operations because Chinese-based steel product exporters
may now focus their marketing efforts on the Chinese domestic market.
We are subject to various risks and uncertainties that might affect our ability to procure quality raw materials.
Our performance depends on our ability to procure low cost, high quality raw materials on a timely basis from our suppliers. Our
suppliers are subject to certain risks, including availability of raw materials, labor disputes, inclement weather, natural disasters, and general
economic and political conditions, which might limit the ability of our suppliers to provide us with low cost, high quality merchandise on a
timely basis. Furthermore, for these or other reasons, one or more of our suppliers might not adhere to our quality control standards, and we
might not identify the deficiency. Our suppliers’ failure to supply quality materials at a reasonable cost on a timely basis could reduce our net
sales or profits, damage our reputation and have an adverse effect on our financial condition.
We may lose our competitive advantage, and our operations may suffer, if we fail to prevent the loss or misappropriation of, or disputes
over, our intellectual property.
We rely on a combination of patents, trademarks, trade secrets and confidentiality agreements to protect our intellectual property
rights. While we are not currently aware of any infringement on our intellectual property rights, our ability to compete successfully and to
achieve future revenue growth will depend, in significant part, on our ability to protect our proprietary technology. Despite many laws and
regulations promulgated, as well as other efforts made, by China over the past several years in an attempt to protect intellectual property rights,
intellectual property rights are not as certain in China as they would be in many Western countries, including the United States. Furthermore,
enforcement of such laws and regulations in China has not been fully developed. Neither the administrative agencies nor the court systems in
China are as equipped as their counterparts in developed countries to deal with violations or handle the nuances and complexities between
compliant technological innovation and non-compliant infringement.
Our rare earth coating technology is protected through a combination of patents, trade secrets, confidentiality agreements and other
methods. However, our competitors may independently develop proprietary methodologies similar to ours or duplicate our products, or develop
alternatives, which could have a material adverse effect on our business, results of operations and financial condition. The misappropriation or
duplication of our intellectual property could disrupt our ongoing business, distract our management and employees, reduce our revenues and
increase our expenses. We may need to litigate to enforce our intellectual property rights. Any such litigation could be time consuming and
costly and the outcome of any such litigation cannot be guaranteed.
Our revenues, expenses and profits are difficult to predict and vary significantly from quarter to quarter. This could cause the trading price
of our ordinary shares to decline.
Our operating results vary significantly from quarter to quarter. Therefore, we believe that period-to-period comparisons of our results
of operations are not necessarily meaningful and should not be relied upon as an indication of our future performance. It is possible that in the
future some of our quarterly results of operations may be below the expectations of market analysts and our investors, which could lead to a
significant decline in the trading price of our ordinary shares. Factors which affect the fluctuation of our revenues, expenses and profits include:
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delays or cancellations of infrastructure projects in China due to unexpected accidents or to financial or other issues
confronting the Ministry of Transport, China National Railway Co., or other PRC governmental agencies overseeing these
industries;
changes in prices of our raw materials, with higher prices leading to reduced operating income;
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variations, expected or unexpected, in the duration, size, timing and scope of purchase orders;
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.
Our success depends in large part upon our senior management and key personnel. Our inability to attract and retain these individuals
could materially and adversely affect our business, results of operations and financial condition.
We are highly dependent on our senior management and other key employees, including our Chairman, Dr. Tang and our Chief
Executive Officer and Chief Financial Officer, Mr. Hua. Our future performance will be dependent upon the continued service of members of
our senior management and key employees. We do not maintain key man life insurance for any of the members of our management team or
other key personnel. Competition for senior management in our industry is intense, and we may not be able to retain our senior management
and key personnel or attract and retain new senior management and key personnel in the future, which could materially and adversely affect our
business, results of operations and financial condition.
We have limited insurance coverage and may incur losses resulting from product liability claims, business interruption or natural disasters.
We are exposed to risks associated with product liability claims in the event that the use of our products results in property damage or
personal injury. Since our products are ultimately incorporated into bridges, buildings, railways and other large structures, it is possible that
users of these structures or people installing our products could be injured or killed by such structures, whether as a result of defects, improper
installation or other causes. Because we continue to expand our customer base and because our products are used for long periods of time, we
are unable to predict whether product liability claims will be brought against us in the future or to predict the impact of any resulting adverse
publicity on our business. The successful assertion of product liability claims against us could result in potentially significant monetary
damages and require us to make significant payments. We do not carry product liability insurance and may not have adequate resources to
satisfy a judgment in the event of a successful claim against us. As the insurance industry in China is still in its early stages of development,
even the insurance that we currently carry offers limited coverage compared with that offered in many other countries. Any business
interruption or natural disaster could result in substantial losses and diversion of our resources and materially and adversely affect our business,
financial condition and results of operations.
8
If we are unable to maintain appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting
obligations, result in the restatement of our financial statements, harm our operating results, subject us to regulatory scrutiny and sanction,
and cause investors to lose confidence in our reported financial information.
Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. As a public company,
we have significant requirements for enhanced financial reporting and internal controls. We are required to document and test our internal
control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires annual management
assessments of the effectiveness of our internal controls over financial reporting and, for many companies, a report by the independent
registered public accounting firm addressing these assessments. The process of designing and implementing effective internal controls is a
continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to
expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company.
We cannot assure you that we will not in the future identify areas requiring improvement in our internal control over financial
reporting. In addition, we cannot assure you that the measures we will take to remediate any areas in need of improvement will be successful or
that we will implement and maintain adequate controls over our financial processes and reporting in the future as we continue our growth. If we
are unable to establish appropriate internal financial reporting controls and procedures, it could cause us to fail to comply with Sarbanes-Oxley
and meet our reporting obligations, result in the restatement of our financial statements, harm our operating results, subject us to regulatory
scrutiny and sanction, and cause investors to lose confidence in our reported financial information.
Risks Related to Doing Business in China
Fluctuations in the value of the RMB may have an adverse effect on our shareholders’ investment.
Our reporting currency is the U.S. dollar. However, substantially all of our revenues are denominated in RMB. Any significant
revaluation of the Renminbi may have a material adverse effect on the U.S. dollar equivalent amount of our revenues and financial condition as
well as on the value of, and any dividends payable on, our ordinary shares in foreign currency terms. For instance, a decrease in the value of
Renminbi against the U.S. dollar could reduce the U.S. dollar equivalent amounts of our financial results, the value of your investment in our
ordinary shares and the dividends we may pay in the future, if any, all of which may have a material adverse effect on the prices of our ADSs.
For 2016 and 2017, we had foreign currency translation loss of $6.9 million and foreign currency translation gain of $6.6 million, respectively,
primarily due to the material depreciation of the RMB against the U.S. dollar in 2016 and the strengthening of the RMB against the U.S. dollar
in 2017.
The value of the RMB against the U.S. dollar and other currencies is affected by changes in China's political and economic conditions
and China's foreign exchange policies, among other things. In 2005, the PRC government changed its decades-old policy of pegging the value
of the RMB to the U.S. dollar, and the RMB appreciated more than 20% against the U.S. dollar over the following three years. Between
July 2008 and June 2010, this appreciation halted and the exchange rate between Renminbi and the U.S. dollar remained within a narrow band.
Since June 2010, Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. With the development of the foreign
exchange market and progress towards interest rate liberalization and Renminbi internationalization, the PRC government may in the future
announce further changes to the exchange rate system and we cannot assure you that Renminbi will not appreciate or depreciate significantly in
value against the U.S. dollar in the future. It is difficult to predict how market forces or PRC or U.S. government policy may impact the
exchange rate between Renminbi and the U.S. dollar in the future.
9
The Renminbi may be revalued further against the U.S. dollar or other currencies, or may be permitted to enter into a full or limited
free float, which may result in an appreciation or depreciation in the value of the Renminbi against the U.S. dollar or other currencies. In
addition, there are very limited hedging transactions available in China to reduce our exposure to exchange rate fluctuations. While we may
decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able
to successfully hedge our exposure, if at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations
that restrict our ability to convert RMB into U.S. dollars.
Changes in China’s political or economic situation could harm us and our operating results.
Economic reforms adopted by the Chinese government have had a positive effect on the economic development of the country, but the
government could change these economic reforms or any of the legal systems at any time. This could either benefit or damage our operations
and profitability. Some of factors that could have this effect include:
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Level of government involvement in the economy;
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 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.
10
In addition, our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation,
import and export tariffs, environmental regulations, land use rights, property, and other matters. We believe that our operations in China are in
material compliance with all applicable legal and regulatory requirements. However, the central or local governments of the jurisdictions in
which we operate may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and
efforts on our part to ensure our compliance with such regulations or interpretations. Accordingly, government actions in the future, including
any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local
variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions
thereof.
You may have difficulty enforcing judgments against us.
Our assets are located, and our operations are conducted, in the PRC. In addition, substantially all of our directors and officers are
nationals and residents of the PRC and a substantial portion of their assets is located outside the United States. As a result, it may be difficult to
effect service of process within the United States upon these persons. In addition, there is uncertainty as to whether the courts of the PRC
would recognize or enforce judgments of U.S. courts because China does not have any treaties or other arrangements that provide for the
reciprocal recognition and enforcement of foreign judgments with the United States. In addition, according to the PRC Civil Procedures Law,
courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates basic
principles of PRC law or national sovereignty, security, or the public interest.
Most of our revenues are denominated in Renminbi, which is not freely convertible for capital account transactions and may be subject to
exchange rate volatility.
We are exposed to the risks associated with foreign exchange controls and restrictions in China, as our revenues are primarily
denominated in Renminbi, which is currently not freely exchangeable. The PRC government imposes control over the convertibility between
Renminbi and foreign currencies. Under the PRC foreign exchange regulations, payments for “current account” transactions, including
remittance of foreign currencies for payment of dividends, profit distributions, interest and operation-related expenditures, may be made
without prior approval but are subject to procedural requirements. Strict foreign exchange control continues to apply to “capital account”
transactions, such as direct foreign investment and foreign currency loans. These capital account transactions must be approved by, or
registered with, the PRC State Administration of Foreign Exchange, or SAFE. Further, capital contribution by an offshore shareholder to its
PRC subsidiaries may require approval by the Ministry of Commerce in China or its local counterparts. We cannot assure you that we are able
to meet all of our foreign currency obligations to remit profits out of China, to pay dividends, or to fund operations in China.
On August 29, 2008, SAFE promulgated the Circular on the Relevant Operating Issues concerning the Improvement of the
Administration of Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or Circular 142, to regulate the
conversion by foreign invested enterprises, or FIEs, of foreign currency into Renminbi by restricting how the converted Renminbi may be used.
Circular 142 requires that Renminbi converted from the foreign currency-dominated capital of a FIE may be used only for purposes within the
business scope approved by the applicable government authority and may not be used for equity investments within the PRC unless specifically
provided. In addition, SAFE strengthened its oversight over the flow and use of Renminbi funds converted from the foreign currency-
dominated capital of a FIE. The use of such Renminbi may not be changed without approval from SAFE, and may not be used to repay
Renminbi loans if the proceeds of such loans have not yet been used. Compliance with Circular 142 may delay or inhibit our ability to
complete such transactions, which could affect our ability to expand our business.
In light of the flood of capital outflows of China in 2016 due to the weakening RMB, the PRC government has imposed more
restrictive foreign exchange policies and stepped up scrutiny of major outbound capital movement including overseas direct investment. More
restrictions and substantial vetting process are put in place by SAFE to regulate cross-border transactions falling under the capital account. If
any of our shareholders regulated by such policies fails to satisfy the applicable overseas direct investment filing or approval requirement
timely or at all, it may be subject to penalties from the relevant PRC authorities. The PRC government may at its discretion further restrict
access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining
sufficient foreign currencies, we may not be able to satisfy our foreign currency demands.
China’s legal system is different from those in some other countries.
China is a civil law jurisdiction. Under the civil law system, prior court decisions may be cited as persuasive authority but do not have
binding precedential effect. Although progress has been made in the promulgation of laws and regulations dealing with economic matters, such
as corporate organization and governance, foreign investment, commerce, taxation and trade, China’s legal system remains less developed than
the legal systems in many other countries. Furthermore, because many laws, regulations and legal requirements have been recently adopted,
their interpretation and enforcement by the courts and administrative agencies may involve uncertainties. Sometimes, different government
departments may have different interpretations. Licenses and permits issued or granted by one government authority may be revoked by a
higher government authority at a later time. Government authorities may decline to take action against unlicensed operators which may work to
the disadvantage of licensed operators, including us. The PRC legal system is based in part on government policies and internal rules that may
have a retroactive effect. We may not be aware of our violation of these policies and rules until sometime after the violation. Changes in
China’s legal and regulatory framework, the promulgation of new laws and possible conflicts between national and provincial regulations could
adversely affect our financial condition and results of operations. In addition, any litigation in China may result in substantial costs and
diversion of resources and management attention.
11
Our business and financial performance may be materially adversely affected if the PRC regulatory authorities determine that our
acquisition of Ossen Materials constitutes a round-trip investment without MOFCOM approval.
On August 8, 2006, six PRC regulatory agencies promulgated the Regulation on Mergers and Acquisitions of Domestic Companies by
Foreign Investors, or the 2006 M&A Rule, which became effective on September 8, 2006. According to the 2006 M&A Rule which was
amended by the Ministry of Commerce on June 22, 2009, a “round-trip investment” is defined as having taken place when a PRC business that
is owned by PRC individuals is sold to a non-PRC entity that is established or controlled, directly or indirectly, by those same PRC individuals.
Under the 2006 M&A Rules which was amended by the Ministry of Commerce on June 22, 2009, any round-trip investment must be approved
by MOFCOM, and any indirect arrangement or series of arrangements which achieves the same end result without the approval of MOFCOM
is a violation of PRC law.
However, the PRC regulatory authorities may take the view that the acquisition of shares in our PRC operating subsidiaries and the
share exchange between our predecessor, Ultra Glory, and our subsidiary, Ossen Materials Group, are part of an overall series of arrangements
which constitute a round-trip investment. If the PRC regulatory authorities take this view, we cannot assure you we may be able to obtain the
approval required from MOFCOM. It is also possible that the PRC regulatory authorities could invalidate our acquisition and ownership of our
Chinese subsidiaries, and that these transactions require the prior approval of the China Securities Regulatory Commission, or CSRC, before
MOFCOM approval is obtained.
If these regulatory actions occur, we cannot assure you that we will be able to re-establish control of our Chinese subsidiaries’
business operations, that any such contractual arrangements will be protected by PRC law, or that we would receive as complete or effective an
economic benefit and control of our Chinese subsidiaries’ business as if we had direct ownership of our Chinese subsidiaries.
PRC regulations relating to investments in offshore companies by PRC residents may subject our future PRC-resident beneficial owners or
our PRC subsidiaries to liability or penalties, limit our ability to inject capital into our PRC subsidiaries or limit our PRC subsidiaries’
ability to increase their registered capital or distribute profits.
SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore
Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, on July 4, 2014, which replaced
the former circular commonly known as “SAFE Circular 75” promulgated by SAFE on October 21, 2005. SAFE Circular 37 requires PRC
residents to register with local branches of SAFE in connection with their direct establishment or indirect control of an offshore entity, for the
purpose of overseas investment and financing, with such PRC residents’ legally owned assets or equity interests in domestic enterprises or
offshore assets or interests, referred to in SAFE Circular 37 as a “special purpose vehicle.” SAFE Circular 37 further requires amendment to the
registration in the event of any significant changes with respect to the special purpose vehicle, such as increase or decrease of capital
contributed by PRC individuals, share transfer or exchange, merger, division or other material event. In the event that a PRC shareholder
holding interests in a special purpose vehicle fails to fulfill the required SAFE registration, the PRC subsidiaries of that special purpose vehicle
may be prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange
activities, and the special purpose vehicle may be restricted in its ability to contribute additional capital into its PRC subsidiary. Moreover,
failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for evasion of
foreign exchange controls.
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We believe that some of our shareholders are PRC residents under SAFE Circular 37. We do not have control over the these
shareholders and our other beneficial owners and cannot assure you that all of our PRC-resident beneficial owners have complied with, and will
in the future comply with, SAFE Circular 37 and subsequent implementation rules. The failure of PRC-resident beneficial owners to register or
amend their SAFE registrations in a timely manner pursuant to SAFE Circular 37 and subsequent implementation rules, or the failure of future
PRC-resident beneficial owners of our company to comply with the registration procedures set forth in SAFE Circular 37 and subsequent
implementation rules, may subject such beneficial owners or our PRC subsidiaries to fines and legal sanctions. Furthermore, SAFE Circular 37
is unclear how this regulation, and any future regulation concerning offshore or cross-border transactions, will be interpreted, amended and
implemented by the relevant PRC government authorities, and we cannot predict how these regulations will affect our business operations or
future strategy. Failure to register or comply with relevant requirements may also limit our ability to contribute additional capital to our PRC
subsidiaries and limit our PRC subsidiaries’ ability to distribute dividends to us. These risks could in the future have a material adverse effect
on our business, financial condition and results of operations.
All employee participants in our share incentive plans who are PRC citizens may be required to register with the SAFE. We may also face
regulatory uncertainties that could restrict our ability to adopt additional option plans for our directors and employees under PRC law.
In December 2006, the People’s Bank of China promulgated the Administrative Measures for Individual Foreign Exchange, which set
forth the respective requirements for foreign exchange transactions by PRC individuals under either current account or the capital account. In
January 2007, the SAFE issued the Implementation Rules of the Administrative Measures for Individual Foreign Exchange, which, among
other things, specified approval requirements for certain capital account transactions such as a PRC citizen’s participation in the employee
stock ownership plans or stock option plans of an overseas publicly-listed company. On March 28, 2007, the SAFE promulgated the Processing
Guidance on Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Ownership Plans or Stock Option
Plans of Overseas-Listed Companies, or the Stock Option Rule. Under the Stock Option Rule, PRC citizens who are granted stock options by
an overseas publicly-listed company are required, through a qualified PRC domestic agent or PRC subsidiary of such overseas publicly-listed
company, to register with the SAFE and complete certain other procedures. In February 2012, the SAFE promulgated the Notice on Issues
Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly Listed
Company, according to which, employees, directors, supervisors and other management members participating in any share incentive plan of
an overseas publicly listed company who are PRC citizens or who are non-PRC citizens residing in China for a continuous period of not less
than one year, subject to limited exceptions, are required to register with SAFE through a domestic qualified agent, which could be a PRC
subsidiary of such overseas listed company, and complete certain other procedures. Failure to complete the SAFE registrations may subject
them to fines and legal sanctions and may also limit our ability to make payments under our equity incentive plans or receive dividends or sales
proceeds related thereto, or our ability to contribute additional capital into our subsidiaries in China and limit our subsidiaries’ ability to
distribute dividends to us. We also face regulatory uncertainties that could restrict our ability to adopt additional equity incentive plans for our
directors and employees under PRC law.
In addition, the PRC State Administration of Taxation has issued circulars concerning employee share options or restricted shares.
Under these circulars, employees working in the PRC who exercise share options, or whose restricted shares vest, will be subject to PRC
individual income tax. The PRC subsidiaries of an overseas listed company have obligations to file documents related to employee share
options or restricted shares with relevant tax authorities and to withhold individual income taxes of those employees related to their share
options or restricted shares. If the employees fail to pay, or the PRC subsidiaries fail to withhold applicable income taxes, the PRC subsidiaries
may face sanctions imposed by the tax authorities or other PRC government authorities.
Under the New Enterprise Income Tax Law, we may be classified as a “resident enterprise” of China. Such classification will likely result
in unfavorable tax consequences to us and our non-PRC shareholders.
China passed a New Enterprise Income Tax Law, or the New EIT Law, which became effective on January 1, 2008. Under the New
EIT Law, an enterprise established outside of China with de facto management bodies within China is considered a resident enterprise,
meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the
New EIT Law define de facto management as “substantial and overall management and control over the production and operations, personnel,
accounting, and properties” of the enterprise. In addition, a circular issued by the State Administration of Taxation on April 22, 2009 clarified
that dividends and other income paid by such resident enterprises will be considered to be PRC source income, subject to PRC withholding tax,
currently at a rate of 10%, when recognized by non-PRC enterprise shareholders. This recent circular also subjects such resident enterprises to
various reporting requirements with the PRC tax authorities.
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Although substantially all of our management is currently located in the PRC, it remains unclear whether the PRC tax authorities
would require or permit our overseas registered entities to be treated as PRC resident enterprises. We do not currently consider our company to
be a PRC resident enterprise. However, if the PRC tax authorities determine that we are a resident enterprise for PRC enterprise income tax
purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income tax at a rate of 25%
on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this would mean that income such as
interest on offering proceeds and non-China source income would be subject to PRC enterprise income tax at a rate of 25%. Second, although
under the New EIT Law and its implementing rules dividends paid to us from our PRC subsidiaries would qualify as tax-exempt income, we
cannot guarantee that such dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which
enforce the withholding tax, have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as
resident enterprises for PRC enterprise income tax purposes. Finally, it is possible that future guidance issued with respect to the new resident
enterprise classification could result in a situation in which a 10% withholding tax is imposed on dividends we pay to our non-PRC
shareholders and with respect to gains derived by our non-PRC shareholders from transferring our shares.
Restrictions under PRC law on our PRC subsidiaries' ability to pay dividends and make other distributions could materially and adversely
affect our ability to grow, make investments or acquisitions that could benefit our business, pay dividends to you, and otherwise fund and
conduct our business.
Our revenues are generated by our PRC subsidiaries. However, PRC regulations restrict the ability of our PRC subsidiaries to pay
dividends and make other payments to their offshore parent company. PRC legal restrictions permit payments of dividends by our PRC
subsidiaries only out of their accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations.
Our PRC subsidiaries are also required under PRC laws and regulations to allocate at least 10% of their annual after-tax profits determined in
accordance with PRC GAAP to a statutory general reserve fund until the amounts in said fund reaches 50% of their registered capital.
Allocations to these statutory reserve funds can be used only for specific purposes and are not transferable to us in the form of loans, advances,
or cash dividends. Any limitations on the ability of our PRC subsidiaries to transfer funds to us could materially and adversely limit our ability
to grow, make investments or acquisitions that could be beneficial to our business, pay dividends and otherwise fund and conduct our business.
Any failure to comply with PRC environmental laws may require us to incur significant costs.
We carry on our business in an industry that is subject to PRC environmental protection laws and regulations. These laws and
regulations require enterprises engaged in manufacturing and construction that may cause environmental waste to adopt effective measures to
control such waste. In addition, such enterprises are required to pay fines, or to cease operations entirely under extreme circumstances, should
they discharge waste substances. The Chinese government may also change the existing laws or regulations or impose additional or stricter
laws or regulations, compliance with which may cause us to incur significant capital expenditures, which we may be unable to pass on to our
customers through higher prices for our products.
We must comply with the Foreign Corrupt Practices Act.
We are required to comply with the United States Foreign Corrupt Practices Act, which prohibits U.S. companies from making
prohibited payments to foreign officials for the purpose of obtaining or retaining business. Corruption, extortion, bribery, pay-offs, theft and
other fraudulent practices occur from time to time in mainland China. If any of our non-U.S. listed competitors that are not subject to the
Foreign Corrupt Practices Act engage in these practices, they may receive preferential treatment and secure business from government officials
in a way that is unavailable to us. Furthermore, although we inform our personnel that such practices are illegal, we cannot assure you that our
employees or other agents will not engage in illegal conduct for which we might be held responsible under U.S. law. If our employees or other
agents are found to have engaged in such practices, we could suffer severe penalties.
14
Because our funds are held in banks that do not provide insurance, the failure of any bank in which we deposit our funds could affect our
ability to continue our business operations.
Banks and other financial institutions in the PRC do not provide insurance for funds held on deposit. The Chinese government
implemented the bank deposit insurance program on May 1, 2015. Financial institutions are required to pay insurance premiums into a fund
that is managed by an agency appointed by the State Council. The program is designed to return bank clients' deposits if their bank suffers
insolvency or bankruptcy. The reimbursement is drawn from the new fund in the case of the deposit being RMB 500,000 ($76,520 as of
December 31, 2017) or less. However, the implementation and impact of this program are uncertain. As a result, in the event of a bank failure,
we may not have access to funds on deposit. Depending upon the amount of money we maintain in a bank that fails, our inability to have access
to our cash could impair our operations, and, if we are not able to access funds to pay our suppliers, employees and other creditors, we may be
unable to continue our business operations.
If relations between the United States and China worsen, investors may be unwilling to hold or buy our ordinary shares and our share price
may decrease.
At various times during recent years, the United States and China have had significant disagreements over political and economic
issues, which may result in or intensify potential conflicts in relation to territorial, regional security and trade disputes. For instance, the
United States has expressed a desire to reexamine the trade relationship between China and the United States. Any continuing or worsening
slowdown could significantly reduce domestic growth in China and therefore adversely affect our business, financial condition and results
of operations.
If we become directly subject to the scrutiny, criticism and negative publicity that historically related to U.S.-listed Chinese companies, we
may have to expend significant resources to investigate and resolve the matter which could harm our business operations, stock price and
reputation and could result in a loss of your investment in our stock, especially if such matter cannot be addressed and resolved favorably.
In past years, U.S. public companies that have substantially all of their operations in China, particularly companies that have
completed reverse merger transactions, have been the subject of intense scrutiny, criticism and negative publicity by investors, financial
commentators and regulatory agencies, such as the United States Securities and Exchange Commission. Much of the scrutiny, criticism and
negative publicity has centered around financial and accounting irregularities and mistakes, a lack of effective internal controls over financial
accounting, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the
scrutiny, criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese companies has sharply decreased in value and,
in some cases, has become virtually worthless. Many of these companies are now, or were in the recent past, subject to shareholder lawsuits,
SEC enforcement actions and are conducting internal and external investigations into the allegations. If we become the subject of any
unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate
such allegations and/or defend our Company. This situation will be costly and time consuming and distract our management from growing our
Company. If such allegations are not proven to be groundless, our Company and business operations will be severely impacted and your
investment in our stock could be rendered worthless.
The disclosures in our reports and other filings with the SEC and our other public pronouncements are not subject to the scrutiny of any
regulatory bodies in the PRC. Accordingly, our public disclosure should be reviewed in light of the fact that no governmental agency that is
located in China where substantially all of our operations and business are located have conducted any due diligence on our operations or
reviewed or cleared any of our disclosures.
