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, 2019
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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:
For the transition period from _________ to _____________.
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, People’s Republic of China 200120
(Address of principal executive offices)
Wei Hua
Tel: +86 (21) 6888-8886; Fax: +86 (21) 6888-8666
518 Shangcheng Road, Floor 17, Shanghai, People’s Republic of China 200120
(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
Trading Symbol
Name of each exchange on which registered
Ordinary shares, par value US$0.01 per share *
OSN
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)
As of December 31, 2019, there were 19,791,110 ordinary shares, par value $0.01 per share, of the registrant issued and outstanding.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See
definition of “large accelerated filer,” “accelerated filer” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
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 whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control
over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its audit report. ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
☒ 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 ☒
EXPLANATORY NOTE
As previously reported by Ossen Innovation Co., Ltd. (the “Company”) in its current report on Form 6-K as filed with the U.S. Securities and
Exchange Commission on April 20, 2020, in accordance with the Securities and Exchange Commission Order Under Section 36 of the Securities Exchange
Act of 1934 Modifying Exemptions from the Reporting and Proxy Delivery Requirements for Public Companies (Release No. 34-88465 dated March 25,
2020) (the “Order”), the Company disclosed: (i) that it was relying on the relief provided by the Order in connection with the filing of this Annual Report
on Form 20-F for the fiscal year ended December 31, 2019 (the “Annual Report”), and (ii) as a result of the outbreak and spread of COVID-19, the
Company’s factories in Jiujiang and Ma’anshan were temporarily closed from China’s Spring Festival national holiday in late January to March 9, 2020.
Restrictions on access to the Company’s facilities have resulted in delays by the Company in the preparation of its financial statements and by its
independent public accountant in the completion of the necessary audit procedures. This, in turn, has hampered the ability of the Company to complete its
financial statements and prepare the Annual Report in time to be filed by the original due date of April 30, 2020.
1
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.
Item 13.
Item 14.
Item 15.
Item 16.
Item 16A.
Item 16B.
Item 16C.
Item 16D.
Item 16E.
Item 16F.
Item 16G.
Item 16H.
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
Material Modifications to the Rights of Security Holders and Use of Proceeds
Controls and Procedures
[Reserved]
Audit Committee Financial Expert
Code of Ethics
Principal Accountant Fees and Services
Exemptions from the Listing Standards for Audit Committees
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Change in Registrant’s Certifying Accountant
Corporate Governance
Mine Safety Disclosure
Item 17.
Item 18.
Item 19.
Financial Statements
Financial Statements
Exhibits
PART III
2
Page
3
3
4
20
38
38
55
59
60
60
61
73
74
76
76
76
77
77
77
77
77
77
78
78
78
79
79
79
PART I
CERTAIN INFORMATION
In this annual report on Form 20-F, unless otherwise indicated, “we,” “us,” “our,” the “Company” and “Ossen” refer to Ossen Innovation
Co., Ltd., a company organized in the British Virgin Islands, its predecessor entities and its subsidiaries.
Unless the context indicates otherwise, all references to “China” and the “PRC” refer to the People’s Republic of China, all references to
“Renminbi” or “RMB” are to the legal currency of the People’s Republic of China, all references to “U.S. dollars,” “dollars” and “$” are to the legal
currency of the United States and all references to “ADSs” refer to our American Depositary Shares, each of which represents one ordinary share. This
annual report contains translations of Renminbi amounts into U.S. dollars at specified rates solely for the convenience of the reader. We make no
representation that the Renminbi or U.S. dollar amounts referred to in this report could have been or could be converted into U.S. dollars or Renminbi, as
the case may be, at any particular rate or at all. On April 1, 2020, the cash buying rate announced by the People’s Bank of China was RMB 7.12 to $1.00.
FORWARD-LOOKING STATEMENTS
This report contains “forward-looking statements” for purposes of the safe harbor provisions of the Private Securities Litigation Reform Act of
1995 that represent our beliefs, projections and predictions about future events. All statements other than statements of historical fact are “forward-looking
statements,” including any projections of earnings, revenue or other financial items, any statements of the plans, strategies and objectives of management
for future operations, any statements concerning proposed new projects or other developments, any statements regarding future economic conditions or
performance, any statements of management’s beliefs, goals, strategies, intentions and objectives, and any statements of assumptions underlying any of the
foregoing. Words such as “may,” “will,” “should,” “could,” “would,” “predicts,” “potential,” “continues,” “expects,” “anticipates,” “future,” “intends,”
“plans,” “believes,” “estimates” and similar expressions, as well as statements in the future tense, identify forward-looking statements.
These statements are necessarily subjective and involve known and unknown risks, uncertainties and other important factors that could cause our
actual results, performance or achievements, or industry results, to differ materially from any future results, performance or achievements described in or
implied by such statements. Actual results may differ materially from expected results described in our forward-looking statements, including with respect
to correct measurement and identification of factors affecting our business or the extent of their likely impact, and the accuracy and completeness of the
publicly available information with respect to the factors upon which our business strategy is based or the success of our business.
Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of
whether, or the times by which, our performance or results may be achieved. Forward-looking statements are based on information available at the time
those statements are made and management’s belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause
actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could
cause such differences include, but are not limited to, those factors discussed under the headings “Risk Factors,” “Operating and Financial Review and
Prospects,” and elsewhere in this report.
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable.
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable.
3
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, 2019, 2018 and 2017 and the balance sheet data as of December 31, 2019
and 2018 are derived from audited consolidated financial statements included elsewhere in this annual report. The consolidated statements of income data
for the fiscal years ended December 31, 2016 and 2015 and the balance sheet data as of December 31, 2017, 2016 and 2015 are not included in this annual
report. Our historical results for any prior period are not necessarily indicative of results to be expected in any future period.
Selected Consolidated Statement of Operations and
Comprehensive Income
Revenues
Cost of goods sold
Gross profit
Selling and distribution expenses
General and administrative expenses
Total Operating Expenses
Income from operations
Financial expenses, net
Other income, net
Income before income taxes
Income taxes
Net income
Less: Net Income attributable to non-controlling interest
Net income attributable to controlling interest
Other comprehensive income
Foreign currency translation gain (loss)
Total other comprehensive income (loss)
Comprehensive Income (loss)
2019
$ 138,900,357
116,541,972
22,358,385
357,426
6,155,316
6,512,742
15,845,643
2018
2017
2016
2015
$ 136,104,867 $ 132,375,915 $ 117,029,154 $ 117,908,416
115,585,803 117,721,799 100,932,528 102,197,994
15,710,422
20,519,064
986,378
327,365
4,478,413
5,263,914
5,464,791
5,591,279
10,245,631
14,927,785
16,096,626
734,159
6,376,383
7,110,542
8,986,084
14,654,116
598,832
6,002,121
6,600,953
8,053,163
(2,382,405)
297,438
13,760,676
(1,533,794)
12,226,882
1,137,712
(1,621,486)
208,071
13,514,370
(2,129,387)
11,384,983
1,005,530
(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
7,793,573
(1,180,167)
6,613,406
716,602
11,089,170
10,379,453
5,345,311
4,823,973
5,896,804
(1,744,846)
(6,272,303)
6,606,207
(6,975,100)
(5,829,470
(1,744,846)
9,344,324
(6,272,303)
4,107,150
6,606,207
11,951,518
(6,975,100)
(2,151,127)
(5,829,470
67,334
Weighted average shares outstanding
19,791,110
19,791,110
19,791,110
19,804,164
19,862,537
Earnings per share*
0.56
0.52
0.27
0.24
0.30
* Calculation is based on net income attributable to controlling interest and the weighted average shares outstanding, excluding foreign currency translation
gain (loss).
Selected Balance Sheets Data
Cash and cash equivalents
Restricted cash
Total current assets
Total long-term assets
Total assets
Total liabilities
Total shareholders’ equity
Total liabilities and shareholders’ equity
$
$
$
$
2019
2,576,677
6,025,718
171,199,812
6,443,225
177,643,037
47,097,942
130,545,095
177,643,037
4
December 31,
2017
2016
2015
2018
3,444,421 $
4,070,655 $
950,225 $
7,192,928 $
812,277
8,780,443
155,293,023 144,640,849 132,259,554 144,772,273
9,468,260
162,245,911 152,518,906 140,443,752 154,240,533
217,631 $
6,703,242 $
8,184,198
6,952,888
7,878,057
50,106,311
42,182,852
120,063,059 114,950,379 102,445,794 104,134,222
162,245,911 152,518,906 140,443,752 154,240,533
37,997,958
37,568,527
3.B. Capitalization and Indebtedness
Not Applicable.
3.C. Reasons for the Offer and Use of Proceeds
Not Applicable.
3.D. Risk Factors
An investment in our ADSs involves a high degree of risk. You should carefully consider the risks and uncertainties described below together with
all other information contained in this annual report, including the matters discussed under the headings “Forward-Looking Statements” and “Operating
and Financial Review and Prospects” before you decide to invest in our ADSs. We are a holding company with substantial operations in China and are
subject to a legal and regulatory environment that in many respects differs from the United States. If any of the following risks, or any other risks and
uncertainties that are not presently foreseeable to us, actually occur, our business, financial condition, results of operations, liquidity and our future growth
prospects could be materially and adversely affected.
Risks Related to Our Business and Our Industry
Our Chairman controls a large percentage of our outstanding stock through an entity whose shares are listed on a foreign exchange and could
significantly influence the outcome of our corporate matters.
As of the date of this report, Dr. Liang Tang, our Chairman, beneficially owns approximately 65.9% of our outstanding ordinary shares.
Accordingly, Dr. Liang Tang could have significant influence in determining the outcome of any corporate transaction or other matter submitted to the
shareholders for approval, including mergers, consolidations, the election of directors and other significant corporate actions. This concentration of
ownership in our shares controlled by Dr. Liang Tang limits your ability to influence corporate matters and may have the effect of delaying or preventing a
third party from acquiring control over us. In addition, sales of significant amounts of ordinary shares controlled by Dr. Liang Tang, or the prospect of these
sales, could adversely affect the market price of our ordinary shares.
As a “controlled company” under the Nasdaq listing rules, we may follow certain exemptions from certain corporate governance requirements that
could adversely affect our public shareholders.
Because Pujiang International Group Limited (“Pujiang”), a Cayman Islands company listed on the Hong Kong Stock Exchange with Dr. Liang
Tang, our Chairman, being a 64.39% shareholder and chairman of Pujiang, beneficially holds approximately 65.9% of our outstanding ordinary shares
through its wholly-owned subsidiary, Acme Innovation Limited, a British Virgin Islands company (“Acme”), we may be considered a "controlled
company" within the meaning of the Nasdaq Stock Market (“Nasdaq”) corporate governance standards. Under these rules, a company of which more than
50% of the voting power is held by an individual, group or another company is a “controlled company” and is permitted to phase in its compliance with the
independent committee requirements. Although we do not intend to rely on the “controlled company” exemptions under the Nasdaq listing rules, we could
elect to rely on these exemptions in the future. If we were to elect to rely on the “controlled company” exemptions, a majority of the members of our board
of directors might not be independent directors and our nominating and corporate governance and compensation committees might not consist entirely of
independent directors. Accordingly, if we rely on the exemptions, during the period we remain a controlled company and during any transition period
following a time when we are no longer a controlled company, you would not have the same protections afforded to shareholders of companies that are
subject to all of the corporate governance requirements of Nasdaq.
5
Our operations are cash intensive, and our business could be adversely affected if we fail to maintain sufficient levels of liquidity and working capital.
As of December 31, 2019, we had approximately $2.6 million of cash and cash equivalents and $6.0 million of restricted cash. Historically, we
have spent a significant amount of cash on our operational activities, principally to procure raw materials for our products. Our short-term loans are from
Chinese banks and are generally secured by a portion of our fixed assets, land use right, receivables and/or guarantees by related parties. The term of almost
all such short-term loans is one year or less. Historically, we have rolled over such loans on an annual basis. However, we may not have sufficient funds
available to pay all of our borrowings upon maturity in the future. Failure to roll over our short-term borrowings at maturity or to service our debt could
result in the imposition of penalties, including increases in interest rates, legal actions against us by our creditors, or even insolvency.
Although we have been able to maintain adequate working capital primarily through cash from operations and short-term borrowings, any failure
by our customers to settle outstanding accounts receivable, or our inability to borrow sufficient capital from local banks, in the future could materially and
adversely affect our cash flow, financial condition and results of operations.
If existing sources of capital are insufficient to support our business, we may issue debt and equity securities that are senior to our ordinary shares as
to distributions and in liquidation, which could negatively affect the value of our ordinary shares, or we may not be able to raise additional financing at
all.
If available liquidity is not sufficient to meet our operating and loan obligations as they come due, our plans include considering pursuing
alternative financing arrangements, reducing expenditures as necessary, or limiting our plans for expansion to meet our cash requirements. However, there
is no assurance that, if required, we will be able to raise additional capital, reduce discretionary spending or efficiently limit our expansion to provide the
required liquidity. Currently, the capital markets for small capitalization companies are difficult and banking institutions have become stringent in their
lending requirements. Accordingly, we cannot ensure the availability or terms of any third party financing. If we are unable to raise additional financing,
we may be unable to procure the raw materials we need, implement our long-term business plan, develop or enhance our products, take advantage of future
opportunities or respond to competitive pressures on a timely basis.
Alternatively, if we raise capital by issuing equity or convertible debt securities, such issuances could result in substantial dilution to our
shareholders. In addition, we may issue senior notes, subordinated notes or preferred shares that have preference over our common equity. In the event of
our liquidation, any such lenders and holders of our debt or preferred securities would receive a distribution of our available assets before distributions to
the holders of our ADSs. Our decision to incur debt and issue securities in future offerings will depend on market conditions and other factors beyond our
control. We cannot predict or estimate the amount, timing or nature of future offerings and debt financings. Future offerings could reduce the value of
shares of our ADSs or dilute your investment.
We face intense competition, and if we are unable to compete effectively, we may not be able to maintain profitability.
We compete with many other companies located in the PRC and internationally that manufacture materials similar to ours. Many of our
competitors are larger companies with greater financial resources than us. Intense competition in a challenging economic environment in the PRC has, in
the past, put pressure on our margins and may adversely affect our future financial performance. Moreover, intense competition may result in potential or
actual litigation between us and our competitors relating to such activities as competitive sales practices, relationships with key suppliers and customers or
other matters.
In 2019 and 2018, we generated revenue of approximately $107.3 million and $103.4 million, respectively, or 77.2% and 76.0%, respectively, of
our total revenue, from sales of our rare earth coated PC wires and PC strands. We believe that our rare earth coating capabilities provide us with a
competitive advantage among our competitors; however, it is likely that our competitors may develop similar competing products. We intend to continue to
expand research and development efforts to advance our rare earth coating applications even further, including improving the products’ corrosion-resistant
level and increasing the products’ strength and life span. Meanwhile, we will also continue to invest in research and development of higher strength and
higher corrosion-resistant level of other types of prestressed products. However, there can be no assurance that our initial competitive advantage will be
retained and that one or more competitors will not develop products that are equal or superior to ours in quality and are better priced than our rare earth
coated products.
6
Our revenues are highly dependent on a limited number of customers and the loss of any one of our major customers could materially and adversely
affect our growth and our revenues.
During the years ended December 31, 2019 and 2018, our six largest customers contributed 66.8% and 68.3% of our total sales, respectively. As a
result of our reliance on a limited number of customers, we may face pricing and other competitive pressures, which may have a material adverse effect on
our profits and our revenues. The volume of products sold for specific customers varies from year to year, especially since we are not the exclusive
provider for any customers. In addition, there are a number of factors, other than our performance, that could cause the loss of a customer or a substantial
reduction in the products that we provide to any customer and that may not be predictable. For example, our customers may decide to reduce spending on
our products or a customer may no longer need our products following the completion of a project. The loss of any one of our major customers, a decrease
in the volume of sales to these customers or a decrease in the price at which we sell our products to them could materially adversely affect our profits and
our revenues.
In addition, this customer concentration may subject us to perceived or actual leverage that our customers may have in negotiations with us, given
their relative size and importance to us. If our customers seek to negotiate their agreements on terms less favorable to us and we accept such unfavorable
terms, such unfavorable terms may have a material adverse effect on our business, financial condition and results of operations. Accordingly, unless and
until we diversify and expand our customer base, our future success will significantly depend upon the timing and volume of business from our largest
customers and the financial and operational success of these customers.
As we expand our operations, we may need to establish a more diverse supplier network for our raw materials. The failure to secure a more diverse
supplier network could have an adverse effect on our financial condition.
We currently purchase almost all of our raw materials from a small number of suppliers. Purchases from our five largest suppliers accounted for
99.8% and 99.8% of our raw material purchases in the years ended December 31, 2019 and 2018, respectively. In the event that we need to diversify our
supplier network, we may not be able to procure a sufficient supply of raw materials at a competitive price, which could have an adverse effect on our
results of operations, financial condition and cash flows.
Furthermore, despite our efforts to control our supply of raw materials and maintain good relationships with our existing suppliers, we could lose
one or more of our existing suppliers at any time. The loss of one or more key suppliers could increase our reliance on higher cost or lower quality supplies,
which could negatively affect our profitability. Any interruptions to, or decline in, the amount or quality of our raw materials supply could materially
disrupt our production and adversely affect our business, financial condition and financial prospects.
Volatile steel prices can cause significant fluctuations in our operating results. Our revenues and operating income could decrease if steel prices
decline or if we are unable to pass price increases on to our customers.
Our principal raw material is high carbon steel wire rods that we typically purchase from multiple primary steel producers. The steel industry as a
whole is cyclical and, at times, pricing and availability of steel can be volatile due to numerous factors beyond our control, including general domestic and
international economic conditions, labor costs, sales levels, competition, levels of inventory held by us and other steel service centers, consolidation of steel
producers, higher raw material costs for steel producers, import duties and tariffs and currency exchange rates. This volatility can significantly affect the
availability and cost of raw materials for us.
We, like many other steel product manufacturers, maintain substantial inventories of steel to accommodate the short lead times and just-in-time
delivery requirements of our customers. Accordingly, we purchase steel in an effort to maintain our inventory at levels that we believe to be appropriate to
satisfy the anticipated needs of our customers based upon historic buying practices, supply agreements with customers and market conditions. Our
commitments to purchase steel are generally at prevailing market prices in effect at the time we place our orders. We have no long-term, fixed-price steel
purchase contracts. When steel prices increase, competitive conditions will influence how much of the price increase we can pass on to our customers. To
the extent we are unable to pass on future price increases in our raw materials to our customers, the revenues and profitability of our business could be
adversely affected.
7
When steel prices decline, customer demands for lower prices and our competitors' responses to those demands could result in lower sale prices,
lower margins and inventory valued at the lower of cost or market adjustments as we use existing steel inventory. Significant or rapid declines in steel
prices or reductions in sales volumes could result in us incurring inventory or goodwill impairment charges. Therefore, changing steel prices could
significantly impact our revenues, gross margins, operating income and net income.
In 2019, the Chinese central government focused on strictly controlling steel capacity increases after the Chinese central government addressed the
overcapacity in the steel industry and lowered steel production by approximately 150 million tons in prior years. However, due to the uncertainty of the
trade war between the United States and China and the slowdown of economic growth, as well as the increase of capacity utilization of the Chinese steel
industry, which resulted in the higher output of steel products, the average price of steel products, including our products and principal raw materials,
decreased in 2019.
Our business operations have been and may continue to be materially and adversely affected by the outbreak of the coronavirus disease (COVID-19).
An outbreak of respiratory illness caused by COVID-19 emerged in China in late 2019 and has expanded within the rest of China and globally.
The Company’s principal operations are located in China. The new strain of COVID-19 is considered to be highly contagious and poses a serious public
health threat. The World Health Organization (the “WHO”) is closely monitoring and evaluating the situation. On March 11, 2020, the WHO declared the
outbreak of COVID-19 a pandemic, expanding its assessment of the threat beyond the global health emergency it had announced in January 2020.
Any outbreak of such epidemic illness or other adverse public health developments in China or elsewhere in the world will materially and
adversely affect the global economy, our markets and our business. Restrictions on the movement of people and goods currently remain in place in certain
regions, which requires us to adjust certain of our sales and delivery processes. Our factories in Jiujiang and Ma’anshan were temporarily closed from
China’s Spring Festival national holiday in late January to March 9, 2020, as a result of the COVID-19 outbreak. A prolonged outbreak of COVID-19
could result in disruption of supply chain of certain raw materials necessary for our products, decrease of customer demand, restrictions on our travel to
support our sites or our customers around the world, and delays in our production and construction of our new production facilities in Jiujiang, Jiangxi,
China. The extent to which COVID-19 impacts raw material prices in 2020 will depend on the future developments of the outbreak, including new
information concerning the global severity of and actions taken to contain the outbreak, which are highly uncertain and unpredictable. All these factors may
affect our overall financial performance in 2020, although we cannot quantify the overall impact at this time.
We cannot foresee whether the outbreak of COVID-19 will be effectively contained, nor can we predict the severity and duration of its impact. If
the outbreak of COVID-19 is not effectively and timely controlled, our business operations and financial condition may be materially and adversely
affected as a result of the deteriorating market outlook, the slowdown in regional and national economic growth, weakened liquidity and financial condition
of our customers and other factors that we cannot foresee. Any of these factors and other factors beyond our control could have an adverse effect on the
overall business environment, cause uncertainties in the regions where we conduct business, cause our business to suffer in ways that we cannot predict and
materially and adversely impact our business, financial condition and results of operations.
Sales to customers outside China and international developments expose us to risks inherent in international sales and increased competition.
We generated approximately 1.8% and 3.3%, respectively, of our revenue during the years ended December 31, 2019 and 2018 from sales to
customers in international markets. As a result, we are subject to risks and challenges that we would otherwise not face if we conducted our business only
in China. In 2018 and 2019, the United States imposed tariffs on more than $550 billion of Chinese goods, and China retaliated with tariffs on more than
$185 billion of US products. In January 2020, the two sides signed the Phase One Trade Deal, which officially agreed to the rollback of tariffs, expansion
of trade purchases, and renewed commitments on intellectual property, technology transfer, and currency practices. Although we have not generated any
sales from the United States since the anti-dumping duties were imposed in 2010, these measures imposed in 2018 and 2019 may also have a negative
impact on our business and results of operations because Chinese-based steel product exporters may now focus their marketing efforts on the Chinese
domestic market.
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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;
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.
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A portion of our expenses, particularly those related to personnel and facilities are generally fixed in advance of any particular quarter. As a result,
unanticipated variations in the number and timing of our purchase orders or prices of our raw materials may cause significant variations in our operating
results in any particular quarter.
Our success depends in large part upon our senior management and key personnel. Our inability to attract and retain these individuals could
materially and adversely affect our business, results of operations and financial condition.
We are highly dependent on our senior management and other key employees, including our Chairman, Dr. Liang Tang and our Chief Executive
Officer and Chief Financial Officer, Mr. Wei Hua. Our future performance will be dependent upon the continued service of members of our senior
management and key employees. We do not maintain key man life insurance for any of the members of our management team or other key personnel.
Competition for senior management in our industry is intense, and we may not be able to retain our senior management and key personnel or attract and
retain new senior management and key personnel in the future, which could materially and adversely affect our business, results of operations and financial
condition.
We have limited insurance coverage and may incur losses resulting from product liability claims, business interruption or natural disasters.
We are exposed to risks associated with product liability claims in the event that the use of our products results in property damage or personal
injury. Since our products are ultimately incorporated into bridges, buildings, railways and other large structures, it is possible that users of these structures
or people installing our products could be injured or killed by such structures, whether as a result of defects, improper installation or other causes. Because
we continue to expand our customer base and because our products are used for long periods of time, we are unable to predict whether product liability
claims will be brought against us in the future or to predict the impact of any resulting adverse publicity on our business. The successful assertion of
product liability claims against us could result in potentially significant monetary damages and require us to make significant payments. We do not carry
product liability insurance and may not have adequate resources to satisfy a judgment in the event of a successful claim against us. As the insurance
industry in China is still in its early stages of development, even the insurance that we currently carry offers limited coverage compared with that offered in
many other countries. Any business interruption or natural disaster could result in substantial losses and diversion of our resources and materially and
adversely affect our business, financial condition and results of operations.
If we are unable to maintain appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting
obligations, result in the restatement of our financial statements, harm our operating results, subject us to regulatory scrutiny and sanction, and cause
investors to lose confidence in our reported financial information.
Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. As a public company, we have
significant requirements for enhanced financial reporting and internal controls. We are required to document and test our internal control procedures in
order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires annual management assessments of the effectiveness of
our internal controls over financial reporting and, for many companies, a report by the independent registered public accounting firm addressing these
assessments. The process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes
in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate
to satisfy our reporting obligations as a public company.
We cannot assure you that we will not in the future identify areas requiring improvement in our internal control over financial reporting. In
addition, we cannot assure you that the measures we will take to remediate any areas in need of improvement will be successful or that we will implement
and maintain adequate controls over our financial processes and reporting in the future as we continue our growth. If we are unable to establish appropriate
internal financial reporting controls and procedures, it could cause us to fail to comply with Sarbanes-Oxley and meet our reporting obligations, result in
the restatement of our financial statements, harm our operating results, subject us to regulatory scrutiny and sanction, and cause investors to lose confidence
in our reported financial information.
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A failure of our information technology systems would harm our business.
The nature of our business requires the development and implementation of certain functioning information technology systems. Such systems are
vulnerable to a variety of potential risks, including damage or interruption resulting from natural disasters and telecommunication failures and human error
or intentional acts of sabotage, vandalism, break-ins and similar acts. The occurrence of any of these events could result in costly interruptions or failures
adversely affecting our business and the results of our operations.
We rely on information technology to support our operations and reporting environments. A security failure of that technology could impact our ability
to operate our businesses effectively, adversely affect our reported financial results, impact our reputation and expose us to potential liability or
litigation.
In the ordinary course of our business, we store sensitive data, including intellectual property, our proprietary business information and that of our
customers, suppliers and business partners, and information of our customers and employees, on our networks. The secure processing, maintenance and
transmission of this information is critical to our operations and business strategy. Despite our security measures, our information technology and
infrastructure may be vulnerable to attacks by hackers or breached due to a cyber incident, natural disaster, hardware or software failure or error,
telecommunications system failure, service provider or vendor error or failure, intentional or unintentional personnel actions, employee error, malfeasance
or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, altered,
damaged, held ransom, lost or stolen. In any such event, we could suffer significant loss or incur significant liability, including: damage to our reputation;
loss of customer confidence or goodwill; and significant expenditures of time and money to address and remediate resulting damages to affected
individuals or business partners. Furthermore, such data breach could result in legal claims or proceedings, liability under laws that protect the privacy of
personal information, and regulatory penalties, disrupt our operations, and damage our reputation, which could adversely affect our business, revenues and
competitive position.
Risks Related to Doing Business in China
Fluctuations in the value of the RMB may have an adverse effect on our shareholders’ investment.
Our reporting currency is the U.S. dollar. However, substantially all of our revenues are denominated in RMB. Any significant revaluation of the
Renminbi may have a material adverse effect on the U.S. dollar equivalent amount of our revenues and financial condition as well as on the value of, and
any dividends payable on, our ordinary shares in foreign currency terms. For instance, a decrease in the value of Renminbi against the U.S. dollar could
reduce the U.S. dollar equivalent amounts of our financial results, the value of your investment in our ordinary shares and the dividends we may pay in the
future, if any, all of which may have a material adverse effect on the prices of our ADSs. For 2019 and 2018, we had foreign currency translation loss of
$1.7 million and $6.3 million, respectively, primarily due to the depreciation of the RMB against the U.S. dollar in 2019 and 2018.
The value of the RMB against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic
conditions and China’s foreign exchange policies. The conversion of RMB into foreign currencies, including U.S. dollars, has been based on exchange
rates set by the People’s Bank of China. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB solely to
the U.S. dollar, and the RMB appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010,
however, this appreciation halted and the RMB was traded within a narrow range against the U.S. dollar. Between July 2010 and November 2015, the RMB
fluctuated against the U.S. dollar, at times significantly and unpredictably. On November 30, 2015, the Executive Board of IMF completed the regular five-
year review of the basket of currencies that make up the Special Drawing Right, or the SDR, and decided that with effect from October 1, 2016, RMB is
determined to be a freely usable currency and will be included in the SDR basket as a fifth currency, along with the U.S. dollar, the Euro, the Japanese yen
and the British pound. In the fourth quarter of 2016, the RMB depreciated significantly in the backdrop of a surging U.S. dollar and persistent capital
outflows of China. This depreciation halted in 2017, and the RMB appreciated approximately 7% against the U.S. dollar during this one-year period. In
2019 and 2018, the RMB depreciated 1.3% and 4.8% against the U.S. dollar. With the development of the foreign exchange market and progress towards
interest rate liberalization and RMB internationalization, the PRC government may in the future announce further changes to the exchange rate system, and
we cannot assure you that the RMB will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how
market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future.
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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:
Level of government involvement in the economy;
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Control of foreign exchange;
· Methods of allocating resources;
Balance of payments position;
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International trade restrictions; and
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International conflict.
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The Chinese economy differs from most countries belonging to the Organization for Economic Cooperation and Development, or OECD, in many
ways. For example, state-owned enterprises still constitute a large portion of the Chinese economy, and weak corporate governance and the lack of a
flexible currency exchange policy still prevail in China. As a result of these differences, we may not develop in the same way or at the same rate as might
be expected if the Chinese economy were similar to those of the OECD member countries.
The PRC government exerts substantial influence over the infrastructure and steel sectors and the manner in which we must conduct our business
activities.
The PRC government has exercised, and continues to exercise, substantial control over virtually every sector of the Chinese economy through
regulation and state ownership, including the infrastructure and steel sectors where we have been doing our business. Any government decisions or actions
to postpone, change or halt the construction of certain types of infrastructure projects for any reason, such as the high speed railway accident in July 2011
in South China, the reduction of 150 million tons of steel production announced between 2016 and 2018 and the strict environmental protection measures
imposed on the steel industry since 2017, or any decisions the government might make to cut spending, could adversely impact our business and results of
operations.
In addition, our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, import and
export tariffs, environmental regulations, land use rights, property, and other matters. We believe that our operations in China are in material compliance
with all applicable legal and regulatory requirements. However, the central or local governments of the jurisdictions in which we operate may impose new,
stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance
with such regulations or interpretations. Accordingly, government actions in the future, including any decision not to continue to support recent economic
reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a
significant effect on economic conditions in China or particular regions thereof.
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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.
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Our business and financial performance may be materially adversely affected if the PRC regulatory authorities determine that our acquisition of Ossen
Materials Group constitutes a round-trip investment without governmental approval.
On August 8, 2006, six PRC regulatory agencies promulgated the Regulation on Mergers and Acquisitions of Domestic Companies by Foreign
Investors, or the 2006 M&A Rule, which became effective on September 8, 2006. According to the 2006 M&A Rule which was amended by the Ministry
of Commerce on June 22, 2009, a “round-trip investment” is defined as having taken place when a PRC business that is owned by PRC individuals is sold
to a non-PRC entity that is established or controlled, directly or indirectly, by those same PRC individuals. Under the 2006 M&A Rules which was
amended by the Ministry of Commerce, or MOFCOM, on June 22, 2009, any round-trip investment must be approved by MOFCOM, and any indirect
arrangement or series of arrangements which achieves the same end result without the approval of MOFCOM is a violation of PRC law.
However, the PRC regulatory authorities may take the view that the acquisition of shares in our PRC operating subsidiaries and the share
exchange between our predecessor, Ultra Glory, and our subsidiary, Ossen Materials Group (“Ossen Materials”), are part of an overall series of
arrangements which constitute a round-trip investment. If the PRC regulatory authorities take this view, we cannot assure you we may be able to obtain the
approval required from MOFCOM. It is also possible that the PRC regulatory authorities could invalidate our acquisition and ownership of our Chinese
subsidiaries, and that these transactions require the prior approval of the China Securities Regulatory Commission, or CSRC, before MOFCOM approval is
obtained.
If these regulatory actions occur, we cannot assure you that we will be able to re-establish control of our Chinese subsidiaries’ business operations,
that any such contractual arrangements will be protected by PRC law, or that we would receive as complete or effective an economic benefit and control of
our Chinese subsidiaries’ business as if we had direct ownership of our Chinese subsidiaries.
PRC regulations relating to investments in offshore companies by PRC residents may subject our future PRC-resident beneficial owners or our PRC
subsidiaries to liability or penalties, limit our ability to inject capital into our PRC subsidiaries or limit our PRC subsidiaries’ ability to increase their
registered capital or distribute profits.
SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and
Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, on July 4, 2014, which replaced the former circular
commonly known as “SAFE Circular 75” promulgated by SAFE on October 21, 2005. SAFE Circular 37 requires PRC residents to register with local
branches of SAFE in connection with their direct establishment or indirect control of an offshore entity, for the purpose of overseas investment and
financing, with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests, referred to in SAFE
Circular 37 as a “special purpose vehicle.” SAFE Circular 37 further requires amendment to the registration in the event of any significant changes with
respect to the special purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, division
or other material event. In the event that a PRC shareholder holding interests in a special purpose vehicle fails to fulfill the required SAFE registration, the
PRC subsidiaries of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent and from carrying out
subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in its ability to contribute additional capital into its
PRC subsidiary. Moreover, failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for
evasion of foreign exchange controls.
