Registration No._____________

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM F-1

REGISTRATION STATEMENT UNDER

THE SECURITIES ACT OF 1933

 

ZK International Group Co., Ltd.

(Exact name of registrant as specified in its charter)

 

Not Applicable

(Translation of Registrant’s Name into English)

 

British Virgin Islands   3490   Not Applicable
(State or other jurisdiction of   (Primary Standard Industrial   (I.R.S. Employer
incorporation or organization)   Classification Code Number)   Identification Number)

 

c/o Zhejiang Zhengkang Industrial Co., Ltd.

No. 678 Dingxiang Road, Binhai Industrial Park

Economic & Technology Development Zone

Wenzhou, Zhejiang Province

People’s Republic of China 325025

+86-577-86852999 – telephone

 

(Address, including zip code, and telephone number,

including area code, of principal executive offices)

 

Vcorp Agent Services, Inc.

25 Robert Pitt Drive, Suite 204

Monsey, NY 10952

 

(Name, address, including zip code, and telephone

number, including area code, of agent for service)

 

Copies to:

 

William S. Rosenstadt, Esq.

Mengyi “Jason” Ye, Esq.

Ortoli Rosenstadt LLP

501 Madison Avenue, 14 th Floor

New York, NY 10022

+1-212-588-0022 – telephone

+1-212-826-9307 – facsimile

 

Louis Taubman, Esq.

Joan Wu, Esq.
Hunter Taubman Fischer & Li LLC

1450 Broadway, 26 th Floor

New York, NY 10017

+1- 917- 512-0827 – telephone

+1-212- 202-6380 – facsimile

 

Approximate date of commencement of proposed sale to public: As soon as practicable after the effective date of this Registration Statement.

 

If any securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. x

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933.

 

Emerging growth company x

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ¨

 

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Class of 
Securities to be 
Registered
  Amount to 
be 
Registered
    Proposed 
Maximum 
Aggregate 
Price Per 
Share
    Proposed 
Maximum 
Aggregate 
offering 
Price (1)
    Amount of 
Registration
Fee
 
Ordinary shares, no par value per share (2)     1,500,000     $ 5.00     $ 7,500,000     $ 869.25  
Ordinary shares, no par value per share (2)(3)     1,500,000     $ 5.00     $ 7,500,000     $ 869.25  
Underwriter Warrants (4)     -     $ -     $ -     $ -  
Ordinary shares underlying Underwriter Warrants (4)     105,000     $ 5.00     $ 525,000     $ 60.85  
Total     3,105,000     $ 5.00     $ 15,525,000     $ 1,799.35  

 

(1) The registration fee for securities is based on an estimate of the Proposed Maximum Aggregate Offering Price of the securities, assuming the sale of the maximum number of shares at the highest expected offering price, and such estimate is solely for the purpose of calculating the registration fee pursuant to Rule 457(o).
(2) In accordance with Rule 416(a), the Registrant is also registering an indeterminate number of additional Ordinary Shares that shall be issuable pursuant to Rule 416 to prevent dilution resulting from share splits, share dividends or similar transactions.
(3) Reflects the resale by the selling shareholders set forth herein of up to 1,500,000 ordinary shares.
(4) The Registrant will issue to the Underwriter warrants to purchase a number of ordinary shares equal to an aggregate of seven percent (7%) of the ordinary shares (the “Underwriter Warrant”) sold in the offering. The closing date will be a date mutually acceptable to the Registrant and the Underwriter after the minimum offering has been sold. The exercise price of the Underwriter Warrants is equal to 100% of the offering price of the ordinary shares offered hereby. Assuming a maximum placement and an exercise price of $5.00 per share, we would receive, in the aggregate, $525,000 upon exercise of the Underwriter Warrants. The ordinary shares underlying the Underwriter Warrants are exercisable within five years commencing 180 days from the effective date of the offering at any time, and from time to time, in whole or in part.

 

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

 

EXPLANATORY NOTE

 

This Registration Statement contains two prospectuses, as set forth below.

 

· Public Offering Prospectus .  A prospectus to be used for the public offering by the Registrant of up to 1,605,000 ordinary shares of the Registrant (including up 105,000 ordinary share underlying the Underwriter Warrant) (the “Public Offering Prospectus”) through the underwriter named on the cover page of the Public Offering Prospectus.

