EX-99.1 3 v471250_ex99-1.htm EXHIBIT 99.1

 

Exhibit 99.1

 

OSSEN INNOVATION CO., LTD.
518 Shangcheng Road, Floor 17
Shanghai 200120
People’s Republic of China

 

Dear Ossen Innovation Co., Ltd. Shareholders:

 

You are cordially invited to attend the special meeting of shareholders of Ossen Innovation Co., Ltd., which we refer to as “we,” “us,” “our,” “Ossen” or the “Company,” on Tuesday, September 5, 2017, at 10:00 a.m., Eastern time, at the offices of Ellenoff Grossman & Schole LLP, 1345 Avenue of the Americas, 11th Floor, New York, New York 10105. This proxy statement is dated August 1, 2017, and is first being made available to shareholders of the Company on or about August 1, 2017.

 

At the special meeting, our shareholders will be asked to consider and vote upon two proposals, which we refer to as the “Acquisition Proposal” and the “Spin-Off Proposal.” We are asking you to approve the Acquisition Proposal, by approving a share exchange agreement, dated July 19, 2017, as amended (the “Exchange Agreement”), providing for the acquisition (the “Acquisition”) by the Company of all of the issued and outstanding equity interests in America-Asia Diabetes Research Foundation (“AADRF”), a California corporation, from the shareholders of AADRF (“Sellers”), in exchange for 81,243,000 of our ordinary shares (“Exchange Shares”).

 

An aggregate of 28,095,454 of such Exchange Shares will be deposited in escrow at the closing of the Acquisition (which is also referred to herein as the closing), including (i) 24,372,900 of such Exchange Shares (“Earn-Out Shares”) subject to forfeiture back to us (along with dividends and other earnings otherwise payable with respect to such Earn-Out Shares) in the event that the post-combination company fails after the closing to obtain aggregated consolidated revenue from the operations of Ossen, AADRF and their respective subsidiaries (including subsidiaries acquired by Ossen, AADRF or their respective subsidiaries following the closing of the Acquisition and the Spin-Off)  (as reported in the audited financial statements included in our annual report on Form 20-F) of $6,470,588, assuming a RMB:USD exchange rate of 6.8:1, in 2017, and (ii) an additional 3,722,554 of such Exchange Shares (the “Indemnification Shares” and, collectively with the Earn-Out Shares, the “Escrow Shares”) subject to forfeiture back to us (along with dividends and other earnings otherwise payable with respect to such Indemnification Shares) in the event that the Ossen Representative successfully brings an indemnification claim under the Exchange Agreement on behalf of our shareholders.

 

AADRF indirectly owns 90.27% of the equity interests of San Meditech (Huzhou) Co., Ltd. (“San Meditech”), a China-based medical device company engaged in the research, development and marketing of glucose control products. A copy of the Exchange Agreement is attached to the accompanying proxy statement as Annex A and the first amendment thereto is attached as Annex G.

 

In addition, we are asking you to approve the Spin-Off Proposal, by approving a share purchase agreement, dated July 19, 2017 (the “Purchase Agreement”) and related transactions providing for the sale by us of our existing business and operations to Elegant Kindness Limited, an affiliate of our Chairman, Dr. Liang Tang, in exchange for the cancellation of all of Dr. Tang’s ownership interests (11,850,000 ordinary shares, representing a 59.9% interest prior to the Acquisition and the Spin-Off) in the Company (the “Spin-Off”), so that our only business upon completion of the Acquisition and the Spin-Off will be that of AADRF and its subsidiaries. We will receive no cash consideration in connection with the Spin-Off. A copy of the Purchase Agreement is attached to the accompanying proxy statement as Annex B.

 

It is anticipated that, following completion of the Acquisition and Spin-Off, Ossen’s existing shareholders (excluding Dr. Tang) will retain an ownership interest of approximately 8.9% of the Company (or approximately 12.25% in the event that the Earn-Out Shares are forfeited), current members of Ossen management or affiliates of Ossen (excluding Dr. Tang) will own approximately 1.35% (or approximately 1.85% in the event that the Earn-Out Shares are forfeited), and Sellers will own approximately 91.1%, of the outstanding equity of the Company (or approximately 89.75% in the event that the Earn-Out Shares are forfeited). These percentages are based on the assumption that Ossen will not issue any additional ordinary shares.

 

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Our shareholders will also be asked to consider and vote upon the following proposals:

 

(a)

to approve and adopt an amendment and restatement of the Company’s memorandum and articles of association, as set out in the draft amended and restated version of our memorandum and articles of association (appended to the accompanying proxy statement as Annex C (the “Amended Charter”), to: (i) change the Company’s name from “Ossen Innovation Co., Ltd.” to “San Meditech Holdings Ltd.” (the “Name Change”), (ii) increase the maximum number of shares authorized to be issued by the Company from 100,000,000 to 150,000,000 shares; (iii) automatically exchange the ordinary shares held prior to the Acquisition and Spin-Off for a newly designated Class A ordinary shares, each of which will be entitled to one vote per share and (iv) designate a new series of Class B ordinary shares to be issued to certain of the Sellers, each Class B share to be entitled to ten votes per share (the “Dual Class Structure”); and

 

(b)to approve the adoption of the San Meditech 2017 Equity Incentive Plan, a copy of which is attached to the accompanying proxy statement as Annex D, which we refer to as the “Incentive Plan Proposal”.

 

Each of these proposals is more fully described in the accompanying proxy statement, which each shareholder is encouraged to review carefully.

 

Our American Depositary Shares (“ADS’s”) are currently listed on The NASDAQ Capital Market (“Nasdaq”) under the symbol “OSN.” We intend to apply for the continued listing of our ADS’s on Nasdaq under the symbol “SMDT,” effective upon the closing of the Acquisition and the Spin-Off. In connection with the closing of the Acquisition and the Spin-Off, we intend to effect a ratio change for our American Depositary Receipt (“ADR”) program, such that, immediately after such closings, the number of the Company's ordinary shares represented by each ADS will change from three (3) ordinary shares to such number of ordinary shares needed for us to comply with Nasdaq’s initial listing standards.

 

We are providing the accompanying proxy statement and the accompanying proxy card to our shareholders, ADS holders in connection with the solicitation of proxies to be voted at the special meeting and at any adjournments or postponements of the special meeting. Holders of the Company’s ordinary shares whose names are on the register of members of the Company at the close of business in the British Virgin Islands on August 17, 2017 (the “Record Date”) are cordially invited to attend the meeting in person as well as any adjourned or postponed meeting thereof.  Holders of the Company’s ADSs who wish to exercise their voting rights for the underlying ordinary shares must act through JPMorgan Chase Bank, N.A., the depositary of the Company’s ADS program (the “Depositary”). Holders of ADSs will not be able to attend the special meeting unless they convert their ADSs into ordinary shares and become registered in the Company's register of members as the holders of ordinary shares prior to the close of business in the British Virgin Islands on August 22, 2017. Whether or not you plan to attend the special meeting, we urge you to read the accompanying proxy statement carefully. Please pay particular attention to the section entitled “Risk Factors”.

 

A special committee of the board of directors of the Company, composed solely of directors unrelated to the management of the Company, AADRF, San Meditech or the Sellers, negotiated, reviewed and considered the terms and conditions of the Exchange Agreement, the Purchase Agreement and the transactions contemplated therein, including the Acquisition and the Spin-Off. The special committee unanimously (a) determined that the Exchange Agreement, the Purchase Agreement and the transactions contemplated therein, including the Acquisition and the Spin-Off, are advisable and fair to the Company and the Company’s unaffiliated shareholders and unaffiliated ADS holders, (b) approved and recommended that the board of directors of the Company approve the Exchange Agreement, the Purchase Agreement and the transactions contemplated therein, including the Acquisition and the Spin-Off, (c) recommended that the board of directors of the Company submit the Exchange Agreement and the Purchase Agreement to the shareholders and ADS holders of the Company for approval and authorization at a meeting of the shareholders of the Company, and (d) recommended that the shareholders of the Company vote for the approval and authorization of the Exchange Agreement, the Purchase Agreement and the transactions contemplated therein, including the Acquisition and the Spin-Off.

 

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On July 19, 2017, the board of directors of the Company, after carefully considering all relevant factors, including the unanimous determination and recommendation of the special committee of the board of directors and review of the fairness opinion of Highline Research Advisors, unanimously: (a) determined that the transactions contemplated by the Exchange Agreement and the Purchase Agreement, including the Acquisition and the Spin-Off, on the terms and subject to the condition set forth in the Exchange Agreement and the Purchase Agreement, are fair to the Company and the Company’s unaffiliated shareholders and unaffiliated ADS holders, (b) approved the Exchange Agreement, the Purchase Agreement and the transactions contemplated therein, including the Acquisition and the Spin-Off, (c) directed that the Exchange Agreement and the Purchase Agreement be submitted to the shareholders and the ADS holders of the Company for approval and authorization at a meeting of the shareholders of the Company and (d) recommended that the shareholders of the Company vote for the approval and authorization of the Exchange Agreement, the Purchase Agreement and the transactions contemplated therein, including the Acquisition and the Spin-Off.

 

After careful consideration, and upon the unanimous recommendation of the special committee of the board of directors and having reviewed the fairness opinion of Highline Research Advisors, our board of directors has unanimously approved the Exchange Agreement and the Purchase Agreement and recommends that our shareholders vote FOR adoption and approval of the Acquisition, vote FOR adoption and approval of the Spin-Off, and vote FOR all other proposals presented to our shareholders in the accompanying proxy statement. When you consider the board recommendation of these proposals, you should keep in mind that certain of our directors and officers have interests in the Acquisition and the Spin-off that may conflict with your interests as a shareholder. See the sections entitled “The Acquisition Proposal — Certain Interests of Ossen’s Directors and Officers and Others in the Acquisition” and “The Spin-Off Proposal — Certain Interests of Ossen’s Directors and Officers and Others in the Spin-Off.”

 

Approval of the Acquisition Proposal, the Spin-Off Proposal and the Incentive Plan Proposal requires the affirmative vote of a majority of the shares held by disinterested shareholders as of the record date. The Charter Amendment Proposal, including the re-designation of Class A ordinary shares and the issuance of Class A ordinary shares and Class B ordinary shares, requires the affirmative vote of 75% of the votes cast by disinterested shareholders present in person or represented by proxy at the special meeting. The boards of directors of Ossen and AADRF, and the shareholders of AADRF, have already unanimously approved the Acquisition.

 

Your vote is very important. If you are a registered shareholder, please vote your shares as soon as possible by completing, signing, dating and returning the enclosed proxy card in the postage-paid envelope provided. If you hold your shares in “street name” through a bank, broker or other nominee, you will need to follow the instructions provided to you by your bank, broker or other nominee to ensure that your shares are represented and voted at the special meeting. Holders of our ADS’s who wish to exercise their voting rights for the underlying ordinary shares must act through the Depositary. A failure to vote your shares will have no effect on the Charter Amendment Proposal and will count as a vote against the other proposals to be considered at the special meeting of shareholders. The transactions contemplated by the Exchange Agreement and Purchase Agreement will be consummated only if each of the Acquisition Proposal and the Spin-Off Proposal are approved at the special meeting.

 

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If you are a holder of ordinary shares and you sign, date and return your proxy card without indicating how you wish to vote, your proxy will be voted FOR each of the proposals described in the accompanying proxy statement. If you fail to return your proxy card or fail to instruct your bank, broker or other nominee how to vote, or you are an ADS holder and fail to instruct the Depository how to vote, and do not attend the special meeting in person, the effect will be that your shares will not be counted for purposes of determining whether a quorum is present at the special meeting. If a quorum is present, such failure will have no effect on the Charter Amendment Proposal and will have the effect of a vote against all other proposals. If you are a shareholder of record and you attend the special meeting and wish to vote in person, you may withdraw your proxy and vote in person.

 

As the record holder of the ordinary shares represented by ADSs, the Depositary will endeavor to vote (or will endeavor to cause the vote of) the ordinary shares it holds on deposit at the special meeting in accordance with the voting instructions timely received from holders of ADSs on August 31, 2017. The Depositary must receive such instructions no later than 12:00 p.m. (New York City Time) on August 31, 2017. The Depositary will not itself exercise any voting discretion in respect of any ADSs.

 

Holders of ADSs will not be able to attend the special meeting unless they convert their ADSs into ordinary shares and become registered in the Company's register of members as the holders of ordinary shares prior to the close of business in the British Virgin Islands on August 17, 2017 (the “Record Date”). ADS holders who wish to convert their ADSs into ordinary shares need to make arrangements to deliver the ADSs to the Depositary for cancellation before the close of business on August 17, 2017 together with (a) delivery instructions for the corresponding Shares (name and address of person who will be the registered holder of the ordinary shares), (b) payment of the ADS cancellation fees ($0.05 per ADS to be cancelled) and any applicable taxes, and (c) a certification that the ADS holder either (i) held the ADSs as of August 3, 2017 and has not given, and will not give, voting instructions to the Depositary as to the ADSs being converted, or has given voting instructions to the Depositary as to the ADSs being converted but undertakes not to vote the corresponding ordinary shares at the special meeting, or (ii) did not hold the ADSs as of August 3, 2017 and undertakes not to vote the corresponding ordinary shares at the special meeting. If you hold your ADSs in a brokerage, bank or nominee account, please contact your broker, bank or nominee to find out what actions you need to take to instruct the broker, bank or nominee to convert the ADSs on your behalf. Upon conversion of the ADSs, the Depositary will arrange to transfer registration of the ordinary shares to the former ADS holder (or a person designated by the former ADS holder). If after the registration of ordinary shares in your name you wish to receive a certificate evidencing the ordinary shares registered in your name, you will need to request the registrar of the ordinary shares to issue and mail a certificate to your attention. The Company's ordinary shares are not listed and cannot be traded on any stock exchange other than the NASDAQ Capital Market, and in such case only in the form of ADSs. As a result, if you have converted your ADSs to attend the special meeting and the Acquisition and the Spin-Off are not completed and you wish to be able to sell your ordinary shares on a stock exchange, you would need to deposit your ordinary shares into the Company's ADR program for the issuance of the corresponding number of ADSs, subject to the terms and conditions of applicable law and the ADS deposit agreement, including, among other things, payment of relevant fees of the Depositary for the issuance of ADSs ($0.05 per ADS issued) and any applicable stock transfer taxes (if any) and related charges pursuant to the ADS deposit agreement.

 

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On behalf of our board of directors, I thank you for your support and look forward to the successful completion of the Acquisition and Spin-Off.

 

August 1, 2017 Sincerely,
   
  /s/ Wei Hua
 

Wei Hua

Chief Executive Officer and Chief Financial Officer

 

This proxy statement is dated August 1, 2017, and is first being made available to shareholders of the Company on or about August 1, 2017.

 

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES REGULATORY AGENCY HAS APPROVED OR DISAPPROVED THE TRANSACTIONS DESCRIBED HEREIN, PASSED UPON THE MERITS OR FAIRNESS OF THE ACQUISITION, SPIN-OFF OR RELATED TRANSACTIONS OR PASSED UPON THE ADEQUACY OR ACCURACY OF THE DISCLOSURE HEREIN. ANY REPRESENTATION TO THE CONTRARY CONSTITUTES A CRIMINAL OFFENSE.

 

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OSSEN INNOVATION CO., LTD.
518 Shangcheng Road, Floor 17
Shanghai 200120
People’s Republic of China

 

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

 

OF OSSEN INNOVATION CO., LTD.

To Be Held on September 5, 2017

 

To the Shareholders of Ossen Innovation Co., Ltd.:

 

NOTICE IS HEREBY GIVEN that a special meeting of shareholders (the “special meeting”) of Ossen Innovation Co., Ltd., a British Virgin Islands company (“we,” “us,” “our,” “Ossen” or the “Company”), will be held on Tuesday, September 5, 2017, at 10:00 a.m., Eastern time, at the offices of Ellenoff Grossman & Schole LLP, 1345 Avenue of the Americas, 11th Floor, New York, New York 10105. You are cordially invited to attend the special meeting for the following purposes:

 

(1) The Acquisition Proposal —to approve a share exchange agreement, as amended (the “Exchange Agreement”) and related transactions providing for the acquisition (the “Acquisition”) by us of 100% of the outstanding capital stock of America-Asia Diabetes Research Foundation (“AADRF”), a California corporation, from the shareholders of AADRF, in exchange for 81,243,000 of our ordinary shares (the “Exchange Shares”), an aggregate of 28,095,454 of such Exchange Shares (the “Escrow Shares”) to be deposited in escrow at the closing of the Acquisition as described in this proxy statement (such proposal, the “Acquisition Proposal”). AADRF indirectly owns 90.27% of the equity interests of San Meditech (Huzhou) Co., Ltd. (“San Meditech”), a China-based medical device company engaged in the research, development and marketing of glucose control products. We refer to AADRF, San Meditech and their consolidated subsidiaries hereafter collectively as “San Meditech;”

 

(2) The Spin-Off Proposal — to approve a share purchase agreement dated July 19, 2017 (the “Purchase Agreement”), and related transactions providing for the sale by us of our existing business and operations to Elegant Kindness Limited, an affiliate of our Chairman, Dr. Liang Tang, in exchange for the cancellation of all of Dr. Tang’s ownership interests (11,850,000 ordinary shares, representing a 59.9% interest prior to the Acquisition and the Spin-Off) in the Company (the “Spin-Off”), so that our only business upon completion of the Acquisition and the Spin-Off will be that of AADRF and its subsidiaries, and we will receive no cash consideration in connection with the Spin-Off;

 

(3) The Charter Amendment Proposal — to approve and adopt an amendment and restatement of the Company’s memorandum and articles of association, as set forth in the draft amended and restated version of our memorandum and articles of association (the “Amended Charter”), to: (i) change the Company’s name from “Ossen Innovation Co., Ltd.” to “San Meditech Holdings Ltd.” (the “Name Change”), (ii) increase the maximum number of shares authorized to be issued by the Company from 100,000,000 to 150,000,000 shares; (iii) automatically exchange the ordinary shares held prior to the Acquisition and Spin-Off for a newly designated Class A ordinary shares, each of which will be entitled to one vote per share and (iv) designate a new series of Class B ordinary shares to be issued to certain of the Sellers, each Class B share to be entitled to ten votes per share (the “Dual Class Structure”); and

 

(4) The Incentive Plan Proposal— to approve the adoption of the San Meditech 2017 Equity Incentive Plan.

 

After careful consideration, and upon the unanimous recommendation of the special committee of the board of directors and having reviewed the fairness opinion of Highline Research Advisors, our board of directors has unanimously approved the Exchange Agreement and the Purchase Agreement and recommends that our shareholders vote FOR adoption and approval of the Acquisition, vote FOR adoption and approval of the Spin-Off, and vote FOR all other proposals presented to our shareholders in this proxy statement. When you consider the board recommendation of these proposals, you should keep in mind that certain of our directors and officers have interests in the Acquisition and the Spin-off that may conflict with your interests as a shareholder. See the sections entitled “The Acquisition Proposal — Certain Interests of Ossen’s Directors and Officers and Others in the Acquisition” and “The Spin-Off Proposal — Certain Interests of Ossen’s Directors and Officers and Others in the Spin-Off.”

 

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Only holders of record at the close of business in the British Virgin Islands on August 17, 2017 (the “Record Date”) are entitled to notice of the special meeting and to vote at the special meeting and any adjournments or postponements of the special meeting. A complete list of our shareholders of record entitled to vote at the special meeting will be available for ten days before the special meeting at our principal executive offices for inspection by shareholders during ordinary business hours for any purpose germane to the special meeting. Holders of the Company’s ADSs who wish to exercise their voting rights for the underlying ordinary shares must act through JPMorgan Chase Bank, N.A., the depositary of the Company’s American depositary receipts program (the “Depositary”).

 

If you own American depositary shares of the Company, each representing three (3) ordinary shares (“ADSs”), you cannot vote at the special meeting directly, but you may instruct the Depositary (as the holder of the ordinary shares underlying the ADSs) how to vote the ordinary shares underlying your ADSs. The Depositary must receive such instructions no later than 12:00 p.m. (New York City Time) on August 31, 2017 in order to vote the underlying ordinary shares at the special meeting. Alternatively, you may vote directly at the special meeting if you convert your ADSs into ordinary shares, pay the Depositary's fees required for the conversion of the ADSs, provide instructions for the registration of the corresponding ordinary shares, and certify that you have not given, and will not give, voting instructions as to the ADSs (or alternatively, you will not vote the ordinary shares) before the close of business in New York City on August 22, 2017, and become a registered holder of ordinary shares. In addition, if you hold your ADSs through a financial intermediary such as a broker, you must rely on the procedures of the financial intermediary through which you hold your ADSs if you wish to vote at the special meeting.

 

If you abstain from voting, fail to cast your vote in person, fail to complete and return your proxy card in accordance with the instructions set forth on the proxy card, or fail to give voting instructions to your broker, dealer, commercial bank, trust company or other nominee, your vote will have the effect of a vote against each of the Acquisition Proposal, the Spin-Off Proposal and the Incentive Plan Proposal and will have no effect on the Charter Amendment Proposal.

 

Each of the Acquisition Proposal and the Spin-Off Proposal is conditioned upon each other. In addition, we would not implement the Incentive Plan Proposal or the Charter Amendment Proposal in the event that the Acquisition Proposal and the Spin-Off Proposal were not approved.

 

Your attention is directed to the proxy statement accompanying this notice (including the annexes thereto) for a more complete description of the proposed Acquisition, the Spin-Off, and related transactions and each of our proposals. We encourage you to read the proxy statement carefully. If you have any questions or need assistance voting your ordinary shares or ADSs, please call Johnson Zhou, Vice President, at +86 (21) 6888-8886.

 

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By Order of the Board of Directors,

 

August 1, 2017

 

  Sincerely,
   
  /s/ Wei Hua
  Wei Hua
Chief Executive Officer and Chief Financial Officer

 

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TABLE OF CONTENTS

 

SUMMARY TERM SHEET  
FREQUENTLY USED TERMS 11
QUESTIONS AND ANSWERS ABOUT THE PROPOSALS FOR SHAREHOLDERS 13
SUMMARY OF THE PROXY STATEMENT 24
SELECTED HISTORICAL FINANCIAL INFORMATION OF OSSEN 30
SELECTED HISTORICAL FINANCIAL INFORMATION OF SAN MEDITECH  
SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION 34
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS 37
RISK FACTORS 38
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION 71
COMPARATIVE PER SHARE INFORMATION 76
SPECIAL MEETING OF OSSEN SHAREHOLDERS 77
THE ACQUISITION PROPOSAL 82
The Exchange Agreement 82
General Description of the Exchange Agreement 82
Earn-Out 83
Post-Acquisition Ownership of AADRF and Ossen 83
Closing of the Acquisition 84
Conditions to Closing of the Acquisition 84
Amendment or Waiver of the Exchange Agreement 86
Efforts to Obtain Shareholder Approval and Consummate the Acquisition; Regulatory Matters 86
Termination 87
Fees and Expenses 88
Representations and Warranties 88
Additional Covenants of the Parties 90
Trust Account Waiver and Seller Release  
Related Agreements 92
Background of the Acquisition 93
Ossen’s Board of Directors’ Reasons for the Approval of the Acquisition 98
Certain Interests of Ossen’s Directors and Officers and Others in the Acquisition 109
Potential Purchases of Public Shares  
Total Ossen shares to be Issued in the Acquisition  
Sources and Uses for the Acquisition  
Board of Directors of Ossen Following the Acquisition  
Spin-Off Proposal 110
Appraisal Rights  
Accounting Treatment  
Vote Required for Approval 121
Recommendation of the Board 121
INFORMATION ABOUT OSSEN 122

 

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OSSEN’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 151
INFORMATION ABOUT AADRF 175
EXECUTIVE AND DIRECTOR COMPENSATION OF AADRF 193
AADRF’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 194
MANAGEMENT AFTER THE ACQUISITION 214
DESCRIPTION OF SECURITIES 219
BENEFICIAL OWNERSHIP OF SECURITIES 231
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS 233
PRICE RANGE OF SECURITIES AND DIVIDENDS 237
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS 240
APPRAISAL RIGHTS 240
DELIVERY OF DOCUMENTS TO SHAREHOLDERS 240
TRANSFER AGENT AND REGISTRAR 240
SUBMISSION OF SHAREHOLDER PROPOSALS 240
FUTURE SHAREHOLDER PROPOSALS  
WHERE YOU CAN FIND MORE INFORMATION 241
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS F-1
   
ANNEXES  
Annex A — Exchange Agreement A-1
Annex B — Purchase Agreement B-1
Annex C — Amended Memorandum and Articles of Association C-1
Annex D — San Meditech 2017 Incentive Plan D-1
Annex E — Opinion of Highline Research Advisors E-1
Annex F — British Virgin Islands Business Companies Act 2004, as amended—Section 179 F-1
Annex G — First Amendment to Exchange Agreement G-1

 

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FREQUENTLY USED TERMS

 

“AADRF” means of America-Asia Diabetes Research Foundation.

 

“Acquisition” means the acquisition by Ossen of 100% of the equity interests of AADRF and related transactions as contemplated by the Exchange Agreement.

 

“Company” or “Ossen” means Ossen Innovation Co., Ltd.

 

“Companies Act” and the “Insolvency Act” mean the BVI Business Companies Act, 2004 and the Insolvency Act, 2003 of the British Virgin Islands, respectively.

 

“Depositary” means JPMorgan Chase Bank, N.A., the depositary of the Company’s ADS program.

 

“Earn-Out Shares” means the 24,372,900 Exchange Shares subject to forfeiture back to us (along with dividends and other earnings otherwise payable with respect to such Earn-Out Shares) in the event that the post-combination company fails to obtain aggregated consolidated revenue from the operations of Ossen, AADRF and their respective subsidiaries, including subsidiaries acquired by Ossen, AADRF or their respective subsidiaries following the closing of the Acquisition and the Spin-Off, (as reported in the audited financial statements included in our annual report on Form 20-F) of $6,470,588, assuming a RMB:USD exchange rate of 6.8:1, in 2017.

 

“EK” means Elegant Kindness Limited, a business company incorporated in the British Virgin Islands with limited liability that is solely owned by Dr. Liang Tang, Ossen’s Chairman and majority shareholder.

 

“Escrow Shares” means collectively the Earn-Out Shares and the Indemnification Shares.

 

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

 

“Exchange Agreement” means the Share Exchange Agreement, dated as of July 19, 2017, as amended, by and among the Company, AADRF, Fascinating Acme Development Limited, a BVI company, Ossen’s Representative, Seller’s Representative and Sellers.

 

“Exchange Shares” means 81,243,000 of our ordinary shares which Ossen agreed to issue to Sellers in exchange for 100% of the equity interests of AADRF.

 

“Indemnification Shares” means 3,722,554 of such Exchange Shares subject to forfeiture back to us (along with dividends and other earnings otherwise payable with respect to such Indemnification Shares) in the event that the Ossen Representative successfully brings an indemnification claim under the Exchange Agreement on behalf of our shareholders.

 

“San Meditech” means San Meditech (Huzhou) Co. Ltd., a PRC company that is 90.27% indirectly owned by AADRF.

 

“OIM” means Ossen Innovation Materials Group Co., Ltd., a BVI limited liability company and Ossen’s wholly-owned subsidiary.

 

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“Ossen Representative” means Wei Hua, the Chief Executive Officer of Ossen, in his capacity as the representative for our shareholders prior to the Acquisition.

 

“PRC” means the People’s Republic of China.

 

“Purchase Agreement” means the Purchase Agreement, dated as of July 19, 2017, as it may be amended, by and among the Company, its wholly-owned subsidiary OIM, EK and Liang Tang, the sole shareholder of EK.

 

“Securities Act” means the Securities Act of 1933, as amended.

 

“Sellers” means the shareholders of AADRF.

 

“Spin-Off” means the sale of Ossen’s pre-stressed steel manufacturing business to EK, an entity affiliated with Ossen’s Chairman, Dr. Liang Tang, and related transactions as contemplated by the Purchase Agreement.

 

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QUESTIONS AND ANSWERS ABOUT THE PROPOSALS FOR SHAREHOLDERS

 

Questions and Answers Regarding the Special Meeting

 

Q.           Why am I receiving this proxy statement?

 

A.           We have entered into the Exchange Agreement, providing for the acquisition of all of the issued and outstanding equity interests in AADRF, from the Sellers, in exchange for 81,243,000 of our ordinary shares, an aggregate of 28,095,454 of such Exchange Shares to be deposited in escrow at the closing of the Acquisition as described in this proxy statement. AADRF indirectly owns 90.27% of the equity interests of San Meditech, a China-based medical device company engaged in the research, development and marketing of glucose control products. A copy of the Exchange Agreement is attached to this proxy statement as Annex A, and the first amendment thereto is attached as Annex G. Additionally, we have entered into the Purchase Agreement, providing for the sale by us of our existing business and operations to Elegant Kindness Limited, an affiliate of our Chairman, Dr. Liang Tang, in exchange for the cancellation of all of Dr. Tang’s ownership interests (11,850,000 ordinary shares, representing a 59.9% interest prior to the Acquisition and the Spin-Off) in the Company. A copy of the Exchange Agreement is attached to this proxy statement as Annex B. Upon completion of the Acquisition and the Spin-Off, our only business will be that of AADRF and its subsidiaries. You are encouraged to read this proxy statement, including all the annexes hereto. In order to complete the Acquisition and the Spin-Off, among other things, Ossen shareholders must approve the following proposals, each of which is discussed in this proxy statement:

 

·the Acquisition Proposal;

 

·the Spin-Off Proposal;

 

·the Charter Amendment Proposal; and

 

·the Incentive Plan Proposal.

 

Q:           When and where will the special meeting be held?

 

A:           The special meeting will be held on Tuesday, September 5, 2017, at 10:00 a.m., Eastern time, at the offices of Ellenoff Grossman & Schole LLP, 1345 Avenue of the Americas, 11th Floor, New York, New York 10105, or such other date, time and place to which such meeting may be adjourned or postponed, to consider and vote upon the proposals.

 

Q:           Who is entitled to vote at the special meeting?

 

A:           Only holders of issued and outstanding ordinary shares, including ordinary shares underlying outstanding ADSs, as of the close of business in the British Virgin Islands on the Record Date are entitled to notice of, and to vote at, the special meeting or any adjournment or postponement thereof. The Record Date for the special meeting is August 17, 2017. As of the date hereof, there are 19,791,110 ordinary shares of Ossen outstanding, each of which is entitled to one vote per share. However, Dr. Tang, who holds 11,850,000 shares, has agreed to abstain from voting on the Acquisition Proposal, the Spin-Off Proposal, the Charter Amendment Proposal and the Incentive Plan Proposal.

 

Holders of the Company’s ADSs who wish to exercise their voting rights for the underlying ordinary shares (whereby each ADS is entitled to three votes) must act through JPMorgan Chase Bank, N.A., the depositary of the Company’s ADS program.

 

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Q.           What is being voted on?

 

A.           Below are the proposals on which Ossen’s shareholders are being asked to vote:

 

(1) The Acquisition Proposal —to approve the Exchange Agreement and related transactions providing for our acquisition of 100% of the outstanding capital stock of America-Asia Diabetes Research Foundation (“AADRF”), a California corporation, from the shareholders of AADRF, in exchange for 81,243,000 of our ordinary shares, an aggregate of 28,095,454 of such Exchange Shares to be deposited in escrow at the closing of the Acquisition as described in this proxy statement. AADRF indirectly owns 90.27% of the equity interests of San Meditech, a China-based medical device company engaged in the research, development and marketing of glucose control products;

 

(2) The Spin-Off Proposal — to approve the Purchase Agreement providing for the sale by us of our existing business and operations to Elegant Kindness Limited, an affiliate of our Chairman, Dr. Liang Tang, in exchange for the cancellation of all of Dr. Tang’s ownership interests (11,850,000 ordinary shares, representing a 59.9% interest prior to the Acquisition and the Spin-Off) in the Company, so that our only business upon completion of the Acquisition and the Spin-Off will be that of AADRF and its subsidiaries;

 

(3) The Charter Amendment Proposal — to approve and adopt an amendment and restatement of the Company’s memorandum and articles of association, as set out in the amended and restated memorandum and articles of association appended to this proxy statement as Annex C (the “Amended Charter”), to: (i) change the Company’s name from “Ossen Innovation Co., Ltd.” to “San Meditech Holdings Ltd.” (the “Name Change”), (ii) increase the maximum number of shares authorized to be issued by the Company from 100,000,000 to 150,000,000 shares; (iii) automatically exchange the ordinary shares held prior to the Acquisition and Spin-Off for a newly designated Class A ordinary shares, each of which will be entitled to one vote per share and (iv) designate a new series of Class B ordinary shares to be issued to certain of the Sellers, each Class B share to be entitled to ten votes per share (the “Dual Class Structure”); and

 

(4) The Incentive Plan Proposal— to approve the adoption of the San Meditech 2017 Equity Incentive Plan, a copy of which is attached to the accompanying proxy statement as Annex D.

 

Q.           Are the proposals conditioned on one another?

 

A.           Each of the Acquisition Proposal and the Spin-Off Proposal is conditioned upon each other. In addition, we would not implement the Incentive Plan Proposal or the Charter Amendment Proposal in the event that the Acquisition Proposal and the Spin-Off Proposal were not approved.

 

Q:           What constitutes a quorum for the special meeting?

 

A:           At the special meeting, the presence in person or by proxy of the holders of a majority of the voting power of the ordinary shares issued and outstanding and entitled to vote at the special meeting will constitute a quorum. In the absence of a quorum, the chairman of the meeting will have power to adjourn the special meeting. As of the date hereof, 9,895,556 ordinary shares of Ossen would be required to achieve a quorum. Dr. Tang, who holds 11,850,000 shares, is expected to attend the meeting in person or by proxy, in which case a quorum will be met. However, Dr. Tang has agreed to abstain from voting on the Acquisition Proposal, the Spin-Off Proposal, the Charter Amendment Proposal and the Incentive Plan Proposal.

 

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Q:           How many votes do I have?

 

A:           Ossen’s shareholders are entitled to one vote at the special meeting for each ordinary share, or three votes at the special meeting for each ADS, held of record as of the Record Date. As of the close of business in the British Virgin Islands on the Record Date, there were 13,840,502 outstanding ordinary shares not underlying ADSs, and 1,983,536 outstanding ADSs, each ADS representing three ordinary shares, of Ossen.

 

Q.           Why is Ossen proposing the Acquisition Proposal and the Spin-Off Proposal?

 

A.           Ossen’s board of directors believes that the Acquisition and the Spin-Off, and the other transactions entered into in connection with the Acquisition and the Spin-Off, are fair to Ossen and its shareholders because:

 

·Ossen’s current business has been undervalued by the U.S. public markets, and, based on Ossen’s historical performance, Ossen’s board of directors does not expect Ossen’s share price to improve, even if Ossen’s underlying business were to perform well;

 

·Ossen’s current business is facing significant challenges in China, including increasing price of raw materials and strict environmental requirements being enforced by the Chinese government. Ossen reported material decreases in revenue and net income during the first quarter of 2017, and Ossen’s management team continues to be cautious about future prospects;

 

·the transactions will provide Ossen’s shareholders the opportunity to retain ownership in San Meditech after the Acquisition and Spin-Off are completed;

 

·with San Meditech’s anticipated expansion in the growing Chinese market, with its new series of continuous glucose monitoring products in the pipeline, Ossen’s board of directors believes that Ossen shareholders will benefit from the future prospects and potential value of San Meditech in the U.S. public markets;

 

·the structure of the Acquisition is intended to protect existing Ossen shareholders by requiring that an aggregate of 28,095,454 Escrow Shares will be deposited in escrow at the closing, including (i) 24,372,900 Earn-Out Shares subject to forfeiture back to us (along with dividends and other earnings otherwise payable with respect to such Earn-Out Shares) in the event that the post-combination company fails after the closing to obtain aggregated consolidated revenue from the operations of Ossen, AADRF and their respective subsidiaries (including subsidiaries acquired by Ossen, AADRF or their respective subsidiaries following the closing of the Acquisition and the Spin-Off)  (as reported in the audited financial statements included in our annual report on Form 20-F) of $6,470,588, assuming a RMB:USD exchange rate of 6.8:1, in 2017, and (ii) an additional 3,722,554 Indemnification Shares subject to forfeiture back to us (along with dividends and other earnings otherwise payable with respect to such Earn-Out Shares) in the event that the Ossen Representative successfully brings an indemnification claim under the Exchange Agreement on behalf of our shareholders;

 

  · the structure of the Acquisition and the Spin-Off is intended to protect existing Ossen shareholders by requiring that the holders of a majority of shares held by the disinterested shareholders approve the Acquisition and the Spin-Off;

 

  · Dr. Tang has agreed to (i) abstain from voting for the Acquisition or the Spin-Off; (ii) indemnify Ossen in the event that certain representations and warranties in the transaction documents were breached; and (iii) indemnify Ossen with respect to any expenses relating to any appraisal rights; and

 

·based on the fairness opinion of HRA and the unanimous recommendation of the special committee of Ossen’s board of directors, the board believes that the transactions are fair to Ossen’s shareholders.

 

In addition, Ossen’s board of directors also gave consideration to the following negative factors (although not weighted or in any order of significance):

  

  · the sale of all of Ossen’s existing business to Dr. Tang in exchange for only the cancellation of Dr. Tang’s shares, and no cash consideration;

 

  · the costs associated with the Acquisition and the Spin-Off, including the diversion of management’s attention;

 

  ·

the issuance of up to 81,243,000 ordinary shares to the Sellers, which will represent up to 91.1% of Ossen’s issued and outstanding ordinary shares; and

 

  · uncertainty relating to the future results of San Meditech, as described in the “Risk Factors” section below.