We believe that some of our shareholders are PRC residents under SAFE Circular 37. We do not have control over the these shareholders and our
other beneficial owners and cannot assure you that all of our PRC-resident beneficial owners have complied with, and will in the future comply with, SAFE
Circular 37 and subsequent implementation rules. The failure of PRC-resident beneficial owners to register or amend their SAFE registrations in a timely
manner pursuant to SAFE Circular 37 and subsequent implementation rules, or the failure of future PRC-resident beneficial owners of our company to
comply with the registration procedures set forth in SAFE Circular 37 and subsequent implementation rules, may subject such beneficial owners or our
PRC subsidiaries to fines and legal sanctions. Furthermore, SAFE Circular 37 is unclear how this regulation, and any future regulation concerning offshore
or cross-border transactions, will be interpreted, amended and implemented by the relevant PRC government authorities, and we cannot predict how these
regulations will affect our business operations or future strategy. Failure to register or comply with relevant requirements may also limit our ability to
contribute additional capital to our PRC subsidiaries and limit our PRC subsidiaries’ ability to distribute dividends to us. These risks could in the future
have a material adverse effect on our business, financial condition and results of operations.
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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 accounting standards to a
statutory general reserve fund until the amounts in said fund reaches 50% of their registered capital. Allocations to these statutory reserve funds can be used
only for specific purposes and are not transferable to us in the form of loans, advances, or cash dividends. Any limitations on the ability of our PRC
subsidiaries to transfer funds to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our
business, pay dividends and otherwise fund and conduct our business.
Any failure to comply with PRC environmental laws may require us to incur significant costs.
We carry on our business in an industry that is subject to PRC environmental protection laws and regulations. These laws and regulations require
enterprises engaged in manufacturing and construction that may cause environmental waste to adopt effective measures to control such waste. In addition,
such enterprises are required to pay fines, or to cease operations entirely under extreme circumstances, should they discharge waste substances. The
Chinese government may also change the existing laws or regulations or impose additional or stricter laws or regulations, compliance with which may
cause us to incur significant capital expenditures, which we may be unable to pass on to our customers through higher prices for our products.
We must comply with the Foreign Corrupt Practices Act.
We are required to comply with the United States Foreign Corrupt Practices Act, which prohibits U.S. companies from making prohibited
payments to foreign officials for the purpose of obtaining or retaining business. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices
occur from time to time in mainland China. If any of our non-U.S. listed competitors that are not subject to the Foreign Corrupt Practices Act engage in
these practices, they may receive preferential treatment and secure business from government officials in a way that is unavailable to us. Furthermore,
although we inform our personnel that such practices are illegal, we cannot assure you that our employees or other agents will not engage in illegal conduct
for which we might be held responsible under U.S. law. If our employees or other agents are found to have engaged in such practices, we could suffer
severe penalties.
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Because our funds are held in banks that do not provide insurance, the failure of any bank in which we deposit our funds could affect our ability to
continue our business operations.
Banks and other financial institutions in the PRC do not provide insurance for funds held on deposit. The Chinese government implemented the
bank deposit insurance program on May 1, 2015. Financial institutions are required to pay insurance premiums into a fund that is managed by an agency
appointed by the State Council. The program is designed to return bank clients' deposits if their bank suffers insolvency or bankruptcy. The reimbursement
is drawn from the new fund in the case of the deposit being RMB 500,000 (approximately $71,735 as of December 31, 2019) or less. However, the
implementation and impact of this program are uncertain. As a result, in the event of a bank failure, we may not have access to funds on deposit.
Depending upon the amount of money we maintain in a bank that fails, our inability to have access to our cash could impair our operations, and, if we are
not able to access funds to pay our suppliers, employees and other creditors, we may be unable to continue our business operations.
If relations between the United States and China worsen, investors may be unwilling to hold or buy our ordinary shares and our share price may
decrease.
At various times during recent years, the United States and China have had significant disagreements over political and economic issues, which
may result in or intensify potential conflicts in relation to territorial, regional security and trade disputes. In 2018 and 2019, the United States and China
implemented certain trade policies, tariffs, other trade actions against each other relating to the import and export of certain products, and negotiations with
respect thereto, may have a negative effect on our business, financial condition, and results of operations in China. Although the two sides signed the Phase
One Trade Deal in January 2020, which officially agreed to the rollback of tariffs, expansion of trade purchases, and renewed commitments on intellectual
property, technology transfer, and currency practices, it is unclear as to what the long-term impact of such agreement will be. Any continuing or worsening
trade relations between the United States and China could significantly reduce domestic growth in China and therefore adversely affect our business,
financial condition and results of operations.
If we become directly subject to the scrutiny, criticism and negative publicity that historically related to U.S.-listed Chinese companies, we may have to
expend significant resources to investigate and resolve the matter which could harm our business operations, stock price and reputation and could
result in a loss of your investment in our stock, especially if such matter cannot be addressed and resolved favorably.
In past years, U.S. public companies that have substantially all of their operations in China, particularly companies that have completed reverse
merger transactions, have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory
agencies, such as the United States Securities and Exchange Commission (the “SEC”). Much of the scrutiny, criticism and negative publicity has centered
around financial and accounting irregularities and mistakes, a lack of effective internal controls over financial accounting, inadequate corporate governance
policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism and negative publicity, the publicly
traded stock of many U.S. listed Chinese companies has sharply decreased in value and, in some cases, has become virtually worthless. Many of these
companies are now, or were in the recent past, subject to shareholder lawsuits, SEC enforcement actions and are conducting internal and external
investigations into the allegations. If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we
will have to expend significant resources to investigate such allegations and/or defend our Company. This situation will be costly and time consuming and
distract our management from growing our Company. If such allegations are not proven to be groundless, our Company and business operations will be
severely impacted and your investment in our stock could be rendered worthless.
The disclosures in our reports and other filings with the SEC and our other public pronouncements are not subject to the scrutiny of any regulatory
bodies in the PRC. Accordingly, our public disclosure should be reviewed in light of the fact that no governmental agency that is located in China
where substantially all of our operations and business are located have conducted any due diligence on our operations or reviewed or cleared any of
our disclosures.
We are regulated by the SEC and our reports and other filings with the SEC are subject to SEC review in accordance with the rules and regulations
promulgated by the SEC under the Securities Act and the Exchange Act. Unlike public reporting companies whose operations are located primarily in the
United States, however, substantially all of our operations are located in China. Since substantially all of our operations and business take place in China, it
may be more difficult for the Staff of the SEC to overcome the geographic and cultural obstacles that are present when reviewing our disclosures. These
same obstacles are not present for similar companies whose operations or business take place entirely or primarily in the United States. Furthermore, our
SEC reports and other disclosures and public pronouncements are not subject to the review or scrutiny of any PRC regulatory authority. For example, the
disclosure in our SEC reports and other filings are not subject to the review of China Securities Regulatory Commission, a PRC regulator that is tasked
with oversight of the capital markets in China. Accordingly, you should review our SEC reports, filings and our other public pronouncements with the
understanding that no local regulator has done any due diligence on our Company and with the understanding that none of our SEC reports, other filings or
any of our other public pronouncements has been reviewed or otherwise been scrutinized by any local regulator.
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The audit report included in this annual report is prepared by auditors who are not inspected fully by the Public Company Accounting Oversight
Board, or the PCAOB, and, as such, our shareholders are deprived of the benefits of such inspection.
As an auditor of companies that are publicly traded in the United States and a firm registered with the PCAOB, BDO China Shu Lun Pan Certified
Public Accountants LLP is required under the laws of the United States to undergo regular inspections by the PCAOB. However, because we have
substantial operations within the PRC, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese
government authorities, our auditor and its audit work is not currently inspected fully by the PCAOB.
Inspections of other auditors conducted by the PCAOB outside China have at times identified deficiencies in those auditors' audit procedures and
quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The lack of PCAOB inspections of
audit work undertaken in China prevents the PCAOB from regularly evaluating our auditor's audits and its quality control procedures. As a result,
shareholders may be deprived of the benefits of PCAOB inspections, and may lose confidence in our reported financial information and procedures and the
quality of our financial statements.
In May 2013, the PCAOB announced that it has entered into a Memorandum of Understanding (MOU) on Enforcement Cooperation with the
China Securities Regulatory Commission (the CSRC) and the Ministry of Finance (the MOF). The MOU establishes a cooperative framework between the
parties for the production and exchange of audit documents relevant to investigations in both countries’ respective jurisdictions. More specifically, it
provides a mechanism for the parties to request and receive from each other assistance in obtaining documents and information in furtherance of their
investigative duties. In addition to developing enforcement MOU, the PCAOB has been engaged in continuing discussions with the CSRC and MOF to
permit joint inspections in China of audit firms that are registered with the PCAOB and audit Chinese companies that trade on U.S. exchanges.
On November 18, 2016, the PCAOB issued its 2016 to 2020 Strategic Plan on improving the quality of the audit for the protection and benefits of
investors, which revised the plan to update initiatives relating to the PCAOB’s new standard-setting process, planning for and adopting a permanent broker-
dealer inspection program, inspecting firms located in China, audit quality indicators, monitoring and developing reports related to independence and the
business model of the firms and business continuity. This may eventually improve PCAOB’s ability to conduct inspections of independent registered public
accounting firms operating in China.
Risks Related to Our ADSs
The market price for our ADSs may be volatile.
The market price for our ADSs is highly volatile and subject to wide fluctuations in response to various factors, including the following:
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actual or anticipated fluctuations in our quarterly operating results and revisions to our expected results;
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;
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changes in market valuations of U.S. listed companies headquartered in China, and in particular small capitalization companies;
announcements by us or our competitors of new products, acquisitions, strategic relationships, joint ventures or capital commitments;
addition or departure of our senior management and key personnel;
fluctuations of exchange rates between the Renminbi and the U.S. dollar;
litigation related to our intellectual property;
release or expiry of transfer restrictions on our outstanding ordinary shares; and
sales or perceived potential sales of our ADSs.
In addition, the securities market has from time to time, and to an even greater degree over the past several years, experienced significant price and
volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also have a material adverse
effect on the market price of our ADSs. In the event that market price of our ADSs is below $1 for more than 30 consecutive business days we will fail to
meet the requirements of Nasdaq listing rules. Furthermore, in the past, following periods of volatility in the market price of a public company’s securities,
shareholders have frequently instituted securities class action litigation against that company. Litigation of this kind could result in substantial costs and a
diversion of our management’s attention and resources.
We may be precluded from paying any dividends on our ADSs.
Under British Virgin Islands law, we may pay dividends if the directors declare that the company is able to satisfy the provisions of Section 57 of
the BVI Business Companies Act, 2004, or the BVI Act. Pursuant to this provision, the company, immediately after the distribution, must satisfy the
solvency test, in so far as its assets exceeds its liabilities, and the company must be able to pay its debts as they become due. Our ability to pay dividends
will therefore depend on our ability to generate sufficient profits. Even if we are able to pay dividends, we cannot give any assurance that we will declare
dividends of any amounts, at any rate or at all in the future. We have not paid any dividends in the past. Future dividends, if any, will be at the discretion of
our board of directors, subject to the approval of our shareholders, and will depend upon our results of operations, our cash flows, our financial condition,
the payment of our subsidiaries of cash dividends to us, our capital needs, future prospects and other factors that our directors may deem appropriate. We
currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.
You may not have the same voting rights as the holders of our ordinary shares and may not receive voting materials in time to be able to exercise your
right to vote.
Holders of our ADSs may not be able to exercise voting rights attaching to the shares represented by our ADSs on an individual basis. Holders of
our ADSs appoint the depositary or its nominee as their representative to exercise the voting rights attached to the ordinary shares represented by the ADSs.
You may not receive voting materials in time to instruct the depositary to vote, and it is possible that you, or persons who hold their ADSs through brokers,
dealers or other third parties, will not have the opportunity to exercise your right to vote.
Your right to participate in any rights offering may be limited, which may cause dilution to your holdings, and you may not receive cash dividends if it
is impractical to make them available to you.
We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make rights
available to you in the United States unless we register the rights, and the securities to which the rights relate, under the Securities Act, or unless an
exemption from registration is available. Under the deposit agreement, the depositary will not make rights available to you unless both the rights and the
underlying securities to be distributed to ADS holders are either registered under the Securities Act or exempt from registration. We are under no obligation
to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective and
we may not be able to establish a necessary exemption from registration under the Securities Act. Accordingly, you may be unable to participate in our
rights offerings and may experience dilution in your holdings as a result.
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The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on our ordinary shares or
other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your
ADSs represent. However, the depositary may, at its discretion, decide that it is inequitable or impractical to make a distribution available to holders of
ADSs. For example, the depositary may determine that it is not practicable to distribute certain property through the mail, or that the value of certain
distributions may be less than the cost of mailing them. In these cases, the depositary may decide not to distribute such property to you.
You may be subject to limitations on transfer of your ADSs.
Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time
when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of
ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deems it advisable to do so because of any
requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.
If we are classified as a passive foreign investment company, our U.S. shareholders may suffer adverse tax consequences.
Generally, if for any taxable year, after applying certain look-through rules, 75% or more of our gross income is passive income, or at least 50% of
our assets (generally based on average value determined on a quarterly basis) are held for the production of, or produce, passive income, we may be
characterized as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes. This characterization could result in adverse U.S.
tax consequences to our U.S. shareholders, including gain realized on the disposition of our ADSs or ordinary shares being treated as ordinary income
rather than capital gain and in punitive interest charges being applied to such sales proceeds. Rules similar to those applicable to dispositions apply to
amounts treated as “excess distributions.”
We do not believe that we were a PFIC for our previous taxable year. However, because the determination of our PFIC status is based on such
factual matters as the composition of our income and assets, the valuation of our assets, and our market capitalization, there is no assurance that the United
Stated Internal Revenue Service (“IRS”) will agree with our position. In addition, there can be no assurance that we will not become a PFIC for current
taxable year or in future taxable years. U.S. shareholders should consult with their own U.S. tax advisors with respect to the U.S. tax consequences of
investing in our ADSs or ordinary shares if we were to become a PFIC. See “Taxation — United States Federal Income Taxation.”
If equity research analysts do not publish research or reports about our company or if they issue unfavorable commentary or downgrade our ADSs, the
price of our ADSs could decline.
The trading market for our ADSs relies in part on the research and reports that equity research analysts publish about us and our company. We do
not control these analysts. The price of our ADSs could decline if one or more equity analysts downgrade our ordinary shares or if they issue other
unfavorable commentary, or cease publishing reports, about us or our company.
ITEM 4.
INFORMATION ON THE COMPANY
4.A. History and Development of the Company
We were incorporated under the laws of the British Virgin Islands as Ultra Glory International Ltd., or Ultra Glory, in 2010. We operate under the
BVI Act. Our registered office is located at Akara Bldg., 24 De Castro Street, Wickhams Cay 1, Road Town, Tortola, British Virgin Islands. The telephone
number of the registered office is +86 (21) 51192951. Our World Wide Web address is http://www.osseninnovation.com. Information contained on our
website does not constitute a part of this annual report. The SEC maintains an Internet site that contains reports, proxy and information statements, and
other information regarding issuers that file electronically with the SEC at http://www.sec.gov.
Our agent for service of process in the United States is CT Corporation System, 111 Eighth Avenue, New York, New York 10011. The telephone
number of our agent for service is (212) 894-8940.
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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.
Capital Expenditures
We incurred capital expenditures of approximately $139,795 and $72,305 for the years ended December 31, 2019 and 2018, respectively,
primarily in connection with maintenance and repair of current production lines. These capital expenditures were financed by proceeds from bank financing
and cash provided by operating activities.
We expect to incur further capital expenditures in fiscal year 2020 in connection with our production lines.
4.B. Business Overview
Overview
We manufacture and sell an array of plain surface prestressed steel materials and rare earth coated and zinc coated prestressed steel materials,
which we believe is the most comprehensive array among our competitors in China. Our materials are used in the construction of bridges, highways and
other infrastructure projects in the PRC and internationally. Our facilities are located in Maanshan City, Anhui Province and in Jiujiang City, Jiangxi
Province in the PRC. Based on our extensive experience in the industry, we believe that Ossen is one of the leading enterprises in the PRC in the design,
engineering, manufacture and sale of customized prestressed steel materials used in the construction of bridges, highways, and other infrastructure projects
in China.
During the year ended December 31, 2019, we generated revenue of approximately $107.3 million, or 77.2% of our total revenue (as compared to
$103.4 million, or 76.0% of our total revenue, in 2018), from sales of our rare earth coated PC wires and PC strands.
While we believe that our rare earth coating capabilities provide us with a competitive advantage among our competitors due to higher strength
and higher quality, however, it is likely that our competitors may develop similar competing products. We intend to continue to expand research and
development efforts to advance our rare earth coating applications even further including improving the product’s corrosion-resistant level and increasing
the product’s strength and life span However, there can be no assurance that our initial competitive advantage will be retained and that one or more
competitors will not develop products that are equal or superior to ours in quality or are better priced than our rare earth coated products.
The primary characteristics of coated prestressed products, which are used in infrastructure projects, most notably, the construction of new bridges
and the renovation of older bridges in need of repair, are as follows:
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Superior corrosion resistance;
Superior toughness and plasticity;
Endurance against extreme heat;
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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 Ma’anshan
City and Jiujiang City in the PRC.
In 2013, the Chinese market began to adopt zinc-aluminum alloy coated PC wires and PC strands, which have more corrosion-resistance and
stronger protective effect than zinc coated PC wires and PC strands. Our research and development department is currently developing a method to apply
rare earth materials to the zinc-aluminum alloy coating process. We have made progress in developing such product so far and we will continue our
research and development efforts in 2020. We anticipate that additional time will be necessary for such products to pass government inspection and to gain
acceptance in the market.
Ossen Materials, our operating subsidiary, was founded in 2004. In 2005, we expanded our manufacturing capabilities by acquiring a facility in
Jiujiang City in the PRC and forming Ossen Jiujiang. The senior management team of Ossen were among the first in China to introduce and promote the
use of prestressed steel materials in construction projects. They have been involved in producing prestressed materials since 1994 and each has
accumulated nearly 25 years of experience in the prestressed materials industry.
Competitive Advantages
Our management believes that the following competitive strengths differentiate us from other domestic and international competitors and are the
key factors to our success:
We are taking advantage of industry trends in the bridge infrastructure sectors in the PRC and other international markets
To echo the “13th-Five Year Plan” promulgated by the People’s Republic of China’s government in 2017, in recent years, the government places
great effort in boosting the investment in transportation infrastructure sector in order to accelerate economic cooperation between regions within China. In
line with the plan, the government had also promulgated several directives in relation to the improvement of transportation infrastructure aiming at
alleviating poverty in areas with extreme poverty by providing them better access to and from other regions. As such, the growth in the infrastructure
construction industry in China is expected to remain strong. Since December 2019, the National Development and Reform Commission has approved
numerous infrastructure construction projects, amounting to approximately RMB270 billion, focusing on high speed rail, transportation infrastructure
aiming at fostering communication and the mobility of people between cities and rural areas, in particular, the Western region, the Guangdong Province,
Shandong Province, Hebei Province and Fujian Province. In addition, in response to the impact of the COVID-19 pandemic, China’s central and local
governments have announced key infrastructure project investment plans for 2020. The total investment is approximately RMB 25 trillion (approximately
$3.6 trillion) and the planned investment in 2020 is approximately RMB 3.5 trillion (approximately $500 billion). As the Company’s business is closely
connected with the infrastructure investment in China, we believe that these developments should create new opportunities for us in 2020 and beyond.
Leading provider of customized prestressed steel materials
Based on our extensive experience in the industry, we believe that Ossen is one of the leading enterprises in the PRC in the design, engineering,
manufacture and sale of customized prestressed steel materials used in the construction of bridges, highways, and other infrastructure projects in China. We
manufacture and sell an array of plain surface prestressed steel materials and rare earth coated and zinc coated prestressed steel materials, which we believe
is the most comprehensive array among our competitors in China and which are used in the construction of bridges, highways and other infrastructure
projects in the PRC and internationally. Our facilities are located in Maanshan City, Anhui Province and in Jiujiang City, Jiangxi Province in the PRC.
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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 extensive experience in prestressed materials industry. We have built a recognized brand name in the industry by introducing innovative solutions
to the prestressed materials industry, and particularly coated prestressed materials, in China and internationally. Our engineering team works closely with
our customers in order to understand their requirements. We have been able to introduce new equipment to enhance cost saving and time reduction in the
construction of bridges, highways, railways and buildings, as well as numerous other projects.
Efficient proprietary production technology
We continually pursue technological improvements to our manufacturing processes via our strong in-house development teams. We own thirty-
seven patents granted by the State Intellectual Property Office of the PRC, including seven invention patents and thirty utility model patents as of May 18,
2020. These patents and patent applications are intended to protect our technologies, including production processes of various wire ropes, pickling
methods for steel wire materials, the quality control methods for certain steel wire products and devices designed for the production of steel wire. Our
research and development efforts have generated technological improvements that have been instrumental in controlling our production costs and
increasing our operational efficiency, most notably with respect to the development of our rare earth coated materials.
Strong recognition from domestic and international customers for supplying materials for infrastructure projects
The solid reputation that our management team has developed over the past nearly 25 years in the prestressed material industry in China and in
other countries such as Canada, the United States, Japan, South Korea, Bangladesh, South Africa, Italy and Spain, including an established track record for
consistently providing quality products at competitive prices, has enabled us to develop a strong customer base and to be involved in major building
projects.
We generated approximately 1.8% and 3.3%, respectively, of our revenue during the years ended December 31, 2019 and 2018 from sales to
customers in international markets including primarily Vietnam, South Korea, Japan, and Oman, primarily for use in the construction of bridges. Due to the
anti-dumping measures imposed by the United States and European Union in 2008 and 2009 and recent stiff trade measures imposed by the United States
government in 2018 and 2019, we do not intend to reestablish a presence in the United States or the European Union at the levels we experienced in 2008
in the near future. However, if opportunities arise in the U.S. or EU markets or in other international markets for us to win bids on projects or to reengage
with former customers or establish relationships with new customers, we would pursue such opportunities. The measures imposed in 2018 and 2019 may
have a negative impact on our business and results of operations because Chinese-based steel product exporters may focus more of their marketing efforts
on the Chinese domestic market.
Rigorous quality control standards
Consistent with our continuing commitment to quality, we impose rigorous quality control standards at various stages of our production process.
We strictly comply with various national and international quality standards with respect to the manufacture of prestressed materials. Our certifications and
accreditations include the Japanese Industrial Standards (JIS) certification, United Kingdom Accreditation Service (UKAS), the Korean Standards
Association (KS) certification from South Korea and an ISO 9001 certification. We believe that these certifications, together with the numerous national
awards that we have been awarded demonstrate our commitment to producing high-quality products as well as providing us with a competitive advantage
over some of our competitors in certain international markets and in China.
Experienced management and operational teams with domestic PRC international market knowledge
Our senior management team and key operating personnel have extensive management skills, relevant operating experience and industry
knowledge. In particular, Dr. Liang Tang, our Chairman, is a Doctor of Economics, Senior Engineer and Professor of Finance and Statistics at the School of
East China Normal University, and has extensive experience managing and operating companies in the prestressed steel industry. We believe our
management team’s experience and in-depth knowledge of the market in China and internationally will enable us to continue to successfully execute our
expansion strategies. In addition, we believe our management team’s strong track record will enable us to continue to take advantage of market
opportunities that may arise.
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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.
Indented PC wires. This product consists of an individual round wire that contains an indentation used in the construction of buildings.
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o Helical (spiral) rib PC wires. This product consists of an individual round wire whose surface is pulled out into a helical rib pattern used
in the construction of railway ties, or sleepers, and buildings.
PC wires are categorized based on size, strength and structure. Sizes range from 4.0mm to 9.0mm. Strength level ranges from 1570MPa to
2000MPa. The number of strands in the products varies between 3 and 7.
Coated Prestressed Products
Our coated prestressed products included zinc coated PC products and rare earth coated PC products. Rare earth coated prestressed products are
plain surface materials that are coated with a rare earth or rare earth alloy protective layer so as to produce materials that are more corrosion-resistant and
long-lasting. The purpose of coating is to generate a surface layer to protect the materials from erosion, abrasion and oxidization, without changing the
elements of the basic materials or weakening the basic material’s strength or other functionality through any techniques that utilize physical chemistry or
electrochemistry. The coating process can cause loss of strength in regular steel materials, but the loss of strength in rare earth coated prestressed products
is reduced.
For steel wires and strands, coating can provide a protective layer to improve the product’s corrosion-resistant level and increase its life span.
Traditional technology uses zinc as the coating material and such products are called zinc coated PC wires and PC strands. The introduction of rare earth in
the coating process adds more benefits to the final products. When rare earth is added into the coating material and form a new alloy with zinc, it increases
further the life span of the product. More importantly, it reduces the loss of strength compared to traditional zinc coating process.
The coating process happens in an environment with very high temperature. Because of the high temperature, there will be some loss of product
strength during the coating process. For example, if the steel wires to be used as raw material have a strength level of 2000 MPa (mega pascal), its strength
level will lose about 300 MPa after going through the traditional coating process. When zinc forms a new alloy with rare earth and is used as a coating
layer, the requirement of high temperature for processing could be lowered. Processing with lower temperature results in less loss of product strength
during the coating process. Therefore, the same raw material, if using rare earth coating, could deliver higher strength final product. Compared with better
corrosion-resistant level, longer life span, higher strength level may be the most important benefit rare earth coated products bring to customers, as
compared to zinc coated products. Higher strength means less steel is needed to build the bridge. The bridge cables could be slimmer, quantity of steel
required for construction could be less and overall construction cost could be reduced.
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Applications of zinc coated PC wires and PC strands are primarily in the construction of bridges.
Customers that purchase our prestressed materials also purchase other supporting products, such as anchorage devices and ripple tubes, to
complement our materials. These supplementary products are produced by anchorage manufacturing factories that are unaffiliated with us.
Competition
China is one of the world’s largest producers and markets for prestressed steel materials. In 2018 and 2019, our sales were predominantly to
customers located in the PRC, and as a result, our primary competitors were PRC domestic companies.
We believe that being located in China provides us with a number of competitive factors within our industry, including the following:
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Pricing. Flexibility to control pricing of products and the ability to use economies of scale to secure competitive pricing advantages;
Technology. Ability to manufacture products efficiently, utilize low-cost raw materials, and to achieve better production quality; and
Barriers to entry. Technical knowledge, access to raw materials, local market knowledge and established relationships with suppliers and
customers to support the development of commercially viable production facilities and products.
Competition among manufacturers of plain surface steel products in China can be characterized as fragmented, with many large and small
companies competing with each other. Our primary competitors for these products are Guizhou Steel Wire Co., Ltd. and Silvery Dragon Co., Ltd.
Competition among PRC manufacturers of zinc coated prestressed products in China is limited to only several companies. Our main competitors
for these products are Baosteel Group Nantong Wire Products Co., Ltd., Shuangyou Eaststeel and Jiangyin Walsin Steel Cable Co. Ltd. Furthermore, while
we believe that our rare earth coating capabilities provide us with a competitive advantage among our competitors, however, it is likely that our competitors
may develop similar competing products. We intend to continue to expand research and development efforts to advance our coating applications even
further, including improving the products’ corrosion-resistant level and increasing the products’ strength and life span However, there can be no assurance
that our initial competitive advantage will be retained and that one or more competitors will not develop products that are equal or superior to ours in
quality or are better priced than our rare earth coated products.
We believe that we differentiate ourselves because we have built a recognized brand name in the industry and because we offer superior product
quality, timely delivery and high value. We believe that we have the following advantages over many of our competitors:
·
·
·
·
·
·
the performance and cost effectiveness of our products;
our ability to manufacture and deliver products in required volumes, on a timely basis, and at competitive prices;
superior quality and reliability of our products;
our after-sale support capabilities, from both an engineering and an operational perspective;
effectiveness of customer service and our ability to send experienced operators and engineers as well as a seasoned sales force to assist our
customers; and
overall management capability.
25
Seasonality
Demand for our products is slightly affected by seasonality and is usually low during the first quarter of every year, as January or February is the
Chinese New Year holiday and the winter weather in northern China is cold, which results in a slowdown of construction.
Our Raw Materials and Supply
Raw Materials
High carbon steel wire rods are the primary raw material required to manufacture prestressed steel materials. The quality and cost of the rods we
purchase differ between our plain surface products and our rare earth and zinc coated products. Rare earth and zinc coated products require higher-priced
rods that are higher in purity and durability. The price for certain rods needed for coated products is higher than rods needed for plain surface products.
Our Supply Sources
We select our suppliers by assessing criteria such as the quality of materials supplied, the duration of the supplier’s business relationship with us,
pricing, delivery reliability and response time to orders placed by us. To minimize purchasing costs, we use a limited number of suppliers. Because we
purchase substantial quantities from these suppliers, we are often able to procure these products at competitive prices. We usually enter into a one-year
purchase agreement with each supplier and then order on a spot basis for each delivery. We negotiate pricing with our suppliers on an arm’s length basis
prior to the delivery of these supplies to us, based upon the prevailing market prices at such time.
The suppliers that supplied us with a significant percentage of our raw materials for the past three years were Jiangsu Shagang Group Co., Ltd.,
Shanghai Chemical Industry Supply and Marketing Co., Ltd., Jiangxi Yigeer Technology Co., Ltd., Shanghai Yehao Steel Co. Ltd., and Baosteel Group
Nantong Wire Products Co., Ltd. and all are based in China.
Purchases from our five largest suppliers accounted for 99.8% and 99.8%of our raw material purchases in 2019 and 2018, respectively.
Nonetheless, we are not dependent on any one of our suppliers, as we are able to source raw materials from alternative vendors should the need arise. We
have not experienced significant production disruptions due to a supply shortage from our suppliers, nor have we had any major dispute with a material
supplier.
Volatility of Price of Raw Materials
We have no long-term, fixed-price steel purchase contracts. When steel prices increase competitive conditions will influence how much of the
price increase we can pass on to our customers. To the extent we are unable to pass on future price increases in our raw materials to our customers, the
revenues and profitability of our business could be adversely affected. When steel prices decline, customer demands for lower prices and our competitors'
responses to those demands could result in lower sale prices, lower margins and inventory valued at the lower of cost or market adjustments as we use
existing steel inventory. Significant or rapid declines in steel prices or reductions in sales volumes could result in us incurring inventory or goodwill
impairment charges. Therefore, changing steel prices could significantly impact our revenues, gross margins, operating income and net income.
In 2019, Chinese central government focused on strictly controlling steel capacity increases after Chinese central government addressed the
overcapacity in the steel industry and lowered steel production by approximately 150 million tons in last a few years before 2019. However, due to the
uncertainty of the trade war between the United States and China and the slowdown of economic growth, as well as the increase of capacity utilization of
Chinese steel industry which resulted in the higher output of steel products, the average price of our principal raw materials decreased in 2019.
26
The recent outbreak of the coronavirus known as COVID-19 in China and other geographic areas may cause a disruption of the global supply
chain for certain raw materials necessary for our products. The extent to which COVID-19 impacts raw material prices in 2020 will depend on the future
developments of the outbreak, including new information concerning the global severity of and actions taken to contain the outbreak, which are highly
uncertain and unpredictable.
Manufacturing Process
Equipment
Our production facilities use innovative equipment and machinery imported from France and Italy and, we believe, is of the highest quality in
metal wire drawing, wire stranding, zinc plating and finishing. Our production lines produce prestressed steel materials that meet quality standards
mandated by numerous countries, including Japan, the United Kingdom and South Korea.
We own cutting edge technologies in over 20 high-tech fields, including oil-immersion preservation technology, new coating production
technology, skin pass coating technology, coating stabilization technology, zinc rare earth alloy plating technology, new high-temperature phosphorization
heating technology, new material traction technology, rare earth alloy technology, new fixed scoring technology, new high-temperature low-speed thread
stripping technology, and double coating stabilization, among others. We believe that we are the leading company in our industry with respect to the
implementation of innovative technologies in the manufacture of prestressed steel materials.
Production Process
The production of our products involves various steps, including inspection, pickling, washing, rinsing, phosphatizing, boronizing, surface
treatment, plating, baking, coating, cooling, polishing, inspection and packaging. The technology and procedures used in the above processes vary among
the different products that we manufacture and depend upon the product specifications prescribed by a particular customer.
Generally, the manufacturing process involves the following:
·
·
·
Cleaning steel wire rods or other similar raw materials by chemical pickling, mechanical de-scaling or a similar process. The materials are then
cold drawn and reduced until the desired diameter and resistance characteristics are achieved. This process is what provides the material with its
strength.
In the production of strands, the individual wires (either 3 or 7 wires) are braided together to form a strand.
The final step is to subject the steel material to a thermo-chemical process which endows the material with mechanical properties, such as low
relaxation, which enable the material to last over time.