 

· Resale Prospectus .  A prospectus to be used for the resale by selling shareholders of up to 1,500,000 ordinary shares of the Registrant (the “Resale Prospectus”).

 

The Resale Prospectus is substantively identical to the Public Offering Prospectus, except for the following principal points:

 

  · they contain different outside and inside front covers;

 

  · they contain different Offering sections in the Prospectus Summary section beginning on page 1;

 

  · they contain different Use of Proceeds sections on page 93;

 

  · the Capitalization, Dilution, Post-Offering Ownership sections on page 31, page 33 and page 34 of the Public Offering Prospectus are deleted from the Resale Prospectus respectively;

 

  · a Selling Shareholders section is included in the Resale Prospectus beginning on page 94;

 

  · references in the Public Offering Prospectus to the Resale Prospectus will be deleted from the Resale Prospectus;

 

  · the Underwriting section from the Public Offering Prospectus on page 84 is deleted from the Resale Prospectus and a Plan of Distribution is inserted in its place;

 

  · the Legal Matters section in the Resale Prospectus on page 96 deletes the reference to counsel for the underwriters; and

 

  · the outside back cover of the Public Offering Prospectus is deleted from the Resale Prospectus.

 

The Registrant has included in this Registration Statement, after the financial statements, a set of alternate pages to reflect the foregoing differences of the Resale Prospectus as compared to the Public Offering Prospectus.

  

   

 

 

The information in this prospectus is not complete and may be changed. We will not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED MAY [●] , 2017

 

 

ZK International Group Co., Ltd.

 

Minimum Offering: 1,000,000 Ordinary Shares

Maximum Offering: 1,500,000 Ordinary Shares

 

This is an initial public offering of Ordinary Shares of ZK International Group Co., Ltd., a British Virgin Islands company. We are offering a minimum of 1,000,000 and a maximum of 1,500,000 of our ordinary shares with no par value (the “Ordinary Shares”).

 

Prior to this offering, there has been no public market for our Ordinary Shares. The initial public offering price of our Ordinary Shares is expected to be $5.00 per share. We have applied to list our Ordinary Shares on Nasdaq Capital Market under the symbol “ZKIN.” 

 

We are an “emerging growth company” under the federal securities laws and will be subject to reduced public company reporting requirements. Investing in our Ordinary Shares involves risks. See “Risk Factors” beginning on page 13.

 

    Per Ordinary Share     Minimum Offering     Maximum Offering  
Assumed public offering price   $ 5.00     $ 5,000,000     $ 7,500,000  
Underwriter fees and commissions*   $ 0.35     $ 350,000     $ 525,000  
Proceeds to us, before expenses   $ 4.65     $ 4,650,000     $ 6,975,000  

 

*            Under the Underwriting Agreement, we will pay our underwriter, Boustead Securities, LLC (the “Underwriter”) a fee and commission equal to 7% of the gross proceeds raised in the offering. In addition to the cash commission, we will also reimburse the Underwriter for the full amount of its reasonable out-of-pocket expenses, including its legal expenses in an amount not to exceed $75,000, $25,000 of travel expenses and $25,000 for a third party due diligence report incurred by the Underwriter in connection with the offering, and a financial advisory fee of $100,000.

 

We expect our total cash expenses for this offering to be approximately $[●], including cash expenses payable to the Underwriter for its reasonable out-of-pocket expenses, exclusive of the above commissions. The Underwriter must sell the minimum number of securities offered (1,000,000 ordinary shares) if any are sold. The Underwriter is only required to use its best efforts to sell the maximum number of securities offered (1,500,000 ordinary shares). The offering will terminate upon the earlier of: (i) a date mutually acceptable to us and our Underwriter after which the minimum offering is sold or (ii) September 30 , 2017. Until we sell at least 1,000,000 shares, all investor funds will be held in an escrow account at Signature Bank, New York, NY. If we do not sell at least 1,000,000 ordinary shares by September 30, 2017, all funds will be promptly returned to investors (within three business days) without interest or deduction. One of the conditions to our obligation to sell any securities through the Underwriter is that, upon the closing of the offering, the Ordinary Shares would qualify for listing on the Nasdaq Capital Market.

