- Ossen Chairman Liang Tang will abstain from voting his shares at the meeting. His $0 acquisition of Ossen’s business will require approval by an affirmative majority of disinterested shareholders.
- The “Fairness Opinion” provided to the Ossen Board of Directors appears to be of low quality and provides no practical insight into the value of the proposed transactions to Ossen shareholders.
- San Meditech, the operating business which Ossen proposes to buy via its parent company (AADRF – America-Asia Diabetes Research Foundation), has a “going concern” warning attached to its financial statements. If the transactions are approved as proposed then imminent dilution is very likely.
Neither Ossen nor AADRF/San-Meditech appears to have made any effort to build shareholder support for the proposed transactions. In my opinion the proposed transactions are not fair to Ossen’s public shareholders and I would be extremely surprised if they are approved.
Record date for voting at the meeting is August 17, 2017. Approval of the proxy proposals will require:
- Affirmative majority of “disinterested shareholders” for the sale of the steel business and acquisition of San-Meditech. Non-votes and abstentions will be equivalent to votes against.
- 75% affirmative majority of “disinterested shareholders” for the Charter Amendments that will separate Ossen’s equity into a dual-class structure that will give management super-voting Class B shares.
The text of the proxy statement appears contradictory in several places, probably due to hasty drafting. For example, page 114 says that Dr. Tang will abstain from voting on any of the proposals:
However page 16 says that Dr. Tang will vote in favor of the proposals:
The term “disinterested” is never defined in the proxy, but implies that shares held by Dr. Tang, Ossen CEO Wei Hua, and any parties connected to San Meditech will not vote. Ossen has no significant institutional shareholders and so far has not announced support from any disinterested shareholders.
The “Fairness” Opinion
Ossen’s Board of Directors employed an obscure entity named “Highline Research Advisors” as its advisor in evaluating the proposed transactions. The advisor has a website www.highlineresearchadvisors.com which was inactive on 08/10/17. EDGAR search results seem to show that Highline did not provide a “fairness opinion” to any other SEC-registered company in the past three years (LINK). Regardless of its qualifications, Highline carefully stated the limits of its analysis:
- Highline relied on management projections of future business results of Ossen and San Meditech. Highline did not make any assessment of the reasonableness of these projections. The projections were not included in the proxy statement.
- Highline did not assess the solvency of Ossen or San Meditech. As described further below, San Meditech appears to be in financial distress
- Highline did not evaluate any possible alternative transactions.
It does not appear that any evaluation was made of the medical value and business potential of San Meditech’s products.
San-Meditech’s Financial Distress
San Meditech’s financial statements include a “going concern” warning (see proxy page 202)
The company held $2.1mm of cash at 3/31/17, but has been losing over $5mm/year and has lost the license for the products responsible for most of its revenues:
San Meditech has an overdue loan at an interest rate of 24% and an August 2017 payment obligation in excess of the company’s cash:
It appears extraordinarily reckless for Ossen Directors and advisors to recommend acquisition of a company that may lose a significant asset prior to closing of the transaction.
It appears that San Meditech requires new financing as soon as possible and successful completion of the Ossen merger would not bring any new cash. Significant shareholder dilution appears inevitable.
Appraisal Rights for Ossen Shareholders
Under BVI law minority shareholders may exercise dissent rights in the event of a merger or sale of a majority of company assets. Dissenting shareholders will surrender their shares in exchange for their “fair value” in cash as determined by a court supervised appraisal process. The proxy statement includes a lengthy description of the appraisal process on page 240. Key terms:
- Appraisal Rights can only be exercised by registered shareholders. In order to exercise these rights ADS holders would have to convert their ownership to ordinary shares.
- Exercise of these Rights requires assistance of a BVI counsel to ensure proper compliance with court procedures.
- Exercise of Rights requires a vote against the transaction.