We are regulated by the SEC and our reports and other filings with the SEC are subject to SEC review in accordance with the rules
and regulations promulgated by the SEC under the Securities Act and the Exchange Act. Unlike public reporting companies whose operations
are located primarily in the United States, however, substantially all of our operations are located in China. Since substantially all of our
operations and business take place in China, it may be more difficult for the Staff of the SEC to overcome the geographic and cultural obstacles
that are present when reviewing our disclosures. These same obstacles are not present for similar companies whose operations or business take
place entirely or primarily in the United States. Furthermore, our SEC reports and other disclosures and public pronouncements are not subject
to the review or scrutiny of any PRC regulatory authority. For example, the disclosure in our SEC reports and other filings are not subject to the
review of China Securities Regulatory Commission, a PRC regulator that is tasked with oversight of the capital markets in China. Accordingly,
you should review our SEC reports, filings and our other public pronouncements with the understanding that no local regulator has done any
due diligence on our Company and with the understanding that none of our SEC reports, other filings or any of our other public
pronouncements has been reviewed or otherwise been scrutinized by any local regulator.
15
The audit report included in this prospectus is prepared by auditors who are not inspected fully by the Public Company Accounting
Oversight Board, or the PCAOB, and, as such, our shareholders are deprived of the benefits of such inspection.
As an auditor of companies that are publicly traded in the United States and a firm registered with the PCAOB, BDO China Shu Lun
Pan Certified Public Accountants LLP is required under the laws of the United States to undergo regular inspections by the PCAOB. However,
because we have substantial operations within the PRC, a jurisdiction where the PCAOB is currently unable to conduct inspections without the
approval of the Chinese government authorities, our auditor and its audit work is not currently inspected fully by the PCAOB.
Inspections of other auditors conducted by the PCAOB outside China have at times identified deficiencies in those auditors' audit
procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The lack
of PCAOB inspections of audit work undertaken in China prevents the PCAOB from regularly evaluating our auditor's audits and its quality
control procedures. As a result, shareholders may be deprived of the benefits of PCAOB inspections, and may lose confidence in our reported
financial information and procedures and the quality of our financial statements.
Risks Related to Our ADSs
The market price for our ADSs may be volatile.
The market price for our ADSs is highly volatile and subject to wide fluctuations in response to various factors, including the
following:
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actual or anticipated fluctuations in our quarterly operating results and revisions to our expected results;
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
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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.
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.
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You may be subject to limitations on transfer of your ADSs.
Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from
time to time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver,
transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary
deems it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the
deposit agreement, or for any other reason.
If we are classified as a passive foreign investment company, our U.S. shareholders may suffer adverse tax consequences.
Generally, if for any taxable year, after applying certain look-through rules, 75% or more of our gross income is passive income, or at
least 50% of our assets (generally based on average value determined on a quarterly basis) are held for the production of, or produce, passive
income, we may be characterized as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes. This
characterization could result in adverse U.S. tax consequences to our U.S. shareholders, including gain realized on the disposition of our ADSs
or ordinary shares being treated as ordinary income rather than capital gain and in punitive interest charges being applied to such sales proceeds.
Rules similar to those applicable to dispositions apply to amounts treated as “excess distributions.”
We do not believe that we were a PFIC for our 2017 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, 2018 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.
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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.
On July 19, 2017, we entered into a Share Exchange Agreement with the shareholders of America-Asia Diabetes Research Foundation,
a California corporation that owns 90.27% of the equity interests of San MediTech (Huzhou) Co. Ltd., a China-based medical device company
engaged in the research, development and marketing of glucose control products. Pursuant to the Share Exchange Agreement, we agreed to
acquire all of the issued and outstanding equity interests of America-Asia Diabetes Research Foundation in exchange for 81,243,000 of our
ordinary shares. Upon completion of the Acquisition, we would indirectly own 90.27% of San MediTech. In connection with the Acquisition,
we agreed to sell our existing pre-stressed steel manufacturing business, including all existing liabilities, immediately following the completion
of the Acquisition. An entity affiliated with Dr. Liang Tang, our Chairman, agreed to acquire all of the equity of our wholly-owned subsidiary,
which indirectly owns all of our existing operating subsidiaries, in exchange for the forfeiture and cancellation of all 11,850,000 ordinary
shares currently held by Dr. Tang. The shareholders of America-Asia Diabetes Research Foundation breached the Share Exchange Agreement
and as a result, the Share Exchange Agreement and the Sale Transaction was terminated on May 4, 2018.
Capital Expenditures
We incurred capital expenditures of approximately $37,848 and $17,537 for the years ended December 31, 2017 and 2016,
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.
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We expect that our capital expenditures in fiscal year 2018 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, 2017, we generated revenue of approximately $112.4 million, or 84.9% of our total revenue (as
compared to $101.4 million, or 86.6% of our total revenue, in 2016), 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 including improving the
product’s corrosion-resistant level and increasing the product’s strength and life span. In particular, we continued to develop a rare earth
coating application for zinc-aluminum alloy coated products in 2017, 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.
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;
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.
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In 2013, the Chinese market began to adopt zinc-aluminum alloy coated PC wires and PC strands, which have more corrosion-
resistance and stronger protective effect than zinc coated PC wires and PC strands. Our research and development department is currently
developing a method to apply rare earth materials to the zinc-aluminum alloy coating process. We have made progress in developing such
product so far and we will continue our research and development efforts in 2018. 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 nearly 25 years of experience in the prestressed materials industry.
We are affiliated with the Ossen Group, which is a Chinese conglomerate controlled by our Chairman, Dr. Tang. The Ossen Group’s
core businesses include steel manufacturing, real estate and other investments. There is no active business relationship between our company
and any of the other entities that comprise the Ossen Group other than what we have disclosed in Items 4.C and 7.B below.
Competitive Advantages
Our management believes that the following competitive strengths differentiate us from other domestic and international competitors
and are the key factors to our success:
We are taking advantage of industry trends in the bridge infrastructure sectors in the PRC and other international markets
Since 2012, China’s economic growth slowed and the demand for prestressed materials in the infrastructure construction industry in
the domestic PRC market decreased. However, we believe there is still much room for growth in China’s infrastructure construction industry,
and in particular the construction and restoration of bridges in the PRC that would benefit from the quality and durability of our rare earth
coated prestressed materials.
We believe that the Chinese central government will continue to maintain economic growth rate at approximately 6.5% in the next
few years by optimizing economic structure and reforming the supply-side and funding infrastructure investment to maintain stable GDP
growth. While we do not believe that the Chinese government will initiate another large scale, comprehensive capital injection, we believe that
infrastructure spending will be selectively targeted at developing regions in Central or Western China. Furthermore, through the “One Belt,
One Road” initiatives, announced in late 2013, and the Asian Infrastructure Investment Bank launched in December 2015, investments are
expected to be made during the next decade to construct new bridges and new railroads. We believe that these developments should create
bidding opportunities for us and we expect the market will continue to recover gradually in 2018 and beyond.
Leading provider of customized prestressed steel materials
Based on our extensive experience in the industry, we believe that Ossen is one of the leading enterprises in the PRC in the design,
engineering, manufacture and sale of customized prestressed steel materials used in the construction of bridges, highways, and other
infrastructure projects in China. We manufacture and sell an array of plain surface prestressed steel materials and rare earth coated and zinc
coated prestressed steel materials, which we believe is the most comprehensive array among our competitors in China and which are used in
the construction of bridges, highways and other infrastructure projects in the PRC and internationally. Our facilities are located in Maanshan
City, Anhui Province and in Jiujiang City, Jiangxi Province, in the People’s Republic of China.
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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 nearly 25 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 forty-three patents granted by the State Intellectual Property Office of the PRC, including five invention patents and thirty-eight utility
model patents as of April 17, 2018. In addition, we have applied for four invention 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, the quality control methods for certain steel wire products and devices designed for the production of steel wire. Our research
and development efforts have generated technological improvements that have been instrumental in controlling our production costs and
increasing our operational efficiency, most notably with respect to the development of our rare earth coated materials.
Strong recognition from domestic and international customers for supplying materials for infrastructure projects
The solid reputation that our management team has developed over the past nearly 25 years in the prestressed material industry in
China and in other countries such as Canada, the United States, Japan, South Korea, Bangladesh, South Africa, Italy and Spain, including an
established track record for consistently providing quality products at competitive prices, has enabled us to develop a strong customer base and
to be involved in major building projects.
We generated approximately 4.1% and 4.2%, respectively, of our revenue during the years ended December 31, 2017 and 2016 from
sales to customers in international markets (including primarily Japan, Vietnam, South Korea, New Zealand, Australia, Bangladesh, Chile,
Costa Rica, South Africa, and Brunei), primarily for use in the construction of bridges. Due to the anti-dumping measures imposed by the
United States and European Union and recent stiff trade measures imposed by the United States government, we do not intend to reestablish a
presence in the United States or the European Union at the levels we experienced in 2008 in the near future. However, if opportunities arise in
the U.S. or EU markets or in other international markets for us to win bids on projects or to reengage with former customers or establish
relationships with new customers, we would pursue such opportunities. Although we have not generated any sales from the United States since
the new tariffs were imposed in 2018, these measures may also have a negative impact on our business and results of operations because
Chinese-based steel product exporters may now focus their marketing efforts on the Chinese domestic market, thereby increasing competition
in China.
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.
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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.
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Indented PC wires. This product consists of an individual round wire that contains an indentation used in the
construction of buildings.
§ Helical (spiral) rib PC wires. This product consists of an individual round wire whose surface is pulled out into a helical
rib pattern used in the construction of railway ties, or sleepers, and buildings.
PC wires are categorized based on size, strength and structure. Sizes range from 4.0mm to 9.0mm. Strength level ranges from
1570MPa to 2000MPa. The number of strands in the products varies between 3 and 7.
Coated Prestressed Products
Our coated prestressed products included zinc coated PC products and rare earth coated PC products. Rare earth coated products are
plain surface materials that are zinc coated with a rare earth zinc-plating protective layer so as to produce materials that are more corrosion-
resistant and long-lasting. The purpose of galvanizing is to generate a surface layer to protect the materials from erosion, abrasion and
oxidization, without changing the elements of the basic materials or weakening the basic material’s strength or other functionality through any
techniques that utilize physical chemistry or electrochemistry. The coating process can cause loss of strength in regular steel materials, but the
loss of strength in rare earth coated prestressed products is reduced.
For steel wires and strands, coating can provide a protective layer to improve the product’s corrosion-resistant level and increase its
life span. Traditional technology uses zinc as the coating material and such products are called zinc coated PC wires and PC strands. The
introduction of rare earth coating technology adds more benefits to the final products. When rare earth is added into the coating material and
form a new alloy with zinc, it increases further the life span of the product. More importantly, it reduces the loss of strength compared to
traditional zinc coating process.
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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.
Competition
China is one of the world’s largest producers and markets for prestressed steel materials. In 2016 and 2017, 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 to support the development of commercially viable production facilities and products.
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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, including improving the products’ corrosion-resistant level and increasing the products’ strength and life span.
In particular, we continued to develop a rare earth coating application for zinc-aluminum alloy coated products, which are more corrosion-
resistant than zinc coated products in 2017. However, there can be no assurance that our initial competitive advantage will be retained and that
one or more competitors will not develop products that are equal or superior to ours in quality 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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Seasonality
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.
Demand for our products remains fairly consistent throughout the year.
Our Raw Materials and Supply
Raw Materials
High carbon steel wire rods are the primary raw material required to manufacture prestressed steel materials. The quality and cost of
the rods we purchase differ between our plain surface products and our rare earth and zinc coated products. Rare earth and zinc coated products
require higher-priced rods that are higher in purity and durability. The price for certain rods needed for coated products is higher than rods
needed for plain surface products.
Our Supply Sources
We select our suppliers by assessing criteria such as the quality of materials supplied, the duration of the supplier’s business
relationship with us, pricing, delivery reliability and response time to orders placed by us. To minimize purchasing costs, we use a limited
number of suppliers. Because we purchase substantial quantities from these suppliers, we are often able to procure these products at
competitive prices. We usually enter into a one-year purchase agreement with each supplier and then order on a spot basis for each delivery.
We negotiate pricing with our suppliers on an arm’s length basis prior to the delivery of these supplies to us, based upon the prevailing market
prices at such time.
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The suppliers that supplied us with a significant percentage of our raw materials for the past three years were Jiangsu Shagang Group
Co., Ltd., Shanghai Chemical Industry Supply and Marketing Co., Ltd., Jiangxi Yigeer Technology Co., Ltd., Beijing Baosteel Northern
Trading Co., Ltd, and Baosteel Group Nantong Wire Products Co., Ltd. and all are based in China. Due to the variety of raw materials from
different suppliers, our purchases from Shanghai Chemical Industry Supply and Marketing Co., Ltd. decreased and our purchases from Jiangsu
Shagang Group Co., Ltd. increased in 2017.
Purchases from our five largest suppliers amounted to 99.7% and 99.1% of our raw material purchases in 2017 and 2016, 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 2017, the Chinese government continued to focus on addressing the overcapacity in the
steel industry and strengthening supply-side structural reform to drive sustained growth. As of December 2017, China has lowered steel
production by about 115 million tons, according to reports issued by the Chinese government. We believe that the Chinese government will
continue its efforts and target cutting 150 million tons of steel capacity by the end of 2018, while strictly controlling steel capacity increases.
As a result, the average price of steel products, including our products and principal raw materials, increased in 2017. We expect steel demand
will continue to slightly outpace supply due to the reduction of overcapacity and average price of steel products will continue to rise in 2018.
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 six employees that proactively follows up on new sales leads.
Our marketing team develops strategies for the short-term and long-term by obtaining first-hand information about our products’
market positioning, monitoring national macro-economic policies, inquiring about current and future market needs, following the progress of
existing projects and the satisfaction of existing customers. In addition, our technicians and marketing specialists regularly visit governmental
departments, construction development companies, design institutes, supervision institutions, national construction quality inspection
institutions and builders to promote new products. We have also joined the PRC national bridge exhibition for marketing purposes.
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, the People’s Bank of China (PBOC) maintained a prudent and
neutral monetary policy and local banks have generally maintained tight lending policies, thereby limiting our ability to win bids that we
believe we otherwise could have won. We selectively put down cash deposit for projects that we believed we could win and generate higher
profit.
Distribution
Both of our manufacturing plants are equipped with facilities for cargo lifting, shipment and distribution. Products for domestic
customers are distributed to the destination designated by our customers. Products for international customers are delivered either to carriers at
various ports of exit in China or delivered to a designated destination overseas.
28
Technical After-Sales Services
Our team of experienced engineers and technicians provides after-sales services to our customers. After the delivery of our materials,
our engineers train our customers to install and identify and address safety and maintenance concerns. After a sale of our product, we introduce
and advertise the company brand position, distribute a guide application method process, issue regulation manuals, and explain and solve
general and difficult problems. All technical after-sales services are provided to our customers free of charge.
Our Customers
We sell the vast majority of our products domestically in China. Since our inception, we have also exported our products to foreign
countries, including the United States, Canada, Spain, Japan, South Korea, Taiwan, Australia, South Africa and Saudi Arabia, among others.
Our customers are diverse in nature, as we sell our products directly to end users, to other manufacturers and to distributors, in each case
depending on the nature of the product and the utilization of the product.
While we value our relationship with each of our customers, we believe that generally the loss of any particular customer, including
our largest customers, would not materially impact our business in the long-term. Many of our customer contracts relate to designated
infrastructure projects which are performed during a defined period of time, and are not necessarily long-term in nature. Accordingly, if any of
our customers were to discontinue purchasing our products, we would actively seek new customers, which we have been successful doing in
the past.
In 2017 and 2016, sales to our six largest customers, in the aggregate, accounted for approximately 74.8% and 81.4% of our total sales,
respectively. The following table provides the name of each customer that contributed to more than 10% of our revenues in each of 2016 and
2017 and the percentage of our revenues generated from such customers during these periods.
Name of Customer
Zhangjiagang Shajing Iron and Steel Trading Co., Ltd.**
Jiangsu Jinrun Steel Cable Co., Ltd.
Wuhan Weikaer Steel Wire Product Co., Ltd.
Zhejiang Kexin Engineering Material Co., Ltd.
Wuhan Xianggang Metal Products Co., Ltd.
2017 Revenues 2016 Revenues
(%)
(%)
30.4%
43.52%
10.4%
*
*
10.2%
10.9%
*
*
10.1%
* Less than 10% of our annual revenues.
** Zhangjiagang Ruifeng Iron and Steel Co., Ltd. changed its name to Zhangjiagang Shajing Iron and Steel Trading Co., Ltd. in 2013.
29
The following table describes the breakdown of our sales in 2017 and 2016 between our domestic and international customers.
For the Year Ended December 31,
2017
2016
$
126,930,386 $ 112,119,286
5,445,529
4,909,868
$
132,375,915 $ 117,029,154
Domestic Sales
International Sales
Total Sales
Research and Development
Our research and development efforts are focused on three objectives:
·
Superior product safety and quality;
· Reduction of operating costs; and
·
Sustaining growth through the development of new products.
We have a research and development team at each of our facilities. In total, seventeen employees are dedicated to research and
development. We spent $4.3 and $3.9 million in 2017 and 2016, respectively, on our research and development activities to customize products
for new or existing customers and develop new products such as rare earth zinc-aluminum coated products. The nature of our research and
development activities needed for our product development is generally not cash intensive. In addition, a portion of the work is conducted by
organizations and universities with which we have a collaborative relationship.
We regularly train the members of our research and development department in order to consistently enhance our research and
development capabilities in the field of coating technology. We have developed a business model that involves a very close interrelationship
between our research and development department and our product development and marketing departments. As a result, we focus our research
and development activities on projects that would enable us to branch out our products into new desired markets. In addition, we conduct
research and development activities that enable us to increase our market share in existing markets in the PRC and internationally. We also
focus certain of our research and development activities on higher margin products that can be sold to customers in international markets.
Specifically, we have entered into cooperation agreements with Jiujiang Institute pursuant to which the institute assists us in our
efforts to improve the comprehensive function and manufacturing technique of our high strength, anti-erosion zinc coated prestressed strands.
These high strength products, which have high endurance against erosion, are sold domestically and internationally. In addition, we are
cooperating with other steel manufacturers in research efforts regarding zinc coated PC wires, which serve as raw materials for our zinc coated
PC strands, indented PC wires and helical rib PC wires with high performance and are designed for our international customers.
We entered into an agreement with the Shanghai Machinery Manufacturing Technology Research Institute in 2000 and pursuant to
this agreement, we established a joint laboratory to design high strength, indented PC wire and zinc coated PC wire according to our
specifications or requirements of our customers. These customized products designed by our joint laboratory can reduce customer costs by
improving the efficiency of the use of raw materials. This cooperation is a mutually beneficial and there is no fee for the research and
laboratory results.
30
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 mega pascal (“mPa”) strength level and 15.20 mm
diameter in the world, as a result of our rare earth zinc-plating technology. We will continue our research and development efforts to improve
the strength and stability of such product.
We plan to continue our research and development efforts to strengthen our leading position in our industry. In 2014, we developed
12.7 mm 2060 mPa ultra high strength and low relaxation prestressed strands. Our research and development team also upgraded the heating
method of acid pickling process, the circulating cooling water system of steel wire stabilization production line, and the winding system of
coated steel wire. In addition, we are working on developing a production line with annual output of 5,000 tons of ultra high strength steel wire
and strand and have broken through several technical difficulties to date. We also own or lease various technologies that improve the quality of
our products and reduce our operating costs, including coating polished technology, stabilizing treatment technology for dual tension gear zinc
coated prestressing material, warning technology for missing plating of coating production line, stranded wire greasing technology, water cut-
off technology by strander infrared temperature detection and other core technologies.
Since 2013, the Chinese market began to adopt zinc-aluminum alloy coated PC wires and PC strands, which have more corrosion-
resistance and stronger protective effect than zinc coated PC wires and PC strands. Zinc-aluminum alloy layer (coating containing 5% Al and
95% Zn) has better plastic, adhesion, and corrosion resistance, and thus its corrosion resistance property is unchanged before and after the
deformation. Its resistance to atmospheric etching characteristics is better than zinc and rare earth coated products, and still has good coating
properties. The alloy layer of such products has long-term stability. Although we are able to produce zinc-aluminum alloy coated PC wires and
PC strands, we are trying to develop the method to apply rare earth in zinc-aluminum alloy coating process, which will result in less loss of
product strength during the coating process and higher strength final product.
Intellectual Property
We rely on a combination of patents, trademarks, domain names and confidentiality agreements to protect our intellectual property.
Our manufacturing processes are based on technology developed primarily in-house by our research and development and engineering
personnel.
With respect to proprietary know-how that is not patentable and processes for which patents are difficult to enforce, we rely on,
among other things, trade secret protection and confidentiality agreements to safeguard our interests. All of our research and development
personnel have entered into confidentiality and proprietary information agreements with us. These agreements address intellectual property
protection issues and require our associates to assign to us all of the inventions, designs and technologies they develop during the course of
employment with us. We are not aware of any material infringement of our intellectual property rights.
Patents
As of April 17, 2017, we have forty-three patents registered with the State Intellectual Property Office of the PRC, including five
invention patents and thirty-eight utility model patents. In addition, we have applied for an additional four invention patents as of April 17,
2017.
From January 1, 2017 to April 17, 2018, seven pending utility model patents and one pending invention patent were approved by the
State Intellectual Property Office.
Actual examination times for patent applications in China vary, but examinations of similar patent applications have taken
approximately one year. These patents and patent applications are intended to protect the production processes of various wire ropes, pickling
methods of materials of steel wire, the quality control methods for certain steel wire products and devices designed for the steel wire production.
The term of all of the utility model patents is ten years from the filing of the application and the term of all of the invention patents is twenty
years from the filing of the application. We currently do not have any patents registered or pending in any jurisdiction outside of the PRC.
31
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
ZL200710157149.0
Method to Change the Length of Waste of Stranded Wire Joint
ZL200910144241.2
Production Process of Zinc Coated Steel Wire
ZL201010105179.9
Re-processing Technology of Galvanized Steel Wire
Prestressed Galvanized Steel Wire Joint Stabilizing Processing
Production Method
ZL201310137387.0
ZL201610567857.0
Applicant
/Patent
Holder
Ossen
Jiujiang
Ossen
Materials
Ossen
Jiujiang
Ossen
Jiujiang
Ossen
Jiujiang
Status
Expiration
Date
Registered
11/22/2027
Registered
7/26/2029
Registered
2/2/2030
Registered
4/18/2033
Registered
7/18/2036
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.
Oiling Device for PC Strand
ZL200820185079.x
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
ZL200920233724.5
Device for Testing Center Steel Wire Broken for Stranded Wire
ZL200920233725.x
Device Designed to Test Temperature of Steel Wire When
Drawing the Stranded Wire
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
Applicant
/Patent
Holder
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
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
32
Name
Application No.
/Patent No.
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
Pickling Pool Electric Heating Control System
ZL201620087931.4
Air Compressor Motor Protection System
ZL201620087953.0
Prestressed Steel Wire Ultrasonic Vibration Pickling Pool
ZL201621197903.4
Prestressed Strand Online Water Removal Device
ZL201720979882.X
Prestressed Steel Strand Production Spiral Air Cylinder
ZL201621197904.9
Closed Soot Filter System for Strand Production
ZL201721178282.X
Strand Take-up Machine
ZL201721177583.0
Steel Wire On-line Oil Coating Device
ZL201721178741.4
Prestressed Steel Strand Packaging Structure
ZL201720976708.X
Furnace for Zinc Coating Process
ZL201320200197.4
Actinomycetes Machine Discharge Line Protection Devices
ZL201320200077.4
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
Ossen
Materials
Ossen
Jiujiang
Ossen
Jiujiang
Status
Expiration
Date
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
Registered
1/26/2026
Registered
1/26/2026
Registered
11/6/2026
Registered
8/6/2027
Registered
11/6/2026
Registered
9/13/2027
Registered
9/13/2027
Registered
9/13/2027
Registered
8/6/2027
Registered
4/18/2023
Registered
4/18/2023
Strand Actinomycetes Devices
ZL201320200171.X Ossen
Registered
4/18/2023
Cooling Device with Distilled Water for Medium Frequency
Furnace
Jiujiang
Ossen
ZL201320199776.1
Jiujiang
Registered
4/18/2023
Ossen
U-shape Hot Galvanizing Furnace
ZL201420532006.9
Jiujiang
Registered
9/16/2024
Ossen
Plastic Particle Drying Mixer
ZL201420798062.7
Jiujiang
Registered
12/16/2024
Multi-functional Line Traction Machine for Steel Wire
Stabilization Processing Production Line
ZL201420798307.6
Jiujiang
Registered
12/16/2024
Ossen
Dust Removing Device for Surface Treatment for Drawing Steel
Wire
ZL201420798232.1
Jiujiang
Registered
12/16/2024
Ossen
An Oil Weight Control Device for Unbonded Steel Strand
ZL201620720468.2
Jiujiang
Registered
7/10/2026
Ossen
A Dedusting and Dedusting Device for A Prestressed Steel Strand
Joint Machine
ZL201620720466.3
Jiujiang
Registered
7/10/2026
Ossen
A Galvanized Steel Wire Fixture for Tensile Testing Machine
ZL201620720452.1
Jiujiang
Registered
7/10/2026
Ossen
A Trapezoid Mold for Wire Rod Drawing of Carbon Steel
ZL201620720451.7
Jiujiang
Registered
7/10/2026
Ossen
33
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
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
“
” (PRC Domestic Registered)
4396896
Ossen
Innovation
Materials
Ossen
Innovation
Materials
Ossen
Innovation
Materials
Ossen
Innovation
Materials
Ossen
Innovation
Materials
Status
Registered
Registered
Registered
Registered
Registered
Environmental Matters
The Environmental Protection Law, promulgated by the National People’s Congress on December 26, 1989, is the primary law for
environmental protection in China. The law establishes basic principles for coordinated advancement of economic growth, social progress and
environmental protection, and defines the rights and duties of governments at all levels. Local environmental protection bureaus may set
stricter local standards than the national standards and enterprises are required to comply with the stricter of the two sets of standards. Due to
the nature of our business, we produce certain amounts of waste water, gas and solid waste materials during the course of our production. We
believe that we are in compliance in all material respects with applicable PRC laws and regulations. All of our products meet the relevant
environmental requirements under PRC laws and during the three years ended December 31, 2017 and 2016, we were not subject to any fines
or legal action involving non-compliance with any relevant environmental regulation, nor are we aware of any threatened or pending action,
including by any environmental regulatory authority.