Processing Lines
We currently have 18 processing lines, consisting of the following:
·
·
·
·
·
·
·
Two surface treatment lines, one located in our Maanshan facility and one in our Jiujiang facility, each composed of an acid pickling bath, rinsing
bath, high pressure water rinsing bath, phosphating bath, saponification (boronizing) bath and cleaning bath.
Seven wire drawing production lines, four located in our Maanshan facility and three in our Jiujiang facility, each composed of a pay-off machine,
drawn can and take-up machine. Each of our half-finished products is processed on a wire drawing production line.
Three PC strand stabilization treatment lines, two located in our Maanshan facility and one in our Jiujiang facility, each composed of stranding
machines, straightening wheels, jockey wheels, medium frequency furnace, cooling tank, take-up and pay-off machines, a wire arraying machine
and a layer winding machine. The PC strand stabilization product lines in our Jiujiang facility produce plain surface PC strands and zinc coated PC
strands of various specifications.
One zinc galvanization line, located in our Jiujiang facility, composed of a pay-off machine, degreasing furnace, acid rinsing pickling tank,
assistant plating tank, drying furnace, galvanizing furnace, drawing tower and take-up machine. Half-finished products needed for different series
of zinc coated PC wires and strands are produced on this line.
Two surface finishing lines, both located in our Jiujiang facility, each composed of a pay-off machine, a finishing machine and a take-up machine.
These production lines are used to produce half-finished products of zinc coated PC wires and strands.
Two PC wire stabilization treatment lines, both located in our Jiujiang facility, each composed of a pay-off machine, jockey wheel, straightening
machine, indent marking machine, medium frequency furnace, cooling tank, towing machine, shearing machine and take-up machine. Zinc coated
PC wires, round PC wires, indented PC wires and helical rib PC wires are produced on these production lines.
One unbonded PC strand line, located in our Jiujiang facility, composed of a pay-off machine, oiling machine, high-density polyethylene plastic
injection machine, water tank, towing machine and take-up machine. This line is used to produce different series of unbonded plain surface PC
strands and unbonded zinc coated PC strands.
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.
Distribution
Both of our manufacturing plants are equipped with facilities for cargo lifting, shipment and distribution. Products for domestic customers are
distributed to the destination designated by our customers. Products for international customers are delivered either to carriers at various ports of exit in
China or delivered to a designated destination overseas.
Technical After-Sales Services
Our team of experienced engineers and technicians provides after-sales services to our customers. After the delivery of our materials, our
engineers train our customers to install and identify and address safety and maintenance concerns. After a sale of our product, we introduce and advertise
the company brand position, distribute a guide application method process, issue regulation manuals, and explain and solve general and difficult problems.
All technical after-sales services are provided to our customers free of charge.
28
Our Customers
We sell the vast majority of our products domestically in China. Since our inception, we have also exported our products to foreign countries,
including the United States, Canada, Spain, Japan, South Korea, Taiwan, Australia, South Africa and Saudi Arabia, among others. Our customers are
diverse in nature, as we sell our products directly to end users, to other manufacturers and to distributors, in each case depending on the nature of the
product and the utilization of the product.
While we value our relationship with each of our customers, we believe that generally the loss of any particular customer, including our largest
customers, would not materially impact our business in the long-term. Many of our customer contracts relate to designated infrastructure projects which are
performed during a defined period of time, and are not necessarily long-term in nature. Accordingly, if any of our customers were to discontinue purchasing
our products, we would actively seek new customers, which we have been successful doing in the past.
In 2019 and 2018, sales to our six largest customers, in the aggregate, accounted for approximately 66.8% and 68.3% of our total sales,
respectively. The following table provides the name of each customer that contributed to more than 10% of our revenues in each of 2019 and 2018 and the
percentage of our revenues generated from such customers during these periods.
Name of Customer
Zhangjiagang Shajing Iron and Steel Trading Co., Ltd.
Jiangsu Jinrun Steel Cable Co., Ltd.
Zhangjiagang OVM Machinery Co., Ltd.
Shanghai Xingshun Steel Pipe Factory
Zhejiang Kexin Engineering Material Co., Ltd.
Liuzhou OVM Machinery Co., Ltd.
* Less than 10% of our annual revenues.
2019 Revenues 2018 Revenues
(%)
(%)
21.4
*
10.2
10.6
*
*
*
13.6
14.1
*
14.6
10.2
The following table describes the breakdown of our sales in 2019 and 2018 between our domestic and international customers.
Domestic Sales
International Sales
Total Sales
For the Year Ended December 31,
2019
2018
$
136,414,471 $
131,642,673
$
2,485,886 $
4,462,194
$
138,900,357 $
136,104,867
29
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 $4.4 million and $3.3 million in 2019 and 2018, respectively, on our research and development activities to customize products for new or existing
customers and develop new products. The nature of our research and development activities needed for our product development is generally not cash
intensive. In addition, a portion of the work is conducted by organizations and universities with which we have a collaborative relationship.
We regularly train the members of our research and development department in order to consistently enhance our research and development
capabilities in the field of coating technology. We have developed a business model that involves a very close interrelationship between our research and
development department and our product development and marketing departments. As a result, we focus our research and development activities on
projects that would enable us to branch out our products into new desired markets. In addition, we conduct research and development activities that enable
us to increase our market share in existing markets in the PRC and internationally. We also focus certain of our research and development activities on
higher margin products that can be sold to customers in international markets.
Specifically, we have entered into cooperation agreements with Jiujiang Institute pursuant to which the institute assists us in our efforts to improve
the comprehensive function and manufacturing technique of our high strength, anti-erosion zinc coated prestressed strands. These high strength products,
which have high endurance against erosion, are sold domestically and internationally. Pursuant to a two-year research cooperation agreement with Jiujiang
Institute in 2017, Ossen Jiujiang agreed to provide its research and development resources such as the research and development team and testing
laboratories for facilitating students of Jiujiang Institute to develop new technology know-how on certain galvanised prestressed technology with a view to
reducing unit costs, improving production efficiency, upgrading product quality. On December 28, 2018, we have renewed our cooperation agreements
with Jiujiang Institute for two more years.
In 2019, we also have three research and development projects listed as Jiujiang City Science and Technology Project. They are Φ15.20mm
1960MPa unbonded galvanized PC strand, Φ5.00mm 1960MPa aluminum alloy galvanized PC wire and Φ5.00mm 1960MPa galvanized aluminum and
rare earth alloy galvanized PC wire. In addition, we are cooperating with other steel manufacturers in research efforts regarding zinc coated PC wires,
which serve as raw materials for our zinc coated PC strands, indented PC wires and helical rib PC wires with high performance and are designed for our
international customers.
In addition, our Jiujiang facility received the recognition of Jiujiang Municipal Enterprise Technology Center by Jiujiang Municipal Government
in 2012 and our Maanshan facility received Maanshan Municipal Projects Technology Research Center by Maanshan Municipal Science and Technology
Bureau in 2014.
We believe that our research and development activities and production technology for rare-earth zinc coated materials have enhanced our market
position. By using rare earth-alloy-plating technology, we are able to lower the temperature for the stabilizing treatment during the production process and
thereby minimize the loss of strength during the stabilizing process. As a result, this technology reduces the level of strength required of our raw materials
under circumstances of unvaried finished product strength requirement and enables us to produce materials with greater strength under circumstances in
which the strength of raw materials remains firm. We can produce zinc rare earth alloy coated pre-stressing materials of 1,860 mega pascal (“mPa”)
strength level and 15.20 mm diameter, as a result of our rare earth alloy-plating technology. We will continue our research and development efforts to
improve the strength and stability of such product.
We plan to continue our research and development efforts to strengthen our leading position in our industry. In 2014, we developed 12.7 mm 2060
mPa ultra high strength and low relaxation prestressed strands. Our research and development team also upgraded the heating method of acid pickling
process, the circulating cooling water system of steel wire stabilization production line, and the winding system of coated steel wire We also own or lease
various technologies that improve the quality of our products and reduce our operating costs, including coating polished technology, stabilizing treatment
technology for dual tension gear zinc coated prestressing material, warning technology for missing plating of coating production line, stranded wire
greasing technology, water cut-off technology by strander infrared temperature detection and other core technologies.
30
Intellectual Property
We rely on a combination of patents, trademarks, domain names and confidentiality agreements to protect our intellectual property. Our
manufacturing processes are based on technology developed primarily in-house by our research and development and engineering personnel.
With respect to proprietary know-how that is not patentable and processes for which patents are difficult to enforce, we rely on, among other
things, trade secret protection and confidentiality agreements to safeguard our interests. All of our research and development personnel have entered into
confidentiality and proprietary information agreements with us. These agreements address intellectual property protection issues and require our associates
to assign to us all of the inventions, designs and technologies they develop during the course of employment with us. We are not aware of any material
infringement of our intellectual property rights.
Patents
As of May 18, 2020, we have thirty-seven patents registered with the State Intellectual Property Office of the PRC, including seven invention
patents and thirty utility model patents.
Between January 1, 2019 and May 18, 2020, two previously-pending utility model patent was approved by the State Intellectual Property Office.
Actual examination times for patent applications in China vary, but examinations of similar patent applications have taken approximately one year.
These patents and patent applications are intended to protect the production processes of various wire ropes, pickling methods of materials of steel wire, the
quality control methods for certain steel wire products and devices designed for the steel wire production. The term of all of the utility model patents is ten
years from the filing of the application and the term of all of the invention patents is twenty years from the filing of the application. We currently do not
have any patents registered or pending in any jurisdiction outside of the PRC.
The following table provides the name, the application number or patent number, the name of the applicant or patent holder and the status of our
registered invention patents and each of our invention patent applications, and the expiration date of our registered invention patent:
Name
Stabilizing Process of Indented Wire
Method to Change the Length of Waste of Stranded Wire Joint
Production Process of Zinc Coated Steel Wire
Re-processing Technology of Galvanized Steel Wire
Prestressed Galvanized Steel Wire Joint Stabilizing Processing
Production Method
High-strength Prestressed Steel Wire Drawing and Matching Method
Prestressed Steel Strand Aeration Pickling Tank and Pickling Method
Application No.
/Patent No.
Applicant
/Patent
Holder
ZL200710157149.0 Ossen Jiujiang
ZL200910144241.2 Ossen Materials
ZL201010105179.9 Ossen Jiujiang
ZL201310137387.0 Ossen Jiujiang
Status
Registered
Registered
Registered
Registered
ZL201610567857.0 Ossen Jiujiang
ZL201610567616.6 Ossen Jiujiang
ZL201510161287.0 Ossen Materials
Registered
Registered
Registered
Expiration
Date
11/22/2027
7/26/2029
2/2/2030
4/18/2033
7/18/2036
7/18/2036
4/6/2035
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 each
of our registered utility model patents and utility model patent applications, and the expiration dates of our registered utility model patents:
Name
Lubricating Device for Twisted Strand of Steel Strand
Application No.
/Patent No.
Applicant
/Patent
Holder
ZL201821549310.9 Ossen Materials
Status
Registered
Expiration
Date
09/20/2028
Inductive Water Saving Device
ZL201220218155.4 Ossen Materials
Registered
06/25/2021
Anti-Impact Gear
ZL201220217756.3 Ossen Materials
Registered
06/23/2021
Lock Device for PC Strand Production Wheel
ZL201220218156.9 Ossen Materials
Registered
06/25/2021
New Dies for Wire Drawing
ZL201320723167.7 Ossen Materials
Registered
12/24/2022
Energy-saving Device for Acid Mist Drainage
ZL201320722838.8 Ossen Materials
Registered
12/24/2022
Cold Assembly Mould
Prestressed Strand Spreader
ZL201420023335.0 Ossen Materials
Registered
1/14/2024
ZL201420023447.6 Ossen Materials
Registered
1/14/2024
Pickling Pool Electric Heating Control System
ZL201620087931.4 Ossen Materials
Registered
1/26/2026
Air Compressor Motor Protection System
ZL201620087953.0 Ossen Materials
Registered
1/26/2026
Prestressed Steel Wire Ultrasonic Vibration Pickling Pool
ZL201621197903.4 Ossen Materials
Registered
11/6/2026
Prestressed Strand Online Water Removal Device
ZL201720979882.X Ossen Materials
Registered
8/6/2027
Prestressed Steel Strand Production Spiral Air Cylinder
ZL201621197904.9 Ossen Materials
Registered
11/6/2026
Closed Soot Filter System for Strand Production
ZL201721178282.X Ossen Materials
Registered
9/13/2027
Strand Take-up Machine
ZL201721177583.0 Ossen Materials
Registered
9/13/2027
Steel Wire On-line Oil Coating Device
ZL201721178741.4 Ossen Materials
Registered
9/13/2027
Prestressed Steel Strand Packaging Structure
ZL201720976708.X Ossen Materials
Registered
8/6/2027
Air Circuit Control System
ZL201921561142.X Ossen Materials
Registered
9/18/2029
Furnace for Zinc Coating Process
ZL201320200197.4 Ossen Jiujiang
Registered
4/18/2023
Actinomycetes Machine Discharge Line Protection Devices
ZL201320200077.4 Ossen Jiujiang
Registered
4/18/2023
Strand Actinomycetes Devices
ZL201320200171.X Ossen Jiujiang
Registered
4/18/2023
Cooling Device with Distilled Water for Medium Frequency Furnace
ZL201320199776.1 Ossen Jiujiang
Registered
4/18/2023
U-shape Hot Galvanizing Furnace
ZL201420532006.9 Ossen Jiujiang
Registered
9/16/2024
Plastic Particle Drying Mixer
ZL201420798062.7 Ossen Jiujiang
Registered
12/16/2024
Multi-functional Line Traction Machine for Steel Wire Stabilization
Processing Production Line
ZL201420798307.6 Ossen Jiujiang
Registered
12/16/2024
Dust Removing Device for Surface Treatment for Drawing Steel Wire
ZL201420798232.1 Ossen Jiujiang
Registered
12/16/2024
An Oil Weight Control Device for Unbonded Steel Strand
ZL201620720468.2 Ossen Jiujiang
Registered
7/10/2026
A Dedusting and Dedusting Device for A Prestressed Steel Strand Joint
Machine
ZL201620720466.3 Ossen Jiujiang
Registered
7/10/2026
A Galvanized Steel Wire Fixture for Tensile Testing Machine
ZL201620720452.1 Ossen Jiujiang
Registered
7/10/2026
A Trapezoid Mold for Wire Rod Drawing of Carbon Steel
ZL201620720451.7 Ossen Jiujiang
Registered
7/10/2026
32
Trademarks
We have been granted a total of five trademarks, three of which are registered trademarks in the PRC and two of which are registered with the
World Intellectual Property Organization (WIPO) in accordance with Madrid Agreement. The five trademarks which are described in the table below were
transferred by Shanghai Ossen Investment Co., Ltd., an entity controlled by Dr. Liang Tang (“Shanghai Ossen”) to Ossen Materials in 2008 and 2009.
Name of Trademark
A Figurative Trademark (Registered under Madrid Agreement )
Application No.
/Trademark No.
0973552
Applicant
/Trademark
Holder
Status
Ossen Innovation Materials Registered
“OSSEN” (Registered under Madrid Agreement )
0945308
Ossen Innovation Materials Registered
A Figurative Trademark (PRC Domestic Registered)
4396898
Ossen Innovation Materials Registered
“OSSEN” (PRC Domestic Registered)
4396895
Ossen Innovation Materials Registered
“” (PRC Domestic Registered)
Environmental Matters
4396896
Ossen Innovation Materials Registered
The Environmental Protection Law, promulgated by the National People’s Congress on December 26, 1989, is the primary law for environmental
protection in China. The law establishes basic principles for coordinated advancement of economic growth, social progress and environmental protection,
and defines the rights and duties of governments at all levels. Local environmental protection bureaus may set stricter local standards than the national
standards and enterprises are required to comply with the stricter of the two sets of standards. Due to the nature of our business, we produce certain
amounts of waste water, gas and solid waste materials during the course of our production. We believe that we are in compliance in all material respects
with applicable PRC laws and regulations. All of our products meet the relevant environmental requirements under PRC laws and during the three years
ended December 31, 2019, we were not subject to any fines or legal action involving non-compliance with any relevant environmental regulation, nor are
we aware of any threatened or pending action, including by any environmental regulatory authority.
Governmental Regulations
Business license
Any company that conducts business in the PRC must have a business license that covers a particular type of work. Our business license covers
our present business of manufacturing, processing, procuring and selling metallic materials, metallic products, new alloy materials, rare earth application
products, building materials, general machinery and related products. Prior to expanding our business beyond that of our business license, we are required
to apply and receive approval from the PRC government.
Employment laws
We are subject to laws and regulations governing our relationship with our employees, including: wage and hour requirements, working and safety
conditions, citizenship requirements, work permits and travel restrictions. These include local labor laws and regulations, which may require substantial
resources for compliance. China’s National Labor Law, which became effective on January 1, 1995, and China’s National Labor Contract Law, which
became effective on January 1, 2008, permit workers in both state and private enterprises in China to bargain collectively. The National Labor Law and the
National Labor Contract Law provide for collective contracts to be developed through collaboration between the labor union (or worker representatives in
the absence of a union) and management that specify such matters as working conditions, wage scales, and hours of work. The laws also permit workers
and employers in all types of enterprises to sign individual contracts, which are to be drawn up in accordance with the collective contract.
33
Patent protection in China
The PRC has domestic laws for the protection of copyrights, patents, trademarks and trade secrets. The PRC is also signatory to some of the
world’s major intellectual property conventions, including:
·
·
·
·
Convention establishing the World Intellectual Property Organization (WIPO Convention) (June 4, 1980);
Paris Convention for the Protection of Industrial Property (March 19, 1985);
Patent Cooperation Treaty (January 1, 1994); and
The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) (November 11, 2001).
Patents in the PRC are governed by the China Patent Law and its Implementing Regulations, each of which went into effect in 1985. Amended
versions of the China Patent Law and its Implementing Regulations came into effect in 2001 and 2003, respectively.
The PRC is signatory to the Paris Convention for the Protection of Industrial Property, in accordance with which any person who has duly filed an
application for a patent in one signatory country shall enjoy, for the purposes of filing in the other countries, a right of priority during the period fixed in the
convention (12 months for inventions and utility models, and 6 months for industrial designs).
The Patent Law covers three kinds of patents - patents for inventions, utility models and designs. The Chinese patent system adopts the principle
of first to file, which means that a patent may be granted only to the person who first files an application. Consistent with international practice, the PRC
allows the patenting of inventions or utility models that possess the characteristics of novelty, inventiveness and practical applicability only. For a design to
be patentable it cannot be identical with, or similar to, any design which, before the date of filing, has been publicly disclosed in publications in the country
or abroad or has been publicly used in the country, and should not be in conflict with any prior right of another.
Value added tax
Pursuant to the Provisional Regulation of China on Value Added Tax and their implementing rules, all entities and individuals that are engaged in
the sale of goods, the provision of repairs and replacement services and the importation of goods in China are generally required to pay VAT at a rate of
16.0% or 17.0% of the gross sales proceeds received, less any deductible VAT already paid or borne by the taxpayer. Since May 1, 2018, the VAT rate is
16% which applies to the manufacturing sector in China. Since April 1, 2019, the VAT rate has been further reduced and is 13% for the manufacturing
sector in China. Furthermore, when exporting goods, the exporter is entitled to a portion, or in some instances all, of the VAT refund that the exporter
previously paid.
Foreign currency exchange
Under the PRC foreign currency exchange regulations applicable to us, the Renminbi is convertible for current account items, including the
distribution of dividends, interest payments, and trade and service-related foreign exchange transactions. Conversion of Renminbi for capital account items,
such as direct investment, loan, security investment and repatriation of investment, however, is still subject to the approval of the PRC State Administration
of Foreign Exchange, or SAFE. Foreign-invested enterprises may buy, sell and/or remit foreign currencies only at those banks authorized to conduct
foreign exchange business, after providing valid commercial documents and, in the case of capital account item transactions, obtaining approval from
SAFE. Capital investments by foreign-invested enterprises outside of China are also subject to limitations, which include approvals by the Ministry of
Commerce, SAFE and the State Reform and Development Commission.
34
Mandatory statutory reserve and dividend distributions
Under applicable PRC regulations, foreign-invested enterprises in China may pay dividends out of their accumulated profits only, if any, as
determined in accordance with PRC accounting standards and regulations. In addition, a foreign-invested enterprise in China is required to set aside at least
10% of its after-tax profit based on PRC accounting standards each year for its general reserve until the cumulative amount of such reserve reaches 50% of
its registered capital. These reserves are not distributable as cash dividends. The board of directors of a foreign-invested enterprise has the discretion to
allocate a portion of its after-tax profits to staff welfare and bonus funds, which may not be distributed to equity owners except in the event of liquidation.
Employees
As of December 31, 2019 and 2018, we had 176 and 184 full-time employees, respectively. As of May 18, 2020, we had 177 full-time employees.
The following table shows the breakdown in numbers and percentages of employees by department as of December 31, 2019:
Functions
Manufacturing
Research & Development
Quality Control
General Administration, Purchasing, Sales and Marketing
Total
Number of
employees
% of total
100
17
6
53
176
57%
10%
3%
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 $190,117 and $265,491 in 2019 and 2018, respectively.
As we continue to expand our business, we believe it is critical to hire and retain top talent, especially in the areas of marketing, metal surface
treatment, materials science, and technology engineering. We believe we have the ability to attract and retain high quality engineering talent in China based
on our competitive salaries, annual performance-based bonus system, and equity incentive program for senior employees and executives. In addition, we
have a training program for entry-level engineers that allows them to work closely with an experienced mentor to gain valuable hands-on experience and
provide other professional development opportunities, including seminars where experienced engineers give lectures on specific engineering topics and
new methods that can be applied to various projects.
4.C. Organizational Structure
Our Majority Shareholders
Pursuant to securities purchase agreements dated August 7, 2018, on August 8, 2018 and August 14, 2018, Effectual Strength Enterprises Limited
(“Effectual”), a British Virgin Islands company controlled by Dr. Liang Tang, purchased:
·
·
600,000 shares from Fascinating Acme Development Limited, an entity controlled by the spouse of Wei Hua, our Chief Executive Officer and
Chief Financial Officer, at a price of $2.582 per ADS, each ADS representing three ordinary shares; and
600,000 shares from Gross Inspiration Development Limited, an entity controlled by the spouse of Xufeng Zhou, our senior manager, at a price of
$2.582 per ADS.
On October 2, 2018, Acme, a wholly-owned subsidiary of Pujiang and an entity controlled by Dr. Liang Tang, purchased 13,050,000 of our
ordinary shares from Effectual, in exchange for the issuance of 54,404 shares of Pujiang to Elegant Kindness Limited, a British Virgin Islands company
wholly owned by Dr. Liang Tang. Consequently, Acme now holds 13,050,000 of our ordinary shares.
35
On May 28, 2019, Pujiang, the parent entity of Acme, was successfully listed and commenced trading on the main board of the Hong Kong Stock
Exchange. Dr. Liang Tang, our Chairman, is currently a 64.39% shareholder and the chairman of Pujiang.
We are a “controlled company” as defined under the Nasdaq listing rules because Pujiang beneficially own approximately 65.9% of the aggregate
voting power of our outstanding ordinary shares.
Our Subsidiaries
British Virgin Islands Companies
Ossen Innovation Group, our wholly owned subsidiary, is the sole shareholder of two holding companies organized in the British Virgin Islands:
Ossen Group (Asia) Co., Ltd., or Ossen Asia, and Topchina Development Group Ltd., or Topchina. All of the equity of Ossen Asia and Topchina had been
held by Dr. Liang Tang, our Chairman, since inception. In May 2010, Dr. Liang Tang transferred these shares to Ossen Innovation Group in anticipation of
the public listing of our company’s shares in the United States.
Ossen Asia is a British Virgin Islands company organized on February 7, 2002. Ossen Asia has one direct operating subsidiary in China, Ossen
Materials. Ossen Asia owns 81% of the equity of Ossen Materials.
Topchina is a British Virgin Islands company organized on November 3, 2004. Ossen Materials and Topchina directly own an operating subsidiary
in China, Ossen (Jiujiang) Innovation Materials Co., Ltd., or Ossen Jiujiang. As of December 31, 2019, Ossen Materials owned 20.5% of the equity of
Ossen Jiujiang and Topchina owned 79.5%.
Ossen Materials
Ossen Materials was formed in China on October 27, 2004 as a Sino-foreign joint venture limited liability company under the name Ossen
(Maanshan) Steel Wire and Cable Co., Ltd. On May 8, 2008, Ossen Materials was restructured from a Sino-foreign joint venture limited liability company
to a corporation. The name of the entity was changed at that time to Ossen Innovation Materials Co., Ltd.
Ossen Asia owns 81% of the equity of Ossen Materials. The remaining 19% is held in the aggregate by three third-party Chinese entities, two of
which are controlled by Chinese governmental entities and one of which is controlled by Zhonglu Co. Ltd., a company whose shares are listed on the
Shanghai Stock Exchange, and Ossen Group PRC, which is ultimately controlled by Chinese citizens.
Through Ossen Materials, we have manufactured and sold plain surface PC strands, rare earth coated PC steel wires and PC wires in our
Maanshan City facility since 2004. The primary markets for the products manufactured at our Maanshan facility are Anhui Province, Jiangsu Province,
Zhejiang Province and Shanghai City, each in the PRC.
Ossen Jiujiang
On April 6, 2005, Shanghai Ossen Investment Holdings (Group) Co., Ltd., or Ossen Shanghai, acquired a portion of the bankruptcy assets of
Jiujiang Steel & Iron Company, including equipment, land use rights and inventory, for approximately RMB 20,000,000 (approximately $2.9 million).
Ossen Jiujiang was formed by Ossen Shanghai in the PRC as a Sino-foreign joint venture limited liability company on April 13, 2005. Ossen Shanghai then
transferred the newly acquired assets to Ossen Jiujiang. At its inception, Ossen Jiujiang was owned by two entities: 33.3% of its equity was held by Ossen
Asia and 66.7% by Ossen Shanghai. In June 2005, Ossen Shanghai transferred its entire interest in Ossen Jiujiang to Topchina in exchange for
approximately $2.9 million. In October 2007, Topchina transferred 41.7% of the equity in Ossen Jiujiang to Ossen Asia for no consideration. On
December 17, 2007, Ossen Asia transferred all of its shares in Ossen Jiujiang to Ossen Materials.
36
On November 19, 2010, the Department of Commerce of Jiujiang City approved an increase in the registered capital of Ossen Jiujiang by
approximately $29.2 million, which capital must be paid in full by November 2013. On November 5, 2012, the Department of Commerce of Jiujiang City
approved a decrease in the registered capital of Ossen Jiujiang by approximately $9.2 million. As of December 31, 2014, Topchina paid approximately $20
million of the increased registered capital to Ossen Jiujiang. As a result, 79.5% of Ossen Jiujiang is currently held by Topchina and 20.5% by Ossen
Materials. On April 9, 2014, Ossen (Jiujiang) Steel Wire & Cable Co., Ltd. changed its name to Ossen (Jiujiang) Innovation Materials Co., Ltd.
Through Ossen Jiujiang, we manufacture zinc or rare earth coated PC wires and strands, plain surface PC strands, unbonded PC strands, helical rib
PC wires, sleeper PC wires and indented PC wires. The primary markets for the PC strands manufactured in our Jiujiang facility are Jiangxi Province,
Hubei Province, Hunan Province, Fujian Province and Sichuan Province, each in the PRC.
Organizational Structure Chart
The following chart reflects our organizational structure:
37
4D. Property, Plants and Equipment
Under PRC law, land is owned by the state. “Land use rights” are granted to an individual or entity after payment of a land use right fee is made to
the applicable state or rural collective economic organization. Land use rights allow the holder the right to use the land for a specified long-term period.
We have land-use rights for facilities at two locations in the PRC, one in Maanshan City, Anhui Province and one in Jiujiang City, Jiangxi
Province, which are utilized for production, research and development and employee living quarters. We have paid all amounts relating to these properties.
The land-use rights for our Maanshan facility expires in 2058 and the rights for our Jiujiang facilities expire at different intervals, ranging from 2055 to
2057. Our facilities cover an aggregate of approximately 106,136 square meters.
As of December 31, 2019, our production facility and office in Maanshan City had a total gross floor area of approximately 14,668 square meters
and we employed 46 production personnel at that facility. Our Maanshan facility contained seven processing lines. As of December 31, 2019, our
production facility and office in Jiujiang City had a total gross floor area of approximately 20,810 square meters and we employed 54 production personnel
at that facility. Our Jiujiang facility contained eleven processing lines. The production volume of our Ma’anshan facility and Jiujiang facility was 191,529
tons in 2019, as compared to 193,174 tons in 2018.
Historically, we did not experience any form of disruption in our production facilities. However, from July 2018 to December 2018, due to a local
government's construction accident affecting a high-voltage transmission line near Ossen Jiujiang production facility, the power supply to some of our zinc
coating processing lines was interrupted, resulting in the inoperability of several pieces of equipment. We were able to overcome this temporary
interruption by purchasing semi-finished zinc coated products to produce finished zinc coated products. Since China’s Spring Festival national holiday in
late January 2019 and up to March 9, 2020, due to the widespread of the COVID-19 pandemic in China, many cities imposed travel and work restrictions
in efforts to curb the spread of COVID-19. As a result, the factories situated in Jiujiang and Ma’anshan have been temporarily closed after the Chinese New
Year holiday until March 9, 2020 for the Jiujiang and Ma’anshan Site, and the supply of the raw materials has been affected in February 2020. However, as
of the date of this report, the factories are fully operational.
The total annual production of our two facilities decreased slightly in 2019 compared to 2018 primarily due to less production of rare earth coated
products which had higher margin. In January 2020, we acquired a piece of land of approximately 63,000 square meters for the construction site of the new
production facility in Jiujiang, Jiangxi Province. Due to delays caused by the COVID-19 pandemic, we plan to commence the construction work in the
second half of 2020, subject to the government’s approval on the construction plan and any other potential delays relating to the pandemic or otherwise.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not Applicable.
ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion and analysis should be read in conjunction with our consolidated financial statements, the notes to those financial
statements and other financial data that appear elsewhere in this annual report. In addition to historical information, the following discussion contains
forward-looking statements based on current expectations that involve risks and uncertainties. Actual results and the timing of certain events may differ
significantly from those projected in such forward-looking statements due to a number of factors, including those set forth in “Risk Factors” and elsewhere
in this report. Our consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”).
38
5.A. Operating Results
Overview
General
We manufacture and sell an array of plain surface prestressed steel materials and rare earth coated and zinc coated prestressed steel materials,
which we believe is the most comprehensive array among our competitors in China. Our materials are used in the construction of bridges, highways and
other infrastructure projects in the PRC and internationally. Our facilities are located in Maanshan City, Anhui Province and in Jiujiang City, Jiangxi
Province, in the PRC. Based on our extensive experience in the industry, we believe that Ossen is one of the leading enterprises in the PRC in the design,
engineering, manufacture and sale of customized prestressed steel materials used in the construction of bridges, highways, and other infrastructure projects
in China.
Important Factors Affecting our Results of Operations and Existing Trends
COVID-19
Our factories in Jiujiang and Ma’anshan were temporarily closed from China’s Spring Festival national holiday in late January to March 9, 2020,
as a result of the COVID-19 outbreak. A prolonged outbreak of COVID-19 could result in disruption of supply chain of certain raw materials necessary for
our products, restrictions on our travel to support our sites or our customers around the world, decrease of customer demand, restrictions on our travel to
support our sites or our customers around the world, and delays in our production and construction of our new production facilities in Jiujiang, Jiangxi,
China. The extent to which COVID-19 impacts raw material prices in 2020 will depend on the future developments of the outbreak, including new
information concerning the global severity of and actions taken to contain the outbreak, which are highly uncertain and unpredictable. All these factors may
affect our overall financial performance in 2020, although we cannot quantify the overall impact at this time.
Product Mix and Industry Trends
Our results of operations also depend in part on the product mix that we attain during a particular financial reporting period. We produce and sell
products according to customer orders. As an overall percentage of sales, sales of our coated products increased from 95.7% in 2018 to 96.0% in 2019.
Overall gross margin of our products was 16.1%, 15.1% and 11.1% respectively in 2019, 2018 and 2017. The increase of gross margin in 2018
was primarily due to the increase of the prices of our steel products. The increase of gross margin in 2019 compared to 2018 was primarily due to the
increase in sales of high margin rare earth coated products.
As an overall percentage of sales, sales of our coated products increased to 96.0% in 2019 from 95.7% in 2018 and 80.5% and 79.4%,
respectively, of our coated product sales in the years ended December 31, 2019 and December 31, 2018 were sales of rare earth coated products and the
remaining 19.5% and 20.6%, respectively, were zinc coated products.