 

If we complete this offering, net proceeds will be delivered to us on the closing date. We will not be able to use such proceeds in China, however, until we complete certain remittance procedures in China. If we complete this offering, then on the closing date, we will issue to the Underwriter warrant to purchase the number of ordinary shares in the aggregate equal to 7% of the gross proceeds received by the Company from the Closing. The warrants will be exercisable at any time, and from time to time, in whole or in part, during the period commencing 180 days from the effective date of the offering, which period shall not extend further than five years from the effective date of the offering in compliance with FINRA Rule 5110(f)(2)(G)(i). The warrants are exercisable at a per share price equal to 100% of the public offering price per share in the offering and may also be exercisable on a cashless basis. See “Underwriting” on page 84.

 

Investing in our Ordinary Shares involves a high degree of risk. See “Risk Factors” beginning on page 13 to read about factors you should consider before investing in shares of our Ordinary Shares. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

The date of this prospectus is [●], 2017.

 

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TABLE OF CONTENTS  
   
Prospectus Summary 4
   
Risk Factors 13
   
Special Note Regarding Forward-Looking Statements 28
   
Use of Proceeds 29
   
Dividend Policy 29
   
Exchange Rate Information 30
   
Capitalization 31
   
Dilution 33
   
Post-Offering Ownership 34
   
Management’s Discussion and Analysis of Financial Condition and Results of Operations 34
   
Quantitative and Qualitative Disclosures About Market Risk 41
   
Business 42
   
Description of Property 62
   
Management 63
   
Executive Compensation 68
   
Related Party Transactions 69
   
Principal Shareholders 69
   
Description of Share Capital 70
   
Shares Eligible for Future Sale 78
   
Material Tax Consequences Applicable to U.S. Holders of Our Ordinary Shares 79
   
Enforceability of Civil Liabilities 84
   
Underwriting 85
   
Expenses Relating to This Offering 88
   
Legal Matters 88
   
Experts 88
   
Interests of Named Experts and Counsel 88
   
Disclosure of Commission Position on Indemnification 88
   
Where You Can Find Additional Information 89
   
Selling Shareholders  95
   
Plan of Distribution  96
   
Financial Statements F-1

 

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Neither we nor the Underwriter have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We are offering to sell, and seeking offers to buy, shares of our Ordinary Shares only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our Ordinary Shares. Our business, financial condition, results of operations, and prospects may have changed since that date.

 

The information in this preliminary prospectus is not complete and is subject to change. No person should rely on the information contained in this document for any purpose other than participating in our proposed initial public offering, and only the preliminary prospectus issued on [●], 2017 is authorized by us to be used in connection with our proposed initial public offering. The preliminary prospectus will only be distributed by us and the Underwriter named herein and no other person has been authorized by us to use this document to offer or sell any of our securities.

 

Until [●] , 2017 (25 days after the commencement of our initial public offering), all dealers that buy, sell, or trade our Ordinary Shares, whether or not participating in our initial public offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as Underwriter and with respect to their unsold allotments or subscriptions.

 

Prospectus Summary

 

This summary highlights information contained in greater detail elsewhere in this prospectus. This summary is not complete and does not contain all of the information you should consider in making your investment decision. You should read the entire prospectus carefully before making an investment in our Ordinary Shares. You should carefully consider, among other things, our consolidated financial statements and the related notes and the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

Prospectus Conventions

 

Except where the context otherwise requires and for purposes of this prospectus only, “we”, “us”, “our company”, “Company”, “our”, “Zhengkang” and “ZKIN” refer to

 

· ZK International Group Co., Ltd., a British Virgin Islands company limited by shares (“ZK International” when individually referenced);

 

· ZK Pipe Industry Co., Ltd., a Hong Kong limited company (“ZK Pipe” when individually referenced), which is a wholly-owned subsidiary of ZK International;

 

· Wenzhou Weijia Pipeline Development Co., Ltd. (“Wenzhou Weijia”) (also referred to as 温州维佳管道发展有限公司 in China), a PRC company, which is a wholly-owned subsidiary of ZK Pipe;

 

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  · Zhejiang Zhengkang Industrial Co., Ltd. (“Zhejiang Zhengkang”) (also referred to as 浙江正康实业股份有限公司 in China), a PRC company, 99% of which is held by Wenzhou Weijia; and

 

· Wenzhou Zhengfeng Industry and Trade Co., Ltd. (“Wenzhou Zhengfeng”) (also referred to as 温州正丰工贸有限公司 in China), a PRC company, which is a wholly-owned subsidiary of Zhejiang Zhengkang.