 

 

Q.           Why is Ossen proposing the Charter Amendment Proposal?

 

A.           Ossen is seeking approval of its shareholders to amend its charter as required pursuant to and in connection with the consummation of the Exchange Agreement in order to implement changes to the charter requested by AADRF. If the requisite approval is received, the Amended Charter will be filed with the BVI Registrar of Corporate Affairs in connection with the closing of the Acquisition and Spin-Off.

 

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Upon the closing of the Acquisition and the Spin-Off, and the transactions contemplated by the Exchange Agreement and the Purchase Agreement, Ossen’s current name will not accurately reflect its business operations. Accordingly, Ossen’s board of directors believes that changing its name to “San Meditech Holdings Ltd.” in connection with the Acquisition will better reflect its business operations upon completion of the Acquisition.

 

The Ossen board believes that retaining two classes of ordinary shares with different voting rights is in the best interest of the Company and its shareholders. The Board believes that the dual class capitalization structure: (a) will promote stability and continuity in the leadership and management of the Company, which will allow the Company to focus on long-term objectives, (b) will enhance the Company’s ability to attract, retain and motivate highly qualified key employees and (c) will provide the Company with greater flexibility in financing its growth. See “Charter Amendment Proposal—Dual Class Structure.

 

Q.           What vote is required to approve the proposals presented at the special meeting?

 

A.           Approval of the Acquisition Proposal, the Spin-Off Proposal and the Incentive Plan Proposal requires the affirmative vote of a majority of the shares held by disinterested shareholders as of the record date. The Charter Amendment Proposal, including the re-designation of Class A ordinary shares and the issuance of Class A ordinary shares and Class B ordinary shares, requires the affirmative vote of 75% of the votes cast by disinterested shareholders present in person or represented by proxy at the special meeting.

 

Q.           How will Ossen’s directors, officers and affiliates vote the shares owned by them?

 

A.            Dr. Liang Tang, a holder of approximately 59.9% of the issued and outstanding shares of Ossen, has indicated that he will vote in favor of the proposals.

 

Q.           How do I vote if I own ordinary shares?

 

A.           If you are a holder of record of ordinary shares on the Record Date for the special meeting, you may submit your proxy by completing, signing, dating and returning the enclosed proxy card in the accompanying pre-addressed postage paid envelope or vote your shares online by following the instructions printed on your proxy card. If you hold your shares in “street name,” which means your shares are held of record by a broker, bank or other nominee, you should contact your broker, bank or nominee to ensure that votes related to the shares you beneficially own are properly counted. In this regard, you must provide the record holder of your shares with instructions on how to vote your shares or, if you wish to attend the special meeting and vote in person, obtain a proxy from your broker, bank or nominee.

 

Q.           Am I entitled to appraisal rights?

 

A.           Yes. Shareholders who dissent from the Spin-Off will have the right to seek appraisal and payment of the fair value of their shares if the Spin-Off is completed, but only if such shareholders deliver to the Company, before the vote is taken at the special meeting, a written objection to the Spin-Off, including a statement that such shareholder proposes to demand payment for his or her shares if the Spin-Off is approved, and they subsequently comply with all procedures and requirements of Section 179 of the BVI Business Companies Act for the exercise of appraisal rights. The fair value of your shares as determined under that statute could be more than, the same as, or less than the value of your shares, and the corresponding stock price of the ADSs relating to such shares on Nasdaq (assuming you arrange with the Depositary to obtain ordinary shares in registered form in exchange for your ADSs), if you do not exercise appraisal rights with respect to your shares.

 

Appraisal rights are available only to registered holders of shares. If you hold any shares in “street name,” you are considered the beneficial owner but not the “registered holder” of such shares. If you hold ADSs, you are not considered the “registered holder” of such shares. Therefore, if you hold any shares in “street name,” or if you hold ADSs, and wish to exercise the appraisal rights, you must arrange for such shares to be registered in your name and certify that you have not given and will not give, directly or indirectly voting instructions. We encourage you to read the information set forth in this proxy statement carefully and to consult your own British Virgin Islands legal counsel if you desire to exercise your appraisal rights. If you hold ADSs, we encourage you to contact the Depositary. Please see “Appraisal Rights” as well as “Annex F—British Virgin Islands Business Companies Act 2004, as amended—Section 179” to this proxy statement for additional information.

 

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Q.           How do I vote if I own ADSs?

 

A.           If you own ADSs as of the close of business in New York City on August 3, 2017 (and do not cancel such ADSs and become a registered holder of the ordinary shares underlying such ADSs as explained below), you cannot vote at the meeting directly, but you may instruct the Depositary (as the holder of the ordinary shares underlying your ADSs) how to vote the ordinary shares underlying your ADSs by completing and signing the ADS voting instruction card and returning it in accordance with the instructions printed on it as soon as possible but, in any event, so as to be received by the Depositary no later than 12:00 p.m. (New York City Time) on August 31, 2017. The Depositary will endeavor, in so far as practicable, to vote or cause to be voted the number of ordinary shares represented by your ADSs in accordance with your voting instructions. The Depositary will not itself exercise any voting discretion in respect of any ADSs.

 

Alternatively, you may vote at the special meeting if you convert your ADSs into ordinary shares prior to the close of business in New York City on August 22, 2017, and become a holder of Shares by the close of business in the British Virgin Islands on August 22, 2017. If you hold your ADSs through a financial intermediary such as a broker, you must rely on the procedures of the financial intermediary through which you hold your ADSs if you wish to vote. If your ADSs are held by your broker, bank or other nominee, see below.

 

If you wish to convert your ADSs into ordinary shares, you need to make arrangements to deliver your ADSs to the Depositary for conversion prior to the close of business in New York City on August 17, 2017, the record date, together with (a) delivery instructions for the corresponding Shares (name and address of person who will be the registered holder of Shares), (b) payment of the ADS conversion fees ($0.05 per ADS to be cancelled) and any applicable taxes, and (c) a certification that the ADS holder held the ADSs as of August 3, 2017 and has not given, and will not give, voting instructions to the Depositary as to the ADSs being cancelled, or has given voting instructions to the Depositary as to the ADSs being converted but undertakes not to vote the corresponding ordinary shares at the special meeting. If you hold your ADSs in a brokerage, bank or nominee account, please contact your broker, bank or nominee to find out what actions you need to take to instruct the broker, bank or nominee to cancel the ADSs on your behalf. Upon cancellation of the ADSs, the Depositary will arrange to transfer registration of the ordinary shares to the former ADS holder. If after registration of ordinary shares in your name you wish to receive a certificate evidencing the ordinary shares registered in your name, you will need to request the registrar of the ordinary shares to issue and mail a certificate to your attention.

 

Q.           What will happen if I abstain from voting or fail to vote on a proposal?

 

A.           If you abstain from voting, fail to cast your vote in person or by proxy or fail to give voting instructions to your broker, dealer, commercial bank, trust company or other nominee, your vote will not be counted for purposes of determining whether the Charter Amendment Proposal has been approved and will have the effect of a vote against each of the Acquisition Proposal, the Spin-Off Proposal and the Incentive Plan Proposal. Dr. Tang, who holds 11,850,000 shares, has agreed to abstain from voting on the Acquisition Proposal, the Spin-Off Proposal, the Charter Amendment Proposal and the Incentive Plan Proposal.

 

Q.           What will happen if I sign and return my proxy card without indicating how I wish to vote?

 

A.           Signed and dated proxies received by Ossen without an indication of how the shareholder intends to vote on a proposal will be voted in favor of each proposal presented to the shareholders.

 

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Q.           If I am not going to attend the special meeting in person, should I return my proxy card instead?

 

A.           Yes. Whether or not you plan to attend the special meeting, after carefully reading and considering the information contained in this proxy statement, please complete and sign your proxy card. Then return the enclosed proxy card in the pre-addressed postage-paid envelope provided herewith as soon as possible, so your shares may be represented at the special meeting.

 

Q.           If my shares or ADSs are held in “street name,” will my broker, bank or nominee automatically vote my shares for me?

 

A.            No. Your broker, bank or nominee cannot vote your shares or the shares underlying your ADSs unless you provide instructions on how to vote in accordance with the information and procedures provided to you by your broker, bank or nominee. If you do not provide instructions with your proxy, your bank, broker or other nominee may deliver a proxy card expressly indicating that it is NOT voting your shares; this indication that a bank, broker or nominee is not voting your shares is referred to as a “broker non-vote.” Broker non-votes will be counted for the purpose of determining the existence of a quorum, but will count as a vote against the Acquisition Proposal, the Spin-Off Proposal and the Incentive Plan Proposal, and will not count for purposes of determining the number of votes cast at the special meeting for the Charter Amendment Proposal. Your bank, broker or other nominee can vote your shares only if you provide instructions on how to vote. You should instruct your broker to vote your shares in accordance with directions you provide.

 

Q.           May I change my vote after I have mailed my signed proxy card?

 

A.           Yes. You may change your vote by sending a later-dated, signed proxy card to Ossen’s Corporate Secretary at 518 Shangcheng Road, Floor 17, Shanghai 200120, PRC, so that it is received prior to the special meeting or, if you are a holder of ordinary shares, you may attend the special meeting in person and vote. You also may revoke your proxy by sending a notice of revocation to Ossen’s Corporate Secretary, which must be received by Ossen’s Corporate Secretary prior to the special meeting. If you vote online and wish to change your vote, you may do so by revisiting the website indicated on your proxy card.

 

If you hold ordinary shares through a broker, bank or other nominee and have instructed the broker, bank or other nominee to vote your shares, you must follow directions received from the broker, bank or other nominee to change your instructions.

 

Holders of our ADSs may revoke their voting instructions by notification to the Depositary in writing at any time prior to 12:00 p.m. (New York City Time) on August 31, 2017. A holder of ADSs can do this in one of two ways:

 

first, a holder of ADSs can revoke its voting instructions by written notice of revocation timely delivered to the Depositary; or

 

second, a holder of ADSs can complete, date and submit a new ADS voting instruction card to the Depositary bearing a later date than the ADS voting instruction card sought to be revoked.

 

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If you hold your ADSs through a broker, bank or nominee and you have instructed your broker, bank or nominee to give ADS voting instructions to the Depositary, you must follow the directions of your broker, bank or nominee to change those instructions.

 

Q.           What should I do if I receive more than one set of voting materials?

 

A.           You may receive more than one set of voting materials, including multiple copies of this proxy statement and multiple proxy cards or voting instruction cards. For example, if you hold your shares in more than one brokerage account, you will receive a separate voting instruction card for each brokerage account in which you hold shares. If you are a holder of record and your shares are registered in more than one name, you will receive more than one proxy card. Please complete, sign, date and return each proxy card and voting instruction card that you receive in order to cast your vote with respect to all of your Ossen shares.

 

Q.           Who can help answer my questions?

 

A.           If you have questions about the Acquisition or if you need additional copies of the proxy statement or the enclosed proxy card you should contact:

 

Wei Hua

Ossen Innovation Co., Ltd.

518 Shangcheng Road, Floor 17

Shanghai, 200120, People’s Republic of China

+86 (21) 6888-8886

 

To obtain timely delivery, Ossen shareholders must request the materials no later than five business days prior to the special meeting.

 

You may also obtain additional information about Ossen from documents filed with the SEC, by following the instructions in the section entitled Where You Can Find More Information.”

 

Questions and Answers about the Acquisition

 

Q.           What will happen in the Acquisition?

 

A.           At the closing of the Acquisition, we will acquire 100% of the equity interest of AADRF, with AADRF becoming a wholly-owned subsidiary of Ossen. Effective contemporaneously with the completion of the Acquisition, Ossen will sell its current pre-stressed steel manufacturing business to EK, an entity affiliated with Ossen’s Chairman, Dr. Liang Tang, in exchange for the cancellation of all of Dr. Tang’s ownership interests (11,850,000 ordinary shares, representing a 59.9% interest prior to the Acquisition and the Spin-Off) in the Company, as described in the Spin-Off Proposal.

 

Q.           What percentage will current Ossen shareholders hold in the Company after the closing of the Acquisition and Spin-Off?

 

A.           It is anticipated that, following completion of the Acquisition and Spin-Off, Ossen’s existing shareholders (excluding Dr. Tang) will retain an ownership interest of approximately 8.9% of the Company (or approximately 12.25% in the event that the Earn-Out Shares are forfeited), current members of Ossen management or affiliates of Ossen (excluding Dr. Tang) will own approximately 1.35% (or approximately 1.85% in the event that the Earn-Out Shares are forfeited), and Sellers will own approximately 91.1%, of the outstanding equity of the Company (or approximately 89.75% in the event that the Earn-Out Shares are forfeited). These percentages are based on the assumption that Ossen will not issue any additional ordinary shares.

 

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Q.           What percentage of the voting power of the Company will current Ossen shareholders hold after the closing of the Acquisition and Spin-Off?

 

A.           It is anticipated that, upon the closing of the Acquisition and Spin-Off and the effectiveness of the Amended Charter providing for a dual class structure, and based upon (a) the number of outstanding Ossen ordinary shares as of the Record Date for the special meeting, (b) the cancellation of all of Dr. Tang’s ownership interests (11,850,000 ordinary shares) pursuant to the Purchase Agreement, (b) the issuance of the Exchange Shares to Sellers pursuant to the Exchange Agreement, including 62,630,231 Class A ordinary shares and 18,612,769 Class B ordinary shares (assuming that the Earn-Out Shares are not forfeited) and (c) assuming conversion of all outstanding ordinary shares held by Ossen shareholders into Class A ordinary shares, Ossen’s existing shareholders (excluding Dr. Tang and other affiliates of Ossen) will retain voting power of approximately 2.6% of the Company (or approximately 3.7% in the event that the Earn-Out Shares are forfeited), current members of Ossen management or affiliates of Ossen (excluding Dr. Tang) will own approximately 0.5% (or approximately 0.7% in the event that the Earn-Out Shares are forfeited), and Sellers will own approximately 96.9%, of the outstanding equity of the Company (or approximately 95.6% in the event that the Earn-Out Shares are forfeited). These percentages are based on the assumption that Ossen will not issue any additional ordinary shares.

 

Q:           What conditions must be satisfied to complete the Acquisition?

 

A:           There are a number of closing conditions in the Exchange Agreement. For a summary of additional conditions that must be satisfied or waived prior to completion of the Acquisition, see the section entitled The Exchange Agreement.”

 

Q:           Will the ordinary shares of the Company received by Sellers in the Acquisition be subject to any transfer restrictions?

 

A:           Yes. At Closing, each Seller will enter into a “lock-up” agreement providing that such Seller will not, from the closing until the first anniversary of the closing, sell, pledge or otherwise dispose of or encumber any of the Exchange Shares received in the Acquisition. See “The Exchange Agreement—Lock-up Agreements.”

 

Q:           Who will be the directors of the Company following the Acquisition and Spin-Off?

 

A:           Immediately following the Acquisition and Spin-Off, we anticipate that the board of directors of the Company will be as follows:

 

Name   Current Principal Role at Ossen or San Meditech
Howard Gang Hao   Founder of San Meditech
Hongguang Liu   Director
Song Guo   Director
Yipeng Wang   Director
Xiaoyang Li   Director

 

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Q:           Who will be the executive officers of the Company immediately following the Acquisition and Spin-Off?

 

A:           Immediately following the Acquisition and Spin-Off, the executive management team of the Company is expected to consist of the members of the San Meditech executive management team prior to the Acquisition as set forth below:

 

Name   Title
Howard Gang Hao   Chief Executive Officer
Minfang Zhou   Chief Financial Officer
Hongguang Liu   Chief Strategy Officer

 

Q:           Will the Company continue operations after the closing of the Acquisition?

 

A:           Yes, the Company will continue operations after the closing. However, the Company will cease operating its prestressed steel manufacturing business and will instead operate San Meditech’s business. San Meditech designs, develops and markets affordable, easy-to-use and dynamic continuous glucose monitoring (“CGM”) systems for use by individuals with diabetes and their healthcare providers.

 

Q:           Will the ADSs be listed on Nasdaq after the closing of the Acquisition?

 

A:           Yes, it is expected that our ADSs will be listed on Nasdaq under the symbol “SMDT.” In the event that Nasdaq does not approve our application for continued listing, the transactions described in this proxy statement will not be consummated unless the requirement that we obtain Nasdaq approval for continued listing is waived by Ossen and the Sellers.

 

Q:           What is the recommendation of Ossen’s board of directors?

 

A:           The board of directors of Ossen has unanimously approved the Exchange Agreement and the other transactions contemplated thereby and determined that the Exchange Agreement and the Acquisition are advisable and fair to Ossen’s shareholders. The Ossen board of directors, upon the unanimous recommendation of the special committee of the board of directors, and having reviewed of the fairness opinion of HRA, unanimously recommends that the Company’s shareholders vote in favor of each of the proposals described in this proxy statement. For a description of the role of Highline Research Advisors in the board’s decision-making process, see the sections entitled “The Acquisition Proposal—Ossen’s Board of Directors Reasons for the Approval of the Acquisition and “– Description of Opinion of Highline Research Advisors” and “The Spin-Off Proposal—Ossen’s Board of Directors Reasons for the Approval of the Spin-Off.”

 

Q:           When is the Acquisition expected to be completed?

 

A:           It is currently anticipated that the Acquisition will be consummated promptly following the special meeting, provided that all other conditions to the consummation of the Acquisition, including but not limited to the consummation of the Spin-Off and approval for the continued listing of our ADSs on NASDAQ, have been satisfied or waived. In the event that any of these conditions is not met or otherwise waived pursuant to the terms of the Exchange Agreement, we will not consummate the Acquisition. For a description of the conditions to the completion of the Acquisition, see the section entitled The Exchange Agreement.”

 

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Questions and Answers about the Spin-Off

 

Q.           What is the Spin-Off?

 

A.           On July 19, 2017, we and OIM entered into a Purchase Agreement with Elegant Kindness Limited, a BVI limited liability company solely owned by Dr. Liang Tang (“EK”), Ossen’s Chairman and majority shareholder. The Purchase Agreement provides for the sale of 100% of the equity interest in OIM to Dr. Tang through EK, in exchange for the cancellation of all of the Ossen shares held by Dr. Tang, which shares, as of the date of this proxy statement, represented approximately 59.9% of the issued and outstanding shares of Ossen. The transactions contemplated by the Purchase Agreement would take place contemporaneously with the closing of the Acquisition.

 

Upon completion of the Acquisition and the Spin-Off, Dr. Tang, through EK, will own all of the outstanding shares of OIM, Ossen will no longer own any interest in OIM and its subsidiaries, Ossen Group (Asia) Co., Ltd., Topchina Development Group Ltd., Ossen Innovation Materials Co. Ltd. and Ossen (Jiujiang) New Materials Co., Ltd. Following the closing of the Spin-Off and the Acquisition, the business of Ossen will be solely that of San Meditech. See “The Spin-Off Proposal.”

 

Q:           What conditions must be satisfied to complete the Spin-Off?

 

A:           There are a number of closing conditions in the Purchase Agreement. For a summary of additional conditions that must be satisfied or waived prior to completion of the Spin-Off, see the section entitled The Purchase Agreement.”

 

Q.           What is the recommendation of Ossen’s board of directors?

 

A.           The board of directors of Ossen, upon the unanimous recommendation of its special committee and having reviewed the fairness opinion of Highline Research Advisors, has unanimously approved the Purchase Agreement and the other transactions contemplated thereby and determined that the Purchase Agreement and the Spin-Off are advisable and fair to Ossen shareholders. The Ossen board of directors unanimously recommends that the Ossen shareholders vote in favor of the Spin-Off Proposal and each of the proposals described in this proxy statement.

 

Q.           When will the Spin-Off be completed?

 

A.           The closing of the Spin-Off shall take place only if the Acquisition is completed and shall be effective contemporaneously with the completion of the Acquisition.

 

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Q: What will happen to Ossen if, for any reason, the Acquisition and Spin-Off do not close?

 

A:           If, for any reason, the Acquisition and Spin-Off do not close, the Company’s board of directors may elect to, among other things, continue its current business, attempt to complete another strategic transaction, or attempt to sell or otherwise dispose of the various assets of Ossen (whether by means of the Spin-Off Proposal or otherwise) or acquire a different target company. If the Ossen board of directors determines to sell or otherwise dispose of the various assets of Ossen and not pursue an acquisition, any remaining cash proceeds would be distributed to its shareholders, subject to any restrictions under BVI law. If Ossen decides to dissolve and liquidate its assets, Ossen would be required to pay all of its debts and contractual obligations, and to set aside certain reserves for potential future claims, and there can be no assurances as to the amount or timing of available cash left to distribute to shareholders after paying the debts and other obligations of Ossen and setting aside funds for reserves.

 

Q.           Do Ossen’s executive officers and/or directors have any interest in the Spin-Off?

 

A.            Yes. Liang Tang, Chairman of the Board of Ossen, holds an approximate 59.9% interest in Ossen and, through EK, will receive 100% of the equity interest in OIM and its subsidiaries in consideration for the cancellation of his 59.9% interest in Ossen. Wei Hua, Ossen’s Chief Executive Officer and Chief Financial Officer, owns 600,000 ordinary shares and another affiliate of Ossen owns 600,000 ordinary shares, each of whom is expected to continue to hold such shares after the consummation of the Acquisition and Spin-Off.

 

Q.           Does the Spin-Off require any regulatory approvals?

 

A.           No. Other than Nasdaq’s approval of the continued listing of our ADSs, which approval must be received prior to the consummation of the Acquisition and Spin-Off (unless such requirement is waived pursuant to the terms of the Exchange Agreement), and the filing of the amended and restated memorandum and articles of association of the Company with the BVI Registrar of Corporate Affairs, none of the transactions contemplated by the Spin-Off require any regulatory approvals.

 

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SUMMARY OF THE PROXY STATEMENT

 

This summary highlights selected information from this proxy statement and does not contain all of the information that is important to you. To better understand the Acquisition and the proposals to be considered at the special meeting, you should read this entire proxy statement carefully, including the annexes. See also the section entitled “Where You Can Find More Information.”

 

Acquisition

 

Parties to the Acquisition

 

Ossen

 

Ossen Innovation Co., Ltd. is a British Virgin Islands limited company incorporated on January 21, 2010. Ossen is a holding company headquartered in Shanghai, China, that conducts its production activities in China through indirectly held subsidiaries.

 

Ossen’s ADSs are currently listed on the Nasdaq Capital Market under the symbol “OSN”. We intend to apply to apply for a new listing of our ADSs on the Nasdaq Capital Market under the symbol “SMDT”, effective upon the closing of the Acquisition and the Spin-Off. In connection with the closing of the Acquisition and the Spin-Off, we intend to effect a ratio change for our ADR program, such that, immediately after closing, the number of the Company's ordinary shares represented by each ADS will change from three (3) ordinary shares to such number of ordinary shares needed for us to comply with Nasdaq’s initial listing standards.

 

The mailing address of Ossen’s principal executive office is 518 Shangcheng Road, Floor 17, Shanghai 200120 People’s Republic of China and its phone number is +86 (21) 6888-8886.

 

AADRF

 

AADRF is a California corporation formed on July 18, 2015. The mailing address of AADRF’s principal executive office is 49 Georgetown Avenue, Irvine CA 92612 and its phone number is (949) 725-2208.

 

For more information about AADRF and San Meditech, see the sections entitled “Information About AADRF,” “AADRF’s Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Management After the Acquisition.”

 

Consideration to Sellers in the Acquisition

 

Pursuant to the Exchange Agreement, we will acquire all of the issued and outstanding equity interests in AADRF, from the Sellers in exchange for 81,243,000 of our newly issued ordinary shares. The Exchange Shares will be allocated among the Sellers pro-rata based on each Seller’s ownership of AADRF prior to the closing. AADRF indirectly owns 90.27% of the equity interests of San Meditech, a China-based medical device company engaged in the research, development and marketing of glucose control products.

 

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An aggregate of 28,095,454 of such Exchange Shares will be deposited in escrow at the closing of the Acquisition (which is also referred to herein as the closing), including (i) 24,372,900 of such Exchange Shares subject to forfeiture back to us (along with dividends and other earnings otherwise payable with respect to such Earn-Out Shares) in the event that the post-combination company fails to obtain aggregated consolidated revenue from the operations of Ossen, AADRF and their respective subsidiaries, including subsidiaries acquired by Ossen, AADRF or their respective subsidiaries following the closing of the Acquisition and the Spin-Off, (as reported in the audited financial statements included in our annual report on Form 20-F) of $6,470,588, assuming a RMB:USD exchange rate of 6.8:1, in 2017, and (ii) an additional 3,722,554 of such Exchange Shares subject to forfeiture back to us (along with dividends and other earnings otherwise payable with respect to such Indemnification Shares) in the event that the Ossen Representative successfully brings an indemnification claim under the Exchange Agreement on behalf of our shareholders.

 

Spin-Off

 

On July 19, 2017, we and Ossen Innovation Materials Group Co., Ltd., a BVI limited liability company and our wholly-owned subsidiary, entered into a Purchase Agreement with Elegant Kindness Limited, a BVI limited liability company solely owned by Dr. Liang Tang, Ossen’s Chairman and majority shareholder. The Purchase Agreement provides for the sale of 100% of the equity interest in OIM to Dr. Tang through EK, in exchange for the cancellation of all of the Ossen shares held by Dr. Tang, which shares, as of the date of this proxy statement, represented approximately 59.9% of the issued and outstanding shares of Ossen. The transactions contemplated by the Purchase Agreement are a condition to the closing of the Acquisition and would take place contemporaneously with the closing of the Acquisition.

 

Organizational Structure

 

The following diagram illustrates the ownership structure of the Company immediately following the Acquisition and the Spin-Off and the jurisdictions in which the identified entities were organized. Unless noted, all entities are 100% owned.

 

 

25 

 

 

Opinion of Highline Research Advisors to Ossen’s Board of Directors

 

On July 19, 2017, the Company’s financial advisor, Highline Research Advisors (“Highline”), rendered its oral opinion to the special committee of Ossen’s board of directors to the effect that, as of July 19, 2017, and subject to and based on the assumptions, factors, limitations, qualifications and other matters considered in connection with the preparation of such opinion, (i) the Exchange Shares to be issued by Ossen for 100% of the equity interests of AADRF in the Acquisition pursuant to the Exchange Agreement was fair, from a financial point of view, to Ossen, and (ii) the sale of Ossen’s prestressed steel manufacturing business pursuant to the Purchase Agreement in exchange for the cancellation of Dr. Tang’s 59.9% interest in Ossen was fair, from a financial point of view, to Ossen.

 

The summary of the opinion in this proxy statement is qualified in its entirety by reference to the full text of the written opinion, which is attached as Annex E and sets forth, among other things, the scope of review undertaken and the assumptions made, factors considered and limitations and qualifications on the review undertaken by Highline. The opinion was addressed to the special committee of Ossen’s board of directors for the use and benefit of the members of the board (in their capacities as such) in connection with the committee’s and the board’s evaluation of the Acquisition. Highline expressed no view as to, and its opinion did not address, the relative merits of the Acquisition as compared to an alternative transaction or business strategy that might exist for Ossen. Neither Highline’s opinion nor the summary of the opinion and related analyses set forth in this proxy statement is intended to constitute advice or a recommendation to any holder of Ossen ordinary shares as to how such holder should vote or act with respect to any matter relating to the Acquisition or otherwise.

 

Board of Directors of Ossen Following the Acquisition

 

Immediately following the Acquisition and Spin-Off, we anticipate that the board of directors of the Company will be as follows:

 

Name   Current Principal Role at Ossen or San Meditech
Howard Gang Hao   Founder of San Meditech
Hongguang Liu   Director
Song Guo   Director
Yipeng Wang   Director
Xiaoyang Li   Director

 

See the section entitled “Management After the Acquisition.”

 

Ownership Interest of Ossen Shareholders after the Acquisition

 

It is anticipated that, following completion of the Acquisition and Spin-Off, Ossen’s existing shareholders (excluding Dr. Tang) will retain an ownership interest of approximately 8.9% of the Company (or approximately 12.25% in the event that the Earn-Out Shares are forfeited), current members of Ossen management or affiliates of Ossen (excluding Dr. Tang) will own approximately 1.35% (or approximately 1.85% in the event that the Earn-Out Shares are forfeited), and Sellers will own approximately 91.1%, of the outstanding equity of the Company (or approximately 89.75% in the event that the Earn-Out Shares are forfeited). These percentages are based on the assumption that Ossen will not issue any additional ordinary shares.

 

26 

 

 

Appraisal Rights

 

If you elect to dissent from the Spin-Off, you will have the right to seek appraisal and payment of the fair value of their shares if the Spin-Off is completed, but only if you deliver to Ossen, before the vote is taken at the special meeting, a written objection to the Spin-Off, including a statement that such shareholder proposes to demand payment for his or her shares if the Spin-Off is approved, and subsequently comply with all procedures and requirements of Section 179 of the British Virgin Islands Business Companies Act, 2004, as amended with respect to the exercise of appraisal rights, a copy of which is attached as Annex F to this proxy statement. The fair value of your shares as determined under that statute could be more than, the same as, or less than the value if your shares, and the corresponding stock price of the ADSs relating to such shares on Nasdaq (assuming you arrange with the Depositary to obtain ordinary shares in registered form in exchange for your ADSs), if you do not exercise appraisal rights with respect to your shares.

 

Appraisal rights are available only to registered holders of shares. If you hold any shares in “street name,” you are considered the beneficial owner but not the “registered holder” of such shares. If you hold ADSs, you are not considered the “registered holder” of such shares. Therefore, if you hold any shares in “street name,” or if you hold ADSs, and wish to exercise the appraisal rights, you must arrange for such shares to be registered in your name and certify that you have not given and will not give, directly or indirectly voting instructions prior to the special meeting of shareholders on September 5, 2017. Thereafter, such registered holders must comply with the procedures and requirements for exercising appraisal rights with respect to the shares under Section 179 of the BVI Business Companies Act.

 

We encourage you to read the section of this proxy statement entitled “Appraisal Rights” as well as Annex F to this proxy statement carefully and to consult your BVI legal counsel if you desire to exercise your appraisal rights. If you hold ADSs, we encourage you to contact the Depositary.

 

Reasons for the Acquisition and the Spin-Off

 

Based upon its evaluation, Ossen’s board of directors, after carefully considering all relevant factors, including the unanimous determination and recommendation of the special committee of the board of directors and review of the fairness opinion of Highline Research Advisors, unanimously approved the Acquisition and the Spin-Off and determined that such transactions are fair to Ossen and its shareholders. The terms of the Acquisition and the Spin-Off were the result of thorough negotiations between the representatives of Ossen, including the special committee of Ossen’s board of directors, Dr. Tang, and the Sellers.

 

Ossen’s board of directors, including the special committee, considered a wide variety of factors in connection with its evaluation of the Acquisition and the Spin-Off. In light of the complexity of those factors, its board of directors, as a whole, did not consider it practicable to, nor did it attempt to, quantify or otherwise assign relative weights to the specific factors it considered in reaching its decision. Individual members of Ossen’s board of directors may have given different weight to different factors.

 

In considering the Acquisition and the Spin-Off, Ossen’s board of directors gave consideration to the following positive factors (although not weighted or in any order of significance):

 

·Ossen’s current business has been undervalued by the U.S. public markets, and, based on Ossen’s historical performance, Ossen’s board of directors does not expect Ossen’s share price to improve, even if Ossen’s underlying business were to perform well;

 

·Ossen’s current business is facing significant challenges in China, including increasing price of raw materials and strict environmental requirements being enforced by the Chinese government. Ossen reported material decreases in revenue and net income during the first quarter of 2017, and Ossen’s management team continues to be cautious about future prospects;

 

·the transactions will provide Ossen’s shareholders the opportunity to retain ownership in San Meditech after the Acquisition and Spin-Off are completed;

 

·with San Meditech’s expected growth in the Chinese market with its new series of continuous glucose monitoring products in the pipeline, Ossen’s board of directors believes that Ossen shareholders will benefit from the future prospects and potential value of San Meditech in the U.S. public markets;

 

27 

 

 

·the structure of the Acquisition is intended to protect existing Ossen shareholders by requiring that an aggregate of 28,095,454 Escrow Shares will be deposited in escrow at the closing, including (i) 24,372,900 Earn-Out Shares subject to forfeiture back to us (along with dividends and other earnings otherwise payable with respect to such Earn-Out Shares) in the event that the post-combination company fails to meet certain minimum financial performance targets after the closing and (ii) an additional 3,722,554 Indemnification Shares subject to forfeiture back to us (along with dividends and other earnings otherwise payable with respect to such Indemnification Shares) in the event that the Ossen Representative successfully brings an indemnification claim under the Exchange Agreement on behalf of our shareholders; and

 

  · the structure of the Acquisition and the Spin-Off is intended to protect existing Ossen shareholders by requiring that the holders of a majority of shares held by the disinterested shareholders approve the Acquisition and the Spin-Off;

 

  · Dr. Tang has agreed to (i) abstain from voting for the Acquisition or the Spin-Off; (ii) indemnify Ossen in the event that certain representations and warranties in the transaction documents were breached; and (iii) indemnify Ossen with respect to any expenses relating to any appraisal rights; and

 

·based on the fairness opinion of HRA and the unanimous recommendation of the special committee of Ossen’s board of directors, the board believes that the transactions are fair to Ossen’s shareholders.

 

In addition, Ossen’s board of directors also gave consideration to the following negative factors (although not weighted or in any order of significance):

 

  · the sale of all of Ossen’s existing business to Dr. Tang in exchange for only the cancellation of Dr. Tang’s shares, and no cash consideration;

 

·the costs associated with the Acquisition and the Spin-Off, including the diversion of management’s attention;

 

  ·

the issuance of up to 81,243,000 ordinary shares to the Sellers, which will represent up to 91.1% of Ossen’s issued and outstanding ordinary shares; and

 

  · uncertainty relating to the future results of San Meditech, as described in the “Risk Factors” section below.

  

Quorum and Required Vote for Proposals for the Special Meeting

 

A quorum of Ossen’s shareholders is necessary to hold a valid meeting. A quorum will be present at the special meeting if a majority of the ordinary shares outstanding and entitled to vote at the special meeting is represented in person or by proxy. Dr. Tang, who holds 11,850,000 shares, is expected to attend the meeting in person or by proxy, in which case a quorum will be met. However, Dr. Tang has agreed to abstain from voting on the Acquisition Proposal, the Spin-Off Proposal, the Charter Amendment Proposal and the Incentive Plan Proposal.

 

Approval of the Acquisition Proposal, the Spin-Off Proposal and the Incentive Plan Proposal require the affirmative vote of a majority of the shares held by disinterested shareholders as of the record date. The Charter Amendment Proposal, including the re-designation of Class A ordinary shares and the issuance of Class A ordinary shares and Class B ordinary shares, requires the affirmative vote of 75% of the votes cast by disinterested shareholders present in person or represented by proxy at the special meeting. The boards of directors of Ossen and AADRF, and the shareholders of AADRF, have already unanimously approved the Acquisition.

 

Accordingly, an Ossen shareholder’s failure to vote by proxy or to vote in person at the special meeting or the failure of an Ossen shareholder who holds his or her shares or ADSs in “street name” through a broker or other nominee to give voting instructions to such broker or other nominee (a “broker non-vote”) will result in that shareholder’s shares not being counted towards the number of Ossen ordinary shares required to validly establish a quorum. If a valid quorum is otherwise established, such failure will have no effect on the outcome of the Charter Amendment Proposal and will have the effect of a vote against all of the other proposals. Abstentions will also have no effect on the outcome of the Charter Amendment Proposal and will have the effect of a vote against all other proposals.

 

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Each of the Acquisition Proposal and the Spin-Off Proposal is conditioned upon each other. In addition, we would not implement the Incentive Plan Proposal or the Charter Amendment Proposal in the event that the Acquisition Proposal and the Spin-Off Proposal were not approved.

 

Recommendation to Ossen Shareholders

 

Our board of directors believes that each of the Acquisition Proposal, the Spin-Off Proposal, the Charter Amendment Proposal and the Incentive Plan Proposal to be presented at the special meeting is in the best interests of the Company and our shareholders and unanimously recommends that our shareholders vote “FOR” each of these proposals.

 

When you consider the recommendation of our board of directors in favor of approval of these proposals, you should keep in mind that certain of our directors and officers have interests in the Acquisition that are different from or in addition to (and which may conflict with) your interests as a shareholder. These interests include, among other things:

 

  · Pursuant to the Purchase Agreement, Dr. Liang Tang, the Chairman of Ossen and sole shareholder of EK, will receive 100% of the equity interest of OIM, which, through its subsidiaries, operates the current business of Ossen. Dr. Tang owns approximately 59.9% of the issued and outstanding shares of Ossen, which shares will be cancelled as consideration for EK’s purchase of OIM;

 

  · Wei Hua, Ossen’s Chief Executive Officer and Chief Financial Officer, owns 600,000 ordinary shares, and an affiliate of Ossen own 600,000 ordinary shares, and each is expected to continue to hold such shares after the consummation of the Acquisition and Spin-Off; and
     
  · the continued indemnification of current directors and officers of Ossen and AADRF.

 

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SELECTED HISTORICAL FINANCIAL INFORMATION OF OSSEN

 

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 “Ossen’s Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this proxy statement. The consolidated statements of income data for the three months ended March 31, 2016 and 2017 and the balance sheet data as of March 31, 2016 and 2017 are derived from unaudited consolidated financial statements included elsewhere in this proxy statement. The consolidated statements of income data for the fiscal years ended December 31, 2014, 2015 and 2016 and the balance sheet data as of December 31, 2015 and 2016 are derived from audited consolidated financial statements included elsewhere in this proxy statement. The consolidated statements of income data for the fiscal years ended December 31, 2012 and 2013 and the balance sheet data as of December 31, 2012, 2013 and 2014 are not included in this proxy statement. Our historical results for any prior period are not necessarily indicative of results to be expected in any future period.