Governmental Regulations
Business license
Any company that conducts business in the PRC must have a business license that covers a particular type of work. Our business
license covers our present business of manufacturing, processing, procuring and selling metallic materials, metallic products, new alloy
materials, rare earth application products, building materials, general machinery and related products. Prior to expanding our business beyond
that of our business license, we are required to apply and receive approval from the PRC government.
34
Employment laws
We are subject to laws and regulations governing our relationship with our employees, including: wage and hour requirements,
working and safety conditions, citizenship requirements, work permits and travel restrictions. These include local labor laws and regulations,
which may require substantial resources for compliance. China’s National Labor Law, which became effective on January 1, 1995, and China’s
National Labor Contract Law, which became effective on January 1, 2008, permit workers in both state and private enterprises in China to
bargain collectively. The National Labor Law and the National Labor Contract Law provide for collective contracts to be developed through
collaboration between the labor union (or worker representatives in the absence of a union) and management that specify such matters as
working conditions, wage scales, and hours of work. The laws also permit workers and employers in all types of enterprises to sign individual
contracts, which are to be drawn up in accordance with the collective contract.
Patent protection in China
The PRC has domestic laws for the protection of copyrights, patents, trademarks and trade secrets. The PRC is also signatory to some
of the world’s major intellectual property conventions, including:
· Convention establishing the World Intellectual Property Organization (WIPO Convention) (June 4, 1980);
·
·
Paris Convention for the Protection of Industrial Property (March 19, 1985);
Patent Cooperation Treaty (January 1, 1994); and
· The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) (November 11, 2001).
Patents in the PRC are governed by the China Patent Law and its Implementing Regulations, each of which went into effect in 1985.
Amended versions of the China Patent Law and its Implementing Regulations came into effect in 2001 and 2003, respectively.
The PRC is signatory to the Paris Convention for the Protection of Industrial Property, in accordance with which any person who has
duly filed an application for a patent in one signatory country shall enjoy, for the purposes of filing in the other countries, a right of priority
during the period fixed in the convention (12 months for inventions and utility models, and 6 months for industrial designs).
The Patent Law covers three kinds of patents - patents for inventions, utility models and designs. The Chinese patent system adopts
the principle of first to file, which means that a patent may be granted only to the person who first files an application. Consistent with
international practice, the PRC allows the patenting of inventions or utility models that possess the characteristics of novelty, inventiveness and
practical applicability only. For a design to be patentable it cannot be identical with, or similar to, any design which, before the date of filing,
has been publicly disclosed in publications in the country or abroad or has been publicly used in the country, and should not be in conflict with
any prior right of another.
Value added tax
Pursuant to the Provisional Regulation of China on Value Added Tax and their implementing rules, all entities and individuals that are
engaged in the sale of goods, the provision of repairs and replacement services and the importation of goods in China are generally required to
pay VAT at a rate of 17.0% of the gross sales proceeds received, less any deductible VAT already paid or borne by the taxpayer. Furthermore,
when exporting goods, the exporter is entitled to a portion, or in some instances all, of the VAT refund that the exporter previously paid.
Foreign currency exchange
Under the PRC foreign currency exchange regulations applicable to us, the Renminbi is convertible for current account items,
including the distribution of dividends, interest payments, and trade and service-related foreign exchange transactions. Conversion of Renminbi
for capital account items, such as direct investment, loan, security investment and repatriation of investment, however, is still subject to the
approval of the PRC State Administration of Foreign Exchange, or SAFE. Foreign-invested enterprises may buy, sell and/or remit foreign
currencies only at those banks authorized to conduct foreign exchange business, after providing valid commercial documents and, in the case of
capital account item transactions, obtaining approval from SAFE. Capital investments by foreign-invested enterprises outside of China are also
subject to limitations, which include approvals by the Ministry of Commerce, SAFE and the State Reform and Development Commission.
35
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, 2017 and 2016, we had 190 and 191 full-time employees. As of April 17, 2018, we had 190 full-time employees.
The following table shows the breakdown in numbers and percentages of employees by department as of December 31, 2017:
Functions
Manufacturing
Research & Development
Quality Control
General Administration, Purchasing, Sales and Marketing
Total
Number of
employees
% of total
108
17
8
57
190
57%
9%
4%
30%
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 $249,491 and $276,044 in 2017 and 2016, 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.
36
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 59.9% 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 32.3% of our ordinary shares,
or 6,389,510 shares, trading on NASDAQ in the form of ADS’s. The holders of the remaining approximately 1.8% of our shares are investors
that are residents of the PRC and are unaffiliated with Ossen.
Our Subsidiaries
British Virgin Islands Companies
Ossen Innovation Group, our wholly owned subsidiary, is the sole shareholder of two holding companies organized in the British
Virgin Islands: Ossen Group (Asia) Co., Ltd., or Ossen Asia, and Topchina Development Group Ltd., or Topchina. All of the equity of Ossen
Asia and Topchina had been held by Dr. Tang, our Chairman, since inception. In May 2010, Dr. Tang transferred these shares to Ossen
Innovation Group in anticipation of the public listing of our company’s shares in the United States.
Ossen Asia is a British Virgin Islands limited liability company organized on February 7, 2002. Ossen Asia has one direct operating
subsidiary in China, Ossen Innovation Materials Co. Ltd., or Ossen Materials. Ossen Asia owns 81% of the equity of Ossen Materials.
Topchina is a British Virgin Islands limited liability company organized on November 3, 2004. Ossen Materials and Topchina directly
own an operating subsidiary in China, Ossen (Jiujiang) New Materials Co., Ltd., or Ossen Jiujiang. As of December 31, 2016, Ossen Materials
owns 20.5% of the equity of Ossen Jiujiang and Topchina owns 79.5%.
Ossen Materials
Ossen Materials was formed in China on October 27, 2004 as a Sino-foreign joint venture limited liability company under the name
Ossen (Maanshan) Steel Wire and Cable Co., Ltd. On May 8, 2008, Ossen Materials was restructured from a Sino-foreign joint venture limited
liability company to a corporation. The name of the entity was changed at that time to Ossen Innovation Materials Co., Ltd.
Ossen Asia owns 81% of the equity of Ossen Materials. The remaining 19% is held in the aggregate by four Chinese entities, two of
which are controlled by Chinese governmental entities, one of which is controlled by Zhonglu Co. Ltd., a company whose shares are listed on
the Shanghai Stock Exchange, and one of which is controlled by Chinese citizens.
Through Ossen Materials, we have manufactured and sold plain surface PC strands, rare earth coated PC steel wires and PC wires in
our Maanshan City facility since 2004. The primary markets for the products manufactured at our Maanshan facility are Anhui Province,
Jiangsu Province, Zhejiang Province and Shanghai City, each in the PRC.
37
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.
38
Organizational Structure Chart
The following chart reflects our organizational structure:
4D. Property, Plants and Equipment
Under PRC law, land is owned by the state. “Land use rights” are granted to an individual or entity after payment of a land use right
fee is made to the applicable state or rural collective economic organization. Land use rights allow the holder the right to use the land for a
specified long-term period.
We have land-use rights for facilities at two locations in the PRC, one in Maanshan City, Anhui Province and one in Jiujiang City,
Jiangxi Province, which are utilized for production, research and development and employee living quarters. We have paid all amounts relating
to these properties. The land-use rights for our Maanshan facility expires in 2058 and the rights for our Jiujiang facilities expire at different
intervals, ranging from 2055 to 2057. Our facilities cover an aggregate of approximately 106,136 square meters.
As of December 31, 2017, our production facility in Maanshan City had a total gross floor area of approximately 47,356 square meters
and we employed 51 production personnel at that facility. Our Maanshan facility contained seven production lines with an annual production of
approximately 110,134 tons in 2017. As of December 31, 2017, our production facility in Jiujiang City had a total gross floor area of
approximately 58,780 square meters and we employed 44 production personnel at that facility. Our Jiujiang facility contained eleven
production lines with an annual production of approximately 121,682 tons in 2017. 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. The total annual production of our two facilities decreased in 2017 compared to 2016 due to the change in our
strategy to focus on higher priced products in 2017.
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.
Important Factors Affecting our Results of Operations and Existing Trends
Migration of Our Business to the Domestic PRC Market
Our results of operations depend in part on the proportion of international sales to domestic sales that we attain during a particular
financial reporting period. Sales to international customers have historically generated profit margins that are approximately 2% to 5% higher
on average than sales to domestic customers. In addition, we have historically collected a significant percentage of revenues generated by
international sales by letter of credit, which enables us to convert accounts receivable into cash more quickly. Between 2013 and 2015, the
Chinese government followed a prudent monetary policy and was conservative in lending to certain industries, including steel industry and our
domestic customers. In both 2016 and 2017, the Chinese government’s policy in lending is slightly less conservative compared to 2015. As a
result, our domestic customers were able to pay our accounts receivables faster than 2014 and 2015, and our average Days Sales Outstanding
was approximately 123, 126 and 150 days in 2017, 2016 and 2015, respectively.
Our current business model is to continue focusing on the domestic PRC market, while selectively pursuing international opportunities
when appropriate. Under existing PRC governmental policies, especially the newly announced “One Belt, One Road” initiatives, significant
investments are expected to be made during the next decade to construct many new bridges and new railroads.
40
We generated approximately 4.1%, 4.2% and 6.6%, respectively, of our revenue during the years ended December 31, 2017, 2016 and
2015 from sales to customers in international markets including primarily Vietnam, South Korea, Japan, New Zealand, Australia, Bangladesh,
Brunei, Costa Rica, South Africa, and Chile, 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. In 2017, we renewed our JIS certificate and continued to export plain surface prestressed steel products to
the Japanese market. Due to the anti-dumping measures imposed by the United States and European Union and recent stiff trade measures
imposed by the United States government, we do not intend to reestablish a presence in the United States or the European Union at the levels
we experienced in 2008 in the near future. However, if opportunities arise in the U.S. or EU markets or in other international markets for us to
win bids on projects or to reengage with former customers or establish relationships with new customers, we would pursue such opportunities.
Although we have not generated any sales from the United States since the anti-dumping duties were imposed in 2010, these measures may
also have a negative impact on our business and results of operations because Chinese-based steel product exporters may now focus their
marketing efforts on the Chinese domestic market.
Product Mix and Industry Trends
Our results of operations also depend in part on the product mix that we attain during a particular financial reporting period. We
produce and sell products according to customer orders. 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.
In 2015, 2016 and 2017, the average gross margin of plain surface products was approximately 17.5%, 21.0% and 7.0% and the
average gross margin of our coated products, including rare earth coated and zinc coated products, was approximately 12.7%, 11.6% and
10.0%, respectively. The margins for our plain surface products surpassed the margins for our coated products in 2015 and 2016. In 2015, the
average gross margin of coated products, including zinc coated products and rare earth coated products, was lower than plain surface products
mainly because the average price of the raw materials purchased for our coated products did not decline as steeply as the average price of the
raw materials purchased for our plain surface products. In 2016, coated products had lower gross margin mainly because the average price of
the raw materials purchased for our coated products increased more than the average price of the raw materials purchased for our plain surface
products. In 2017, the average gross margin of plain surface products declined significantly because the orders were mainly wholesale orders
which normally have lower gross profit margin than the retail orders we had in 2016. The decrease in average gross margin of coated products
in 2017 was mainly due to the increase of prices of raw materials.
As an overall percentage of sales, sales of our coated products increased from 93.6% in 2016 to 94.0% in 2017 and 90.4% and 92.5%,
respectively, of our coated product sales in the years ended December 31, 2017 and December 31, 2016 were sales of rare earth coated products
and the remaining 9.6% and 7.5%, 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 2014 and 2015, steel supply continued to outpace demand as China’s economic growth slowed and
growth in steel demand in China remained weak. The price of all of our principal raw materials decreased in 2014 and 2015 due to the market
condition of steel industry in China. However, since raw materials purchased for our rare earth and zinc coated products are produced by only a
select few steel manufacturers, the average price of these raw materials was not as volatile as other steel products, and the decline is not as
much as those that are mass produced such as raw materials for plain surface products in 2014 and 2015. In 2016 and 2017, Chinese
Government continued its policy to cut excessive industrial capacity and reform the supply-side of its economy, while strictly controlling steel
capacity increases. As a result, the average price of steel products, including our products and principal raw materials, increased in 2016 and
2017. We expect steel demand will continue to slightly outpace supply due to the reduction of overcapacity and average price of steel products
will continue to rise in 2018.
We currently purchase almost all of our new materials from a very small number of suppliers. Purchases from our five largest
suppliers amounted to 99.7%, 99.1% and 97.7% of our total raw material purchases in 2017, 2016 and 2015, respectively. To date, we have
been able to obtain favorable pricing and delivery terms from these suppliers. However, if we were to increase the scale of our production, we
may need to further diversify our supplier network and, as a result, may not be able to obtain favorable pricing and delivery terms from new
suppliers.
Slow Growth of the Chinese Economy
We operate our manufacturing facilities in China and derive the majority of our revenues from sales to customers in China. As such,
economic conditions in China affect virtually all aspects of our operations, including the demand for our products, the availability and prices of
our raw materials and our other expenses. Although the economy in China has grown significantly in the past decades, any slow-down of
economic growth in China could reduce expenditures for infrastructure, which in turn may adversely affect our operating results and financial
condition. For example, the weakness in the economy could reduce the investment in infrastructure, which, in turn, could result in demand for
our products and our revenues may decline. Furthermore, any financial turmoil affecting the financial markets and banking system may
significantly restrict our ability to obtain financing in the capital markets or from financial institutions on commercially reasonable terms, or at
all.
42
Level of income tax and preferential tax treatment
Our net income is affected by the income tax that we pay and any preferential tax treatment that we are able to receive. Our operating
subsidiaries are subject to the PRC enterprise income tax, or EIT. According to the relevant laws and regulations in the PRC, foreign invested
enterprises established prior to January 1, 2008 are entitled to full exemption from income tax for two years beginning with the first year in
which such enterprise is profitable and a 50% income tax reduction for the subsequent three years. Ossen Materials was entitled to an EIT
exemption during the two years ended December 31, 2006 and was subject to a 50% income tax reduction during the three years ended
December 31, 2009. Ossen Jiujiang was entitled to the EIT exemption during the two years ended December 31, 2008, and a 50% income tax
reduction during the three years ended December 31, 2012.
Ossen Materials was subject to a 15% tax rate through 2012 as the result of its being designated a high-tech enterprise. In 2012, Ossen
Materials renewed its status of high-tech enterprise, and would be subject to a 15% tax rate through 2015. In 2015, Ossen Materials renewed its
status of high-tech enterprise again, and will be subject to a 15% tax rate through 2018. Ossen Jiujiang was subject to a 15% tax rate through
2011 as the result of its being designated a high-tech enterprise. Since January 1, 2012, Ossen Jiujiang has enjoyed a tax rate of 15% as it is
considered as a high-tech enterprise. In 2015, Ossen Jiujiang successfully renewed its status of high-tech enterprise, and will be subject to a 15%
tax rate through 2018. In the event that our income tax obligations increase over time, our net income will be affected.
Foreign currency translation
Our financial statements are expressed in U.S. dollars but the functional currency of our operating subsidiaries is RMB. Our results of
operations are translated at average exchange rates during the relevant financial reporting periods, assets and liabilities are translated at the
unified exchange rate at the end of these periods and equity is translated at historical exchange rates. Adjustments resulting from the process of
translating the local currency financial statements into U.S. dollars are included in determining comprehensive income.
Description of Selected Income Statement Items
Revenues. We generate revenue from sales of our prestressed steel products, including plain surface products and rare earth coated
products. We also derive an insignificant amount of revenue from providing services to select customers. Service revenues account for less than
2% of total revenues for all periods presented and is recognized upon delivery and acceptance of the finished products by the customer, or
when pick up occurs.
Cost of goods sold. Cost of goods sold includes direct and indirect production costs, as well as freight and handling costs for products
sold.
Selling expenses. Selling expenses consist of sales commissions, payroll, traveling expenses, transportation expenses and advertising
expenses. For example, we typically pay our international distribution customers a commission ranging from 0.5% to 5% of invoiced amounts
(including VAT) actually paid to us.
General and administrative expenses. General and administrative expenses consist primarily of research and development expense,
management and office salaries and employee benefits, deprecation for office facility and office equipment, travel and entertainment, legal and
accounting, consulting fees and other office expenses.
Financial expenses. Financial expenses consist of interest expense on bank loans, interest income.
Other Income. Our other income consisted of government grants and revenue from sales of scrap materials.
Income Taxes. Ossen Materials and Ossen Jiujiang have been recognized by their respective local government agencies as high-tech
enterprises. As a result, both subsidiaries were subject to an income tax rate of 15% under relevant PRC income tax laws in 2015, 2016 and
2017.
43
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.
Revenues
Cost of Goods Sold
Gross profit
Selling expenses
General and administrative expenses
Total operating expenses
Income from operation
Financial expenses, net
Other income, net
Income before income taxes
Income Taxes
Net Income
2017
132,375,915
117,721,799
14,654,116
598,832
6,002,121
6,600,953
8,053,163
(1,610,337)
147,108
6,589,934
(691,556)
5,898,378
Less: net income attributable to non-
controlling interest
553,067
Net income attributable to controlling interest 5,345,311
Other comprehensive income- Foreign
currency translation gain (loss)
Total other comprehensive income (loss)
Comprehensive Income
6,606,207
6,606,207
11,951,518
% of Revenue
2016
For the Year Ended December 31,
% of Revenue
2015
% of Revenue
100.0% 117,029,154
88.9% 100,932,528
11.1% 16,096,626
734,159
0.5%
4.5% 6,376,383
5.0% 7,110,542
6.1% 8,986,084
(2,827,138)
-1.2%
0.1%
90,584
5.0% 6,249,530
-0.5%
(926,048)
4.5% 5,323,482
100.0% 117,908,416
86.2% 102,197,994
13.8% 15,710,422
986,378
0.6%
5.4% 4,478,413
6.1% 5,464,791
7.7% 10,245,631
(2,823,952)
-2.4%
0.1%
371,894
5.3% 7,793,573
-0.8%
(1,180,167)
4.5% 6,613,406
0.4%
499,509
4.0% 4,823,973
0.4%
716,602
4.1% 5,896,804
5.0%
5.0%
9.0%
(6,975,100)
(6,975,100)
(2,151,127)
-6.0%
-6.0%
-1.8%
(5,829,470)
(5,829,470)
67,334
100.0%
86.7%
13.3%
0.8%
3.8%
4.6%
8.7%
-2.4%
0.3%
6.6%
-1.0%
5.6%
0.6%
5.0%
-4.9%
-4.9%
0.1%
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Revenues. During the year ended December 31, 2017, we had revenues of approximately $132.4 million as compared to revenues of
approximately $117.0 million during year ended December 31, 2016, an increase of approximately $15.4 million, or 13.1%. The increase in our
revenues during the year ended December 31, 2017 was mainly attributable to a 10.9% increase in sales of rare earth coated PC wires and PC
strands, a 46.1% increase in zinc coated PC wires and PC strands, and a 14.9% increase in plain surface PC strands, partially offset by a 13.2%
decrease in other products.
44
The following table provides a breakdown of our revenues during the years ended December 31, 2016 and 2015, respectively:
Year ended December 31,
2017
Revenue ($) % of Total Revenue
2016
Revenue ($) % of Total Revenue
Difference
Products:
Plain surface PC strands
Zinc coated PC wires and PC strands
Rare earth coated PC wires and PC strands
Others
Total
6,037,207
11,978,159
112,437,410
1,923,138
132,375,915
4.6% 5,256,109
9.0% 8,195,801
84.9% 101,361,992
1.5% 2,215,252
100% 117,029,154
4.5%
7.0%
86.6%
1.9%
100%
14.9%
46.1%
10.9%
-13.2%
13.1%
The demand for our rare earth coated PC wires and PC strands continue to improve in 2017. However, the demand for lower strength
coated materials was greater than demand for higher strength coated materials. We used lower grade raw materials for some of our rare earth
coated products to improve margins without sacrificing product strength or quality. As a result, the sales of rare earth coated PC wires and PC
strands increased by $11.1 million, or 10.9%, to $112.4 million for the year of 2017.
The sales of zinc coated PC wires and PC strands were $12.0 million during the year ended December 31, 2017, an increase of 46.1%,
compared to the year ended December 31, 2016. The increase of sales generated by zinc coated products in 2017 was primarily due to our
efforts to take advantage of the improved market condition and customer demand and promoting the products in 2017.
The sales of plain surface PC strands and PC wires were $6.0 million during the year ended December 31, 2017, an increase of $0.8
million, or 13.9%, compared to the year ended December 31, 2016. This increase of sales generated by plain surface PC strands and PC wires
was primarily due to favorable wholesale market demand during the period.
Other sales were $1.9 million during the year ended December 31, 2017, a decrease of $0.3 million, or 13.2%, compared to the year
ended December 31, 2016. This decrease was primarily due to fewer spare raw materials sold in 2017 compared to 2016 and the decrease of
service revenue.
Cost of Goods Sold. Cost of goods sold was approximately $117.7 million during the year ended December 31, 2017, as compared to
approximately $100.9 million during the year ended December 31, 2016, representing an increase of 16.6%, or approximately $16.8 million.
This increase mainly resulted from the increase of revenues and the increase of raw material costs. As a percentage of revenues, cost of goods
sold increased from 86.2% to 88.9% during the year ended December 31, 2017.
Gross Profit and Gross Margin. Our gross profit is equal to the difference between our revenues and our cost of goods sold. Our gross
profit decreased 9.0% to approximately $14.7 million during the year ended December 31, 2017, from approximately $16.1 million for the
same period in 2016. For the years ended December 31, 2017 and 2016, our gross margin was 11.1% and 13.8%, respectively. The decrease of
gross margin was primarily due to the increase of the price of raw materials and because the orders for plain surface products were mainly
wholesale orders, which normally have lower gross profit margin than the retail orders we had in 2016. .
Selling Expenses. Selling expenses totaled $0.6 million for the year ended December 31, 2017, as compared to $0.7 million for the
year ended December 31, 2016, a decrease of 18.4%. This decrease was primarily due to lower sales commission and lower transportation cost
in 2017.
General and Administrative Expenses. General and administrative expenses totaled $6.0 million for the year ended December 31,
2017, as compared to $6.4 million for the year ended December 31, 2016, a decrease of 5.9%. The decrease in 2017 was primarily due to lower
bad-debt provision, partially offset by higher research and development cost in 2017.
Operating Income. As a result of the foregoing, operating income for the year ended December 31, 2017 was approximately $8.1
million, a decrease of 10.4% as compared to approximately $9.0 million for the same period in 2016. As a percentage of net sales, operating
income decreased from 7.7% to 6.1% during the year ended December 31, 2017.This decrease was primarily due to lower gross profit partially
offset by lower operating expenses.
45
Income Taxes. We incurred income tax expenses of $0.7 million and $0.9 million in the fiscal years ended December 31, 2017 and
2016, respectively. Ossen Materials and Ossen Jiujiang were subject to a 15% tax rate as the result of being designated as high-tech enterprises
through 2018.
Net Income . As a result of the foregoing, our net income totaled approximately $5.9 million for the year ended December 31, 2017, as
compared to approximately $5.3 million for the year ended December 31, 2016, an increase of 10.8%.
Net Income Attributable to Non-controlling Interest. We own 81% of Ossen Materials and 96.1% of Ossen Jiujiang in the aggregate.
Net income attributable to non-controlling interest represents the net income attributable to the holders of the remaining shares. Our net income
attributable to non-controlling interest totaled approximately $0.6 million for the year ended December 31, 2017, as compared to approximately
$0.5 million for the year ended December 31, 2016.
Foreign Currency Income (Loss). For the year ended December 31, 2017, foreign currency exchange gain was $6.6 million, compared
to foreign currency exchange loss of $6.9 million, for the year ended December 31, 2016. The gain was due to the strengthening of the
exchange rate of the RMB versus the US dollar in 2017.
46
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Revenues. During the year ended December 31, 2016, we had revenues of approximately $117.0 million as compared to revenues of
approximately $117.9 million during year ended December 31, 2015, a decrease of approximately $0.9 million, or 0.8%. The slight decrease in
our revenues during the year ended December 31, 2016 was mainly attributable to a 67.9% decrease in sales of plain surface PC strands, a 21.6%
decrease in sales of zinc coated products, and a 63.4% decrease in other products, partially offset by an increase in sales of rare earth coated PC
wires and PC strands.
The following table provides a breakdown of our revenues during the years ended December 31, 2016 and 2015, respectively:
Year ended December 31,
2016
Revenue ($) % of Total Revenue
2015
Revenue ($) % of Total Revenue
Difference
Products:
Plain surface PC strands
Zinc coated PC wires and PC strands
Rare earth coated PC wires and PC strands
Others
Total
5,256,109
8,195,801
101,361,992
2,215,252
117,029,154
4.5% 16,394,864
7.0% 10,459,026
86.6% 85,007,683
1.9%
6,046,843
100% 117,908,416
13.9%
8.9%
72.1%
5.1%
100%
-67.9%
-21.6%
19.2%
-63.4%
-0.7%
In 2016, the demand for our rare earth coated PC wires and PC strands continue to recover and the demand for our higher strength and
higher margin rare earth coated products improved compared to 2015. As a result, the sales of rare earth coated PC wires and PC strands
increased by $16.4 million, or 19.2%, to $101.4 million for the year of 2016. However, revenues of our plain surface products and zinc coated
products decreased due to our business strategy to focus on rare earth coated products. The average steel price recovered in 2016 due to the
government policy to cut excess capacity.
The sales of zinc coated PC wires and PC strands were $8.2 million during the year ended December 31, 2016, a decrease of 21.6%,
compared to the year ended December 31, 2015. The decrease of sales generated by zinc coated products in 2016 was primarily due to our
strategy to focus on rare earth coated products in 2016.
The sales of plain surface PC strands and PC wires were $5.3 million during the year ended December 31, 2016, a decrease of $11.1
million, or 67.9%, compared to the year ended December 31, 2015. This decrease of sales generated by plain surface PC strands and PC wires
was primarily due to our focus on rare earth coated products and the decline in sales to wholesale market during the period.
Other sales were $2.2 million during the year ended December 31, 2016, a decrease of $6.0 million, or 63.4%, compared to the year
ended December 31, 2015. This decrease was primarily due to less spare raw materials sold in 2016 compared to 2015 and the decrease of
service revenue.