 

This prospectus contains translations of certain RMB amounts into U.S. dollar amounts at specified rates solely for the convenience of the reader. The relevant exchange rates are listed below:

 

    For the Fiscal Years
Ended September 30
 
    2016     2015  
Period Ended RMB: USD exchange rate     6.6711       6.3668  
Period Average RMB : USD exchange rate     6.5333       6.1746  

 

For the sake of clarity, this prospectus follows the English naming convention of first name followed by last name, regardless of whether an individual’s name is Chinese or English. For example, the name of our chief executive officer will be presented as “Jiancong Huang,” even though, in Chinese, Mr. Huang’s name is presented as “Huang Jiancong.”

 

We have relied on statistics provided by a variety of publicly-available sources regarding China’s expectations of growth. We did not, directly or indirectly, sponsor or participate in the publication of such materials, and these materials are not incorporated in this prospectus other than to the extent specifically cited in this prospectus. We have sought to provide current information in this prospectus and believe that the statistics provided in this prospectus remain up-to-date and reliable, and these materials are not incorporated in this prospectus other than to the extent specifically cited in this prospectus.

 

Prior to this offering, we closed three financing transactions pursuant to exemptions provided by Regulations S and/or Regulation D of the Securities Act of 1933, as amended (the “Securities Act”). We sold an aggregate of 3,000,000 Ordinary Shares, 1,500,000 of which carry certain registration rights, for total proceeds of US$2,300,000. Boustead Securities LLC acted as placement agent for the private placements and received 7% placement fee from respective offerings. The Ordinary Shares subscribed in these private placements were issued after we i) decreased our par value from $1 per ordinary share to no par value (the “Par Value Change”), ii) effectuated a 180:1 forward stock split on March 20, 2017 whereby every authorized, issued and outstanding ordinary share was exchanged for 180 new ordinary shares (the “Stock Split”) and iii) increased our authorized shares from 9,000,000 to 50,000,000 ordinary shares (the “Share Increase”, collectively with Par Value Change and Forward Split referred as the “Recapitalization”).

 

Overview

 

Incorporated on May 13, 2015, under the laws of the British Virgin Islands (“BVI”), we primarily conduct our business through our subsidiary Zhejiang Zhengkang. Our core business focuses on providing systematic solutions to construction projects that require sophisticated piping systems. Leveraging our experience in the industry, we offer urban planners and real estate developers sophisticated pipe and fitting products and engineering expertise, enabling them to bring communities reliable and durable gas and water transmission systems. Our products are primarily sold in China, but are also exported and distributed in Europe and Southeast Asia. We have received numerous awards and recognitions domestically and internationally. Located within the Wenzhou Binhai Industrial Park, a national economic development zone, our facility occupies approximately five acres, consisting of business offices, manufacturing plants, a research and development center and storage facilities.

 

We specialize in designing and producing pipes and fittings such as double-press thin-walled stainless steel tubes and fittings, carbon steel tubes and fittings and single-press tubes and fittings. Focused on the innovation and expansion of our products to meet the specific needs of our clients, we believe that we are a leading manufacturer and engineer of high-performance stainless steel pipes. Our products offer a comprehensive suite of superior solutions for use in the construction and infrastructure industries. Our innovative products are used in a broad range of applications, including water and gas transmission within urban infrastructural development, residential housing development, food and beverage production, oil and gas exploitation, and agricultural irrigation. Since Zhejiang Zhengkang’s founding in 2001, we have developed an array of patented pipe and fitting products that have been marketed and distributed both domestically and internationally.

 

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We promote our brand through our sales staff, distributors, trade shows, trade fairs, forums, direct communications with potential customers, business networks, and the internet. In addition, we tailor our products to the needs of our clients and provide our clients with competitive pricing to establish long-term business relationships. We take pride in the cutting-edge technology and superb quality of our products, which have received recognitions such as the ISO9001 Quality Management System Certification, ISO14001 Environmental Management System Certification, and National Industrial Stainless Steel Production License, among other awards and honors. Our products have been used in well-known facilities such as Olympic stadiums, multinational hotel chains, and mega-sized apartment complexes.