 

Selected Consolidated Statement of
Income Data*
  For the Years Ended December 31, 
   2016   2015   2014   2013   2012 
   (Audited)   (Audited)   (Audited)   (Audited)   (Audited) 
Revenues  $117,029,154   $117,908,416   $123,571,455   $113,891,989   $122,397,886 
Cost of goods sold   100,932,528    102,197,994    110,250,876    102,353,957    111,611,457 
Gross profit   16,096,626    15,710,422    13,320,579    11,538,032    10,786,429 
Selling and distribution expenses   734,159    986,378    772,383    625,500    917,074 
General and administrative expenses   6,376,383    4,478,413    6,340,584    3,485,118    3,950,934 
Total Operating Expenses   7,110,542    5,464,791    7,112,967    4,110,618    4,868,008 
Income from operations   8,986,084    10,245,631    6,207,612    7,427,414    5,918,421 
                          
Financial expenses, net   (2,827,138)   (2,823,952)   (2,401,268)   (2,696,966)   (3,556,045)
Other income, net   90,584    371,894    907,941    558,426    911,430 
Income before income taxes   6,249,530    7,793,573    4,714,285    5,288,874    3,273,806 
Income taxes   (926,048)   (1,180,167)   (578,727)   (1,219,030)   (575,428)
Net income   5,323,482    6,613,406    4,135,558    4,069,844    2,716,378 
Less: Net Income attributable to non-controlling interest   499,509    716,602    276,682    426,440    335,099 
                          
Net income attributable to controlling interest   4,823,973    5,896,804    3,858,876    3,643,404    2,381,279 
Other comprehensive income                         
Foreign currency translation gain (loss)   (6,975,100)   (5,829,470)   779,135    1,647,348    703,573 
                          
Total other comprehensive income (loss)   (6,975,100)   (5,829,470)   779,135    1,647,348    703,573 
Comprehensive Income (loss)   (2,151,127)   67,334    4,638,011    5,290,752    3,084,852 
                          
Weighted average shares outstanding   19,804,164    19,862,537    19,901,959    19,901,959    19,942,333 
                          
Earnings per share**   0.24    0.30    0.19    0.18    0.12 

 

* The Selected Consolidated Statement of Income Data for 2012, 2013 and 2014 was audited by BDO China Da Hua CPA Co. Ltd. and the data for 2015 and 2016 was audited by BDO China Shu Lun Pan Certified Public Accountants LLP. 

 

** Calculation is based on net income attributable to controlling interest and the weighted average shares outstanding, excluding foreign currency translation gain (loss).

 

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Selected Balance Sheets Data*  December 31, 
   2016   2015   2014   2013   2012 
   (Audited)   (Audited)   (Audited)   (Audited)   (Audited) 
Cash and cash equivalents  $217,631   $812,277   $684,592   $1,139,450   $1,996,764 
Total current assets   132,425,505    144,772,273    159,358,503    169,273,347    165,023,097 
Total long-term assets   8,018,247    9,468,260    11,405,994    12,755,970    21,958,617 
Total assets   140,443,752    154,240,533    170,764,497    182,029,317    186,981,714 
                          
Total liabilities   37,997,958    50,106,311    67,355,476    83,534,989    94,204,578 
Total shareholders’ equity   102,445,794    104,134,222    103,409,021    98,494,328    92,777,136 
Total liabilities and shareholders’ equity   140,443,752    154,240,533    170,764,497    182,029,317    186,981,714 

 

* The Balance Sheets Data for 2012, 2013 and 2014 was audited by BDO China Da Hua CPA Co., Ltd. and the data for 2015 and 2016 was audited by BDO China Shu Lun Pan Certified Public Accountants LLP.

 

 

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SELECTED HISTORICAL FINANCIAL INFORMATION OF AADRF

 

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 “AADRF’s Management Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this proxy statement. The consolidated statements of income data for the three months ended March 31, 2016 and 2017 and the balance sheet data as of March 31, 2017 are derived from unaudited consolidated financial statements included elsewhere in this proxy statement. The consolidated statements of income data for the fiscal years ended December 31, 2015 and 2016 and the balance sheet data as of December 31, 2015 and 2016 are derived from audited consolidated financial statements included elsewhere in this proxy statement. The consolidated statements of income data for the fiscal years ended December 31, 2012, 2013 and 2014 and the balance sheet data as of December 31, 2012, 2013 and 2014 are not included in this proxy statement. Our historical results for any prior period are not necessarily indicative of results to be expected in any future period.

 

  

For the Years ended

December 31,

  

For the Three Months ended

March 31,

 
   2016   2015   2017   2016 
                 
Product  $1,757,849   $1,417,504   $596   $304,472 
Service   937,661    -    1,301    - 
Service – related party   1,407,201    -    51,359    - 
Total revenues   4,102,711    1,417,504    53,256    304,472 
Cost of product   527,278    854,550    11,974    57,069 
Cost of service   247,870    -    2,123    - 
Cost of service – related party   389,933    -    83,799    - 
Total cost of revenues   1,165,081    854,550    97,896    57,069 
Gross profit (loss)   2,937,630    562,954    (44,640)   247,403 
Selling, general and administrative expenses   6,591,907    2,632,625    1,151,068    1,289,158 
Research and development   1,057,640    2,966,075    167,465    703,873 
Total operating expenses   7,649,547    5,598,700    1,318,533    1,993,031 
Loss from operations   (4,711,917)   (5,035,746)   (1,363,173)   (1,745,628)
Other expense, net   (743,806)   (514,966)   (482,711)   (295,728)
Loss before noncontrolling interest /Net loss   (5,455,723)   (5,550,712)   (1,845,884)   (2,041,356)
Less:  Net loss attributable to noncontrolling interest   (141,562)   (513,850)   (87,929)   (133,420)
Net loss attributable to America-Asia Diabetes Research Foundation  $(5,314,161)  $(5,036,862)  $(1,757,955)  $(1,907,936)

 

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Selected Balance Sheets Data 

December 31,

2016

  

December 31,

2015

   March 31,
2017
 
             
Cash and cash equivalents  $325,406   $2,792,374   $2,088,481 
Total current assets   1,547,112    3,874,572    3,017,348 
Total long-term assets   8,948,972    771,952    8,981,881 
Total assets   10,496,084    4,646,524    11,999,229 
                
Total liabilities   33,782,072    28,481,474    4,707,303 
Total shareholders’ equity (deficiency)   (23,285,988)   (23,834,950)   7,291,926 
Total liabilities and shareholders’ equity (deficiency)   10,496,084    4,646,524    11,999,229 

 

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SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

 

The following selected unaudited pro forma condensed combined financial information has been derived from, and should be read in conjunction with, the unaudited pro forma condensed combined financial information included elsewhere in this proxy statement.

 

The historical financial information has been adjusted to give effect to pro forma events that are related and/or directly attributable to the Acquisition and Spin-Off, are factually supportable and are expected to have a continuing impact on the combined results. The adjustments presented on the unaudited pro forma condensed combined financial statements have been identified and presented to provide relevant information necessary for an accurate understanding of the company upon consummation of the Acquisition and Spin-Off.

 

The unaudited pro forma condensed combined financial information is for illustrative purposes only. The financial results may have been different had the companies always been combined. You should not rely on the unaudited pro forma condensed combined financial information as being indicative of the historical results that would have been achieved had the companies always been combined or the future results that the combined company will experience. Ossen and AADRF have not had any historical relationship prior to the Acquisition and Spin-Off. Accordingly, no pro forma adjustments were required to eliminate activities between the companies.

 

           Pro Forma 
Balance Sheet Data  Ossen   AADRF   Balance Sheet 
   (Unaudited)   (Unaudited)   (Unaudited) 
As of March 31, 2017:               
                
Cash and cash equivalents  $742,415   $2,088,481   $2,088,481 
Total current assets   134,692,642    3,017,348    3,017,348 
Total long-term assets   7,880,068    8,981,881    8,981,881 
Total Assets   142,572,710    11,999,229    11,999,229 
Total Liabilities   39,323,157    4,707,303    4,707,303 
                
Common stock   200,000    29,976    893,930 
Stock subscription receivable   -    (750,000)   (750,000)
Additional paid-in-capital   33,971,455    39,920,427    39,248,626 
Statutory reserve   6,147,452    -    - 
Retained earnings (accumulated deficit)   54,615,873    (33,110,359)   (33,110,359)
Treasury stock   (192,153)   -    (192,153)
Accumulated other comprehensive income (loss)   (3,677,790)   1,828,958    1,828,958 
Noncontrolling interests   12,184,716    (627,076)   (627,076)
Total shareholders' equity  $103,249,553   $7,291,926   $7,291,926 

 

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           Pro Forma 
   Ossen   AADRF   Balance Sheet 
   (Audited)      (Unaudited) 
As of December 31, 2016:               
                
Cash and cash equivalents  $217,631   $325,406   $325,406 
Total current assets   132,425,505    1,547,112    1,547,112 
Total long-term assets   8,018,247    8,948,972    8,948,972 
Total Assets   140,443,752    10,496,084    10,496,084 
Total Liabilities   37,997,958    33,782,072    33,782,072 
                
Common stock   200,000    14,078    893,930 
Additional paid-in-capital   33,971,455    4,364,510    3,676,811 
Statutory reserve   6,123,022    -    - 
Retained earnings (accumulated deficit)   54,590,589    (31,352,404)   (31,352,404)
Treasury stock   (192,153)   -    (192,153)
Accumulated other comprehensive income (loss)   (4,378,873)   4,223,834    4,223,834 
Noncontrolling interests   12,131,754    (536,006)   (536,006)
Total shareholders' equity (Deficiency)  $102,445,794   $(23,285,988)  $(23,285,988)

 

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Income Statement Data:          Pro Forma 
           Statement of 
   Ossen   AADRF   Operations 
   (Unaudited)   (Unaudited)   (Unaudited) 
For the Three Months ended March 31, 2017               
                
Revenues  $25,582,538   $53,256   $53,256 
Cost of revenues   23,809,907    97,896    97,896 
Gross profit (loss)   1,772,631    (44,640)   (44,640)
Selling, general and administrative expenses   1,271,446    1,151,068    1,151,068 
Research and development   -    167,465    167,465 
Income (loss) from operations   501,185    (1,363,173)   (1,363,173)
Other expense, net   (399,259)   (482,711)   (482,711)
Provision for income taxes   750    -    - 
Net income (loss)  $102,676   $(1,845,884)  $(1,845,884)

 

           Pro Forma 
           Statement of 
   Ossen   AADRF   Operations 
   (Audited)      (Unaudited) 
For the Year Ended December 31, 2016               
                
Revenues  $117,029,154   $4,102,711   $4,102,711 
Cost of revenues   100,932,528    1,165,081    1,165,081 
Gross profit   16,096,626    2,937,630    2,937,630 
Selling, general and administrative expenses   7,110,542    6,591,907    6,591,907 
Research and development   -    1,057,640    1,057,640 
Income (loss) from operations   8,986,084    (4,711,917)   (4,711,917)
Other expense, net   (2,736,554)   (743,806)   (743,806)
Provision for income taxes   (926,048)   -    - 
Net income (loss)  $5,323,482   $(5,455,723)  $(5,455,723)

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

We make forward-looking statements in this proxy statement. These forward-looking statements relate to expectations for future financial performance, business strategies or expectations for our business, and the timing and ability for us to complete the Acquisition and the Spin-Off. Specifically, forward-looking statements may include statements relating to:

 

the benefits of the Acquisition and the Spin-Off;

 

the future financial performance of the Company following the Acquisition and the Spin Off;

 

expansion plans and opportunities for San Meditech’s business; and

 

other statements preceded by, followed by or that include the words “estimate,” “plan,” “project,” “forecast,” “intend,” “expect,” “anticipate,” “believe,” “seek,” “target” or similar expressions.

 

These forward-looking statements are based on information available as of the date of this proxy statement, and current expectations, forecasts and assumptions, and involve a number of judgments, risks and uncertainties. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date, and we do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

 

You should not place undue reliance on these forward-looking statements in deciding how to grant your proxy or instruct how your vote should be cast or vote your shares on the proposals set forth in this proxy statement. As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different from those expressed or implied by these forward-looking statements. Some factors that could cause actual results to differ include:

 

the occurrence of any event, change or other circumstances that could give rise to the termination of the Exchange Agreement or the Purchase Agreement;

 

the outcome of any legal proceedings that may be instituted against San Meditech or Ossen following announcement of the Acquisition or the Spin-Off and the transactions contemplated thereby;

 

the inability to complete the transactions contemplated by the Acquisition due to the failure to obtain approval of the shareholders of Ossen, or other conditions to closing in the Exchange Agreement or the Purchase Agreement;

 

the inability to maintain the listing of the Company’s ADSs on the Nasdaq Capital Market in connection with the Acquisition and the Spin-Off;

 

the risk that the Acquisition or the Spin-Off disrupts current plans and operations as a result of the announcement and consummation of the transactions described herein;

 

the ability to recognize the anticipated benefits of the Acquisition and the Spin-Off, which may be affected by, among other things, competition and the ability of the combined business to grow and manage growth profitably;

 

costs related to the Acquisition and the Spin-Off;

 

changes in applicable laws or regulations;

 

the possibility that San Meditech or Ossen may be adversely affected by other economic, business, and/or competitive factors; and

 

other risks and uncertainties indicated in this proxy statement, including those under “Risk Factors.”

 

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RISK FACTORS

 

The following risk factors apply to the business and operations of AADRF, Ossen, the Acquisition and the Spin-Off and the business and operations of the company following the completion of the Acquisition and the Spin-Off. These risk factors are not exhaustive and investors are encouraged to perform their own investigation with respect to the business, financial condition and prospects of AADRF You should carefully consider the following risk factors in addition to the other information included in this proxy statement, including matters addressed in the section entitled “Cautionary Statement Regarding Forward-Looking Statements.” We may face additional risks and uncertainties that are not presently known to us, or that we currently deem immaterial, which may also impair our business. The following discussion should be read in conjunction with the financial statements and notes to the financial statements included herein.

 

Risks Relating to the Acquisition and Spin-Off

 

Subsequent to the consummation of the Acquisition and the Spin-Off, we may be required to take writedowns or write-offs, restructuring and impairment or other charges that could have a significant negative effect on our financial condition, results of operations and share price, which could cause you to lose some or all of your investment.

 

Although we have conducted due diligence on AADRF, we cannot assure you that this diligence revealed all material issues that may be present in AADRF’s business, that it would be possible to uncover all material issues through a customary amount of due diligence, or that factors outside of our and AADRF’s control will not later arise. As a result, we may be forced to later write down or write-off assets, restructure its operations, or incur impairment or other charges that could result in losses. Even if our due diligence successfully identifies certain risks, unexpected risks may arise and previously known risks may materialize in a manner not consistent with our preliminary risk analysis. Even though these charges may be non-cash items and not have an immediate impact on our liquidity, the fact that we report charges of this nature could contribute to negative market perceptions about the Company or its securities. In addition, charges of this nature may cause us to be unable to obtain future financing on favorable terms or at all.

 

The unaudited pro forma financial information included in this document may not be indicative of what our actual financial position or results of operations would have been.

 

The unaudited pro forma financial information in this proxy statement is presented for illustrative purposes only and is not necessarily indicative of what our actual financial position or results of operations would have been had the Acquisition and the Spin-Off been completed on the dates indicated. See the section entitled “Unaudited Pro Forma Condensed Combined Financial Information” for more information.

 

We will have limited protection in the event that any of the representations and warranties made by Sellers or AADRF in the Exchange Agreement ultimately proves to be inaccurate or incorrect.

 

Ossen and its shareholders will have limited protection if any representation or warranty made by Sellers or AADRF in the Exchange Agreement proves to be inaccurate or incorrect. Accordingly, to the extent such representations or warranties are incorrect, Ossen would have limited indemnification claims with respect thereto and its financial condition or results of operations could be adversely affected.

 

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We may waive one or more of the conditions to the Acquisition and the Spin-Off.

 

We may agree to waive, in whole or in part, some of the conditions to our obligations to complete the Acquisition and the Spin-Off, to the extent permitted by our charter and applicable laws. For example, it is a condition to our obligations to close the Acquisition and the Spin-Off that AADRF’s representations and warranties are true and correct in all respects as of the closing date, except for such inaccuracies that, individually or in the aggregate, would not result in a Material Adverse Effect (as defined in the Exchange Agreement). However, if our board of directors determines that it is in the shareholders’ best interest to waive any such breach, then the board may elect to waive that condition and close the Acquisition and the Spin-Off.

 

Our proposed dual-class voting structure will limit your ability to influence corporate matters and could discourage others from pursuing any change of control transactions that holders of our Class A ordinary shares and ADSs may view as beneficial.

 

We have proposed to adopt an amended and restated memorandum and articles of association, which will become effective immediately prior to the consummation of the Acquisition and will replace our Current Charter in its entirety. Our Amended Charter provides that, immediately prior to the completion of the Acquisition, we will have two classes of shares, Class A ordinary shares and Class B ordinary shares. Our maximum number of shares authorized to be issued upon completion of the Acquisition will be (1) 125,000,000 Class A ordinary shares of a par value of $0.01 each, and (2) 25,000,000 Class B ordinary shares of a par value of $0.01 each.

 

All ordinary shares (including shares underlying ADSs), except for the ordinary shares to be forfeited by Dr. Tang pursuant to the Purchase Agreement, that are outstanding immediately prior to the completion of the Acquisition and Spin-Off will be automatically redesignated or converted into Class A ordinary shares. Class A ordinary shares will be entitled to one vote per share, while holders of Class B ordinary shares will be entitled to ten votes per share. 18,612,769 of the Exchange Shares to be issued to Sellers in connection with the Acquisition will be designated as Class B ordinary shares, representing an aggregate of 186,127,690 votes, and the remaining 62,630,231 Exchange Shares to be issued to Sellers in connection with the Acquisition will be designated as Class A ordinary shares, representing an aggregate of 62,630,231 votes. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof, for so long as initial holders of the Class B ordinary shares, in the aggregate, hold at least 5% of our issued and outstanding shares, on a fully diluted basis. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any transfer of Class B ordinary shares by a holder thereof to any person or entity which is not an affiliate of such holder, such Class B ordinary shares shall be automatically and immediately converted into the equal number of Class A ordinary shares.

 

Due to the disparate voting powers attached to these two classes of ordinary shares, Sellers will own approximately 91.1% (or approximately 89.75% in the event that the Earn-Out Shares are forfeited) of our total issued and outstanding ordinary shares and 96.9% (or approximately 95.6% in the event that the Earn-Out Shares are forfeited) of the voting power of our outstanding shares immediately after the Acquisition and Spin-Off. Therefore, Sellers will have decisive influence over matters requiring shareholders’ approval, including election of directors and significant corporate transactions, such as a merger or sale of our company or our assets. This concentrated control will limit your ability to influence corporate matters and could discourage others from pursuing any potential merger, takeover or other change of control transactions that holders of Class A ordinary shares and ADSs may view as beneficial.

 

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Our ability to successfully effect the Acquisition and the Spin-Off and successfully operate the business thereafter will be largely dependent upon the efforts of certain key personnel, including the key personnel of AADRF, all of whom we expect to stay with AADRF following the Acquisition and the Spin-Off. The loss of such key personnel could negatively impact the operations and profitability of the post-combination business.

 

Our ability to successfully effect the Acquisition and the Spin-Off and successfully operate the business is dependent upon the efforts of certain key personnel, including the key personnel of AADRF Although we expect all of such key personnel to remain with AADRF following the Acquisition and the Spin-Off, it is possible that we will lose some key personnel, the loss of which could negatively impact the operations and profitability of our post-combination business. In addition, we do not have key-man insurance on the life of, any of our directors or executive officers. The unexpected loss of the services of one or more of our directors or executive officers could adversely impact our ability to complete the Acquisition and the Spin-Off. Furthermore, our assessment of these individuals may not prove to be correct. These individuals may be unfamiliar with the requirements of operating a company regulated by the SEC, which could cause us to have to expend time and resources helping them become familiar with such requirements.

 

A market for our ADSs may not continue, which would adversely affect the liquidity and price of our ADSs.

 

Following the Acquisition and the Spin-Off, as well as the anticipated concurrent change in ratio of our ADSs, the price of our ADSs may fluctuate significantly due to the market’s reaction to the Acquisition and the Spin-Off and general market and economic conditions. An active trading market for our ADSs following the Acquisition and the Spin-Off may never develop or, if developed, it may not be sustained. In addition, the price of our ADSs after the Acquisition and the Spin-Off can vary due to general economic conditions and forecasts, our general business condition and the release of our financial reports. Additionally, if our ADSs are not listed on, or become delisted from, the NASDAQ for any reason, and are quoted on the OTC Bulletin Board, an inter-dealer automated quotation system for equity securities that is not a national securities exchange, the liquidity and price of our ADSs may be more limited than if we were quoted or listed on the NASDAQ or another national securities exchange. You may be unable to sell your ADSs unless a market can be established or sustained.

 

Although we expect that our ADSs will remain listed on the NASDAQ after the Acquisition and the Spin-Off, there can be no assurance that our ADSs will continue to be so listed or, if listed, that we will be able to comply with the continued listing standards of the NASDAQ.

 

We intend to apply for the continued listing of our ADSs on the NASDAQ subsequent to the closing of the Acquisition and the Spin-Off. To continue listing our ADSs on the NASDAQ subsequent to the closing of the Acquisition and the Spin-Off, we will be required to demonstrate compliance with NASDAQ’s initial listing standards, which are more rigorous than NASDAQ’s continued listing requirements, including that our ADSs trade at a minimum of $4.00 per ADS. We cannot assure you that we will be able to meet those initial listing standards at that time.

 

40 

 

 

If, after the Acquisition and the Spin-Off, the NASDAQ delists our ADSs from trading on its exchange due to our failure to meet the NASDAQ’s initial and/or continued listing standards, we and our shareholders could face significant material adverse consequences including:

 

a limited availability of market quotations for our securities;

 

a determination that our ordinary shares are a “penny stock,” which will require brokers trading in our ordinary shares to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for our ordinary shares;

 

a limited amount of analyst coverage; and

 

a decreased ability to issue additional securities or obtain additional financing in the future.

 

If the Acquisition and the Spin-Off’s benefits do not meet the expectations of investors, shareholders or financial analysts, the market price of our securities may decline.

 

If the benefits of the Acquisition and the Spin-Off do not meet the expectations of investors or securities analysts, the market price of the Company’s ADSs prior to the closing of the Acquisition and the Spin-Off may decline. The market values of our securities at the time of the Acquisition and the Spin-Off may vary significantly from their prices on the date the Exchange Agreement was executed, the date of this proxy statement, or the date on which our shareholders vote on the Acquisition and the Spin-Off.

 

In addition, following the Acquisition and the Spin-Off, fluctuations in the price of our ADSs could contribute to the loss of all or part of your investment. Prior to the Acquisition and the Spin-Off, there has not been a public market for AADRF’s securities. Accordingly, the valuation ascribed to AADRF and our ADSs in the Acquisition and the Spin-Off may not be indicative of the price that will prevail in the trading market following the Acquisition and the Spin-Off. If an active market for our ADSs develops and continues, the trading price of our ADSs following the Acquisition and the Spin-Off could be volatile and subject to wide fluctuations in response to various factors, some of which are beyond our control. Any of the factors listed below could have a material adverse effect on your investment in our ADSs and our ADSs may trade at prices significantly below the price you paid for them. In such circumstances, the trading price of our ADSs may not recover and may experience a further decline.

 

Broad market and industry factors may materially harm the market price of our securities irrespective of our operating performance. The stock market in general, and the NASDAQ in particular, have experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the particular companies affected. The trading prices and valuations of these stocks, and of our securities, may not be predictable. A loss of investor confidence in the market for retail stocks or the stocks of other companies which investors perceive to be similar to the Company could depress our stock price regardless of our business, prospects, financial conditions or results of operations. A decline in the market price of our securities also could adversely affect our ability to issue additional securities and our ability to obtain additional financing in the future.

 

41 

 

 

Following the Acquisition and the Spin-Off, the Company’s business and share prices may suffer as a result of its lack of public company operating experience of new management and if securities or industry analysts do not publish or cease publishing research or reports about the Company, its business, or its market, or if they change their recommendations regarding our ordinary shares adversely, the price and trading volume of our ordinary shares could decline.

 

Prior to the completion of the Acquisition and the Spin-Off, AADRF has been a privately-held company. The lack of incoming management’s public company operating experience may make it difficult to forecast and evaluate its future prospects. If the Company is unable to execute its business strategy, either as a result of its inability to manage effectively its business in a public company environment or for any other reason, the Company’s business, prospects, financial condition and operating results may be harmed.

 

The trading market for our ADSs will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market, or our competitors. Securities and industry analysts do not currently, and may never, publish research on the Company. If no securities or industry analysts commence coverage of the Company, our ADS prices and trading volume would likely be negatively impacted. If any of the analysts who may cover the Company change their recommendation regarding our ADSs adversely, or provide more favorable relative recommendations about our competitors, the price of our ADSs would likely decline. If any analyst who may cover the Company were to cease coverage of the Company or fail to regularly publish reports on it, we could lose visibility in the financial markets, which could cause our ADS prices or trading volume to decline.

 

Directors, officers and affiliates of Ossen have potential conflicts of interest in recommending that shareholders vote in favor of approval of the Acquisition and the Spin-Off and the other transactions described in this proxy statement.

 

When considering the Ossen board of directors’ recommendation that the Ossen shareholders vote in favor of the approval of the Acquisition Proposal and the Spin-Off Proposal, Ossen shareholders should be aware that directors, executive officers and affiliates of Ossen have interests in the Acquisition and Spin-Off that may be different from, or in addition to, the interests of Ossen shareholders. These interests include:

 

  · Pursuant to the Purchase Agreement, Dr. Liang Tang, the Chairman of Ossen and sole shareholder of EK, will receive 100% of the equity interest of OIM, which, through its subsidiaries, operates the current business of Ossen. Dr. Tang owns approximately 59.9% of the issued and outstanding shares of Ossen, which shares will be cancelled as consideration for EK’s purchase of OIM;
     
  · Wei Hua, Ossen’s Chief Executive Officer and Chief Financial Officer, owns 600,000 ordinary shares and an affiliate of Ossen own 600,000 ordinary shares, and each is expected to continue to hold such shares after the consummation of the Acquisition and Spin-Off; and

 

  · the continued indemnification of current directors and officers of Ossen and AADRF

 

These interests may influence the Ossen directors in making their recommendation that you vote in favor of the approval of the Acquisition Proposal, the Spin-Off Proposal and the other transactions described in this proxy statement.

 

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Risks Related to Our ADSs

 

The market price for our ADSs may be volatile.

 

The market price for our ADSs is highly volatile and subject to wide fluctuations in response to various factors, including the following:

 

  · actual or anticipated fluctuations in our quarterly operating results and revisions to our expected results;

 

  · changes in financial estimates by securities research analysts;

 

  · conditions in the markets for our products;

 

  · changes in the economic performance or market valuations of companies specializing in our industry or our customers or their industries;

 

  · changes in market valuations of U.S. listed companies headquartered in China, and in particular small capitalization companies;

 

  · announcements by us or our competitors of new products, acquisitions, strategic relationships, joint ventures or capital commitments;

 

  · addition or departure of our senior management and key personnel;

 

  · 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;
  · ratio changes for our ADR program that we may effect from time to time; 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 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.

 

43 

 

 

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 ADRs. You may not receive voting materials in time to instruct the depositary to vote, and it is possible that you, or persons who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise your right to vote.

 

Your right to participate in any rights offering may be limited, which may cause dilution to your holdings, and you may not receive cash dividends if it is impractical to make them available to you.

 

We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make rights available to you in the United States unless we register the rights, and the securities to which the rights relate, under the Securities Act, or unless an exemption from registration is available. Under the deposit agreement, the depositary will not make rights available to you unless both the rights and the underlying securities to be distributed to ADS holders are either registered under the Securities Act or exempt from registration. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective and we may not be able to establish a necessary exemption from registration under the Securities Act. Accordingly, you may be unable to participate in our rights offerings and may experience dilution in your holdings as a result.

 

The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on our ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your ADSs represent. However, the depositary may, at its discretion, decide that it is inequitable or impractical to make a distribution available to holders of ADSs. For example, the depositary may determine that it is not practicable to distribute certain property through the mail, or that the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may decide not to distribute such property to you.

 

You may be subject to limitations on transfer of your ADSs.

 

Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deems it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.

 

44 

 

 

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.

 

Risks Related to San Meditech’s Business and Operations

 

In the event the Acquisition and Spin-Off is completed, San Meditech will become a wholly-owned subsidiary of Ossen and comprise substantially all of Ossen’s consolidated assets and revenues following the Acquisition. Therefore, the following risk factors that apply to the current business and operations of San Meditech will also apply to the business and operations of Ossen following the Acquisition.

 

Approval of San Meditech’s product license is currently pending, and limited revenues are anticipated until such approval is obtained.

 

San Meditech’s revenues consist of CGM systems sales revenue and related technical support service revenue. Total revenue decreased by approximately $0.3 million, or approximately 82.5%, to approximately $53,000 for the three months ended March 31, 2017, compared to approximately $0.3 million for the three months ended March 31, 2016. The decrease was primarily attributable to the fact that San Meditech’s CGM products sales license expired during the three months ended March 31, 2017, the renewal process was delayed and to date such renewal license has not been received. San Meditech’s strategy is to wait until the approval of the CGM renewal sales licenses before they will continue to manufacture and sell their products. There is no guarantee that the company will receive approval to continue selling its CGM systems. Until such time as the approval is obtained, we anticipate that San Meditech’s revenues will be limited and San Meditech will generate substantial losses during such time.

 

We have incurred losses since inception and anticipate that we will incur continued losses in the future.

 

We have incurred net losses since our inception, including a net loss of $5.5 million for the twelve months ended December 31, 2016 and a net loss of approximately $1.8 million for the three months ended March 31, 2017. We have financed our operations primarily through private offerings of equity securities and debt, and the sales of our products. We have devoted substantial resources to:

 

research and development relating to our continuous glucose monitoring systems;
sales and marketing and manufacturing expenses associated with the commercialization of our products; and

 

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expansion of our workforce.

 

We expect our research and development expenses to increase in connection with our clinical trials and other development activities related to our products, including our next generation sensors, transmitters and sensor augmented insulin pumps, as well as other collaborations. This increase of expenses is also expected to occur due to increasing costs related to our marketing activities, including patient and distributor training and the expansion of our production capability. We also expect that our general and administrative expenses will continue to increase due to the additional operational and regulatory burdens applicable to public healthcare and medical device companies. As a result, we expect we may continue to incur operating losses in the future. These losses, among other things, have had and will continue to have an adverse effect on our shareholders' equity.

 

If we are unable to continue the development of an adequate sales and marketing organization, or if our direct sales organization is not successful, we may have difficulty achieving market awareness and selling our products.

 

To achieve commercial success for our current and future products, we must continue to develop and grow our sales and marketing organization and enter into partnerships or other arrangements to market and sell our products. Developing and managing a direct sales organization is a difficult, expensive and time consuming process. To be successful we must:

 

recruit and retain adequate numbers of effective and experienced sales personnel;
effectively train our sales personnel in the benefits and risks of our products;
establish and maintain successful sales, marketing and education programs that educate endocrinologists, physicians and diabetes educators so they can appropriately inform their patients about our products; and
manage geographically disbursed sales and marketing operations.

 

We currently employ a direct sales force to market our products in China. Our direct sales force calls directly on healthcare providers and distributors to initiate sales of our products. Our sales organization competes with the experienced, larger and well-funded marketing and sales operations of our competitors. Our biggest competitor in this space is Medtronic. We may not be able to successfully manage our dispersed sales force, or increase our product sales at acceptable rates.

 

We have also entered into distribution arrangements to leverage existing distributors already engaged in the diabetes marketplace. Our distributors in China comprise of physical examination companies, healthcare insurance companies and healthcare providers. The end-users of our products include type-2 diabetic patients and existing customers. Our distributors in Europe comprise of traditional glucose meter manufacturers. The end-users are their existing customers. Our distribution partners call directly on healthcare providers and patients to market and sell our products in China. Each distributor contract we enter into has minimum sales requirements. If the distributors are not able to meet these minimum sales requirements within the specified period of time, our practice is to terminate the distribution contract with that distributor and change distributors. Therefore, we are not dependent on any one distributor. Because of the competition for their services, we may be unable to partner with or retain additional qualified distributors. Further, we may not be able to enter into agreements with distributors on commercially reasonable terms, if at all. Our distributors might not have the resources to continue to support our recent rapid growth.

 

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We may require additional funding to continue the commercialization of our products, or the development and commercialization of our future generation continuous glucose monitoring systems.

 

We have invested substantial amounts of cash, almost 200 million yuan (approximately $30 million) in research and development since inception. We developed a glucose monitoring sensor and are still continuing to improve the user experience. Our CGM-303 product is one of the first CGM devices which provide downloadable sensor data to mobile devices. We are now developing a healthcare system that integrates multiple physical parameters and intelligent glucose management tools. These new systems require a number of clinical studies. We expect to continue spending substantial amounts on commercializing our products, including research and development and conducting clinical trials for our next generation continuous glucose monitoring systems, also for new product application, which is projected to be $15 million in 3 years. We believe CGM-303 may have as many as 2 million subscribed users in the coming years. If the market penetration rate grows fast in a short time, we will need funding to build up new production line, which is approximately $12 million. The production technology is sophisticated and requires a lot of resources to manufacture high-quality product, the expenses we incur in manufacturing depends on the scale of capacity. The production capacity expansion and research and development investments is projected to contribute $30 million per year. Although we expect that our cash generated by operations will increase in each of the next several years, we may need additional funds to continue the commercialization of our current products and to develop and commercialize our next generation sensors and systems. Additional financing may not be available on a timely basis on terms acceptable to us, or at all. Any additional financing may be dilutive to shareholders or may require us to grant a lender a security interest in our assets. The amount of funding we may need will depend on many factors, including:

 

the revenue generated by sales of our products and other future products;
the costs, timing and risks of delay of additional regulatory approvals;
the expenses we incur in manufacturing, developing, selling and marketing our products;
our ability to scale our manufacturing operations to meet demand for our current and any future products;
the costs to produce our continuous glucose monitoring systems or future products;
the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;
the rate of progress and cost of our clinical trials and other development activities;
the success of our research and development efforts;
the emergence of competing or complementary technologies;
the terms and timing of any collaborative, licensing and other arrangements that we may establish;
the cost of ongoing compliance with legal and regulatory requirements, and third party payors' policies;
the cost of obtaining and maintaining regulatory or payor clearance or approval for our current or future products including those integrated with other companies' products; and
the acquisition of businesses, products and technologies, although we currently have no commitments or agreements relating to any of these types of transactions.

 

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If adequate funds are not available, we may not be able to commercialize our products at the rate we desire and we may have to delay development or commercialization of our other products or license to third parties the rights to commercialize products or technologies that we would otherwise seek to commercialize. We also may have to reduce sales, marketing, customer support or other resources devoted to our products. Any of these factors could harm our financial condition.

 

If we are unable to establish adequate sales, marketing and distribution capabilities or enter into and maintain arrangements with third parties to sell, market and distribute our products, our business may be harmed.

 

We have entered into distribution arrangements to leverage established distributors already engaged in the healthcare industry in China. We cannot guarantee that these relationships will continue or that we will be able to maintain this volume of sales from these relationships in the future. A substantial decrease or loss of these sales could have a material adverse effect on our operating performance. To the extent that we enter into additional arrangements with third parties to perform sales, marketing, distribution and billing services, our product margins could be lower than if we directly marketed and sold our products. To the extent that we enter into co-promotion or other marketing and sales arrangements with other companies, any revenue received will depend on the skills and efforts of others, and we cannot predict whether these efforts will be successful. In addition, if we are unable to establish and maintain adequate sales, marketing and distribution capabilities, independently or with others, we may not be able to generate adequate product revenue and may not become profitable.

 

If insurance companies do not provide reimbursement for our product, our sales will be harmed.

 

In China, our product is usually reimbursed by insurance in most regions for in-hospital patients. The insurance is provided by the government’s healthcare program and the coverage is limited in in-hospital diabetic patients. Each city and province has the right to limit the reimbursed coverage including the type of patients covered. If any given city or province limits reimbursements for our products, we cannot guarantee that the relationships with our distributors (partners) will continue, or we will be able to maintain current sales volume from these relationships in the future. Additionally, we are not covered by any healthcare insurance outside China and we may not be reimbursed in Europe where most CGM sales come from insurance reimbursement. This may harm our sales opportunities and volume in Europe.

 

We may not be able to establish adequate manufacturing capability to scale up our product production.

 

We do not currently have the manufacturing capabilities to manufacture our product on a large scale and may not be able to secure relationships with third-party manufacturers for upscaling our product manufacturing capabilities. If we are unable to establish adequate manufacturing channels, we may not generate adequate product revenue and may not become profitable.

 

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We depend on third-party suppliers for raw materials and any need to replace suppliers may affect the yield rate on our product and delay product shipments.

 

We rely on third-party suppliers for raw materials used to manufacture our product. While we currently have several third-party supplier relationships for most of our materials, it is possible that in the future none of our suppliers are able to meet our needs or supply the materials we need in a timely manner. Changing suppliers may decrease the yield rate of our product, increase the cost of our product or delay our ability to ship our product to distributors on a timely basis.