Cost of Goods Sold . Cost of goods sold was approximately $100.9 million during the year ended December 31, 2016, as compared to
approximately $102.2 million during the year ended December 31, 2015, representing a decrease of 1.3%, or approximately $1.3 million. This
decrease primarily resulted from the slight decrease of revenues As a percentage of revenues, cost of goods sold decreased from 86.7% to 86.2%
during the year ended December 31, 2016.
Gross Profit and Gross Margin. Our gross profit is equal to the difference between our revenues and our cost of goods sold. Our gross
profit increased 2.5% to approximately $16.1 million during the year ended December 31, 2016, from approximately $15.7 million for the
same period in 2015. For the years ended December 31, 2016 and 2015, our gross margin was 13.8% and 13.3%, respectively. The slight
increase of gross margin was primarily due to the lower than average price of raw materials locked by advance payment to suppliers.
Selling Expenses . Selling expenses totaled $0.7 million for the year ended December 31, 2016, as compared to $1.0 million for the
year ended December 31, 2015, a decrease of 25.6%. This decrease was primarily due to lower transportation cost associated with lower
revenue from export in 2016.
General and Administrative Expenses . General and administrative expenses totaled $6.4 million for the year ended December 31,
2016, as compared to $4.5 million for the year ended December 31, 2015, an increase of 42.4%. The increase in 2016 was primarily due
to higher research and development cost and higher bad-debt provision in 2016.
Operating Income. As a result of the foregoing, operating income for the year ended December 31, 2016 was approximately $9.0
million, a decrease of 12.3% as compared to approximately $10.2 million for the same period in 2015. This decrease was primarily due to an
increase in research and development expenses and an increase in bad-debt provision. As a percentage of net sales, operating income decreased
from 7.7% to 8.7% during the year ended December 31, 2016.
Income Taxes . We incurred income tax expenses of $0.9 million and $1.2 million in the fiscal years ended December 31, 2016 and
2015, respectively. Ossen Materials and Ossen Jiujiang were subject to a 15% tax rate as the result of being designated as high-tech enterprises
through 2018.
Net Income . As a result of the foregoing, our net income totaled approximately $5.3 million for the year ended December 31, 2016, as
compared to approximately $6.6 million for the year ended December 31, 2015, a decrease of 19.5%.
Net Income Attributable to Non-controlling Interest. We own 81% of Ossen Materials and 96.1% of Ossen Jiujiang in the aggregate.
Net income attributable to non-controlling interest represents the net income attributable to the holders of the remaining shares.
Foreign Currency Income (Loss). For the year ended December 31, 2016, foreign currency exchange loss was $6.9 million, compared
to foreign currency exchange loss of $5.8 million, for the year ended December 31, 2015.
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.
47
Use of Estimates
The preparation of the consolidated and combined financial statements in conformity with generally accepted accounting principles in
the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are
made. Actual results could differ from those estimates.
Revenue Recognition
In accordance with the ASC Topic 605, “Revenue Recognition”, the Company recognizes revenue when persuasive evidence of an
arrangement exists, delivery has occurred or services have been rendered, the seller’s price to the buyer is fixed or determinable, and
collectability is reasonable assured.
The Company derives revenues from the processing, distribution and sale of own products. The Company recognizes its revenues net
of value-added taxes (“VAT”). The Company is subject to VAT which is levied on the rate of 17% on the invoiced value of sales. Output VAT
is borne by customers in addition to the invoiced value of sales and input VAT is borne by the Company in addition to the invoiced value of
purchases to the extent not refunded for export sales.
The Company will recognize revenue for domestic sales based on the terms defined in the contract as long as risk of loss has
transferred to the customers and each of the criteria under ASC 605 have been met. Contracts terms may require the Company to deliver the
finished goods to the customers’ location or the customer may pick up the finished goods at the Company’s factory. International sales are
recognized when shipment clears customs and leaves the port.
Contracts with distributors do not offer any chargeback or price protection. The Company experienced no product returns and
recorded no reserve for sales returns for the years ended December 31, 2017, 2016 and 2015.
Research and Development
Research and development costs are expensed as incurred and totaled approximately $4,269,512, $3,869,277 and $3,404,333 for the
years ended December 31, 2017, 2016 and 2015, respectively. Research and development costs are included in general and administrative
expenses in the accompanying statements of operations. Research and development costs are incurred on a project specific basis.
Income Taxes
The Company accounts for income taxes following the liability method pursuant to FASB ASC 740 “Income Taxes”. Under this
method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and
liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. The Company records a
valuation allowance to offset deferred tax assets if, based on the weight of available evidence, it is more-likely-than-not that some portion, or
all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rate is recognized in income in the period that
includes the enactment date.
The Company also follows FASB ASC 740, which addresses the determination of whether tax benefits claimed or expected to be
claimed on a tax return should be recorded in the financial statements. The Company may recognize the tax benefit from an uncertain tax
position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical
merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest
benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on
recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. As of
December 31, 2016, the Company did not have a liability for unrecognized tax benefits. It is unlikely that the amount of liability for
unrecognized tax benefits will significantly change over the next 12 months. It is the Company’s policy to include penalties and interest
expense related to income taxes as a component of other expense and interest expense, respectively, as necessary. The Company’s historical tax
years will always remain open for examination by the local authorities.
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The Company has not provided for income taxes on accumulated earnings amounting $59,386,668 that are subject to the PRC
dividend withholding tax as of December 31, 2017, since these earnings are intended to be permanently reinvested.
Fair Value of Financial Instruments
The Company applies the provisions of ASC 820, Fair Value Measurements and Disclosures, to the financial instruments that are
required to be carried at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in
the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement
date. The Company uses a three-tier fair value hierarchy based upon observable and non-observable inputs that prioritizes the information used
to develop our assumptions regarding fair value. Fair value measurements are separately disclosed by level within the fair value hierarchy.
FASB ASC 820 (formerly SFAS No. 157 Fair Value Measurements) establishes a three-tier fair value hierarchy, which prioritizes the inputs
used in measuring fair value. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair
value are observable in the market
These tiers include:
Level 1—defined as observable inputs such as quoted prices in active markets for identical assets or liabilities;
Level 2—defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
Level 3—defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The company’s financial instruments primarily consist of cash and cash equivalents, restricted cash, accounts receivable, notes
receivable, accounts payable, other payables and accrued liabilities, short-term bank loans, and bond payable.
The carrying value of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, and other current assets and
liabilities approximate fair value because of the short term nature of these items. The estimated fair values of short-term bank loans were not
materially different from their carrying value as presented due to the short maturities and that the interest rates on the borrowing approximate
those that would have been available for loans of similar remaining maturity and risk profile. As the carrying amounts are reasonable estimates
of the fair value, these financial instruments are classified within Level 1 of the fair value hierarchy.
Accounts Receivable
Accounts receivable are carried at net realizable value. The Company reviews its accounts receivables on a periodic basis and makes
general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual
receivable balances, the Company considers many factors, including the age of the balance, customer’s historical payment history, its current
credit-worthiness and current economic trends. Accounts are written off after exhaustive efforts at collection. If accounts receivable are to be
provided for, or written off, they would be recognized in the consolidated statement of operations within operating expenses. Balance of
allowance of doubtful accounts was $868,973 and $985,990 at December 31, 2017 and 2016, respectively. The decrease was mainly due to the
decrease of accounts receivable aging over 1 year.
Inventories
Inventories are stated at the lower of cost or net realizable value, which is based on estimated selling prices less any further costs
expected to be incurred for completion and disposal. Cost of raw materials is calculated using the weighted average method and is based on
purchase cost. Work-in-progress and finished goods costs are determined using the weighted average method and comprise direct materials,
direct labor and an appropriate proportion of overhead. The Company considers a provision for excess, obsolete, or slow-moving inventory
based on changes in customer demand, technology developments or other economic factors. At December 31, 2017 and 2016, the Company has
$127,766 and $120,347 reserve for inventories, respectively.
49
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 $71,280,903 and $46,729,285 and at December 31, 2017 and 2016, respectively. Among the balance of $71,280,903, the aging
of $26,821,447 was within 60 days, $6,530,127 was between 60-90 days and $37,929,329 was over 90 days. High carbon steel wire rods are
the primary raw material required to manufacture prestressed steel materials. Most suppliers of high carbon steel wire rods require advance
payment. Advance to suppliers at December 31, 2017 increased from 2016 because we used more cash flow available to lock the supply and
price with our suppliers with the expectation of rising steel price. No allowance was provided for the prepayments balance at December 31,
2017.
In 2017, the PRC steel industry was in the late stage of the process of reducing overcapacity which resulted in the increase of the
average steel price. However, we were able to receive raw materials delivered by our suppliers in 2017 at a discounted price, locked in by
prepayments. We expect to continue using the advance payment to suppliers to lock a discounted price of raw materials and the balance of
advance to suppliers may fluctuate depending on the market development.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost less accumulated depreciation, and include expenditure that substantially increases the
useful lives of existing assets.
Depreciation is provided over their estimated useful lives, using the straight-line method. Estimated useful lives are as follows:
Plant, buildings and improvements
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.
50
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, 2017, 2016 and 2015.
Related Party
In general, related parties exist when there is a relationship that offers the potential for transactions at less than arm’s-length, favorable
treatment, or the ability to influence the outcome of events different from that which might result in the absence of that relationship. A related
party may be any of the followings: a) affiliate, a party that directly or indirectly controls, is controlled by, or is under common control with
another party; b) principle owner, the owner of record or known beneficial owner of more than 10% of the voting interest of an entity; c)
management, persons having responsibility for achieving objectives of the entity and requisite authority to make decision; d) immediate family
of management or principal owners; e) a parent company and its subsidiaries; d) other parties that has ability to significant influence the
management or operating policies of the entity.
FASB issued authoritative guidance that clarifies considerations relating to the consolidation of certain entities. The guidance requires
identification of the Company’s participation in variable interest entities (“VIE”), which are defined as entities with a level of invested equity
that is not sufficient to fund future activities to permit them to operation on a standalone basis, or whose equity holders lack certain
characteristics of a controlling financial interest. That, for entities identified as a VIE, the guidance sets forth a model to evaluate potential
consolidation based on an assessment of which party to a VIE, if any, bears a majority of the exposure to expected losses, or stand to gain from
majority of its expected returns. The guidance also sets forth certain disclosure regarding interests in a VIE that are deemed significant even if
consolidation is not required. This item is discussed in further detail in Note 10 – Related Party Transactions.
Recently Issued Accounting Pronouncements
In July 2017, the FASB issued ASU No. 2017-11, “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic
480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II)
Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain
Mandatorily Redeemable Non-controlling Interests with a Scope Exception” (“ASU 2017-11”), which addresses the complexity of accounting
for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded
features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates
cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that
require fair value measurement of the entire instrument or conversion option. The amendments in Part I of this ASU are effective for public
business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently
evaluating the impact of the adoption of ASU 2017-11 on its consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification
Accounting” (“ASU 2017-09”), which provides guidance on determining which changes to the terms and conditions of share-based payment
awards require an entity to apply modification accounting under Topic 718. The amendments in this ASU are effective for all entities for
annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including
adoption in any interim period, for (1) public business entities for reporting periods for which financial statements have not yet been issued and
(2) all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in
this ASU should be applied prospectively to an award modified on or after the adoption date. We do not expect the adoption of ASU 2017-09
to have a material impact on our consolidated financial statements.
In February 2017, the FASB issued ASU No. 2017-05, “Other Income—Gains and Losses from the Derecognition of Nonfinancial
Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets”
(“ASU 2017-05”), which clarifies the scope of the nonfinancial asset guidance in Subtopic 610-20. This ASU also clarifies that the
derecognition of all businesses and nonprofit activities (except those related to conveyances of oil and gas mineral rights or contracts with
customers) should be accounted for in accordance with the derecognition and deconsolidation guidance in Subtopic 810-10. The amendments
in this ASU also provide guidance on the accounting for what often are referred to as partial sales of nonfinancial assets within the scope of
Subtopic 610-20 and contributions of nonfinancial assets to a joint venture or other non-controlled investee. The amendments in this ASU are
effective for annual reporting reports beginning after December 15, 2017, including interim reporting periods within that reporting period.
Public entities may apply the guidance earlier but only as of annual reporting periods beginning after December 15, 2016, including interim
reporting periods within that reporting period. We do not expect the adoption of ASU 2017-05 to have a material impact on our consolidated
financial statements.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment” (“ASU 2017-04”), which removes Step 2 from the goodwill impairment test. An entity will apply a one-step
quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to
exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of
goodwill impairment. Public business entity that is a U.S. Securities and Exchange Commission filer should adopt the amendments in this ASU
for its annual or any interim goodwill impairment test in fiscal years beginning after December 15, 2019. Early adoption is permitted for
interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently evaluating the impact of the
adoption of ASU 2017-04 on our consolidated financial statements.
51
In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”),
which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally
described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash
equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts
shown on the statement of cash flows. The amendments in this ASU do not provide a definition of restricted cash or restricted cash equivalents.
The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods
within those fiscal years. Early adoption is permitted, including adoption in an interim period. We do not expect the adoption of ASU 2016-18
to have a material impact on our consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts
and Cash Payments” (“ASU 2016-15”), which addresses the following eight specific cash flow issues: debt prepayment or debt extinguishment
costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the
effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of
insurance claims; proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies;
distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows
and application of the predominance principle. The amendments in this ASU are effective for public business entities for fiscal years beginning
after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period.
We do not expect the adoption of ASU 2016-15 to have a material impact on our consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments” (“ASU 2016-13”). Financial Instruments—Credit Losses (Topic 326) amends guideline on reporting credit losses for
assets held at amortized cost basis and available-for-sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates the
probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses.
The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net
amount expected to be collected. For available-for-sale debt securities, credit losses should be measured in a manner similar to current GAAP,
however Topic 326 will require that credit losses be presented as an allowance rather than as a write-down. ASU 2016-13 affects entities
holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans,
debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial
assets not excluded from the scope that have the contractual right to receive cash. The amendments in this ASU will be effective for fiscal years
beginning after December 15, 2019, including interim periods within those fiscal years. We are currently evaluating the impact of the adoption
of ASU 2016-13 on our consolidated financial statements.
In April 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09,
“Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”), which
simplifies several aspects of the accounting for employee share-based payment transactions. The areas for simplification in ASU 2016-09
include the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.
The amendments in this ASU will be effective for annual periods beginning after December 15, 2016 and interim periods within those annual
periods. Early adoption is permitted. The adoption of the ASU 2016-09 did not have a material impact on the Company’s consolidated financial
statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The amendments in this update create
Topic 842, Leases, and supersede the leases requirements in Topic 840, Leases. Topic 842 specifies the accounting for leases. The objective of
Topic 842 is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the
amount, timing, and uncertainty of cash flows arising from a lease. The main difference between Topic 842 and Topic 840 is the recognition of
lease assets and lease liabilities for those leases classified as operating leases under Topic 840. Topic 842 retains a distinction between finance
leases and operating leases. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to
the classification criteria for distinguishing between capital leases and operating leases in the previous leases guidance. The result of retaining a
distinction between finance leases and operating leases is that under the lessee accounting model in Topic 842, the effect of leases in the
statement of comprehensive income and the statement of cash flows is largely unchanged from previous GAAP. The amendments in ASU
2016-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public business
entities. Early application of the amendments in ASU 2016-02 is permitted. We are currently evaluating the impact of the adoption of ASU
2016-02 on our consolidated financial statements.
52
In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). The amendments in this update require all equity investments to
be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of
accounting or those that result in consolidation of the investee). The amendments in this update also require an entity to present separately in
other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific
credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In
addition, the amendments in this update eliminate the requirement for to disclose the method(s) and significant assumptions used to estimate
the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public entities. For
public business entities, the amendments in ASU 2016-01 are effective for fiscal years beginning after December 15, 2017, including interim
periods within those fiscal years. Except for the early application guidance discussed in ASU 2016-01, early adoption of the amendments in
this update is not permitted. We do not expect the adoption of ASU 2016-01 to have a material impact on our consolidated financial statements.
In August 2014, the FASB issued an accounting standards update which requires management to assess whether there are conditions
or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after
the financial statements are issued. If substantial doubt exists, additional disclosures are required. This update was effective for the Company’s
annual period ended January 28, 2017. The adoption of the new standard did not have a material impact on the Company’s consolidated
financial position, results of operations, cash flows or disclosures.
In May 2014 the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which ASU No. 2014-09
supersedes the revenue recognition requirements in Revenue Recognition (Topic 605) and requires entities to recognize revenue when it
transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in
exchange for those goods or services. The FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of
the Effective Date, in August 2015. The amendments in ASU No. 2015-14 defer the effective date of ASU No. 2014-09. Public business
entities, certain not-for-profit entities and certain employee benefit plans should apply the guidance in ASU No. 2014-09 to annual reporting
periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier adoption is permitted only
as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Further to
ASU No. 2014-09 and ASU No. 2015-14, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal
versus Agent Considerations (Reporting Revenue Gross versus Net), in March 2016, ASU No. 2016-10, Revenue from Contracts with
Customers (Topic 606): Identifying Performance Obligations and Licensing in April 2016, ASU No. 2016-12, Revenue from Contracts with
Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, and ASU No. 2016-20, Technical Corrections and
Improvements to Topic 606, Revenue from Contracts with Customers, respectively. The amendments in ASU No. 2016-08 clarify the
implementation guidance on principal versus agent considerations, including indicators to assist an entity in determining whether it controls a
specified good or service before it is transferred to the customers.
ASU No. 2016-10 clarifies guideline related to identifying performance obligations and licensing implementation guidance contained
in the new revenue recognition standard. The updates in ASU No. 2016-10 include targeted improvements based on input the FASB received
from the Transition Resource Group for Revenue Recognition and other stakeholders. It seeks to proactively address areas in which diversity in
practice potentially could arise, as well as to reduce the cost and complexity of applying certain aspects of the guidance both at implementation
and on an ongoing basis. ASU No. 2016-12 addresses narrow-scope improvements to the guidance on collectability, non-cash consideration
and completed contracts at transition. Additionally, the amendments in this ASU provide a practical expedient for contract modifications at
transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers. The
amendments in ASU No. 2016-20 represent changes to make minor corrections or minor improvements to the ASC that are not expected to
have a significant effect on current accounting practice or create a significant administrative cost to most entities. The effective date and
transition requirements for ASU No. 2016-08, ASU No. 2016-10, ASU No. 2016-12 and ASU No. 2016-20 are the same as ASU No. 2014-09.
We will adopt ASU No. 2014-09, ASU No. 2016-08, ASU No. 2016-10, ASU No. 2016-12 and ASU No. 2016-20 at January 1, 2018. We are
currently in the process of assessing the potential effects of these ASUs on our consolidated financial statements, business processes, systems
and controls. While the assessment process is ongoing, we anticipate adopting ASC Topic 606, Revenue from Contracts with Customers, using
the modified retrospective transition approach. Our product revenues are recognized at a point in time (either upon delivery to the customer or
accepted by the customers), which is when we control transfers to the customer. The Company has also determined that it will make accounting
policy elections to 1) treat shipping and handling activities that occur after the customer obtains control of the goods as fulfillment costs and 2)
exclude sales (and similar) taxes from the measurement of the transaction price. The Company does not expect the adoption of the new
standard will have a material impact on the Company’s consolidated financial position, results of operations, cash flows or disclosures.
In May 2014, the FASB issued an accounting standards update which replaces the current revenue recognition standards.
Subsequently, the FASB has also issued accounting standards updates which clarify the guidance. The new revenue recognition standard
provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should
recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those goods or services. This standard was initially released as effective for fiscal years beginning
after December 15, 2016; however, the FASB has decided to defer the effective date of this accounting standard update for one year. Early
adoption of the update is permitted, but not before the original date for fiscal years beginning after December 15, 2016. The update may be
applied retrospectively for each period presented or as a cumulative-effect adjustment at the date of adoption. The Company does not expect
the adoption of the new standard will have a material impact on the Company’s consolidated financial position, results of operations, cash
flows or disclosures.
53
5B. Liquidity and Capital Resources
We have historically met our working capital and capital expenditure requirements by using both net cash flow from operations and
by bank borrowings, including loans from banks and bank acceptance notes. In 2014, in addition to bank borrowings, our subsidiary in
Maanshan, Ossen Materials, completed a private placement of approximately $16.2 million in aggregate principal amount of notes to certain
accredited investors in China. The notes bore a fixed interest rate of 10.75% per annum, payable annually in arrears, and was repaid on
September 2, 2016 with income from operations and short-term bank loans. We expect to finance our operations and working capital needs in
the near future from cash generated from operations and short-term borrowings, including lines of credit from local banks, which can be
utilized to fund our short term operation and fulfill liabilities.
Our cash and cash equivalents, which are denominated in RMB, were approximately $1.0 million at December 31, 2017, as compared
to $0.2 million at December 31, 2016 and $0.8 million at December 31, 2015. Our restricted cash, which is used to secure notes payable, was
approximately $7.2 million at December 31, 2017, as compared to $6.7 million at December 31, 2016 and $8.8 million at December 31, 2015.
For the years ended December 31, 2015, 2016 and 2017, 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, the People’s Bank of China (PBOC) maintained a prudent and neutral monetary policy and local banks have generally maintained tight
lending policies, 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 2015 and 2016, we were able to generate net
profits and positive cash flow from operating activities. In 2017, we had net profits, but net cash used in operating activities were $3.0 million.
We believe that our cash reserves, together with expected cash flow from operations and short-term loans, are sufficient to allow us to continue
to operate for the next 12 months. For details of our bank loans and notes payables please see “Bank Loans and Bank Acceptance Notes” below.
We had $2.7 million of accounts receivable aged over 180 days as of December 31, 2016. We had $5.0 million of accounts receivable
aged over 180 days as of December 31, 2017. As of April 1, 2018, we have collected approximately $7.0 million of the $51.7 million of
accounts receivable outstanding as of December 31, 2017. The remaining approximately $44.7 million of uncollected accounts receivable are
mainly from construction companies that have long-term business relationship with us. Based on our historical experience, most of these
projects are government sponsored programs and we are confident that we will be able to collect the balance when the projects are completed.
We believe that current cash balances, future cash provided by operations, and amounts available under our line of credit or bank
borrowings will be sufficient to cover our operating and capital needs in the ordinary course of business for the foreseeable future. If we
experience an adverse operating environment or unanticipated and unusual capital expenditure requirements, additional financing may be
required. No assurance can be given, however, that additional financing, if required, would be available at all or on favorable terms. We might
also require or seek additional financing for the purpose of bidding new projects growing our existing markets, or for other reasons. Such
financing may include the use of additional debt or the sale of additional equity securities. Any financing which involves the sale of equity
securities or instruments that are convertible into equity securities could result in immediate and possibly significant dilution to our existing
shareholders.
Accounts Receivable
In 2015, 2016 and 2017, the accounts receivable collection period of our domestic customers was approximately 150, 126, and 123
days after receiving the materials at their construction site, respectively. Our accounts receivable decreased to $37.3 million at December 31,
2016 from $43.2 million at December 31, 2015 primarily due to the slightly improved marketing condition in 2016, which positively affected
the timing of our customers’ payments to us. As of December 31, 2017, our accounts receivable increased to $51.7 million at December 31,
2017 from $37.3 million at December 31, 2016 as a result of slower collection of accounts receivable in 2017.
54
The average Days Sales Outstanding (“DSO”) of 2016 and 2017 were 126 days and 123 days, respectively. The DSO as of December
31, 2016 and 2017 were 116 days and 142 days, respectively. The increase in DSO as of December 31, 2017 was primarily due to the slower
payments from our customers during 2017.
The following table describes the aging of our accounts receivable during 2015 and 2016:
As of Date
December 31, 2017
December 31, 2016
Account Receivables
Balance (in US
Dollars)
<60 days
60-90 days 90-180 days >180 days
51,699,930 37,801,468
37,298,465 24,914,390
0
8,698,708
8,854,564
951,302
5,043,898
2,734,065
As of April 1, 2018, we have collected approximately $7.0 million or 13.5% of the $51.7 million of accounts receivable outstanding as
of December 31, 2017 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, 2017, 2016 and 2015, our six largest customers contributed 74.8%, 81.4% and 79.5% of our
total sales, respectively. See “Business—Our Customers” above. As a result of our reliance on a limited number of customers, we may face
pricing and other competitive pressures, which may have a material adverse effect on our profits and our revenues. The volume of products
sold for specific customers varies from year to year, especially since we are not the exclusive supplier for any customers. In addition, there are
a number of factors, other than our performance, that could cause an unpredictable loss of a customer or substantial reduction in the business.
For example, our customers may decide to reduce spending on our products due to insufficient funding or delay of the project, or a customer
may no longer need our products following the completion of a project. The loss of any one of our major customers, a decrease in the volume
of sales to these customers or a decrease in the price at which we sell our products to them could materially adversely affect our profits and our
revenues.
In addition, this customer concentration may subject us to perceived or actual leverage that our customers may have in negotiations
with us, given their relative size and importance to us. If our customers seek to negotiate their agreements on terms less favorable to us and we
accept such unfavorable terms, such unfavorable terms may have a material adverse effect on our business, financial condition and results of
operations. Accordingly, unless and until we diversify and expand our customer base, our future success will significantly depend upon the
timing and volume of business from our largest customers and the financial and operational success of these customers.
Bank Loans and Bank Acceptance Notes
At December 31, 2017, we had approximately $13.9 million of short-term bank loans and $10.3 million of bank acceptance notes
outstanding, as compared to approximately $16.9 million of short-term bank loans and $9.6 million of bank acceptance notes outstanding at
December 31, 2016 and $17.7 million and $12.5 million at December 31, 2015, respectively. The decrease in short-term bank loans in 2017
was primarily due to the fact that the Chinese government and Chinese banks were still conservative in lending to certain industries including
steel industry and our domestic customers.
55
Our notes payable of $9.6 million at December 31, 2016 and $10.3 million at December 31, 2017 represented the amount of bank
acceptance notes our suppliers received from us for our purchases of raw materials. These notes were issued by financial institutions, typically
by banks, that entitle our suppliers to receive the full face amount from the bank or financial institution at maturity. Our notes payable are
interest-free and range from six months to one year from the date of issuance. These notes are subject to bank charges of 0.05% of the principal
amount as commission on each issuance and in total were secured by $6.7 million and $7.2 million restricted cash as of December 31, 2016 and
2017, respectively. Bank acceptance notes are commonly used in domestic China due to their enhanced credibility and the liquidity it provides
to the bearer. The bearer always has the option to cash the bank acceptance notes before maturity at its issuing bank and receive a discounted
amount in cash. We expect that bank acceptance notes will continue to account for a material portion of our total receivables and payables in
the near future.