Favorable Price and Terms for Supply of Principal Raw Materials
Our principal raw material is high carbon steel wire rods that we typically purchase from multiple primary steel producers. The steel industry as a
whole is cyclical and, at times, pricing and availability of steel can be volatile due to numerous factors beyond our control, including general domestic and
international economic conditions, labor costs, sales levels, competition, levels of inventory held by us and other steel service centers, consolidation of steel
producers, higher raw material costs for steel producers, import duties and tariffs and currency exchange rates. This volatility can significantly affect the
availability and cost of raw materials for us.
We, like many other steel product manufacturers, maintain substantial inventories of steel to accommodate the short lead times and just-in-time
delivery requirements of our customers. Accordingly, we purchase steel in an effort to maintain our inventory at levels that we believe to be appropriate to
satisfy the anticipated needs of our customers based upon historic buying practices, supply agreements with customers and market conditions. Our key
suppliers usually dedicate portions of their inventories as reserves to meet our manufacturing requirements. These key suppliers are generally provided a
prepayment and in return, they give us discounts compared to prevailing market prices.
39
We have no long-term, fixed-price steel purchase contracts. When steel prices increase, competitive conditions will influence how much of the
price increase we can pass on to our customers. To the extent we are unable to pass on future price increases in our raw materials to our customers, the net
sales and profitability of our business could be adversely affected.
When steel prices decline, customer demands for lower prices and our competitors' responses to those demands could result in lower sale prices
and, consequently, lower margins. Significant or rapid declines in steel prices or reductions in sales volumes could result in us incurring inventory or
goodwill impairment charges. Changing steel prices therefore could significantly impact our net sales, gross margins, operating income and net income. In
2014 and 2015, steel supply outpaced demand as China’s economic growth slowed and growth in steel demand in China remained weak. The price of all of
our principal raw materials decreased in 2014 and 2015 due to the market condition of steel industry in China. However, since raw materials purchased for
our rare earth and zinc coated products are produced by only a select few steel manufacturers, the average price of these raw materials was not as volatile as
other steel products, and the decline is not as much as those that are mass produced such as raw materials for plain surface products in 2014 and 2015. In
2016, 2017 and 2018, Chinese Government continued its policy to cut excessive industrial capacity and reform the supply-side of its economy, while
strictly controlling steel capacity increases. As a result, the average price of steel products, including our products and principal raw materials, increased in
2016, 2017 and 2018. In 2019, Chinese central government focused on strictly controlling steel capacity increases after Chinese central government
addressed the overcapacity in the steel industry and lowered steel production by approximately 150 million tons in last a few years before 2019. However,
due to the uncertainty of the trade war between the United States and China and the slowdown of economic growth, as well as the increase of capacity
utilization of Chinese steel industry which resulted in the higher output of steel products, the average price of steel products, including our products and
principal raw materials, decreased in 2019. The recent outbreak of the coronavirus known as COVID-19 in China and other geographic areas may cause a
disruption of the global supply chain for certain raw materials necessary for our products and could threaten the health and safety of our employees. A
prolonged outbreak of COVID-19 could create disruptions that may, over time, slow down manufacturing in impacted jurisdictions and disrupt supply
chain of certain raw materials necessary for our products. The extent to which COVID-19 impacts raw material prices in 2020 will depend on the future
developments of the outbreak, including new information concerning the global severity of and actions taken to contain the outbreak, which are highly
uncertain and unpredictable. We are unable to determine the full impact of the outbreak at this time and will continue to closely monitor this developing
situation.
We currently purchase almost all of our new materials from a very small number of suppliers. Purchases from our five largest suppliers amounted
to 99.8%, 99.8% and 99.7% of our total raw material purchases in 2019, 2018 and 2017, respectively. To date, we have been able to obtain favorable
pricing and delivery terms from these suppliers. However, if we were to increase the scale of our production, we may need to further diversify our supplier
network and, as a result, may not be able to obtain favorable pricing and delivery terms from new suppliers.
Slow Growth of the Chinese Economy
We operate our manufacturing facilities in China and derive the majority of our revenues from sales to customers in China. As such, economic
conditions in China affect virtually all aspects of our operations, including the demand for our products, the availability and prices of our raw materials and
our other expenses. Although the economy in China has grown significantly in the past decades, any slow-down of economic growth in China could reduce
expenditures for infrastructure, which in turn may adversely affect our operating results and financial condition. For example, the weakness in the economy
could reduce the investment in infrastructure, which, in turn, could result in demand for our products and our revenues may decline. Furthermore, any
financial turmoil affecting the financial markets and banking system may significantly restrict our ability to obtain financing in the capital markets or from
financial institutions on commercially reasonable terms, or at all.
Level of Income Tax and Preferential Tax Treatment
Our net income is affected by the income tax that we pay and any preferential tax treatment that we are able to receive. Our operating subsidiaries
are subject to the PRC enterprise income tax, or EIT. According to the relevant laws and regulations in the PRC, foreign invested enterprises established
prior to January 1, 2008 are entitled to full exemption from income tax for two years beginning with the first year in which such enterprise is profitable and
a 50% income tax reduction for the subsequent three years. Ossen Materials was entitled to an EIT exemption during the two years ended December 31,
2006 and was subject to a 50% income tax reduction during the three years ended December 31, 2009. Ossen Jiujiang was entitled to the EIT exemption
during the two years ended December 31, 2008, and a 50% income tax reduction during the three years ended December 31, 2012.
40
Ossen Materials was subject to a 15% tax rate through 2012 as the result of it being designated a high-tech enterprise. In 2012, Ossen Materials
renewed its status of high-tech enterprise, and would be subject to a 15% tax rate through 2015. In 2015, Ossen Materials renewed its status of high-tech
enterprise again, and was subject to a 15% tax rate through 2018. In 2018, Ossen Materials renewed its status of high-tech enterprise again and will be
subject to a 15% tax rate through 2020. Ossen Jiujiang was subject to a 15% tax rate through 2011 as the result of its being designated a high-tech
enterprise. Since January 1, 2012, Ossen Jiujiang has enjoyed a tax rate of 15% as it is considered as a high-tech enterprise. In 2015, Ossen Jiujiang
successfully renewed its status of high-tech enterprise, and was subject to a 15% tax rate through 2018. In 2018, Ossen Jiujiang renewed its status of high-
tech enterprise again and will be subject to a 15% tax rate through 2021. In the event that our income tax obligations increase over time, our net income
will be affected.
Foreign Currency Translation
Our financial statements are expressed in U.S. dollars but the functional currency of our operating subsidiaries is RMB. Our results of operations
are translated at average exchange rates during the relevant financial reporting periods, assets and liabilities are translated at the unified exchange rate at the
end of these periods and equity is translated at historical exchange rates. Adjustments resulting from the process of translating the local currency financial
statements into U.S. dollars are included in determining comprehensive income.
Description of Selected Income Statement Items
Revenues. We generate revenue from sales of our prestressed steel products, including plain surface products and rare earth coated products. We
also derive an insignificant amount of revenue from providing services to select customers. Service revenues account for less than 2% of total revenues for
all periods presented and is recognized upon delivery and acceptance of the finished products by the customer, or when pick up occurs.
Cost of goods sold. Cost of goods sold includes direct and indirect production costs, as well as freight and handling costs for products sold.
Selling expenses. Selling expenses consist of sales commissions, payroll, traveling expenses, transportation expenses and advertising expenses.
For example, we typically pay our international distribution customers a commission ranging from 0.5% to 5% of invoiced amounts (including VAT)
actually paid to us.
General and administrative expenses. General and administrative expenses consist primarily of research and development expense, management
and office salaries and employee benefits, deprecation for office facility and office equipment, travel and entertainment, legal and accounting, consulting
fees and other office expenses.
Financial expenses. Financial expenses consist of interest expense on bank loans and interest income.
Other Income. Our other income consisted of government grants and revenue from sales of scrap materials.
Income Taxes. Ossen Materials and Ossen Jiujiang have been recognized by their respective local government agencies as high-tech enterprises.
As a result, both subsidiaries were subject to an income tax rate of 15% under relevant PRC income tax laws in 2019, 2018 and 2017.
41
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.
2019
% of Revenue
For the Year Ended December 31,
% of Revenue
2018
2017
% 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
Less: net income attributable to
non-controlling interest
Net income attributable to Ossen
Innovation Co. Ltd.
Other comprehensive income-
Foreign currency translation gain
(loss)
Total other comprehensive
income (loss)
Comprehensive Income
138,900,357
116,541,972
22,358,385
357,426
6,155,316
6,512,742
15,845,643
(2,382,405)
297,438
13,760,676
(1,533,794)
12,226,882
100.0%
83.9%
16.1%
0.3%
136,104,867
115,585,803
20,519,064
327,365
100.0%
84.9%
15.1%
0.2%
132,375,915
117,721,799
14,654,116
598,832
4.4%
4.7%
11.4%
-1.7%
0.2%
9.9%
-1.1%
8.8%
5,263,914
5,591,279
14,927,785
(1,621,486)
208,071
13,514,370
(2,129,387)
11,384,983
3.9%
4.1%
11.0%
-1.2%
0.2%
9.9%
-1.6%
8.6%
6,002,121
6,600,953
8,053,163
(1,610,337)
147,108
6,589,934
(691,556)
5,898,378
1,137,712
0.8%
1,005,530
0.7%
553,067
11,089,170
8.0%
10,379,453
7.6%
5,345,311
(1,744,846)
-1.3%
(6,272,303)
-4.6%
6,606,207
(1,744,846)
9,344,324
-1.3%
6.6%
(6,272,303)
4,107,150
-4.6%
3.0%
6,606,207
11,951,518
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
100.0%
88.9%
11.1%
0.5%
4.5%
5.0%
6.1%
-1.2%
0.1%
5.0%
-0.5%
4.5%
0.4%
4.0%
5.0%
5.0%
9.0%
Revenues. During the year ended December 31, 2019, we had revenues of approximately $138.9 million as compared to revenues of
approximately $136.1 million during year ended December 31, 2018, an increase of approximately $2.8 million, or 2.1%. The increase in our revenues
during the year ended December 31, 2019 was mainly attributable to a 3.8% increase in sales of rare earth coated PC wires and PC strands and a 151.8%
increase in other products, partially offset by a 41.4% decrease in plain surface products and a 2.9% decrease in zinc coated PC wires and PC strands.
The following table provides a breakdown of our revenues during the years ended December 31, 2019 and 2018, respectively:
Revenue ($)
2019
% of Total Revenue
Revenue ($)
2018
% of Total Revenue
Difference
Year ended December 31,
Products:
Plain surface PC strands
Zinc coated PC wires and PC strands
Rare earth coated PC wires and PC strands
Others
Total
2,820,075
26,064,009
107,273,567
2,742,706
138,900,357
2.0%
18.8%
77.2%
2.0%
100%
4,812,541
26,834,870
103,368,148
1,089,308
136,104,867
3.5%
19.7%
76.0%
0.8%
100%
-41.4%
-2.9%
3.8%
151.8%
2.1%
42
In 2019, we focused on the production and sale of rare earth coated PC wires and PC strands due to the increase in the average price and
profitability of such products. As a result, the sales of rare earth coated PC wires and PC strands increased by $3.9 million, or 3.8%, to $107.3 million for
the year of 2019.
The sales of zinc coated PC wires and PC strands were $26.1 million during the year ended December 31, 2019, a decrease of 2.9%, compared to
the year ended December 31, 2018. The decrease of sales generated by zinc coated products in 2019 was primarily due to the decrease in market demand
and the lower average price of such products in 2019.
The sales of plain surface PC strands and PC wires were $2.8 million during the year ended December 31, 2019, a decrease of $2.0 million, or
41.4%, compared to the year ended December 31, 2018. This decrease of sales generated by plain surface PC strands and PC wires was primarily due to the
decrease in market demand during the period.
Other sales were $2.7 million during the year ended December 31, 2019, an increase of $1.6 million, or 151.8%, compared to the year ended
December 31, 2018. This increase was primarily due to more scrap materials sold in 2019 compared to 2018 and the increase of service revenue.
Cost of Goods Sold. Cost of goods sold was approximately $116.5 million during the year ended December 31, 2019, as compared to
approximately $115.6 million during the year ended December 31, 2018, representing an increase of 0.8%, or approximately $0.9 million. This increase
occurred mainly because the total sales increased in 2019. As a percentage of revenues, cost of goods sold decreased from 84.9% during the year ended
December 31, 2018 to 83.9% during the year ended December 31, 2019.
Gross Profit and Gross Margin. Our gross profit is equal to the difference between our revenues and our cost of goods sold. Our gross profit
increased 9.0% to approximately $22.4 million during the year ended December 31, 2019, from approximately $20.5 million for the same period in 2018.
For the years ended December 31, 2019 and 2018, our gross margin was 16.1% and 15.1%, respectively. The increase of gross margin was primarily due to
the improvement of the profitability of rare earth coated PC wires and PC strands.
Selling Expenses. Selling expenses totaled $0.4 million for the year ended December 31, 2019, as compared to $0.3 million for the year ended
December 31, 2018, an increase of 9.2%. This increase was primarily due to higher transportation cost for domestic sales in 2019, partially offset by lower
freight and sales commission for international sales.
General and Administrative Expenses. General and administrative expenses totaled $6.2 million for the year ended December 31, 2019, as
compared to $5.3 million for the year ended December 31, 2018, an increase of 16.9%. The increase in 2019 was primarily due to higher research and
development cost in 2019.
Operating Income. As a result of the foregoing, operating income for the year ended December 31, 2019 was approximately $15.8 million, an
increase of 6.1% as compared to approximately $14.9 million for the same period in 2018. As a percentage of net sales, operating income increased from
11.0% during the year ended December 31, 2018 to 11.4% during the year ended December 31, 2019. This increase was primarily due to higher sales and
gross profit.
Income Taxes. We incurred income tax expenses of $1.5 million and $2.1 million in the fiscal years ended December 31, 2019 and 2018,
respectively. The decrease was primarily due to more tax incentive received in 2019. Ossen Materials and Ossen Jiujiang were subject to a 15% tax rate as
the result of being designated as high-tech enterprises through 2019.
43
Net Income. As a result of the foregoing, our net income totaled approximately $12.2 million for the year ended December 31, 2019, as compared
to approximately $11.4 million for the year ended December 31, 2018, an increase of 7.4%.
Net Income Attributable to Non-controlling Interest. We own 81% of Ossen Materials and 96.1% of Ossen Jiujiang in the aggregate. Net income
attributable to non-controlling interest represents the net income attributable to the holders of the remaining shares. Our net income attributable to non-
controlling interest totaled approximately $1.1 million for the year ended December 31, 2019, as compared to approximately $1.0 million for the year
ended December 31, 2018.
Foreign Currency Income (Loss). For the year ended December 31, 2019, foreign currency exchange loss was $1.7 million, compared to foreign
currency exchange loss of $6.3 million, for the year ended December 31, 2018. The loss was due to the weakening of the exchange rate of the RMB versus
the US dollar in 2019.
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
Revenues. During the year ended December 31, 2018, we had revenues of approximately $136.1 million as compared to revenues of
approximately $132.4 million during year ended December 31, 2017, an increase of approximately $3.7 million, or 2.8%. The increase in our revenues
during the year ended December 31, 2018 was mainly attributable to a 124.0% increase in sales of zinc coated PC wires and PC strands, partially offset by
an 8.1% decrease in rare earth coated products, a 20.3% decrease in plain surface products and a 43.4% decrease in other products.
The following table provides a breakdown of our revenues during the years ended December 31, 2018 and 2017, respectively:
Revenue ($)
2018
% of Total Revenue
Revenue ($)
2017
% of Total Revenue
Difference
Year ended December 31,
Products:
Plain surface PC strands
Zinc coated PC wires and PC strands
Rare earth coated PC wires and PC strands
Others
Total
4,812,541
26,834,870
103,368,148
1,089,308
136,104,867
3.5%
19.7%
76.0%
0.8%
100%
6,037,207
11,978,159
112,437,410
1,923,138
132,375,915
4.6%
9.0%
84.9%
1.5%
100%
-20.3%
124.0%
-8.1%
-43.4%
2.8%
The market demand for our rare earth coated PC wires and PC strands decreased in 2018, which motivated us to focus on the production and sale
of zinc coated products. As a result, the sales of rare earth coated PC wires and PC strands decreased by $9.1 million, or 8.1%, to $103.4 million for the
year of 2018.
The sales of zinc coated PC wires and PC strands were $26.8 million during the year ended December 31, 2018, an increase of 124.0%, compared
to the year ended December 31, 2017. The increase of sales generated by zinc coated products in 2018 was primarily due to our efforts to focus on the
production and sale of zinc coated products and increased market demand for such products in 2018.
The sales of plain surface PC strands and PC wires were $4.8 million during the year ended December 31, 2018, a decrease of $1.2 million, or
20.3%, compared to the year ended December 31, 2017. This decrease of sales generated by plain surface PC strands and PC wires was primarily due to
decreased market demand during the period.
Other sales were $1.1 million during the year ended December 31, 2018, a decrease of $0.8 million, or 43.4%, compared to the year ended
December 31, 2017. This decrease was primarily due to fewer scrap materials sold in 2018 compared to 2017 and the decrease of service revenue.
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Cost of Goods Sold. Cost of goods sold was approximately $115.6 million during the year ended December 31, 2018, as compared to
approximately $117.7 million during the year ended December 31, 2017, representing a decrease of 1.8%, or approximately $2.1 million. This decrease
occurred mainly because the total sales volume deceased in 2018 and the average price of raw materials did not increase as much as the average sale price
of our products. As a percentage of revenues, cost of goods sold decreased from 88.9% to 84.9% during the year ended December 31, 2018.
Gross Profit and Gross Margin. Our gross profit is equal to the difference between our revenues and our cost of goods sold. Our gross profit
increased 40.0% to approximately $20.5 million during the year ended December 31, 2018, from approximately $14.7 million for the same period in 2017.
For the years ended December 31, 2018 and 2017, our gross margin was 15.1% and 11.1%, respectively. The increase of gross margin was primarily due to
the increase of the prices of our steel products.
Selling Expenses. Selling expenses totaled $0.3 million for the year ended December 31, 2018, as compared to $0.6 million for the year ended
December 31, 2017, a decrease of 45.3%. This decrease was primarily due to lower freight and sales commission for export sales and lower transportation
cost for domestic sales as more projects were in closer proximity in 2018.
General and Administrative Expenses. General and administrative expenses totaled $5.3 million for the year ended December 31, 2018, as
compared to $6.0 million for the year ended December 31, 2017, a decrease of 12.3%. The decrease in 2018 was primarily due to lower research and
development cost for customized products in 2018.
Operating Income. As a result of the foregoing, operating income for the year ended December 31, 2018 was approximately $14.9 million, an
increase of 85.4% as compared to approximately $8.1 million for the same period in 2017. As a percentage of net sales, operating income increased from
6.1% to 11.0% during the year ended December 31, 2018. This increase was primarily due to higher gross profit and lower operating expenses.
Income Taxes. We incurred income tax expenses of $2.1 million and $0.7 million in the fiscal years ended December 31, 2018 and 2017,
respectively. Ossen Materials and Ossen Jiujiang were subject to a 15% tax rate as the result of being designated as high-tech enterprises through 2018.
Net Income. As a result of the foregoing, our net income totaled approximately $11.4 million for the year ended December 31, 2018, as compared
to approximately $5.9 million for the year ended December 31, 2017, an increase of 93.0%.
Net Income Attributable to Non-controlling Interest. We own 81% of Ossen Materials and 96.1% of Ossen Jiujiang in the aggregate. Net income
attributable to non-controlling interest represents the net income attributable to the holders of the remaining shares. Our net income attributable to non-
controlling interest totaled approximately $1.0 million for the year ended December 31, 2018, as compared to approximately $0.6 million for the year
ended December 31, 2017.
Foreign Currency Income (Loss). For the year ended December 31, 2018, foreign currency exchange loss was $6.3 million, compared to foreign
currency exchange gain of $6.6 million, for the year ended December 31, 2017. The loss was due to the weakening of the exchange rate of the RMB versus
the US dollar in 2018.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with U.S. GAAP. Our financial statements reflect the selection and
application of accounting policies, which require management to make significant estimates and judgments. See Note 2 to our consolidated financial
statements for “Summary of Significant Accounting Policies.” We believe that the following paragraphs reflect the most critical accounting policies that
currently affect our financial condition and results of operations.
45
Use of Estimates
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles in the United States of
America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.
Management makes these estimates using the best information available at the time the estimates are made. Actual results could differ from those estimates.
Revenue Recognition
In accordance with ASC Topic 606, Revenue from Contracts with Customers, the Company recognizes revenues when products are transferred to
customers in an amount that reflects the consideration which the Company expects to receive in exchange for those products. In determining when and how
revenues are recognized from contracts with customers, the Company performs the following five-step analysis: (i) identification of contract with customer;
(ii) determination of performance obligations; (iii) measurement of the transaction price; (iv) allocation of the transaction price to the performance
obligations; and (v) recognition of revenues when (or as) the Company satisfies each performance obligation. The Company derives revenues from the
processing, distribution and sale of its own products. The Company recognizes its revenues net of value-added taxes (“VAT”). The Company is subject to
VAT which had been levied at the rate of 17% on the invoiced value of sales until April 30, 2018, after which date the rate was reduced to 16%. VAT rate
was further reduced to 13% starting from April 1, 2019. Output VAT is borne by customers in addition to the invoiced value of sales and input VAT is borne
by the Company in addition to the invoiced value of purchases to the extent not refunded for export sales.
Revenues are recognized at a point in time once the Company has determined that the customer has obtained control over the product. Control is
typically deemed to have been transferred to the customer when the performance obligation is fulfilled based on the terms defined in the contract and each
of the criteria under ASC 606 have been met. Contracts terms for domestic sales may require the Company to deliver the finished goods to the customers’
location or the customer may pick up the finished goods at the Company’s factory. International sales are recognized when shipment clears customs and
leaves the port. The Company recognizes its revenues net of VAT.
Contracts with distributors do not offer any chargeback or price protection. The Company experienced no product returns and recorded no reserve
for sales returns for the years ended December 31, 2019, 2018 and 2017.
The Company has adopted ASC 606 on January 1, 2018, using the transition method of Modified-Retrospective Method. The adoption of ASC
606 had no impact on the Company’s beginning balance of retained earnings.
Research and Development
Research and development costs are expensed as incurred and totaled approximately $4.4 million, $3.3 million and $4.3 million for the years
ended December 31, 2019, 2018 and 2017, respectively. Research and development costs are included in general and administrative expenses in the
accompanying statements of operations. Research and development costs are incurred on a project specific basis.
Income Taxes
The Company accounts for income taxes following the liability method pursuant to FASB ASC 740 “Income Taxes”. Under this method, deferred
tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates
that will be in effect in the period in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets
if, based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on
deferred taxes of a change in tax rate is recognized in income in the period that includes the enactment date.
46
The Company also follows FASB ASC 740, which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax
return should be recorded in the financial statements. The Company may recognize the tax benefit from an uncertain tax position only if it is more likely
than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits
recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood
of being realized upon ultimate settlement. ASC 740 also provides guidance on recognition, classification, interest and penalties on income taxes,
accounting in interim periods and requires increased disclosures. As of December 31, 2019, the Company did not have a liability for unrecognized tax
benefits. It is unlikely that the amount of liability for unrecognized tax benefits will significantly change over the next 12 months. It is the Company’s
policy to include penalties and interest expense related to income taxes as a component of other expense and interest expense, respectively, as necessary.
The Company’s historical tax years will always remain open for examination by the local authorities.
The Company has not provided for income taxes on accumulated earnings amounting $78,484,535 that are subject to the PRC dividend
withholding tax as of December 31, 2019, since these earnings are intended to be permanently reinvested.
Fair Value of Financial Instruments
The Company applies the provisions of ASC 820, Fair Value Measurements and Disclosures, to the financial instruments that are required to be
carried at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The Company uses a three-tier
fair value hierarchy based upon observable and non-observable inputs that prioritizes the information used to develop our assumptions regarding fair value.
Fair value measurements are separately disclosed by level within the fair value hierarchy. FASB ASC 820 (formerly SFAS No. 157 Fair Value
Measurements) establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy prioritizes the inputs
into three levels based on the extent to which inputs used in measuring fair value are observable in the market
These tiers include:
· Level 1—defined as observable inputs such as quoted prices in active markets for identical assets or liabilities;
· Level 2—defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
· Level 3—defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The company’s financial instruments primarily consist of cash and cash equivalents, restricted cash, accounts receivable, notes receivable,
accounts payable, notes payable-bank acceptance notes, other payables and accrued liabilities, and short-term bank loans.
The carrying value of cash and cash equivalents, restricted cash, accounts receivable, notes receivable, accounts payable, notes payable-bank
acceptance notes, other payables and accrued liabilities, and short-term bank loans approximate fair value because of the short-term nature of these items.
The estimated fair values of short-term bank loans were not materially different from their carrying value as presented due to the short maturities and that
the interest rates on the borrowing approximate those that would have been available for loans of similar remaining maturity and risk profile. As the
carrying amounts are reasonable estimates of the fair value, these financial instruments are classified within Level 1 of the fair value hierarchy.
Accounts Receivable
Accounts receivable are carried at net realizable value. The Company reviews its accounts receivables on a periodic basis and makes general and
specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the
Company considers many factors, including the age of the balance, customer’s historical payment history, its current credit-worthiness and current
economic trends. Accounts are written off after exhaustive efforts at collection. If accounts receivable are to be provided for, or written off, they would be
recognized in the consolidated statement of operations within operating expenses. Balance of allowance of doubtful accounts was $1.3 million and $0.9
million at December 31, 2019 and 2018, respectively. The increase was mainly due to the increase of accounts receivable as of December 31, 2019.
47
Inventories
Inventories are stated at the lower of cost or net realizable value, which is based on estimated selling prices less any further costs expected to be
incurred for completion and disposal. Cost of raw materials is calculated using the weighted average method and is based on purchase cost. Work-in-
progress and finished goods costs are determined using the weighted average method and comprise direct materials, direct labor and an appropriate
proportion of overhead. The Company considers a provision for excess, obsolete, or slow-moving inventory based on changes in customer demand,
technology developments or other economic factors. At December 31, 2019 and 2018, the Company has $119,775 and $121,370 reserve for inventories,
respectively.
Advance to Suppliers
Advance to Suppliers represents interest-free cash paid in advance to suppliers for purchases of raw materials. The balance of advance to suppliers
was $74.4 million and $70.0 million at December 31, 2019 and 2018, respectively. Among the balance of $74.4 million, the aging of $46.2 million was
within 60 days, $19.0 million was between 60-180 days, $9.1 million was between 180 days and 1 year, and $0.1 million was over 1 year. High carbon
steel wire rods are the primary raw material required to manufacture prestressed steel materials. Most suppliers of high carbon steel wire rods require
advance payment. Advance to suppliers at December 31, 2019 increased from 2018 in order to secure favorable treatment in terms of supply of raw
materials. No allowance was provided for the prepayments balance at December 31, 2019 since we have not experienced any difficulty with the
collectability of the balance with our suppliers who have the payment for over 1 year.
In 2019, Chinese central government focused on strictly controlling steel capacity increases after Chinese central government addressed the
overcapacity in the steel industry and lowered steel production by approximately 150 million tons in last a few years before 2019. However, due to the
uncertainty of the trade war between the United States and China and the slowdown of economic growth, as well as the increase of capacity utilization of
Chinese steel industry which resulted in the higher output of steel products, the average price of steel products, including our products and principal raw
materials, decreased in 2019. We were able to receive raw materials delivered by our suppliers in 2019 at a discounted price, locked in by prepayments. We
expect to continue using the advance payment to suppliers to lock a discounted price of raw materials and the balance of advance to suppliers may fluctuate
depending on the market development.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost less accumulated depreciation, and include expenditure that substantially increases the useful lives
of existing assets.
Depreciation is provided over their estimated useful lives, using the straight-line method. Estimated useful lives are as follows:
Plant, buildings and improvements
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.
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Lease
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Lessees are required to recognize a right-of-use asset and a lease liability
for virtually all of their leases (other than leases that meet the definition of a short-term lease). The liability is equal to the present value of lease payments.
The asset is based on the liability, subject to certain adjustments, such as for initial direct costs. For income statement purposes, a dual model was retained,
requiring leases to be classified as either operating or finance leases. Operating leases result in straight-line expense (similar to operating leases under the
prior accounting standard) while finance leases result in a front-loaded expense pattern (similar to capital leases under the prior accounting standard).
Lessor accounting is similar to the prior model, but updated to align with certain changes to the lessee model (e.g., certain definitions, such as initial direct
costs, have been updated) and the new revenue standard, ASU 2014-9.
The Company adopted this new accounting standard on January 1, 2019 and the adoption has no material impact on the Consolidated Financial
Statements.
Land Use Rights
According to the PRC laws, the government owns all the land in the PRC. Companies or individuals are authorized to possess and use the land
only through land use rights granted by the Chinese government. The land use rights granted to the Company are being amortized using the straight-line
method over the lease term of fifty years.
Impairment of Long-Lived Assets
Long-lived assets are evaluated for impairment periodically whenever events or changes in circumstances indicate that their related carrying
amounts may not be recoverable in accordance with FASB ASC 360, “Property, Plant and Equipment”.
In evaluating long-lived assets for recoverability, the Company uses its best estimate of future cash flows expected to result from the use of the
asset and eventual disposition in accordance with FASB ASC 360-10-15. To the extent that estimated future, undiscounted cash inflows attributable to the
asset, less estimated future, undiscounted cash outflows, are less than the carrying amount, an impairment loss is recognized in an amount equal to the
difference between the carrying value of such asset and its fair value. Assets to be disposed of and for which there is a committed plan of disposal, whether
through sale or abandonment, are reported at the lower of carrying value or fair value less costs to sell.
No impairment loss is subsequently reversed even if facts and circumstances indicate recovery. There was no impairment loss recognized for the
years ended December 31, 2019, 2018 and 2017.
Related Party
In general, related parties exist when there is a relationship that offers the potential for transactions at less than arm’s-length, favorable treatment,
or the ability to influence the outcome of events different from that which might result in the absence of that relationship. A related party may be any of the
followings: a) affiliate, a party that directly or indirectly controls, is controlled by, or is under common control with another party; b) principle owner, the
owner of record or known beneficial owner of more than 10% of the voting interest of an entity; c) management, persons having responsibility for
achieving objectives of the entity and requisite authority to make decision; d) immediate family of management or principal owners; e) a parent company
and its subsidiaries; d) other parties that has ability to significant influence the management or operating policies of the entity.
FASB issued authoritative guidance that clarifies considerations relating to the consolidation of certain entities. The guidance requires
identification of the Company’s participation in variable interest entities (“VIE”), which are defined as entities with a level of invested equity that is not
sufficient to fund future activities to permit them to operation on a standalone basis, or whose equity holders lack certain characteristics of a controlling
financial interest. That, for entities identified as a VIE, the guidance sets forth a model to evaluate potential consolidation based on an assessment of which
party to a VIE, if any, bears a majority of the exposure to expected losses, or stand to gain from majority of its expected returns. The guidance also sets
forth certain disclosure regarding interests in a VIE that are deemed significant even if consolidation is not required. This item is discussed in further detail
in Note 10 – Related Party Transactions.
49
Recently Adopted Accounting Pronouncements
In February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which requires lessees
to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01,
Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-
11, Targeted Improvements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on
the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern
and classification of expense recognition in the income statement. Operating leases result in straight-line expense (similar to operating leases under the
prior accounting standard) while finance leases result in a front-loaded expense pattern (similar to capital leases under the prior accounting standard). The
amendments in this Update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for a public
business entity. Early application of the amendments in this Update is permitted for all entities. The Company started adoption of ASU 2016-02 for the
fiscal year ended December 31, 2019, including interim periods within those fiscal years. The adoption of this new standard did not impact our
consolidated statements as the Company did not have any lease arrangements.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments”, to require financial assets carried at
amortized cost to be presented at the net amount expected to be collected based on historical experience, current conditions and forecasts. Subsequently, the
FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, to clarify that receivables arising from operating leases are within the scope of
lease accounting standards. The ASUs are effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted.
Adoption of the ASUs is modified retrospective. The Company is currently evaluating the impact of the adoption of ASU 2016-13 on the Company’s
consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04 (Topic 350) Intangibles—Goodwill and Other: Simplifying the Test for Goodwill
Impairment, which removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Under the amended guidance,
a goodwill impairment charge will now be recognized for the amount by which the carrying value of a reporting unit exceeds its fair value, not to exceed
the carrying amount of goodwill. This ASU will be applied on a prospective basis and is effective for interim and annual periods beginning after
December 15, 2019, with early adoption permitted for any impairment tests performed after January 1, 2017. The Company does not expect the adoption to
have a material impact on the Consolidated Financial Statements.
In February 2018, the FASB released ASU 2018-2, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.”
This standard update addresses a specific consequence of the Tax Cuts and Jobs Act (“U.S. tax reform”) and allows a reclassification from accumulated
other comprehensive income to retained earnings for the stranded tax effects resulting from U.S. tax reform. Consequently, the update eliminates the
stranded tax effects that were created as a result of the historical U.S. federal corporate income tax rate to the newly enacted U.S. federal corporate income
tax rate. The Company is required to adopt this standard in the first quarter of fiscal year 2020, with early adoption permitted. The amendments in this
update should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate
income tax rate in the Tax Cuts and Jobs Act is recognized. The Company does not expect the adoption to have a material impact on the Consolidated
Financial Statements.