 

Potential long-term complications from our current or future products or other continuous glucose monitoring systems under development may not be revealed by our clinical experience to date.

 

Based on our experience, complications from use of our products may include sensor errors, sensor failures, broken sensors, lodged sensors or skin irritation under the adhesive dressing of the sensor, inflammation or redness, swelling, minor infection, and minor bleeding at the sensor insertion site. Additionally, the extended use of our products may increase the likelihood of suffering from the above listed complications. If unanticipated long-term side-effects result from the use of our products or other glucose monitoring systems under development, we could be subject to liability and the adoption of our systems may become more limited. We cannot assure you that repeated, long-term use would not result in unanticipated adverse effects, potentially even after the sensor is removed.

 

We face the risk of product liability claims and may not be able to maintain or obtain insurance.

 

Our business exposes us to the risk of product liability claims that is inherent in the testing, manufacturing and marketing of medical devices, including those which may arise from the misuse (including system hacking or other unauthorized access by third parties to our systems) or malfunction of, or design flaws in, our products. We may be subject to product liability claims if our products cause, or merely appear to have caused, an injury. Claims may be made by customers, healthcare providers or others selling our products. The risk of claims may also increase if our products are subject to a product recall or seizure.

 

Although we have product liability and clinical trial liability insurance that we believe is appropriate, this insurance is subject to deductibles and coverage limitations. Our current product liability insurance may not continue to be available to us on acceptable terms, if at all, and, if available, the coverage may not be adequate to protect us against any future product liability claims. Further, if additional products are approved for marketing, we may seek additional insurance coverage. If we are unable to obtain insurance at an acceptable cost or on acceptable terms with adequate coverage or otherwise protect against potential product liability claims, we will be exposed to significant liabilities, which may harm our business. A product liability claim, recall or other claim with respect to uninsured liabilities or for amounts in excess of insured liabilities could result in significant costs and significant harm to our business.

 

We may be subject to claims against us even if the apparent injury is due to the actions of others or misuse of the device. Our customers, either on their own or following the advice of their physicians, may use our products in a manner not described in the products’ labeling and that differs from the manner in which it was used in clinical studies and approved by the CFDA. For example, our current systems are designed to be used by an individual continuously for up to five days, but the individual might be able to circumvent the safeguards designed into the systems and use the products for longer than five days. These liabilities could prevent or interfere with our product commercialization efforts. Defending a suit, regardless of merit, could be costly, could divert management attention and might result in adverse publicity, which could result in the withdrawal of, or inability to recruit, clinical trial volunteers or result in reduced acceptance of our products in the market.

 

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Failure to protect our information technology infrastructure against cyber-based attacks, network security breaches, service interruptions, or data corruption could significantly disrupt our operations and adversely affect our business and operating results.

 

We rely on information technology and telephone networks and systems, including the Internet, to process and transmit sensitive electronic information and to manage or support a variety of business processes and activities, including sales, billing, customer service, procurement and supply chain, manufacturing, and distribution. We use enterprise information technology systems to record, process, and summarize financial information and results of operations for internal reporting purposes and to comply with regulatory financial reporting, legal, and tax requirements. Our information technology systems, some of which are managed by third-parties, may be susceptible to damage, disruptions or shutdowns due to computer viruses, ransomware or other malware, attacks by computer hackers, failures during the process of upgrading or replacing software, databases or components thereof, power outages, hardware failures, telecommunication failures, user errors or catastrophic events. Although we have developed systems and processes that are designed to protect customer information and prevent data loss and other security breaches, including systems and processes designed to reduce the impact of a security breach at a third party vendor, such measures cannot provide absolute security. If our systems are breached or suffer severe damage, disruption or shutdown and we are unable to effectively resolve the issues in a timely manner, our business and operating results may significantly suffer and we may be subject to litigation, government enforcement actions and other actions for which we could face financial liability and other adverse consequences which may include:

 

loss of existing customers;
   
difficulty in attracting new customers;
   
problems in determining product cost estimates and establishing appropriate pricing;
   
difficulty in preventing, detecting, and controlling fraud;
   
disputes with customers, physicians, and other health care professionals;

 

increases in operating expenses, incurrence of expenses, including remediation costs;
   
loss of revenues;
   
product development delays;
   
disruption of key business operations; and
   
diversion of attention of management and key information technology resources.

 

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If our efforts to protect the security of information about our patients are unsuccessful, we could become subject to costly government enforcement actions and private litigation and our sales and reputation could suffer.

 

The nature of our business involves the receipt and storage of information about our patients. We have implemented programs to detect and alert us to data security incidents. However, because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and may be difficult to detect for long periods of time, we may be unable to anticipate these techniques or implement adequate preventive measures. We believe that companies have been increasingly subject to a wide variety of security incidents, cyber-attacks and other attempts to gain unauthorized access. These threats can come from a variety of sources, ranging in sophistication from an individual hacker to malfeasance by employees, consultants or other service providers to state-sponsored attacks. Cyber threats may be generic, or they may be custom-crafted against our information systems. Over the past several years, cyber-attacks have become more prevalent and much harder to detect and defend against. Our network and storage applications may be vulnerable to cyber-attack, malicious intrusion, malfeasance, loss of data privacy or other significant disruption and may be subject to unauthorized access by hackers, employees, consultants or other service providers. In addition, hardware, software or applications we develop or procure from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise information security. Unauthorized parties may also attempt to gain access to our systems or facilities through fraud, trickery or other forms of deceiving our employees, contractors and temporary staff. If there are significant breaches of our data security or we fail to detect and appropriately respond to significant data security breaches, we could be exposed to government enforcement actions and private litigation. In addition, our patients could further lose confidence in our ability to protect their information, which could cause them to discontinue using our products or purchasing from us altogether.

 

Our products may not achieve significant market acceptance.

 

We expect that sales of our current products will account for substantially all of our product revenue for the foreseeable future. Our new products, the CGM-203 and CGM-303, are currently in the process of getting CFDA approval. We plan to launch the CGM-203 in the third quarter of 2017 in China. Both products received European CE mark in the first quarter of 2017. If and when we receive CFDA approval for and begin commercialization of our next generation continuous glucose monitoring systems and sensors, we expect most patients will migrate onto those systems. Notwithstanding our prior experience in selling our products, we might be unable to successfully expand the commercialization of our products on a wide scale for a number of reasons, including:

 

widespread market acceptance of our products by physicians and people with diabetes will largely depend on our ability to demonstrate their relative safety, efficacy, reliability, cost-effectiveness and ease of use;
   
  the limited size of our sales force;
   
we may not have sufficient financial or other resources to adequately expand the commercialization efforts for our products;
   
our CFDA submissions may be delayed, or approved with limited product labeling
   
we may not be able to manufacture our products in commercial quantities or at an acceptable cost;

 

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people with diabetes do not generally receive broad reimbursement from third-party payers for their purchase of our products since many payers require that a policy holder meet specific medical criteria to qualify for reimbursement, which may reduce widespread use of our products;
   
the uncertainties associated with establishing and qualifying new manufacturing facilities for expanded production and demand of our products;
   
our systems are not labeled as a replacement for the information that is obtained from single-point finger stick devices;
   
people with diabetes will need to incur the costs of our systems in addition to single-point finger stick devices;
   
the relative immaturity of the continuous glucose monitoring market internationally, and the general absence of international reimbursement of continuous glucose monitoring devices by third-party payors and government healthcare providers;
   
the introduction and market acceptance of competing products and technologies;
   
our inability to obtain sufficient quantities of supplies at appropriate quality levels from our key suppliers;
   
our inability to manufacture products that perform in accordance with expectations of consumers; and
   
rapid technological change may make our technology and our products obsolete.

 

Our products are more invasive than current self-monitored glucose testing systems, including single-point finger stick devices, and people with diabetes may be unwilling to insert a sensor in their body, especially if their current diabetes management involves no more than two finger sticks per day. Moreover, people with diabetes may not perceive the benefits of continuous glucose monitoring and may be unwilling to change their current treatment regimens. In addition, physicians tend to be slow to change their medical treatment practices because of perceived liability risks arising from the use of new products. Physicians may not recommend or prescribe our products until (i) there is more long-term clinical evidence to convince them to alter their existing treatment methods, (ii) there are additional recommendations from prominent physicians that our products are effective in monitoring glucose levels and (iii) reimbursement or insurance coverage is more widely available. We cannot predict when, if ever, physicians and people with diabetes may adopt more widespread use of continuous glucose monitoring systems, including our systems. If our systems do not achieve an adequate level of acceptance by people with diabetes, physicians and healthcare payors, we may not generate significant product revenue and we may not become profitable.

 

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Current uncertainty in global economic and political conditions makes it particularly difficult to predict product demand and other related matters and makes it more likely that our actual results could differ materially from expectations.

 

Our operations and performance depend on worldwide economic and political conditions. These conditions have been adversely impacted by continued global economic uncertainty, political instability and military hostilities in multiple geographies and monetary and financial uncertainties in China and other countries. These conditions have made and may continue to make it difficult for our customers and potential customers to afford our products, and could cause our customers to stop using our products or to use them less frequently. If that were to occur, our revenue may decrease and our performance may be negatively impacted. In addition, the pressure on consumers to absorb more of their own health care costs has resulted in some cases in higher deductibles and limits on durable medical equipment, which may cause seasonality in purchasing patterns. Furthermore, during economic uncertainty, our customers have had job losses and may continue to have issues gaining timely access to sufficient health insurance or credit, which could result in their unwillingness to purchase products or impair their ability to make timely payments to us. We cannot predict the reoccurrence of any economic slowdown or the strength or sustainability of the economic recovery, worldwide, in China, or in our industry. These and other economic factors could have a material adverse effect on our financial condition and operating results.

 

We depend on clinical investigators and clinical sites to enroll patients in our clinical trials and other third parties to manage the trials and to perform related data collection and analysis, and, as a result, we may face costs and delays that are outside of our control.

 

We rely on clinical investigators and clinical sites to enroll patients in our clinical trials and other third parties to manage the trial and to perform related data collection and analysis. However, we may not be able to control the amount and timing of resources that clinical sites may devote to our clinical trials. If these clinical investigators and clinical sites fail to enroll a sufficient number of patients in our clinical trials or fail to ensure compliance by patients with clinical protocols or fail to comply with regulatory requirements, we will be unable to complete these trials, which could prevent us from obtaining regulatory approvals for our products. Our agreements with clinical investigators and clinical sites for clinical testing place substantial responsibilities on these parties and, if these parties fail to perform as expected, our trials could be delayed or terminated. If these clinical investigators, clinical sites or other third parties do not carry out their contractual duties or obligations or fail to meet expected deadlines, or if the quality or accuracy of the clinical data they obtain is compromised due to their failure to adhere to our clinical protocols, regulatory requirements or for other reasons, our clinical trials may be extended, delayed or terminated, or the clinical data may be rejected by the CFDA, and we may be unable to obtain regulatory approval for, or successfully commercialize, our products.

 

Our success will depend on our ability to attract and retain our personnel.

 

We depend to a significant degree on our senior management, especially Gang Hao, San Meditech’s CEO. Our success will depend on our ability to retain our current management and to attract and retain qualified personnel in the future, including sales persons, scientists, clinicians, engineers and other highly skilled personnel. Competition for senior management personnel, as well as sales persons, scientists, clinicians and engineers, is intense and we may not be able to retain our personnel. The loss of the services of members of our senior management, scientists, clinicians or engineers could prevent the implementation and completion of our objectives, including the commercialization of our current products and the development and introduction of additional products. The loss of a member of our senior management or our professional staff would require the remaining executive officers to divert immediate and substantial attention to seeking a replacement. Each of our officers may terminate their employment at any time without notice and without cause or good reason. Additionally, volatility or a lack of positive performance in our stock price may adversely affect our ability to retain key employees.

 

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There is intense competition from other companies and research and academic institutions for qualified personnel in the areas of our activities. If we fail to identify, attract, retain and motivate these skilled personnel, we may be unable to continue our development and commercialization activities.

 

Compliance with regulations relating to public company corporate governance matters and reporting is time consuming and expensive.

 

Many laws and regulations, notably those adopted in connection with the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, new SEC regulations and The NASDAQ Stock Market listing rules, impose obligations on public companies, such as ours, which have increased the scope, complexity and cost of corporate governance, reporting and disclosure practices. Compliance with these laws and regulations, including enhanced new disclosures, has required and will continue to require substantial management time and oversight and the incurrence of significant accounting and legal costs. The effects of new laws and regulations remain unclear and will likely require substantial management time and oversight and require us to incur significant additional accounting and legal costs. Additionally, changes to existing accounting rules or standards, such as the potential requirement that U.S. registrants prepare financial statements in accordance with International Financial Reporting Standards, may adversely impact our reported financial results and business, and may require us to incur greater accounting fees.

 

If we are unable to successfully maintain effective internal control over financial reporting, investors may lose confidence in our reported financial information and our stock price and our business may be adversely impacted.

 

As a public company, we are required to maintain internal control over financial reporting and our management is required to evaluate the effectiveness of our internal control over financial reporting as of the end of each fiscal year. If we are not successful in maintaining effective internal control over financial reporting, there could be inaccuracies or omissions in the consolidated financial information we are required to file with the SEC. Additionally, even if there are no inaccuracies or omissions, we will be required to publicly disclose the conclusion of our management that our internal control over financial reporting or disclosure controls and procedures are not effective. These events could cause investors to lose confidence in our reported financial information, adversely impact our stock price, result in increased costs to remediate any deficiencies, attract regulatory scrutiny or lawsuits that could be costly to resolve and distract management’s attention, limit our ability to access the capital markets or cause our stock to be delisted from The NASDAQ Capital Market or any other securities exchange on which it is then listed.

 

The limited operating history of San Meditech makes it difficult to evaluate its business and prospects.

 

San Meditech commenced operations in December 2003 and has a limited operating history. Prior to November 2005, the company had limited operations and was focused primarily on research and development. For the years ended December 31, 2016 and 2015, San Meditech generated approximately $4.1 million and $1.4 million of revenue, respectively. However San Meditech’s growth rate from 2014 through December 2016 may not be indicative of future performance.

 

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After the Acquisition, we may not be able to achieve similar results or grow at the same rate as San Meditech has in the past. It is also difficult to our prospects, as we may not have sufficient experience in addressing the risks to which companies operating in new and rapidly evolving markets such as the industrial and mining recycling industry may be exposed. After the Acquisition, we will continue to encounter risks and difficulties that companies at a similar stage of development frequently experience, including the potential failure to:

 

obtain sufficient working capital and increase its registered capital to support expansion of our business;

 

comply with any changes in the laws and regulations of the PRC or local province that may affect our operations;

 

expand our customer base;

 

maintain adequate control of default risks and expenses allowing us to realize anticipated revenue growth;

 

implement our growth strategies and plans and adapt and modify them as needed;

 

integrate any future acquisitions; and

 

anticipate and adapt to changing conditions in the Chinese medical device industry resulting from changes in government regulations, mergers and acquisitions involving our competitors, and other significant competitive and market dynamics.

 

If we are unable to address any or all of the foregoing risks, our business may be materially and adversely affected.

 

San Meditech’s business is highly concentrated in one sector. Accordingly, its future revenue and earnings are more susceptible to fluctuations than a more diversified company.

 

San Meditech’s business activities includes primarily the sale of glucose monitoring systems. If San Meditech is unable to maintain and grow the operating revenues from this business or develop additional revenue streams, its future revenue and earnings are not likely to grow and could decline. San Meditech’s lack of significant product and business diversification could limit the opportunities for the growth of its business, revenues and profits.

 

Discontinuation of preferential tax treatment San Meditech currently enjoys may result in additional compliance obligations and costs so as to materially and adversely impact the company’s net income.

 

From 2014 through 2016, local tax authorities granted San Meditech the preferential income tax rate of 15% because San Meditech was entitled to the preferential rate as a “high-tech enterprise.” Our status as a “high-tech enterprise” expires on October 27, 2017 and we are in the process of applying for a renewal of this status. We cannot guarantee that the renewal of our “high-tech enterprise” status will be approved. The discontinuation of such preferential tax treatment may materially and adversely affect our results of operations.

 

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Risks Related to Doing Business in China

 

A slowdown of the Chinese economy or adverse changes in economic and political policies of the PRC government could negatively impact China’s overall economic growth, which could materially adversely affect our business.

 

After the Acquisition and the Spin-Off, we will be a holding company and all of our operations will be entirely conducted in the PRC. Although the PRC economy has grown in recent years, the pace of growth has slowed, and even that rate of growth may not continue. The annual rate of growth in the PRC declined from 7.7% in 2013 to 7.3% in 2014, and 6.9% in 2015. According to a recent State Information of China forecast, China’s economic growth rate in 2016 will slow to 6.5%, its lowest since 1990. A slowdown in overall economic growth, an economic downturn or recession or other adverse economic developments in the PRC may materially reduce the demand for our products and may have a materially adverse effect on its business.

 

China’s economy differs from the economies of most other countries in many respects, including the amount of government involvement in the economy, the general level of economic development, growth rates and government control of foreign exchange and the allocation of resources. While the PRC economy has grown significantly over the past few decades, this growth has remained uneven across different periods, regions and economic sectors.

 

The PRC government also exercises significant control over China’s economic growth by allocating resources, controlling the payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Any actions and policies adopted by the PRC government could negatively impact the Chinese economy or the economy of the region we serve, which could materially adversely affect our business.

 

Substantial uncertainties and restrictions with respect to the political and economic policies of the PRC government and PRC laws and regulations could have a significant impact upon the business we may be able to conduct in the PRC and accordingly on the results of its operations and financial condition.

 

Our business operations may be adversely affected by the current and future political environment in the PRC. The Chinese government exerts substantial influence and control over the manner in which we must conduct its business activities. Our ability to operate in China may be adversely affected by changes in Chinese laws and regulations. Under the current government leadership, the government of the PRC has been pursuing economic reform policies that encourage private economic activities and greater economic decentralization. However, the government of the PRC may not continue to pursue these policies, or may significantly alter these policies from time to time without notice.

 

There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including, but not limited to, the laws and regulations governing our business, or the enforcement and performance of our arrangements with borrowers in the event of the imposition of statutory liens, death, bankruptcy or criminal proceedings. Only after 1979 did the Chinese government begin to promulgate a comprehensive system of laws that regulate economic affairs in general, deal with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade, as well as encourage foreign investment in China. Although the influence of the law has been increasing, China has not developed a fully integrated legal system and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. Also, because these laws and regulations are relatively new, and because of the limited volume of published cases and their lack of force as precedents, interpretation and enforcement of these laws and regulations involve significant uncertainties. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively. In addition, there have been constant changes and amendments of laws and regulations over the past 30 years in order to keep up with the rapidly changing society and economy in China. Because government agencies and courts provide interpretations of laws and regulations and decide contractual disputes and issues, their inexperience in adjudicating new business and new polices or regulations in certain less developed areas causes uncertainty and may affect our business. Consequently, neither we nor San Meditech can predict the future direction of Chinese legislative activities with respect to either businesses with foreign investment or the effectiveness on enforcement of laws and regulations in China. The uncertainties, including new laws and regulations and changes of existing laws, as well as judicial interpretation by inexperienced officials in the agencies and courts in certain areas, may cause possible problems to foreign investors.

 

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San Meditech’s business is subject to extensive regulation and supervision by state, provincial and local government authorities, which may interfere with the way we conduct our business and may negatively impact its financial results.

 

San Meditech is subject to extensive and complex state, provincial and local laws, rules and regulations with regard to their loan operations, capital structure, maximum interest rates, allowance for loan losses, among other things, as set out in “Business — Applicable Government Regulations.” These laws, rules and regulations are issued by different central government ministries and departments, provincial and local governments and are enforced by different local authorities in Zhejiang Province and the city of Huzhou. As a result of the complexity, uncertainties and constant changes in these laws, rules and regulation, including changes in interpretation and implementation of such, the San Meditech’s business activities and growth may be adversely affected if they do not respond to the changes in a timely manner or are found to be in violation of the applicable laws, regulations and policies as a result of a different position from theirs taken by the competent authority in the interpretation of such applicable laws, regulations and policies. If San Meditech is found to be not in compliance with these laws and regulations, they may be subject to sanctions by regulatory authorities, monetary penalties and/or reputation damage, which could have a material adverse effect on our business operations and profitability.

 

You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions against us or our management, in China, based upon United States laws, including the U.S. federal securities laws, or other foreign laws.

 

After the Acquisition and the Spin-Off, substantially all of our operations will be conducted in China, and substantially all of our assets will be located in China. With the exception of our current Chief Financial Officer, all of our current and proposed directors and officers reside in China, and substantially all of the assets of those persons are located outside of the United States. As a result, Allbright Law, our counsel as to PRC law, has advised us that it may be difficult for a shareholder to effect service of process within the United States upon these persons, or to enforce judgments against us which are obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.

 

Allbright Law has further advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. China does not have any treaties or other form of reciprocity with the United States providing for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors or officers if they decide that the judgment violates the basic principles of PRC laws, national sovereignty, security or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States.

 

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Allbright Law has also advised us that in the event shareholders originate an action against a company without domicile in China for disputes related to contracts or other property interests, the PRC courts may accept a cause of action if (a) the disputed contract is concluded or performed in the PRC or the disputed subject matter is located in the PRC, (b) the company (as defendant) has properties that can be seized within the PRC, (c) the company has a representative organization within the PRC, or (d) the parties chose to submit to the jurisdiction of the PRC courts in the contract on the condition that such submission does not violate the requirements of jurisdiction under the PRC Civil Procedures Law. The action may be initiated by the shareholder by filing a complaint with the PRC courts. The PRC courts would determine whether to accept the complaint in accordance with the PRC Civil Procedures Law. The shareholder may participate in the action by itself or entrust any other person or PRC legal counsel to participate on behalf of such shareholder. Foreign citizens and companies will have the same rights as PRC citizens and companies in such an action unless such foreign country restricts the rights of PRC citizens and companies.

 

Up to 25% of San Meditech’s shares are subject to a pledge agreement and may be subject to forfeiture.

 

In August and October 2015, Huzhou Zetong Investment Management Limited Partnership (“Huzhou Zetong”) entrusted China Industrial Bank Huzhou Branch to loan an aggregate of RMB 30,000,000 to San Meditech; in return AADRF made a 50% pledge of San Meditech’s equity securities to Huzhou Zetong as a guarantee of repayment.  On August 24, 2016, Huzhou Zetong made two arbitration applications to Huzhou Arbitration Committee (the “Committee”) to require repayment of the loans with interest as well as costs incurred in connection with the collection of the loans from AADRF, which were approved by the Committee. AADRF entered into an oral settlement with Huzhou Zetong, according to which it would pay back RMB 17,227,253 before March 31, 2017 and RMB15,000,000 with an interest rate of 24% before April 30, 2017 to Huzhou Zetong. A third party made the payment of $2,850,000 on March 31, 2017 to Huzhou Zetong which was confirmed by the Huzhou Intermediate People's Court in order to avoid Huzhou Zetong foreclosing on the 25% equity of San Meditech pledged by AADRF. AADRF has not yet paid the balance of the loan with agreed interest to Huzhou Zetong, and the Company and Huzhou Zetong are negotiating to extend the payment period. AADRF currently has an oral agreement with Huzhou Zetong that the repayment of loan principal RMB 15,000,000 would be made in August 2017 and the agreed interest would be paid over an extended period. If the parties are unable to reach a final agreement concerning this matter, San Meditech’s shares may be subject to forfeiture. In such event, AADRF’s ownership interest would be substantially reduced, which would negatively impact our business and results of operations.

 

After the Acquisition and the Spin-Off, San Meditech’s ability to pay dividends to us may be restricted due to foreign exchange control and other regulations of China.

 

After the Acquisition and the Spin-Off, as an offshore holding company, we will rely principally on dividends from our subsidiary in China, San Meditech, for our cash requirements. Under the applicable PRC laws and regulations, foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, a foreign-invested enterprise in China is required to set aside a portion of its after-tax profit to fund specific reserve funds prior to payment of dividends. In particular, at least 10% of its after-tax profits based on PRC accounting standards each year is required to be set aside towards its general reserves until the accumulative amount of such reserves reach 50% of its registered capital. These reserves are not distributable as cash dividends.

 

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Furthermore, San Meditech’s ability to pay dividends may be restricted due to foreign exchange control policies and the availability of its cash balance. Substantially all of the Operating Companies’ operations are conducted in China and all of the revenue we recognize, through San Meditech will be denominated in RMB. RMB is subject to exchange control regulation in China, and, as a result, San Meditech may be unable to distribute any dividends outside of China due to PRC exchange control regulations that restrict our ability to convert RMB into U.S. dollars.

 

The lack of dividends or other payments from San Meditech may limit our ability to make investments or acquisitions that could be beneficial to our business, pay dividends or otherwise fund, and conduct our business. Our funds may not be readily available to us to satisfy obligations which have been incurred outside the PRC, which could adversely affect our business and prospects or our ability to meet our cash obligations. Accordingly, if we do not receive dividends from San Meditech, our liquidity and financial condition will be materially and adversely affected.

 

Dividends payable to our foreign investors and gains on the sale of our ordinary shares by our foreign investors may become subject to tax by the PRC.

 

Under the Enterprise Income Tax Law and its implementation regulations issued by the State Council of the PRC, a 10% PRC withholding tax is applicable to dividends payable to investors that are non-resident enterprises, which do not have an establishment or place of business in the PRC or which have such establishment or place of business but the dividends are not effectively connected with such establishment or place of business, to the extent such dividends are derived from sources within the PRC. Similarly, any gain realized on the transfer of shares by such investors is also subject to PRC tax at a current rate of 10%, subject to any reduction or exemption set forth in relevant tax treaties, if such gain is regarded as income derived from sources within the PRC. If we are deemed a PRC resident enterprise, dividends paid on our shares, and any gain realized from the transfer of our shares, would be treated as income derived from sources within the PRC and would as a result be subject to PRC taxation. Furthermore, if we are deemed a PRC resident enterprise, dividends payable to individual investors who are non-PRC residents and any gain realized on the transfer shares by such investors may be subject to PRC tax at a current rate of 20%, subject to any reduction or exemption set forth in applicable tax treaties. It is unclear whether we or any of our subsidiaries established outside of China are considered a PRC resident enterprise, holders of shares would be able to claim the benefit of income tax treaties or agreements entered into between China and other countries or areas. If dividends payable to our non-PRC investors, or gains from the transfer of our shares by such investors are subject to PRC tax, the value of your investment in our shares may decline significantly.

 

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Our global income may be subject to PRC taxes under the PRC Enterprise Income Tax Law, which could have a material adverse effect on our results of operations.

 

Under the PRC Enterprise Income Tax Law, or the New EIT Law, and its implementation rules, which became effective in January 2008, an enterprise established outside of the PRC with a “de facto management body” located within the PRC is considered a PRC resident enterprise and will be subject to the enterprise income tax at the rate of 25% on its global income. The implementation rules define the term “de facto management bodies” as “establishments that carry out substantial and overall management and control over the manufacturing and business operations, personnel and human resources, finance and treasury, and acquisition and disposition of properties and other assets of an enterprise.” On April 22, 2009, the State Administration of Taxation (the “SAT”), issued a circular, or SAT Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China. Although the SAT Circular 82 only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners, the determining criteria set forth in the SAT Circular 82 may reflect the SAT’s general position on how the “de facto management body” text should be applied in determining the resident status of all offshore enterprises for the purpose of PRC tax, regardless of whether they are controlled by PRC enterprises or individuals. Although we do not believe that our legal entities organized outside of the PRC constitute PRC resident enterprises, it is possible that the PRC tax authorities could reach a different conclusion. In such case, we may be considered a PRC resident enterprise and may therefore be subject to the 25% enterprise income tax on our global income, which could significantly increase our tax burden and materially and adversely affect our cash flow and profitability. In addition to the uncertainty regarding how the new PRC resident enterprise classification for tax purposes may apply, it is also possible that the rules may change in the future, possibly with retroactive effect.

 

We and our shareholders face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.

 

On February 3, 2015, the State Administration of Taxation issued an Announcement on Several Issues Concerning Enterprise Income Tax on Income Arising from Indirect Transfers of Property by Non-PRC Resident Enterprises, or Announcement 7, with the same effective date. Under Announcement 7, an “indirect transfer” refers to a transaction where a non-resident enterprise transfers its equity interest and other similar interest in an offshore holding company, which directly or indirectly holds Chinese taxable assets (the assets of an “establishment or place” situated in China; real property situated in China and equity interest in Chinese resident enterprises) and any indirect transfer without reasonable commercial purposes are subject to the PRC taxation. In addition, Announcement 7 specifies the conditions under which an indirect transfer is deemed to lack a reasonable commercial purpose which include: (1) 75% or more of the value of the offshore holding company’s equity is derived from Chinese taxable assets, (2) anytime in the year prior to the occurrence of the indirect transfer of Chinese taxable assets, 90% or more of the total assets (excluding cash) of the offshore holding company are direct or indirect investment in China, or 90% or more of the revenue of the offshore holding company was sourced from China; (3) the functions performed and risks assumed by the offshore holding company(ies), although incorporated in an offshore jurisdiction to conform to the corporate law requirements there, are insufficient to substantiate their corporate existence and (4) the foreign income tax payable in respect of the indirect transfer is lower than the Chinese tax which would otherwise be payable in respect of the direct transfer if such transfer were treated as a direct transfer. As a result, gains derived from such indirect transfer will be subject to PRC enterprise income tax, currently at a rate of 10%.

 

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Announcement 7 grants a safe harbor under certain qualifying circumstances, including transfers in the public securities market and certain intragroup restricting transactions, however, there is uncertainty as to the implementation of Announcement 7. For example, Announcement 7 requires the buyer to withhold the applicable taxes without specifying how to obtain the information necessary to calculate taxes and when the applicable tax shall be submitted. Announcement 7 may be determined by the tax authorities to be applicable to our offshore restructuring transactions or sale of the shares of our offshore subsidiaries where non-resident enterprises, being the transferors, were involved. Though Announcement 7 does not impose a mandatory obligation of filing the report of taxable events, the transferring party shall be subject to PRC withholding tax if the certain tax filing conditions are met. Non-filing may result in an administrative penalty varying from 50% to 300% of unpaid taxes. As a result, we and our non-resident enterprises in such transactions may become at risk of being subject to taxation under Announcement 7, and may be required to expend valuable resources to comply with Announcement 7 or to establish that we and our non-resident enterprises should not be taxed under Announcement 7, for any restructuring or disposal of shares of our offshore subsidiaries, which may have a material adverse effect on our financial condition and results of operations.

 

Restrictions on currency exchange may limit our ability to utilize our revenue effectively.

 

Substantially all of our revenue is denominated in Renminbi. The Renminbi is currently convertible under the “current account,” which includes dividends, trade and service-related foreign exchange transactions, but not under the “capital account,” which includes foreign direct investment and loans. Currently, our PRC subsidiaries, which are joint venture enterprises, may purchase foreign currency for settlement of “current account transactions,” including payment of dividends to us, without the approval of SAFE by complying with certain procedural requirements. However, the relevant PRC governmental authorities may limit or eliminate our ability to purchase foreign currencies in the future for current account transactions. Since a significant amount of our future revenue will be denominated in Renminbi, any existing and future restrictions on currency exchange may limit our ability to utilize revenue generated in Renminbi to fund our business activities outside of the PRC or pay dividends in foreign currencies to our shareholders. Foreign exchange transactions under the capital account remain subject to limitations and require approvals from, or registration with, SAFE or banks and other relevant PRC governmental authorities. This could affect our ability to obtain foreign currency through debt or equity financing for our subsidiaries and San Meditech.

 

Fluctuations in the foreign currency exchange rate between U.S. Dollars and Renminbi could adversely affect our financial condition.

 

The value of the RMB against the U.S. dollar and other currencies may fluctuate. Exchange rates are affected by, among other things, changes in political and economic conditions and the foreign exchange policy adopted by the PRC government. In 2015, the yuan experienced a 4.88% drop in value, and on January 4, 2016 the PRC government set the U.S. dollar-Chinese yuan currency pair to a reference rate of 6.5%, the lowest rate in 4.5 years. However, 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. As significant international pressure remains on the PRC government to adopt a more flexible currency policy, greater fluctuation of the RMB against the U.S. dollar could result.

 

Our revenues and costs are mostly denominated in the RMB, and a significant portion of our financial assets are also denominated in the RMB. Any significant fluctuations in the exchange rate between the RMB and the U.S. dollar may materially adversely affect our cash flows, revenues, earnings and financial position, and the amount of and any dividends we may pay on our shares in U.S. dollars. Fluctuations in the exchange rate between the RMB and the U.S. dollar could also result in foreign currency translation losses for financial reporting purposes.

 

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If any dividend is declared in the future and paid in a foreign currency, you may be taxed on a larger amount in U.S. dollars than the U.S. dollar amount that you will actually ultimately receive.

 

If you are a U.S. holder of our ordinary shares, you will be taxed on the U.S. dollar value of your dividends, if any, at the time you receive them, even if you actually receive a smaller amount of U.S. dollars when the payment is in fact converted into U.S. dollars. Specifically, if a dividend is declared and paid in a foreign currency such as the RMB, the amount of the dividend distribution that you must include in your income as a U.S. holder will be the U.S. dollar value of the payments made in the foreign currency, determined at the spot rate of the foreign currency to the U.S. dollar on the date the dividend distribution is includible in your income, regardless of whether the payment is in fact converted into U.S. dollars. Thus, if the value of the foreign currency decreases before you actually convert the currency into U.S. dollars, you will be taxed on a larger amount in U.S. dollars than the U.S. dollar amount that you will actually ultimately receive.

 

Future inflation in China may inhibit economic activity and adversely affect our operations.

 

The Chinese economy has experienced periods of rapid expansion in recent years which can lead to high rates of inflation or deflation. This has caused the PRC government to, from time to time, enact various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. High inflation may in the future cause the PRC government to once again impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China. Any action on the part of the PRC government that seeks to control credit and/or prices may adversely affect our business operations.

 

PRC laws and regulations have established more complex procedures for certain acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.

 

Further to the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the New M&A Rules, the Anti-monopoly Law of the PRC, the Rules of Ministry of Commerce on Implementation of Security Review System of Mergers and Acquisitions of Domestic Enterprises by Foreign Investors promulgated by MOFCOM or the MOFCOM Security Review Rules, was issued in August 2011, which established additional procedures and requirements that are expected to make merger and acquisition activities in China by foreign investors more time-consuming and complex, including requirements in some instances that MOFCOM be notified in advance of any change of control transaction in which a foreign investor takes control of a PRC enterprise, or that the approval from MOFCOM be obtained in circumstances where overseas companies established or controlled by PRC enterprises or residents acquire affiliated domestic companies. PRC laws and regulations also require certain merger and acquisition transactions to be subject to merger control review and or security review.

 

The MOFCOM Security Review Rules, effective from September 1, 2011, which implement the Notice of the General Office of the State Council on Establishing the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors promulgated on February 3, 2011, further provide that, when deciding whether a specific merger or acquisition of a domestic enterprise by foreign investors is subject to the security review by MOFCOM, the principle of substance over form should be applied and foreign investors are prohibited from bypassing the security review requirement by structuring transactions through proxies, trusts, indirect investments, leases, loans, control through agreements control or offshore transactions.

 

Further, if the business of any target company that we seek to acquire falls into the scope of security review, we may not be able to successfully acquire such company either by equity or asset acquisition, capital contribution or through any VIE Agreement. We may grow our business in part by acquiring other companies operating in its industry. Complying with the requirements of the relevant regulations to complete such transactions could be time consuming, and any required approval processes, including approval from MOFCOM, may delay or inhibit its ability to complete such transactions, which could affect its ability to maintain or expand its market share.

 

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In addition, SAFE promulgated the Circular on the Settlement of Foreign Currency Capital of Foreign-invested Enterprises, or Circular 19, on June 1, 2015. Under Circular 19, registered capital of a foreign-invested company settled in RMB converted from foreign currencies may only be used within the business scope approved by the applicable governmental authority and the equity investments in the PRC made by the foreign-invested company shall be subject to the relevant laws and regulations about the foreign-invested company’s reinvestment in the PRC. In addition, foreign-invested companies cannot use such capital to make the investments on securities, and cannot use such capital to issue the entrusted RMB loans (except approved in its business scope), repay the RMB loans between the enterprises and the ones which have been transferred to the third party. Circular 19 may significantly limit our ability to effectively use the proceeds from future financing activities as the Chinese subsidiaries may not convert the funds received from us in foreign currencies into RMB, which may adversely affect their liquidity and our ability to fund and expand our business in the PRC.

 

SAFE issued the Circular on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts (“Circular 16”), on June 9, 2016, which became effective simultaneously. Pursuant to Circular 16, enterprises registered in the PRC may also convert their foreign debts from foreign currency to RMB on self-discretionary basis. Circular 16 provides an integrated standard for conversion of foreign exchange under capital account items (including but not limited to foreign currency capital and foreign debts) on self-discretionary basis which applies to all enterprises registered in the PRC. Circular 16 reiterates the principle that RMB converted from foreign currency-denominated capital of a company may not be directly or indirectly used for purpose beyond its business scope or prohibited by PRC Laws or regulations, while such converted RMB shall not be provide as loans to its non-affiliated entities. As Circular 16 is newly issued and SAFE has not provided detailed guidelines with respect to its interpretation or implementation, it is uncertain how these rules will be interpreted and implemented.

 

Failure to comply with the United States Foreign Corrupt Practices Act and Chinese anti-corruption laws could subject us to penalties and other adverse consequences.