Dissenting shareholders will not know the fair value ahead of exercising their appraisal rights, however there are two useful reference points:
- Ossen’s book value was $13.80/ADS at 3/31/17 and was almost entirely composed of working capital items whose full value could be realized within 12 months. The company also holds land use rights whose fair value is likely to be well in excess of their balance sheet carrying value.
- Highline Research Advisors estimated the value of Ossen’s steel business using various metrics:
Having presented the Highline analysis in its justification for the merger, it would be difficult for Ossen to argue for a lower valuation during the appraisal process. Exercise of Appraisal Rights appears to be an extremely attractive option for Ossen shareholders, except that it is dependent on approval of the transaction by an affirmative majority of shareholders and that appears very unlikely.
Can this Deal be Saved?
It’s not surprising that Dr. Tang would like to acquire Ossen’s valuable steel business for $0, but it appears that a poorly selected acquisition target and apparent failure to engage competent professional advisors in execution of the transaction leave Ossen’s public shareholders with no reason to approve this transaction. It appears shameful for Dr. Tang to seek to retain all funds invested by shareholders in his business while leaving them with only a tiny retained interest in a new business at high risk of bankruptcy.
It’s not surprising that San Meditech would like to go public, but delays in growth of the business and apparent failure to engage competent professional advisors make this a poor time to become public. If San Meditech’s products have real potential then I believe it would be wiser to seek investment from a US venture capital firm that would provide sufficient capital to cover the current liquidity shortfall and guidance towards achieving a successful future listing through a traditional IPO at a much higher valuation. San Meditech would suffer higher dilution in the short-term, but less in the long-term.
Nevertheless, if these parties remain committed to this transaction structure then I suggest the following terms would be fair to all parties:
- A substantial cash payment from Dr. Tang to Ossen in exchange for acquisition for the steel business. I suggest $20mm which is equal to the Ossen Innovation IPO proceeds invested in the China Business. Note that Dr. Tang already agreed to compensate Ossen for any payments required due to exercise of Appraisal Rights.
- Distribution of $15mm of the cash as a special dividend ($6.74/ADS) to disinterested Ossen Innovation shareholders.
- Retention of $5mm of the cash as working capital for San Meditech following the acquisition.
- Reduction of the number of shares to be issued to AADRF to reflect the benefit of cash held by Ossen at the time of merger
- Elimination of the dual class shareholding proposal.
- A delay of at least 3 months in the shareholder vote to allow for drafting of revised agreements, issuance of an error-free proxy statement, and to permit San Meditech a chance to get its sh*t together. Completion of the AADRF acquisition should be conditional on San Meditech’s payoff of its existing debt and renewal of its sales licenses.
- Ossen and San-Meditech should engage an experienced investor relations advisor to explain the transaction to existing Ossen shareholders and develop future investor interest in San Meditech that would support issuance of shares that may be required to fund its long-term growth.
Disclaimers and Notes
At the time of publication the author is a public shareholder of Ossen Innovation. The author believes that it would be in his best interest if the facts in this article were widely understood. The author does not make any recommendation to any other person about investment in Ossen Innovation shares. The author may adjust his own investment in Ossen at any time. The author intends to vote against all proposals at the September 5 shareholder meeting.
Conditional terms used in the article such as “may” “could” “seem” and “appear” indicate the author’s subjective opinion based on the facts presented. Readers are encouraged to check the facts themselves rather than relying on the author’s opinion.
The author has made his best effort to accurately summarize facts publicly available as of the date of publication (08/10/17). The author does not want to spread errors or misinformation. A link to this article has been sent to Ossen Innovation, Dr. Tang, and Mr. Hao of San Meditech. If these parties, or anybody else, can provide public information as of 08/10/17 which shows there are errors in the text then corrections will be made as promptly as possible.
Aside from corrections to any errors discovered in this article, the author may not release new public commentary about Ossen. His willingness to do so will depend on future developments which cannot currently be predicted.
Interested parties who wish to communicate privately about Ossen Innovation may contact the author at konekoresearch (at) gmail.com
Minor edits were made to this article on 08/11/17 to improve clarity and readability.