Short-term bank loans were obtained from local banks in China. All short-term bank loans are repayable within one year and are
secured by a portion of our property, plant and equipment and land use rights, or guaranteed by related parties. None of our short-term bank
loans have financial covenants. However, each loan contains a covenant that restricting our use of the funds to either purchases of raw materials
or working capital.
The weighted average annual interest rate of our short-term bank loans was 6.41%, 6.11% and 6.18% as of December 31, 2017, 2016
and 2015, respectively. Interest expense was $0.9, $1.1 million and $1.0 million for the years ended December 31, 2017, 2016 and 2015,
respectively.
Due to the Chinese government’s policy to reduce the country’s steel capacity, Chinese banks further tightened lending to steel
companies. We were also affected by this policy and we had to repay a portion of our short term bank loans in 2017 without being able to roll-
over such loans into new short-term loans. However, we did not experience difficulties in the rollover of the remaining short-term bank loans
that we use to fund our daily operations in 2017. We anticipate rollovers of most current facilities that are set to mature in 2018 and anticipate a
slight reduction in the availability of short-term bank loans but we do not anticipate any difficulties to fund our operations. In the past, our
affiliates, namely Ossen Material Research (formerly Shanghai ZFX), Shanghai Ossen, and Ossen Shanghai, have provided guarantees for
certain of our short-term bank loans for no consideration. There can be no assurance that they will be willing or able to continue to provide
similar guarantees on this basis with respect to future borrowings. We usually maintain lines of credit with several local banks, which will be
utilized to fund our short term operation and fulfill liabilities.
Working Capital
Our working capital was approximately $114.9 million at December 31, 2017, as compared to $101.6 million at December 31, 2016
and $94.7 million at December 31, 2015.
The working capital increase of $13.3 million in 2017 as compared with 2016 was due primarily to the increase of accounts receivable
and advance to suppliers, partially offset by the decrease in note receivable and inventories. The working capital increase of $6.9 million in
2016 as compared with 2015 was due primarily to the repayment of bond and the increase in bank acceptance note, partially offset by the
decrease in accounts receivable and advance to suppliers.
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
In 2016, our cash flow from operations was positive primarily due to the decrease in advance to suppliers and inventories. Despite the
increase in cash from operating activities in 2016, we had a decrease of $0.6 million in cash and cash equivalent primarily due to effect of
exchange rate changes on cash was $8.6 million. In 2017, our cash flow from operations was negative primarily due to the increase in advance
to suppliers and accounts receivable. Despite the decrease in cash from operating activities in 2017, we had an increase of $0.8 million in cash
and cash equivalent primarily due to effect of exchange rate changes on cash was $8.1 million.
56
Years Ended December 31, 2017 and 2016
The following table sets forth a summary of our net cash flow information for the periods indicated:
Net cash provided by operating activities
Net cash used in investing activities
Net cash used in financing activities
Operating Activities
Year Ended December 31,
2017
2016
$
(3,019,725) $ 15,528,845
(37,848)
(17,537)
(4,298,299)
(7,523,571)
Net cash used in operating activities was approximately $3.0 million in 2017, as compared to $15.5 million of net cash provided by
operating activities in 2016. This was the result of a $14.4 million increase in accounts receivable due to slower payment from our customers, a
$24.6 million increase in advance to suppliers due to more prepayments for raw materials, partially offset by a $12.5 million decrease in
inventories due to higher consumption of raw materials at the end of 2017 and a $15.3 million decrease in notes receivable because our
customers used more cash for payment.
Investing Activities
Net cash used in investing activities was $37,848 in 2017, as compared to $17,537of net cash used in investing activities in 2016 as the
result of more spending in maintenance and repair of production lines in 2017.
Financing Activities
Net cash used in financing activities in 2017 was approximately $4.3 million, as compared to approximately $7.5 million of net cash
used in financing activities in 2016. The decrease in cash used in financing activities was the result of a decrease in proceeds from notes
payable, a decrease in proceeds from short-term bank loans, and a decrease in proceeds from long-term bank loans, partially offset by a
decrease in repayments of bond payable, a decrease in repayment of notes payable and a decrease in repayments of short-term bank loans.
57
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, 2017 we guaranteed $5.4 million and $18.8 million short-term debt for Shanghai Pujiang and Ossen Material
Research respectively. We do not have any other off-balance sheet arrangements that have, or are reasonably likely to have, a current or future
effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources that is material to our investors.
5.F. Tabular Disclosure of Contractual Obligations
Our contractual obligations consist of short-term and long-term debt obligations. The following table sets forth a breakdown of our
contractual obligations as of December 31, 2017:
CONTRACTUAL OBLIGATIONS
Total
Payments due by period
Less than
1 year
1-3 years
3-5 years
5 years
More than
Short-term debt obligations (1)
Interest Commitments – Short-term bank loans
Long-term debt obligations (2)
Interest Commitments – Long-term bank loans
Total
24,201,127
547,169
7,652,046
1,020,273
33,420,615
24,201,127
547,169
-
612,164
25,360,460
-
-
7,652,046
408,109
8,060,155
-
-
-
-
-
-
-
-
-
-
(1) Attributable to short-term bank loans and bank acceptance notes.
(2) Attributable to long-term bank loans.
ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
6.A. Directors, Executive Officers and Key Employees
The following table sets forth the name, age, positions and a brief description of the business experience of each of our directors,
executive officers and key employees as of the date hereof.
58
Name
Liang Tang
Wei Hua
Junhong Li
Xiaobing Liu
Yingli Pan
Zhongcai Wu
Position(s)
Chairman of the Board
Chief Executive Officer, Chief Financial
Officer and Director
Director
Director
Director
Director
Age
51
56
52
59
64
69
There are no family relationships among our directors and officers. There are no arrangements or understandings with major
shareholders, customers, suppliers or others, pursuant to which any person referred to above was selected as a director or member of senior
management, except as disclosed in Note 10 in the “accompanying consolidated financial statements”. The address of each of our directors and
executive officers is c/o Ossen Innovation Co., Ltd., 518 Shangcheng Road, Floor 17, Shanghai, 200120, People’s Republic of China.
Executive Officers and Directors
Dr. Liang Tang was appointed as our Chairman following our business combination. Dr. Tang has been the Chairman and President of
Ossen Materials, our subsidiary, since 2008. Dr. Tang has also been President of Shanghai Ossen Investment Holding (Group) Co., Ltd. since
2001. He has more than 20 years of experience in the steel industry. Prior to joining our Company in 2004, from 1994 until 1998, Dr. Tang was
the President of Zhongmin Group of PRC Ministry of Civil Affairs. From 1988 until 1994, Dr. Tang was Head of Enterprise Administrative
Division of the Shanghai Municipal Metallurgical Industry Bureau. Prior to that date, Dr. Tang was the Deputy Director of Enterprise
Management at Baosteel Group Shanghai Ergang Co., Ltd., a competitor of ours. Dr. Tang is involved in many charity affairs and social
organizations including China Committee of Corporate Citizenship and China Chamber of Metallurgy Industry. Dr. Tang has received the title
of Shanghai Leader by the Shanghai Municipal Government, Outstanding Innovation Entrepreneur by the Symposium on Chinese Enterprise
Innovation and the Royal Knight Medal of Spain by the King of Spain. Dr. Tang received a bachelor’s degree from Shanghai University, a
Masters degree in International Finance from Peking University and an MBA from Fordham University. Dr. Tang also received a doctoral
degree in world economics from East China Normal University.
Mr. Wei Hua was appointed as our CEO and a director of ours following our business combination. In January 1, 2017, Mr. Hua was
appointed as our CFO. Mr. Hua has served as Chairman of the Board of Directors of Ossen Jiujiang since 2007. Since 2000, he has been the
Assistant Chief Executive Officer for the Steel Department of Ossen Group. Before joining Ossen Group in 2000, from 1988 until 2000, Mr.
Hua was a vice supervisor of the department of technology and quality supervision at Baosteel Group Shanghai Ergang Co., Ltd. From 1985
until 1988, Mr. Hua worked at Shanghai No. 5 steel factory. He graduated from Shanghai University with a degree in Business Management.
Mr. Junhong Li has been one of our directors since July 2010. Mr. Li has been the Senior Partner and Deputy Chief Accountant at
Continental Certified Public Accountants since 2008. Prior to joining Continental Certified Public Accountants in 2008, from 2007 until 2008,
Mr. Li was the Executive Director and Chief Financial Officer of ZMAY Holdings Limited. From 2004 until 2007, Mr. Li was Chief Financial
Officer of Zhongmin On Line Technology Co. Ltd. Mr. Li has more than 20 years of experience in mergers and acquisitions, reorganizations
and management consulting. Mr. Li received a bachelor’s degree from Central University of Finance and Economics and he is qualified as a
certified public accountant.
59
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 Wuhas been one of our directors since July 2010. Mr. Wu has been Chief Engineer in the Communications Department
of Yunnan Province since 2002. Mr. Wu received a bachelor’s degree in road and bridge engineering from Hunan University.
Each of our directors will serve as a director until our next annual general meeting and until their successors are duly elected and
qualified.
6.B. Compensation
For the year ended December 31, 2017, the aggregate cash compensation that we paid to our executive officers and directors was
approximately $86,300. For the year ended December 31, 2016, the aggregate cash compensation that we paid to our executive officers and
directors was approximately $86,300. There are no service contracts between us and any of our directors, except for those directors who are
also our executive officers. Pursuant to PRC law, 25% of our executive officers’ salaries have been set aside for pension and retirement.
Employment Agreements
We have entered into an employment agreement with Dr. Liang Tang. Dr. Tang is employed as Chairman of the Board of our
Company. The term of his agreement expired on December 31, 2021. We compensate Dr. Tang at an annual rate of approximately $14,000.
We may terminate the employment agreement for cause as specified in the agreement. Dr. Tang may terminate the employment agreement with
thirty days written notice. The employment agreement may be renewed upon the mutual agreement of the parties.
Each executive officer has agreed to hold in confidence any confidential information that he has obtained about the Company.
6.C. Board Practices
Terms of Directors and Officers
Expiration of Term of Directors
Pursuant to our memorandum and articles of association, the business of our company is managed by our board of directors.
Commencing with the first annual meeting of the shareholders, directors are elected for a term of office to expire at the next succeeding annual
meeting of the shareholders after their election. Each director will hold office until the expiration of his or her term of office and until his or her
successor has been elected and qualified, or until his or her earlier death, resignation or removal by the shareholders or a resolution passed by
the majority of the remaining directors.
60
In the interim between annual meetings of shareholders, or special meetings of shareholders called for the election of directors, any
vacancy on the board of directors may be filled by the vote of a majority of the remaining directors then in office, although less than a quorum,
or by the sole remaining director. A director elected to fill a vacancy resulting from death, resignation or removal of a director will serve for the
remainder of the full term of the director whose death, resignation or removal will have caused such vacancy and until his successor will have
been elected and qualified.
Director Remuneration Upon Termination
The directors may receive such remuneration as our board of directors may determine from time to time. The compensation committee
will assist the directors in reviewing and approving the compensation structure for the directors. Currently, our directors are not entitled to
receive any remuneration upon termination of employment.
Audit Committee
Our audit committee consists of Junhong Li, Yingli Pan and Xiaobing Liu, each of whom satisfies the independence requirements of
Rule 10A-3 under the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act, and Rule 5605 of the NASDAQ
rules. The audit committee oversees our accounting and financial reporting processes and audits of the financial statements of our company.
The audit committee is responsible for, among other things:
·
·
·
·
·
·
selecting our independent auditors and pre-approving all audit and non-audit services permitted to be performed by our
independent auditors;
reviewing with our independent auditors any audit problems or difficulties and management’s response;
reviewing and approving all proposed related party transactions, as defined in Item 404 of Regulation S-K;
discussing our annual audited financial statements with management and our independent auditors;
reviewing major issues as to the adequacy of our internal controls and any special audit steps adopted in light of material
control deficiencies; and
meeting separately and periodically with management and our independent auditors.
Compensation Committee
Our compensation committee consists of Xiaobing Liu, Yingli Pan and Junhong Li, each of whom satisfies the independence
requirements of Rule 5605 of the NASDAQ rules. The compensation committee assists the Board in reviewing and approving the
compensation structure, including all forms of compensation relating to our directors and executive officers. Our Chief Executive Officer may
not be present at any committee meeting during which his compensation is deliberated. The compensation committee is responsible for, among
other things:
·
·
reviewing and approving the total compensation package for our senior executives; and
reviewing periodically, and approving, any long-term incentive compensation or equity plans, programs or similar
arrangements, annual bonuses, employee pension and welfare benefit plans.
Corporate Governance and Nominating Committee
Our corporate governance and nominating committee consists of Yingli Pan, Zhongcai Wu and Xiaobing Liu, each of whom satisfies
the independence requirements of Rule 5605 of the NASDAQ rules. The corporate governance and nominating committee assists the board in
selecting individuals qualified to become members of our board and in determining the composition of the board and its committees. The
corporate governance and nominating committee is responsible for, among other things:
61
·
·
·
identifying and recommending to the board qualified candidates to be nominated for the election or re-election to the board of
directors and committees of the board of directors, or for appointment to fill any vacancy;
reviewing annually with the board of directors the current composition of the board of directors with regards to
characteristics such as independence, age, skills, experience and availability of service to us; and
advising the board of directors periodically with regard to significant developments in the law and practice of corporate
governance as well as our compliance with these laws and practices, and making recommendations to the board of directors
on all matters of corporate governance and on any remedial actions to be taken, if needed.
6.D. Employees
See the section entitled “Employees” in Item 4.B above.
6.E. Share Ownership
As of April 17, 2018, 19,791,110 of our ordinary shares were outstanding. Holders of our ordinary shares are entitled to vote together
as a single class on all matters submitted to shareholders for approval. No holder of ordinary shares has different voting rights from any other
holders of ordinary shares. We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.
Approximately 6,389,510 of our ordinary shares represented by American Depositary Receipts are held by an aggregate of 1 record holder in
the United States.
Beneficial ownership is determined in accordance with the rules and regulations of the SEC. The percentages of shares beneficially
owned in the table below are based on 19,791,110 ordinary shares outstanding as of April 17, 2018.
The following table sets forth information with respect to the beneficial ownership of our common shares as of April 17, 2018 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)
Junhong Li
Xiaobing Liu
Yingli Pan
Zhongcai Wu
62
Number of
Shares
Percentage
11,850,000
59.9%
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
17, 2018 and the ordinary shares underlying any options and warrants exercisable by such person within 60 days of the date of this
filing.
(2) The spouse of our chief executive officer, Wei Hua, owns 100% of the shares of Fascinating Acme Development Ltd., which owned
3% of the shares of Ossen Innovation Group prior to the business combination, and owns 3% of our shares since the business
combination. Mr. Hua may be deemed to beneficially own these shares under SEC rules and regulations.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
7.A. Major Shareholders
See Item 6.E., “Share Ownership,” for a description of our major shareholders.
7.B. Related Party Transactions
Transfers of Shares Between Related Parties
Several of our subsidiaries and affiliates which are, or at one time were, controlled by our chairman, transferred shares with other
entities controlled by Dr. Tang. See the discussion under Item 4.C above for a description of these transactions.
Issuance of Shares to Related Parties
The spouse of our chief executive officer, Wei Hua, owns 100% of the shares of Fascinating Acme Development Ltd., which owns 3%
of our outstanding ordinary shares. The spouse of the chief executive officer of Ossen Material Research, which is an affiliated company of
ours that supplies us with raw materials, owns 100% of the shares of Gross Inspiration Development Ltd., which owns 3% of our outstanding
ordinary shares.
Purchases from a Related Party
Historically, we have purchased a significant percentage of our raw materials from an affiliated entity, Ossen Material Research
(formerly Shanghai ZFX), an agent that supplies steel wire rods to prestressed concrete manufacturers in China such as our company. Ossen
Material Research is controlled by our chairman, Dr. Tang. Ossen Material Research is a member of the Ossen Group, whose relationship to us
is described above under the heading “Business – Overview.”
Ossen Material Research procures materials from the limited number of high quality manufacturers and suppliers of our raw materials
in the PRC. However, since the introduction in 2009 of our rare earth coated materials, which undergo a coating process that reduces the loss in
strength and performance that prestressed materials otherwise undergo during our manufacturing processes, we have lowered the standards for
strength and performance requirements for our raw materials. As a result, we have been able to expand our supplier base to include suppliers of
products with lower levels of strength and performance and have not relied on supplies from Ossen Material Research.
63
Guarantees
During the years ended December 31, 2017, 2016 and 2015, Ossen Material Research (formerly Shanghai ZFX), an affiliate of ours,
and Ossen Shanghai, an affiliate of ours, and Shanghai Pujiang, an affiliate of ours, provided guarantees for certain of our short-term and long-
term bank loans. The term of each of the short-term loans is within one year. The term of the long-term loans is within three years. The purpose
of these loans is to fund our working capital needs. Local banks have required guaranties pursuant to their standard regulations. Shanghai
Ossen Investment Co., Ltd. is a member of the Ossen Group, whose relationship to us is described above under the heading “Business –
Overview.”
Ossen Material Research guaranteed loans in the amount of $3.7 million, $1.3 million and $11.9 million in 2017, 2016 and 2015,
respectively. Ossen Shanghai guaranteed loans in the amount of $0 in 2017, $0 in 2016, and $2.5 million in 2015. Shanghai Pujiang guaranteed
loans in the amount of $3.7 million in 2017, $0 in 2016, and $0 in 2015. These guarantees in 2017, 2016 and 2015 were provided for no
consideration. In addition, in 2017, 2016 and 2015, we guaranteed loans in the amount of $5.4 million, $59.8 million and $16.9 million and
notes payable in the amount of $0, $7.2 million and $34.1 million for Shanghai Pujiang, we guaranteed loans in the amount of $18.8 million,
$70.6 million and $32.3 million and notes payable in the amount of $0, $0 and $12.3 million for Ossen Material Research, we guaranteed loans
in the amount of $0, $28.5 million and $7.7 million and notes payable in the amount of $0, $2.2 million and $1.5 million for Ossen Shanghai,
and we guaranteed loans in the amount of $25.4 million, $0, and $0 for Zhejiang Pujiang.
There can be no assurance that Ossen Material Research, Shanghai Pujiang and Ossen Shanghai will be willing or able to continue to
provide similar guarantees on this basis with respect to future borrowings. The loans that have come due have been repaid by us in full.
The terms of the loan guarantees between the guarantor and the bank provide for the following: if the borrower does not repay its loan,
the bank may seek the principal and interest of the loan from the guarantor; the guarantee period is typically one or two years from the date the
guaranteed loan is due, as determined by the lending bank; the bank may change the terms of the loan with the borrower without receiving the
consent of the guarantor; the guarantor indemnifies the bank for actual damage or loss because of any fraudulent misrepresentations made by
the guarantor and if the guarantor causes the contract to become invalid, the guarantor indemnifies the bank for damages and losses.
7.C. Interests of Experts and Counsel
Not applicable.
ITEM 8.
FINANCIAL INFORMATION
Consolidated Statements and Other Financial Information
The financial statements required by this item may be found at the end of this report on 20-F, beginning on page F-1.
Legal Proceedings
We are not currently, and have not recently been, a party to any material legal or administrative proceedings. We are not aware of any
material legal or administrative proceedings threatened against us. From time to time, we are subject to various legal or administrative
proceedings arising in the ordinary course of our business.
64
Dividends
We have never declared or paid any dividend on our ordinary shares and we do not anticipate paying any dividends on our ordinary
shares in the future. We currently intend to retain all future earnings to finance our operations and to expand our business.
No Significant Changes
No significant changes to our financial condition have occurred since the date of the annual financial statements contained herein.
ITEM 9.
THE OFFER AND LISTING
9.A. Offer and Listing Details
Our ADS’s are listed for trading on the NASDAQ Capital Market under the symbol “OSN.” The shares began trading on December
21, 2010 on the NASDAQ Global Market. The listing of our ADS’s was transferred to the NASDAQ Capital Market on July 30, 2013. The
trading price for the ADSs was $2.47 on May 10, 2018.
The table below shows, for the periods indicated the high and low market prices on the NASDAQ for the ADSs and all prices have
been retroactively adjusted to reflect the current ADS-to-ordinary share ratio of one ADS to three ordinary shares, which became effective on
August 22, 2016, for all periods presented.
High
Low
2015
2016
2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2018
First Quarter
$
$
$
$
$
$
$
$
2.40 $
2.94 $
3.42 $
3.00 $
2.82 $
3.30 $
3.12 $
2.36 $
$
2.72 $
2.39
2.28
2.88
1.89
1.89
2.13
2.37
2.27
2.09
1.95
1.99
1.96
2.02
1.51
1.69
$
6.11 $
2.33
65
The table below sets forth the high and low closing market prices for our shares on NASDAQ during the most recent six-month period
(all prices have been retroactively adjusted to reflect the current ADS-to-ordinary share ratio of one ADS to three ordinary shares, which
became effective on August 22, 2016, for all periods presented):
High
Low
$
$
$
$
$
$
1.86 $
2.83 $
2.88 $
6.11 $
3.92 $
3.10 $
1.69
1.85
2.34
2.65
2.48
2.33
2017
2018
October
November
December
January
February
March
9.B. Plan of Distribution
Not Applicable.
9.C. Markets
Our ADS’s are currently traded on the NASDAQ Capital Market.
9.D. Selling Shareholders
Not Applicable.
9.E. Dilution
Not Applicable.
9.F. Expenses of the Issuer
Not Applicable.
66
ITEM 10. ADDITIONAL INFORMATION
10.A. Share Capital
Not Applicable.
10.B. Memorandum and Articles of Association
We are a British Virgin Islands exempted company with limited liability and our affairs are governed by our memorandum and articles
of association and the BVI Business Companies Act, 2004 (as amended from time to time) which is referred to as the BVI Act below. The
following description of certain provisions of our memorandum and articles of association does not propose to be complete and is qualified in
its entirety by our memorandum and articles of association.
Ordinary Shares
Certificates representing our ordinary shares are issued in registered form. Our shareholders who are nonresidents of the British Virgin
Islands may freely hold and vote their shares. We are currently authorized to issue 100,000,000 ordinary shares. We do not have the power to
issue bearer shares.
Charter
Our charter documents consist of our amended and restated memorandum of association and our amended and restated articles of
association, or the memorandum and articles of association. We may amend our memorandum and articles of association generally by a special
resolution of our shareholders.
Corporate Powers
Ultra Glory was incorporated under the BVI Act on January 21, 2010. Pursuant to our memorandum of association, the objects for
which we were established are unrestricted and we have full power and authority to carry out any objects not prohibited by the BVI Act, as the
same may be revised from time to time, or any other law of the British Virgin Islands, except that we have no power to carry on banking or
trust business, business as an insurance or reinsurance company, insurance agent or insurance broker, the business of company management,
the business of providing the registered office or the registered agent for companies incorporated in the British Virgin Islands, or business as a
mutual fund, mutual fund management or mutual fund administrator, unless we obtain certain licenses under the laws of the British Virgin
Islands.
Board Composition
Pursuant to our memorandum and articles of association, the business of our company is managed by our board of directors.
Commencing with the first annual meeting of the shareholders, directors are elected for a term of office to expire at the next succeeding annual
meeting of the shareholders after their election. Each director will hold office until the expiration of his or her term of office and until his or her
successor has been elected and qualified, or until his or her earlier death, resignation or removal by the shareholders or a resolution passed by
the majority of the remaining directors.
In the interim between annual meetings of shareholders, or special meetings of shareholders called for the election of directors, any
vacancy on the board of directors may be filled by the vote of a majority of the remaining directors then in office, although less than a quorum,
or by the sole remaining director. A director elected to fill a vacancy resulting from death, resignation or removal of a director will serve for the
remainder of the full term of the director whose death, resignation or removal will have caused such vacancy and until his successor will have
been elected and qualified.
There is no cumulative voting by shareholders for the election of directors. We do not have any age-based retirement requirement and
we do not require our directors to own any number of shares to qualify as a director.
67
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.
shares.
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
Rights of Shares
We are currently authorized to issue 100,000,000 ordinary shares. The shares are made up of one class and one series, namely
ordinary shares with a par value of $0.01 per share. The ordinary shares have one vote each and have the same rights with regard to dividends
paid by the company and distributions of the surplus assets of the company.
We may purchase, redeem or acquire our shares, provided that we obtain the consent of the member whose shares are being purchased,
redeemed or otherwise acquired.
Issuance of Shares; Variation of Rights of Shares
Our articles of association provide that directors may, without limiting or affecting any right of holders of existing shares, offer, allot,
grant options over or otherwise dispose of our unissued shares to such persons at such times and for such consideration and upon such terms
and conditions as the directors may determine.
Without prejudice to any special rights previously conferred on the holders of any existing shares or class of shares, we may issue
shares, with such preferred, deferred or other special rights or such restrictions, whether in regard to dividend, voting or otherwise, as the
directors from time to time may determine.
If we issue shares of more than one class, we will further amend and restate our Memorandum and Articles of Association to reflect
the rights attached to any class (unless otherwise provided by the terms of issue of the shares of that class) as may be varied with the consent in
writing of the holders of not less than three-fourths of the issued shares of that class and the holders of not less than three-fourths of the issued
shares of any other class of shares which may be affected by such variation. The rights conferred upon the holders of the shares of any class
issued with preferred or other rights will not, unless otherwise expressly provided by the terms of issue of the shares of that class, be deemed to
be varied by the creation or issue of further shares ranking pari passu therewith.
68
Shareholders Meetings
Under our memorandum and articles of association, we are required to hold an annual meeting of shareholders each year at such date
and time determined by our directors. Meetings of shareholders may be called pursuant to board resolution or the written request of
shareholders holding more than 30% of the votes of our outstanding voting shares. Written notice of meetings of shareholders must be given to
each shareholder entitled to vote at a meeting not fewer than 10 days prior to the date of the meeting, with certain limited exceptions. The
written notice will state the place, time and business to be conducted at the meeting. The shareholders listed in our share register on the date
prior to the date the notice is given shall be entitled to vote at the meeting, unless the notice provides a different date for determining the
shareholders who are entitled to vote.