 

As our shares are listed on NASDAQ, we are subject to the United States Foreign Corrupt Practices Act, which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Non-U.S. companies, including some that may compete with us, may not be subject to these prohibitions. In addition, in 2012, the central government of the PRC commenced a far-reaching campaign against corruption. That ongoing campaign involves aggressive enforcement of existing Chinese anti-corruption laws. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices may occur from time-to-time in the PRC. Our employees or other agents may engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.

 

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.

 

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. Our SEC filings and other disclosure 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 by CSRC, 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 review of our company, our SEC reports, other filings or any of our other public pronouncements.

 

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Risks Related to Ossen’s Business and Industry

 

If the Acquisition and the Spin-Off are not completed, Ossen will continue to operate its business as presently conducted and will be subject to ongoing risks from its operations, including the risks described below.

 

Our chairman owns a large percentage of our outstanding stock and could significantly influence the outcome of our corporate matters.

 

Dr. Tang owns approximately 59.9% of our outstanding ordinary shares, reflecting a majority equity interest in our company. As our majority shareholder, Dr. Tang is able to elect our board of directors, and determine the outcome of all matters requiring the approval of the holders of a majority of our outstanding shares, including the sale of our assets or an acquisition of assets pursuant to the currently proposed Acquisition and Sale Transaction or otherwise. This concentration of ownership in our shares by Dr. Tang limits your ability to influence corporate matters and may have the effect of delaying or preventing a third party from acquiring control over us. In addition, sales of significant amounts of ordinary shares held by Dr. Tang, or the prospect of these sales, could adversely affect the market price of our ordinary shares. However, Dr. Tang has agreed to abstain from voting on the Acquisition Proposal, the Spin-Off Proposal, the Charter Amendment Proposal and the Incentive Plan Proposal.

 

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, 2016, we had $0.2 million of cash and cash equivalents. Historically, we have spent a significant amount of cash on our operational activities, principally to procure raw materials for our products. Our short-term loans are from Chinese banks and are generally secured by a portion of our fixed assets, land use right, receivables and/or guarantees by related parties. The term of almost all such loans is one year or less. Historically, we have rolled over such loans on an annual basis. However, we may not have sufficient funds available to pay all of our borrowings upon maturity in the future. Failure to roll over our short-term borrowings at maturity or to service our debt could result in the imposition of penalties, including increases in interest rates, legal actions against us by our creditors, or even insolvency.

 

Although we have been able to maintain adequate working capital primarily through cash from operations and short-term borrowings, any failure by our customers to settle outstanding accounts receivable, or our inability to borrow sufficient capital from local banks, in the future could materially and adversely affect our cash flow, financial condition and results of operations. For example, in 2016, one of our customers in South Korea filed for bankruptcy, which negatively impacted our revenue generated from export.

 

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In addition, since 2013, we have been required to provide cash deposits, instead of bank guarantee letters, when we bid for projects, which results in further pressure on our working capital. Yet, during this time period, local banks have generally maintained tighter lending policies than in the past, thereby limiting our ability to borrow funds in order to win bids that we believe we otherwise could have won. Although our production facilities are running at full capacity, the bids we are losing due to lack of up-front cash deposit may be more profitable than the ones we are winning, which could negatively impact our overall revenue and profitability.

 

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.

 

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In 2015 and 2016, we generated revenue of approximately $85.0 million and $101.4 million, respectively, or 72.1% and 86.6%, respectively, of our total revenue, from sales of our rare earth coated PC wires and PC strands. We believe that we are the only prestressed steel material manufacturer in the PRC that currently manufactures rare earth coated prestressed steel materials for bridge construction. While we believe that our rare earth coating capabilities provide us with a competitive advantage among our competitors, it is likely that our competitors will seek to develop similar competing products in the near future. Furthermore, in 2015 and 2016, gross margins for our coated products was lower than the gross margins for our plain surface products due, in part, to pricing pressure. We intend to continue to expand research and development efforts to advance our rare earth coating applications even further. In particular, we continued to develop a rare earth coating application for zinc-aluminum alloy coated products, which are more corrosion-resistant than zinc coated products in 2017. However, there can be no assurance that our initial competitive advantage will be retained and that one or more competitors will not develop products that are equal or superior to ours in quality and are better priced than our rare earth coated products.

 

Our revenues are highly dependent on a limited number of customers and the loss of any one of our major customers could materially and adversely affect our growth and our revenues.

 

During the years ended December 31, 2016, 2015 and 2014, our six largest customers contributed 81.4%, 74.9% and 61.3% of our total sales, respectively. As a result of our reliance on a limited number of customers, we may face pricing and other competitive pressures, which may have a material adverse effect on our profits and our revenues. The volume of products sold for specific customers varies from year to year, especially since we are not the exclusive provider for any customers. In addition, there are a number of factors, other than our performance, that could cause the loss of a customer or a substantial reduction in the products that we provide to any customer and that may not be predictable. For example, our customers may decide to reduce spending on our products or a customer may no longer need our products following the completion of a project. The loss of any one of our major customers, a decrease in the volume of sales to these customers or a decrease in the price at which we sell our products to them could materially adversely affect our profits and our revenues.

 

In addition, this customer concentration may subject us to perceived or actual leverage that our customers may have in negotiations with us, given their relative size and importance to us. If our customers seek to negotiate their agreements on terms less favorable to us and we accept such unfavorable terms, such unfavorable terms may have a material adverse effect on our business, financial condition and results of operations. Accordingly, unless and until we diversify and expand our customer base, our future success will significantly depend upon the timing and volume of business from our largest customers and the financial and operational success of these customers.

 

As we expand our operations, we may need to establish a more diverse supplier network for our raw materials. The failure to secure a more diverse supplier network could have an adverse effect on our financial condition.

 

We currently purchase almost all of our raw materials from a small number of suppliers. Purchases from our five largest suppliers amounted to 99.1%, 97.7% and 95.1% of our raw material purchases in the years ended December 31, 2016, 2015 and 2014, 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.

 

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Furthermore, despite our efforts to control our supply of raw materials and maintain good relationships with our existing suppliers, we could lose one or more of our existing suppliers at any time. The loss of one or more key suppliers could increase our reliance on higher cost or lower quality supplies, which could negatively affect our profitability. Any interruptions to, or decline in, the amount or quality of our raw materials supply could materially disrupt our production and adversely affect our business, financial condition and financial prospects.

 

Volatile steel prices can cause significant fluctuations in our operating results. Our revenues and operating income could decrease if steel prices decline or if we are unable to pass price increases on to our customers.

 

Our principal raw material is high carbon steel wire rods that we typically purchase from multiple primary steel producers. The steel industry as a whole is cyclical and, at times, pricing and availability of steel can be volatile due to numerous factors beyond our control, including general domestic and international economic conditions, labor costs, sales levels, competition, levels of inventory held by us and other steel service centers, consolidation of steel producers, higher raw material costs for steel producers, import duties and tariffs and currency exchange rates. This volatility can significantly affect the availability and cost of raw materials for us.

 

We, like many other steel manufacturers, maintain substantial inventories of steel to accommodate the short lead times and just-in-time delivery requirements of our customers. Accordingly, we purchase steel in an effort to maintain our inventory at levels that we believe to be appropriate to satisfy the anticipated needs of our customers based upon historic buying practices, supply agreements with customers and market conditions. Our commitments to purchase steel are generally at prevailing market prices in effect at the time we place our orders. We have no long-term, fixed-price steel purchase contracts. When steel prices increase, competitive conditions will influence how much of the price increase we can pass on to our customers. To the extent we are unable to pass on future price increases in our raw materials to our customers, the revenues and profitability of our business could be adversely affected.

 

When steel prices decline, customer demands for lower prices and our competitors' responses to those demands could result in lower sale prices, lower margins and inventory valued at the lower of cost or market adjustments as we use existing steel inventory. Significant or rapid declines in steel prices or reductions in sales volumes could result in us incurring inventory or goodwill impairment charges. Therefore, changing steel prices could significantly impact our revenues, gross margins, operating income and net income.

 

In 2016, Chinese Government continue its policy to cut excessive industrial capacity and reform the supply-side of its economy. China has lowered steel production by about 90 million tons in the recent years and will push to cut a further 100 million to 150 million tons over the next 5 years, while strictly controlling steel capacity increases, according to the Chinese government statement announced in January 2016. As a result, the average price of steel products, including our products and principal raw materials, increased in 2016 and reached the highest level in two and a half years. The shortage of coking coal, one of steelmaking raw materials, also led to higher prices. The average selling prices of our products also increased in 2016 and with our advanced payment to suppliers, we were able to lock the raw materials at a lower price, which resulted in higher margin in 2016. We expect steel demand will slightly outpace supply and average price of steel products will continue to rise in 2017.  However, there can be no assurance that we will be able to raise our prices to compensate for the increase in raw materials.

 

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Sales to customers outside China expose us to risks inherent in international sales.

 

We generated approximately 4.2%, 6.6% and 7.2%, respectively, of our revenue during the years ended December 31, 2016, 2015 and 2014 from sales to customers in international markets. As a result, we are subject to risks and challenges that we would otherwise not face if we conducted our business only in China. For example, in 2009 and 2010, the European Union and the United States imposed anti-dumping duties on imports of certain prestressed wires and wire strands originating in China. These measures had a negative impact on our business and results of operations. In 2016, one of our customers in South Korea filed for bankruptcy, which negatively impacted our revenue generated from export.

 

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.

 

68 

 

 

Our revenues, expenses and profits are difficult to predict and vary significantly from quarter to quarter. This could cause the trading price of our ordinary shares to decline.

 

Our operating results vary significantly from quarter to quarter. Therefore, we believe that period-to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon as an indication of our future performance. It is possible that in the future some of our quarterly results of operations may be below the expectations of market analysts and our investors, which could lead to a significant decline in the trading price of our ordinary shares. Factors which affect the fluctuation of our revenues, expenses and profits include:

 

  · delays or cancellations of railway or infrastructure projects in China due to unexpected accidents or to financial or other issues confronting the Ministry of Transport, China National Railway Co., or other PRC governmental agencies overseeing these industries;

 

  · changes in prices of our raw materials, with higher prices leading to reduced operating income;

 

  · variations, expected or unexpected, in the duration, size, timing and scope of purchase orders;

 

  · changes in our pricing policies or those of our competitors;

 

  · changes in compensation, which may reduce our gross profit for the quarter in which they are effected;

 

  · our inability to manage costs, including those related to our raw materials, personnel, infrastructure and facilities;

 

  · exchange rate fluctuations; and

 

  · general economic conditions.

 

A portion of our expenses, particularly those related to personnel and facilities are generally fixed in advance of any particular quarter. As a result, unanticipated variations in the number and timing of our purchase orders or prices of our raw materials may cause significant variations in our operating results in any particular quarter.

 

Our success depends in large part upon our senior management and key personnel. Our inability to attract and retain these individuals could materially and adversely affect our business, results of operations and financial condition.

 

We are highly dependent on our senior management and other key employees, including our Chairman, Dr. Tang and our Chief Executive Officer and Chief Financial Officer, Mr. Hua. Our future performance will be dependent upon the continued service of members of our senior management and key employees. We do not maintain key man life insurance for any of the members of our management team or other key personnel. Competition for senior management in our industry is intense, and we may not be able to retain our senior management and key personnel or attract and retain new senior management and key personnel in the future, which could materially and adversely affect our business, results of operations and financial condition.

 

69 

 

 

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.

 

70 

 

 

 

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

 

OSSEN INNOVATION CO., LTD AND SUBSIDIARIES

Unaudited Pro Forma Combined Balance Sheet

As of March 31, 2017

 

           Pro Forma 
   Ossen   AADRF   Adjustments   Note 2  Balance Sheet 
                    
CURRENT ASSETS                       
Cash and cash equivalents  $742,415   $2,088,481   $(742,415)  1  $2,088,481 
Restricted cash   6,022,841    -    (6,022,841)  1   - 
Note receivable - bank acceptance note   7,256,367    -    (7,256,367)  1   - 
Accounts receivable, net   48,514,648    136,716    (48,514,648)  1   136,716 
Accounts receivables - related parties   -    325,859    -       325,859 
Other receivables   -    210,248    -       210,248 
Inventories, net   16,403,361    128,642    (16,403,361)  1   128,642 
Advance to vendors   55,536,112    109,431    (55,536,112)  1   109,431 
Prepaid and other current assets   216,898    17,971    (216,898)  1   17,971 
TOTAL CURRENT ASSETS   134,692,642    3,017,348    (134,692,642)  1   3,017,348 
                        
PROPERTY AND EQUIPMENT, NET   4,307,145    293,400    (4,307,145)  1   293,400 
                        
OTHER ASSETS                       
Intangible assets, net   3,572,923    8,668,691    (3,572,923)  1   8,668,691 
Deposits   -    19,790    -       19,790 
TOTAL OTHER ASSETS   3,572,923    8,688,481    (3,572,923)  1   8,688,481 
                        
TOTAL ASSETS  $142,572,710   $11,999,229   $(142,572,710)  1  $11,999,229 
                        
CURRENT LIABILITIES                       
Notes payable - bank acceptance notes  $8,925,332   $-   $(8,925,332)  1  $- 
Short term loan - bank   17,030,694    435,252    (17,030,694)  1   435,252 
Short term loans - other   -    2,176,240    -       2,176,240 
Accounts payable   3,020,452    19,258    (3,020,452)  1   19,258 
Other payables and accrued liabilities   2,023,126    1,159,510    (2,023,126)  1   1,159,510 
Other payables - related party   351,411    330,985    (351,411)  1   330,985 
Customer deposits   333,668    586,058    (333,668)  1   586,058 
Taxes payable   382,107    -    (382,107)  1   - 
TOTAL LIABILITIES   32,066,790    4,707,303    (32,066,790)  1   4,707,303 
                        
LONG-TERM LIABILITIES   7,256,367    -    (7,256,367)  1   - 
                        
TOTAL LIABILITIES   39,323,157    4,707,303    (39,323,157)  1   4,707,303 
                        
SHAREHOLDERS' EQUITY (DEFICIENCY)                       
Common stock   200,000    29,976    663,954   1, 2   893,930 
Stock subscription receivable   -    (750,000)   -       (750,000)
Additional paid-in-capital   33,971,455    39,920,427    (34,643,256)  1, 2   39,248,626 
Statutory reserve   6,147,452    -    (6,147,452)  1   - 
Retained earnings (accumulated deficit)   54,615,873    (33,110,359)   (54,615,873)  1   (33,110,359)
Treasury stock   (192,153)   -    -       (192,153)
Accumulated other comprehensive income (loss)   (3,677,790)   1,828,958    3,677,790   1   1,828,958 
TOTAL CONTROLLING INTERESTS' EQUITY (DEFICIENCY)   91,064,837    7,919,002    (91,064,837)      7,919,002 
                        
NONCONTROLLING INTERESTS   12,184,716    (627,076)   (12,184,716)  1   (627,076)
TOTAL SHAREHOLDERS' EQUITY (DEFICIENCY)   103,249,553    7,291,926    (103,249,553)      7,291,926 
                        
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)  $142,572,710   $11,999,229   $(142,572,710)     $11,999,229 

 

71 

 

 

OSSEN INNOVATION CO., LTD AND SUBSIDIARIES

Unaudited Pro Forma Combined Balance Sheet

As of December 31, 2016

 

           Pro Forma 
   Ossen   AADRF   Adjustments   Note 2  Balance Sheet 
                    
CURRENT ASSETS                       
Cash and cash equivalents  $217,631   $325,406   $(217,631)  1  $325,406 
Restricted cash   6,703,242    -    (6,703,242)  1   - 
Note receivable - bank acceptance note   15,280,381    -    (15,280,381)  1   - 
Accounts receivable, net   37,298,465    132,988    (37,298,465)  1   132,988 
Accounts receivables - related parties   -    586,196    -       586,196 
Other receivables   -    208,636    -       208,636 
Inventories, net   25,999,182    155,590    (25,999,182)  1   155,590 
Advance to vendors   46,729,285    117,181    (46,729,285)  1   117,181 
Prepaid and other current assets   197,320    21,115    (197,320)  1   21,115 
TOTAL CURRENT ASSETS   132,425,506    1,547,112    (132,425,506)  1   1,547,112 
                        
PROPERTY AND EQUIPMENT, NET   4,447,063    315,110    (4,447,063)  1   315,110 
                        
OTHER ASSETS                       
Intangible assets, net   3,571,183    8,606,942    (3,571,183)  1   8,606,942 
Deposits   -    26,920    -       26,920 
TOTAL OTHER ASSETS   3,571,183    8,633,862    (3,571,183)  1   8,633,862 
                        
TOTAL ASSETS  $140,443,752   $10,496,084   $(140,443,752)  1  $10,496,084 
                        
CURRENT LIABILITIES                       
Notes payable - bank acceptance notes  $9,586,276   $-   $(9,586,276)  1  $- 
Short term loan - bank   16,916,535    575,972    (16,916,535)  1   575,972 
Short term loans - other        4,319,790    -       4,319,790 
Accounts payable   1,504,863    28,330    (1,504,863)  1   28,330 
Other payables and accrued liabilities   1,740,474    4,904,854    (1,740,474)  1   4,904,854 
Other payables - related party   311,385    4,429,354    (311,385)  1   4,429,354 
Customer deposits   135,903    635,455    (135,903)  1   635,455 
Investment payable   -    18,888,317    -       18,888,317 
Taxes payable   594,795    -    (594,795)  1   - 
TOTAL LIABILITIES   30,790,231    33,782,072    (30,790,231)  1   33,782,072 
                        
LONG-TERM LIABILITIES   7,207,727    -    (7,207,727)  1   - 
                        
TOTAL LIABILITIES   37,997,958    33,782,072    (37,997,958)  1   33,782,072 
                        
SHAREHOLDERS' EQUITY (DEFICIENCY)                       
Common stock   200,000    14,078    679,852   1, 2   893,930 
Additional paid-in-capital   33,971,455    4,364,510    (34,659,154)  1, 2   3,676,811 
Statutory reserve   6,123,022    -    (6,123,022)  1   - 
Retained earnings (accumulated deficit)   54,590,589    (31,352,404)   (54,590,589)  1   (31,352,404)
Treasury stock   (192,153)   -    -       (192,153)
Accumulated other comprehensive income (loss)   (4,378,873)   4,223,834    4,378,873   1   4,223,834 
TOTAL CONTROLLING INTERESTS' EQUITY (DEFICIENCY)   90,314,040    (22,749,982)   (90,314,040)      (22,749,982)
                        
NONCONTROLLING INTERESTS   12,131,754    (536,006)   (12,131,754)  1   (536,006)
TOTAL SHAREHOLDERS' EQUITY (DEFICIENCY)   102,445,794    (23,285,988)   (102,445,794)      (23,285,988)
                        
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)  $140,443,752   $10,496,084   $(140,443,752)     $10,496,084 

 

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OSSEN INNOVATION CO., LTD AND SUBSIDIARIES

Unaudited Pro Forma Combined Statement of Opeartions

For the Three Months Ended March 31, 2017

 

           Pro Forma 
   Ossen   AADRF   Adjustments   Note 2  Statement of Operations 
                    
REVENUES  $25,582,538   $53,256   $(25,582,538)  1  $53,256 
                        
COST OF REVENUES   23,809,907    97,896    (23,809,907)  1   97,896 
                        
GROSS PROFIT (LOSS)   1,772,631    (44,640)   (1,772,631)  1   (44,640)
                        
OPERATING EXPENSES:                       
Selling, general and administrative   1,271,446    1,151,068    (1,271,446)  1   1,151,068 
Research and development   -    167,465    -       167,465 
Total operating expenses   1,271,446    1,318,533    (1,271,446)  1   1,318,533 
                        
INCOME (LOSS) FROM OPERATIONS   501,185    (1,363,173)   (501,185)  1   (1,363,173)
                        
OTHER INCOME (EXPENSE), NET   (399,259)   (482,711)   399,259   1   (482,711)
                        
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES   101,926    (1,845,884)   (101,926)  1   (1,845,884)
                        
INCOME TAX   750    -    (750)  1   - 
                        
NET INCOME (LOSS)   102,676    (1,845,884)   (102,676)  1   (1,845,884)
                        
LESS: NET INCOME (LOSS) ATTRIBUTABLE TO NONCONTROLLING INTEREST   52,962    (87,929)   (52,962)  1   (87,929)
                        
NET INCOME (LOSS) ATTRIBUTABLE TO CONTROLLING INTEREST  $49,714   $(1,757,955)  $(49,714)  1  $(1,757,955)
                        
EARNINGS (LOSS) PER ORDINARY SHARE                       
Basic and diluted  $0.003   $(0.02)          $(0.02)
                        
WEIGHTED AVERAGE ORDINARY SHARES OUTSTANDING                       
Basic and diluted   19,791,110    81,243,000    (11,850,000)  1, 2   89,184,110 

 

73 

 

 

OSSEN INNOVATION CO., LTD AND SUBSIDIARIES

Unaudited Pro Forma Combined Statement of Opeartions

For the Year Ended December 31, 2016

 

           Pro Forma 
   Ossen   AADRF   Adjustments   Note 2  Statement of Operations 
                    
REVENUES  $117,029,154   $4,102,711   $(117,029,154)  1  $4,102,711 
                        
COST OF REVENUES   100,932,528    1,165,081    (100,932,528)  1   1,165,081 
                        
GROSS PROFIT (LOSS)   16,096,626    2,937,630    (16,096,626)  1   2,937,630 
                        
OPERATING EXPENSES:                       
Selling, general and administrative   7,110,542    6,591,907    (7,110,542)  1   6,591,907 
Research and development   -    1,057,640    -       1,057,640 
Total operating expenses   7,110,542    7,649,547    (7,110,542)  1   7,649,547 
                        
INCOME (LOSS) FROM OPERATIONS   8,986,084    (4,711,917)   (8,986,084)  1   (4,711,917)
                        
OTHER INCOME (EXPENSE)   (2,736,554)   (743,806)   2,736,554   1   (743,806)
                        
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES   6,249,530    (5,455,723)   (6,249,530)  1   (5,455,723)
                       
INCOME TAX   (926,048)   -    926,048   1   - 
                        
NET INCOME (LOSS)   5,323,482    (5,455,723)   (5,323,482)  1   (5,455,723)
                        
LESS: NET INCOME (LOSS) ATTRIBUTABLE TO NONCONTROLLING INTEREST   499,509    (141,562)   (499,509)  1   (141,562)
                        
NET INCOME (LOSS) ATTRIBUTABLE TO CONTROLLING INTEREST  $4,823,973   $(5,314,161)  $(4,823,973)  1  $(5,314,161)
                        
EARNINGS (LOSS) PER ORDINARY SHARE                       
Basic and diluted  $0.24   $(0.07)          $(0.06)
                        
WEIGHTED AVERAGE ORDINARY SHARES OUTSTANDING                       
Basic and diluted   19,804,164    81,243,000    (11,850,000)  1, 2   89,197,164 

 

74 

 

 

Note 1 - Description of Transactions

 

A share exchange agreement, dated July 19, 2017, as amended (the “Exchange Agreement”), providing for the acquisition by Ossen Innovation. Ltd. (“the Company”) of all of the issued and outstanding equity interests in America-Asia Diabetes Research Foundation (“AADRF”), a California corporation, from the shareholders of AADRF (“Sellers”), in exchange for 81,243,000 of our ordinary shares (the “Acquisition”). AADRF indirectly owns 90.27% of the equity interests of San Meditech (Huzhou) Co., Ltd. (“San Meditech”), a China-based medical device company engaged in the research, development and marketing of glucose control products. An aggregate of 28,095,454 of such Exchange Shares will be deposited in escrow at the closing of the Acquisition (which is also referred to herein as the closing), including (i) 24,372,900 of such Exchange Shares subject to forfeiture back to us (along with dividends and other earnings otherwise payable with respect to such Earn-Out Shares) in the event that the post-combination company fails to meet certain minimum financial performance targets after the closing and (ii) an additional 3,722,554 of such Exchange Shares subject to forfeiture back to us (along with dividends and other earnings otherwise payable with respect to such Earn-Out Shares) in the event that the Ossen Representative successfully brings an indemnification claim under the Exchange Agreement on behalf of our shareholders.

 

A share purchase agreement, dated July 19, 2017 (the “Purchase Agreement”) and related transactions providing for the sale by the Company of its existing business and operations to Elegant Kindness Limited, an affiliate of the Company’s Chairman, Dr. Liang Tang, in exchange for the cancellation of all of Dr. Tang’s ownership interests (11,850,000 ordinary shares, representing a 59.9% interest prior to the Acquisition and the Spin-Off) in the Company (the “Spin-Off”), so that the Company’s only business upon completion of the Acquisition and the Spin-Off will be that of AADRF and its subsidiaries.

 

Note 2 - Pro Forma Adjustments to the Unaudited Pro Forma Balance Sheet as of December 31, 2016 and March, 2017 and Unaudited Pro Forma Statement of Operations for the Year Ended December 31, 2016 and the Three Months Ended March 31, 2017.

 

1.To record the sale by the Company of its existing business and operations to Elegant Kindness Limited, an affiliate of our Chairman, Dr. Liang Tang, in exchange for the cancellation of all of Dr. Tang’s ownership interests of 11,850,000 ordinary shares.

 

2.To record the acquisition by the Company of 100% of the outstanding capital stock of AADRF, a California corporation, from the shareholders of AADRF, in exchange for 81,243,000 of the Company’s ordinary shares.

 

Note 3 - Earnings Per Share

 

As the Acquisition and the Spin-Off transactions are being reflected as if it had occurred at the beginning of the period presented, the calculation of weighted average shares outstanding for basic and diluted net income (loss) per share assumes that the shares issuable relating to the Acquisition were outstanding for the entire period presented and assumes that the shares cancellable relating to the Spin-Off were not outstanding for the entire period presented.

 

75 

 

 

COMPARATIVE SHARE INFORMATION

 

The following table sets forth historical comparative share information for Ossen and AADRF and unaudited pro forma combined share information after giving effect to the Acquisition and Spin-Off. The historical information should be read in conjunction with “Selected Historical Financial Information of Ossen” and “Selected Historical Financial Information of AADRF” included elsewhere in this proxy statement and the historical financial statements of Ossen and AADRF included elsewhere in this proxy statement. The unaudited pro forma combined share information is derived from, and should be read in conjunction with, the unaudited pro forma condensed combined financial information and related notes included elsewhere in this proxy statement.

 

The unaudited pro forma combined share information does not purport to represent what the actual results of operations of Ossen and AADRF would have been had the Acquisition and Spin-Off been completed or to project Ossen’s and AADRF’s results of operations that may be achieved after the Acquisition and Spin-Off. The unaudited pro forma book value per share information below does not purport to represent what the value of Ossen and AADRF would have been had the Acquisition and Spin-Off been completed nor the book value per share for any future date or period.

 

The pro forma book value per share (calculated by totaling the Company’s assets, subtracting all debts and liabilities, then dividing by the number of outstanding ordinary shares) information was computed as if the Acquisition and Spin-Off had been completed on March 31, 2017. The pro forma earnings (loss) from continuing operations information for the fiscal year ended December 31, 2016 and the three months ended March 31, 2017 was computed as if the Acquisition and Spin-Off and the related financing transactions had been completed on January 1, 2017.

 

The historical book value per share is computed by dividing total ordinary shareholders’ equity by the number of ordinary shares outstanding at the end of the period. The pro forma combined book value per share is computed by dividing total pro forma ordinary shareholders’ equity by the pro forma number of ordinary shares outstanding at the end of the period. The pro forma earnings (loss) from continuing operations per share of the combined company is computed by dividing the pro forma income (loss) from continuing operations available to the combined company’s ordinary shareholders by the pro forma weighted-average number of shares outstanding over the period.

 

   Ossen   AADRF   Pro Forma 
   (Historical)   (Historical)   (Unaudited) 
As of and for the three months ended March 31, 2017               
                
Weight Average Shares Outstanding - Basic and Diluted   19,791,110    81,243,000    89,184,110 
Basic and diluted earnings (loss) from continuing operations per share  $0.003   $(0.02)  $(0.02)
                
Shares outstanding   19,791,110    81,243,000    89,184,110 
                
Book value per share*  $4.60   $0.10   $0.09 
                
As of and for the year ended December 31, 2016               
                
Weight Average Shares Outstanding - Basic and Diluted   19,804,164    81,243,000    89,197,164 
Basic and diluted earnings (loss) from continuing operations per share  $0.24   $(0.07)  $(0.06)
                
Shares outstanding   19,791,110    81,243,000    89,184,110 
                
Book value per share*  $4.60   $(0.28)  $(0.26)

 

*Book value per share is not audited. 

 

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SPECIAL MEETING OF OSSEN SHAREHOLDERS

 

General

 

We are furnishing this proxy statement to our shareholders as part of the solicitation of proxies by our board of directors for use at the special meeting of shareholders to be held on Tuesday, September 5, 2017, and at any adjournment or postponement thereof. This proxy statement is first being furnished to our shareholders on or about August 1, 2017. This proxy statement provides you with information you need to know to be able to vote or instruct your vote to be cast at the special meeting.

 

Date, Time and Place of Special Meeting

 

The special meeting will be held at 10:00 a.m., Eastern time, on Tuesday, September 5, 2017 at the offices of Ellenoff Grossman & Schole LLP, 1345 Avenue of the Americas, 11th Floor, New York, New York 10105, or such other date, time and place to which such meeting may be adjourned or postponed, to consider and vote upon the proposals.

 

Voting Power; Record Date

 

You will be entitled to vote or direct votes to be cast at the special meeting if you own ordinary shares at the close of business in the British Virgin Islands on August 17, 2017, which is the Record Date for the special meeting. You are entitled to one vote for every ordinary share that you own as of the close of business on the Record Date. If your shares are held in “street name” or are in a margin or similar account, you should contact your broker, bank or other nominee to ensure that votes related to the shares you beneficially own are properly counted. As of the date hereof, Ossen has 19,791,110 ordinary shares outstanding, of which 11,850,000 shares are held by Dr. Tang, the Chairman of Ossen. However, Dr. Tang has agreed to abstain from voting on the Acquisition Proposal, the Spin-Off Proposal, the Charter Amendment Proposal and the Incentive Plan Proposal.

 

Holders of the Company’s ADSs who wish to exercise their voting rights for the underlying ordinary shares must act through the Depositary. You are entitled to three votes for every ADS that you own as of the close of business in New York City on August 3, 2017.

 

Quorum and Required Vote for Proposals for the Special Meeting

 

A quorum of our shareholders is necessary to hold a valid meeting. A quorum will be present at the special meeting if a majority of the ordinary shares outstanding and entitled to vote at the special meeting is represented in person or by proxy. Dr. Tang, who holds 11,850,000 shares, is expected to attend the meeting in person or by proxy, in which case a quorum will be met. However, Dr. Tang has agreed to abstain from voting on the Acquisition Proposal, the Spin-Off Proposal, the Charter Amendment Proposal and the Incentive Plan Proposal.

 

Approval of the Acquisition Proposal, the Spin-Off Proposal and the Incentive Plan Proposal requires the affirmative vote of a majority of the shares held by disinterested shareholders as of the record date. The Charter Amendment Proposal, including the re-designation of Class A ordinary shares and the issuance of Class A ordinary shares and Class B ordinary shares, requires the affirmative vote of 75% of the votes cast by disinterested shareholders present in person or represented by proxy at the special meeting.  Accordingly, an Ossen shareholder’s failure to vote by proxy or to vote in person at the special meeting or the failure of an Ossen shareholder who holds his or her shares in “street name” through a broker or other nominee to give voting instructions to such broker or other nominee (a “broker non-vote”) will not be counted towards the number of Ossen ordinary shares required to validly establish a quorum. If a valid quorum is otherwise established, such failure will have no effect on the outcome of the Charter Amendment Proposal and will have the effect of a vote against all of the other proposals. Abstentions will also have no effect on the outcome of the Charter Amendment Proposal and will have the effect of a vote against all other proposals.

 

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Each of the Acquisition Proposal and the Spin-Off Proposal is conditioned upon each other. In addition, we would not implement the Incentive Plan Proposal or the Charter Amendment Proposal in the event that the Acquisition Proposal and the Spin-Off Proposal were not approved.

 

Recommendation to Ossen Shareholders

 

Our board of directors believes that each of the Acquisition Proposal, the Spin-Off Proposal, the Charter Amendment Proposal and the Incentive Plan Proposal to be presented at the special meeting is in the best interests of the Company and our shareholders and unanimously recommends that its shareholders vote “FOR” each of these proposals.

 

When you consider the recommendation of our board of directors in favor of approval of the Acquisition Proposal and the Spin-Off Proposal, you should keep in mind that certain of our directors and officers have interests in the Acquisition and the Spin-Off that are different from or in addition to (or which may conflict with) your interests as a shareholder. These interests include, among other things:

  

  · Pursuant to the Purchase Agreement, Dr. Liang Tang, the Chairman of Ossen and sole shareholder of EK, will receive 100% of the equity interest of OIM, which, through its subsidiaries, operates the current business of Ossen. Dr. Tang owns approximately 59.9% of the issued and outstanding shares of Ossen, which shares will be cancelled as consideration for EK’s purchase of OIM;

 

  · Wei Hua, Ossen’s Chief Executive Officer and Chief Financial Officer, owns 600,000 ordinary shares, and an affiliate of Ossen own 600,000 ordinary shares, and each is expected to continue to hold such shares after the consummation of the Acquisition and Spin-Off; and
     
  · the continued indemnification of current directors and officers of Ossen and AADRF.

 

These interests may influence the Ossen directors in making their recommendation that you vote in favor of the approval of the Acquisition Proposal, the Spin-Off Proposal and the other transactions described in this proxy statement.

 

Broker Non-Votes and Abstentions

 

Under the rules of various national and regional securities exchanges, your broker, bank or nominee cannot vote your ordinary shares with respect to non-discretionary matters unless you provide instructions on how to vote in accordance with the information and procedures provided to you by your broker, bank or nominee.

 

We believe the proposals presented to our shareholders will be considered non-discretionary and therefore your broker, bank or nominee cannot vote your shares without your instructions. If you do not provide instructions with your proxy, your bank, broker or other nominee may deliver a proxy card expressly indicating that it is NOT voting your shares; this indication that a bank, broker or nominee is not voting your shares is referred to as a “broker non-vote.”

 

Assuming a quorum is otherwise validly established, broker non-votes and abstentions will have no effect on the Charter Amendment and will have the effect of a vote against all other proposals to be considered at the special meeting of shareholders.

 

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Voting Your Ordinary Shares

 

Each ordinary share that you own in your name entitles you to one vote on each of the proposals for the special meeting. Your one or more proxy cards show the number of ordinary shares that you own.

 

  You can vote your shares in advance of the special meeting by completing, signing, dating and returning the enclosed proxy card in the postage-paid envelope provided. If you hold your shares in “street name” through a bank, broker or other nominee, you will need to follow the instructions provided to you by your bank, broker or other nominee to ensure that your shares are represented and voted at the special meeting. If you vote by proxy card, your “proxy,” whose name is listed on the proxy card, will vote your shares as you instruct on the proxy card. If you sign and return the proxy card but do not give instructions on how to vote your shares, your ordinary shares will be voted as recommended by our board of directors. Our board of directors recommends voting “FOR” the Acquisition Proposal, “FOR” the Spin-Off Proposal, “FOR” the Charter Amendment Proposal” and “FOR” the Incentive Plan Proposal”.

 

 

You can attend the special meeting if you are a holder of ordinary shares and vote in person even if you have previously voted by submitting a proxy. You will be given a ballot when you arrive. However, if your ordinary shares are held in the name of your broker, bank or other nominee, you must get a proxy from the broker, bank or other nominee.

 

 

Voting your ADSs

 

If you own ADSs as of the close of business in New York City on August 3, 2017 (and do not cancel such ADSs and become a registered holder of the ordinary shares underlying such ADSs as explained below), you cannot attend the meeting or vote at the meeting directly, but you may instruct the Depositary (as the holder of the ordinary shares underlying your ADSs) how to vote the ordinary shares underlying your ADSs by completing and signing the ADS voting instruction card and returning it in accordance with the instructions printed on it as soon as possible but, in any event, so as to be received by the Depositary no later than 12:00 p.m. (New York City Time) on August 31, 2017. The Depositary will endeavor, in so far as practicable, to vote or cause to be voted the number of ordinary shares represented by your ADSs in accordance with your voting instructions. The Depositary will not itself exercise any voting discretion in respect of any ADSs.

 

Alternatively, you may vote at the special meeting if you convert your ADSs into ordinary shares prior to 12:00 p.m. in New York City on August 22, 2017, and become a holder of Shares by the close of business in the British Virgin Islands on August 22, 2017. If you hold your ADSs through a financial intermediary such as a broker, you must rely on the procedures of the financial intermediary through which you hold your ADSs if you wish to vote. If your ADSs are held by your broker, bank or other nominee, see below.

 

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Holders of ADSs will not be able to attend the special meeting unless they convert their ADSs into ordinary shares and become registered in the Company's register of members as the holders of ordinary shares prior to the close of business in the British Virgin Islands on August 17, 2017. If you wish to convert your ADSs into ordinary shares, you need to make arrangements to deliver your ADSs to the Depositary for conversion prior to the close of business on August 17, 2017 together with (a) delivery instructions for the corresponding Shares (name and address of person who will be the registered holder of Shares), (b) payment of the ADS conversion fees ($0.05 per ADS to be cancelled) and any applicable taxes, and (c) a certification that the ADS holder held the ADSs as of August 3, 2017 and has not given, and will not give, voting instructions to the Depositary as to the ADSs being cancelled, or has given voting instructions to the Depositary as to the ADSs being converted but undertakes not to vote the corresponding ordinary shares at the special meeting. If you hold your ADSs in a brokerage, bank or nominee account, please contact your broker, bank or nominee to find out what actions you need to take to instruct the broker, bank or nominee to cancel the ADSs on your behalf. Upon cancellation of the ADSs, the Depositary will arrange to transfer registration of the ordinary shares to the former ADS holder. If after registration of ordinary shares in your name you wish to receive a certificate evidencing the ordinary shares registered in your name, you will need to request the registrar of the ordinary shares to issue and mail a certificate to your attention.