In August 2018, the FASB issued ASU 2018-13 Disclosure Framework—Changes to the Disclosure Requirements for Fair Value
Measurement, which eliminates, adds, and modifies certain disclosure requirements for fair value measurements under ASC 820. This ASU is to be applied
on a prospective basis for certain modified or new disclosure requirements, and all other amendments in the standard are to be applied on a retrospective
basis. The new standard is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted. The Company is
currently evaluating the impact of adoption on the Consolidated Financial Statements.
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5.B. Liquidity and Capital Resources
We have historically met our working capital and capital expenditure requirements by using both net cash flow from operations and by bank
borrowings, including loans from banks and bank acceptance notes. We expect to finance our operations and working capital needs in the near future from
cash generated from operations and short-term borrowings, including lines of credit from local banks, which can be utilized to fund our short term
operation and fulfill liabilities.
Our cash and cash equivalents, and restricted cash which are denominated in RMB, were approximately $2.6 million and $6.0 million,
respectively, at December 31, 2019, as compared to $3.4 million and $4.1 million, respectively, at December 31, 2018. The decrease in cash and cash
equivalents and the increase in restricted cash were mainly because the increase in bank acceptance notes. For the years ended December 31, 2018 and
2019, we used a significant portion of our cash reserve to purchase raw materials to satisfy our production needs and to maintain satisfactory levels of
inventory. In 2016, 2017 and 2018, Chinese central bank, the People’s Bank of China, maintained a prudent and neutral monetary policy and local banks
have generally maintained tight lending policies, in addition to the Chinese government’s policy to reduce the country’s steel capacity which resulted in
further tightened lending to steel companies, thereby limiting our ability to borrow funds for working capital purpose. In 2019, the People’s Bank of China
relaxed monetary policy and lowered its reserve requirement ratio for all banks, which encouraged more bank loans to Chinese companies. We also had net
profits and positive cash flow from operating activities. We believe that our cash reserves, together with expected cash flow from operations and short-term
loans, are sufficient to allow us to continue to operate for the next 12 months. For details of our bank loans and notes payables please see “Bank Loans and
Bank Acceptance Notes” below.
We had $4.6 million of accounts receivable aged over 180 days as of December 31, 2019. We had $5.8 million of accounts receivable aged over
180 days as of December 31, 2018. As of May 1, 2020, we have collected approximately $34.5 million of the $72.5 million of accounts receivable
outstanding as of December 31, 2019. The remaining approximately $38.0 million of uncollected accounts receivable are mainly from construction
companies that have long-term business relationship with us. Based on our historical experience, most of these projects are government sponsored
programs and we are confident that we will be able to collect the balance when the projects are completed.
In May 2019, we borrowed approximately $2.6 million from Pujiang. The annual interest rate of the loan is 8% and it has a one-year term. We
used the proceeds of approximately $1.7 million to pay off the balance due to Dr. Liang Tang and approximately $0.9 million for general corporate
purposes. We plan to renew this loan with Pujiang when it is due in May 2020.
We believe that current cash balances, future cash provided by operations, and amounts available under our line of credit or bank borrowings will
be sufficient to cover our operating and capital needs in the ordinary course of business for the foreseeable future. We continue, however, to evaluate and
take action, as necessary, to preserve adequate liquidity and ensure that our business can continue to operate during these uncertain times. If we experience
an adverse operating environment or unanticipated and unusual capital expenditure requirements, additional financing may be required. Consequently, we
are actively monitoring spending and taking action, when necessary, to align spending with sales performance. We also plan to defer non-essential capital
investments amid the COVID-19 pandemic. No assurance can be given, however, that additional financing, if required, would be available at all or on
favorable terms. We might also require or seek additional financing for the purpose of bidding new projects growing our existing markets, or for other
reasons. Such financing may include the use of additional debt or the sale of additional equity securities. Any financing which involves the sale of equity
securities or instruments that are convertible into equity securities could result in immediate and possibly significant dilution to our existing shareholders.
51
Accounts Receivable
In 2019 and 2018, the accounts receivable collection period of our domestic customers was approximately 175 and 150 days after receiving the
materials at their construction site, respectively. As of December 31, 2019, our accounts receivable increased to $72.5 million from $60.6 million at
December 31, 2018 as a result of slower collection of accounts receivable in 2019.
The average Days Sales Outstanding (“DSO”) of 2019 and 2018 were 175 and 150 days, respectively. The DSO as of December 31, 2019 and
2018 were 191 and 162 days, respectively. The increase in DSO as of December 31, 2019 was primarily due to the slower payments from our customers
during 2019.
The following table describes the aging of our accounts receivable during 2019 and 2018:
As of Date
December 31, 2019
December 31, 2018
Major Customers
Account Receivables
Balance (in US
Dollars)
<60 days
60-90 days
90-180 days
>180 days
72,544,202
60,586,869
52,336,097
40,328,956
4,723,410
7,571,838
10,928,413
6,900,964
4,556,282
5,785,111
During the years ended December 31, 2019, 2018 and 2017, our six largest customers contributed 66.8%, 68.3% and 74.8% of our total sales,
respectively. See “Business—Our Customers” above. As a result of our reliance on a limited number of customers, we may face pricing and other
competitive pressures, which may have a material adverse effect on our profits and our revenues. The volume of products sold for specific customers varies
from year to year, especially since we are not the exclusive supplier for any customers. In addition, there are a number of factors, other than our
performance, that could cause an unpredictable loss of a customer or substantial reduction in the business. For example, our customers may decide to
reduce spending on our products due to insufficient funding or delay of the project, or a customer may no longer need our products following the
completion of a project. The loss of any one of our major customers, a decrease in the volume of sales to these customers or a decrease in the price at which
we sell our products to them could materially adversely affect our profits and our revenues.
In addition, this customer concentration may subject us to perceived or actual leverage that our customers may have in negotiations with us, given
their relative size and importance to us. If our customers seek to negotiate their agreements on terms less favorable to us and we accept such unfavorable
terms, such unfavorable terms may have a material adverse effect on our business, financial condition and results of operations. Accordingly, unless and
until we diversify and expand our customer base, our future success will significantly depend upon the timing and volume of business from our largest
customers and the financial and operational success of these customers.
Bank Loans and Bank Acceptance Notes
At December 31, 2019, we had approximately $17.1 million of short-term bank loans and $8.9 million of bank acceptance notes outstanding, as
compared to approximately $13.6 million of short-term bank loans and $8.7 million of bank acceptance notes outstanding at December 31, 2018. In 2019,
Chinese government and Chinese banks relaxed monetary policy and lowered its reserve requirement ratio for all banks which encouraged more bank loans
to Chinese companies including steel industry and our domestic customers.
Our notes payable of $8.7 million at December 31, 2018 and $8.9 million at December 31, 2019 represented the amount of bank acceptance notes
our suppliers received from us for our purchases of raw materials. These notes were issued by financial institutions, typically by banks, that entitle our
suppliers to receive the full face amount from the bank or financial institution at maturity. Our notes payable are interest-free and range from six months to
one year from the date of issuance. These notes are subject to bank charges of 0.05% of the principal amount as commission on each issuance and in total
were secured by $6.0 million and $4.1 million of restricted cash as of December 31, 2019 and 2018, respectively. Bank acceptance notes are commonly
used in domestic China due to their enhanced credibility and the liquidity it provides to the bearer. The bearer always has the option to cash the bank
acceptance notes before maturity at its issuing bank and receive a discounted amount in cash. We expect that bank acceptance notes will continue to
account for a material portion of our total receivables and payables in the near future.
52
Short-term bank loans were obtained from local banks in China. All short-term bank loans are repayable within one year and are secured by a
portion of our property, plant and equipment and land use rights, or guaranteed by related parties. None of our short-term bank loans have financial
covenants. However, each loan contains a covenant that restricting our use of the funds to either purchases of raw materials or working capital.
The weighted average annual interest rate of our short-term bank loans was 5.48%, 5.71% and 6.41% as of December 31, 2019, 2018 and 2017,
respectively. Interest expense was $1.6 million, $0.9 million and $0.9 million for the years ended December 31, 2019, 2018 and 2017, respectively.
In 2019, we were able to rollover substantially all short-term bank loans and obtain new short-term bank loans from local Chinese banks, and we
anticipate rollovers of substantially all current facilities that are set to mature in 2020. We also anticipate an increase in the availability of short-term bank
loans in 2020 and we do not anticipate any difficulties to fund our operations. In the past, our affiliates, namely Ossen Material Research (formerly
Shanghai ZFX), Shanghai Ossen, and Ossen Shanghai, have provided guarantees for certain of our short-term bank loans for no consideration. There can be
no assurance that they will be willing or able to continue to provide similar guarantees on this basis with respect to future borrowings. We usually maintain
lines of credit with several local banks, which will be utilized to fund our short-term operation and fulfill liabilities.
Working Capital
Our working capital was approximately $130.2 million at December 31, 2019, as compared to $113.1 million at December 31, 2018.
The working capital increase of $17.1 million in 2019 as compared with 2018 was due primarily to the increase of accounts receivable and
advance to suppliers, partially offset by the decrease in inventories and the increase in short-term bank loans.
Inventories
We, like many other steel product manufacturers, maintain substantial inventories of steel to accommodate the short lead times and just-in-time
delivery requirements of our customers. Accordingly, we purchase steel in an effort to maintain our inventory at levels that we believe to be appropriate to
satisfy the anticipated needs of our customers based upon historic buying practices, supply agreements with customers and market conditions.
Cash Flows
In 2019, our cash flow from operations was positive primarily due to the increase in inventories, customer deposits and due to related party,
partially offset by the increase in advance to suppliers and accounts receivable. In 2018, our cash flow from operations was positive primarily due to the
increases in net income and customer deposits, and a decrease in advance to suppliers, partially offset by the increases in accounts receivable and
inventories.
Years Ended December 31, 2019 and 2018
The following table sets forth a summary of our net cash flow information for the periods indicated:
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
$
53
Year Ended December 31,
2018
7,619,314
401,192 $
2019
(139,795)
(72,305)
2,904,019
(700,151)
Operating Activities
Net cash provided in operating activities was approximately $0.4 million in 2019, as compared to $7.6 million of net cash provided in operating
activities in 2018. This was the result of a $3.1 million increase in accounts receivable due to slower payment from our customers, a $5.7 million increase
in advance to suppliers due to more prepayments for raw materials, a $6.2 million decrease in customer deposits from related parties due to less business
opportunity from our related parties, and a $3.0 million decrease in due to shareholder due to repayment of the balance due to the chairman of Ossen
Innovation, partially offset by a $5.8 million increase in inventories due to lower consumption of raw materials at the end of 2019, a $2.8 million increase
in customer deposits, and a $2.3 million increase in due to related party.
Investing Activities
Net cash used in investing activities was $139,795 in 2019, as compared to $72,305 of net cash used in investing activities in 2018 as the result of
more spending in maintenance and repair of production lines in 2019.
Financing Activities
Net cash provided in financing activities in 2019 was approximately $2.9 million, as compared to approximately $0.7 million of net cash used in
financing activities in 2018. This was the result of a $67.6 million increase in proceeds from short-term bank loans, a $6.2 million increase in proceeds
from long-term bank loans, partially offset by a $64.2 million increase in repayments of short-term bank loans and an increase in repayments of long-term
bank loans.
5.C. Research and Development, Patents and Licenses, etc.
See the discussion under the headings “Research and Development,” “Intellectual Property” and “Patents” in Item 4 above.
5.D. Trend Information
See discussion in Parts A and B of this item.
5.E. Off-Balance Sheet Arrangements
As of December 31, 2019 we guaranteed $86.0 million short-term debt for Shanghai Pujiang. We do not have any other off-balance sheet
arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our investors.
5.F. Tabular Disclosure of Contractual Obligations
Our contractual obligations consist of short-term and long-term debt obligations. The following table sets forth a breakdown of our contractual
obligations as of December 31, 2019:
CONTRACTUAL OBLIGATIONS
Land Use Right
Short-term debt obligations (1)
Interest Commitments – Short-term bank loans
Long-term debt obligations (2)
Interest Commitments – Long-term bank loans
Total
Payments due by period
Less than
1 year
912,436
25,967,974
481,827
-
536,576
27,898,813
1-3 years
3-5 years
5 years
More than
-
-
-
6,097,453
889,393
6,986,846
-
-
-
-
-
-
-
-
-
-
-
-
Total
912,436
25,967,974
481,827
6,097,453
1,425,969
34,885,659
(1) Attributable to short-term bank loans and bank acceptance notes.
(2) Attributable to long-term bank loans. Less than 1 year is the current portion of long-term bank loans.
54
ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
6.A. Directors and Senior Management
The following table sets forth the name, age, positions and a brief description of the business experience of each of our directors, executive
officers and key employees as of the date hereof.
Name
Liang Tang
Wei Hua
Junhong Li
Yingli Pan
Zhongcai Wu
Chairman of the Board
Position(s)
Chief Executive Officer, Chief Financial Officer and Director
Director
Director
Director
Age
52
57
53
64
70
There are no family relationships among our directors and officers. There are no arrangements or understandings with major shareholders,
customers, suppliers or others, pursuant to which any person referred to above was selected as a director or member of senior management. The address of
each of our directors and executive officers is c/o Ossen Innovation Co., Ltd., 518 Shangcheng Road, Floor 17, Shanghai, People’s Republic of China
200120.
Executive Officers and Directors
Dr. Liang Tang was appointed as our Chairman following our business combination. Dr. Tang has been the executive Director and the Chairman of
the Board of Pujiang International Group Limited since December 2018. He has more than 20 years of experience in the steel industry. Prior to joining the
Company, Dr. Tang first worked as an officer of the enterprise management office at Baosteel Group Shanghai Ergang Co., Ltd. from July 1988 to
March 1993 and then promoted and worked as the deputy director of the enterprise management office from March 1993 to November 1994. He then
served as the deputy head of the enterprise administrative division of the Shanghai Municipal Metallurgical Industry Bureau from November 1994 to
May 1998. From May 1998 to May 2001, Dr. Tang served as an officer of the China Association of Social Workers, previously known as China Union of
Social Workers. Thereafter, Dr. Tang served as the general manager of Innovation Material Research Institute from May 2001 to April 2004 and since
April 2004, Dr. Tang has served as the president of Ossen Group Co, Ltd. (PRC). Dr. Tang graduated from Shanghai University in the PRC, previously
Shanghai University of Technology, with a Bachelor’s degree in Metallurgy and Materials Engineering (Metal Pressure Processing Discipline) in
July 1988. He then obtained a Master of Business Administration degree jointly organized by Peking University in the PRC and Fordham University in the
USA in May 2002, and obtained a Doctoral degree in World Economics from East China Normal University in the PRC in July 2007.
Mr. Wei Hua was appointed as our Chief Executive Officer and a director of ours following our business combination. In January 1, 2017, Mr. Hua
was appointed as our Chief Financial Officer. Mr. Hua has served as Chairman of the Board of Directors of Ossen Jiujiang since 2007. Since 2000, he has
been the Assistant Chief Executive Officer for the Steel Department of Ossen Group. Before joining Ossen Group in 2000, from 1988 until 2000, Mr. Hua
was a vice supervisor of the department of technology and quality supervision at Baosteel Group Shanghai Ergang Co., Ltd. From 1985 until 1988,
Mr. Hua worked at Shanghai No. 5 Steel Factory. He graduated from Shanghai University with a degree in Business Management.
55
Mr. Junhong Li has been one of our directors since August 2010. Mr. Li has been the Senior Partner and Deputy Chief Accountant at Continental
Certified Public Accountants since 2008. Prior to joining Continental Certified Public Accountants in 2008, from 2007 until 2008, Mr. Li was the
Executive Director and Chief Financial Officer of ZMAY Holdings Limited. From 2004 until 2007, Mr. Li was Chief Financial Officer of Zhongmin On
Line Technology Co. Ltd. Mr. Li has more than 20 years of experience in mergers and acquisitions, reorganizations and management consulting. Mr. Li
received a bachelor’s degree from Central University of Finance and Economics and he is qualified as a certified public accountant.
Ms. Yingli Pan has been one of our directors since August 2010. Professor Pan has been a professor in the Department of Finance at Antai College
of Economics & Management of Shanghai since 2005. Prior to being appointed professor at Antai College of Economics & Management of Shanghai in
2005, from 1984 until 2005, Professor Pan was a professor in the Finance Department at East China Normal University. Ms. Pan has been the independent
non-executive director of Pujiang International Group Limited since December 2018, and the independent non-executive director of Postal Savings Bank of
China since December 2019. From November 2011 to November 2018, she was the independent non-executive director of China Merchants Bank Co., Ltd.
Professor Pan received a bachelor’s degree in economics from East China Normal University, a master’s degree in economics from Shanghai University of
Finance and Economics and a doctoral degree in economics from East China Normal University.
Mr. Zhongcai Wu has been one of our directors since August 2010. Mr. Wu has been Chief Engineer in the Communications Department of
Yunnan Province since 2002. Mr. Wu received a bachelor’s degree in road and bridge engineering from Hunan University.
Each of our directors will serve as a director until our next annual general meeting and until their successors are duly elected and qualified.
6.B. Compensation
For the years ended December 31, 2019 and 2018, the aggregate cash compensation that we paid to our executive officers and directors were
approximately $83,000 and $86,300, respectively. There are no service contracts between us and any of our directors, except for those directors who are
also our executive officers. Pursuant to PRC law, 25% of our executive officers’ salaries have been set aside for pension and retirement.
Employment Agreements
We have entered into an employment agreement with Dr. Liang Tang. Dr. Liang Tang is employed as Chairman of the Board of our Company. The
term of his agreement is set to expire on December 31, 2021. We may terminate the employment agreement for cause as specified in the agreement.
Dr. Liang Tang may terminate the employment agreement with thirty days written notice. The employment agreement may be renewed upon the mutual
agreement of the parties.
Each executive officer has agreed to hold in confidence any confidential information that he or she has obtained about the Company.
6.C. Board Practices
Terms of Directors and Officers
Expiration of Term of Directors
Pursuant to our memorandum and articles of association, the business of our company is managed by our board of directors. Commencing with the
first annual meeting of the shareholders, directors are elected for a term of office to expire at the next succeeding annual meeting of the shareholders after
their election. Each director will hold office until the expiration of his or her term of office and until his or her successor has been elected and qualified, or
until his or her earlier death, resignation or removal by the shareholders or a resolution passed by the majority of the remaining directors.
56
In the interim between annual meetings of shareholders, or special meetings of shareholders called for the election of directors, any vacancy on the
board of directors may be filled by the vote of a majority of the remaining directors then in office, although less than a quorum, or by the sole remaining
director. A director elected to fill a vacancy resulting from death, resignation or removal of a director will serve for the remainder of the full term of the
director whose death, resignation or removal will have caused such vacancy and until his successor will have been elected and qualified.
Director Remuneration Upon Termination
The directors may receive such remuneration as our board of directors may determine from time to time. The compensation committee will assist
the directors in reviewing and approving the compensation structure for the directors. Currently, our directors are not entitled to receive any remuneration
upon termination of employment.
Audit Committee
Our audit committee consists of Junhong Li, Yingli Pan and Zhongcai Wu, each of whom satisfies the independence requirements of Rule 10A-3
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which we refer to as the Exchange Act, and Rule 5605 of the Nasdaq rules.
The audit committee oversees our accounting and financial reporting processes and audits of the financial statements of our company. The audit committee
is responsible for, among other things:
selecting our independent auditors and pre-approving all audit and non-audit services permitted to be performed by our independent auditors;
reviewing with our independent auditors any audit problems or difficulties and management’s response;
reviewing and approving all proposed related party transactions, as defined in Item 404 of Regulation S-K;
discussing our annual audited financial statements with management and our independent auditors;
reviewing major issues as to the adequacy of our internal controls and any special audit steps adopted in light of material control deficiencies; and
·
·
·
·
·
· meeting separately and periodically with management and our independent auditors.
Compensation Committee
Our compensation committee consists of Zhongcai Wu, Yingli Pan and Junhong Li, each of whom satisfies the independence requirements of
Rule 5605 of the Nasdaq rules. The compensation committee assists the Board in reviewing and approving the compensation structure, including all forms
of compensation relating to our directors and executive officers. Our Chief Executive Officer may not be present at any committee meeting during which
his compensation is deliberated. The compensation committee is responsible for, among other things:
·
·
reviewing and approving the total compensation package for our senior executives; and
reviewing periodically, and approving, any long-term incentive compensation or equity plans, programs or similar arrangements, annual bonuses,
employee pension and welfare benefit plans.
Corporate Governance and Nominating Committee
Our corporate governance and nominating committee consists of Yingli Pan, Zhongcai Wu and Junghong Li, each of whom satisfies the
independence requirements of Rule 5605 of the Nasdaq rules. The corporate governance and nominating committee assists the board in selecting
individuals qualified to become members of our board and in determining the composition of the board and its committees. The corporate governance and
nominating committee is responsible for, among other things:
·
·
·
identifying and recommending to the board qualified candidates to be nominated for the election or re-election to the board of directors and
committees of the board of directors, or for appointment to fill any vacancy;
reviewing annually with the board of directors the current composition of the board of directors with regards to characteristics such as independence,
age, skills, experience and availability of service to us; and
advising the board of directors periodically with regard to significant developments in the law and practice of corporate governance as well as our
compliance with these laws and practices, and making recommendations to the board of directors on all matters of corporate governance and on any
remedial actions to be taken, if needed.
57
6.D. Employees
See the section entitled “Employees” in Item 4B. above.
6.E. Share Ownership
As of May 18, 2020, 19,791,110 of our ordinary shares were outstanding. Holders of our ordinary shares are entitled to vote together as a single
class on all matters submitted to shareholders for approval. No holder of ordinary shares has different voting rights from any other holders of ordinary
shares. We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company. Approximately 6,741,110 of our
ordinary shares represented by American Depositary Receipts are held by an aggregate of 1 record holder in the United States.
Beneficial ownership is determined in accordance with the rules and regulations of the SEC. The percentages of shares beneficially owned in the
table below are based on 19,791,110 ordinary shares outstanding as of May 18, 2020.
The following table sets forth information with respect to the beneficial ownership of our ordinary shares as of May 18, 2020 by:
·
·
each of our directors and executive officers; and
each person known to us to beneficially own more than 5% of our outstanding ordinary shares.
Unless otherwise noted below, the address for each listed shareholder, director or executive officer is 518 Shangcheng Road, Floor 17, Shanghai,
People’s Republic of China 200120.
Name
5% or Greater Shareholders (1):
Pujiang International Group Limited (2)
Directors and Executive Officers (1) :
Liang Tang (2)
Wei Hua
Junhong Li
Yingli Pan
Zhongcai Wu
Number of
Shares
Percentage
13,050,000
65.9%
13,050,000
65.9%
-
-
-
-
-
-
-
-
All directors and executive officers as a group (five individuals):
13,050,000
65.9%
(1) Beneficial ownership is determined in accordance with the rules and regulations of the SEC. Percentage of beneficial ownership of each listed
person is based on ordinary shares outstanding as of the date of this filing, including ordinary shares convertible from all outstanding preferred
shares, and the ordinary shares underlying any options and warrants exercisable by such person within 60 days of the date of this filing. Percentage
of beneficial ownership of each listed person is based on ordinary shares outstanding as of May 18, 2020 and the ordinary shares underlying any
options and warrants exercisable by such person within 60 days of the date of this filing.
58
(2) Represents ordinary shares held by Acme Innovation Limited, a wholly-owned subsidiary of Pujiang International Group Limited. Pujiang
International Group Limited is a Cayman Islands company listed on the Hong Kong Stock Exchange Dr. Liang Tang is a 64.39% shareholder and
the chairman of Pujiang International Group Limited. See Item 4.C. above. The address of Pujiang International Group Limited is Floor 16, 518
Shangcheng Road, Shanghai, China 200120.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
7.A. Major Shareholders
See Item 6.E., “Share Ownership,” for a description of our major shareholders.
7.B. Related Party Transactions
Transfers of Shares Between Related Parties
Several of our subsidiaries and affiliates which are, or at one time were, controlled by our Chairman, transferred shares with other entities
controlled by Dr. Liang Tang. See the discussion under Item 4.C. above for a description of these transactions.
Purchases from a Related Party
Historically, we purchased a significant percentage of our raw materials from an affiliated entity, Ossen Material Research (formerly Shanghai
ZFX), an agent that supplies steel wire rods to prestressed concrete manufacturers in China such as our company. Ossen Material Research is controlled by
our Chairman, Dr. Liang Tang. We have not procured any steel wire rods from Ossen Materials Research since 2014.
Sales to a Related Party
In 2019 and 2018, we sold $2.9 million and $2.8 million, respectively, of our products to Shanghai Pujiang Cable Co., Ltd., a subsidiary Shanghai
Ossen acquired in September 2010 (“Shanghai Pujiang”). We sold $1.6 million and $2.9 million of our products to Zhejiang Pujiang Cable Co., Ltd., a
subsidiary of Shanghai Pujiang in 2019 and 2018 (“Zhejiang Pujiang”). In 2019 and 2018, we generated approximately 3.2% and 4.2% of our revenue from
sales to Shanghai Pujiang and Zhejiang Pujiang.
Guarantees
During the years ended December 31, 2019, 2018 and 2017, Ossen Material Research (formerly Shanghai ZFX), an affiliate of ours, and Ossen
Shanghai, an affiliate of ours, and Shanghai Pujiang, an affiliate of ours, provided guarantees for certain of our short-term and long-term bank loans. The
term of each of the short-term loans is within one year. The term of the long-term loans is within three years. The purpose of these loans is to fund our
working capital needs. Local banks have required guaranties pursuant to their standard regulations.
Ossen Material Research guaranteed loans in the amount of $3.5 million, $0 and $3.7 million and notes payable in the amount of $0, $0 and $4.9
million in 2019, 2018 and 2017, respectively. Ossen Shanghai guaranteed loans in the amount of $0 in 2019, $0.6 million in 2018 and $0 in 2017. Shanghai
Pujiang guaranteed loans in the amount of $0 in 2019, $9.4 million in 2018 and $3.7 million in 2017. Pujiang International guaranteed loans in the amount
of $7.8 million in 2019, $0 in 2018 and $0 in 2017. These guarantees in 2019, 2018 and 2017 were provided for no consideration. In addition, in 2019,
2018 and 2017, we guaranteed loans in the amount of $86.0 million, $74.1 million and $5.4 million and notes payable in the amount of $0, $2.9 million and
$0 for Shanghai Pujiang, we guaranteed loans in the amount of $0, $0 and $18.8 million for Ossen Material Research, and we guaranteed notes payable in
the amount of $0, $0 and $25.4 million for Zhejiang Pujiang.
59
There can be no assurance that Ossen Material Research, Shanghai Pujiang, Ossen Shanghai and Pujiang International will be willing or able to
continue to provide similar guarantees on this basis with respect to future borrowings. The loans that have come due have been repaid by us in full.
The terms of the loan guarantees between the guarantor and the bank provide for the following: if the borrower does not repay its loan, the bank
may seek the principal and interest of the loan from the guarantor; the guarantee period is typically one or two years from the date the guaranteed loan is
due, as determined by the lending bank; the bank may change the terms of the loan with the borrower without receiving the consent of the guarantor; the
guarantor indemnifies the bank for actual damage or loss because of any fraudulent misrepresentations made by the guarantor and if the guarantor causes
the contract to become invalid, the guarantor indemnifies the bank for damages and losses.
Loan from related party
In May 2019, we borrowed approximately $2.6 million from Pujiang. The annual interest rate of the loan is 8% and it has a one-year term. We
used the proceeds of approximately $1.7 million to pay off the balance due to Dr. Liang Tang and approximately $0.9 million for general corporate
purposes. We plan to renew this loan with Pujiang when it is due in late May 2020.
7.C. Interests of Experts and Counsel
Not applicable.
ITEM 8.
FINANCIAL INFORMATION
Consolidated Statements and Other Financial Information
The financial statements required by this item may be found at the end of this report on 20-F, beginning on page F-1.
Legal Proceedings
We are not currently, and have not recently been, a party to any material legal or administrative proceedings. We are not aware of any material
legal or administrative proceedings threatened against us. From time to time, we are subject to various legal or administrative proceedings arising in the
ordinary course of our business.
Dividends
We have never declared or paid any dividend on our ordinary shares and we do not anticipate paying any dividends on our ordinary shares in the
future. We currently intend to retain all future earnings to finance our operations and to expand our business.
No Significant Changes
No significant changes to our financial condition have occurred since the date of the annual financial statements contained herein.
ITEM 9.
THE OFFER AND LISTING
9.A. Offer and Listing Details
Our ADSs are listed for trading on the Nasdaq Capital Market under the symbol “OSN.” The shares began trading on December 21, 2010 on the
Nasdaq Global Market. The listing of our ADS’s was transferred to the Nasdaq Capital Market on July 30, 2013. The closing price for the ADSs was
$1.9467 on May 15, 2020.
60
On May 28, 2019, Pujiang, the parent entity of Acme, was successfully listed and commenced trading on the main board of the Hong Kong Stock
Exchange.
9.B. Plan of Distribution
Not Applicable.
9.C. Markets
Our ADS’s are currently traded on the Nasdaq Capital Market.
9.D. Selling Shareholders
Not Applicable.
9.E. Dilution
Not Applicable.
9.F. Expenses of the Issuer
Not Applicable.
ITEM 10. 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
Our company (formerly known as Ultra Glory International, Ltd.) was incorporated under the BVI Act on January 21, 2010. Pursuant to our
memorandum of association, the objects for which we were established are unrestricted and we have full power and authority to carry out any objects not
prohibited by the BVI Act, as the same may be revised from time to time, or any other law of the British Virgin Islands, except that we have no power to
carry on banking or trust business, business as an insurance or reinsurance company, insurance agent or insurance broker, the business of company
management, the business of providing the registered office or the registered agent for companies incorporated in the British Virgin Islands, or business as a
mutual fund, mutual fund management or mutual fund administrator, unless we obtain certain licenses under the laws of the British Virgin Islands.
61
Board Composition
Pursuant to our memorandum and articles of association, the business of our company is managed by our board of directors. Commencing with the
first annual meeting of the shareholders, directors are elected for a term of office to expire at the next succeeding annual meeting of the shareholders after
their election. Each director will hold office until the expiration of his or her term of office and until his or her successor has been elected and qualified, or
until his or her earlier death, resignation or removal by the shareholders or a resolution passed by the majority of the remaining directors.
In the interim between annual meetings of shareholders, or special meetings of shareholders called for the election of directors, any vacancy on the
board of directors may be filled by the vote of a majority of the remaining directors then in office, although less than a quorum, or by the sole remaining
director. A director elected to fill a vacancy resulting from death, resignation or removal of a director will serve for the remainder of the full term of the
director whose death, resignation or removal will have caused such vacancy and until his successor will have been elected and qualified.
There is no cumulative voting by shareholders for the election of directors. We do not have any age-based retirement requirement and we do not
require our directors to own any number of shares to qualify as a director.
Board Meetings
Board meetings may be held at the discretion of the directors at such times and in such manner as the directors may determine upon not less than
three days notice having been given to all directors. Decisions made by the directors at meetings shall be made by a majority of the directors. There must be
at least a majority of the directors (with a minimum of two) at each meeting.
Directors Interested in a Transaction
A director must, immediately after becoming aware of the fact that he is interested in a transaction entered into or to be entered into by us, disclose
such interest to the board of directors. A director who is interested in a transaction entered into, or to be entered into, by the company, may vote on a matter
related to the transaction, attend a meeting of directors at which a matter relating to the transaction arises and be included among the directors present at the
meeting for the purposes of a quorum and sign a document on behalf of the company, or do any other thin in his capacity as a director, that relates to the
transaction. A director is not required to disclose his interest in a transaction or a proposed transaction to our board of directors if the transaction or
proposed transaction is between the director and us, or the transaction or proposed transaction is or is to be entered into the ordinary course of our business
and on usual terms and conditions.
The directors may exercise all powers of our company to borrow money, mortgage or charge our undertakings and property, issue debentures,
debenture shares and other securities whenever money is borrowed or as security for any debt, liability or obligation of the company or of any third party.
Our directors may, by resolution, fix the compensation of directors in respect of services rendered or to be rendered in any capacity to us.
A director may attend and speak at any meeting of the shareholders and at any separate meeting of the holders of any class of our shares.
Rights of Shares
We are currently authorized to issue 100,000,000 ordinary shares. The shares are made up of one class and one series, namely ordinary shares with
a par value of $0.01 per share. The ordinary shares have one vote each and have the same rights with regard to dividends paid by the company and
distributions of the surplus assets of the company.
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We may purchase, redeem or acquire our shares, provided that we obtain the consent of the member whose shares are being purchased, redeemed
or otherwise acquired.
Issuance of Shares; Variation of Rights of Shares
Our articles of association provide that directors may, without limiting or affecting any right of holders of existing shares, offer, allot, grant options
over or otherwise dispose of our unissued shares to such persons at such times and for such consideration and upon such terms and conditions as the
directors may determine.