A meeting of shareholders held without proper notice will be valid if shareholders holding 90% majority of the total number of shares
entitled to vote on all matters to be considered at the meeting, or 90% of the votes of each class or series of shares where shareholders are
entitled to vote thereon as a class or series, together with an absolute majority of the remaining votes, have waived notice of the meeting and,
for this purpose, presence of a shareholder at the meeting is deemed to constitute a waiver. The inadvertent failure of the directors to give
notice of a meeting to a shareholder, or the fact that a shareholder has not received notice, will not invalidate a meeting.
Shareholders may vote in person or by proxy. No business may be transacted at any meeting unless a quorum of shareholders is
present. A quorum consists of the presence in person or by proxy of holders entitled to exercise at least 50% of the voting rights of the shares of
each class or series of shares entitled to vote as a class or series thereon and the same proportion of the votes of the remaining shares entitled to
vote thereon.
Changes in the Maximum Number of Shares the Company is Authorized to Issue
Subject to the provisions of the BVI Act, we may, by a resolution of shareholders, amend our memorandum and articles of association
to increase or decrease the number of shares authorized to be issued. Our directors may, by resolution, authorize a distribution by us at a time,
of an amount, and to any shareholders they think fit if they are satisfied, on reasonable grounds, that we will, immediately after the distribution,
satisfy the solvency test as set forth in the BVI Act, which requires that the value of a company’s assets exceeds its liabilities, and the company
is able to pay its debts as they fall due.
Indemnification
Subject to the provisions of the BVI Act, we may indemnify any person who (a) is or was a party or is threatened to be made a party to
any threatened, pending or completed proceedings, whether civil, criminal, administrative or investigative, by reason of the fact that the person
is or was a director of our company; or (b) is or was, at our request, serving as a director of, or in any other capacity is or was acting for,
another company or a partnership, joint venture, trust or other enterprise, against all expenses, including legal fees, and against all judgments,
fines and amounts paid in settlement and reasonably incurred in connection with legal, administrative or investigative proceedings.
Material Differences between U.S. Corporate Law and British Virgin Islands Corporate Law
The BVI Act differs from laws applicable to U.S. corporations and their shareholders. Set forth below is a summary of the material
differences between the provisions of the BVI Act applicable to us and the laws applicable to companies incorporated in the United States and
their shareholders.
Differences in Corporate Law
We were incorporated under, and are governed by, the laws of the British Virgin Islands. The corporate statutes of the State of
Delaware and the British Virgin Islands are similar, and the flexibility available under British Virgin Islands law has enabled us to adopt
memorandum of association and articles of association that will provide shareholders with rights that do not vary in any material respect from
those they would enjoy if we were incorporated under the Delaware General Corporation Law, or Delaware corporate law. Set forth below is a
summary of some of the differences between provisions of the BVI Act applicable to us and the laws applicable to companies incorporated in
Delaware and their shareholders.
69
Director’s Fiduciary Duties
Under Delaware corporate law, a director of a Delaware corporation has a fiduciary duty to the corporation and its stockholders. This
duty has two components: the duty of care and the duty of loyalty. The duty of care requires that a director act in good faith, with the care that
an ordinarily prudent person would exercise under similar circumstances. Under this duty, a director must inform himself of, and disclose to
stockholders, all material information reasonably available regarding a significant transaction. The duty of loyalty requires that a director act in
a manner he reasonably believes to be in the best interests of the corporation. He must not use his corporate position for personal gain or
advantage. This duty prohibits self-dealing by a director and mandates that the best interest of the corporation and its stockholders take
precedence over any interest possessed by a director, officer or controlling stockholder and not shared by the stockholders generally. In general,
actions of a director are presumed to have been made on an informed basis, in good faith and in the honest belief that the action taken was in
the best interests of the corporation. However, this presumption may be rebutted by evidence of a breach of one of the fiduciary duties. Should
such evidence be presented concerning a transaction by a director, a director must prove the procedural fairness of the transaction, and that the
transaction was of fair value to the corporation.
British Virgin Islands law provides that every director of a British Virgin Islands company, in exercising his powers or performing his
duties, shall act honestly and in good faith and in what the director believes to be in the best interests of the company. Additionally, the director
shall exercise the care, diligence, and skill that a reasonable director would exercise in the same circumstances taking into account, but without
limitation, the nature of the company, the nature of the decision, the position of the director and the nature of his responsibilities. In addition,
British Virgin Islands law provides that a director shall exercise his powers as a director for a proper purpose and shall not act, or agree to the
company acting, in a manner that contravenes British Virgin Islands law or the memorandum association or articles of association of the
company.
Amendment of Governing Documents
Under Delaware corporate law, with very limited exceptions, a vote of the stockholders is required to amend the certificate of
incorporation. Under British Virgin Islands law, no article or regulation shall be amended, rescinded or altered, and no new article shall be
made, without the approval of the members pursuant to a special resolution, unless the memorandum of association and articles of association
provide otherwise.
Written Consent of Directors
Under Delaware corporate law, directors may act by written consent only on the basis of a unanimous vote. Under British Virgin
Islands law, directors’ consents need only a majority of directors signing to take effect.
Written Consent of Shareholders
Under Delaware corporate law, unless otherwise provided in the certificate of incorporation, any action to be taken at any annual or
special meeting of stockholders of a corporation, may be taken by written consent of the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to take such action at a meeting. As permitted by British Virgin Islands law, shareholders’
consents need only a majority of shareholders signing to take effect. Our memorandum of association and articles of association provide that,
other than changes to our memorandum of association and articles of association, shareholders may approve corporate matters by way of a
resolution consented to at a meeting of shareholders or in writing by a majority of shareholders entitled to vote thereon. Changes to our
memorandum of association and articles of association require the approval of 66 2/3% of the votes of shareholders.
70
Shareholder Proposals
Under Delaware corporate law, a shareholder has the right to put any proposal before the annual meeting of shareholders, provided it
complies with the notice provisions in the governing documents. A special meeting may be called by the board of directors or any other person
authorized to do so in the governing documents, but shareholders may be precluded from calling special meetings. British Virgin Islands law
and our memorandum of association and articles of association provide that our directors shall call a meeting of the shareholders if requested in
writing to do so by shareholders entitled to exercise at least 30% of the voting rights in respect of the matter for which the meeting is requested.
Sale of Assets
Under Delaware corporate law, a vote of the stockholders is required to approve the sale of assets only when all or substantially all
assets are being sold. In the British Virgin Islands, shareholder approval is required when more than 50% of the company’s total assets by value
are being disposed of or sold.
Dissolution; Winding Up
Under Delaware corporate law, unless the board of directors approves the proposal to dissolve, dissolution must be approved by
shareholders holding 100% of the total voting power of the corporation. Only if the dissolution is initiated by the board of directors may it be
approved by a simple majority of the corporation’s outstanding shares. Delaware corporate law allows a Delaware corporation to include in its
certificate of incorporation a supermajority voting requirement in connection with dissolutions initiated by the board. As permitted by British
Virgin Islands law and our memorandum of association and articles of association, we may be voluntarily liquidated under Part XII of the BVI
Act by resolution of directors and resolution of shareholders if we have no liabilities and we are able to pay our debts as they fall due.
Redemption of Shares
Under Delaware corporate law, any stock may be made subject to redemption by the corporation at its option or at the option of the
holders of such stock provided there remains outstanding shares with full voting power. Such stock may be made redeemable for cash, property
or rights, as specified in the certificate of incorporation or in the resolution of the board of directors providing for the issue of such stock. As
permitted by British Virgin Islands law, and our memorandum of association and articles of association, shares may be repurchased, redeemed
or otherwise acquired by us. Our directors must determine that immediately following the redemption or repurchase we will be able to satisfy
our debts as they fall due and the value of our assets exceeds our liabilities.
Variation of Rights of Shares
Under Delaware corporate law, a corporation may vary the rights of a class of shares with the approval of a majority of the
outstanding shares of such class, unless the certificate of incorporation provides otherwise. As permitted by British Virgin Islands law, and our
memorandum of association and articles of association, if our share capital is divided into more than one class of shares, we may vary the rights
attached to any class only with the consent in writing of holders of not less than three-fourths of the issued shares of that class and holders of
not less than three-fourths of the issued shares of any other class of shares which may be affected by the variation.
Removal of Directors
Under Delaware corporate law, a director of a corporation with a classified board may be removed only for cause with the approval of
a majority of the outstanding shares entitled to vote, unless the certificate provides otherwise. As permitted by British Virgin Islands law and
our memorandum of association and articles of association, directors may be removed by resolution of directors or resolution of shareholders,
with or without cause.
Mergers
Under the BVI Act, two or more companies may merge or consolidate in accordance with the statutory provisions. A merger means
the merging of two or more constituent companies into one of the constituent companies, and a consolidation means the uniting of two or more
constituent companies into a new company. In order to merge or consolidate, the directors of each constituent company must approve a written
plan of merger or consolidation which must be authorized by a resolution of shareholders.
71
Shareholders not otherwise entitled to vote on the merger or consolidation may still acquire the right to vote if the plan of merger or
consolidation contains any provision which, if proposed as an amendment to the memorandum association or articles of association, would
entitle them to vote as a class or series on the proposed amendment. In any event, all shareholders must be given a copy of the plan of merger
or consolidation irrespective of whether they are entitled to vote at the meeting or consent to the written resolution to approve the plan of
merger or consolidation.
Inspection of Books and Records
Under Delaware corporate law, any shareholder of a corporation may for any proper purpose inspect or make copies of the
corporation’s stock ledger, list of shareholders and other books and records. Under the BVI Act, members, upon giving written notice to us, are
entitled to inspect the register of members, the register of directors and minutes of resolutions of members, and to make copies of these
documents and records.
Conflict of Interest
The BVI Act provides that a director shall forthwith, after becoming aware that he is interested in a transaction entered into or to be
entered into by the company, disclose that interest to the board of directors of the company. The failure of a director to disclose that interest
does not affect the validity of a transaction entered into by the director or the company. A transaction entered into by us, in respect of which a
director is interested, is voidable by us unless the director’s interest was disclosed to the board prior to the company’s entry into the transaction
or was not required to be disclosed. A transaction is not voidable if the material facts of the director’s interest are known by the members
entitled to vote or if the transaction is approved or ratified by a resolution of members. As permitted by British Virgin Islands law and our
memorandum of association and articles of association, a director interested in a particular transaction may vote on it, attend meetings at which
it is considered, and sign documents on our behalf which relate to the transaction.
Transactions with Interested Shareholders
Delaware corporate law contains a business combination statute applicable to Delaware public corporations whereby, unless the
corporation has specifically elected not to be governed by such statute by amendment to its certificate of incorporation, it is prohibited from
engaging in certain business combinations with an “interested shareholder” for three years following the date that such person becomes an
interested shareholder. An interested shareholder generally is a person or group who or that owns or owned 15% or more of the target’s
outstanding voting stock within the past three years. This has the effect of limiting the ability of a potential acquirer to make a two-tiered bid
for the target in which all shareholders would not be treated equally. The statute does not apply if, among other things, prior to the date on
which such shareholder becomes an interested shareholder, the board of directors approves either the business combination or the transaction
that resulted in the person becoming an interested shareholder. This encourages any potential acquirer of a Delaware public corporation to
negotiate the terms of any acquisition transaction with the target’s board of directors.
British Virgin Islands law has no comparable provision.
Independent Directors
There are no provisions under Delaware corporate law or under the BVI Act that require a majority of our directors to be independent.
Cumulative Voting
Under Delaware corporate law, cumulative voting for elections of directors is not permitted unless the company’s certificate of
incorporation specifically provides for it. Cumulative voting potentially facilitates the representation of minority shareholders on a board of
directors since it permits the minority shareholder to cast all the votes to which the shareholder is entitled on a single director, which increases
the shareholder’s voting power with respect to electing such director. There are no prohibitions to cumulative voting under the laws of the
British Virgin Islands, but our memorandum of association and articles of association do not provide for cumulative voting.
72
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.
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.
73
British Virgin Islands Taxation
All dividends, interests, rents, royalties, compensations and other amounts paid by us are exempt from all forms of taxation in the
British Virgin Islands and any capital gains realized with respect to any of our shares, debt obligations, or other securities are not subject to any
form of taxation in the British Virgin Islands. No estate, inheritance, succession or gift tax, rate, duty, levy or other charge is payable under
BVI law by persons who are not persons resident in the British Virgin Islands with respect to any of our shares, debt obligation or other
securities. There are currently no withholding taxes or exchange control regulations in the British Virgin Islands applicable to us or our
shareholders. Currently, there is no income tax treaty, convention or reciprocal tax treaty regarding withholdings currently in effect between the
United States and the British Virgin Islands. We will only be liable to pay payroll tax with respect to employees employed and working in the
British Virgin Islands. We do not currently have, and do not intend to have in the near future, any employees in the British Virgin Islands.
People’s Republic of China Taxation
Under the former Income Tax Law for Enterprises with Foreign Investment and Foreign Enterprises, any dividends payable by
foreign-invested enterprises to non-PRC investors were exempt from PRC withholding tax. In addition, any dividends payable, or distributions
made, by us to holders or beneficial owners of our shares would not be subject to any PRC tax, provided that such holders or beneficial owners,
including individuals and enterprises, were not deemed to be PRC residents under the PRC tax law and were not otherwise subject to PRC tax.
On March 16, 2007, the PRC National People’s Congress approved and promulgated a new PRC Enterprise Income Tax Law, which
took effect as of January 1, 2008. Under the new tax law, enterprises established under the laws of non-PRC jurisdictions but whose “de facto
management body” are located in China are considered “resident enterprises” for PRC tax purposes. Under the implementation regulations
issued by the State Council relating to the new tax law, “de facto management body” is defined as the body that has material and overall
management control over the business, personnel, accounts and properties of an enterprise. In April 2009, the PRC State Administration of
Taxation promulgated a circular to clarify the definition of “de facto management body” for enterprises incorporated overseas with controlling
shareholders being PRC enterprises. It remains unclear how the tax authorities will treat an overseas enterprise invested or controlled by
another overseas enterprise and ultimately controlled by PRC individual residents as is in our case. We are currently not treated as a PRC
resident enterprise by the relevant tax authorities. Since substantially all of our management is currently based in China and may remain in
China in the future, we may be treated as a “resident enterprise” for the PRC tax purposes, in which case, we will be subject to PRC income tax
as to our worldwide income at a uniform income tax rate of 25%. In addition, the new tax law provides that dividend income between qualified
“resident enterprises” is exempt from income tax.
Moreover, the new tax law provides that an income tax rate of 10% is normally applicable to dividends payable for earnings derived
since January 1, 2008 to non-PRC investors who are “non-resident enterprises,” to the extent such dividends are derived from sources within
China. We are a British Virgin Islands holding company and substantially all of our income is derived from dividends, if any, we receive from
our operating subsidiaries located in China. Thus, dividends payable to us by our subsidiaries in China may be subject to the 10% withholding
tax if we are considered as a “non-resident enterprise” under the new tax law.
Moreover, non-resident individual investors may be required to pay PRC individual income tax at a rate of 20% on interests or
dividends payable to the investors or any capital gains realized from the transfer of ADSs or ordinary shares if such gains are deemed income
derived from sources within the PRC. Under the Individual Income Tax Law or the IIT Law, non-resident individual refers to an individual
who has no domicile in China and does not stay in the territory of China or who has no domicile in China and has stayed in the territory of
China for less than one year. Pursuant to the IIT Law and its implementation rules, for purposes of the PRC capital gains tax, the taxable
income will be the balance of the total income obtained from the transfer of the ADSs or ordinary shares minus all the costs and expenses that
are permitted under PRC tax laws to be deducted from the income. Therefore, if we are considered as a PRC "resident enterprise" and
dividends we pay with respect to our ADSs or ordinary shares and the gains realized from the transfer of our ADSs or ordinary shares are
considered income derived from sources within the PRC by relevant competent PRC tax authorities, such gains earned by non-resident
individuals may also be subject to PRC withholding tax at a rate of 20%.
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Under the currently available guidance of the new tax law, dividends payable by us to our shareholders should not be deemed to be
derived from sources within China and therefore should not be subject to withholding tax at 10%, or a lower rate if reduced by a tax treaty or
agreement. However, what will constitute income derived from sources within China is currently unclear. In addition, gains on the disposition
of our shares should not be subject to PRC withholding tax. However, these conclusions are not entirely free from doubt. In addition, it is
possible that these rules may change in the future, possibly with retroactive effect.
United States Federal Income Taxation
The following is a discussion of the material U.S. federal income tax considerations that may apply to an investor with respect to the
acquisition, ownership and disposition of our ADSs or ordinary shares. This discussion does not purport to address all of the tax consequences
of owning our ADSs or ordinary shares with respect to all categories of investors that acquire our ADSs or ordinary shares, some of which
(such as financial institutions, regulated investment companies, real estate investment trusts, tax-exempt organizations, insurance companies,
persons holding our ADSs or ordinary shares as part of a hedging, integrated, conversion, straddle or constructive sale transaction, traders in
securities that have elected the mark-to-market method of accounting for their securities, persons liable for alternative minimum tax, persons
who are investors in pass-through entities, grantor trusts, persons who own, directly or indirectly under applicable constructive ownership rules,
10% or more (by voting power) of our ADSs or ordinary shares, persons who received our ADSs or ordinary shares pursuant to the exercise of
an option or otherwise as compensation, certain former citizens and long-term residents of the United States, dealers in securities or currencies
and investors whose functional currency is not the U.S. dollar) may be subject to special rules. This discussion addresses only holders who
purchase our ADSs or ordinary shares and hold such ADSs or ordinary shares as a capital asset (i.e., generally for investment). Moreover, this
discussion is based on the Internal Revenue Code of 1986, as amended (or the Code), existing and proposed Treasury regulations promulgated
under the Code, published rulings, and administrative and judicial interpretations of the Code, all as currently in effect as of the date of hereof,
all of which are subject to change, possibly with retroactive effect. Investors should consult their own tax advisors regarding the tax
consequences arising in their own particular situation under U.S. federal, state, local or foreign law or the United States – PRC income tax
treaty with respect to the acquisition, ownership or disposition of our ADSs or ordinary shares.
For purposes of this discussion, the term “U.S. Holder” means (except as described in the preceding paragraph) a beneficial owner of
our ADSs or ordinary shares that is, for United States federal income tax purposes, (i) an individual U.S. citizen or resident, (ii) a corporation
(or other entity taxable as a corporation) created or organized under the laws of the United States or any political subdivision thereof, or the
District of Columbia, (iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source or (iv) a trust if either
(x) a court within the United States is able to exercise primary jurisdiction over the administration of the trust and one or more U.S. persons
have the authority to control all substantial decisions of the trust or (y) the trust has a valid election in effect under applicable Treasury
Regulations to be treated as a U.S. person. A beneficial owner of our ADSs or ordinary shares (other than a partnership) that is not a U.S.
Holder is referred to below as a “Non-U.S. Holder.”
If a partnership, or an entity treated for U.S. federal income tax purposes as a partnership, such as a limited liability company, holds
our ADSs or ordinary shares, the tax treatment of a partner in such partnership will depend on the status of the partner and upon the activities of
the partnership. A partner in such a partnership holding our ADSs or ordinary shares, you should consult its tax advisor.
United States Federal Income Taxation of U.S. Holders
Distributions
Subject to the discussion of Passive Foreign Investment Companies, or PFICs, below, distributions made by us with respect to our
ADSs or ordinary shares to a U.S. Holder will constitute dividends to the extent of our current or accumulated earnings and profits, as
determined under U.S. federal income tax principles. Distributions in excess of our earnings and profits will be treated first as a nontaxable
return of capital to the extent of the U.S. Holder’s tax basis in our ADSs or ordinary shares, and thereafter as capital gain. Because we are not a
U.S. corporation, U.S. Holders that are corporations will generally not be entitled to claim a dividends-received deduction with respect to any
distributions they receive from us.
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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 20% under current law), provided
that such dividends meet the requirements of "qualified dividend income." For this purpose, qualified dividend income includes dividends paid
by a non-U.S. corporation if certain holding period and other requirements are met, and the stock of the non-U.S. corporation with respect to
which dividends are paid is readily tradable on an established securities market in the U.S. (such as the NASDAQ Capital Market). Dividends
that fail to meet such requirements, and dividends received by corporate U.S. Holders, are taxed at ordinary income rates. No dividend received
by a U.S. Holder will be a qualified dividend (i) if the U.S. Holder held the ordinary share with respect to which the dividend was paid for less
than 61 days during the 121-day period beginning on the date that is 60 days before the ex-dividend date with respect to such dividend,
excluding for this purpose, under the rules of Code Section 246(c), any period during which the U.S. Holder has an option to sell, is under a
contractual obligation to sell, has made and not closed a short sale of, is the grantor of a deep-in-the-money or otherwise nonqualified option to
buy, or has otherwise diminished its risk of loss by holding other positions with respect to, such ordinary share (or substantially identical
securities); or (ii) to the extent that the U.S. Holder is under an obligation (pursuant to a short sale or otherwise) to make related payments with
respect to positions in property substantially similar or related to the ADS or ordinary share with respect to which the dividend is paid. If we
were to be a "passive foreign investment company" (as such term is defined in the Code) for any taxable year, dividends paid on our ADSs or
ordinary shares in such year or in the following taxable year would not be qualified dividends. In addition, a non-corporate U.S. Holder will be
able to take a qualified dividend into account in determining its deductible investment interest (which is generally limited to its net investment
income) only if it elects to do so; in such case the dividend will be taxed at ordinary income rates.
Sale, Exchange or Other Disposition of ADSs or ordinary shares
Subject to the discussion of PFICs below, a U.S. Holder will recognize taxable gain or loss upon a sale, exchange or other taxable
disposition of our ADSs or ordinary shares in an amount equal to the difference between the amount realized by the U.S. Holder from such
disposition and the U.S. Holder’s tax basis in such stock. Such gain or loss will be treated as long-term capital gain or loss if the U.S. Holder’s
holding period is greater than one year at the time of the disposition. Long-term capital gains of non-corporate U.S. Holders may be eligible for
reduced rates of taxation. A U.S. Holder’s ability to deduct capital losses is subject to certain limitations.
Tax Consequences If We Are A Passive Foreign Investment Company
We will be a passive foreign investment company (a “PFIC”) if, after applying certain pass-through rules, either: (i) 75% or more of
our gross income in any taxable year consists of “passive income” (including dividends, interest, gains from the sale or exchange of investment
property and certain rents and royalties); or (ii) at least 50% of our assets in any taxable year (averaged over the year and generally determined
on a quarterly basis) produce or are held for the production of passive income.
We do not believe that we were a PFIC for our 2017 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 2017 taxable year or any prior taxable year. In
addition, there can be no assurance that we will not become a PFIC for the current taxable year ending December 31, 2018 or in future taxable
years.
If we were to be treated as a PFIC for any taxable year during the period in which a U.S. Holder owns our ADSs or ordinary shares
(and regardless of whether we remain a PFIC for subsequent taxable years), each U.S. Holder who is treated as owning our stock for purposes
of the PFIC rules would be liable to pay U.S. federal income tax at the highest applicable income tax rates on ordinary income upon the receipt
of “excess distributions” (i.e., the portion of any distributions received by the U.S. Holder on our ADSs or ordinary shares in a taxable year in
excess of 125 percent of the average annual distributions received by the U.S. Holder in the three preceding taxable years, or, if shorter, the U.S.
Holder’s holding period for the ADSs or ordinary shares) and on any gain from the disposition of our ADSs or ordinary shares, plus interest on
a portion of such amounts, as if such excess distributions or gain had been recognized ratably over the U.S. Holder’s holding period of our
ADSs or ordinary shares.
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The above rules relating to the taxation of excess distributions and dispositions will not apply to a U.S. Holder who has made a timely
“qualified electing fund” (“QEF”) election for all taxable years that the holder has held our ADSs or ordinary shares and if we comply with
certain reporting requirements. Instead, each U.S. Holder who has made a timely QEF election is required for each taxable year that we are a
PFIC to include in income a pro rata share of our ordinary earnings as ordinary income and a pro rata share of our net capital gain as long term
capital gain, regardless of whether we have made any distributions of the earnings or gain. The U.S. Holder’s basis in our ADSs or ordinary
shares will be increased to reflect taxed but undistributed income. Distributions of income that had been previously taxed will result in a
corresponding reduction in the basis of the ADSs or ordinary shares and will not be taxed again once distributed. A U.S. Holder making a QEF
election will generally recognize capital gain or loss on the sale, exchange or other taxable disposition of our ADSs or ordinary shares. If we
determine that we are a PFIC for any taxable year, we may provide each U.S. Holder with all necessary information in order to make the QEF
election described above.
Alternatively, if we were to be treated as a PFIC for any taxable year and provided that our ADSs or ordinary shares are treated as
“marketable stock” (e.g., “regularly traded” on the NASDAQ Capital Market) a U.S. Holder may make a mark-to-market election. Under a
“mark-to-market” election, in any taxable year that we are a PFIC, any excess of the fair market value of the ADSs or ordinary shares at the
close of any taxable year over the U.S. Holder’s adjusted tax basis in the ADSs or ordinary shares is included in the U.S. Holder’s income as
ordinary income. In addition, the excess, if any, of the U.S. Holder’s adjusted tax basis at the close of any taxable year over the fair market
value of the ADSs or ordinary shares is deductible in an amount equal to the lesser of the amount of the excess or the amount of the net mark-
to-market gains that the U.S. Holder included in income in prior years. A U.S. Holder’s tax basis in its ADSs or ordinary shares would be
adjusted to reflect any such income or loss. For any taxable year that we are a PFIC, gain realized on the sale, exchange or other disposition of
our ADSs or ordinary shares would be treated as ordinary income, and any loss realized on the sale, exchange or other disposition of the ADSs
or ordinary shares would be treated as ordinary loss to the extent that such loss does not exceed the net mark-to-market gains previously
included by the U.S. Holder. There can be no assurances that there will be sufficient trading volume with respect to the ADSs or ordinary
shares for the ADSs or ordinary shares to be considered “regularly traded,” or that our ADSs or ordinary shares will continue to trade on the
NASDAQ Capital Market. Accordingly, there are no assurances that our ADSs or ordinary shares will be marketable stock for these purposes.