 

Revoking Your Proxy

 

If you give a proxy, you may revoke it at any time before the special meeting or at such meeting as follows.

 

If you own ordinary shares:

 

you may send another proxy card with a later date; or

 

you may attend the special meeting, revoke your proxy, and vote in person, as indicated above.

 

If you hold your shares through a broker, bank or nominee, you must follow the directions of your broker, bank or nominee to change those instructions.

 

If you own ADSs:

 

you may revoke you voting instructions by written notice of revocation timely delivered to the Depositary; or 

 

you can complete, date and submit a new ADS voting instruction card to the Depositary bearing a later date than the ADS voting instruction card sought to be revoked.

 

If you hold your ADSs through a broker, bank or nominee and you have instructed your broker, bank or nominee to give ADS voting instructions to the Depositary, you must follow the directions of your broker, bank or nominee to change those instructions.

 

No Additional Matters May Be Presented at the Special Meeting

 

The special meeting has been called only to consider the approval of the Acquisition Proposal, the Spin-Off Proposal, the Charter Amendment Proposal and the Incentive Plan Proposal. Under our memorandum and articles of association, other than procedural matters incident to the conduct of the special meeting, no other matters may be considered at the special meeting if they are not included in this proxy statement, which serves as the notice of the special meeting.

 

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Who Can Answer Your Questions About Voting

 

If you have any questions about how to vote or direct a vote in respect of your ordinary shares or ADSs, you may call Johnson Zhou, Vice President at +86 (21) 6888-8886.

 

Appraisal Rights

 

If you elect to dissent from the Spin-Off, you will have the right to seek appraisal and payment of the fair value of your shares if the Spin-Off is completed, but only if you deliver to Ossen, before the vote is taken at the special meeting, a written objection to the Spin-Off, including a statement that such shareholder proposes to demand payment for your shares if the Spin-Off is approved, and subsequently comply with all procedures and requirements of Section 179 of the British Virgin Islands Business Companies Act, 2004, as amended with respect to the exercise of appraisal rights, a copy of which is attached as Annex F to the accompanying proxy statement. The fair value of your shares as determined under that statute could be more than, the same as, or less than the value if your shares, and the corresponding stock price of the ADSs relating to such shares on Nasdaq (assuming you arrange with the Depositary to obtain ordinary shares in registered form in exchange for your ADSs), if you do not exercise appraisal rights with respect to your shares.

 

Appraisal rights are available only to registered holders of shares. If you hold any shares in “street name,” you are considered the beneficial owner but not the “registered holder” of such shares. If you hold ADSs, you are not considered the “registered holder” of such shares. Therefore, if you hold any shares in “street name,” or if you hold ADSs, and wish to exercise the appraisal rights, you must arrange for such shares to be registered in your name and certify that you have not given and will not give, directly or indirectly voting instructions prior to the special meeting of shareholders on September 5, 2017. Thereafter, such registered holders must comply with the procedures and requirements for exercising appraisal rights with respect to the shares under Section 179 of the BVI Business Companies Act.

 

We encourage you to read the section of this proxy statement entitled “Appraisal Rights” as well as Annex F to this proxy statement carefully and to consult your BVI legal counsel if you desire to exercise your appraisal rights. If you hold ADSs, we encourage you to contact the Depositary.

 

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THE ACQUISITION PROPOSAL

 

We are asking our shareholders to approve and adopt the Exchange Agreement and the transactions contemplated thereby, including the Acquisition. Our shareholders should read carefully this proxy statement in its entirety for more detailed information concerning the Exchange Agreement and the Acquisition. Please see the subsections below for additional information and a summary of the material provisions of the Exchange Agreement, which is qualified in its entirety by reference to the complete text of the Exchange Agreement, a copy of which is attached as Annex A to this proxy statement and the first amendment thereto is attached as Annex G.

 

The Exchange Agreement provides that we may consummate the Acquisition only if it is approved by the affirmative vote of the holders of a majority of the shares held by disinterested shareholders as of the record date, assuming that a quorum is present.

 

The Exchange Agreement

 

The subsections that follow this subsection describe the material provisions of the Exchange Agreement, but do not purport to describe all of the terms of the Exchange Agreement. The following summary is qualified in its entirety by reference to the complete text of the Exchange Agreement, a copy of which is attached as Annex A (and the first amendment thereto is attached as Annex G) hereto, which is incorporated herein by reference. Shareholders and other interested parties are urged to read the Exchange Agreement carefully and in its entirety (and, if appropriate, with the advice of financial and legal counsel) because it is the primary legal document that governs the Acquisition.

 

The Exchange Agreement contains representations, warranties and covenants that the respective parties made to each other as of the date of the Exchange Agreement or other specific dates. The assertions embodied in those representations, warranties and covenants were made for purposes of the contract among the respective parties and are subject to important qualifications and limitations agreed to by the parties in connection with negotiating the Exchange Agreement. The representations, warranties and covenants in the Exchange Agreement are also modified in important part by the disclosure schedules and annexes attached thereto which are not filed publicly and which are subject to a contractual standard of materiality different from that generally applicable to shareholders. The disclosure schedules were used for the purpose of allocating risk among the parties rather than establishing matters as facts. We do not believe that the disclosure schedules contain information that is material to an investment decision.

 

General Description of the Exchange Agreement

 

On July 19, 2017, we entered into the Exchange Agreement with AADRF, the Sellers, Wei Hua, the Chief Executive Officer of Ossen, in his capacity as the representative for our shareholders prior to the Acquisition (the “Ossen Representative”), and Howard Hao, the Chairman of AADRF, in his capacity as the representative for the Sellers (the “Seller Representative”), pursuant to which, among other things and subject to the terms and conditions contained therein, we will effect an indirect acquisition of 90.27% of the equity of San Meditech by acquiring from Sellers all outstanding equity interests of AADRF.

 

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Pursuant to the Exchange Agreement, in exchange for all of the outstanding shares of AADRF, we will issue 81,243,000 ordinary shares (the “Exchange Shares”) to the Sellers, with an aggregate of 28,095,454 of such Exchange Shares being deposited in escrow at the closing of the Acquisition (which is also referred to herein as the closing), including (i) 24,372,900 of such Exchange Shares (“Earn-Out Shares”) subject to forfeiture back to us (along with dividends and other earnings otherwise payable with respect to such Earn-Out Shares) in the event that the post-combination company fails to meet certain minimum financial performance targets after the closing and (ii) an additional 3,722,554 of such Exchange Shares (the “Indemnification Shares” and, collectively with the Earn-Out Shares, the “Escrow Shares”) subject to forfeiture back to us (along with dividends and other earnings otherwise payable with respect to such Indemnification Shares) in the event that the Ossen Representative successfully brings an indemnification claim under the Exchange Agreement on behalf of our shareholders. The Exchange Shares, including the Escrow Shares, will be allocated among the Sellers pro-rata based on each Seller’s ownership of the Company prior to the closing. The Exchange Shares will be subject to a lock-up as set forth in the Lock-Up Agreements as described herein.

 

Earn-Out

 

The Earn-out Shares will be held in an escrow account maintained by an escrow agent that is a party to the Escrow Agreement, in its capacity as the escrow agent under the Escrow Agreement or any other escrow agent agreed to by Ossen and AADRF prior to the Closing (or any successor escrow agent (the “Escrow Agent”). While the Earn-out Shares are held in escrow, any dividends and other distributions otherwise payable with respect to the Earn-Out Shares will be held back by us and not paid until the Earn-out Shares are released from escrow to the Sellers in proportion to their respective equity interests in AADRF immediately prior to the closing of the Acquisition, but the Sellers will be entitled to vote the Earn-out Shares. Subject to indemnification claims, all of the Earn-out Shares (along with the related accrued dividends and distributions) shall be released upon the post-Acquisition company obtaining aggregated consolidated revenue from the operations of Ossen, AADRF and their respective subsidiaries, including subsidiaries acquired by Ossen, AADRF or their respective subsidiaries following the closing of the Acquisition and the Spin-Off (as reported in the audited financial statements included in our annual report on Form 20-F) of $6,470,588, assuming a RMB:USD exchange rate of 6.8:1, in 2017. If the target Earn-out is met, the applicable Earn-out Shares will be released on or before the 130th day after December 31, 2017. Revenue will be determined using the post-Acquisition company’s revenue as determined in accordance with U.S. generally accepted accounting principles.

 

Each Seller’s share of the Earn-out Shares (and the related accrued dividends and distributions not paid) is subject to forfeiture in the event that such Seller breaches its Non-Competition and Non-Solicitation Agreement (as described below under the heading “Related Agreements — Non-Competition and Non-Solicitation Agreements”).

 

Post-Acquisition Ownership of the Company and Ossen

 

It is anticipated that, following completion of the Acquisition and Spin-Off, Ossen’s existing shareholders (excluding Dr. Tang) will retain an ownership interest of approximately 8.9% of the Company (or approximately 12.25% in the event that the Earn-Out Shares are forfeited), current members of Ossen management or affiliates of Ossen (excluding Dr. Tang) will own approximately 1.35% (or approximately 1.85% in the event that the Earn-Out Shares are forfeited), and Sellers will own approximately 91.1%, of the outstanding equity of the Company (or approximately 89.75% in the event that the Earn-Out Shares are forfeited). These percentages are based on the assumption that Ossen will not issue any additional ordinary shares.

 

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Ossen Representative and Seller Representative

 

Wei Hua, the Chief Executive Officer of Ossen, is serving as the Ossen Representative under the Exchange Agreement, and in such capacity will represent the interests of our shareholders prior to closing with respect to certain matters under the Exchange Agreement.

 

Howard Gang Hao, the Chairman of AADRF, is serving as the Seller Representative under the Exchange Agreement, and in such capacity will represent the interests of the Sellers with respect to certain matters under the Exchange Agreement.

 

Closing of the Acquisition

 

The closing of the Acquisition is expected to take place no later than the third business day following the day on which the last of the conditions to the closing (described under the subsection entitled “— Conditions to Closing of the Acquisition”) have been satisfied or waived (other than those conditions that by their nature are to be satisfied at the closing, but subject to the fulfillment or waiver of those conditions) or such other date as may be mutually agreed to by us and AADRF. Assuming timely satisfaction of the necessary closing conditions, we currently expect the closing to occur promptly after the special meeting of our shareholders is concluded.

 

Conditions to Closing of the Acquisition

 

The obligation of the parties to complete the Acquisition is subject to the fulfillment of certain closing conditions, including but not limited to:

 

the approval of the Exchange Agreement and the transactions contemplated thereby (including the Acquisition), and of the Purchase Agreement and the transactions completed thereby (including the Spin-Off) by a majority of the shares held by disinterested shareholders as of the record date;

 

the expiration or termination of the regulatory waiting periods under any applicable antitrust laws and the receipt of any other required governmental and regulatory approvals and consents;

 

there is no applicable law or order in effect which makes illegal or prevents or prohibits the transactions contemplated by the Exchange Agreement, and there is no pending third party legal proceeding to enjoin or otherwise restrict the closing;

 

listing of Ossen’s American Depositary Shares on the NASDAQ;

 

delivery of a fairness opinion by Highline Research Advisers LLC to Ossen’s special committee;

 

the conditions to the obligations of the parties to the Spin-Off Agreements to consummate the Spin-Off Transaction shall have been satisfied or waived;

 

subject to shareholder approval, AADRF’s Amended and Restated Memorandum and Articles of Association shall become effective as of the Closing;

 

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the entrance by the applicable parties into the Escrow Agreement, the Lock-Up Agreement and the Non-Competition and Non-Solicitation Agreement;

 

  Dr. Tang, or any of his affiliates, shall have agreed to reimburse Ossen for any funds, if any, that we shall have paid to dissenting shareholders of the Purchaser pursuant to Section 179 of the BVI Business Companies Act, 2004, and all expenses related thereto, pursuant to an agreement to be entered into between Dr. Tang and Ossen, upon terms acceptable to Ossen and the Sellers.

 

In addition, unless waived by AADRF and the Seller Representative, the obligations of AADRF and the Sellers to consummate the Acquisition are subject to the fulfillment of certain closing conditions, including:

 

the accuracy of our representations and warranties (subject in certain cases to certain materiality, knowledge and other qualifications) and the performance and compliance in all material respects of our agreements and covenants under the Exchange Agreement to be performed on or prior to the closing date (along with the delivery of a certificate from an officer of ours certifying the same)

 

no fact, event, occurrence, change or effect shall have occurred that has had or would be reasonably expected to have a material adverse effect on us (along with the delivery of a certificate from an officer of ours certifying the same);

 

delivery by us of certain other closing deliveries, including:

 

-      a certificate from our secretary certifying as to certain corporate matters;

 

-      good standing certificates for us, to the extent applicable, from the British Virgin Islands and any other jurisdiction where we are qualified to do business as a foreign entity; and

 

-      a fully executed copy of the Escrow Agreement has been delivered by us to AADRF and the Sellers.

 

In addition, unless waived by us, our obligation to consummate the Acquisition is subject to the fulfillment of certain closing conditions, including:

 

the accuracy of the representations and warranties of AADRF and the Sellers (subject in certain cases to certain materiality, knowledge and other qualifications) and the performance and compliance in all material respects by AADRF and the Sellers of their agreements and covenants under the Exchange Agreement to be performed on or prior to the closing date (along with the delivery of a certificate from an officer of AADRF and an officer of each Seller certifying the same);

 

no fact, event, occurrence, change or effect shall have occurred that has had or would be reasonably expected to have a material adverse effect on AADRF or any of its subsidiaries (along with the delivery of a certificate from an officer of AADRF certifying the same);

 

delivery by AADRF and the Sellers of certain other closing deliveries, including:

 

-         a certificate from AADRF’s secretary certifying as to certain corporate matters;

 

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-         good standing certificates for AADRF and its subsidiaries, to the extent applicable, from their jurisdiction of organization and any other jurisdiction where they are qualified to do business as a foreign entity;

 

-         a certified copy of AADRF’s certificate of incorporation from the State of California;

 

-         employment agreements with certain key personnel of San Meditech;

 

-         certain legal opinions from AADRF’s counsel;

 

-         share certificates for AADRF shares purchased by us in the Acquisition;

 

-         board of directors’ resolutions of AADRF; and

 

-         resignations of certain directors and officers of AADRF.

 

We cannot provide assurance as to when or if all of the closing conditions will be satisfied or waived by the appropriate party. As of the date of this proxy statement, we have no reason to believe that any of these conditions will not be satisfied.

 

Amendment or Waiver of the Exchange Agreement

 

The Exchange Agreement may be amended or supplemented by written agreement of the parties of the Exchange Agreement. If permitted under applicable law, we, AADRF and the Seller Representative on behalf of the Sellers may waive any inaccuracies in the representations and warranties made to such party contained in the Exchange Agreement and waive compliance with any agreements or conditions for the benefit of such party contained in the Exchange Agreement. Any waiver of the Exchange Agreement after the closing will also require the consent of the Ossen Representative.

 

Efforts to Obtain Shareholder Approval and Consummate the Acquisition; Regulatory Matters

 

Unless the Exchange Agreement is terminated in accordance with its terms, we have agreed to call a special meeting of our shareholders, for the purpose of such shareholders considering and voting on the approval and adoption of the Exchange Agreement and the Acquisition and the other transactions contemplated thereby, including the appointment of directors and committee members in accordance with the requirements of the Exchange Agreement and any other matters required to be voted upon by such shareholders in connection with the transactions contemplated in the Exchange Agreement. We may delay, postpone or adjourn such special meeting of our shareholders if, as of the time for which the shareholders meeting is originally scheduled, there are insufficient ordinary shares represented (either in person or by proxy) and voting to approve the Acquisition Proposal or to constitute a quorum necessary to conduct the business of the special meeting. Our board of directors has approved the Exchange Agreement and the Acquisition and directed that the Exchange Agreement and the Acquisition be submitted to our shareholders for their consideration.

 

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Moreover, each party to the Exchange Agreement has agreed to execute and deliver such documents and take such further actions as may be reasonably necessary or desirable to carry out the provisions of the Exchange Agreement and the transactions contemplated thereby, including the Acquisition. Upon the terms and subject to the conditions of the Exchange Agreement, each of the parties to the Exchange Agreement will use all commercially reasonable efforts under the circumstances to take, or cause to be taken, all actions and to do, or cause to be done, all other things necessary, proper or advisable to consummate and make effective the transactions contemplated by the Exchange Agreement (including the Acquisition), as soon as reasonably practicable, including preparing and filing as soon as practicable all documentation to effect all necessary notices, reports and other filings.

 

In addition, the parties agreed to as promptly as practicable make all filings and provide all documentation required under any applicable anti-trust laws with respect to the transactions contemplated by the Exchange Agreement, and cooperate with respect to any responses from applicable governmental authorities. At any time before or after consummation of the Acquisition, the applicable competition authorities could take such action under applicable antitrust laws as each deems necessary or desirable in the public interest, including seeking to enjoin the consummation of the Acquisition. Private parties may also seek to take legal action under the antitrust laws under certain circumstances.

 

The parties are also required to, as soon as reasonably practicable, cooperate and use their commercially reasonable efforts to prepare and file with governmental authorities requests for approval of, and have such governmental authorities approve, the transactions contemplated by the Exchange Agreement. Each party also agreed to use its commercially reasonable efforts to obtain any required consents of third parties for the transactions contemplated by the Exchange Agreement. However, in no event will a party be required to agree to any term, condition or modification with respect to obtaining any governmental authority or third party consent in connection with the transactions contemplated by the Exchange Agreement that would, or would be reasonably likely to, result in a material adverse effect to such party or its affiliates or require such party to cease, sell or otherwise dispose of, or hold separate, any material assets or businesses.

 

We cannot assure you that any of the approvals of governmental authorities or other third parties described above will be obtained, and, if obtained, we cannot assure you as to the date of such approvals or the absence of any litigation challenging any such approvals. We are not aware of, and AADRF and the Sellers have not identified to us, any material governmental authority or third party approvals or actions that are required for completion of the Acquisition. It is presently contemplated that if any such additional approvals or actions are required, those approvals or actions will be sought, but there can be no assurance that any additional approvals or actions will be obtained.

 

Termination

 

The Exchange Agreement may be terminated prior to the closing upon occurrence of certain conditions, including:

 

•       the mutual agreement of AADRF and us (even if after our shareholders have voted in favor of the Exchange Agreement and the Acquisition);

 

•       by written notice of AADRF or us if any conditions to closing have not been satisfied or waived by the six month anniversary of the Exchange Agreement, subject to certain carve outs;

 

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•       by either us or AADRF if any governmental authority of competent jurisdiction has issued a final and non-appealable order or taken any other action permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by the Exchange Agreement, so long as no breach of the Exchange Agreement by such terminating party or its affiliates (or, with respect to AADRF, the Sellers) was a substantial cause of, or substantially resulted in, such action by such governmental authority;

 

•       by AADRF for a breach of our representations, warranties, covenants or agreements in the Exchange Agreement which would result in the related closing condition not being met and such breach is incapable of cure or is not cured within the earlier of 20 days after notice of such breach or the outside date;

 

•       by us for a breach of AADRF’s or the Sellers’s representations, warranties, covenants or agreements in the Exchange Agreement which would result in the related closing condition not being met and such breach is incapable of cure or is not cured within the earlier of 20 days after notice of such breach or the outside date;

 

•      by us if there shall have been a material adverse effect on AADRF or its subsidiaries or variable interest entities which is not cured; or

 

•      by us if the requisite shareholder vote in favor of the Exchange Agreement and the Acquisition is not obtained at our special meeting.

 

If the Exchange Agreement is terminated, all further obligations of the parties under the Exchange Agreement will terminate and will be of no further force and effect and no party will have any further liability thereunder to any other party, except that certain obligations related to public announcements, confidentiality, termination and termination fees and general provisions will continue in effect, and no party shall be relieved of liability for any fraud claims or willful breach of the Exchange Agreement prior to such termination.

 

Fees and Expenses

 

In the event that we terminate the Exchange Agreement for a breach by the Company or the Sellers, AADRF will be required to pay to us as liquidated damages a termination fee equal to the transaction expenses incurred by us and our affiliates, provided that AADRF and the Sellers shall not be relieved of liability for any fraud claims or willful breach of the Exchange Agreement prior to such termination.

 

Other than the termination fee described above and the Ossen Representative’s and Seller Representative’s respective rights to reimbursement, each party will bear its own expenses in connection with the Exchange Agreement and the transactions contemplated thereby, including with respect to us, our deferred IPO expenses.

 

Representations and Warranties

 

The Exchange Agreement contains a number of representations and warranties made by us, on the one hand, and AADRF and the Sellers on the other hand, made solely for the benefit of the other, which in certain cases are subject to specified exceptions and qualifications contained in the Exchange Agreement or in information provided pursuant to certain disclosure schedules to the Exchange Agreement. The representations and warranties are customary for transactions similar to the Acquisition.

 

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In the Exchange Agreement, AADRF made certain customary representations and warranties to us. These representations and warranties, among others, related to the following: (1) corporate matters, including due organization, existence and good standing; (2) authority and binding effect relative to execution and delivery of the Exchange Agreement and other ancillary agreements; (3) capitalization; (4) subsidiaries; (5) governmental approvals; (6) non-contravention; (7) financial statements; (8) absence of certain changes; (9) compliance with laws; (10) permits and licenses; (11) litigation; (12) material contracts; (13) intellectual property; (14) taxes and tax returns; (15) real property; (16) personal property; (17) title to and sufficiency of assets; (18) employee matters; (19) benefit plans; (20) environmental matters; (21) transactions with related persons; (22) insurance; (23) books and records; (24) accounts receivable; (25) top customers and suppliers; (26) ethical business practices; (27) Investment Company Act of 1940; (28) finders and investment bankers; (29) independent investigation; (30) information supplied; (31) foreign private issuer status; (32) no disqualification events; and (33) disclosure. Each of the Sellers also made certain customary representations and warranties to us on a several and not joint basis, including representations and warranties related to the following: (1) corporate matters, including due organization, existence and good standing; (2) authority and binding effect relative to execution and delivery of the Exchange Agreement and other ancillary agreements; (3) ownership of AADRF shares to be purchased by us; (4) governmental approvals; (5) non-contravention; (6) litigation; (7) investment representations; (8) finders and investment bankers; (9) independent investigation; (10) information supplied and (11) disclosure.

 

In the Exchange Agreement, we made certain customary representations and warranties to AADRF. These representations and warranties, among others, related to the following: (1) corporate matters, including due organization, existence and good standing; (2) authority and binding effect relative to execution and delivery of the Exchange Agreement and other ancillary agreements; (3) governmental approvals; (4) non-contravention; (5) capitalization; (6) SEC filings and financial statements; (7) absence of certain changes; (8) compliance with laws; (9) litigation, orders and permits and licenses; (10) taxes and returns; (11) employees and employee benefit plans; (12) properties; (13) material contracts; (14) transactions with related persons; (15) Investment Company Act of 1940; (16) finders and investment bankers; (17) ownership of the Exchange Shares; (18) ethical business practices; (19) insurance; (20) independent investigation; (21) foreign private issuer status, (22) lack of disqualifying events under the Securities Act.

 

Certain of the representations and warranties are qualified by knowledge and/or materiality or material adverse effect. For the purposes of the Exchange Agreement, material adverse effect means, with respect to any specified person, any fact, event, occurrence, change or effect that has had, or would reasonably be expected to have, individually or in the aggregate, a material adverse effect upon (a) the business, assets, liabilities, results of operations, prospects or condition (financial or otherwise) of such person and its subsidiaries, taken as a whole, or (b) the ability of such person or any of its subsidiaries on a timely basis to consummate the transactions contemplated by the Exchange Agreement or any of the ancillary documents. However, it excludes any changes or effects directly or indirectly attributable to, resulting from, relating to or arising out of the following: (i) general changes in the financial or securities markets or general economic or political conditions in the country or region in which such person or any of its subsidiaries do business; (ii) changes, conditions or effects that generally affect the industries in which such person or any of its subsidiaries principally operate; (iii) changes in U.S. generally accepting accounting principles or mandatory changes in the regulatory accounting requirements applicable to any industry in which such person and its subsidiaries principally operate; (iv) conditions caused by acts of god, terrorism, war (whether or not declared) or natural disaster; (v) any failure in and of itself by such person and its subsidiaries to meet any internal or published budgets, projections, forecasts or predictions of financial performance for any period (except that the underlying cause of any such failure may be considered in determining whether a material adverse effect has occurred or would reasonably be expected to occur to the extent not excluded by another exception herein); and (vi), with respect to us, the consummation and effects of the redemption of our public shares; provided that any event, occurrence, fact, condition, or change referred to in clauses (i) – (iv) above shall be taken into account in determining whether a material adverse effect has occurred or could reasonably be expected to occur to the extent that such event, occurrence, fact, condition, or change has a disproportionate effect on such person or any of its subsidiaries compared to other participants in the industries in which such person or any of its subsidiaries primarily conducts its businesses.

 

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Other Covenants of the Parties

 

AADRF covenanted to us that during the period from the date of the Exchange Agreement until the earlier of the closing or termination of the Exchange Agreement, it will and will cause its subsidiaries to conduct their respective businesses in the ordinary course of business consistent with past practice, to comply with all applicable laws and to preserve their respective businesses, personnel and assets, all consistent with past practice, including maintaining their top customers and top suppliers. We also agreed to keep current and timely file all of our public filings and comply in all material respects with applicable securities laws and to use our commercially reasonable efforts to maintain the listing of our securities on the NASDAQ Capital Market, and AADRF agreed to provide us with periodic financial statements until the closing, and to not trade our securities while they are in possession of material nonpublic information.

 

The Exchange Agreement also contains customary mutual covenants relating to the preparation of this proxy statement and our redemption of our public shares, the granting of access to information, non-solictation, the filing of tax returns and other tax matters, public announcements with respect to the transactions contemplated by the Exchange Agreement, confidentiality, notification of breaches and other certain events, exclusivity with respect to the transactions contemplated by the Exchange Agreement (and with respect to any alternative transactions), litigation support, the retention of books and records, disclosure schedule updates, as of the closing. The Sellers also agreed that after the closing they would cause Ossen to engage its auditor to complete an attestation pursuant to Section 404(b) of SOX and Item 308(b) of Regulation S-K of Ossen’s internal control over financial reporting effective no later than December 31, 2018, or such date as is required by SEC rules or other applicable law, with such report to be included in Ossen’s applicable annual report.

 

Governing Law and Dispute Resolution

 

The Exchange Agreement is governed by New York law. Any disputes under the Exchange Agreement, other than claims for injunctive or equitable relief (including specific performance to strictly enforce the terms of the Exchange Agreement) will be subject to arbitration by the American Arbitration Association to be held in Manhattan, New York. Any claims that are brought before a court will be subject to exclusive jurisdiction of the state and federal courts in New York, New York (and appeals courts), and each party waived its rights to a jury trial in connection therewith. The parties are entitled to an injunction, specific performance and other equitable relief to prevent breaches of the Exchange Agreement in addition to any other remedy to which they are entitled at law or in equity.

 

Amendment to the Exchange Agreement 

 

The Exchange Agreement was amended on July 31, 2017 to provide for (i) certain technical changes to the description of the contents of the proxy statement set out in the Exchange Agreement, (ii) reimbursement of Ossen by Dr. Tang for any funds, if any, that Ossen shall have paid to dissenting shareholders of Ossen pursuant to Section 179 of the BVI Business Companies Act, 2004, and all expenses related thereto, as well as (iii) to require the approval of the proposals at the special meeting by the holders of a majority of the issued and outstanding shares of Ossen held by disinterested shareholders. The amendment is attached as Annex G to this proxy statement.

 

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Board of Directors and Management Following the Acquisition and Spin-Off

 

Immediately following the Acquisition and Spin-Off, we anticipate that the board of directors of the Company will be as follows:

 

Name   Current Principal Role at Ossen or San Meditech
Howard Gang Hao   Founder of San Meditech
Hongguang Liu   Director
Song Guo   Director
Yipeng Wang   Director
Xiaoyang Li   Director

 

See the section entitled “Management After the Acquisition.”

 

Survival, Indemnification and Escrow

 

The representations and warranties made by AADRF and the Sellers in the Exchange Agreement generally survive for a period of two years after the closing, with certain representations relating to taxes, benefit plans, environmental matters and information supplied surviving until 60 days after the expiration of the applicable statute of limitations and certain fundamental representations relating to due organization and good standing, authorization and binding effect, capitalization and ownership of AADRF shares, subsidiaries, finders and investment bankers and independent investigation surviving indefinitely. Claims against AADRF or the Sellers based on fraud, willful misconduct or intentional misrepresentation also survive indefinitely. The covenants and agreements of AADRF and the Sellers survive until fully performed. Our representations and warranties, as well as our covenants and agreements to be performed prior to the closing, do not survive the closing and after the closing we have no obligations with respect thereto. Our covenants and agreements to be performed after the closing survive until fully performed.

 

From and after the closing, the Sellers and their respective successors and assigns are required to jointly and severally indemnify us and our affiliates and our respective officers, directors, managers, employees, successors and permitted assigns (each referred to with respect to claims as an indemnified party) from and against any losses from (a) the breach of any of AADRF’s or the Sellers’ respective representations and warranties, (b) the breach of any of AADRF’s or the Sellers’ respective covenants or our post-closing covenants, or (c) any actions by persons who were holders of equity securities (including options, warrants, convertible securities or other rights) of any San Meditech entity prior to the closing arising out of the sale, purchase, termination, cancellation, expiration, redemption or conversion of any such securities and any fraud claims.

 

From and after the closing, Fascinating Acme Development Limited, a British Virgin Islands company, and its respective successors and assigns (“FADL”) is required to jointly and severally indemnify us and our affiliates and their respective officers, directors, managers, employees, successors and permitted assigns (each referred to with respect to claims as an indemnified party) from and against any losses from (a) the breach of any of Ossen’s representations and warranties, (b) the breach of any of Ossen’s covenants or post-closing covenants, or (c) any actions by persons who were holders of equity securities (including options, warrants, convertible securities or other rights) of Ossen prior to the closing arising out of the sale, purchase, termination, cancellation, expiration, redemption or conversion of any such securities, and any fraud claims.

 

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In any indemnification claims, the Ossen Representative will represent Ossen and its affiliates and the Seller Representative will represent the AADRF and their affiliates.

 

Other than claims based on fraud, willful misconduct or intentional misrepresentation, indemnification claims will be limited to the value of the 3,722,554 shares (the “Indemnification Shares”) that were deposited in in the escrow account established by the Escrow Agent under the Escrow Agreement to be entered into at the closing and the related accrued dividends and distributions held back by us. Indemnification claims will first be paid from the escrow account and the related accrued dividends and distributions, and if any Indemnification Shares or accrued dividends or distributions have been distributed to the Sellers, the Sellers will be jointly and severally liable up to the value of the Indemnification Shares and accrued dividends and distributions on the date of distribution. Any earn-out payments to be paid will be reduced by the amount of any insurance proceeds paid as well as the amount of any indemnification claims against the Sellers that are pending or finally determined in our favor but not yet paid, with the amounts reserved for pending claims (and related accrued dividends and distributions) distributed either to the Sellers or the Purchaser upon the final resolution of each such claim.

 

Related Agreements

 

This section describes the material provisions of certain additional agreements to be entered into pursuant to the Exchange Agreement (the “Related Agreements”) but does not purport to describe all of the terms thereof. The following summary is qualified in its entirety by reference to the complete text of each of the Related Agreements. Copies of the Related Agreements have been filed with the SEC. Shareholders and other interested parties are urged to read such Related Agreements in their entirety.

 

Lock-Up Agreements

 

At the closing of the Acquisition, the Company and San Meditech will enter into a Lock-Up Agreement with the Sellers with respect to the Exchange Shares received by the Sellers in the Acquisition. In such Lock-Up Agreement, each Seller will agree, subject to certain exceptions set forth therein, that such Seller will not, from the closing of the Acquisition until the first anniversary of the closing (or if earlier, the date on which the Company consummates a liquidation, merger, share exchange or other similar transaction with an unaffiliated third party that results in all of the Company’s shareholders having the right to exchange either equity holdings in us for cash, securities or other property) (the “Lock-up Period”), (i) lend, offer, pledge, hypothecate, encumber, donate, assign, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any Exchange Shares, (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Exchange Shares or (iii) publicly disclose the intention to do any of the foregoing, whether any such transaction described in clauses (i), (ii), or (iii) above is to be settled by delivery of Exchange Shares or other securities, in cash or otherwise. Each Seller will be allowed to transfer any of its Exchange Shares by gift, will or intestate succession or to any affiliate, shareholder, members, party or trust beneficiary, provided in each such case that the transferee thereof agrees to be bound by the restrictions set forth in the Lock-up Agreement. Additionally, each Seller will be allowed to pledge its Exchange Shares to an unaffiliated third party as a guarantee to secure loans made by such third party to San Meditech or any of its subsidiaries.

 

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Non-Competition and Non-Solicitation Agreements

 

At the closing of the Acquisition, certain Sellers and individuals associated with such Sellers that are involved in the management of San Meditech (together with such Seller, referred to as the “Subject Parties”) will enter into a Non-Competition and Non-Solicitation Agreement in favor of us and San Meditech and our respective successors, affiliates and subsidiaries (referred to as the “Covered Parties”), relating to the post-Acquisition company’s business. Under the Non-Competition and Non-Solicitation Agreements, for a period from the closing to two years after the closing, each Subject Party and its affiliates will not, without our prior written consent, anywhere in the Peoples’ Republic of China directly or indirectly engage in (or own, manage, finance or control, or become engaged or serve as an officer, director, employee, member, partner, agent, consultant, advisor or representative of, an entity that engages in) the business of directly or indirectly providing glucose control products in the Peoples’ Republic of China (the “Business”). However, the Subject Parties and their respective affiliates will be permitted under the Non-Competition and Non-Solicitation Agreements to own passive portfolio company investments in a competitor, so long as the Subject Parties and their affiliates and their respective shareholders, directors, officer, managers and employees who were involved with the business of San Meditech and its subsidiaries are not involved in the management or control of such competitor. Additionally, family members and associates of Subject Parties will be permitted to continue their existing activities as specified in the agreement, even if competitive, as long as the Subject Parties are not involved in the management or control of such competitor. The Subject Parties also will agree during such restricted period to not, without our prior written consent, (i) solicit or hire the Covered Parties’ employees, consultants or independent contractors as of the closing (or during the year prior to the closing) or otherwise interfere with the Covered Parties’ relationships with such persons, (ii) solicit or divert the Covered Parties’ customers as of the closing (or during the year prior to the closing) relating to San Meditech’s business or otherwise interfere with the Covered Parties’ contractual relationships with such persons, or (iii) interfere with or disrupt any Covered Parties’ vendors, suppliers, distributors, agents or other service providers for a purpose competitive with a Covered Party as it relates to the Business. The Subject Parties will also agree in each Non-Competition and Non-Solicitation Agreement to not disparage the Covered Parties and to keep confidential and not use the confidential information of the Covered Parties.

 

Background of the Acquisition

 

The terms of the Exchange Agreement and Purchase Agreement are the result of extensive arm’s-length negotiations among the management teams of Ossen and AADRF, and their representatives, under the guidance of each company’s board of directors and the special committee of Ossen, and involving outside advisors retained by each of the companies. From the beginning, Ossen followed a careful process assisted by experienced outside financial and legal advisors to rigorously examine the potential transactions.

 

The following is a brief description of the background of these negotiations, the Exchange Agreement, the Purchase Agreement and related transactions.

 

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Due to the reasons set forth in “Ossen’s Board of Directors Reasons for the Approval of the Acquisition” below, in 2014, the board of Ossen decided that it would consider selling Ossen’s existing business to Dr. Tang and to acquire a new business. Dr. Tang indicated that he would be willing to acquire the existing Ossen business in exchange for the ordinary shares of Ossen held by Dr. Tang. The board was willing to proceed on such basis provided that a target company with substantial growth opportunities that could provide potential significant upside to existing public shareholders could be located and acquired by Ossen. From October 2014 through July 2016, Ossen was introduced to five potential acquisition target companies, including a financial services company, a pharmaceutical company and AADRF. Representatives of Ossen held in-person or telephonic discussions with representatives of these four companies and discussed the potential transaction internally. Representatives of Ossen reviewed the potential acquisitions based on the criteria discussed below and used in evaluating the proposed business combination, which included established businesses with proven track records, experienced management teams and strong competitive positions with, or with the potential for, revenue and earnings growth and strong free cash flow generation. Ossen focused on companies in industries exhibiting growth or the potential for near-term growth momentum, and within those sectors, companies that would benefit from being a publicly-traded company.

 

After reviewing the potential targets, participating in discussions with their representatives and signing non-disclosure agreements with three potential targets, Ossen management identified AADRF as its acquisition target.

 

In June 2015, during its shareholders’ meeting, San Meditech decided to explore the possibility of going public in China or abroad. Since then, San Meditech’s shareholders and senior management distributed San Meditech’s fact sheet to several contacts within its social and business network. One of Mr. Hao’s former classmates introduced Mr. Scott Powell, an individual that has provided investor relations services to Ossen, to Mr. Hao. Mr. Powell was aware of Ossen’s intention to acquire a business because of the discussions he had with Ossen management in Mr. Powell’s capacity as an investor relations advisor. On May 7, 2016, Mr. Powell raised the possibility of a transaction involving Ossen to Mr. Hao, chairman and CEO of San Meditech.