Without prejudice to any special rights previously conferred on the holders of any existing shares or class of shares, we may issue shares, with
such preferred, deferred or other special rights or such restrictions, whether in regard to dividend, voting or otherwise, as the directors from time to time
may determine.
If we issue shares of more than one class, we will further amend and restate our Memorandum and Articles of Association to reflect the rights
attached to any class (unless otherwise provided by the terms of issue of the shares of that class) as may be varied with the consent in writing of the holders
of not less than three-fourths of the issued shares of that class and the holders of not less than three-fourths of the issued shares of any other class of shares
which may be affected by such variation. The rights conferred upon the holders of the shares of any class issued with preferred or other rights will not,
unless otherwise expressly provided by the terms of issue of the shares of that class, be deemed to be varied by the creation or issue of further shares
ranking pari passu therewith.
Shareholders Meetings
Under our memorandum and articles of association, we are required to hold an annual meeting of shareholders each year at such date and time
determined by our directors. Meetings of shareholders may be called pursuant to board resolution or the written request of shareholders holding more than
30% of the votes of our outstanding voting shares. Written notice of meetings of shareholders must be given to each shareholder entitled to vote at a
meeting not fewer than 10 days prior to the date of the meeting, with certain limited exceptions. The written notice will state the place, time and business to
be conducted at the meeting. The shareholders listed in our share register on the date prior to the date the notice is given shall be entitled to vote at the
meeting, unless the notice provides a different date for determining the shareholders who are entitled to vote.
A meeting of shareholders held without proper notice will be valid if shareholders holding 90% majority of the total number of shares entitled to
vote on all matters to be considered at the meeting, or 90% of the votes of each class or series of shares where shareholders are entitled to vote thereon as a
class or series, together with an absolute majority of the remaining votes, have waived notice of the meeting and, for this purpose, presence of a shareholder
at the meeting is deemed to constitute a waiver. The inadvertent failure of the directors to give notice of a meeting to a shareholder, or the fact that a
shareholder has not received notice, will not invalidate a meeting.
Shareholders may vote in person or by proxy. No business may be transacted at any meeting unless a quorum of shareholders is present. A quorum
consists of the presence in person or by proxy of holders entitled to exercise at least 50% of the voting rights of the shares of each class or series of shares
entitled to vote as a class or series thereon and the same proportion of the votes of the remaining shares entitled to vote thereon.
Changes in the Maximum Number of Shares the Company is Authorized to Issue
Subject to the provisions of the BVI Act, we may, by a resolution of shareholders, amend our memorandum and articles of association to increase
or decrease the number of shares authorized to be issued. Our directors may, by resolution, authorize a distribution by us at a time, of an amount, and to any
shareholders they think fit if they are satisfied, on reasonable grounds, that we will, immediately after the distribution, satisfy the solvency test as set forth
in the BVI Act, which requires that the value of a company’s assets exceeds its liabilities, and the company is able to pay its debts as they fall due.
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Indemnification
Subject to the provisions of the BVI Act, we may indemnify any person who (a) is or was a party or is threatened to be made a party to any
threatened, pending or completed proceedings, whether civil, criminal, administrative or investigative, by reason of the fact that the person is or was a
director of our company; or (b) is or was, at our request, serving as a director of, or in any other capacity is or was acting for, another company or a
partnership, joint venture, trust or other enterprise, against all expenses, including legal fees, and against all judgments, fines and amounts paid in
settlement and reasonably incurred in connection with legal, administrative or investigative proceedings.
Material Differences between U.S. Corporate Law and British Virgin Islands Corporate Law
The BVI Act differs from laws applicable to U.S. corporations and their shareholders. Set forth below is a summary of the material differences
between the provisions of the BVI Act applicable to us and the laws applicable to companies incorporated in the United States and their shareholders.
Differences in Corporate Law
We were incorporated under, and are governed by, the laws of the British Virgin Islands. The corporate statutes of the State of Delaware and the
British Virgin Islands are similar, and the flexibility available under British Virgin Islands law has enabled us to adopt memorandum of association and
articles of association that will provide shareholders with rights that do not vary in any material respect from those they would enjoy if we were
incorporated under the Delaware General Corporation Law, or Delaware corporate law. Set forth below is a summary of some of the differences between
provisions of the BVI Act applicable to us and the laws applicable to companies incorporated in Delaware and their shareholders.
Director’s Fiduciary Duties
Under Delaware corporate law, a director of a Delaware corporation has a fiduciary duty to the corporation and its stockholders. This duty has two
components: the duty of care and the duty of loyalty. The duty of care requires that a director act in good faith, with the care that an ordinarily prudent
person would exercise under similar circumstances. Under this duty, a director must inform himself of, and disclose to stockholders, all material
information reasonably available regarding a significant transaction. The duty of loyalty requires that a director act in a manner he reasonably believes to be
in the best interests of the corporation. He must not use his corporate position for personal gain or advantage. This duty prohibits self-dealing by a director
and mandates that the best interest of the corporation and its stockholders take precedence over any interest possessed by a director, officer or controlling
stockholder and not shared by the stockholders generally. In general, actions of a director are presumed to have been made on an informed basis, in good
faith and in the honest belief that the action taken was in the best interests of the corporation. However, this presumption may be rebutted by evidence of a
breach of one of the fiduciary duties. Should such evidence be presented concerning a transaction by a director, a director must prove the procedural
fairness of the transaction, and that the transaction was of fair value to the corporation.
British Virgin Islands law provides that every director of a British Virgin Islands company, in exercising his powers or performing his duties, shall
act honestly and in good faith and in what the director believes to be in the best interests of the company. Additionally, the director shall exercise the care,
diligence, and skill that a reasonable director would exercise in the same circumstances taking into account, but without limitation, the nature of the
company, the nature of the decision, the position of the director and the nature of his responsibilities. In addition, British Virgin Islands law provides that a
director shall exercise his powers as a director for a proper purpose and shall not act, or agree to the company acting, in a manner that contravenes British
Virgin Islands law or the memorandum association or articles of association of the company.
Amendment of Governing Documents
Under Delaware corporate law, with very limited exceptions, a vote of the stockholders is required to amend the certificate of incorporation. Under
British Virgin Islands law, no article or regulation shall be amended, rescinded or altered, and no new article shall be made, without the approval of the
members pursuant to a special resolution, unless the memorandum of association and articles of association provide otherwise.
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Written Consent of Directors
Under Delaware corporate law, directors may act by written consent only on the basis of a unanimous vote. Under British Virgin Islands law,
directors’ consents need only a majority of directors signing to take effect.
Written Consent of Shareholders
Under Delaware corporate law, unless otherwise provided in the certificate of incorporation, any action to be taken at any annual or special
meeting of stockholders of a corporation, may be taken by written consent of the holders of outstanding stock having not less than the minimum number of
votes that would be necessary to take such action at a meeting. As permitted by British Virgin Islands law, shareholders’ consents need only a majority of
shareholders signing to take effect. Our memorandum of association and articles of association provide that, other than changes to our memorandum of
association and articles of association, shareholders may approve corporate matters by way of a resolution consented to at a meeting of shareholders or in
writing by a majority of shareholders entitled to vote thereon. Changes to our memorandum of association and articles of association require the approval
of 66 2/3% of the votes of shareholders.
Shareholder Proposals
Under Delaware corporate law, a shareholder has the right to put any proposal before the annual meeting of shareholders, provided it complies
with the notice provisions in the governing documents. A special meeting may be called by the board of directors or any other person authorized to do so in
the governing documents, but shareholders may be precluded from calling special meetings. British Virgin Islands law and our memorandum of association
and articles of association provide that our directors shall call a meeting of the shareholders if requested in writing to do so by shareholders entitled to
exercise at least 30% of the voting rights in respect of the matter for which the meeting is requested.
Sale of Assets
Under Delaware corporate law, a vote of the stockholders is required to approve the sale of assets only when all or substantially all assets are being
sold. In the British Virgin Islands, shareholder approval is required when more than 50% of the company’s total assets by value are being disposed of or
sold.
Dissolution; Winding Up
Under Delaware corporate law, unless the board of directors approves the proposal to dissolve, dissolution must be approved by shareholders
holding 100% of the total voting power of the corporation. Only if the dissolution is initiated by the board of directors may it be approved by a simple
majority of the corporation’s outstanding shares. Delaware corporate law allows a Delaware corporation to include in its certificate of incorporation a
supermajority voting requirement in connection with dissolutions initiated by the board. As permitted by British Virgin Islands law and our memorandum
of association and articles of association, we may be voluntarily liquidated under Part XII of the BVI Act by resolution of directors and resolution of
shareholders if we have no liabilities and we are able to pay our debts as they fall due.
Redemption of Shares
Under Delaware corporate law, any stock may be made subject to redemption by the corporation at its option or at the option of the holders of
such stock provided there remains outstanding shares with full voting power. Such stock may be made redeemable for cash, property or rights, as specified
in the certificate of incorporation or in the resolution of the board of directors providing for the issue of such stock. As permitted by British Virgin Islands
law, and our memorandum of association and articles of association, shares may be repurchased, redeemed or otherwise acquired by us. Our directors must
determine that immediately following the redemption or repurchase we will be able to satisfy our debts as they fall due and the value of our assets exceeds
our liabilities.
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Variation of Rights of Shares
Under Delaware corporate law, a corporation may vary the rights of a class of shares with the approval of a majority of the outstanding shares of
such class, unless the certificate of incorporation provides otherwise. As permitted by British Virgin Islands law, and our memorandum of association and
articles of association, if our share capital is divided into more than one class of shares, we may vary the rights attached to any class only with the consent
in writing of holders of not less than three-fourths of the issued shares of that class and holders of not less than three-fourths of the issued shares of any
other class of shares which may be affected by the variation.
Removal of Directors
Under Delaware corporate law, a director of a corporation with a classified board may be removed only for cause with the approval of a majority
of the outstanding shares entitled to vote, unless the certificate provides otherwise. As permitted by British Virgin Islands law and our memorandum of
association and articles of association, directors may be removed by resolution of directors or resolution of shareholders, with or without cause.
Mergers
Under the BVI Act, two or more companies may merge or consolidate in accordance with the statutory provisions. A merger means the merging of
two or more constituent companies into one of the constituent companies, and a consolidation means the uniting of two or more constituent companies into
a new company. In order to merge or consolidate, the directors of each constituent company must approve a written plan of merger or consolidation which
must be authorized by a resolution of shareholders.
Shareholders not otherwise entitled to vote on the merger or consolidation may still acquire the right to vote if the plan of merger or consolidation
contains any provision which, if proposed as an amendment to the memorandum association or articles of association, would entitle them to vote as a class
or series on the proposed amendment. In any event, all shareholders must be given a copy of the plan of merger or consolidation irrespective of whether
they are entitled to vote at the meeting or consent to the written resolution to approve the plan of merger or consolidation.
Inspection of Books and Records
Under Delaware corporate law, any shareholder of a corporation may for any proper purpose inspect or make copies of the corporation’s stock
ledger, list of shareholders and other books and records. Under the BVI Act, members, upon giving written notice to us, are entitled to inspect the register
of members, the register of directors and minutes of resolutions of members, and to make copies of these documents and records.
Conflict of Interest
The BVI Act provides that a director shall forthwith, after becoming aware that he is interested in a transaction entered into or to be entered into
by the company, disclose that interest to the board of directors of the company. The failure of a director to disclose that interest does not affect the validity
of a transaction entered into by the director or the company. A transaction entered into by us, in respect of which a director is interested, is voidable by us
unless the director’s interest was disclosed to the board prior to the company’s entry into the transaction or was not required to be disclosed. A transaction
is not voidable if the material facts of the director’s interest are known by the members entitled to vote or if the transaction is approved or ratified by a
resolution of members. As permitted by British Virgin Islands law and our memorandum of association and articles of association, a director interested in a
particular transaction may vote on it, attend meetings at which it is considered, and sign documents on our behalf which relate to the transaction.
Transactions with Interested Shareholders
Delaware corporate law contains a business combination statute applicable to Delaware public corporations whereby, unless the corporation has
specifically elected not to be governed by such statute by amendment to its certificate of incorporation, it is prohibited from engaging in certain business
combinations with an “interested shareholder” for three years following the date that such person becomes an interested shareholder. An interested
shareholder generally is a person or group who or that owns or owned 15% or more of the target’s outstanding voting stock within the past three years. This
has the effect of limiting the ability of a potential acquirer to make a two-tiered bid for the target in which all shareholders would not be treated equally.
The statute does not apply if, among other things, prior to the date on which such shareholder becomes an interested shareholder, the board of directors
approves either the business combination or the transaction that resulted in the person becoming an interested shareholder. This encourages any potential
acquirer of a Delaware public corporation to negotiate the terms of any acquisition transaction with the target’s board of directors.
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British Virgin Islands law has no comparable provision.
Independent Directors
There are no provisions under Delaware corporate law or under the BVI Act that require a majority of our directors to be independent.
Cumulative Voting
Under Delaware corporate law, cumulative voting for elections of directors is not permitted unless the company’s certificate of incorporation
specifically provides for it. Cumulative voting potentially facilitates the representation of minority shareholders on a board of directors since it permits the
minority shareholder to cast all the votes to which the shareholder is entitled on a single director, which increases the shareholder’s voting power with
respect to electing such director. There are no prohibitions to cumulative voting under the laws of the British Virgin Islands, but our memorandum of
association and articles of association do not provide for cumulative voting.
Anti-takeover Provisions in Our Memorandum of Association and Articles of Association
Some provisions of our memorandum of association and articles of association may discourage, delay or prevent a change in control of our
company or management that shareholders may consider favorable, including provisions that authorize our board of directors to issue preference shares in
one or more series and to designate the price, rights, preferences, privileges and restrictions of such preference shares.
10.C. Material Contracts
We have not entered into any material contracts other than in the ordinary course of business and other than those described in this annual report.
10.D. Exchange Controls
British Virgin Islands
There are currently no exchange control regulations in the British Virgin Islands applicable to us or our shareholders.
The PRC
China regulates foreign currency exchanges primarily through the following rules and regulations:
·
·
Foreign Currency Administration Rules of 1996, as amended; and
Administrative Rules of the Settlement, Sale and Payment of Foreign Exchange of 1996.
As we disclosed in the risk factors above, Renminbi is not a freely convertible currency at present. Under the current PRC regulations, conversion
of Renminbi is permitted in China for routine current-account foreign exchange transactions, including trade and service related foreign exchange
transactions, payment of dividends and service of foreign debts. Conversion of Renminbi for most capital-account items, such as direct investments,
investments in PRC securities markets and repatriation of investments, however, is still subject to the approval of SAFE.
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Pursuant to the above-mentioned administrative rules, foreign-invested enterprises may buy, sell and/or remit foreign currencies for current
account transactions at banks in China with authority to conduct foreign exchange business by complying with certain procedural requirements, such as
presentment of valid commercial documents. For capital-account transactions involving foreign direct investment, foreign debts and outbound investment
in securities and derivatives, approval from SAFE is a pre-condition. Capital investments by foreign-invested enterprises outside China are subject to
limitations and requirements in China, such as prior approvals from the PRC Ministry of Commerce or SAFE.
10.E. Taxation
The following summary of the material British Virgin Islands, PRC and U.S. tax consequences of an investment in our ADSs or ordinary shares is
based upon laws and relevant interpretations thereof in effect as of the date hereof, all of which are subject to change, possibly with retroactive effect. This
summary is not intended to be, nor should it be construed as, legal or tax advice and is not exhaustive of all possible tax considerations. This summary also
does not deal with all possible tax consequences relating to an investment in our ADSs or ordinary shares, such as the tax consequences under state, local,
non-U.S., non-PRC, and non-British Virgin Islands tax laws. Investors should consult their own tax advisors with respect to the tax consequences of the
acquisition, ownership and disposition of our ADSs or ordinary shares.
British Virgin Islands Taxation
All dividends, interests, rents, royalties, compensations and other amounts paid by us are exempt from all forms of taxation in the British Virgin
Islands and any capital gains realized with respect to any of our shares, debt obligations, or other securities are not subject to any form of taxation in the
British Virgin Islands. No estate, inheritance, succession or gift tax, rate, duty, levy or other charge is payable under BVI law by persons who are not
persons resident in the British Virgin Islands with respect to any of our shares, debt obligation or other securities. There are currently no withholding taxes
or exchange control regulations in the British Virgin Islands applicable to us or our shareholders. Currently, there is no income tax treaty, convention or
reciprocal tax treaty regarding withholdings currently in effect between the United States and the British Virgin Islands. We will only be liable to pay
payroll tax with respect to employees employed and working in the British Virgin Islands. We do not currently have, and do not intend to have in the near
future, any employees in the British Virgin Islands.
People’s Republic of China Taxation
Under the former Income Tax Law for Enterprises with Foreign Investment and Foreign Enterprises, any dividends payable by foreign-invested
enterprises to non-PRC investors were exempt from PRC withholding tax. In addition, any dividends payable, or distributions made, by us to holders or
beneficial owners of our shares would not be subject to any PRC tax, provided that such holders or beneficial owners, including individuals and enterprises,
were not deemed to be PRC residents under the PRC tax law and were not otherwise subject to PRC tax.
On March 16, 2007, the PRC National People’s Congress approved and promulgated a new PRC Enterprise Income Tax Law, which took effect as
of January 1, 2008. Under the new tax law, enterprises established under the laws of non-PRC jurisdictions but whose “de facto management body” are
located in China are considered “resident enterprises” for PRC tax purposes. Under the implementation regulations issued by the State Council relating to
the new tax law, “de facto management body” is defined as the body that has material and overall management control over the business, personnel,
accounts and properties of an enterprise. In April 2009, the PRC State Administration of Taxation promulgated a circular to clarify the definition of “de
facto management body” for enterprises incorporated overseas with controlling shareholders being PRC enterprises. It remains unclear how the tax
authorities will treat an overseas enterprise invested or controlled by another overseas enterprise and ultimately controlled by PRC individual residents as is
in our case. We are currently not treated as a PRC resident enterprise by the relevant tax authorities. Since substantially all of our management is currently
based in China and may remain in China in the future, we may be treated as a “resident enterprise” for the PRC tax purposes, in which case, we will be
subject to PRC income tax as to our worldwide income at a uniform income tax rate of 25%. In addition, the new tax law provides that dividend income
between qualified “resident enterprises” is exempt from income tax.
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Moreover, the new tax law provides that an income tax rate of 10% is normally applicable to dividends payable for earnings derived since
January 1, 2008 to non-PRC investors who are “non-resident enterprises,” to the extent such dividends are derived from sources within China. We are a
British Virgin Islands holding company and substantially all of our income is derived from dividends, if any, we receive from our operating subsidiaries
located in China. Thus, dividends payable to us by our subsidiaries in China may be subject to the 10% withholding tax if we are considered as a “non-
resident enterprise” under the new tax law.
Moreover, non-resident individual investors may be required to pay PRC individual income tax at a rate of 20% on interests or dividends payable
to the investors or any capital gains realized from the transfer of ADSs or ordinary shares if such gains are deemed income derived from sources within the
PRC. Under the Individual Income Tax Law or the IIT Law, non-resident individual refers to an individual who has no domicile in China and does not stay
in the territory of China or who has no domicile in China and has stayed in the territory of China for less than one year. Pursuant to the IIT Law and its
implementation rules, for purposes of the PRC capital gains tax, the taxable income will be the balance of the total income obtained from the transfer of the
ADSs or ordinary shares minus all the costs and expenses that are permitted under PRC tax laws to be deducted from the income. Therefore, if we are
considered as a PRC "resident enterprise" and dividends we pay with respect to our ADSs or ordinary shares and the gains realized from the transfer of our
ADSs or ordinary shares are considered income derived from sources within the PRC by relevant competent PRC tax authorities, such gains earned by non-
resident individuals may also be subject to PRC withholding tax at a rate of 20%.
Under the currently available guidance of the new tax law, dividends payable by us to our shareholders should not be deemed to be derived from
sources within China and therefore should not be subject to withholding tax at 10%, or a lower rate if reduced by a tax treaty or agreement. However, what
will constitute income derived from sources within China is currently unclear. In addition, gains on the disposition of our shares should not be subject to
PRC withholding tax. However, these conclusions are not entirely free from doubt. In addition, it is possible that these rules may change in the future,
possibly with retroactive effect.
United States Federal Income Taxation
The following is a discussion of the material U.S. federal income tax considerations that may apply to an investor with respect to the acquisition,
ownership and disposition of our ADSs or ordinary shares. This discussion does not purport to address all of the tax consequences of owning our ADSs or
ordinary shares with respect to all categories of investors that acquire our ADSs or ordinary shares, some of which (such as financial institutions, regulated
investment companies, real estate investment trusts, tax-exempt organizations, insurance companies, persons holding our ADSs or ordinary shares as part
of a hedging, integrated, conversion, straddle or constructive sale transaction, traders in securities that have elected the mark-to-market method of
accounting for their securities, persons liable for alternative minimum tax, persons who are investors in pass-through entities, grantor trusts, persons who
own, directly or indirectly under applicable constructive ownership rules, 10% or more (by voting power) of our ADSs or ordinary shares, persons who
received our ADSs or ordinary shares pursuant to the exercise of an option or otherwise as compensation, certain former citizens and long-term residents of
the United States, dealers in securities or currencies and investors whose functional currency is not the U.S. dollar) may be subject to special rules. This
discussion addresses only holders who purchase our ADSs or ordinary shares and hold such ADSs or ordinary shares as a capital asset (i.e., generally for
investment). Moreover, this discussion is based on the Internal Revenue Code of 1986, as amended (or the Code), existing and proposed Treasury
regulations promulgated under the Code, published rulings, and administrative and judicial interpretations of the Code, all as currently in effect as of the
date of hereof, all of which are subject to change, possibly with retroactive effect. Investors should consult their own tax advisors regarding the tax
consequences arising in their own particular situation under U.S. federal, state, local or foreign law or the United States – PRC income tax treaty with
respect to the acquisition, ownership or disposition of our ADSs or ordinary shares.
For purposes of this discussion, the term “U.S. Holder” means (except as described in the preceding paragraph) a beneficial owner of our ADSs or
ordinary shares that is, for United States federal income tax purposes, (i) an individual U.S. citizen or resident, (ii) a corporation (or other entity taxable as a
corporation) created or organized under the laws of the United States or any political subdivision thereof, or the District of Columbia, (iii) an estate the
income of which is subject to U.S. federal income taxation regardless of its source or (iv) a trust if either (x) a court within the United States is able to
exercise primary jurisdiction over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the
trust or (y) the trust has a valid election in effect under applicable Treasury Regulations to be treated as a U.S. person. A beneficial owner of our ADSs or
ordinary shares (other than a partnership or an entity treated as a partnership for U.S. federal income tax purposes) that is not a U.S. Holder is referred to
below as a “Non-U.S. Holder.”
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If a partnership, or an entity treated for U.S. federal income tax purposes as a partnership, such as a limited liability company, holds our ADSs or
ordinary shares, the tax treatment of a partner in such partnership will depend on the status of the partner and upon the activities of the partnership. A
partner in such a partnership holding our ADSs or ordinary shares, you should consult its tax advisor.
United States Federal Income Taxation of U.S. Holders
Distributions
Subject to the discussion of Passive Foreign Investment Companies, or PFICs, below, distributions made by us with respect to our ADSs or
ordinary shares to a U.S. Holder will constitute dividends to the extent of our current or accumulated earnings and profits, as determined under U.S. federal
income tax principles. Distributions in excess of our earnings and profits will be treated first as a nontaxable return of capital to the extent of the U.S.
Holder’s tax basis in our ADSs or ordinary shares, and thereafter as capital gain. Because we are not a U.S. corporation, U.S. Holders that are corporations
will generally not be entitled to claim a dividends-received deduction with respect to any distributions they receive from us.
Subject to the discussion of PFICs below, dividends paid on our ADSs or ordinary shares that are received by U.S. Holders that are individuals,
estates or trusts will be taxed at the rate applicable to long-term capital gains (a maximum rate of 15% for taxable years beginning on or before
December 31, 2013), provided that such dividends meet the requirements of "qualified dividend income." For this purpose, qualified dividend income
includes dividends paid by a non-U.S. corporation if certain holding period and other requirements are met, and the stock of the non-U.S. corporation with
respect to which dividends are paid is readily tradable on an established securities market in the U.S. (such as the Nasdaq Capital Market). Dividends that
fail to meet such requirements, and dividends received by corporate U.S. Holders, are taxed at ordinary income rates. No dividend received by a U.S.
Holder will be a qualified dividend (i) if the U.S. Holder held the ordinary share with respect to which the dividend was paid for less than 61 days during
the 121-day period beginning on the date that is 60 days before the ex-dividend date with respect to such dividend, excluding for this purpose, under the
rules of Code Section 246(c), any period during which the U.S. Holder has an option to sell, is under a contractual obligation to sell, has made and not
closed a short sale of, is the grantor of a deep-in-the-money or otherwise nonqualified option to buy, or has otherwise diminished its risk of loss by holding
other positions with respect to, such ordinary share (or substantially identical securities); or (ii) to the extent that the U.S. Holder is under an obligation
(pursuant to a short sale or otherwise) to make related payments with respect to positions in property substantially similar or related to the ADS or ordinary
share with respect to which the dividend is paid. If we were to be a "passive foreign investment company" (as such term is defined in the Code) for any
taxable year, dividends paid on our ADSs or ordinary shares in such year or in the following taxable year would not be qualified dividends. In addition, a
non-corporate U.S. Holder will be able to take a qualified dividend into account in determining its deductible investment interest (which is generally
limited to its net investment income) only if it elects to do so; in such case the dividend will be taxed at ordinary income rates
Sale, Exchange or Other Disposition of ADSs or ordinary shares
Subject to the discussion of PFICs below, a U.S. Holder will recognize taxable gain or loss upon a sale, exchange or other taxable disposition of
our ADSs or ordinary shares in an amount equal to the difference between the amount realized by the U.S. Holder from such disposition and the U.S.
Holder’s tax basis in such stock. Such gain or loss will be treated as long-term capital gain or loss if the U.S. Holder’s holding period is greater than one
year at the time of the disposition. Long-term capital gains of non-corporate U.S. Holders may be eligible for reduced rates of taxation. A U.S. Holder’s
ability to deduct capital losses is subject to certain limitations.
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Tax Consequences If We Are A Passive Foreign Investment Company
We will be a passive foreign investment company (a “PFIC”) if, after applying certain pass-through rules, either: (i) 75% or more of our gross
income in any taxable year consists of “passive income” (including dividends, interest, gains from the sale or exchange of investment property and certain
rents and royalties); or (ii) at least 50% of our assets in any taxable year (averaged over the year and generally determined on a quarterly basis) produce or
are held for the production of passive income.
We do not believe that we were a PFIC for our 2016 taxable year. However, because the determination of our PFIC status is based on such factual
matters as the composition of our income and assets the valuation of our assets, and our market capitalization, there is no assurance that the United Stated
Internal Revenue Service (“IRS”) will agree with our position for the 2016 taxable year or any prior taxable year. In addition, there can be no assurance that
we will not become a PFIC for the current taxable year ending December 31, 2018 or in future taxable years.
If we were to be treated as a PFIC for any taxable year during the period in which a U.S. Holder owns our ADSs or ordinary shares (and regardless
of whether we remain a PFIC for subsequent taxable years), each U.S. Holder who is treated as owning our stock for purposes of the PFIC rules would be
liable to pay U.S. federal income tax at the highest applicable income tax rates on ordinary income upon the receipt of “excess distributions” (i.e., the
portion of any distributions received by the U.S. Holder on our ADSs or ordinary shares in a taxable year in excess of 125 percent of the average annual
distributions received by the U.S. Holder in the three preceding taxable years, or, if shorter, the U.S. Holder’s holding period for the ADSs or ordinary
shares) and on any gain from the disposition of our ADSs or ordinary shares, plus interest on a portion of such amounts, as if such excess distributions or
gain had been recognized ratably over the U.S. Holder’s holding period of our ADSs or ordinary shares.
The above rules relating to the taxation of excess distributions and dispositions will not apply to a U.S. Holder who has made a timely “qualified
electing fund” (“QEF”) election for all taxable years that the holder has held our ADSs or ordinary shares and if we comply with certain reporting
requirements. Instead, each U.S. Holder who has made a timely QEF election is required for each taxable year that we are a PFIC to include in income a
pro rata share of our ordinary earnings as ordinary income and a pro rata share of our net capital gain as long term capital gain, regardless of whether we
have made any distributions of the earnings or gain. The U.S. Holder’s basis in our ADSs or ordinary shares will be increased to reflect taxed but
undistributed income. Distributions of income that had been previously taxed will result in a corresponding reduction in the basis of the ADSs or ordinary
shares and will not be taxed again once distributed. A U.S. Holder making a QEF election will generally recognize capital gain or loss on the sale,
exchange or other taxable disposition of our ADSs or ordinary shares. If we determine that we are a PFIC for any taxable year, we may provide each U.S.
Holder with all necessary information in order to make the QEF election described above.
Alternatively, if we were to be treated as a PFIC for any taxable year and provided that our ADSs or ordinary shares are treated as “marketable
stock” (e.g., “regularly traded” on the Nasdaq Capital Market) a U.S. Holder may make a mark-to-market election. Under a “mark-to-market” election, in
any taxable year that we are a PFIC, any excess of the fair market value of the ADSs or ordinary shares at the close of any taxable year over the U.S.
Holder’s adjusted tax basis in the ADSs or ordinary shares is included in the U.S. Holder’s income as ordinary income. In addition, the excess, if any, of the
U.S. Holder’s adjusted tax basis at the close of any taxable year over the fair market value of the ADSs or ordinary shares is deductible in an amount equal
to the lesser of the amount of the excess or the amount of the net mark-to-market gains that the U.S. Holder included in income in prior years. A U.S.
Holder’s tax basis in its ADSs or ordinary shares would be adjusted to reflect any such income or loss. For any taxable year that we are a PFIC, gain
realized on the sale, exchange or other disposition of our ADSs or ordinary shares would be treated as ordinary income, and any loss realized on the sale,
exchange or other disposition of the ADSs or ordinary shares would be treated as ordinary loss to the extent that such loss does not exceed the net mark-to-
market gains previously included by the U.S. Holder. There can be no assurances that there will be sufficient trading volume with respect to the ADSs or
ordinary shares for the ADSs or ordinary shares to be considered “regularly traded,” or that our ADSs or ordinary shares will continue to trade on the
Nasdaq Capital Market. Accordingly, there are no assurances that our ADSs or ordinary shares will be marketable stock for these purposes.
A U.S. Holder who holds our ADSs or ordinary shares during a period when we are a PFIC will be subject to the foregoing rules for that taxable
year and all subsequent taxable years with respect to that U.S. Holder’s holding of our ADSs or ordinary shares, even if we cease to be a PFIC, subject to
certain exceptions for U.S. Holders who made a timely mark-to-market or QEF election. U.S. Holders are urged to consult their tax advisors regarding the
PFIC rules in the event that we are a PFIC, including as to the advisability and consequences of making a QEF or mark-to-market election.
71
U.S. Federal Income Taxation of Non-U.S. Holders
Except as described in “Backup Withholding and Information Reporting” below, non-U.S. Holders will generally not be subject to U.S. federal
income tax or withholding tax on the payment of dividends on, and the proceeds from the disposition of, our ADSs or ordinary shares unless, in the case of
U.S. federal income taxes, the income is effectively connected with the conduct by the Non-U.S. Holder of a trade or business in the United States
(“effectively connected income”) (and, if an income tax treaty applies, the income is attributable to a permanent establishment maintained by the Non-U.S.
Holder in the United States or, in the case of an individual, the income is attributable to a fixed place of business).
Non-U.S. Holders will generally not be subject to U.S. federal income tax or withholding tax on any gain realized upon the sale, exchange or other
disposition of our ADSs or ordinary shares, unless either:
·
·
the gain is effectively connected income (or, if a treaty applies, the gain is attributable to a permanent establishment maintained by the Non-U.S.
Holder in the United States or, in the case of an individual, the income is attributable to a fixed place of business); or
the Non-U.S. Holder is an individual who is present in the United States for 183 days or more during the taxable year of disposition and certain other
conditions are met.
Effectively connected income may be subject to regular U.S. federal income tax in the same manner as discussed in the section above relating to
the taxation of U.S. Holders, unless exempt under an applicable income tax treaty. In addition, effectively connected income of a corporate Non-U.S.
Holder may be subject to an additional branch profits tax at a rate of 30%, or at a lower rate as may be specified by an applicable income tax treaty.
Non-U.S. Holders may be subject to tax in jurisdictions other than the United States on dividends received from us on our ADSs or ordinary
shares and on any gain realized upon the sale, exchange or other disposition of our ADSs or ordinary shares. Non-U.S. Holders should consult with their
own tax advisors regarding such other jurisdictions.