A U.S. Holder who holds our ADSs or ordinary shares during a period when we are a PFIC will be subject to the foregoing rules for
that taxable year and all subsequent taxable years with respect to that U.S. Holder’s holding of our ADSs or ordinary shares, even if we cease to
be a PFIC, subject to certain exceptions for U.S. Holders who made a timely mark-to-market or QEF election. U.S. Holders are urged to
consult their tax advisors regarding the PFIC rules in the event that we are a PFIC, including as to the advisability and consequences of making
a QEF or mark-to-market election.
U.S. Federal Income Taxation of Non-U.S. Holders
Except as described in “Backup Withholding and Information Reporting” below, non-U.S. Holders will generally not be subject to
U.S. federal income tax or withholding tax on the payment of dividends on, and the proceeds from the disposition of, our ADSs or ordinary
shares unless, in the case of U.S. federal income taxes, the income is effectively connected with the conduct by the Non-U.S. Holder of a trade
or business in the United States (“effectively connected income”) (and, if an income tax treaty applies, the income is attributable to a permanent
establishment maintained by the Non-U.S. Holder in the United States or, in the case of an individual, the income is attributable to a fixed place
of business).
Non-U.S. Holders will generally not be subject to U.S. federal income tax or withholding tax on any gain realized upon the sale,
exchange or other disposition of our ADSs or ordinary shares, unless either:
·
the gain is effectively connected income (or, if a treaty applies, the gain is attributable to a permanent establishment maintained
by the Non-U.S. Holder in the United States or, in the case of an individual, the income is attributable to a fixed place of
business); or
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·
the Non-U.S. Holder is an individual who is present in the United States for 183 days or more during the taxable year of
disposition and certain other conditions are met.
Effectively connected income may be subject to regular U.S. federal income tax in the same manner as discussed in the section above
relating to the taxation of U.S. Holders, unless exempt under an applicable income tax treaty. In addition, effectively connected income of a
corporate Non-U.S. Holder may be subject to an additional branch profits tax at a rate of 30%, or at a lower rate as may be specified by an
applicable income tax treaty.
Non-U.S. Holders may be subject to tax in jurisdictions other than the United States on dividends received from us on our ADSs or
ordinary shares and on any gain realized upon the sale, exchange or other disposition of our ADSs or ordinary shares. Non-U.S. Holders should
consult with their own tax advisors regarding such other jurisdictions.
Backup Withholding and Information Reporting
U.S. Holders (other than certain exempt recipients) may be subject to information reporting requirements with respect to the payment
of dividends on, or proceeds from the disposition of, our ADSs or ordinary shares. In addition, a U.S. Holder may be subject, under certain
circumstances, to backup withholding at a rate of up to 24% with respect to dividends paid on, or proceeds from the disposition of, our ADSs or
ordinary shares unless the U.S. Holder provides proof of an applicable exemption or correct taxpayer identification number and otherwise
complies with applicable requirements of the backup withholding rules. A U.S. Holder of our ADSs or ordinary shares who provides an
incorrect taxpayer identification number may be subject to penalties imposed by the IRS.
Non-U.S. Holders are generally not subject to information reporting or backup withholding with respect to dividends paid on, or
proceeds from the disposition of, our ADSs or ordinary shares, provided that the Non-U.S. Holder provides its taxpayer identification number,
certifies to its foreign status, or establishes another exemption to the information reporting or back-up withholding requirements.
10.F. Dividends and Paying Agents
Not Applicable.
10.G. Statement by Experts
Not Applicable.
10.H. Documents on Display
The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and will file reports,
registration statements and other information with the SEC. The Company’s reports, registration statements and other information can be
inspected on the SEC’s website at www.sec.gov and such information can also be inspected and copies ordered at the public reference facilities
maintained by the SEC at the following location: 100 F Street NE, Washington, D.C. 20549. You may also visit us on the World Wide Web at
http://www.osseninnovation.com. However, information contained on our website does not constitute a part of this annual report.
10.I. Subsidiary Information
Not Applicable.
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ITEM 11. 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, 2017 and 2016, substantially all of our cash included bank deposits in accounts maintained within the PRC where
there is currently no rule or regulation in place for obligatory insurance to cover bank deposits in the event of bank failure. However, we have
not experienced any losses in such accounts and we believe we are not exposed to any significant risks on our cash in bank accounts.
We are exposed to various types of market risks, including changes in foreign exchange rates, commodity prices and inflation in the
normal course of business.
Interest rate risk
We are subject to risks resulting from fluctuations in interest rates on our bank balances. A substantial portion of our cash is held in
China in interest bearing bank deposits and denominated in RMB. To the extent that we may need to raise debt financing in the future, upward
fluctuations in interest rates would increase the cost of new debt. We do not currently use any derivative instruments to manage our interest rate
risk.
Commodity price risk
Certain raw materials used by us are subject to price volatility caused by supply conditions, political and economic variables and other
unpredictable factors. The primary purpose of our commodity price management activities is to manage the volatility associated with purchases
of commodities in the normal course of business. We do not speculate on commodity prices.
Foreign exchange risk
The RMB is not a freely convertible currency. The PRC government may take actions that could cause future exchange rates to vary
significantly from current or historical exchange rates. Fluctuations in exchange rates may adversely affect the value of any dividends we
declare.
Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not
entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may enter into hedging
transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge
our exposure at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our
ability to convert RMB into foreign currencies.
Inflation risk
Inflationary factors such as increases in the cost of our products and overhead costs may adversely affect our operating results. A high
rate of inflation may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative
expenses as a percentage of net revenues if the selling prices of our products do not increase proportionately with these increased costs.
ITEM 12. 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.
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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.
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.
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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.
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, 2017. 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.
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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, 2017 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, 2017 that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
(e)
Remediation Initiatives
In 2017, 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 2016 in order to
strengthen our internal control over financial reporting:
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;
enhanced open and candid communication between all parties involved in operations, governance and financial and
regulatory reporting, and a strong control and governance environment;
created positions and allocate sufficient resources to achieve an effective disclosure controls and procedures; and
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.
82
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 2016, no
amendments to or waivers from the Code were made or given for any of our executive officers.
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, 2016
Year Ended
December 31, 2017
Audit fees*
$
230,000 $
220,000
*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.
83
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. On
April 28, 2016, we announced that our Board of Directors authorized the extension of its repurchase plan of up to 166,667 shares of the
Company's ADSs for an additional twelve months to May 2017. In the fiscal year ended December 31, 2017, 0 shares of our ADS’s have been
purchased under the repurchase program.
84
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.
ITEM 18. FINANCIAL STATEMENTS
PART III
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
8.1
12.1
13.1
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, 2010
(2)
Employment Contract by and between Ossen Innovation Co., Ltd. and Liang Tang, dated January 1, 2014 (4)
Subsidiaries of the Registrant*
CEO and CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
CEO and 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, 2010.
(2) Incorporated by reference to our Shell Company Report on Form 20-F, filed on July 12, 2010.
(3) Incorporated by reference to Post-Effective Amendment No. 1 to our Registration Statement on Form F-6, filed on August 11, 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
OSSEN INNOVATION CO., LTD.
/s/ Wei Hua
Name: Wei Hua
Title: Chief Executive Officer and Chief Financial Officer
Date: May 15, 2018
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, 2017 AND 2016
PAGE
PAGE
PAGE
F-2-F-3
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2017 AND 2016
F-4
F-5
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME FOR
THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE
YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
PAGE
F-6-F-7
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
2017, 2016 AND 2015
PAGE
PAGE
F-8 –F- 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-45 –F- 47
SCHEDULE I — CONDENSED PARENT COMPANY FINANCIAL INFORMATION FOR THE
YEARS ENDED DECEMBER 31, 2017, 2016, AND 2015
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, 2017 and 2016 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, 2017. 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, 2017 and 2016 and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America.
/s/ BDO China Shu Lun Pan Certified Public Accountants LLP
Shanghai, People’s Republic of China
May 15, 2018
F-1
OSSEN INNOVATION CO., LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2017 AND 2016
ASSETS
Current assets
Cash and cash equivalents
Restricted cash
Note receivable-bank acceptance note
Accounts receivable, net of allowance for doubtful accounts of $868,973 and $985,990 at December
31, 2017 and 2016, respectively
Inventories
Advance to suppliers
Other current assets
$
Total current assets
Property, plant and equipment, net
Land use rights, net
Deferred tax assets
TOTAL ASSETS
See accompanying notes to the consolidated financial statements
$
F-2
December 31,
2017
2016
950,225 $
7,192,928
-
217,631
6,703,242
15,280,381
51,699,930
13,479,473
71,280,903
37,390
144,640,849
4,031,534
3,697,012
149,511
152,518,906 $
37,298,465
25,999,182
46,729,285
31,368
132,259,554
4,447,063
3,571,184
165,951
140,443,752
OSSEN INNOVATION CO., LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2017 AND 2016 (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
Total current liabilities
Long-term bank loans
TOTAL LIABILITIES
EQUITY
Shareholders' Equity
Ordinary shares, $0.01 par value: 100,000,000 shares authorized; 20,000,000 shares issued;
19,791,110 shares outstanding as both of December 31, 2017 and 2016
Additional paid-in capital
Statutory reserve
Retained earnings
Treasury stock, at cost: 208,890 shares as both of December 31, 2017 and 2016
Accumulated other comprehensive income/(loss)
TOTAL SHAREHOLDERS’ EQUITY
Non-controlling interest
TOTAL EQUITY
$
December 31,
2017
2016
10,253,742 $
13,947,385
359,927
316,394
450,711
4,236,823
-
351,499
29,916,481
7,652,046
37,568,527
9,586,276
16,916,535
1,504,863
135,903
594,795
1,740,474
3,886
307,499
30,790,231
7,207,727
37,997,958
200,000
33,971,455
6,672,254
59,386,668
(192,153)
2,227,334
102,265,558
12,684,821
114,950,379
200,000
33,971,455
6,123,022
54,590,589
(192,153)
(4,378,873)
90,314,040
12,131,754
102,445,794
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
152,518,906 $
140,443,752
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, 2017, 2016 AND 2015
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
Year Ended December 31,
2017
2016
2015
$
132,375,915
117,721,799
14,654,116
598,832
6,002,121
6,600,953
8,053,163
(1,610,337)
147,108
6,589,934
(691,556)
5,898,378
117,029,154
100,932,528
16,096,626
734,159
6,376,383
7,110,542
8,986,084
(2,827,138)
90,584
6,249,530
(926,048)
5,323,482
$117,908,416
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
553,067
499,509
716,602
5,345,311
4,823,973
5,896,804
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation gain (loss)
TOTAL OTHER COMPREHENSIVE INCOME (LOSS)
COMPREHENSIVE INCOME/(LOSS)
6,606,207
6,606,207
11,951,518
$
(6,975,100)
(6,975,100)
(2,151,127)
$
EARNINGS PER ORDINARY SHARE
Basic and diluted
WEIGHTED AVERAGE ORDINARY SHARES OUTSTANDING
$
0.27
$
0.24
(5,829,470)
(5,829,470)
67,334
0.30
$
$
Basic and diluted
19,791,110
19,804,164
19,862,537
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, 2017, 2016 AND 2015
Total Ossen Innovation Co., Ltd. Shareholders’ Equity
Paid-in Treasury stock Comprehensive Statutory Retained Controlling
Shares Amount Income/(loss) Reserve Earnings
Interest
Total
Accumulated
Other
Non
Balance at January 1, 2015
Net income
Transfer to statutory reserve
Common shares repurchase
Foreign currency translation adjustment
Balance at December 31, 2015
Net income
Transfer to statutory reserve
Common shares repurchase
Foreign currency translation adjustment
Balance at December 31, 2016
Net income
Transfer to statutory reserve
Foreign currency translation adjustment
Balance at December 31, 2017
Ordinary Shares Additional
$0.01 Par Value
-
-
-
-
Shares Amount Capital
20,000,000 200,000 33,971,455 (98,041)
-
-
-
-
-
-
-
- (73,169)
-
-
-
(96,608)
-
-
(58,735)
-
20,000,000 200,000 33,971,455 (171,210) (155,343)
-
-
(36,810)
-
20,000,000 $200,000 $33,971,455 (208,890) $(192,153) $
-
-
-
20,000,000 $200,000 $33,971,455 (208,890) $(192,153) $
-
-
-
-
- (37,680)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
716,602
-
-
- 609,621
- 5,896,804
(609,621)
8,425,697 5,021,752 44,971,082 10,915,643 103,409,021
6,613,406
-
(58,735)
(5,829,470)
(5,829,470)
2,596,227 5,631,373 50,258,265 11,632,245 104,134,222
-
5,323,482
- 491,649
-
-
-
(36,810)
-
(6,975,100)
(6,975,100)
(4,378,873) $6,123,022 $54,590,589 $12,131,754 $102,445,794
5,898,378
-
6,606,207
6,606,207
2,227,334 $6,672,254 $59,386,668 $12,684,821 $114,950,379
- 4,823,973
(491,649)
-
-
- 5,345,311
(549,232)
-
-
- 549,232
-
499,509
553,067
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, 2017, 2016 AND 2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization
Changes in operating assets and liabilities:
(Increase) Decrease In:
Accounts receivable
Inventories
Advance to suppliers
Other current assets
Deferred tax assets
Notes receivable - 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/ (used in) operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of plant and equipment
Net cash used in investing activities
2017
Year Ended December 31,
2016
2015
$
5,898,378 $
5,323,482 $
6,613,406
796,566
883,755
1,416,060
(14,401,465)
12,519,709
(24,551,618)
(6,023)
16,440
15,280,381
(1,144,936)
180,490
(144,084)
2,496,349
(3,912)
44,000
(3,019,725)
5,949,508
1,277,040
9,000,804
745,284
(27,562)
(7,270,152)
(394,537)
(173,243)
180,545
70,804
(61,883)
25,000
15,528,845
10,516,441
(7,138,320)
597,301
220,047
(188,769)
1,914,927
(1,317,676)
(278,858)
(138,209)
46,712
(3,700)
182,499
12,441,861
(37,848)
(37,848)
(17,537)
(17,537)
(29,687)
(29,687)
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, 2017, 2016 AND 2015 (Continued)
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease/ (increase) in restricted cash
Proceeds from short-term bank loans
Repayments of short-term bank loans
Proceeds from long-term bank loans
Proceeds from notes payable-bank acceptance notes
Repayment of notes payable-bank acceptance notes
Repurchase of common share
Repayments of bond payable
Net cash used in financing activities
Year Ended December 31,
2017
2016
2015
(489,686)
13,497,882
(17,380,550)
0
14,662,757
(14,588,702)
-
-
(4,298,299)
2,077,201
20,422,885
(20,068,975)
7,530,007
17,846,117
(20,029,819)
(36,810)
(15,273,177)
(7,532,571)
8,792,289
18,462,625
(18,462,625)
-
36,202,800
(49,367,454)
(58,735)
-
(4,431,100)
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
$
(7,355,872)
8,088,466
217,631
950,225 $
7,978,737
(8,573,383)
812,277
217,631 $
7,981,074
(7,853,389)
684,592
812,277
SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid during the periods:
Income taxes paid
Interest paid
Non-cash transactions:
Appropriation to statutory reserve
$
$
$
840,670
1,397,635
$
$
740,873
2,311,039
$
$
1,301,687
3,353,344
549,232 $
491,649 $
609,621
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, 2017, 2016 AND 2015
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, 2017, 2016 AND 2015
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.
On July 19, 2017, we entered into a Share Exchange Agreement with the shareholders of America-Asia Diabetes Research Foundation, a
California corporation that owns 90.27% of the equity interests of San MediTech (Huzhou) Co. Ltd., a China-based medical device company
engaged in the research, development and marketing of glucose control products. Pursuant to the Share Exchange Agreement, we agreed to
acquire all of the issued and outstanding equity interests of America-Asia Diabetes Research Foundation in exchange for 81,243,000 of our
ordinary shares. Upon completion of the Acquisition, we would indirectly own 90.27% of San MediTech. In connection with the Acquisition,
we agreed to sell our existing pre-stressed steel manufacturing business, including all existing liabilities, immediately following the completion
of the Acquisition. An entity affiliated with Dr. Liang Tang, our Chairman, agreed to acquire all of the equity of our wholly-owned subsidiary,
which indirectly owns all of our existing operating subsidiaries, in exchange for the forfeiture and cancellation of all 11,850,000 ordinary
shares currently held by Dr. Tang (the “Sale Transaction”). On May 4, 2018, the shareholders of America-Asia Diabetes Research Foundation
breached the Share Exchange Agreement and as a result, the Share Exchange Agreement and the Sale Transaction have been terminated.
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.
F-9
OSSEN INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
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.
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, 2017, 2016 AND 2015
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, 2017, 2016 AND 2015
NOTE 1 – ORGANIZATION AND PRINCIPAL ACTIVITIES (CONTINUED)
At December 31, 2017, 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
Ossen Group (Asia) Co., Ltd. ("Ossen Asia")
BVI
February 7, 2002
Topchina Development Group Ltd.
("Topchina")
BVI
November 3, 2004
USD
USD
USD
-
-
-
Ossen Innovation Materials Co., Ltd.
("Ossen Meterials")
The PRC
October 27, 2004
RMB
75,000,000
100% Investments holdings
100% Investments holdings
100% Investments holdings
Design, engineering,
manufacture and sale of
customized prestressed
steel materials
81%
Ossen (Jiujiang) New Materials Co., Ltd.
(Formerly Ossen (Jiujiang) Steel Wire &
Cable Co., Ltd.) ("Ossen Jiujiang")
The PRC
April 13, 2005
RMB
183,271,074
96.11%
Design, engineering,
manufacture and sale of
customized prestressed
steel materials
F-12
OSSEN INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
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, 2017, 2016 AND 2015
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
2017
2016
2015
6.5342
6.7518
6.9370
6.6401
6.4917
6.2288
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.
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, 2017, 2016 and 2015.
F-14
OSSEN INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
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 $4,269,512, $3,869,277 and $3,404,333 for the years
ended December 31, 2017, 2016 and 2015, 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 $173,637, $160,656 and $148,232 were charged to operations for the years ended December 31, 2017, 2016
and 2015, 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, 2017, 2016 AND 2015
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, 2017, the
Company did not have a liability for unrecognized tax benefits. It is unlikely that the amount of liability for unrecognized tax benefits will
significantly change over the next 12 months. It is the Company’s policy to include penalties and interest expense related to income taxes as a
component of other expense and interest expense, respectively, as necessary. The Company’s historical tax years will always remain open for
examination by the local authorities.
The Company has not provided for income taxes on accumulated earnings amounting $59,386,668 that are subject to the PRC dividend
withholding tax as of December 31, 2017, 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, $549,232, $491,649 and $609,621 have been appropriated to the accumulated statutory reserves by the Company’s PRC
subsidiaries for the years ended December 31, 2017, 2016 and 2015 respectively.
F-16
OSSEN INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Comprehensive Income (loss)
Comprehensive income (loss) 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 (loss) 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, 2017, 2016 AND 2015
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.
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, 2017, 2016 AND 2015
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 $868,973 and $985,990 at December 31, 2017 and 2016, 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, 2017 and 2016, the Company has $127,766 and $120,347 reserve for inventories,
respectively.
Advance to Suppliers
Advance to Suppliers represents interest-free cash paid in advance to suppliers for purchases of raw materials. The balance of advance to
suppliers was $71,280,903 and $46,729,285 at December 31, 2017 and 2016, respectively. Among the balance of $71,280,903, the aging of
$26,821,447 was within 60 days, $31,441,204 was between 60-180 days and $13,018,252 was over 180 days. No allowance was provided for
the prepayments balance at December 31, 2017.
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 $316,394 and $135,903 at December 31, 2017 and 2016, respectively.
F-19
OSSEN INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
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, 2017, 2016 and 2015.
F-20
OSSEN INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
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, 2017, 2016 AND 2015
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Related Party
In general, related parties exist when there is a relationship that offers the potential for transactions at less than arm’s-length, favorable
treatment, or the 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.
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.
F-22
OSSEN INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recently Issued Accounting Pronouncements
In July 2017, the FASB issued ASU No. 2017-11, “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480);
Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement
of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily
Redeemable Non-controlling Interests with a Scope Exception” (“ASU 2017-11”), which addresses the complexity of accounting for certain
financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features)
that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and
complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair
value measurement of the entire instrument or conversion option. The amendments in Part I of this ASU are effective for public business
entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating
the impact of the adoption of ASU 2017-11 on its consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting”
(“ASU 2017-09”), which provides guidance on determining which changes to the terms and conditions of share-based payment awards require
an entity to apply modification accounting under Topic 718. The amendments in this ASU are effective for all entities for annual periods, and
interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim
period, for (1) public business entities for reporting periods for which financial statements have not yet been issued and (2) all other entities for
reporting periods for which financial statements have not yet been made available for issuance. The amendments in this ASU should be
applied prospectively to an award modified on or after the adoption date. We do not expect the adoption of ASU 2017-09 to have a material
impact on our consolidated financial statements.
In February 2017, the FASB issued ASU No. 2017-05, “Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets
(Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets” (“ASU
2017-05”), which clarifies the scope of the nonfinancial asset guidance in Subtopic 610-20. This ASU also clarifies that the derecognition of all
businesses and nonprofit activities (except those related to conveyances of oil and gas mineral rights or contracts with customers) should be
accounted for in accordance with the derecognition and deconsolidation guidance in Subtopic 810-10. The amendments in this ASU also
provide guidance on the accounting for what often are referred to as partial sales of nonfinancial assets within the scope of Subtopic 610-20 and
contributions of nonfinancial assets to a joint venture or other non-controlled investee. The amendments in this ASU are effective for annual
reporting reports beginning after December 15, 2017, including interim reporting periods within that reporting period. Public entities may apply
the guidance earlier but only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that
reporting period. We do not expect the adoption of ASU 2017-05 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, 2017, 2016 AND 2015
Recently Issued Accounting Pronouncements (continued)
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment” (“ASU 2017-04”), which removes Step 2 from the goodwill impairment test. An entity will apply a one-step quantitative test and
record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount
of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment.
Public business entity that is a U.S. Securities and Exchange Commission filer should adopt the amendments in this ASU for its annual or any
interim goodwill impairment test in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill
impairment tests performed on testing dates after January 1, 2017. We are currently evaluating the impact of the adoption of ASU 2017-04 on
our consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”), which
requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally
described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash
equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts
shown on the statement of cash flows. The amendments in this ASU do not provide a definition of restricted cash or restricted cash equivalents.
The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods
within those fiscal years. Early adoption is permitted, including adoption in an interim period. We do not expect the adoption of ASU 2016-18
to have a material impact on our consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash
Payments” (“ASU 2016-15”), which addresses the following eight specific cash flow issues: debt prepayment or debt extinguishment costs;
settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective
interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance
claims; proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies; distributions
received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application
of the predominance principle. The amendments in this ASU are effective for public business entities for fiscal years beginning after December
15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We do not expect
the adoption of ASU 2016-15 to have a material impact on our consolidated financial statements.
F-24
OSSEN INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
Recently Issued Accounting Pronouncements (continued)
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments” (“ASU 2016-13”). Financial Instruments—Credit Losses (Topic 326) amends guideline on reporting credit losses for
assets held at amortized cost basis and available-for-sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates the
probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses.
The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net
amount expected to be collected. For available-for-sale debt securities, credit losses should be measured in a manner similar to current GAAP,
however Topic 326 will require that credit losses be presented as an allowance rather than as a write-down. ASU 2016-13 affects entities
holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans,
debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial
assets not excluded from the scope that have the contractual right to receive cash. The amendments in this ASU will be effective for fiscal years
beginning after December 15, 2019, including interim periods within those fiscal years. We are currently evaluating the impact of the adoption
of ASU 2016-13 on our consolidated financial statements.
In April 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09,
“Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”), which
simplifies several aspects of the accounting for employee share-based payment transactions. The areas for simplification in ASU 2016-09
include the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.
The amendments in this ASU will be effective for annual periods beginning after December 15, 2016 and interim periods within those annual
periods. Early adoption is permitted. The adoption of the ASU 2016-09 did not have a material impact on the Company’s consolidated
financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The amendments in this update create Topic
842, Leases, and supersede the leases requirements in Topic 840, Leases. Topic 842 specifies the accounting for leases. The objective of Topic
842 is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the
amount, timing, and uncertainty of cash flows arising from a lease. The main difference between Topic 842 and Topic 840 is the recognition of
lease assets and lease liabilities for those leases classified as operating leases under Topic 840. Topic 842 retains a distinction between finance
leases and operating leases. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to
the classification criteria for distinguishing between capital leases and operating leases in the previous leases guidance. The result of retaining a
distinction between finance leases and operating leases is that under the lessee accounting model in Topic 842, the effect of leases in the
statement of comprehensive income and the statement of cash flows is largely unchanged from previous GAAP. The amendments in ASU
2016-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public business
entities. Early application of the amendments in ASU 2016-02 is permitted. We are currently evaluating the impact of the adoption of ASU
2016-02 on our consolidated financial statements.
F-25
OSSEN INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
Recently Issued Accounting Pronouncements (continued)
In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of
Financial Assets and Financial Liabilities” (“ASU 2016-01”). The amendments in this update require all equity investments to be measured at
fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or
those that result in consolidation of the investee). The amendments in this update also require an entity to present separately in other
comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit
risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In
addition, the amendments in this update eliminate the requirement for to disclose the method(s) and significant assumptions used to estimate
the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public entities. For
public business entities, the amendments in ASU 2016-01 are effective for fiscal years beginning after December 15, 2017, including interim
periods within those fiscal years. Except for the early application guidance discussed in ASU 2016-01, early adoption of the amendments in
this update is not permitted. We do not expect the adoption of ASU 2016-01 to have a material impact on our consolidated financial statements.
In August 2014, the FASB issued an accounting standards update which requires management to assess whether there are conditions or events,
considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the
financial statements are issued. If substantial doubt exists, additional disclosures are required. This update was effective for the Company’s
annual period ended January 28, 2017. The adoption of the new standard did not have a material impact on the Company’s consolidated
financial position, results of operations, cash flows or disclosures.