 

On May 23, 2016, Mr. Powell called Mr. Peng, Ossen’s Chief Financial Officer, regarding AADRF. Mr. Peng verbally reported to the Ossen board and was instructed by the Ossen board to follow up on this lead. Following the call, Mr. Powell sent a presentation regarding AADRF to Mr. Peng.

 

On June 12, 2016, AADRF signed a non-disclosure agreement with Ossen.

 

On June 20, 2016, Mr. Powell introduced Ms. Wei Ning, Chief Operating Officer of San Meditech and its China legal counsel, to Mr. Peng. Ms.Ning and Mr. Peng held a meeting and discussed the arrangement for Ossen’s initial due diligence on San Meditech. Also in attendance were Mr. Qingfeng Wu and Ms. Yongcui Chen from San Meditech. During the meeting, the group also discussed matters relating to San Meditech’s financial status, business model, and management team. In the following weeks several discussions were held between Ossen and Mr. Powell and between San Meditech and Mr. Powell.

 

For preliminary due diligence purposes, on July 6, 2016, Mr. Powell organized meetings in which Mr. Peng and Mr. Chester Pan, Vice President of Finance of Ossen, visited San Meditech’s manufacturing facility in Huzhou, Zhejiang Province and met with Mr. Howard Gang Hao, founder and chairman of San Meditech, Mr. Huashi Zhang, Chief Scientist, and other senior management of San Meditech. Mr. Peng and Mr. Pan visited San Meditech’s production facility, labs, warehouses, and offices. During the facility tour, they talked to various employees and asked questions about the manufacturing process, production equipment, employee numbers and other pertinent information. After the facility tour, Mr. Peng and Mr. Pan had a meeting with the senior management of San Meditech. During the meeting, the Chief Scientist of San Meditech, Mr. Huashi Zhang, made a presentation of San Meditech’s products and technology. After the presentation, Mr. Peng and Mr. Pan asked Mr. Hao questions about San Meditech’s history, products, market, competitive landscape, financials, customers, management and patents. After the meeting, Mr. Pan reviewed San Meditech’s certifications, registration documents, and last three years’ financial statements.

 

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After this due diligence visit, Mr. Peng and Mr. Pan reported to Ossen’s board on their trip and due diligence on San Meditech. The board instructed Dr. Tang and Mr. Peng to commence negotiations with San Meditech. San Meditech was of great interest to the Ossen board among the acquisition candidates considered to-date, because of its proven technology and great potential of future growth.

 

On June 24, 2016, Ellenoff Grossman & Schole LLP, Ossen’s U.S. legal counsel (“EGS” or “Ellenoff”), provided an initial draft letter of intent to San Meditech on Ossen’s behalf.

 

On June 28, 2016, Ossen’s management reviewed the valuation of comparable companies to San Meditech listed in the United States, including DexCom Inc. (Nasdaq: DXCM) and Medtronic PLC (NYSE: MDT). Then Ossen management reported to Ossen’s board on the valuation and the board discussed and revised the letter of intent accordingly.

 

Between June 25, 2016 and July 2, 2016, Ossen’s management had meetings with San Meditech’s management and both negotiated the terms in the initial draft letter of intent under the guidance of each company’s board of directors.

  

On July 3, 2016, Ossen entered into a non-binding letter of intent with San Meditech. Ossen proposed to buy all the issued and outstanding equity interests in AADRF in exchange for 81,243,000 of Ossen’s ordinary shares.

 

On July 8, 2016, Ossen publicly announced that it had entered into a non-binding letter of intent to acquire San Meditech and sell all of Ossen’s existing business to an affiliate of Dr. Tang in exchange for Dr. Tang’s returning all of his shares in Ossen.

 

On August 4, 2016, Ossen 's board, with the unanimous agreement of all directors, formed a special committee of the Board consisting exclusively of independent directors to evaluate the proposed transaction on behalf of Ossen’s public shareholders. During the ensuing months, Ossen management, the special committee and their respective legal and financial advisors conducted due diligence review of San Meditech and together with San Meditech and its legal and financial advisors, outlined the basic structure of the Acquisition and Spin-Off (the "Proposed Transactions"). Simultaneously, the representatives of San Meditech and their advisors prepared the company’s financial statements and drafts of disclosure to be provided in Ossen’s public filings in connection with the Proposed Transactions.  

 

On September 7, 2016, following a ratio change of Ossen’s ADS to 3:1, Ossen publicly announced that it had regained compliance with Nasdaq’s minimum closing bid price rule. Prior to such ratio change, Ossen’s ADSs had traded below $1.00 and were subject to delisting.

 

On September 30, 2016, Ossen publicly announced significant declines in its second quarter results compared to the prior year.

 

On December 27, 2016, Ossen publicly announced declines in its third quarter results compared to the prior year.

 

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On January 3, 2017, Ossen’s special committee retained Highline Research Advisors LLC ("HRA"), acting through Corinthian Partners, LLC, as its financial advisor in connection with the review and evaluation of the Proposed Transactions.

 

On February 10, 2017, Ossen’s special committee retained Weinberg Zareh Malkin Price LLP ("WZMP") to represent the special committee.

 

On February 15, 2017, Ossen convened an organizational call, led by Ossen, and which included participants from San Meditech, Mr. Powell, Ellenoff, Highline Research Advisors (financial advisor to Ossen’s special committee), WZMP (counsel to Ossen’s special committee) and AllBright Law Offices (PRC counsel to San Meditech). Thereafter, the group held organizational calls numerous times, along with members of San Meditech’s accounting firm, Friedman LLP, to discuss open issues relating to the Proposed Transactions.

 

On or about March 10, 2017 the legal advisors for Ossen and the special committee held a telephonic conference call to discuss the terms of the transactions. They also discussed the fact that the members of the special committee were aware of the terms of the proposed transactions, as previously disclosed to the public, and were prepared to negotiate the final terms of such transactions within such framework.

 

On or about March 13, 2017, WZMP communicated with all of the members of the special committee, explaining where the parties were in the process, including the fact that the parties were in the early stages of drafting the transaction documents.

 

On April 10, 2017, Ossen publicly filed its annual report, reflecting a decline in net income and flat revenue as compared to the prior year.

 

On April 13, 2017, an Ossen representative sent a copy of San Meditech’s 2017 financial statements to the special committee’s financial advisor.

 

On April 20, 2017, representatives of Ossen, the legal advisors for Ossen, the special committee and San Meditech, the special committee’s financial advisor and San Meditech’s accounting firm held a telephonic meeting to discuss the open items in the transaction documents and the timing of San Meditech’s financial statements for the first quarter of 2017. It was noted that such financial statements were needed to demonstrate San Meditech’s eligibility for listing on Nasdaq. Follow-up calls among this group regarding such subjects were held throughout April and May 2017.

 

On April 25, 2017, following discussions between WZMP and Ellenoff, and consultations with their clients, and subsequent negotiations with legal counsel for the sellers, Ellenoff revised the exchange agreement, and later the purchase agreement, to require indemnification from current members of Ossen management in the event that Ossen breached and representations or warranties set forth in such agreements.

 

On April 25, 2017, HRA circulated a draft document that HRA proposed to disclose to shareholders in Ossen’s public filings in advance of the special meeting of shareholders. On April 26, 2017, the legal advisors for Ossen and the special committee reviewed such draft with HRA. HRA discussed in detail the process being taken to determine the fairness of the transactions, the valuation methods being considered and the comparable companies being reviewed. In addition, HRA sent a draft of its fairness opinion to legal counsel for Ossen and the special committee. Revised drafts were subsequently circulated by HRA in June and July 2017.

 

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On or about May 2, 2017, the parties circulated financial projections to the special committee’s legal counsel, which was then sent to all the members of the special committee.

 

From May 2017 through the signing of the agreements relating to the Proposed Transactions on July 19, 2017, the parties negotiated various terms, including those relating to indemnification, earn-out and the dual equity class structure, among others.

 

On May 16, 2017, an independent fair value analysis of San Meditech, prepared by a third party asset valuation firm in China, was delivered to Ossen and its advisors. The board and special committee of Ossen relied in part on the data set forth in such report in determining the value of San Meditech. The Ossen board had previously reviewed an earlier version of such report.

 

On May 24, 2017, the quarterly results of San Meditech for the first quarter of 2017, and management’s discussion and analysis relating thereto, were distributed by San Meditech to the parties and their legal and financial advisors. WZMP then shared such information with all of the members of the special committee and advised the committee to consider negotiating better terms.

 

On May 30, 2017, representatives of Ossen, the legal advisors for Ossen, the special committee and San Meditech, the special committee’s financial advisor and San Meditech’s accounting firm held a telephonic meeting to discuss the open items in the transaction documents and the draft proxy statement. They also discussed the anticipated timeline for the transaction, including applying to Nasdaq. It was noted that San Meditech’s results for the first quarter of 2017 were the result of a delay in a renewal license for their new generation products. It was also noted that Ossen and the special committee would need to determine whether to renegotiate the consideration for the Acquisition.

 

On June 2, 2017, the materials prepared by HRA to support its findings were sent to WZMP, which in turn forwarded such materials to all the members of the special committee. The special committee and its counsel reviewed such materials in anticipation of a follow-up telephonic discussion with representatives of HRA regarding HRA’s findings.

 

An initial meeting of Ossen’s special committee, convened to discuss the Proposed Transactions, was held telephonically on May 4, 2017.

 

A second meeting of the special committee was held telephonically on June 15, 2017. The meeting was convened to continue discussions concerning the Proposed Transactions and to address certain matters requiring the attention of the special committee. At the June 15, 2017 meeting of the special committee, the committee members indicated that they would not proceed with the transactions unless 30% of the shares to be issued to the sellers in the Acquisition were held in escrow, subject to the achievement of appropriate performance targets. The committee members also requested additional information relating to the renewal license not yet obtained by San Meditech and suggested that Ossen consider making the relevant approval a closing condition. In addition, the committee members requested that the parties consider adding a closing condition that a majority of the minority shareholders approve the transactions. Following discussions among the parties and advisors, this “majority of the minority” proposal was subsequently withdrawn by the special committee until the parties revisited the issue on July 26, 2017.

 

On June 16, 2017, Ossen and its legal advisor had discussions with San Meditech and its legal advisor. Following negotiations, both sides agreed to propose to the special committee the dual class share structure as well as a provision that 30% of the consideration for the Acquisition be placed in escrow, subject to San Meditech achieving a revenue target of RMB 44,000,000 for 2017, which both sides agreed is a very high target for San Meditech to reach. In the event that San Meditech failed to hit the performance target, but hit lower revenue targets, the sellers would be eligible to obtain earn-out shares on a pro rata basis. The parties agreed to propose to the special committee that the renewal approval not be added as a closing condition because of the high performance target.

 

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On June 18, 2017, Junhong Li of the special committee communicated to WZMP and the other committee members that he was not prepared to agree to the earn-out provision as proposed. Rather, sellers would not be entitled to any earn-out shares unless San Meditech achieved revenue of RMB 44,000,000 in 2017, with no right to receive a pro rata portion of such shares.

 

On June 19, 2017, WZMP communicated the special committee’s position to Ellenoff. Discussions were then had among the representatives of Ossen and San Meditech and their legal advisors, and the parties agreed to proceed on the terms set forth by the special committee, including the revised earn-out provision as well as the dual share structure.

 

A third meeting of the special committee was held telephonically on June 28, 2017. The meeting was convened to continue discussions concerning the Proposed Transactions and address certain matters requiring the attention of the special committee.

 

On June 29, 2017, representatives of Ossen and San Meditech, their legal advisors, special committee counsel, the special committee’s financial advisor and San Meditech’s accounting firm held a telephonic meeting. Ossen’s counsel confirmed the parties’ understanding of the negotiated terms of the Acquisition and explained the revisions that were being made to the drafts of the agreement and the proxy statement to reflect such terms.

 

A fourth meeting of the special committee was held telephonically on June 30, 2017. The meeting was convened to continue discussions concerning the Proposed Transactions and address certain matters requiring the attention of the special committee. In attendance at such meeting was a representative of HRA, presenting his firm’s findings regarding the fairness of the Proposed Transactions to Ossen’s public shareholders. The special committee thereafter engaged in discussions with the representative of HRA concerning HRA’s opinion.

 

On June 30, 2017, Ossen publicly announced significant declines in its first quarter results compared to the prior year.

 

Between June 30, 2017 and July 19, 2017, drafts of the exchange agreement, the purchase agreement and the proxy statement were circulated to the working group and revised by the various parties.

 

On July 19, 2017, HRA issued its fairness opinion finding the Acquisition and the Spin-Off fair to Ossen’s public shareholders. Ossen’s special committee and the board of Ossen thereafter unanimously approved the Acquisition and the Spin-Off. Following the meetings of the special committee and the executed written consents of the special committee and full board of Ossen, the exchange agreement and purchase agreement were executed.

 

On July 26, 2017, the legal advisors for Ossen, the special committee and AADRF discussed the possibility of revising the Exchange Agreement to provide for a majority of minority vote for the proposals in this proxy statement and for the reimbursement by Dr. Tang of any expenses relating to any appraisal rights that may be payable by Ossen in connection with the Spin-Off. On July 26, 2017 and July 27, 2017, further discussions were had among the parties, and it was agreed to amend the Exchange Agreement to provide for such provisions.

 

On July 27, 2017, the legal advisors for Ossen and the special committee held a discussion with HRA and confirmed that the shareholders’ equity set forth in Ossen’s financial statements is merely an accounting statistic and not reflective of the financial value of Ossen.

 

On July 28, 2017, a draft of the first amendment to the Exchange Agreement was circulated to the various parties by Ossen’s legal counsel.

 

On August 1, 2017, the Exchange Agreement was amended to provide for certain changes to the description of the contents of the proxy statement, reimbursement of Ossen for potential exercise of appraisal rights by dissenting shareholders, as well as to require the approval of the proposals at the special meeting by the holders of a majority of the issued and outstanding shares of Ossen held by disinterested shareholders.

 

Ossen’s Board of Directors Reasons for the Approval of the Acquisition

 

Based upon its evaluation, Ossen’s board of directors, after carefully considering all relevant factors, including the unanimous determination and recommendation of the special committee of the board of directors and review of the fairness opinion of Highline Research Advisors, unanimously approved the Acquisition and the Spin-Off and determined that such transactions are fair to Ossen and its shareholders. The terms of the Acquisition and the Spin-Off were the result of thorough negotiations between the representatives of Ossen, including the special committee of Ossen’s board of directors, Dr. Tang, and the Sellers.

 

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Ossen’s board of directors, including the special committee, considered a wide variety of factors in connection with its evaluation of the Acquisition and the Spin-Off. In light of the complexity of those factors, its board of directors, as a whole, did not consider it practicable to, nor did it attempt to, quantify or otherwise assign relative weights to the specific factors it considered in reaching its decision. Individual members of Ossen’s board of directors may have given different weight to different factors.

 

In considering the Acquisition and the Spin-Off, Ossen’s board of directors gave consideration to the following positive factors (although not weighted or in any order of significance):

 

·Ossen’s current business has been undervalued by the U.S. public markets, and, based on Ossen’s historical performance, Ossen’s board of directors does not expect Ossen’s share price to improve, even if Ossen’s underlying business were to perform well;

 

·Ossen’s current business is facing significant challenges in China, including increasing price of raw materials and strict environmental requirements being enforced by the Chinese government. Ossen reported material decreases in revenue and net income during the first quarter of 2017, and Ossen’s management team continues to be cautious about future prospects;

 

·the transactions will provide Ossen’s shareholders the opportunity to retain ownership in San Meditech after the Acquisition and Spin-Off are completed;

 

·with San Meditech’s expected growth in the Chinese market with its new series of continuous glucose monitoring products in the pipeline, Ossen’s board of directors believes that Ossen shareholders will benefit from the future prospects and potential value of San Meditech in the U.S. public markets;

 

·the structure of the Acquisition is intended to protect existing Ossen shareholders by requiring that an aggregate of 28,095,454 Escrow Shares will be deposited in escrow at the closing, including (i) 24,372,900 Earn-Out Shares subject to forfeiture back to us (along with dividends and other earnings otherwise payable with respect to such Earn-Out Shares) in the event that the post-combination company fails to meet certain minimum financial performance targets after the closing and (ii) an additional 3,722,554 Indemnification Shares subject to forfeiture back to us (along with dividends and other earnings otherwise payable with respect to such Indemnification Shares) in the event that the Ossen Representative successfully brings an indemnification claim under the Exchange Agreement on behalf of our shareholders;

  

  · the structure of the Acquisition and the Spin-Off is intended to protect existing Ossen shareholders by requiring that the holders of a majority of shares held by the disinterested shareholders approve the Acquisition and the Spin-Off;

 

  · Dr. Tang has agreed to (i) abstain from voting for the Acquisition or the Spin-Off; (ii) indemnify Ossen in the event that certain representations and warranties in the transaction documents were breached; and (iii) indemnify Ossen with respect to any expenses relating to any appraisal rights; and

 

·based on the fairness opinion of HRA and the unanimous recommendation of the special committee of Ossen’s board of directors, the board believes that the transactions are fair to Ossen’s shareholders.

 

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In addition, Ossen’s board of directors also gave consideration to the following negative factors (although not weighted or in any order of significance):

 

  ·

the sale of all of Ossen’s existing business to Dr. Tang in exchange for only the cancellation of Dr. Tang’s shares, and no cash consideration.

 

  · the costs associated with the Acquisition and the Spin-Off, including the diversion of management’s attention;

 

  ·

the issuance of up to 81,243,000 ordinary shares to the Sellers, which will represent up to 91.1% of Ossen’s issued and outstanding ordinary shares; and

 

  · uncertainty relating to the future results of San Meditech, as described in the “Risk Factors” section below.

 

Fairness Opinion of Highline Research Advisors

 

Highline Research Advisors rendered its opinion to the Ossen Board that, as of July 19, 2017, and based upon and subject to the factors and assumptions set forth therein, the terms of the Share Exchange Agreement and Share Purchase Agreement (together, the “Agreements”) are fair, from a financial point of view, to the independent holders of the ordinary shares of Ossen.

 

The full text of the written opinion of Highline Research Advisors, dated July 19, 2017, which sets forth assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with the opinion, is attached as Annex E to this proxy statement. Highline Research Advisors provided its opinion for the information and assistance of the Ossen Board in connection with its consideration of the transactions contemplated by the Agreements. The Highline Research Advisors opinion is not a recommendation as to how any holder of ordinary shares should vote with respect to such transaction or any other matter.

 

In connection with rendering the opinion described above and performing its related financial analyses, Highline Research Advisors reviewed, among other things:

 

·the Agreements;

 

  · The filings with the Securities and Exchange Commission filed by Ossen during the five year periods ended July 19, 2017, including a review of the balance sheets, the statements of operations and statements of cash flows, inclusive of the disclosures therein that have pertinence for accounting purposes only;

 

·the projected financial statements of Ossen;

 

·the historical financial statements of San Meditech; and

 

·the projected financial statements of San Meditech.

 

Highline Research Advisors also held discussions with members of the senior managements of both Ossen and San Meditech regarding their assessment of past and current business operations, financial condition and future prospects of their respective companies; reviewed the reported price and trading activity for the ordinary shares of Ossen; compared certain financial and stock market information for both Ossen and San Meditech with similar information for certain other companies the securities of which are publicly traded; reviewed the financial terms of certain recent business combinations in the respective industries of Ossen and San Meditech and in other industries; and performed such other studies and analyses, and considered such other factors, as it deemed appropriate.

 

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For purposes of rendering the opinion described above, Highline Research Advisors relied upon and assumed the accuracy and completeness of all of the financial, legal, regulatory, tax, accounting and other information provided by Ossen, without assuming any responsibility for independent verification thereof. In that regard, Highline Research Advisors assumed, with Ossen’s consent, that the financial projections of Ossen were reasonably prepared on a basis reflecting the best currently available estimates and judgments of Ossen management, and Ossen approved these financial projections for Highline Research Advisors’ use in connection with Highline Research Advisors’ opinion. Highline Research Advisors did not make an independent evaluation or appraisal of the assets and liabilities (including any contingent, derivative or other off-balance-sheet assets and liabilities) of Ossen or any of its subsidiaries and it was not furnished with any such evaluation or appraisal. Highline Research Advisors assumed that all governmental, regulatory or other consents and approvals necessary for the consummation of the transactions contemplated by the Agreements will be obtained without any adverse effect on the expected benefits of the transactions contemplated by the Agreements in any way meaningful to its analysis. Highline Research Advisors also assumed that the transactions contemplated by the Agreements will be consummated on the terms set forth in the Agreements, without the waiver or modification of any term or condition the effect of which would be in any way meaningful to its analysis.

 

Highline Research Advisors’ opinion does not address the underlying business decision of Ossen or AADRF to engage in the transactions contemplated by the Agreements, or the relative merits of the transactions contemplated by the Agreements as compared to any strategic alternatives that may be available to Ossen or AADRF; nor does it address any legal, regulatory, tax or accounting matters. Highline Research Advisors was not requested to solicit, and did not solicit, interest from other parties with respect to an acquisition of, or other business combination with, Ossen or AADRF, or any other alternative transaction. Highline Research Advisors’ opinion addresses only the fairness, from a financial point of view, to the independent holders of the ordinary shares of Ossen of the terms of the Agreements. Highline Research Advisors’ opinion does not express any view on, and does not address, any other term or aspect of the Agreements or transactions contemplated by the Agreements, or any term or aspect of any other agreement or instrument contemplated by the Agreements, or entered into, or amended in connection with, the transactions contemplated by the Agreements, including the fairness of the transactions contemplated by the Agreements to, or any consideration received in connection therewith by, the holders of any other class of securities, creditors, or other constituencies of Ossen. Highline Research Advisors’ opinion does not express any view on, and does not address, the fairness of the amount, or nature of, any compensation to be paid or payable to any of the officers, directors or employees of Ossen, or class of such persons, in connection with the transactions contemplated by the Agreements. Highline Research Advisors’ opinion was necessarily based on economic, monetary, market and other conditions as in effect on, and the information made available to Highline Research Advisors as of, the date of the opinion and Highline Research Advisors assumed no responsibility for updating, revising or reaffirming its opinion based on circumstances, developments or events occurring after the date of its opinion. In addition, Highline Research Advisors did not express any opinion as to the prices at which the ordinary shares will trade at any time or as to the impact of the transactions contemplated by the Agreements on the solvency or viability of Ossen or San Meditech or the ability of Ossen or San Meditech to pay their respective obligations when they come due. Highline Research Advisors’ opinion was approved by a fairness committee of Highline Research Advisors.

 

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The following is a summary of the material financial analyses delivered by Highline Research Advisors to the Ossen Board in connection with rendering the opinion described above. The following summary, however, does not purport to be a complete description of the financial analyses performed by Highline Research Advisors, nor does the order of analyses described represent the relative importance or weight given to those analyses by Highline Research Advisors. Some of the summaries of the financial analyses include information presented in tabular format. The tables must be read together with the full text of each summary and are alone not a complete description of Highline Research Advisors’ financial analyses. Except as otherwise noted, the following quantitative information, to the extent that it is based on market data, is based on market data as it existed on or before July 19, 2017, and is not necessarily indicative of current market conditions.

 

Ossen Historical Stock Trading Analysis

 

Highline Research Advisors reviewed and analyzed the trading price and volume of the ordinary shares of Ossen through July 18, 2017, the last trading day preceding the date of the Highline Research Advisors opinion. As of December 31, 2016 the number of ordinary shares of Ossen outstanding was approximately 19.8 million. Based upon the closing price per ADS of Ossen (representing 3 ordinary shares each) of $2.22 on July 19, 2017, the implied equity valuation for Ossen was $14.6 million.

 

Ossen Selected Companies Analysis

 

Highline Research Advisors reviewed and compared certain financial information for Ossen to corresponding financial information, ratios and public market multiples for the following publicly traded corporations: Haynes International, L.B. Foster, Synalloy, Timkensteel, Universal Stainless & Alloy Products (collectively referred to in the table immediately below as the “Comparable Companies”).

 

Although none of the selected companies is directly comparable to Ossen, the companies included were chosen because they are publicly traded companies with operations that for purposes of analysis may be considered similar to certain operations of Ossen. Highline Research Advisors calculated and compared various financial multiples and ratios based on publicly available estimates. With respect to each of the selected companies, Highline Research Advisors calculated such company’s enterprise value, which we refer to as “EV,” which is the market capitalization of such company that Highline Research Advisors derived based on the closing price of the shares of the applicable company’s common stock and the number of ordinary shares outstanding on a fully diluted basis based upon public information available as of July 19, 2017, plus the book value of debt less the book value of liquid cash and cash equivalents based upon public information available as of July 19, 2017, as a multiple of revenue for the most recent twelve month period ending March 31, 2017. With respect to Ossen, Highline Research Advisors calculated EV as of July 19, 2017 as a multiple of estimated revenue. The Ossen book value of debt and liquid cash and cash equivalents as of March 31, 2017, was based upon publicly available information as of July 19, 2017. The fully diluted share count for Ossen as of December 31, 2016, was derived from publicly available information as of July 19, 2017.

 

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Ossen Selected Transactions Analysis

 

Highline Research Advisors analyzed certain information relating to the following selected transactions in the steel and concrete industries since January 1, 2012.

 

For each of the selected transactions, Highline Research Advisors calculated and compared aggregate enterprise consideration as a multiple of the then latest twelve months revenues and as a multiple of the then latest twelve months estimated earnings before interest, taxes, depreciation and amortization (adjusted for certain non-recurring charges), which we refer to as “Operating Cash Flow.”

 

While none of the companies that participated in the selected transactions are directly comparable to Ossen, the companies that participated in the selected transactions are companies with operations that, for the purposes of analysis, may be considered similar to certain of Ossen’s results, market size and product profile.

 

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The applicable information from these transactions is summarized as follows:

 

 

Ossen Illustrative Discounted Cash Flow Analysis

 

Highline Research Advisors performed an illustrative discounted cash flow analysis of Ossen based on estimates of unlevered free cash flows of Ossen as reflected in the Forecasts to derive an illustrative range of implied present value for the equity of Ossen as of July 19, 2017. Utilizing discount rates ranging from 10.0% to 15.0%, reflecting estimates of Ossen’s weighted average cost of capital derived in part by application of the Capital Asset Pricing Model, Highline Research Advisors derived an illustrative range of implied equity values for Ossen by discounting to present value as of July 19, 2017, based upon (i) estimates of the unlevered free cash flows for Ossen during the period ending December 31, 2017 and the years ending December 31, 2018, 2019, 2020 and 2021, as reflected in the Ossen financial projections, as extrapolated, and (ii) a range of illustrative terminal values for Ossen as of December 31, 2021. The Capital Asset Pricing Model, which we refer to as “CAPM,” requires certain company-specific inputs, including the company’s target capital structure weightings (including the amount of any permanent excess cash), the cost of long-term debt, after-tax yield on permanent excess cash, future applicable marginal cash tax rate and the company’s beta, as well as certain financial metrics for the United States financial markets generally. Under the CAPM, the effect of permanent cash in the target capital structure is to increase the weighted average cost of capital, as such permanent cash has to be permanently financed by capital with a cost which is higher than the yield on the cash. Highline Research Advisors derived the range of illustrative terminal values for Ossen by applying illustrative multiples of LTM Operating Cash Flow as of December 31, 2021 of 6.0x to 8.0x. Highline Research Advisors then added the present value of the illustrative terminal value with the present values of the unlevered free cash flows for the period ending December 31, 2017, and the years ending 2018 to 2021 and subtracted the assumed amount of Ossen’s net debt as of March 31, 2017 (based on public filings) to calculate a range of illustrative equity values for Ossen.

 

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San Meditech Selected Companies Analysis

 

Highline Research Advisors reviewed and compared certain financial information for San Meditech to corresponding financial information; ratios and public market multiples for the following publicly traded corporations: Dexcom, Insulet and Senseonics (collectively referred to as the “San Meditech Selected Companies”).

 

Although none of the selected companies is directly comparable to San Meditech, the companies included were chosen because they are publicly traded companies with operations that for purposes of analysis may be considered similar to certain operations of San Meditech. Highline Research Advisors calculated and compared various financial multiples and ratios based on publicly available estimates. With respect to each of the selected companies, Highline Research Advisors calculated such company’s EV based upon public information available as of July 19, 2017 and at other selected dates, as a multiple of revenue for the relevant twelve month period. The San Meditech book value of debt and liquid cash and cash equivalents as of March 31, 2017, was based upon information as of July 19, 2017.

 

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San Meditech Selected Transactions Analysis

 

Highline Research Advisors analyzed certain information relating to selected transactions in the medical devices industry since 2000 for companies that we deemed to be comparable.

 

For each of the selected transactions, Highline Research Advisors calculated and compared the aggregate consideration as a multiple of the then current latest-twelve-months revenues.

 

While none of the companies that participated in the selected transactions are directly comparable to San Meditech, the companies that participated in the selected transactions are companies with operations that, for the purposes of analysis, may be considered similar to certain of San Meditech’s results, market size and product profile.

 

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The applicable information from these transactions is summarized as follows:

 

 

San Meditech Illustrative Discounted Cash Flow Analysis

 

Highline Research Advisors performed an illustrative discounted cash flow analysis of San Meditech based on estimates of unlevered free cash flows of San Meditech as reflected in the Forecasts to derive an illustrative range of implied present value for the equity of San Meditech as of July 19, 2017. Utilizing discount rates ranging from 20% to 30%, reflecting estimates of San Meditech’s weighted average cost of capital derived in part by application of the Capital Asset Pricing Model, Highline Research Advisors derived an illustrative range of implied equity values for San Meditech by discounting to present value as of July 19, 2017, based upon (i) estimates of the unlevered free cash flows for San Meditech during the period ending December 31, 2017 and years ending December 31, 2018, 2019, 2020 and 2021, as reflected in the San Meditech financial projections, as extrapolated, and (ii) a range of illustrative terminal values for San Meditech as of December 31, 2021. In performing the weighted average cost of capital analysis, Highline Research Advisors calculated a cost of equity of 25% using CAPM and used target capital structure weightings (based on management forecasts delivered to Highline Research Advisors regarding debt, total cash, minimum operating cash and excess cash). Highline Research Advisors derived the range of illustrative terminal values for San Meditech by applying illustrative multiples of LTM Revenues as of December 31, 2021 of 25.0x to 35.0x. Highline Research Advisors then added the present value of the illustrative terminal value with the present values of the unlevered free cash flows for the period ending December 31, 2017, and the years ending December 31, 2018 to 2021 and subtracted the assumed amount of San Meditech’s net debt as of March 31, 2017 to calculate a range of illustrative equity values for San Meditech.

 

 

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The preparation of a fairness opinion is a complex process and is not susceptible to partial analysis or summary description. Selecting portions of the analyses or of the summary set forth above, without considering the analyses as a whole, would create an incomplete view of the processes underlying Highline Research Advisors’ opinion. In arriving at its fairness determination, Highline Research Advisors considered the results of all of its analyses and did not attribute any particular weight to any factor or analysis considered by it. Rather, Highline Research Advisors made its determination as to fairness on the basis of its experience and professional judgment after considering the results of all of its analyses. No company or transaction used in the above analyses as a comparison is directly comparable to Ossen or San Meditech or the contemplated transactions.

 

Highline Research Advisors prepared these analyses for purposes of Highline Research Advisors’ providing its opinion to the Ossen Board as to the fairness, as of July 19, 2017, from a financial point of view, of the economic terms of the Agreements to the independent holders of the ordinary shares of Ossen. These analyses do not purport to be appraisals nor do they necessarily reflect the prices at which businesses or securities actually may be sold. Analyses based upon forecasts of future results are not necessarily indicative of actual future results, which may be significantly more or less favorable than suggested by these analyses. Because these analyses are inherently subject to uncertainty, being based upon numerous factors or events beyond the control of the parties or their respective advisors, Highline Research Advisors does not assume any responsibility if future results are materially different from those forecast.

 

The economic terms of the Agreements were determined through arm’s-length negotiations and was approved by the Ossen Board. Highline Research Advisors did not recommend any specific terms of the Agreements to Ossen or the Ossen Board.

 

As described above, Highline Research Advisors’ opinion to the Ossen Board was one of many factors taken into consideration by the Ossen Board in making its determination to approve the Agreements. The foregoing summary does not purport to be a complete description of the analyses performed by Highline Research Advisors in connection with the fairness opinion and is qualified in its entirety by reference to the written opinion of Highline Research Advisors attached as Annex E to this proxy statement.

 

Highline Research Advisors is engaged in advisory, underwriting and financing, principal investing and other financial and non-financial activities and services for various persons and entities. Prior to being engaged for the purpose of rendering this fairness opinion, Highline Research Advisors had not been engaged by or worked with Ossen, AADRF, or San Meditech.

 

The Ossen Board selected Highline Research Advisors as its financial advisor because it is an internationally recognized investment banking firm that has substantial experience in transactions similar to the transactions contemplated by the Agreements. Pursuant to a letter agreement dated January 17, 2017, Ossen engaged Highline Research Advisors to act as its financial advisor for the purpose of rendering this fairness opinion. Pursuant to the terms of this agreement, Highline Research Advisors’ compensation was paid in full before rendering this fairness opinion and was not dependent upon the conclusions reached by Highline Research Advisors. In addition, Ossen has agreed to reimburse Highline Research Advisors for certain of its expenses and disbursements, and to indemnify Highline Research Advisors and related persons against various liabilities, including certain liabilities under the federal securities laws.

 

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Ownership Interest of Ossen Shareholders after the Acquisition

 

It is anticipated that, following completion of the Acquisition and Spin-Off, Ossen’s existing shareholders (excluding Dr. Tang) will retain an ownership interest of approximately 8.9% of the Company (or approximately 12.25% in the event that the Earn-Out Shares are forfeited), current members of Ossen management or affiliates of Ossen (excluding Dr. Tang) will own approximately 1.35% (or approximately 1.85% in the event that the Earn-Out Shares are forfeited), and Sellers will own approximately 91.1%, of the outstanding equity of the Company (or approximately 89.6% in the event that the Earn-Out Shares are forfeited). These percentages are based on the assumption that Ossen will not issue any additional ordinary shares.

 

Certain Interests of Ossen’s Directors and Officers in the Acquisition

 

When you consider the recommendation of our board of directors in favor of approval of the Acquisition Proposal, you should keep in mind that certain of our directors and officers have interests in the Acquisition that are different from or in addition to (and which may conflict with) your interests as a shareholder. These interests include, among other things:

  

  · Pursuant to the Purchase Agreement, Dr. Liang Tang, the Chairman of Ossen and sole shareholder of EK, will receive 100% of the equity interest of OIM, which, through its subsidiaries, operates the current business of Ossen. Dr. Tang owns approximately 59.9% of the issued and outstanding shares of Ossen, which shares will be cancelled as consideration for EK’s purchase of OIM;

 

  · Wei Hua, Ossen’s Chief Executive Officer and Chief Financial Officer, owns 600,000 ordinary shares, and an affiliate of Ossen own 600,000 ordinary shares, and each is expected to continue to hold such shares after the consummation of the Acquisition and Spin-Off; and
     
  · the continued indemnification of current directors and officers of Ossen and AADRF.

 

Required Vote

 

The approval of the Acquisition Proposal requires the affirmative vote of the holders of a majority of the issued and outstanding shares of Ossen held by disinterested shareholders as of the Record Date. If you abstain or do not instruct your broker how to vote with respect to the Acquisition Proposal, your abstention or broker non-vote will have the effect of a vote against this proposal. Dr. Tang, who holds 11,850,000 shares, has agreed to abstain from voting on the Acquisition Proposal, the Spin-Off Proposal, the Charter Amendment Proposal and the Incentive Plan Proposal.

 

Recommendation

 

After careful consideration of the matters described above, Ossen’s board of directors determined unanimously that the Acquisition Proposal is in fair to Ossen and its shareholders.

 

THE OSSEN BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE OSSEN SHAREHOLDERS VOTE “FOR” THE APPROVAL OF THE ACQUISITION PROPOSAL.

 

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THE SPIN-OFF PROPOSAL

 

Overview

 

On July 19, 2017, we and Ossen Innovation Materials Group Co., Ltd., a BVI limited liability company and our wholly-owned subsidiary, entered into a Purchase Agreement with Elegant Kindness Limited, a BVI limited liability company solely owned by Dr. Liang Tang, Ossen’s Chairman and majority shareholder. The Purchase Agreement provides for the sale of 100% of the equity interest in OIM to Dr. Tang through EK, in exchange for the cancellation of all of the Ossen shares held by EK Shareholder, which shares, as of the date of this proxy statement, represented approximately 59.9% of the issued and outstanding shares of Ossen. The transactions contemplated by the Purchase Agreement (such transactions, collectively, the “Spin-Off”) would take place contemporaneously with the closing of the Acquisition.

 

The Purchase Agreement is attached to this proxy statement as Annex B. You are encouraged to read this proxy statement in its entirety, including the section entitled “Unaudited Pro Forma Condensed Combined Financial Data” and all the annexes hereto.

  

Background of the Spin-Off

        

The transactions contemplated by the Purchase Agreement are all conditioned upon completion of the Acquisition, and are the result of negotiations between the representatives of Ossen and AADRF, as described under “The Acquisition Proposal - Background of the Acquisition.” The non-binding term sheet executed by the parties contemplated the Spin-Off taking place in conjunction with the Acquisition. The parties negotiated the terms of the Purchase Agreement at the same time as the negotiations taking place with respect to the Acquisition. See “The Acquisition Proposal - Background of the Acquisition.” On July 19, 2017, the Ossen board of directors met and the directors in attendance unanimously approved the Purchase Agreement. EK, EK Shareholder, OIM and Ossen entered into the Purchase Agreement on July 19, 2017.