Backup Withholding and Information Reporting
U.S. Holders (other than certain exempt recipients) may be subject to information reporting requirements with respect to the payment of dividends
on, or proceeds from the disposition of, our ADSs or ordinary shares. In addition, a U.S. Holder may be subject, under certain circumstances, to backup
withholding at a rate of up to 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.
72
10.H. Documents on Display
The Company is subject to the informational requirements of the Exchange Act and will file reports, registration statements and other information
with the SEC. The Company’s reports, registration statements and other information can be inspected on the SEC’s website at www.sec.gov. You may also
visit us on our website at http://www.osseninnovation.com. However, information contained on our website does not constitute a part of this annual report.
10.I. Subsidiary Information
Not Applicable.
ITEM 11. 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, 2019 and 2018, substantially all of our cash included bank deposits in accounts maintained within the PRC where there is
currently no rule or regulation in place for obligatory insurance to cover bank deposits in the event of bank failure. However, we have not experienced any
losses in such accounts and we believe we are not exposed to any significant risks on our cash in bank accounts.
We are exposed to various types of market risks, including changes in foreign exchange rates, commodity prices and inflation in the normal course
of business.
Interest rate risk
We are subject to risks resulting from fluctuations in interest rates on our bank balances. A substantial portion of our cash is held in China in
interest bearing bank deposits and denominated in RMB. To the extent that we may need to raise debt financing in the future, upward fluctuations in
interest rates would increase the cost of new debt. We do not currently use any derivative instruments to manage our interest rate risk.
Commodity price risk
Certain raw materials used by us are subject to price volatility caused by supply conditions, political and economic variables and other
unpredictable factors. The primary purpose of our commodity price management activities is to manage the volatility associated with purchases of
commodities in the normal course of business. We do not speculate on commodity prices.
Foreign exchange risk
The RMB is not a freely convertible currency. The PRC government may take actions that could cause future exchange rates to vary significantly
from current or historical exchange rates. Fluctuations in exchange rates may adversely affect the value of any dividends we declare.
Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into
any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may enter into hedging transactions in the future,
the availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our
foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currencies.
73
Inflation risk
Inflationary factors such as increases in the cost of our products and overhead costs may adversely affect our operating results. A high rate of
inflation may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a
percentage of net revenues if the selling prices of our products do not increase proportionately with these increased costs.
Other risks
In addition to the risks described above, our business operations have been and may continue to be materially and adversely affected by the
outbreak of the COVID-19. Our factories in Jiujiang and Ma’anshan were temporarily closed from China’s Spring Festival national holiday in late
January to March 9, 2020, as a result of the COVID-19 outbreak. A prolonged outbreak of COVID-19 could result in disruption of supply chain of certain
raw materials necessary for our products, decrease of customer demand, restrictions on our travel to support our sites or our customers around the world,
and delays in our production and construction of our new production facilities in Jiujiang, Jiangxi, China. The extent to which COVID-19 impacts raw
material prices in 2020 will depend on the future developments of the outbreak, including new information concerning the global severity of and actions
taken to contain the outbreak, which are highly uncertain and unpredictable. All these factors may affect our overall financial performance in 2020,
although we cannot quantify the overall impact at this time.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
The depositary may charge each person to whom ADSs are issued, including, without limitation, issuances against deposits of shares, issuances in
respect of share distributions, rights and other distributions, issuances pursuant to a stock dividend or stock split declared by us or issuances pursuant to a
merger, exchange of securities or any other transaction or event affecting the ADSs or deposited securities, and each person surrendering ADSs for
withdrawal of deposited securities or whose ADRs are cancelled or reduced for any other reason, $5.00 for each 100 ADSs (or any portion thereof) issued,
delivered, reduced, cancelled or surrendered, as the case may be. The depositary may sell (by public or private sale) sufficient securities and property
received in respect of a share distribution, rights and/or other distribution prior to such deposit to pay such charge.
The following additional charges shall be incurred by the ADR holders, by any party depositing or withdrawing shares or by any party
surrendering ADSs or to whom ADSs are issued (including, without limitation, issuance pursuant to a stock dividend or stock split declared by us or an
exchange of stock regarding the ADRs or the deposited securities or a distribution of ADSs), whichever is applicable:
·
·
·
·
·
·
·
·
a fee of $1.50 per ADR or ADRs for transfers of certificated or direct registration ADRs;
a fee of up to $0.05 per ADS for any cash distribution made pursuant to the deposit agreement;
a fee of up to $0.05 per ADS per calendar year (or portion thereof) for services performed by the depositary in administering the ADRs (which fee
may be charged on a periodic basis during each calendar year and shall be assessed against holders of ADRs as of the record date or record dates set
by the depositary during each calendar year and shall be payable in the manner described in the next succeeding provision);
reimbursement of such fees, charges and expenses as are incurred by the depositary and/or any of the depositary’s agents (including, without
limitation, the custodian and expenses incurred on behalf of holders in connection with compliance with foreign exchange control regulations or any
law or regulation relating to foreign investment) in connection with the servicing of the shares or other deposited securities, the delivery of deposited
securities or otherwise in connection with the depositary’s or its custodian’s compliance with applicable law, rule or regulation (which charge shall be
assessed on a proportionate basis against holders as of the record date or dates set by the depositary and shall be payable at the sole discretion of the
depositary by billing such holders or by deducting such charge from one or more cash dividends or other cash distributions);
stock transfer or other taxes and other governmental charges;
cable, telex and facsimile transmission and delivery charges incurred at your request in connection with the deposit or delivery of shares;
transfer or registration fees for the registration of transfer of deposited securities on any applicable register in connection with the deposit or
withdrawal of deposited securities; and
expenses of the depositary in connection with the conversion of foreign currency into U.S. dollars.
74
We will pay all other charges and expenses of the depositary and any agent of the depositary (except the custodian) pursuant to agreements from
time to time between us and the depositary. The charges described above may be amended from time to time by agreement between us and the depositary.
Our depositary has agreed to reimburse us for certain expenses we incur that are related to establishment and maintenance of the ADR program,
including investor relations expenses and exchange application and listing fees. Neither the depositary nor we can determine the exact amount to be made
available to us because (i) the number of ADSs that will be issued and outstanding, (ii) the level of fees to be charged to holders of ADSs and (iii) our
reimbursable expenses related to the ADR program are not known at this time. The depositary collects its fees for issuance and cancellation of ADSs
directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary
collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to
pay the fees. The depositary may collect its annual fee for depositary services by deduction from cash distributions, or by directly billing investors, or by
charging the book-entry system accounts of participants acting for them. The depositary will generally set off the amounts owing from distributions made
to holders of ADSs. If, however, no distribution exists and payment owing is not timely received by the depositary, the depositary may refuse to provide
any further services to holders that have not paid those fees and expenses owing until such fees and expenses have been paid.
At the discretion of the depositary, all fees and charges owing under the deposit agreement are due in advance and/or when declared owing by the
depositary.
The depositary’s office is located at 4 New York Plaza, Floor 12, New York, New York, 10004.
75
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. Our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were 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 defined in Rule 13a-
15(f) and 15d-15(f)under the Exchange Act). 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, 2019. 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).
Based on this assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2019.
(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.
76
ITEM 16. RESERVED
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our audit committee consists of Junhong Li, Yingli Pan and Zhongcai Wu. Our board of directors has determined that Junhong Li, Yingli Pan and
Zhongcai Wu 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 “Code”). 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 2019, 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
Audit fees*
$
135,000 $
Year Ended
December 31, 2019
Year Ended
December 31, 2018
130,000
*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 the SEC regulatory filings or
engagements.
The policy of our audit committee and our board of directors is to pre-approve all audit and non-audit services provided by our principal auditors,
including audit services, audit-related services, and other services as described above, other than those for de minimis services which are approved by the
audit committee or our board of directors prior to the completion of the services.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not Applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
On May 6, 2015, we announced a share repurchase program for up to a total of 500,000 shares of our ADS’s through May 2016 in accordance
with applicable requirements of Rule 10b5-1 and/or Rule 10b-18 under the Exchange Act. 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, no shares of our ADS’s have been purchased under the repurchase program. The repurchase program was not extended to
2018 and 2019.
77
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.
Controlled Company
As of the date of this report, Pujiang beneficially own approximately 65.9% of the aggregate voting power of our outstanding ordinary shares. As
a result, we will be a “controlled company” for purposes of the Nasdaq listing rules. As a controlled company, we are permitted to elect to rely on certain
exemptions from the obligation to comply with certain corporate governance requirements, including:
•
•
the requirement that our director nominees be selected or recommended solely by independent directors; and
the requirement that we have a nominating and corporate governance committee and a compensation committee that are composed entirely of
independent directors with a written charter addressing the purposes and responsibilities of the committees.
Although we do not intend to rely on the controlled company exemptions under the Nasdaq listing rules, we could elect to rely on these exemptions in
the future, and if so, you would not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance
requirements of Nasdaq.
ITEM 16H. MINE SAFETY DISCLOSURE
Not applicable.
78
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-47.
ITEM 19. EXHIBITS
Exhibit
Number
Description of Documents
1.1
1.2
2.1
2.2
2.3
2.4
4.1
4.2
4.3
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)
Description of Securities *
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)
Employment Contract by and between Ossen Innovation Co., Ltd. and Wei Hua, dated January 1, 2017 *
Subsidiaries of the Registrant(5)
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 May 14, 2019.
79
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 18, 2020
80
OSSEN INNOVATION CO., LTD.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
OSSEN INNOVATION CO., LTD. AND SUBSIDIARIES
CONTENTS
PAGE
PAGE
PAGE
PAGE
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
F-2-F-3
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2019 AND 2018
F-4
F-5
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME FOR THE
YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEARS
ENDED DECEMBER 31, 2019, 2018 AND 2017
PAGE
F-6-F-7
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2019,
2018 AND 2017
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, 2019, 2018, AND 2017
REPORT OF INDEPENDENT REGISTERED PUBLIC ACOUNTING FIRM
Shareholders and Board of Directors
Ossen Innovation Co., Ltd.
Shanghai, China
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Ossen Innovation Co., Ltd. (the “Company”) as of December 31, 2019 and 2018, the
related consolidated statements of operations and comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated
financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its
operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally
accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not
required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an
understanding of internal control over financial reporting 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.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis
for our opinion.
/s/ BDO China Shu Lun Pan Certified Public Accountants LLP
We have served as the Company's auditor since 2015.
Shanghai, People’s Republic of China
May 18, 2020
F-1
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2019 AND 2018
ASSETS
Current assets
Cash and cash equivalents
Restricted cash
Accounts receivable, net of allowance for doubtful accounts of $1,253,571 and $939,535 at December 31, 2019
and 2018, respectively
Inventories
Advance to suppliers
Other current assets
Accounts receivable - related parties
Total current assets
Property, plant and equipment, net
Land use rights, net
Deferred tax assets
TOTAL ASSETS
December 31,
2019
2018
$
2,576,677 $
6,025,718
3,444,421
4,070,655
72,544,202
15,100,328
74,391,886
24,643
536,358
171,199,812
2,948,264
3,288,959
206,002
177,643,037 $
60,586,869
17,177,926
69,986,656
26,496
-
155,293,023
3,371,387
3,422,365
159,136
162,245,911
$
See accompanying notes to the consolidated financial statements
F-2
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2019 AND 2018 (Continued)
Current Liabilities
Notes payable-bank acceptance notes
Short-term bank loans
Accounts payables
Customer deposits
Taxes payable
Other payables and accrued liabilities
Customer deposits – related parties
Due to shareholder
Due to related parties
Long-term bank loans – current portion
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, 2019 and 2018
Additional paid-in capital
Statutory reserve
Retained earnings
Treasury stock, at cost: 208,890 shares as of December 31, 2019 and 2018
Accumulated other comprehensive loss
TOTAL SHAREHOLDERS’ EQUITY
Non-controlling interest
TOTAL EQUITY
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
See accompanying notes to the consolidated financial statements
F-3
$
December 31,
2019
2018
8,895,107 $
17,072,867
951,358
3,131,916
1,417,176
3,875,529
3,358,897
-
2,297,639
-
41,000,489
6,097,453
47,097,942
8,722,832
13,593,080
289,954
283,869
1,547,882
3,980,565
4,800,384
1,695,259
-
7,269,027
42,182,852
-
42,182,852
200,000
33,971,455
9,043,010
78,484,535
(192,153)
(5,789,815)
115,717,032
14,828,063
130,545,095
177,643,037 $
200,000
33,971,455
7,764,813
68,673,562
(192,153)
(4,044,969)
106,372,708
13,690,351
120,063,059
162,245,911
$
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
REVENUES
COST OF GOODS SOLD
GROSS PROFIT
Selling expenses
General and administrative expenses
Total Operating Expenses
INCOME FROM OPERATIONS
Financial expenses, net
Other income, net
INCOME BEFORE INCOME TAX
INCOME TAX
NET INCOME
LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST
NET INCOME ATTRIBUTABLE TO OSSEN INNOVATION CO.,LTD
AND SUBSIDIARIES
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation gain (loss)
TOTAL OTHER COMPREHENSIVE INCOME (LOSS)
COMPREHENSIVE INCOME
EARNINGS PER ORDINARY SHARE
Basic and diluted
WEIGHTED AVERAGE ORDINARY SHARES OUTSTANDING
Basic and diluted
$
$
$
Year Ended December 31,
2018
2019
138,900,357 $
116,541,972
22,358,385
357,426
6,155,316
6,512,742
15,845,643
(2,382,405)
297,438
13,760,676
(1,533,794)
12,226,882
1,137,712
136,104,867 $
115,585,803
20,519,064
327,365
5,263,914
5,591,279
14,927,785
(1,621,486)
208,071
13,514,370
(2,129,387)
11,384,983
1,005,530
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
553,067
11,089,170
10,379,453
5,345,311
(1,744,846)
(1,744,846)
9,344,324 $
(6,272,303)
(6,272,303)
4,107,150 $
6,606,207
6,606,207
11,951,518
0.56 $
0.52 $
0.27
19,791,110
19,791,110
19,791,110
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, 2019, 2018 AND 2017
Balance at January 1, 2017
Net income
Transfer to statutory reserve
Foreign currency translation adjustment
Balance at December 31, 2017
Net income
Transfer to statutory reserve
Foreign currency translation adjustment
Balance at December 31, 2018
Net income
Transfer to statutory reserve
Foreign currency translation adjustment
Balance at December 31, 2019
Ordinary Shares
$0.01 Par Value
Shares
20,000,000
-
-
-
20,000,000
-
-
-
20,000,000
-
-
-
20,000,000
$
$
$
$
Amount
200,000
-
-
-
200,000
-
-
-
200,000
-
-
-
200,000
Additional
Paid-in
Capital
$ 33,971,455
-
-
-
$ 33,971,455
-
-
-
$ 33,971,455
-
-
-
$ 33,971,455
Total Ossen Innovation Co., Ltd. Shareholders’ Equity
Treasury stock
Accumulated
Other
Comprehensive
Statutory
Retained
Non
Controlling
Amount
Income/(loss)
Shares
(208,890) $
-
-
-
(192,153) $
-
-
-
(208,890) $
(192,153) $
-
-
-
-
-
-
(208,890) $
(192,153) $
-
-
-
-
-
-
(208,890) $
(192,153) $
-
-
6,606,207
2,227,334
-
-
Reserve
(4,378,873) $ 6,123,022
-
549,232
-
$ 6,672,254
-
1,092,559
(6,272,303)
-
(4,044,969) $ 7,764,813
-
1,278,197
-
(1,744,846)
(5,789,815) $ 9,043,010
-
-
Earnings
$ 54,590,589
5,345,311
(549,232)
Interest
$ 12,131,754
553,067
-
$ 59,386,668
10,379,453
$ 12,684,821
1,005,530
(1,092,559)
-
$ 68,673,562
11,089,170
$ 13,690,351
1,137,712
(1,278,197)
-
$ 78,484,535
$ 14,828,063
Total
$ 102,445,794
5,898,378
-
6,606,207
$ 114,950,379
11,384,983
-
(6,272,303)
$ 120,063,059
12,226,882
-
(1,744,846)
$ 130,545,095
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, 2019, 2018 AND 2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Year Ended December 31,
2018
2019
2017
$
12,226,882 $
11,384,983 $
5,898,378
606,045
641,647
796,566
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
Accounts receivable - related parties
Increase (Decrease) In:
Accounts payable
Customer deposits
Income tax payable
Other payables and accrued expenses
Customer deposits - RPT
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
(11,957,333)
2,077,598
(4,405,230)
1,853
(46,866)
-
(536,358)
661,404
2,848,047
(130,706)
(105,037)
(1,441,487)
2,297,639
(1,695,259)
401,192
(8,886,939)
(3,698,453)
1,294,247
10,894
(9,625)
-
-
(69,973)
(32,524)
1,097,171
(256,258)
4,800,384
-
1,343,760
7,619,314
(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)
(139,795)
(139,795)
(72,305)
(72,305)
(37,848)
(37,848)
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, 2019, 2018 AND 2017 (Continued)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term bank loans
Repayments of short-term bank loans
Proceeds from long-term bank loans
Repayments of long-term bank loans
Proceeds from notes payable-bank acceptance notes
Repayment of notes payable-bank acceptance notes
Net cash used in financing activities
Year Ended December 31,
2018
2019
2017
85,479,789
(81,777,165)
6,171,040
(7,260,047)
9,002,458
(8,712,056)
2,904,019
17,900,302
(17,543,051)
-
-
9,063,444
(10,120,846)
(700,151)
13,497,882
(17,380,550)
-
-
14,662,757
(14,588,702)
(3,808,613)
INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, AND RESTRICTED
CASH
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
Cash, cash equivalents and restricted cash at beginning of period
3,165,416
(2,078,097)
7,515,076
6,846,858
(7,474,935)
8,143,153
(6,866,186)
8,088,466
6,920,873
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD
$
8,602,395 $
7,515,076 $
8,143,153
SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid during the periods:
Income taxes paid
Interest paid
Non-cash transactions:
Appropriation to statutory reserve
$
$
$
1,749,389 $
2,148,285 $
1,019,270 $
1,388,283 $
840,670
1,397,635
1,278,197 $
1,092,559 $
549,232
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, 2019, 2018 AND 2017
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 effecting a merger, capital stock exchange, asset acquisition, or similar business combination with 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 occurred for accounting purposes and was
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, 2019, 2018 AND 2017
NOTE 1 – ORGANIZATION AND PRINCIPAL ACTIVITIES (CONTINUED)
The share exchange acquisition was 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 was recorded in this transaction. As this transaction was accounted for as a reverse
acquisition, all direct costs of the transaction was charged to additional paid-in capital. All professional fees and other costs associated with transaction
were expensed. The 15,000,000 shares of Ultra Glory, subsequent to the July 7, 2010 share exchange, are presented as if they are outstanding for all periods
presented, as these are held 100% by the equity owners of Ossen Innovation Group as of the share exchange and the share sale.
The Company’s Shareholders
Pujiang International Group Limited (“Pujiang”), a Cayman Islands company listed on the Hong Kong Stock Exchange with Dr. Liang Tang, our
Chairman, being a 64.39% shareholder and chairman of Pujiang, beneficially holds approximately 65.9% of the Company’s outstanding ordinary shares
through its wholly-owned subsidiary, Acme Innovation Limited, a British Virgin Islands company. In December 2011, 5 million shares were issued in the
company’s initial public offering. Currently the company has approximately 34.1% of its ordinary shares, or 6,741,110 shares, trading on NASDAQ in the
form of ADS’s. In August 2018, Fascinating Acme Development Ltd and Gross Inspiration Development Ltd transferred its shares to Effectual Strength
Enterprises Ltd. In October 2018, Effectual Strength Enterprises Ltd transferred its shares to Acme Innovation Ltd, which owned by Dr. Tang. On May 28,
2019, Pujiang, the parent entity of Acme, was successfully listed and commenced trading on the main board of the Hong Kong Stock Exchange.
F-9
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
NOTE 1 – ORGANIZATION AND PRINCIPAL ACTIVITIES (CONTINUED)
The Company’s Subsidiaries
British Virgin Islands Companies
Ossen Innovation Materials Group Co., 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 Group (Asia) Co. Ltd 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, 2019, 2018 AND 2017
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, 2019, 2018 AND 2017
NOTE 1 – ORGANIZATION AND PRINCIPAL ACTIVITIES (CONTINUED)
At December 31, 2019, the subsidiaries of Ossen Innovation Co., Ltd were as follows:
Name
Domicile and Date
of Incorporation
Paid-in Capital
Ossen Innovation Materials Group, Co., Ltd.
(“Ossen Innovation Group”)
BVI
April 30, 2010
Ossen Group (Asia) Co., Ltd. ("Ossen Asia")
Topchina Development Group Ltd. ("Topchina")
BVI
February 7, 2002
BVI
November 3, 2004
USD
USD
USD
-
-
-
Percentage
of
Effective
Ownership
Principal
Activities
100%
Investments holdings
100%
Investments holdings
100%
Investments holdings
Ossen Innovation Materials Co., Ltd. ("Ossen
Materials")
The PRC
October 27, 2004
RMB
75,000,000
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
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, 2019, 2018 AND 2017
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, 2019, 2018 AND 2017
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
2019
2018
2017
6.9701
6.8870
6.8785
6.6200
6.5342
6.7518
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
The Company adopted ASC Topic 606 Revenue from Contracts with Customers with a date of the initial application of January 1, 2018 using the modified
retrospective method. As a result, the Company has changed its accounting policy for revenue recognition. The impact of the adoption of ASC Topic 606
on the Company’s consolidated financial statements is not material.
The Company recognizes revenue when goods or services are transferred to customers in an amount that reflects the consideration which it expects to
receive in exchange for those goods or services. In determining when and how revenue is recognized from contracts with customers, the Company
performs the following five-step analysis: (i) identification of contract with customer; (ii) determination of performance obligations; (iii) measurement of
the transaction price; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company
satisfies each performance obligation.
The Company derives revenues from the processing, distribution and sale of own products. The revenue is recognized at a point in time once the Company
has determined that the customer has obtained control over the product. Control is typically deemed to have been transferred to the customer when the
performance obligation is fulfilled, usually at the time of delivery, at the net sales price (transaction price). Revenue is recognized net of any taxes collected
from customers, which are subsequently remitted to governmental authorities. Shipping and handling costs for product shipments occur prior to the
customer obtaining control of the goods are accounted for as fulfillment costs rather than separate performance obligations and recorded as sales and
marketing expenses.
F-14
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company’s contracts are predominantly short-term in nature with a contract term of one year or less. For those contracts, the Company has utilized the
practical expedient in ASC Topic 606 exempting the Company from disclosure of the transaction price allocated to remaining performance obligations if
the performance obligation is part of a contract that has an original expected duration of one year or less.
Receivables are recorded when the Company has an unconditional right to consideration.
Cost of 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 $4,414,219, $3,345,097 and $4,269,512 for the years ended
December 31, 2019, 2018 and 2017, 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.
F-15
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes
The Company accounts for income taxes following the liability method pursuant to FASB ASC 740 “Income Taxes”. Under this method, deferred tax
assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates
that will be in effect in the period in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets
if, based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on
deferred taxes of a change in tax rate is recognized in income in the period that includes the enactment date.
The Company also follows FASB ASC 740, which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return
should be recorded in the financial statements. The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not
that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in
the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being
realized upon ultimate settlement. ASC 740 also provides guidance on recognition, classification, interest and penalties on income taxes, accounting in
interim periods and requires increased disclosures. As of December 31, 2019, the Company did not have a liability for unrecognized tax benefits.
The Company has not provided for income taxes on accumulated earnings amounting $78,484,535 that are subject to the PRC dividend withholding tax as
of December 31, 2019, since these earnings are intended to be permanently reinvested.
Value-Added Tax (“VAT”)
Enterprises or individuals, who sell goods, import or export goods, or engage in certain services in the PRC are subject to a value added tax in accordance
with Chinese Laws. The VAT standard rate was reduced from 16% to 13% after April 2019. The VAT standard rate is 13% 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.
F-16
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, $1,278,197, $1,092,559 and $549,232 have been appropriated to the accumulated statutory reserves by the Company’s PRC subsidiaries for the
years ended December 31, 2019, 2018 and 2017 respectively.
Comprehensive Income (Loss)
Comprehensive income is defined as the change in equity during the year from transactions and other events, excluding the changes resulting from
investments by owners and distributions to owners, and is not included in the computation of income tax expense or benefit. Accumulated comprehensive
income consists of foreign currency translation. The Company presents comprehensive income (loss) in accordance with ASC Topic 220, “Comprehensive
Income”. ASC Topic 220 states that all items that are required to be recognized under accounting standards as components of comprehensive income (loss)
be reported in the consolidated financial statements.
Cash and Cash Equivalents
For financial reporting purposes, the Company considers all highly liquid investments purchased with original maturity of three months or less to be cash
equivalents. The Company maintains no bank account in the United States of America. The Company maintains its bank accounts in Mainland China and
Hong Kong. Balances at financial institutions or state-owned banks within the Mainland China are not covered by insurance. However, the Company has
not experienced any losses in such accounts and believes it is not exposed to any significant risks on its cash in bank accounts. According to the rules of
Hong Kong Deposit Protection Board, in case a member bank of Deposit Protection Scheme (“DPS”) fails, the DPS will pay compensation up to a
maximum of HK$500,000 to each depositor of the failed Scheme member.
F-17
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 a twelve month period.
The Company adopted ASU 2016-18, “Statement of Cash Flows (Topic 230) - Restricted Cash” in the first quarter of 2018. When cash, cash equivalents,
restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, the new guidance requires a reconciliation of
the totals in the statement of cash flows to the related captions in the balance sheet. This reconciliation can be presented either on the face of the statement
of cash flows or in the notes to the financial statements.
The following represents a reconciliation of cash and cash equivalents in the Consolidated Condensed Balance Sheets to total cash, cash equivalents and
restricted cash in the Consolidated Condensed Statements of Cash Flows as of December 31, 2019 and December 31, 2018:
Cash and cash equivalents
Restricted cash
Cash, cash equivalents and restricted cash
F-18
December 31,
2019
2,576,677 $
6,025,718
8,602,395 $
December 31,
2018
3,444,421
4,070,655
7,515,076
$
$
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
• Level 1—defined as observable inputs such as quoted prices in active markets for identical assets or liabilities;
• Level 2—defined as inputs other than quoted prices in active markets, that are either directly or indirectly observable; and
• Level 3—defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The company’s financial instruments primarily consist of cash and cash equivalents, restricted cash, accounts receivable, notes receivable, accounts
payable, notes payable-bank acceptance notes, other payables and accrued liabilities, and short-term bank loans.
The carrying value of cash and cash and cash equivalents, restricted cash, accounts receivable, notes receivable, accounts payable, notes payable-bank
acceptance notes, other payables and accrued liabilities, and short-term bank loans approximate fair value because of the short term nature of these items.
The estimated fair values of short-term bank loans were not materially different from their carrying value as presented due to the short maturities and that
the interest rates on the borrowing approximate those that would have been available for loans of similar remaining maturity and risk profile. As the
carrying amounts are reasonable estimates of the fair value, these financial instruments are classified within Level 1 of the fair value hierarchy.
F-19
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
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, 2019 and 2018, the Company has $119,775 and $121,370 reserve for inventories, respectively.
Advance to Suppliers
Advance to Suppliers represents interest-free cash paid in advance to suppliers for purchases of raw materials. The balance of advance to suppliers was
$74,391,886 and $69,986,656 at December 31, 2019 and 2018, respectively. Among the balance of $74,391,886, the aging of $46,194,726 was within 60
days, $19,009,416 was between 60-180 days, $9,091,223 was between 180 days and 1 year and $96,521 was over 1 year. No allowance was provided for
the prepayments balance at December 31, 2019.
F-20
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Customer Deposits and Customer Deposits – Related parties
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 $3,131,916
and $ 283,869 at December 31, 2019 and 2018, respectively. The increase was primarily due to that our facilities were running at full capacity at the year-
end of 2019 and we could not fulfill some of the orders from the customers who already paid us deposits.
Customer deposits – related parties consist of amounts paid to the Company in advance for the sale of products in the PRC from related parties. The
Company receives these amounts and recognizes them as a current liability until the revenue can be recognized when the goods are delivered. The balance
of customer deposits – related parties was $3,358,897 and $4,800,384 at December 31, 2019 and 2018, respectively.
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.
F-21
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Lease
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Lessees are required to recognize a right-of-use asset and a lease liability for
virtually all of their leases (other than leases that meet the definition of a short-term lease). The liability is equal to the present value of lease payments. The
asset is based on the liability, subject to certain adjustments, such as for initial direct costs. For income statement purposes, a dual model was retained,
requiring leases to be classified as either operating or finance leases. Operating leases result in straight-line expense (similar to operating leases under the
prior accounting standard) while finance leases result in a front-loaded expense pattern (similar to capital leases under the prior accounting standard).
Lessor accounting is similar to the prior model, but updated to align with certain changes to the lessee model (e.g., certain definitions, such as initial direct
costs, have been updated) and the new revenue standard, ASU 2014-9.
The Company adopted this new accounting standard on January 1, 2019 and the adoption has no material impact on the Consolidated Financial Statements.
Land Use Rights
According to the PRC laws, the government owns all the land in the PRC. Companies or individuals are authorized to possess and use the land only
through land use rights granted by the Chinese government. The land use rights granted to the Company are being amortized using the straight-line method
over the lease term of fifty years.
F-22
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Impairment of Long-Lived Assets
Long-lived assets are evaluated for impairment periodically whenever events or changes in circumstances indicate that their related carrying amounts may
not be recoverable in accordance with FASB ASC 360, “Property, Plant and Equipment”.
In evaluating long-lived assets for recoverability, the Company uses its best estimate of future cash flows expected to result from the use of the asset and
eventual disposition in accordance with FASB ASC 360-10-15. To the extent that estimated future, undiscounted cash inflows attributable to the asset, less
estimated future, undiscounted cash outflows, are less than the carrying amount, an impairment loss is recognized in an amount equal to the difference
between the carrying value of such asset and its fair value. Assets to be disposed of and for which there is a committed plan of disposal, whether through
sale or abandonment, are reported at the lower of carrying value or fair value less costs to sell.
No impairment loss is subsequently reversed even if facts and circumstances indicate recovery. There was no impairment loss recognized for the years
ended December 31, 2019, 2018 and 2017.
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.
F-23
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 9 – Related
Party Transactions.
F-24
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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-25
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recently adopted Accounting Pronouncements
In February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which requires lessees to
recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01,
Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-
11, Targeted Improvements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on
the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern
and classification of expense recognition in the income statement. Operating leases result in straight-line expense (similar to operating leases under the
prior accounting standard) while finance leases result in a front-loaded expense pattern (similar to capital leases under the prior accounting standard). The
amendments in this Update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for a public
business entity. Early application of the amendments in this Update is permitted for all entities. The Company started adoption of ASU 2016-02 for the
fiscal year ended December 31, 2019, including interim periods within those fiscal years. The adoption of this new standard did not impact our
consolidated statements as the Company did not have any lease arrangements.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments”, to require financial assets carried at amortized
cost to be presented at the net amount expected to be collected based on historical experience, current conditions and forecasts. Subsequently, the FASB
issued ASU No. 2018-19, Codification Improvements to Topic 326, to clarify that receivables arising from operating leases are within the scope of lease
accounting standards. The ASUs are effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted. Adoption
of the ASUs is modified retrospective. The Company is currently evaluating the impact of the adoption of ASU 2016-13 on the Company’s consolidated
financial statements.
In January 2017, the FASB issued ASU No. 2017-04 (Topic 350) Intangibles—Goodwill and Other: Simplifying the Test for Goodwill Impairment, which
removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Under the amended guidance, a goodwill
impairment charge will now be recognized for the amount by which the carrying value of a reporting unit exceeds its fair value, not to exceed the carrying
amount of goodwill. This ASU will be applied on a prospective basis and is effective for interim and annual periods beginning after December 15, 2019,
with early adoption permitted for any impairment tests performed after January 1, 2017. The Company does not expect the adoption to have a material
impact on the Consolidated Financial Statements.
F-26
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In February 2018, the FASB released ASU 2018-2, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” This
standard update addresses a specific consequence of the Tax Cuts and Jobs Act (“U.S. tax reform”) and allows a reclassification from accumulated other
comprehensive income to retained earnings for the stranded tax effects resulting from U.S. tax reform. Consequently, the update eliminates the stranded tax
effects that were created as a result of the historical U.S. federal corporate income tax rate to the newly enacted U.S. federal corporate income tax rate. The
Company is required to adopt this standard in the first quarter of fiscal year 2020, with early adoption permitted. The amendments in this update should be
applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in
the Tax Cuts and Jobs Act is recognized. The Company does not expect the adoption to have a material impact on the Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-13 Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which
eliminates, adds, and modifies certain disclosure requirements for fair value measurements under ASC 820. This ASU is to be applied on a prospective
basis for certain modified or new disclosure requirements, and all other amendments in the standard are to be applied on a retrospective basis. The new
standard is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted. The Company is currently
evaluating the impact of adoption on the Consolidated Financial Statements.