In May 2014 the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which ASU No. 2014-09 supersedes
the revenue recognition requirements in Revenue Recognition (Topic 605) and requires entities to recognize revenue when it transfers promised
goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those
goods or services. The FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, in
August 2015. The amendments in ASU No. 2015-14 defer the effective date of ASU No. 2014-09. Public business entities, certain not-for-
profit entities and certain employee benefit plans should apply the guidance in ASU No. 2014-09 to annual reporting periods beginning after
December 15, 2017, including interim reporting periods within that reporting period. Earlier adoption is permitted only as of annual reporting
periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Further to ASU No. 2014-09 and
ASU No. 2015-14, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent
Considerations (Reporting Revenue Gross versus Net), in March 2016, ASU No. 2016-10, Revenue from Contracts with Customers (Topic
606): Identifying Performance Obligations and Licensing in April 2016, ASU No. 2016-12, Revenue from Contracts with Customers (Topic
606): Narrow-Scope Improvements and Practical Expedients, and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606,
Revenue from Contracts with Customers, respectively. The amendments in ASU No. 2016-08 clarify the implementation guidance on principal
versus agent considerations, including indicators to assist an entity in determining whether it controls a specified good or service before it is
transferred to the customers.
F-26
OSSEN INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
Recently Issued Accounting Pronouncements (continued)
ASU No. 2016-10 clarifies guideline related to identifying performance obligations and licensing implementation guidance contained in the
new revenue recognition standard. The updates in ASU No. 2016-10 include targeted improvements based on input the FASB received from
the Transition Resource Group for Revenue Recognition and other stakeholders. It seeks to proactively address areas in which diversity in
practice potentially could arise, as well as to reduce the cost and complexity of applying certain aspects of the guidance both at implementation
and on an ongoing basis. ASU No. 2016-12 addresses narrow-scope improvements to the guidance on collectability, non-cash consideration
and completed contracts at transition. Additionally, the amendments in this ASU provide a practical expedient for contract modifications at
transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers. The
amendments in ASU No. 2016-20 represent changes to make minor corrections or minor improvements to the ASC that are not expected to
have a significant effect on current accounting practice or create a significant administrative cost to most entities. The effective date and
transition requirements for ASU No. 2016-08, ASU No. 2016-10, ASU No. 2016-12 and ASU No. 2016-20 are the same as ASU No. 2014-09.
We will adopt ASU No. 2014-09, ASU No. 2016-08, ASU No. 2016-10, ASU No. 2016-12 and ASU No. 2016-20 at January 1, 2018. We are
currently in the process of assessing the potential effects of these ASUs on our consolidated financial statements, business processes, systems
and controls. While the assessment process is ongoing, we anticipate adopting ASC Topic 606, Revenue from Contracts with Customers, using
the modified retrospective transition approach. Our product revenues are recognized at a point in time (either upon delivery to the customer or
accepted by the customers), which is when we control transfers to the customer. The Company has also determined that it will make accounting
policy elections to 1) treat shipping and handling activities that occur after the customer obtains control of the goods as fulfillment costs and 2)
exclude sales (and similar) taxes from the measurement of the transaction price. The Company does not expect the adoption of the new
standard will have a material impact on the Company’s consolidated financial position, results of operations, cash flows or disclosures.
F-27
OSSEN INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
NOTE 3 – CONCENTRATION
Concentration of major customers and suppliers:
2017
Year ended December 31,
2016
2015
$
40,312,341
30%
$
51,033,356
44%
$
26,720,983
23%
-
-
11,802,981
13,822,962
10%
-
-
-
-
-
11,962,597
-
14,511,302
68,646,605
11%
51%
-
74,798,934
$
10%
-
10%
-
-
64%
$
19,159,563
16%
-
-
14,280,544
12%
17,831,266
15%
-
77,992,356
-
66%
2017
Year ended December 31,
2016
2015
$
-
-
$
-
-
$
22,137,683
21%
82,189,241
76%
61,496,533
-
-
-
61%
-
36,094,431
35%
11,729,136
11%
24,907,251
107,096,492
23%
99%
31,553,260
93,049,793
$
31%
92%
30,382,342
100,343,592
29%
96%
$
Accounts receivable related to the Company’s major customers comprised 37% and 60% of all accounts receivable as of December 31, 2017
and 2016, respectively.
Accounts payable related to the Company’s major suppliers comprised 4% and 34% of all accounts payable as of December 31, 2017 and 2016,
respectively.
F-28
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)
Total Revenues
$
Major suppliers
with purchases of
more than 10% of
the Company’s
purchases
Company X (3rd
Party)
Company Y (3rd
Party)
Company U (3rd
Party)
Company V (3rd
Party)
Total Purchase
$
OSSEN INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
NOTE 4 – ACCOUNTS RECEIVABLE
Accounts receivable is net of allowance for doubtful accounts.
Accounts receivable
Less: allowance for doubtful accounts
Accounts receivable, net
Changes in the allowance for doubtful accounts are as follows:
Beginning balance
Provision/(Reverse) for doubtful accounts
Ending balance
NOTE 5 – INVENTORIES
Raw materials
Work-in-progress
Finished goods
Less: reserve for inventories.
Inventories, net
F-29
December 31,
2017
2016
$
$
52,568,903 $
(868,973)
51,699,930 $
38,284,455
(985,990)
37,298,465
December 31,
2017
2016
985,990 $
(117,017)
868,973 $
738,101
247,889
985,990
December 31,
2017
2016
12,354,591 $
229,327
1,023,321
(127,766)
13,479,473 $
24,777,049
241,135
1,101,345
(120,347)
25,999,182
$
$
$
$
OSSEN INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
NOTE 6 – NOTES RECEIVABLE
Bank acceptance notes:
Due April 28, 2017, subsequently settled on due date
Due March 30, 2017, subsequently settled on due date
Due March 13, 2017, subsequently settled on due date
Due February 18, 2017, subsequently settled on due date
Due January 21, 2017, subsequently settled on due date
Total
December 31,
2017
2016
$
$
- $
-
-
-
-
- $
7,207,727
2,883,091
1,441,545
1,441,545
2,306,473
15,280,381
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:
Other receivables
December 31,
2017
2016
$
$
37,390 $
37,390 $
31,368
31,368
F-30
OSSEN INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
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
Property, plant and equipment, net
December 31,
2017
4,090,603
14,743,997
340,271
126,298
19,301,169
(2,781,302)
(12,080,380)
(298,219)
(109,734)
(15,269,635)
4,031,534
2016
$ 3,853,080
13,881,331
291,682
117,507
18,143,600
(2,396,424)
(10,923,184)
(278,494)
(98,435)
(13,696,537)
$ 4,447,063
$
$
Unrealized foreign exchange translation gain/(loss) for the year ended December 31, 2017, 2016 and 2015 was $251,912, ($323,040) and
($329,926), respectively, which has been included in other comprehensive income/(loss). Depreciation expense for the years ended December
31, 2017, 2016 and 2015 was $705,289, $793,844 and $1,317,119, respectively.
As of December 31, 2017 and 2016,
1) A net book value of $340,140 and nil, respectively, were used as collateral for the Company’s short-term bank loans.
2) A net book value of nil and $826,419, respectively, were used as collateral for the Company’s long-term bank loans.
3) A net book value of nil and $3,620,644, respectively, of property were used as collateral for the short-term bank loan borrowed by a
related party.
F-31
OSSEN INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
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,
2017
2016
$
$
4,715,951 $
(1,018,939)
3,697,012 $
4,442,117
(870,933)
3,571,184
Unrealized foreign exchange translation gain/(loss) for the year ended December 31, 2017, 2016 and 2015 was $217,105, ($247,088) and
($221,323), respectively, which has been included in other comprehensive income/(loss). Amortization expense for the years ended December
31, 2017, 2016 and 2015 was $91,277, $89,911 and $98,941, respectively. As of December 31, 2017 and 2016,
1) A net book value of $2,357,834 and $2,276,443, respectively, were used as collateral for the Company’s long-term bank loans.
2) A net book value of nil and $1,294,740, 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:
2018
2019
2020
2021
2022
Thereafter
Total
F-32
$
$
94,319
94,319
94,319
94,319
94,319
3,225,417
3,697,012
OSSEN INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
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”)
(b) Summary of Balances with Related Party:
Due to related party:
Ossen Material Research
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
December 31,
2017
2016
$
$
- $
- $
3,886
3,886
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,
2017
2016
$
$
351,499 $
351,499 $
307,499
307,499
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-33
OSSEN INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
NOTE 10 – RELATED PARTY TRANSACTIONS (CONTINUED)
(c) Summary of Related Party Transactions:
2017
December 31,
2016
2015
Ossen Material Research provided guarantee for the bank loans
borrowed by the Company
$
- $
- $
5,186,623
Ossen Material Research provided guarantee together with
Ossen Shanghai and Dr. Tang for the short-term bank loans
borrowed by the Company
$
- $
- $
2,515,520
Ossen Material Research provided guarantee together with Dr.
Tang for the short-term bank loans borrowed by the Company
$
- $
1,297,391 $
4,159,157
Ossen Material
Research
Ossen Material Research provided guarantee together with
Shanghai Pujiang and Dr. Tang for the short-term bank loans
borrowed by the Company
Ossen Material Research provided guarantee together with Dr.
Tang for the notes payable issued by the Company
3,749,502
4,897,310
-
-
-
-
The Company provided guarantee for the short-term bank loans
borrowed by Ossen Material Research
$
18,824,034 $
70,635,721 $
32,348,999
The Company provided guarantee for the notes payable issued
by Ossen Material Research
$
- $
- $
12,323,428
F-34
OSSEN INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
NOTE 10 – RELATED PARTY TRANSACTIONS (CONTINUED)
(c) Summary of Related Party Transactions:
Ossen Shanghai provided guarantee together with Ossen
Material Research and Dr. Tang for the short-term bank loans
borrowed by the Company
$
- $
- $
2,515,520
Ossen Shanghai
The Company provided guarantee for the short-term bank loans
borrowed by Ossen Shanghai
$
- $
28,542,598 $
7,702,143
The Company provided guarantee for the notes payable issued
by Ossen Shanghai
$
- $
2,162,318 $
1,540,429
Shanghai Pujiang provided guarantee together with Ossen
Material Research and Dr. Tang for the short-term bank loans
borrowed by the Company
3,749,502
-
-
Shanghai Pujiang
The Company provided guarantee for the short-term bank loans
borrowed by Shanghai Pujiang
$
5,356,432 $
59,824,131 $
16,944,714
The Company provided guarantee for the notes payable issued
by Shanghai Pujiang
$
- $
7,207,727 $
34,081,982
Zhejiang Pujiang
The Company provided guarantee for the notes payable issued
by Zhejiang Pujiang
$
25,426,525 $
- $
-
F-35
OSSEN INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
(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, Zhejiang Pujiang and Ossen Material Research because the Company guarantees $5,356,432 of
the outstanding short term debt of Shanghai Pujiang, $25,426,525 of notes payable of Zhejiang Pujiang and $18,824,034 of the outstanding
short term debt of Ossen Material Research. Next, the Company evaluated if Shanghai Pujiang, Zhejiang Pujiang or Ossen Material Research
are variable interest entities. Using both qualitative and quantitative analysis, the Company does not have the power to direct Shanghai Pujiang,
Zhejiang Pujiang and Ossen Material Research’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, Zhejiang Pujiang and Ossen Material Research. As a result, the Company determined Shanghai Pujiang, Zhejiang Pujiang and Ossen
Material Research 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, Zhejiang Pujiang and Ossen Material Research because Dr. Tang is most closely associated
with the Shanghai Pujiang, Zhejiang Pujiang and Ossen Material Research. Dr. Tang had the power to direct the activities of Shanghai Pujiang,
Zhejiang Pujiang and Ossen Material Research that most significantly impact its economic performance and has the obligation to absorb losses
of Shanghai Pujiang, Zhejiang Pujiang and Ossen Material Research 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,
2017
2016
$
$
2,845,393 $
33,977
1,283,660
15,747
58,046
4,236,823 $
488,712
32,014
1,181,143
-
38,605
1,740,474
F-36
OSSEN INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
NOTE 12 – NOTES PAYABLE
Bank acceptance notes:
Due December 19, 2018
Due October 13, 2018
Due August 22, 2018, guaranteed by Ossen Material Research and, Dr. Tang
Due August 22, 2018, guaranteed by Ossen Material Research and, Dr. Tang
Due August 14, 2018
Due June 27, 2018
Due December 27, 2017, subsequently repaid on due date
Due August 21,2017, subsequently repaid on due date
Due June 22, 2017, subsequently repaid on due date
Due June 22, 2017, subsequently repaid on due date
Due April 19, 2017, subsequently repaid on due date
Due March 11,2017, subsequently repaid on due date
Due January 25, 2017, subsequently repaid on due date
Due January 25, 2017, subsequently repaid on due date
Due January 25, 2017, subsequently repaid on due date
Due January 25, 2017, subsequently repaid on due date
Total
December 31,
2017
2016
$
1,530,409 $
1,530,409
2,448,655
2,448,655
765,205
1,530,409
-
-
-
-
-
-
-
-
-
$
10,253,742
$
-
-
-
-
-
-
720,773
1,441,545
720,773
648,695
720,773
720,773
1,441,545
1,441,545
1,441,545
288,309
9,586,276
The interest-free notes payable, ranging from six months to one year from the date of issuance, are secured by $7,192,928 and $6,703,242
restricted cash, as of December 31, 2017 and 2016, respectively.
All the notes payable are subject to bank charges of 0.05% of the principal amount as commission, included in the financial expenses in the
statement of operations, on each loan transaction,
F-37
OSSEN INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
NOTE 13 – SHORT TERM BANK LOANS
Short-term loans are summarized as follows:
Bank Name
Interest Rate
per Annum
December 31,
2017
2016
Due on December 26, 2018, guaranteed by
Dr. Tang and Ma An Shan Pubang
Financing guarantee co., Ltd, a 3rd party,
Due on December 7, 2018, guaranteed by
Dr. Tang,
Due on December 6, 2018, guaranteed by
Postal Savings Bank of China Ma An Shan
Branch
China Construction Bank (“CCB”) Jiu
Jiang Branch
6.09% $
1,224,327 $
5.4375%
2,448,655
Dr. Tang,
CCB Jiu Jiang Branch
5.4375%
765,205
Due on December 5, 2018, guaranteed by
Ossen Material Research, Shanghai
Pujiang, Dr. Tang and Shanghai
Zhaoyang metal material co., Ltd, a 3rd
party
Due on October 9, 2018, guaranteed by
Agricultural Bank of China (“ABC”) Jiu
Long Branch
5.8725%
3,366,900
Ma An Shan Pubang Financing
guarantee co., Ltd, a 3rd party,
Anhui Commercial Bank (“ACB”) Fei Cui
Branch
6.00%
612,164
Due on July 14, 2018, guaranteed by Ma
An Shan Pubang Financing guarantee
co., Ltd, a 3rdparty,
Due on July 14, 2018, guaranteed by Ma
An Shan Pubang Financing guarantee
co., Ltd, a 3rd party,
ACB Fei Cui Branch
6.00%
1,530,409
ACB Fei Cui Branch
6.00%
918,246
Anhui Rural Commercial Bank (“ARCB”)
Ma An Shan Branch
6.276%
250,222
Due on May 11, 2018, Collateral by Fixed
assets subsequently repaid on due date
Due on May 8, 2018, guaranteed by Ossen
Material Research, Shanghai Pujiang,
Dr. Tang and Shanghai Zhaoyang metal
material co., Ltd, a 3rd party
subsequently repaid on due date
Due on April 18, 2018, Collateral by Fixed
assets subsequently repaid on due date
Due on March 3, 2018, Collateral by Fixed
assets subsequently repaid on due date
Due on February 10, 2018, Collateral by
ABC Jiu Long Branch
ARCB Ma An Shan Branch
ARCB Ma An Shan Branch
5.65%
382,602
6.276%
156,102
6.276%
374,950
Fixed assets subsequently repaid on due
date
ARCB Ma An Shan Branch
6.276%
127,024
F-38
-
-
-
-
-
-
-
-
-
-
-
OSSEN INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
NOTE 13 – SHORT TERM BANK LOANS (CONTINUED)
Due on January 7,2018, guaranteed by Ma
An Shan Pubang Financing guarantee
co., Ltd, a 3rd party, subsequently repaid
on due date
Due on January 5, 2018, Collateral by
Fixed assets subsequently repaid on due
date
Due on December 27, 2017, subsequently
Bank Name
Interest Rate
per Annum
December 31,
2017
2016
ACB Hu Nan Road Branch
6.00% $
1,530,409 $
ARCB Ma An Shan Branch
6.276%
260,170
-
-
repaid on due date
ARCB Ma An Shan Branch
6.276%
-
1,782,471
Due on December 14, 2017, subsequently
repaid on due date
CCB Jiu Jiang Branch
4.40%
-
2,306,472
Due on November 20, 2017, guaranteed
by Dr. Tang, subsequently repaid on due
date
Due on November 2, 2017, subsequently
ABC Jiu Long Branch
5.873%
-
2,594,782
repaid on due date
CCB Jiu Jiang Branch
4.40%
-
720,773
ABC Jiu Long Branch
5.873%
-
720,773
Due on November 1, 2017, guaranteed by
Ossen Material Research and Dr. Tang,
subsequently repaid on due date
Due on August 19, 2016, guaranteed by
Ma An Shan Pubang Financing
guarantee co., Ltd, a 3rd party,
subsequently repaid on due date
ARCB Ma An Shan Branch
Due on June 27, 2017, subsequently repaid
on due date
ACB Fei Cui Branch
Due on May 19, 2017, subsequently repaid
on due date
ACB Fei Cui Branch
6.78%
6.00%
6.00%
-
4,324,636
-
1,347,845
-
1,441,545
Due on May 17, 2017, guaranteed by
export order subsequently repaid on due
date
ARCB Ma An Shan Branch
6.60%
-
140,551
F-39
OSSEN INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
NOTE 13 – SHORT TERM BANK LOANS (CONTINUED)
Bank Name
Interest Rate
per Annum
December 31,
2017
2016
Due on May 10, 2017, guaranteed by
export order subsequently repaid on due
date
ARCB Ma An Shan Branch
Due on April 27, 2017, guaranteed by
export order subsequently repaid on due
date
ARCB Ma An Shan Branch
6.60%
6.60%
Due on April 25, 2017, guaranteed by
Ossen Material Research and Dr. Tang,
subsequently repaid on due date
Due on March 28, 2017, guaranteed by
ABC Jiu Long Branch
5.873%
export order subsequently repaid on due
date
ARCB Ma An Shan Branch
Due on March 7, 2017, guaranteed by
export order subsequently repaid on due
date
ARCB Ma An Shan Branch
Due on February 9, 2017, guaranteed by
export order subsequently repaid on due
date
ARCB Ma An Shan Branch
Due on January 4, 2017, guaranteed by
export order subsequently repaid on due
date
Total
ARCB Ma An Shan Branch
-
-
-
-
-
-
95,142
147,038
576,618
207,582
145,596
119,648
6.60%
6.60%
6.60%
6.60 %
-
$ 13,947,385
245,063
$ 16,916,535
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 6.41% and 6.105% as of December 31, 2017 and 2016, respectively. Interest
expense, included in the financial expenses in the statement of operations, was $932,596 $1,070,192 and $1,017,345 for the years ended
December 31, 2017, 2016 and 2015, respectively. The Company was in compliance of their financial covenants at December 31, 2017 and
2016, respectively.
F-40
OSSEN INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
NOTE 14 – LONG TERM BANK LOANS
Bank Name
per Annum
December 31,
Interest
Rate
Due on August 30, 2019, collateral by the
Company’s LUR
Total
Anhui Commercial Bank (“ACB”) Hui
Tong Branch
$2017
$2016
8.00% $
$
7,652,046 $
$
7,652,046
7,207,727
7,207,727
Interest expense, included in the financial expenses in the statement of operations, was $600,663, $225,900 and nil for the years ended
December 31, 2017, 2016 and 2015, respectively.
NOTE 15 – 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:
2017
December 31,
2016
2015
Net income attribute to the Company
$
5,345,311 $
4,823,973 $
5,896,804
Weighted average ordinary shares outstanding - basic and diluted
19,791,110
19,804,164
19,862,537
Basic and diluted earnings per share
$
0.27 $
0.24 $
0.30
F-41
OSSEN INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
NOTE 16 – 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, 2017, no detailed interpretation or guidance has been
issued to define “place of effective management”. Furthermore, as of December 31, 2017, 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, 2017, 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, 2017 and 2016.
F-42
OSSEN INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
NOTE 16 – INCOME TAX-(CONTINUED)
Income tax expenses consist of the following:
Current
Deferred
Income tax expenses
Year Ended December 31,
2016
2017
$
$
665,745 $
25,811
691,556 $
910,231 $
15,817
926,048 $
2015
1,018,143
162,024
1,180,167
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
Reserve for inventories
Provision of interest expense
Year Ended December 31,
2016
1,562,382 $
(653,029)
16,695
926,048 $
2017
1,647,484 $
(993,090)
37,162
691,556 $
2015
1,948,393
(982,104)
213,878
1,180,167
2017
December 31,
2016
2015
130,346 $
19,165
-
149,511 $
147,899 $
18,052
-
165,951 $
110,715
-
82,798
193,513
$
$
$
$
The deferred tax assets balance is $149,511, $165,951 and $193,513 at December 31, 2017, 2016 and 2015 respectively.
F-43
OSSEN INNOVATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
NOTE 17 – 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, 2017, 2016 and 2015 are as follows:
Year Ended December 31,
2016
2017
2015
Domestic Sales
International Sales
NOTE 18 – SUBSEQUENT EVENTS
$ 126,930,386 $ 112,119,286 $ 110,109,028
7,799,388
$ 132,375,915 $ 117,029,154 $ 117,908,416
5,445,529
4,909,868
We have evaluated all events or transactions that occurred after December 31, 2017 up through the date we issued the consolidated financial
statements.
On July 19, 2017, we entered into a Share Exchange Agreement with the shareholders of America-Asia Diabetes Research Foundation, a
California corporation that owns 90.27% of the equity interests of San MediTech (Huzhou) Co. Ltd., a China-based medical device company
engaged in the research, development and marketing of glucose control products. Pursuant to the Share Exchange Agreement, we agreed to
acquire all of the issued and outstanding equity interests of America-Asia Diabetes Research Foundation in exchange for 81,243,000 of our
ordinary shares. Upon completion of the Acquisition, we would indirectly own 90.27% of San MediTech. In connection with the Acquisition,
we agreed to sell our existing pre-stressed steel manufacturing business, including all existing liabilities, immediately following the completion
of the Acquisition. An entity affiliated with Dr. Liang Tang, our Chairman, agreed to acquire all of the equity of our wholly-owned subsidiary,
which indirectly owns all of our existing operating subsidiaries, in exchange for the forfeiture and cancellation of all 11,850,000 ordinary
shares currently held by Dr. Tang (the “Sale Transaction”). On May 4, 2018, the shareholders of America-Asia Diabetes Research Foundation
breached the Share Exchange Agreement and as a result, the Share Exchange Agreement and the Sale Transaction have been terminated.
F-44
OSSEN INNOVATION CO., LTD. AND SUBSIDIARIES
SCHEDULE I
CONDENSED PARENT COMPANY FINANCIAL INFORMATION
OSSEN INNOVATION CO., LTD.
CONDENSED BALANCE SHEETS AS OF DECEMBER 31, 2017 AND 2016
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;
19,791,110 shares outstanding as of December 31, 2017 and 2016
Additional paid-in capital
Statutory reserve
Retained earnings
Accumulated other comprehensive income/(loss)
Treasury stock, at cost: 208,890 shares as of December 31, 2017 and 2016
TOTAL SHAREHOLDERS’ EQUITY
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
F-45
December 31,
2017
2016
2,967 $
-
2,967
103,865,513
103,868,480 $
3,461
20,000,000
20,003,461
71,766,984
91,770,445
1,251,423 $
351,499
1,602,922
1,602,922 $
1,148,906
307,499
1,456,405
1,456,405
200,000 $
33,971,455
6,672,254
59,386,668
2,227,334
(192,153)
102,265,558
103,868,480 $
200,000
33,971,455
6,123,022
54,590,589
(4,378,873)
(192,153)
90,314,040
91,770,445
$
$
$
$
$
$
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, 2017, 2016 AND 2015
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 (LOSS)
$
2017
Year Ended December 31,
2016
2015
- $
-
-
-
146,687
146,687
(146,687)
317
5,492,315
5,345,311
-
5,345,311
- $
-
-
-
279,893
279,893
(279,893)
184
5,104,050
4,823,973
-
4,823,973
-
-
-
-
198,753
198,753
(198,753)
272
6,095,829
5,896,804
-
5,896,804
6,606,207
6,606,207
11,951,518 $
(6,975,100)
(6,975,100)
(2,151,127) $
(5,829,470)
(5,829,470)
67,334
$
F-46
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, 2017, 2016 AND 2015
2017
Year Ended December 31,
2016
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
$
5,345,311 $
4,823,973 $
5,896,804
(5,492,315)
102,517
44,000
(487)
(5,104,050)
213,909
25,000
(41,168)
(6,095,829)
132,938
182,499
116,412
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash provided by / (used in) investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Treasury stock purchased
Net cash 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
List of Subsidiaries of Ossen Innovation Co. Ltd.
Name
Ossen Innovation Materials Group Co., Ltd.
Ossen Group (Asia) Co., Ltd.
Topchina Development Group Ltd.
Ossen Innovation Materials Co. Ltd.
Ossen (Jiujiang) New Materials Co., Ltd.
-
-
-
(487)
(7)
3,461
2,967 $
-
-
(36,810)
(36,810)
(77,978)
(54)
81,493
3,461 $
(58,735)
(58,735)
57,677
54
23,762
81,493
EXHIBIT 8.1
$
F-47
Country of Incorporation
British Virgin Islands
British Virgin Islands
British Virgin Islands
People’s Republic of China
People’s Republic of China
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER PURSUANT TO
EXCHANGE ACT RULE 13A-14(A)/15D-14(A)
AS ADOPTED PURSUANT TO SECTION 302
EXHIBIT 12.1
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: May 15, 2018
/s/ Wei Hua
Wei Hua
Chief Executive Officer and Chief Financial Officer
(Principal Executive Officer and Principal Financial and Accounting Officer)
CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Ossen Innovation Co. Ltd. (the "Registrant") on Form 20-F for the year ended December 31,
2017, 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.
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
EXHIBIT 13.1
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Registrant.
Date: May 15, 2018
/s/ Wei Hua
Wei Hua
Chief Executive Officer and Chief Financial Officer
( Principal Executive Officer and Principal Financial and Accounting Officer)