  

Ossen’s Board of Directors Reasons for the Approval of Spin-Off

 

Based on its evaluation, together with the opinion of Highline Research Advisors (as further described in the section entitled “The Acquisition Proposal—Description of Opinion of Highline Research Advisors”), Ossen’s board of directors unanimously approved the Purchase Agreement and the transactions contemplated therein and determined that it is fair to Ossen and its shareholders. Ossen’s board of directors believes that the Spin-Off is in the best interest of Ossen and its shareholders because consummation of the Spin-Off is a condition to completion of the Acquisition, so that, following the Acquisition, the business of Ossen will be solely the business of San Meditech. See “The Acquisition Proposal - Background of the Acquisition.

 

Certain Interests of Ossen’s Directors, Officers and Others in the Spin-Off

 

When considering the Ossen board of directors’ recommendation that the Ossen shareholders vote in favor of the approval of the Spin-Off and the adoption of the Purchase Agreement, Ossen shareholders should be aware that directors and executive officers of Ossen have interests in the Spin-Off that may be different from, or in addition to, the interests of Ossen shareholders. These interests include:

 

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  · Pursuant to the Purchase Agreement, Dr. Liang Tang, the Chairman of Ossen and sole shareholder of EK, will receive 100% of the equity interest of OIM, which, through its subsidiaries, operates the current business of Ossen. Dr. Tang owns approximately 59.9% of the issued and outstanding shares of Ossen, which shares will be cancelled as consideration for EK’s purchase of OIM;

 

  · Wei Hua, Ossen’s Chief Executive Officer and Chief Financial Officer, owns 600,000 ordinary shares, and an affiliate of Ossen own 600,000 ordinary shares, and each is expected to continue to hold such shares after the consummation of the Acquisition and Spin-Off; and
     
  · the continued indemnification of current directors and officers of Ossen and AADRF.

 

Inasmuch as the closing of the Transition Transactions is a condition to consummation of the Acquisition, please see “The Acquisition Proposal—Certain Interests of Ossen’s Directors, Officers and Others in the Acquisition” for additional information.

 

The Purchase Agreement

 

The subsections that follow this subsection describe the material provisions of the Purchase Agreement, but do not purport to describe all of the terms of the Purchase Agreement. The following summary is qualified in its entirety by reference to the complete text of the Purchase Agreement, a copy of which is attached as Annex B hereto, which is incorporated herein by reference. Shareholders and other interested parties are urged to read the Purchase Agreement carefully and in its entirety (and, if appropriate, with the advice of financial and legal counsel) because it is the primary legal document that governs the Spin-Off.

 

The Purchase Agreement contains representations, warranties and covenants that the respective parties made to each other as of the date of the Purchase Agreement or other specific dates. The assertions embodied in those representations, warranties and covenants were made for purposes of the contract among the respective parties and are subject to important qualifications and limitations agreed to by the parties in connection with negotiating the Purchase Agreement.

 

Post-Acquisition Ownership of OIM

 

It is anticipated that, following completion of the Spin-Off, Dr. Liang Tang, the Chairman of Ossen and sole shareholder of EK, will receive 100% of the equity interest of OIM, which, through its subsidiaries, operates the current business of Ossen. Dr. Tang owns approximately 59.9% of the issued and outstanding shares of Ossen, which shares will be cancelled as consideration for EK’s purchase of OIM.

 

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OSN Representative and Purchaser Representative

 

Wei Hua, the Chief Executive Officer of Ossen, is serving as the OSN Representative under the Purchase Agreement, and in such capacity will represent the interests of Ossen with respect to certain matters under the Purchase Agreement.

 

Dr. Liang Tang, the Chairman of Ossen and sole shareholder of EK, is serving as the Indemnifying Representative under the Purchase Agreement, and in such capacity will represent the interests of certain indemnifying parties with respect to certain matters under the Purchase Agreement.

 

Closing of the Purchase Agreement

 

The closing of the Purchase Agreement is expected to take place no later than the third business day following the day on which the last of the conditions to the closing (described under the subsection entitled “— Conditions to Closing of the Acquisition”) have been satisfied or waived (other than those conditions that by their nature are to be satisfied at the closing, but subject to the fulfillment or waiver of those conditions) or such other date as may be mutually agreed to by the parties.

 

Conditions to Closing of the Purchase Agreement

 

The obligation of the parties to complete the Purchase Agreement is subject to the fulfillment of certain closing conditions, including but not limited to:

 

•       all of the conditions to the obligations of the parties to the agreements to consummate the Acquisition shall have been satisfied or waived in writing (where permissible) by the parties thereto;

 

•       all consents required to be obtained from or made with any governmental authority in order to consummate the transactions contemplated by the Purchase Agreement shall have been obtained or made; and

•       there is no applicable law or order in effect which makes illegal or prevents or prohibits the transactions contemplated by the Purchase Agreement, and there is no pending third party legal proceeding to enjoin or otherwise restrict the closing;

 

In addition, unless waived by Ossen and OIM, the obligations of Ossen and OIM to consummate the Purchase Agreement are subject to the fulfillment of certain closing conditions, including:

 

•       receipt of share certificates and transfer documents for Ossen shares from Dr. Liang Tang; and

 

•       Ossen’s special committee shall have received a fairness opinion from the Highline Research Advisors LLC.

 

In addition, unless waived by EK, its obligation to consummate the Purchase Agreement is subject to the receipt of share certificates and transfer documents for OIM shares from Ossen.

 

We cannot provide assurance as to when or if all of the closing conditions will be satisfied or waived by the appropriate party. As of the date of this proxy statement, we have no reason to believe that any of these conditions will not be satisfied.

 

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Amendment or Waiver of the Purchase Agreement

 

The Purchase Agreement may be amended or supplemented by written agreement of the parties of the Purchase Agreement. If permitted under applicable law, Ossen, EK and OIM may (i) extend the time for the performance of any obligation or other act of any other non-affiliated party, (ii) waive any inaccuracy in the representations and warranties by such other non-affiliated party in the Purchase Agreement or in any document delivered pursuant thereto and (iii) waive compliance by such other non-affiliated party with any covenant or condition contained in the Purchase Agreement.

 

Termination

 

The Purchase Agreement may be terminated prior to the closing upon occurrence of certain conditions, including:

 

•       the mutual agreement of EK and us;

•       by either us or EK if any governmental authority of competent jurisdiction has issued a final and non-appealable order or taken any other action permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by the Purchase Agreement, so long as no breach of the Purchase Agreement by such terminating party or its affiliates was a substantial cause of, or substantially resulted in, such action by such governmental authority.

 

If the Purchase Agreement is terminated, all further obligations of the parties under the Purchase Agreement will terminate and will be of no further force and effect and no party will have any further liability thereunder to any other party, except that certain obligations related to public announcements, confidentiality, termination and termination fees and general provisions will continue in effect, and no party shall be relieved of liability for any fraud claims or willful breach of the Purchase Agreement prior to such termination.

 

Fees and Expenses

 

Each party will bear its own expenses in connection with the Purchase Agreement and the transactions contemplated thereby, including with respect to us, our deferred IPO expenses.

 

Representations and Warranties

 

The Purchase Agreement contains a number of representations and warranties made by us and OIM, on the one hand, and EK and the Purchaser on the other hand, made solely for the benefit of the other, which in certain cases are subject to specified exceptions and qualifications contained in the Purchase Agreement or in information provided pursuant to certain disclosure schedules to the Purchase Agreement. The representations and warranties are customary for transactions similar to the Purchase Agreement.

 

In the Purchase Agreement, EK and Dr. Liang Tang made certain customary representations and warranties to us. These representations and warranties, among others, related to the following: (1) corporate matters, including due organization, existence and good standing; (2) authority and binding effect relative to execution and delivery of the Purchase Agreement and other ancillary agreements; (3) capitalization; (3) governmental approvals; (4) non-contravention; (5) seller’s assets and liabilities; (6) ownership of Ossen shares by Dr. Liang Tang.

 

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In the Purchase Agreement, we made certain customary representations and warranties to EK and Dr. Liang Tang. These representations and warranties, among others, related to the following: (1) corporate matters, including due organization, existence and good standing; (2) authority and binding effect relative to execution and delivery of the Purchase Agreement and other ancillary agreements; (3) governmental approvals; and (4) non-contravention.

 

Release and Covenant Not to Sue

 

EK and Dr. Liang Tang will release and discharge us from and against any and all actions, obligations, agreements, debts and liabilities which they now have, has ever had or may hereafter have against us arising on or prior to the closing of the Purchase Agreement or on account of or arising out of any matter occurring on or prior to such closing, including any rights to indemnification or reimbursement. The releases and restrictions shall not apply to any claims EK or Dr. Liang Tang may have against any party pursuant to the terms and conditions of the Purchase Agreement.

 

Survival and Indemnification

 

All representations and warranties of EK and Dr. Liang Tang shall survive the closing of the Purchase Agreement through and until the second anniversary of the closing date; provided, however, that the representations and warranties relating to due organization and good standing, authorization, binding agreement and ownership shall survive indefinitely. Additionally, fraud claims against EK and Dr. Liang Tang shall survive indefinitely. All covenants, obligations and agreements of EK and Dr. Liang Tang contained in the Purchase Agreement, including indemnification obligations, shall survive the closing and continue until fully performed in accordance with their terms.

 

EK and Dr. Liang Tang have agreed to indemnify and hold harmless Ossen and its affiliates from (i) the breach of any representation or warranty made by EK and Dr. Liang Tang set forth in the Purchase Agreement or in any certificate delivered by EK and Dr. Liang Tang pursuant to the Purchase Agreement; (ii) the breach of any covenant or agreement on the part of EK and Dr. Liang Tang set forth in the Purchase Agreement or in any certificate delivered by EK and Dr. Liang Tang pursuant to the Purchase Agreement; (iii) any action by person(s) who were holders of equity securities of Ossen, including options, warrants, convertible debt or other convertible securities or other rights to acquire equity securities of Ossen, prior to the closing arising out of the sale, purchase, termination, cancellation, expiration, redemption or conversion of any such securities; or (iv) any fraud claims.

 

Governing Law and Dispute Resolution

 

The Purchase Agreement is governed by New York law. Any disputes under the Purchase Agreement, other than claims for injunctive or equitable relief (including specific performance to strictly enforce the terms of the Purchase Agreement) will be subject to arbitration by the American Arbitration Association to be held in Manhattan, New York. Any claims that are brought before a court will be subject to exclusive jurisdiction of the state and federal courts in New York, New York (and appeals courts), and each party waived its rights to a jury trial in connection therewith. The parties are entitled to an injunction, specific performance and other equitable relief to prevent breaches of the Purchase Agreement in addition to any other remedy to which they are entitled at law or in equity.

 

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Required Vote

 

Approval of the Spin-Off Proposal will require the affirmative vote of the holders of a majority of the shares held by disinterested shareholders as of the record date. If you abstain or do not instruct your broker how to vote with respect to the Spin-Off Proposal, your abstention or broker non-vote will have the effect of a vote against this proposal. The approval of the Spin-Off Proposal is conditioned on approval of the Acquisition Proposal, the Charter Amendment Proposal and the Incentive Plan Proposal. Dr. Tang, who holds 11,850,000 shares, has agreed to abstain from voting on the Acquisition Proposal, the Spin-Off Proposal, the Charter Amendment Proposal and the Incentive Plan Proposal.

 

Recommendation

 

THE OSSEN BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT OSSEN SHAREHOLDERS VOTE “FOR” THE APPROVAL OF THE SPIN-OFF PROPOSAL.

 

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THE CHARTER AMENDMENT PROPOSAL

 

On July 19, 2017, the Ossen board adopted and recommended for shareholder approval the amendment and restatement of the Company’s memorandum and articles of association (the “Amended Charter”), which amends Ossen’s current memorandum and articles of association (the “Current Charter”). Ossen is asking its shareholders to adopt the Amended Charter, effective only upon consummation of the Acquisition, to: (i) change the Company’s name from “Ossen Innovation Co., Ltd.” to “San Meditech Holdings Ltd.” (the “Name Change”), (ii) increase the maximum number of shares authorized to be issued by the Company from 100,000,000 to 150,000,000 shares; (iii) automatically exchange the ordinary shares held prior to the Acquisition and Spin-Off for a newly designated Class A ordinary shares, each of which will be entitled to one vote per share and (iv) designate a new series of Class B ordinary shares to be issued to certain of the Sellers, each Class B share to be entitled to ten votes per share (the “Dual Class Structure”).

        

The amendment will only be effected in the event, and at the time, the Acquisition and Spin-Off are consummated. Assuming that the Charter Amendment Proposal is approved, Ossen will file the Amended Charter, substantially in the form attached as Annex C, in connection with the consummation of the Acquisition and Spin-Off.

 

If the Acquisition Proposal or the Spin-Off Proposal is not approved, the Charter Amendment Proposal will not be presented at the special meeting.

 

Name Change

 

Upon the closing of the Acquisition and the Spin-Off, and the transactions contemplated by the Exchange Agreement and the Purchase Agreement, Ossen’s current name will not accurately reflect its business operations. Accordingly, Ossen’s board of directors believes that changing its name to “San Meditech Holdings Ltd.” in connection with the Acquisition will better reflect its business operations upon completion of the Acquisition.

 

Shareholders of Ossen will not be required to exchange outstanding share certificates for new share certificates if the amendment is adopted. ADR holders will be required to exchange their existing ADRs for new ADRs reflecting the name change, the ratio change and the redesignation to Class A shares. Ossen has reserved with Nasdaq the symbol “SMDT” in the event the Name Change Proposal is adopted and the Acquisition and the Spin-Off are consummated. Upon the closing of Acquisition and Spin-Off and the approval of Ossen’s listing application, Ossen will announce the final symbol approved by Nasdaq.

 

Increase in Authorized Shares

 

We have proposed to amend or memorandum of association to increase the maximum number of shares authorized to be issued by us. Currently, we are authorized to issue 100,000 shares. However, as a result of our issuing up to an aggregate of 81,243,000 shares pursuant to the Acquisition, we would have a very limited number of shares available to issue to employees pursuant to the San Meditech 2017 Equity Incentive plan or in connection with future financing or acquisition transactions. As a result, we believe that it is in the best interest of our shareholders to increase our authorized shares to 150,000,000, of which 125,000,000 would be designated Class A ordinary shares and 25,000,000 Class B ordinary shares.

 

Dual Class Structure

 

We have proposed to adopt an amended and restated memorandum and articles of association, which will become effective immediately prior to the consummation of the Acquisition and will replace our Current Charter in its entirety. Our Amended Charter provides that, immediately prior to the completion of the Acquisition, we will have two classes of shares, Class A ordinary shares and Class B ordinary shares. Our maximum number of shares authorized to be issued upon completion of the Acquisition will be (1) 125,000,000 Class A ordinary shares of a par value of $0.01 each, and (2) 25,000,000 Class B ordinary shares of a par value of $0.01 each.

 

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The Ossen board believes that retaining two classes of ordinary shares with different voting rights is in the best interest of the Company and its shareholders. The Board believes that the dual class capitalization structure: (a) will promote stability and continuity in the leadership and management of the Company, which will allow the Company to focus on long-term objectives, (b) will enhance the Company’s ability to attract, retain and motivate highly qualified key employees and (c) will provide the Company with greater flexibility in financing its growth.

 

Continuity and Stability. In the face of difficult challenges, management of companies with a single class of ordinary shares can become singularly focused on maximizing short-term value and performance at the expense of long-range planning in an effort to justify its business plans. The Board believes that Mr. Howard Gang Hao, San Meditech’s founder, is the primary source of the strategic vision that has made San Meditech’s success up to this point possible. The board believes that the dual class capital structure, which provides limited voting rights for the Class A ordinary shareholders, reduces the risk of disruption in the continuity of the Company’s current operational policies and long-range strategy by allowing management to pursue strategies that it believes will enhance the long-term profitability of the Company.

 

Retention of Key Employees. The board believes that the dual class capital structure enhances the Company’s ability to attract and retain highly qualified key employees. The Company’s ability to issue Class A ordinary shares-based equity awards increases its flexibility in structuring compensation plans so that management and key employees can participate in the growth of the Company without diluting the voting power of the Class B shareholders.

 

Financing Flexibility. The dual class capital structure provides the Company with greater flexibility to pursue a long-term emphasis on shareholder value through growth and financial strength. The board believes that the Company’s ability to issue Class A ordinary shares better positions the Company to finance growth opportunities without significantly diluting the voting interest of the Company’s Class B shareholders. The Board believes that a company with a single class of shares may run the risk of foregoing share issuances (thereby foregoing strategic transactions that potentially could be of great benefit to shareholders) simply out of concerns over dilution of control. As the issue of control is not a factor in the board’s consideration of these transactions, the decision by the Company to issue shares in acquisitions or capital raising transactions is based solely on the perceived economic benefits of the transaction to the Company and all of its shareholders.

 

All ordinary shares (including shares underlying ADSs), except for the ordinary shares to be forfeited by Dr. Tang pursuant to the Purchase Agreement, that are outstanding immediately prior to the completion of the Acquisition and Spin-Off will be automatically redesignated or converted into Class A ordinary shares. Holders of our ordinary shares vote as a single class on all matters submitted to a vote of our shareholders, except as may otherwise be required by law. In respect of matters requiring shareholders’ vote, each Class A ordinary share is entitled to one vote and each Class B ordinary share is entitled to 10 votes.

 

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13,028,938 of the Exchange Shares (including Indemnification Shares) to be issued to Sellers in connection with the Acquisition, representing an aggregate of 130,289,380 votes, and 5,583,831 Earn-Out Shares, representing an aggregate of 55,838,310 votes, will be designated as Class B ordinary shares. The remaining 43,841,161 Exchange Shares (including Indemnification Shares) to be issued to Sellers in connection with the Acquisition, representing an aggregate of 43,841,161 votes, and the remaining 18,789,070 Earn-Out Shares, representing an aggregate of 18,789,070 votes will be designated as Class A ordinary shares, representing an aggregate of 62,630,231 votes. The holders of the Class B shares will be Howard Gang Hao, who will serve as Chief Executive Officer and Director of the Company following the consummation of the Acquisition and the Spin-Off, and Mr. Hao’s son.

 

Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof, for so long as initial holders of the Class B ordinary shares, in the aggregate, hold at least 5% of our issued and outstanding shares, on a fully diluted basis. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any transfer of Class B ordinary shares by a holder thereof to any person or entity which is not an affiliate of such holder, such Class B ordinary shares shall be automatically and immediately converted into the equal number of Class A ordinary shares. Except for conversion rights and voting rights, the Class A ordinary shares and Class B ordinary shares shall carry equal rights and rank pari passu with one another, including but not limited to the rights to dividends and other capital distributions.

 

Immediately upon the completion of the Acquisition and Spin-Off, we will have 70,571,341 Class A ordinary shares and 18,612,769 Class B ordinary shares outstanding, assuming that Ossen will not issue any additional ordinary shares and assuming the Earn-Out Shares will be issued.

 

Filing of Amended Memorandum and Articles of Association

 

Ossen will file the Amended Charter substantially in the form attached as Annex C to this proxy statement in connection with consummation of the Acquisition.

 

Required Vote

 

The Charter Amendment Proposal, including the re-designation of Class A ordinary shares and the issuance of Class A ordinary shares and Class B ordinary shares, requires the affirmative vote of 75% of the votes cast by disinterested shareholders present in person or represented by proxy at the special meeting. If you abstain or do not instruct your broker how to vote with respect to the Charter Amendment Proposal, your abstention or broker non-vote will have no effect on the proposal. The approval of the Charter Amendment Proposal is conditioned on approval of the Acquisition Proposal and the Spin-Off Proposal.

 

Recommendation

 

THE OSSEN BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT OSSEN SHAREHOLDERS VOTE “FOR” THE APPROVAL OF THE CHARTER AMENDMENT PROPOSAL.

 

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THE INCENTIVE PLAN PROPOSAL

 

We are submitting for the approval of Ossen’s shareholder approval the San Meditech Holdings Ltd. 2017 Equity Incentive Plan (the “Plan”), which will apply following the closing of the Acquisition and the Spin-Off. The purpose of the Plan is to allow San Meditech to attract and retain key personnel and to provide a means for directors, officers, employees, consultants and advisors to acquire and maintain an interest in San Meditech, which interest may be measured by reference to the value of its ordinary shares.

 

If approved by Ossen’s shareholders, the Plan will become effective as the date that post-transaction board of directors of San Meditech adopts the Plan. We expect that that board adoption will be given on the day of, and immediately following, the closing of the Share Exchange. Capitalized terms used but not defined in this proposal shall have the meanings ascribed to them in the Plan, a copy of which is attached hereto as Annex D. The following description is qualified in its entirety by reference to the Plan.

 

Administration

 

San Meditech’s Compensation Committee (the “Committee”) will administer the Plan. The Committee will have the authority to determine the terms and conditions of any agreements evidencing any Awards granted under the Plan and to adopt, alter and repeal rules, guidelines and practices relating to the Plan. The Committee will have full discretion to administer and interpret the Plan and to adopt such rules, regulations and procedures as it deems necessary or advisable and to determine, among other things, the time or times at which the awards may be exercised and whether and under what circumstances an award may be exercised.

 

Eligibility

 

Employees, directors, officers, advisors or consultants of San Meditech or its affiliates are eligible to participate in the Plan. The Committee has the sole and complete authority to determine who will be granted an award under the Plan, however, it may delegate such authority to a special committee consisting of one or more directors under the circumstances set forth in the Plan.

 

Number of Shares Authorized

 

The Plan provides for an aggregate number of 8,924,300 ordinary shares equal to 10% of the outstanding ordinary shares on the Effective Date (which will be the date of board adoption of the Plan, which is expected to occur on the day of, and immediately following, the closing of the Acquisition and the Spin Off) to be available for awards. If an award is forfeited or if any option terminates, expires or lapses without being exercised, the ordinary shares subject to such award will again be made available for future grant. Shares that are used to pay the exercise price of an option or that are withheld to satisfy the Participant’s tax withholding obligation will not be available for re-grant under the Plan.

 

If there is any change in San Meditech’ corporate capitalization, the Committee in its sole discretion may make substitutions or adjustments to the number of shares reserved for issuance under the Plan, the number of shares covered by awards then outstanding under the Plan, the limitations on awards under the Plan, the exercise price of outstanding options and such other equitable substitution or adjustments as it may determine appropriate.

 

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The Plan will have a term of ten years and no further awards may be granted under the Plan after that date.

 

Awards Available for Grant

 

The Committee may grant awards of Non-Qualified Stock Options, Incentive (qualified) Stock Options) or any combination of the foregoing; provided, that the Committee may not grant to any one person in any one calendar year Awards (i) for more than 300,000 ordinary shares in the aggregate or (ii) payable in cash in an amount to exceed $1,200,000 in the aggregate.

  

The Committee will be authorized to grant Options to purchase ordinary shares that are either “qualified,” meaning they are intended to satisfy the requirements of Code Section 422 for incentive stock options, or “non-qualified,” meaning they are not intended to satisfy the requirements of Section 422 of the Code. Options granted under the Plan will be subject to the terms and conditions established by the Committee. Under the terms of the Plan, unless the Committee determines otherwise in the case of an Option substituted for another Option in connection with a corporate transaction, the exercise price of the Options will not be less than the fair market value (as determined under the Plan) of the ordinary shares at the time of grant. Options granted under the Plan will be subject to such terms, including the exercise price and the conditions and timing of exercise, as may be determined by the Committee and specified in the applicable award agreement. The maximum term of an option granted under the Plan will be ten years from the date of grant (or five years in the case of a qualified option granted to a 10% shareholders). Payment in respect of the exercise of an option may be made in cash or by check, by surrender of unrestricted shares (at their fair market value on the date of exercise) that have been held by the participant for any period deemed necessary by San Meditech’s accountants to avoid an additional compensation charge or have been purchased on the open market, or the Committee may, in its discretion and to the extent permitted by law, allow such payment to be made through a broker-assisted cashless exercise mechanism, a net exercise method, or by such other method as the Committee may determine to be appropriate. 

 

Transferability

 

Each award may be exercised during the participant’s lifetime only by the participant or, if permissible under applicable law, by the participant’s guardian or legal representative and may not be otherwise transferred or encumbered by a participant other than by will or by the laws of descent and distribution. The Committee, however, may permit awards (other than incentive stock options) to be transferred to family members, a trust for the benefit of such family members, a partnership or limited liability company whose partners or shareholders are the participant and his or her family members or anyone else approved by it.

 

Amendment

 

The Plan will have a term of ten years. San Meditech’s board of directors may amend, suspend or terminate the Plan at any time; however, shareholder approval to amend the Plan may be necessary if the law so requires. No amendment, suspension or termination will impair the rights of any participant or recipient of any award without the consent of the participant or recipient.

 

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Change in Control

 

Except to the extent otherwise provided in an Award agreement, in the event of a Change in Control, all outstanding options issued under the Plan will become fully vested. In general, the Committee may, in its discretion, cancel outstanding awards and pay the value of such awards to the participants in connection with a Change in Control. The Committee can also provide otherwise in an award agreement under the Plan.

 

New Plan Benefits

 

Future grants under the Plan will be made at the discretion of the Committee and, accordingly, are not yet determinable. In addition, the value of the awards granted under the Plan will depend on a number of factors, including the fair market value of the ordinary shares on future dates, the exercise decisions made by the participants and/or the extent to which any applicable performance goals necessary for vesting or payment are achieved. Consequently, it is not possible to determine the benefits that might be received by participants receiving discretionary grants under, or having their annual bonus paid pursuant to, the Plan.

 

Interests of Directors of Officers

 

San Meditech’s directors may grant awards under the Plan to themselves as well as to San Meditech’s officers and other employees.

 

Vote Required for Approval

 

Adoption of this proposal requires the affirmative vote of a majority of the shares held by disinterested shareholders as of the record date. If you abstain or do not instruct your broker how to vote with respect to the Charter Amendment Proposal, your abstention or broker non-vote will have the effect of a vote against this proposal. 

 

The Incentive Plan Proposal is conditioned upon the approval of the Acquisition Proposal and the Spin-Off Proposal. 

        

Recommendation of the Board

 

OSSEN’S BOARD OF DIRECTORS RECOMMENDS THAT OUR SHAREHOLDERS VOTE FOR THE INCENTIVE PLAN PROPOSAL.

 

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INFORMATION ABOUT OSSEN

 

Corporate History

 

We were incorporated under the laws of the British Virgin Islands as Ultra Glory International Ltd. (“Ultra Glory”) in 2010. We operate under the BVI Business Companies Act, 2004, or the BVI Act. Our registered office is located at Akara Bldg., 24 De Castro Street, Wickhams Cay 1, Road Town, Tortola, British Virgin Islands. The telephone number of the registered office is +86 (21) 51192951. Our World Wide Web address is http://www.osseninnovation.com. Information contained on our website does not constitute a part of this annual report.

 

Our agent for service of process in the United States is CT Corporation System, 111 Eighth Avenue, New York, New York 10011. The telephone number of our agent for service is (212) 894-8940.

 

Our Subsidiaries

 

British Virgin Islands Companies

 

Ossen Innovation Group, our wholly owned subsidiary, is the sole shareholder of two holding companies organized in the British Virgin Islands: Ossen Group (Asia) Co., Ltd., or Ossen Asia, and Topchina Development Group Ltd., or Topchina. All of the equity of Ossen Asia and Topchina had been held by Dr. Tang, our Chairman, since inception. In May 2010, Dr. Tang transferred these shares to Ossen Innovation Group in anticipation of the public listing of our company’s shares in the United States.

 

Ossen Asia is a British Virgin Islands limited liability company organized on February 7, 2002. Ossen Asia has one direct operating subsidiary in China, Ossen Innovation Materials Co. Ltd., or Ossen Materials. Ossen Asia owns 81% of the equity of Ossen Materials.

 

Topchina is a British Virgin Islands limited liability company organized on November 3, 2004. Ossen Materials and Topchina directly own an operating subsidiary in China, Ossen (Jiujiang) New Materials Co., Ltd., or Ossen Jiujiang. As of December 31, 2016, Ossen Materials owns 20.5% of the equity of Ossen Jiujiang and Topchina owns 79.5%.

 

Ossen Materials

 

Ossen Materials was formed in China on October 27, 2004 as a Sino-foreign joint venture limited liability company under the name Ossen (Maanshan) Steel Wire and Cable Co., Ltd. On May 8, 2008, Ossen Materials was restructured from a Sino-foreign joint venture limited liability company to a corporation. The name of the entity was changed at that time to Ossen Innovation Materials Co., Ltd.

 

Ossen Asia owns 81% of the equity of Ossen Materials. The remaining 19% is held in the aggregate by four Chinese entities, two of which are controlled by Chinese governmental entities, one of which is controlled by Zhonglu Co. Ltd., a company whose shares are listed on the Shanghai Stock Exchange, and one of which is controlled by Chinese citizens.

 

Through Ossen Materials, we have manufactured and sold plain surface PC strands, rare earth coated PC steel wires and PC wires in our Maanshan City facility since 2004. The primary markets for the products manufactured at our Maanshan facility are Anhui Province, Jiangsu Province, Zhejiang Province and Shanghai City, each in the PRC. 

 

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Ossen Jiujiang

 

On April 6, 2005, Shanghai Ossen Investment Holdings (Group) Co., Ltd., or Ossen Shanghai, acquired a portion of the bankruptcy assets of Jiujiang Steel & Iron Company, including equipment, land use rights and inventory, for approximately RMB 20,000,000 (approximately $2.9 million). Ossen Jiujiang was formed by Ossen Shanghai in the PRC as a Sino-foreign joint venture limited liability company on April 13, 2005. Ossen Shanghai then transferred the newly acquired assets to Ossen Jiujiang. At its inception, Ossen Jiujiang was owned by two entities: 33.3% of its equity was held by Ossen Asia and 66.7% by Ossen Shanghai. In June 2005, Ossen Shanghai transferred its entire interest in Ossen Jiujiang to Topchina in exchange for approximately $2.9 million. In October 2007, Topchina transferred 41.7% of the equity in Ossen Jiujiang to Ossen Asia for no consideration. On December 17, 2007, Ossen Asia transferred all of its shares in Ossen Jiujiang to Ossen Materials.

 

On November 19, 2010, the Department of Commerce of Jiujiang City approved an increase in the registered capital of Ossen Jiujiang by approximately $29.2 million, which capital must be paid in full by November 2013. On November 5, 2012, the Department of Commerce of Jiujiang City approved a decrease in the registered capital of Ossen Jiujiang by approximately $9.2 million. As of December 31, 2014, Topchina paid approximately $20 million of the increased registered capital to Ossen Jiujiang. As a result, 79.5% of Ossen Jiujiang is currently held by Topchina and 20.5% by Ossen Materials. On April 9, 2014, Ossen (Jiujiang) Steel Wire & Cable Co., Ltd. changed its name to Ossen (Jiujiang) New Materials Co., Ltd.

 

Through Ossen Jiujiang, we manufacture zinc or rare earth coated PC wires and strands, plain surface PC strands, unbonded PC strands, helical rib PC wires, sleeper PC wires and indented PC wires. The primary markets for the PC strands manufactured in our Jiujiang facility are Jiangxi Province, Hubei Province, Hunan Province, Fujian Province and Sichuan Province, each in the PRC.

 

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Organizational Structure Chart

 

The following chart reflects our current organizational structure:

 

 

Overview

 

We manufacture and sell an array of plain surface prestressed steel materials and rare earth coated and zinc coated prestressed steel materials, which we believe is the most comprehensive array among our competitors in China. Our materials are used in the construction of bridges, highways and other infrastructure projects in the PRC and internationally. Our facilities are located in Maanshan City, Anhui Province and in Jiujiang City, Jiangxi Province, in the People’s Republic of China. Based on our extensive experience in the industry, we believe that Ossen is one of the leading enterprises in the PRC in the design, engineering, manufacture and sale of customized prestressed steel materials used in the construction of bridges, highways, and other infrastructure projects in China.

 

During the year ended December 31, 2016, we generated revenue of approximately $101.4 million, or 86.6% of our total revenue (as compared to $85.0 million, or 72.1% of our total revenue, in 2015), from sales of our rare earth coated PC wires and PC strands. We believe that we are the only prestressed steel material manufacturer in the PRC that currently manufactures rare earth coated materials for bridge construction.

 

While we believe that our rare earth coating capabilities provide us with a competitive advantage among our competitors due to higher strength and higher quality, it is likely that our competitors will seek to develop similar competing products in the near future. We intend to continue to expand research and development efforts to advance our rare earth coating applications even further. In particular, we continued to develop a rare earth coating application for zinc-aluminum alloy coated products in 2016, which are more corrosion-resistant than zinc coated products. However, there can be no assurance that our initial competitive advantage will be retained and that one or more competitors will not develop products that are equal or superior to ours in quality or are better priced than our rare earth coated products. Furthermore, in both 2015 and 2016, the average margin for our coated products was lower than the average margin for our plain surface products. In 2015, it was mainly because the average price of the raw materials purchased for our coated products did not decline as steeply as the average price of the raw materials purchased for our plain surface products, while in 2016 it was mainly because the average price of the raw materials purchased for our coated products increased more than the average price of the raw materials purchased for our plain surface products.

 

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The primary characteristics of our rare earth coated products, which are used primarily in the construction of new bridges and the renovation of older bridges in need of repair, are as follows:

 

  · Superior corrosion resistance;

 

  · Superior toughness and plasticity;

 

  · Endurance against extreme heat;

 

  · Smooth and appealing coating; and

 

  · Easily coated.

 

Our products are marketed under the “Ossen” brand name both domestically and internationally. We handle all aspects of market research, product design, engineering, manufacturing, sales and marketing. We conduct our manufacturing operations in our ISO 9001 manufacturing facilities in Maanshan City and Jiujiang City, in the PRC.

  

Our capacity expansion to add 30,000 tons of annual production capacity for rare earth coated products has been indefinitely suspended due to an extended unfavorable business climate, intense market competition and the uncertainty of financial markets in China.

 

In 2013, the Chinese market began to adopt zinc-aluminum alloy coated PC wires and PC strands, which have more corrosion-resistance and stronger protective effect than zinc coated PC wires and PC strands. Our research and development department is currently developing a method to apply rare earth materials to the zinc-aluminum alloy coating process. In 2014, 2015 and 2016, we have made progress in developing such product and we will continue our research and development efforts in 2017. We anticipate that additional time will be necessary for such products to pass government inspection and to gain acceptance in the market.

 

Ossen Materials, our operating subsidiary, was founded in 2004. In 2005, we expanded our manufacturing capabilities by acquiring a facility in Jiujiang City in the PRC and forming Ossen Jiujiang. The founders of Ossen were among the first in China to introduce and promote the use of prestressed steel materials in construction projects. They have been involved in producing prestressed materials since 1994 and each has accumulated more than 20 years of experience in the prestressed materials industry.

 

We are affiliated with the Ossen Group, which is a Chinese conglomerate controlled by our Chairman, Dr. Tang. The Ossen Group’s core businesses include steel manufacturing, real estate and other investments. There is no active business relationship between our company and any of the other entities that comprise the Ossen Group other than what we have disclosed in Items 4.C and 7.B below.

 

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Competitive Advantages

 

Our management believes that the following competitive strengths differentiate us from other domestic and international competitors and are the key factors to our success:

 

We are taking advantage of industry trends in the bridge infrastructure sectors in the PRC and other international markets

 

Since 2012, China’s economic growth slowed and the demand for prestressed materials in the infrastructure construction industry in the domestic PRC market decreased. However, we believe there is still much room for growth in China’s infrastructure construction industry, and in particular the construction and restoration of bridges in the PRC that would benefit from the quality and durability of our rare earth coated prestressed materials.

 

We believe that the Chinese central government will continue to maintain economic growth rate at 6-7% in the next two years by injecting capital into the economy by funding new infrastructure projects.  While we do not believe that the Chinese government will initiate another large scale, comprehensive capital injection, we believe that infrastructure spending will be selectively targeted at developing regions in Central or Western China. Furthermore, through the “One Belt, One Road” initiatives, announced in late 2013, and the Asian Infrastructure Investment Bank launched in December 2015, investments are expected to be made during the next decade to construct new bridges and new railroads. We believe that these developments should create bidding opportunities for us and we expect the market will continue to recover gradually in 2017 and beyond.

 

Leading provider of customized prestressed steel materials

 

Based on our extensive experience in the industry, we believe that Ossen is one of the leading enterprises in the PRC in the design, engineering, manufacture and sale of customized prestressed steel materials used in the construction of bridges, highways, and other infrastructure projects in China. We manufacture and sell an array of plain surface prestressed steel materials and rare earth coated and zinc coated prestressed steel materials, which we believe is the most comprehensive array among our competitors in China and which are used in the construction of bridges, highways and other infrastructure projects in the PRC and internationally. Our facilities are located in Maanshan City, Anhui Province and in Jiujiang City, Jiangxi Province, in the People’s Republic of China.

  

Strong in-house research and development capabilities

 

Our research and development team consists of members recognized as industry experts in China, and each member of our senior management team has over 20 years of industry experience on average. We have built a recognized brand name in the industry by introducing innovative solutions to the prestressed materials industry, and particularly coated prestressed materials, in China and internationally. Our engineering team works closely with our customers in order to understand their requirements. We have been able to introduce new equipment to enhance cost saving and time reduction in the construction of bridges, highways, railways and buildings, as well as numerous other projects.

 

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Efficient proprietary production technology