F-27
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
NOTE 3 – CONCENTRATION
Concentration of major customers and suppliers:
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
2019
Year ended December 31,
2018
2017
$
29,679,053
14,782,479
21% $
11%
14,189,482
10%
$
58,651,014
42% $
-
-
$
40,312,341
-
18,566,897
19,131,793
19,845,886
13,832,333
71,376,909
-
14%
14%
15%
10%
53% $
-
13,822,962
-
14,511,302
-
68,646,605
2019
Year ended December 31,
2018
2017
Major suppliers with purchases of more than 10% of the
Company’s purchases
Company X (3rd Party)
Company Y (3rd Party)
Total Purchase
$
81,605,384
29,273,310
$ 110,878,694
72% $
93,832,471
30,583,589
26%
98% $ 124,416,060
75%
82,189,241
24,907,251
24%
99% $ 107,096,492
30%
-
10%
-
11%
-
51%
76%
23%
99%
Accounts receivable related to the Company’s major customers comprised 42% and 43% of all accounts receivable as of December 31, 2019 and 2018,
respectively.
Accounts payable related to the Company’s major suppliers comprised nil of all accounts payable as of December 31, 2019 and 2018, respectively.
F-28
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
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 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,
2019
73,797,773 $
(1,253,571)
72,544,202 $
2018
61,526,404
(939,535)
60,586,869
December 31,
2019
2018
939,535 $
314,036
1,253,571 $
868,973
70,562
939,535
December 31,
2019
13,515,011 $
508,117
1,196,975
(119,775)
15,100,328 $
2018
12,084,766
188,794
5,025,736
(121,370)
17,177,926
$
$
$
$
$
$
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
NOTE 6 – OTHER CURRENT ASSETS
Other current assets consist of the following:
Other receivables
NOTE 7 – PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
At Cost:
Plant and buildings
Machinery and equipment
Motor vehicles
Office equipment
Less: Accumulated depreciation
Plant and buildings
Machinery and equipment
Motor vehicles
Office equipment
Construction- in-progress
Property, plant and equipment, net
December 31,
2019
2018
$
$
24,643 $
24,643 $
26,496
26,496
December 31,
2019
2018
$
$
3,854,165 $
13,980,996
339,701
119,445
18,294,307
(2,848,768)
(12,087,004)
(298,904)
(111,367)
(15,346,043)
-
2,948,264 $
3,885,849
14,047,271
344,226
120,678
18,398,024
(2,765,332)
(11,216,276)
(292,464)
(759,186)
(15,033,258)
6,621
3,371,387
Unrealized foreign exchange translation gain/(loss) for the year ended December 31, 2019, 2018 and 2017 was ($39,727), ($183,640) and $251,912,
respectively, which has been included in other comprehensive income/(loss). Depreciation expense for the years ended December 31, 2019, 2018 and 2017
was $516,560, $548,553 and $705,289, respectively.
F-30
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
NOTE 8 – LAND USE RIGHTS
Land use rights consist of the following:
Cost of land use rights
Less: Accumulated amortization
Land use rights, net
December 31,
2019
4,421,007 $
(1,132,048)
3,288,959 $
2018
4,479,896
(1,057,531)
3,422,365
$
$
Unrealized foreign exchange translation gain/(loss) for the year ended December 31, 2019, 2018 and 2017 was ($43,921), ($181,553) and $217,105,
respectively, which has been included in other comprehensive income/(loss). Amortization expense for the years ended December 31, 2019, 2018 and 2017
was $89,485, $93,094 and $91,277, respectively.
Amortization expense for the next five years and thereafter is as follows:
2020
2021
2022
2023
2024
Thereafter
Total
$
$
88,418
88,418
88,418
88,418
88,418
2,846,869
3,288,959
F-31
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
NOTE 9 – RELATED PARTY TRANSACTIONS
(a) Names and Relationship of Related Parties:
Dr. Tang
Shanghai Ossen Material Research Institute 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”)
Pujiang International Group Limited. (“Pujiang International”)
Top Innovation Enterprises Limited. (“Top Innovation”)
(b) Summary of Balances with Related Parties:
Accounts receivable – related parties
Shanghai Pujiang
Existing Relationship with the Company
Chairman and controlling shareholder of the Company
Under common control of Dr. Tang
Under common control of Dr. Tang
Under common control of Dr. Tang and Dr. Tang is the President
Subsidiary of Ossen Shanghai since September 2010
Subsidiary of Shanghai Pujiang since December 2010
Under common control of Dr. Tang
Subsidiary of Pujiang International
December 31,
2019
2018
$
$
536,358 $
536,358 $
-
-
The balance of Accounts receivable-related parties consist of amounts from Shanghai Pujiang for the sale of products.
Customer deposits – related parties
Shanghai Pujiang
Zhejiang Pujiang
December 31,
2019
2018
$
$
$
- $
3,358,897 $
3,358,897 $
2,604,604
2,195,780
4,800,384
The balance of Customer deposits-related parties consist of amounts paid to the Company in advance from Shanghai Pujiang and Zhejiang Pujiang for the
sale of products.
F-32
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
NOTE 9 – RELATED PARTY TRANSACTIONS (CONTINUED)
b) Summary of Balances with Related Parties (Continued):
Due to shareholder:
Dr. Tang
December 31,
2019
2018
$
$
- $
- $
1,695,259
1,695,259
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.
Due to related parties:
Pujiang International
Top Innovation
December 31,
2019
2018
$
$
2,181,098 $
116,541
2,297,639 $
-
-
-
The balance of Due to related parties consists of the loans to the Company from Pujiang International and the interest payable to Top Innovation.
F-33
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
NOTE 9 – RELATED PARTY TRANSACTIONS (CONTINUED)
(c) Summary of Related Party Transactions:
Ossen Material
Research
Ossen Shanghai
Shanghai Pujiang
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
The Company provided guarantee for the short-term bank loans
borrowed by Ossen Material Research
Ossen Shanghai provided guarantee together with Dr. Tang for the
short-term bank loans borrowed by the Company
Shanghai Pujiang provided guarantee together with Dr. Tang for the
short-term bank loans borrowed by the Company
The Company provided guarantee for the short-term bank loans
borrowed by Shanghai Pujiang
The Company provided guarantee for the long-term bank loans
borrowed by Shanghai Pujiang
The Company provided guarantee for the notes payable issued by
Shanghai Pujiang
The Company sold products to Shanghai Pujiang
Zhejiang Pujiang
The Company provided guarantee for the notes payable issued by
Zhejiang Pujiang
The Company sold products to Zhejiang Pujiang
Pujiang International
Pujiang International provided guarantee the short-term bank loans
borrowed by the Company
$
$
$
$
$
$
$
$
$
$
$
F-34
2019
December 31,
2018
2017
3,515,003 $
- $
3,749,502
- $
- $
- $
- $
4,897,310
- $
18,824,034
581,522 $
-
9,377,044
-
-
85,995,602 $
30,529,912 $
5,356,432
- $
43,585,084 $
- $
2,906,755 $
2,907,611 $
2,810,147 $
-
-
-
- $
1,566,558 $
- $
2,945,584 $
25,426,525
-
7,819,086 $
- $
-
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
NOTE 9 – RELATED PARTY TRANSACTIONS (CONTINUED)
(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 held any variable interest in the related parties. The Company determined to have a variable interest in
Shanghai Pujiang because the Company guarantees $85,995,602 of the outstanding short term debt. Next, the Company evaluated if Shanghai Pujiang is
variable interest entity. Using both qualitative and quantitative analysis, the Company does not have the power to direct Shanghai Pujiang’s activities that
significantly impact its economic performance and does not have the obligation to absorb losses or the right to receive benefits from the entity. Thus, the
Company is not the primary beneficiary of Shanghai Pujiang. As a result, the Company determined Shanghai Pujiang was not variable interest entity that
requires consolidation as defined in ASC 810. The Company determined Dr. Tang to be the primary beneficiary of Shanghai Pujiang because Dr. Tang is
most closely associated with the Shanghai Pujiang. Dr. Tang had the power to direct the activities of Shanghai Pujiang that most significantly impacted its
economic performance and had the obligation to absorb losses of Shanghai Pujiang that could potentially be significant or the right to receive benefits from
the related parties that could potentially be significant.
The Company also evaluated the remaining related parties and affiliated entities under ASC 810 and because the Company does not guarantee the debt, the
holders of the equity were at risk and therefore determined to be the primary beneficiaries and these entities are not variable interest entities that require
consolidation.
NOTE 10 – 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
F-35
December 31,
2019
3,614,082 $
13,623
191,918
-
55,906
3,875,529 $
2018
3,548,227
13,805
365,304
4,148
49,081
3,980,565
$
$
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
NOTE 11 – NOTES PAYABLE
Bank acceptance notes:
Due September 5, 2020
Due August 30, 2020
Due July 15, 2020
Due July 12, 2020
Due March 14, 2020, subsequently repaid on due date
Due September 28, 2019, subsequently repaid on due date
Due September 28, 2019, subsequently repaid on due date
Due August 28, 2019, subsequently repaid on due date
Due August 28, 2019, subsequently repaid on due date
Due March 7, 2019, subsequently repaid on due date
Due March 6, 2019, subsequently repaid on due date
Due February 7,2019, subsequently repaid on due date
Due February 6,2019, subsequently repaid on due date
Total
December 31,
2019
1,147,756 $
3,443,266
1,434,695
1,434,695
1,434,695
-
-
-
-
-
-
-
-
8,895,107 $
2018
-
-
-
-
726,903
726,903
2,326,088
2,326,088
828,669
334,375
726,903
726,903
8,722,832
$
$
The interest-free notes payable, ranging from six months to one year from the date of issuance, are secured by $6,025,718 and $4,070,655 restricted cash,
as of December 31, 2019 and 2018, respectively.
The notes payable represented the amount of bank acceptance notes the Company’s suppliers received from the Company for its purchases of raw
materials. These notes were issued by financial institutions, typically by banks, that entitle the Company’s suppliers to receive the full face amount from the
bank or financial institution at maturity. The 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 were secured by $6.0 million and $4.1 million of
restricted cash as of December 31, 2019 and 2018, respectively. The banks deduct the amount due from the accounts to pay the bill holders on the dates of
maturity. If the funds in the accounts cannot cover the acceptance notes, the banks treat the shortfall as an overdue loan. The notes payable 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.
F-36
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
NOTE 12 – CONTRACT BALANCES
Contract liabilities primarily represent the Company’s obligation to transfer additional goods or services to a customer for which the Company has received
consideration. The consideration received remains a contract liability until goods or services have been provided to the customer.
The following table provides information about contract liabilities from contracts with customers:
Customer deposits
Customer deposits – related parties
F-37
December 31,
2019
3,131,916 $
3,358,897
6,490,813 $
2018
283,869
4,800,384
5,084,253
$
$
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
NOTE 13 – SHORT TERM BANK LOANS
Short-term loans are summarized as follows:
Bank Name
Interest Rate
per Annum
December 31,
2019
2018
Agricultural Bank of China (“ABC”) Jiu Long Branch
Anhui Commercial Bank (“ACB”) Dong Hu Branch
ACB Dong Hu Branch
ACB Dong Hu Branch
Due on December 25, 2020, guaranteed by Shanghai
Pujiang, Ossen Material Research and Dr. Tang
Due on October 10, 2020, guaranteed by Ma An Shan
Pubang Financing guarantee co., Ltd, a 3rd party
Due on August 1, 2020, guaranteed by Ma An Shan
Pubang Financing guarantee co., Ltd, a 3rd party
Due on August 1, 2020, guaranteed by Ma An Shan
Pubang Financing guarantee co., Ltd, a 3rd party
Due on June 20, 2020, guaranteed by Jiang Xi Financing
guarantee co., Ltd, a 3rd party
Bank of Shanghai
Due on June 18, 2020, guaranteed by Pujiang
International
Guang Zhong Branch
Due on June 8, 2020, guaranteed by Pujiang International Bank SinoPac (China)
Due on January 2, 2020, guaranteed by Ma An Shan
Pubang Financing guarantee co., Ltd, a 3rd party,
subsequently repaid on due date
Due on January 2, 2020, guaranteed by Ma An Shan
Pubang Financing guarantee co., Ltd, a 3rd party,
subsequently repaid on due date
Due on December 18, 2019, guaranteed by Shanghai
Pujiang, and Dr. Tang, subsequently repaid on due date
Due on October 9, 2019, guaranteed by Ma An Shan
Pubang Financing guarantee co., Ltd, a 3rd party,
subsequently repaid on due date
ACB Fei Cui Branch
ABC Jiu Long Branch
Jiujiang Rural Commercial Bank Lian Hua branch
Postal Savings Bank of China Ma An Shan Branch
Postal Savings Bank of China Ma An Shan Branch
F-38
5.8225% $
3,515,003
$
5.655%
5.655%
5.655%
6.525%
3.915%
5.220%
573,878
1,291,225
1,004,286
717,347
4,949,697
2,869,389
5.438%
1,147,756
5.438%
5.8725%
6.50%
1,004,286
-
-
-
-
-
-
-
-
-
-
-
3,198,372
581,521
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
NOTE 13 – SHORT TERM BANK LOANS (CONTINUED)
Due on July 25, 2019, guaranteed by Ma An Shan Pubang
Financing guarantee co., Ltd, a 3rd party, subsequently
repaid on due date
Due on July 23, 2019, guaranteed by Ma An Shan Pubang
Financing guarantee co., Ltd, a 3rd party, subsequently
repaid on due date
Due on June 27, 2019, guaranteed by Shanghai Pujiang
and Dr. Tang, subsequently repaid on due date
Due on June 26, 2019, guaranteed by Shanghai Pujiang
and Dr. Tang
Due on May 21, 2019, guaranteed by Shanghai Pujiang
and Dr. Tang, subsequently repaid on due date
Due on March 6, 2019, guaranteed by Ossen Shanghai,
Dr. Tang and Ma An Shan Pubang Financing guarantee
co., Ltd, a 3rd party, subsequently repaid on due date
Due on January 27, 2019, guaranteed by Ma An Shan
Pubang Financing guarantee co., Ltd, a 3rd party
subsequently repaid on due date
Total
Bank Name
Interest Rate
per Annum
December 31,
2019
2018
ACB Fei Cui Branch
5.655% $
-
$
1,090,354
ACB Fei Cui Branch
Bank SinoPac (China)
Bank SinoPac (China)
ABC Jiu Long Branch
Industrial Bank Ma An Shan Branch
ACB Fei Cui Branch
6.00%
5.22%
5.22%
5.6971%
5.22%
-
-
-
-
-
1,235,735
2,907,611
2,907,611
363,451
581,522
6.00%
$
-
17,072,867
$
726,903
13,593,080
All short-term bank loans are obtained from local banks in China and are repayable within one year. All short-term bank loans are secured by a portion of
our property, plant and equipment and land use rights, or guaranteed by related parties. None of our short-term bank loans have financial covenants.
However, each loan contains a covenant restricting our use of funds to purchases raw materials or for working capital purposes.
The average annual interest rate of the short-term bank loans was 5.48% and 5.71% as of December 31, 2019 and 2018, respectively. Interest expense,
included in the financial expenses in the statement of operations, was $1,569,047, $897,840 and $932,596 for the years ended December 31, 2019, 2018
and 2017, respectively. The Company was in compliance of their financial covenants at December 31, 2019 and 2018, respectively.
F-39
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
NOTE 14 – LONG TERM BANK LOANS
Bank Name
Interest Rate
per Annum
December 31,
$2019
$2018
Due on August 28, 2022,
Anhui Commercial Bank (“ACB”) Hui Tong
Branch
8.80% $
6,097,453 $
-
Due on August 30, 2019, collateral by the
Company’s LUR, subsequently repaid on due
date
Less: current portion
Long term bank loans, net
ACB Hui Tong ranch
8.00%
-
6,097,453 $
$
7,269,027
7,269,027
-
All long-term bank loans are obtained from local banks in China and are repayable over one year. All long-term bank loans are secured by a portion of our
property, plant and equipment and land use rights, or guaranteed by related parties. None of our long-term bank loans have financial covenants. However,
each loan contains a covenant restricting our use of funds to purchases raw materials or for working capital purposes.
Interest expense, included in the financial expenses in the statement of operations, was $580,497, $612,622 and $600,663 for the years ended December 31,
2019, 2018 and 2017, respectively.
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:
Net income attribute to the Company
Weighted average ordinary shares outstanding - basic and diluted
Basic and diluted earnings per share
F-40
2019
11,089,170 $
December 31,
2018
10,379,453 $
2017
5,345,311
19,791,110
19,791,110
19,791,110
0.56 $
0.52 $
0.27
$
$
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
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, 2019, no detailed interpretation or guidance has been issued to define “place of effective
management”. Furthermore, as of December 31, 2019, 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, 2019, and 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, 2019 and 2018.
F-41
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
NOTE 16 – INCOME TAX-(CONTINUED)
Income tax expenses consist of the following:
Current
Deferred
Income tax expenses
Year Ended December 31,
2018
2,147,164 $
(17,777)
2,129,387 $
2019
1,583,343 $
(49,549)
1,533,794 $
$
$
2017
665,745
25,811
691,556
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 / (taxable) expense
Income tax expenses
Year Ended December 31,
2018
3,378,592 $
(1,377,961)
128,756
2,129,387 $
2019
3,486,260 $
(1,394,504)
(557,962)
1,533,794 $
$
$
2017
1,647,484
(993,090)
37,162
691,556
The Company's accounting for deferred taxes involves the evaluation of a number of factors concerning the realizability of the Company's deferred tax
assets. Assessing the realizability of deferred tax assets is dependent upon several factors, including the likelihood and amount, if any, of future taxable
income in relevant jurisdictions during the periods in which those temporary differences become deductible. The Company's management forecasts taxable
income by considering all available positive and negative evidence including its history of operating income or losses and its financial plans and estimates
which are used to manage the business. These assumptions require significant judgment about future taxable income. The amount of deferred tax assets
considered realizable is subject to adjustment in future periods if estimates of future taxable income are reduced. The Company's management determined,
based on the Company's history of earnings coupled with its forecasted profitability, that it is more likely than not that all of deferred tax assets will be
realized in the foreseeable future.
Components of net deferred tax assets are as follows:
Provision of doubtful accounts
Reserve for inventories
2019
December 31,
2018
2017
$
$
188,036 $
17,966
206,002 $
140,930 $
18,206
159,136 $
130,346
19,165
149,511
F-42
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
NOTE 16 – INCOME TAX-(CONTINUED)
The accounting for uncertain tax positions prescribes a recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. The Company is required to recognize in the financial statements the impact of
a tax position, if that position is more-likely than-not of being sustained on audit, based on the technical merits of the position. The company does not have
uncertain tax position as of December 31, 2019.
The Company does not have any tax positions for which it is reasonably possible the total amount of gross unrecognized tax benefits will increase or
decrease over the next year. The unrecognized tax benefits may increase or change during the next year for items that arise in the ordinary course of
business.
The Company includes interest and penalties related to unrecognized tax benefits within the benefit from (provision for) income taxes. The company does
not have interest and penalties as of December 31, 2019.
The Company's China income tax returns are generally not subject to examination by the tax authorities for tax years before 2015.
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, 2019, 2018 and 2017 are as follows:
Domestic Sales
International Sales
Year Ended December 31,
2018
2019
$
$
136,414,471 $
2,485,886
138,900,357 $
131,642,673 $
4,462,194
136,104,867 $
2017
126,930,386
5,445,529
132,375,915
F-43
OSSEN INNOVATION CO., LTD AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
NOTE 18 – SUBSEQUENT EVENTS
On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in
Wuhan, China (the “COVID-19 outbreak”) and the risks to the international community as the virus spreads globally beyond its point of origin. In
March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.
The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. As such, it is uncertain as to the full magnitude that the
pandemic will have on the Company’s financial condition, liquidity, and future results of operations. Management is actively monitoring the global
situation on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the
global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial
condition, or liquidity1 for fiscal year 2020.
Although the Company cannot estimate the length or gravity of the impact of the COVID-19 outbreak at this time, if the pandemic continues, it may have
an adverse effect on the Company’s results of future operations, financial position, and liquidity in fiscal year 2020.
F-44
OSSEN INNOVATION CO., LTD. AND SUBSIDIARIES
SCHEDULE I
CONDENSED PARENT COMPANY FINANCIAL INFORMATION
SCHEDULE I — CONDENSED PARENT COMPANY FINANCIAL INFORMATION
OSSEN INNOVATION CO., LTD
CONDENSED BALANCE SHEETS AS OF DECEMBER 31, 2019 AND 2018
ASSETS
Current Assets
Cash
Due from related parties
Total Current Assets
Investments in subsidiaries
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Other payables and accrued liabilities
Due to shareholder
Due to related parties
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, 2019 and 2018
Additional paid-in capital
Statutory reserve
Retained earnings
Accumulated other comprehensive income/(loss)
Treasury stock, at cost: 208,890 shares as of December 31, 2019 and 2018
TOTAL SHAREHOLDERS’ EQUITY
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
F-45
December,31
2019
2018
103,628 $
32,236
135,864
118,070,724
118,206,588 $
4,796
-
4,796
108,509,080
108,513,876
191,917 $
-
2,297,639
2,489,556
2,489,556 $
205,000
1,663,022
-
1,868,022
1,868,022
200,000 $
33,971,455
9,043,010
78,484,535
(5,789,815)
(192,153)
115,717,032
118,206,588 $
200,000
33,971,455
7,764,813
68,959,065
(4,057,326)
(192,153)
106,645,854
108,513,876
$
$
$
$
$
$
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, 2019, 2018 AND 2017
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)
F-46
Year Ended December,31
2018
2019
2017
$
- $
-
-
-
383,325
383,325
- $
-
-
-
263,002
263,002
(383,325)
(116,865)
11,378,898
10,878,708
-
10,878,708
(263,002)
268
10,927,690
10,664,956
-
10,664,956
-
-
-
-
146,687
146,687
(146,687)
317
5,492,315
5,345,311
-
5,345,311
(1,744,846)
(1,744,846)
9,133,862 $
(6,284,660)
(6,284,660)
4,380,296 $
6,606,207
6,606,207
11,951,518
$
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, 2019, 2018 AND 2017
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
Due from related parties
Due to related parties
Net cash provided by / (used in) operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash provided by / (used in) investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
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
F-47
Year Ended December,31
2018
2019
2017
$
10,878,708 $
10,664,956 $
5,345,311
(11,378,898)
(13,083)
(1,663,022)
(32,236)
2,297,639
89,108
(10,927,690)
(1,046,423)
1,311,523
-
-
2,366
(5,492,315)
102,517
44,000
-
-
(487)
-
-
89,108
9,724
4,796
103,628 $
$
-
-
2,366
(537)
2,967
4,796 $
-
-
(487)
(7)
3,461
2,967
DESCRIPTION OF SECURITIES
EXHIBIT 2.4
As of December 31, 2019, Ossen Innovation Co., Ltd. (“we,” “our,” “us” or the “Company”) had one class of securities registered under
Section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”): its ordinary shares, par value US$0.01 per share. The following
description summarizes the material terms of our capital stock. For a complete description of the matters set forth herein, you should refer to our amended
and restated memorandum and articles of association, as amended and the applicable provisions of British Virgin Islands law.
Defined terms used herein and not defined herein shall have the meaning ascribed to such terms in the Company’s Annual Report on Form 20-F.
Ordinary Shares
Rights of Shares
We are currently authorized to issue 100,000,000 ordinary shares. The shares are made up of one class and one series, namely ordinary shares with
a par value of $0.01 per share. The ordinary shares have one vote each and have the same rights with regard to dividends paid by the Company and
distributions of the surplus assets of the Company.
We may purchase, redeem or acquire our shares, provided that we obtain the consent of the member whose shares are being purchased, redeemed
or otherwise acquired.
Issuance of Shares; Variation of Rights of Shares
Our articles of association provide that directors may, without limiting or affecting any right of holders of existing shares, offer, allot, grant options
over or otherwise dispose of our unissued shares to such persons at such times and for such consideration and upon such terms and conditions as the
directors may determine.
Without prejudice to any special rights previously conferred on the holders of any existing shares or class of shares, we may issue shares, with
such preferred, deferred or other special rights or such restrictions, whether in regard to dividend, voting or otherwise, as the directors from time to time
may determine.
If we issue shares of more than one class, we will further amend and restate our memorandum and articles of association to reflect the rights
attached to any class (unless otherwise provided by the terms of issue of the shares of that class) as may be varied with the consent in writing of the holders
of not less than three-fourths of the issued shares of that class and the holders of not less than three-fourths of the issued shares of any other class of shares
which may be affected by such variation. The rights conferred upon the holders of the shares of any class issued with preferred or other rights will not,
unless otherwise expressly provided by the terms of issue of the shares of that class, be deemed to be varied by the creation or issue of further shares
ranking pari passu therewith.
Our shareholders who are nonresidents of the British Virgin Islands may freely hold and vote their shares.
We do not have the power to issue bearer shares.
Changes in the Maximum Number of Shares the Company is Authorized to Issue
Subject to the provisions of the BVI Business Companies Act, 2004 (as amended from time to time, 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.
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.
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.
Mergers
Under the BVI Act, two or more companies may merge or consolidate in accordance with the statutory provisions. A merger means the merging of
two or more constituent companies into one of the constituent companies, and a consolidation means the uniting of two or more constituent companies into
a new company. In order to merge or consolidate, the directors of each constituent company must approve a written plan of merger or consolidation which
must be authorized by a resolution of shareholders.
Shareholders not otherwise entitled to vote on the merger or consolidation may still acquire the right to vote if the plan of merger or consolidation
contains any provision which, if proposed as an amendment to the memorandum association or articles of association, would entitle them to vote as a class
or series on the proposed amendment. In any event, all shareholders must be given a copy of the plan of merger or consolidation irrespective of whether
they are entitled to vote at the meeting or consent to the written resolution to approve the plan of merger or consolidation.
Inspection of Books and Records
Under Delaware corporate law, any shareholder of a corporation may for any proper purpose inspect or make copies of the corporation’s stock
ledger, list of shareholders and other books and records. Under the BVI Act, members, upon giving written notice to us, are entitled to inspect the register
of members, the register of directors and minutes of resolutions of members, and to make copies of these documents and records.
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.
Cumulative Voting
Under Delaware corporate law, cumulative voting for elections of directors is not permitted unless the company’s certificate of incorporation
specifically provides for it. Cumulative voting potentially facilitates the representation of minority shareholders on a board of directors since it permits the
minority shareholder to cast all the votes to which the shareholder is entitled on a single director, which increases the shareholder’s voting power with
respect to electing such director. There are no prohibitions to cumulative voting under the laws of the British Virgin Islands, but our memorandum of
association and articles of association do not provide for cumulative voting.
Anti-takeover Provisions in Our Memorandum of Association and Articles of Association
Some provisions of our memorandum of association and articles of association may discourage, delay or prevent a change in control of our
company or management that shareholders may consider favorable, including provisions that authorize our board of directors to issue preference shares in
one or more series and to designate the price, rights, preferences, privileges and restrictions of such preference shares.
American Depositary Share
The ordinary shares are not traded in the United States; rather they are deposited with JP Morgan Chase Bank, N.A., as depositary. The
depositary’s office is located at 4 New York Plaza, Floor 12, New York, New York, 10004. Each American Depositary Share (“ADS”) represents three
(3) ordinary shares. Our ADSs are listed for trading on the Nasdaq Capital Market under the symbol “OSN.”
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 American depositary receipts 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.
Employment Contract
Exhibit 4.3
Party A: Ossen Innovation Co., Ltd.
Party B: Name: Wei Hua
Gender: Male
ID No.: *********************
Address: *********************
In accordance with the Labor Law of the People's Republic of China, Party A and Party B hereby agree to conclude the employment contract through
equivalent negotiations.
I.
Term
The valid term of the employment contract is five years, from January 1, 2017 to December 31, 2021.
II.
Position
Party B agrees to undertake the position of Chief Executive Officer and Chief Financial Officer as per the needs of Party A. Party A may adjust
the department and the position of Party B based on its production and work needs or the capability and performance of Party B. Party B must
follow the arrangement of Party A unless there is any special condition.
III.
Obligations of both Parties
(I)
Obligations of Party A
1.To give education and training to Party B on politics, occupational morale, technical business, safety production, laws and regulations and
various policies.
2.To stipulate the scientific and reasonable technology, techniques, quality, consumption standards and the relevant work standards to
appraise the performance of Party B.
3.To pay remuneration based on the relevant rules of the enterprise when Party B finishes the production tasks; and render the necessary
material and spiritual awards where Party B makes significant contributions to the enterprise.
(II) Obligations of Party B
1.To complete the production and work tasks and reach the stipulated targets or standards as per the regulations and requirements of Party
A.
2.To make major corporate decisions and manage the overall operations and resources of Party A.
3.To keep and maintain all the production equipment, installation devices and production facilities provided by Party A, to care about the
public welfare facilities to save the raw materials and energy.
4.To carry out production safely.
5. To act as the main point of communication between the board of directors and corporate operations.
6. To manage Party A’s finances, assess financial risks and opportunities, and oversee financial staff members.
7.To cooperate with Party A and properly dispose the matters after the employment contract is rescinded or terminated.
IV. Work conditions and labor protection
(I) Party A must provide Party B with such sanitary working environment as may be consistent with the state rules to ensure the personal
safety of Party B and to prevent the personnel of Party B from working under dangerous environment.
(II) Party A provide the necessary labor protective materials to Party B based on the actual conditions of the position of Party B.
(III) Party A is obligated to give education to Party B on work safety and sanitation and Party B must improve its sense of risk control and
strictly follow the procedures of Party A on risk control and safety operation.
V.
Remuneration
(I) Party A shall pay the remuneration to Party B in monetary way on a monthly basis according to the applicable state regulations and the
rules of Party B on salary management. The basic salary of Party B is 47,500 RMB based on the current salary rules of Party A.
(II) Party A will distribute the salary on the 20th day of each month, or the latest working day before the 20th day if the 20th day is holiday or
vocation.
VI.
Change, rescission, termination and renewal of employment contract
(I) In case of any change to the laws, administrative regulations and policies, based on which the employment contract is concluded, the
employment contract must be amended accordingly.
(II) The parties may change or rescind the contract upon the mutual agreement by the parties.
(III) Party A may terminate the employment contract without any liabilities if Party B is involved in any of the following conditions:
1. Party B submits to Party A fraudulent identity materials, title or capability certificates or other important materials and information, or
conclude the contract in the way of fraudulence.
2. Party B materially violates the principles or regulations of Party A in such a way as may materially impair the interests of Party A.
3. Party B seriously neglect its duties, seeks for personal interests in such a way as may materially impair the interests of Party A.
4. Party B discloses the trade secrets of Party A in such way as may materially impair the interests of Party A.
5. Party B is legally investigated for his criminal liabilities.
6. Party B is unable to undertake his work agreed in the contract or the adjusted work after training or position adjustment.
7. Party B is unable to carry out his original work or the work arranged by Party A after the expiration of the medical care period due to
illness or non-work-related injury.
(IV) Where Party B intends to terminate the employment contract, Party B must notify Party A in writing thirty days in advance and the
employment contract may not be terminated unless and until Party B finishes all the existing businesses, settles the credits and credits and
completes all the relevant handover formalities; provided that Party B must still undertake the corresponding liabilities for breaching the contract
in this case.
(V) Party B may terminate the employment contract by notifying Party A without liabilities if Party A is involved in any of the following
conditions:
1. Party A compels Party B by violent or threatening method or by illegally restricting the personal freedom of Party B;
2. Party A fails to pay the remuneration or provide the relevant conditions as per the employment contract;
(VI) The employment relationship between the parties is terminated upon the expiration of the employment contract. Party A and Party B may
renew the employment contract upon mutual agreement.
(VII) Where the contract is terminated or rescinded, Party B must hand over all the work he has completed or is undertaking to Party A within
seven days, settle all the credits and debts , completes all the handover formalities and return to Party A all the properties, tools, technical
materials and other assets of Party A, which are delivered by Party A to Party B for use or maintenance during the performance of the employment
contract, and give the indemnification in case of any loss.
VII. Miscellaneous
1.The rules and regulations of Party B have the binding force on both parties of the employment contract.
2.Matters not mentioned herein must be subject to the applicable laws and regulations of the state and the government.
3.The employment contract is made in two counterparts. Each party holds one counterpart. The employment contract takes effect from the time when it is
duly executed. Both counterparts have the same legal force and effect.
Party A: Ossen Innovation Co., Ltd. [Corporate Seal Affixed Herein]
Party B: /s/ Wei Hua
Date of execution: January 1, 2017
Date of execution: January 1, 2017
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
OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 12.1
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. I am 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. I have disclosed, based on my 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 18, 2020
/s/ Wei Hua
Wei Hua
Chief Executive Officer and Chief Financial Officer
(Principal Executive Officer and Principal Financial and
Accounting Officer)
EXHIBIT 13.1
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, 2019, as
filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned certifies pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1.
2.
The Report, fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Registrant.
Date: May 18, 2020
/s/ Wei Hua
Wei Hua
Chief Executive Officer and Chief Financial Officer
( Principal Executive Officer and Principal Financial and Accounting Officer)