 

Industry and Market Background

 

Our products are marketed and sold globally in Europe, East Asia and Southeast Asia with plans to market our products and services in North America, however, we believe that our biggest market will continue to be within China. Currently, most of the households and apartment buildings in China use pipes made of polymerized vinyl chloride (“PVC”), due to its lower cost. However, as the general Chinese population begins to recognize the short lifespan of PVC and realize the potential health hazards of PVC pipes, due to its plasticizer and lead compositions, thin-walled stainless steel pipes are projected to become real estate developers’ preferred material to ensure the delivery of high-quality water to each household.

 

According to the Chinese Bureau of Statistics, the total amount of investment in China’s real estate industry was approximately US$893 billion (RMB 5.9 trillion) and investment on pipe installation is estimated to make up 4% of the total investment in the next five years. As cities across China continue to undergo urbanization, real estate developers have been building apartment complexes in cities of all sizes. The need for safe water supply pipes is expected to experience a significant growth, and we believe that our products offer solutions that will meet the needs of both the real estate developers and health-conscious end users.

 

The commitment to replace aging plastic pipes with stainless-steel varieties due to health concerns has also gained support from the Chinese government. It was discovered that the erosion of the plastic pipes could significantly impact the quality of water being transmitted. Several major cities have therefore, under a government initiative, launched programs to improve water supply systems in and around residential complexes by replacing existing plastic pipes with new stainless-steel systems and using stainless-steel pipes as the first choice for any new urban development projects. Our experience in working with these large municipal projects include those within first and second-tier cities such as Shenzhen and Wenzhou. As we expect additional cities to initiate similar programs under the government initiative, the name recognition of our brand because of these large-scale infrastructural projects would give us an edge in this large potential market within China.

 

In addition to the significant potential market within the urban development and residential real estate industries, we anticipate that the demand of our services and products from hotels within China will also become an important target market. Currently, through local distributors, our products are provided to global hotel brands such as Kempinski, Sheraton and Holiday Inn within China. During the past ten years, through contractors, distributors and wholesalers, our products have been used in more than three hundred three- to five-star hotels. As we believe that we have become one of the industry-leading stainless pipe manufacturers, we plan to work with end users such as multinational global chains from the initial planning stage, assisting in the design of their pipe transmission systems, to the post-sale stage, providing maintenance and repair services as part of their daily operation. China’s hotel industry has experienced tremendous growth due to both inbound foreign travelers and domestic travelers, resulting in a $44 billion business with 2.5 million hotel rooms. However, the hotel penetration rate is only approximately 4 rooms per 1,000 capita in China, which is relatively low compared to that of developed nations. It is anticipated that the hospitality industry in China could reach $100 billion with 6.3 million rooms and 8 rooms per 1,000 capita. This therefore presents a significant opportunity for our company. As developers and travelers are becoming more sophisticated, the need for a sustainable and cost-effective solution is expected to increase. The quality of our products and our expertise servicing global hotel chains will provide us with a competitive advantage for future hotel construction projects.

 

Our Products and Services

 

Our products primarily consist of specialty steel strips, pipes and fittings. Based on the design of our client’s piping system, we have the expertise to tailor the shapes and specification of our products, providing the end users with environmentally-friendly and safe water and gas pipeline networks. We are equipped with an internal product design team who can customize and modify our products to meet each end user’s specific needs. Our technicians are also available to install products directly for our customers or assist contractors with the installation process. We have developed expertise in providing piping solutions for infrastructural projects, hotels and residential complexes. To maximize the utility of our products and create a systematic solution for our customers, we often combine the strength of available third-party components on the market with those of our own products to help our customers create an efficient and safe piping system based on their project needs. As we plan to position ourselves as a widely-recognized industry leader, in addition to being a manufacturer and supplier of piping and fitting products, we plan to add additional value to our products by providing consulting service with respect to the design, installation and maintenance of the piping system.

 

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Our products focus primarily on the drinking water and gas transmission industries, while a minor portion of revenue is generated from the pharmaceutical, medical, food and beverage industries. Produced from different stages of our production line, our steel products can be broken down and sold as the following parts and components:

 

  · Steel Strip: We manufacture carbon steel and stainless steel strip for sale to traditional manufacturers who are not in the pipe and fitting industry and for our own internal use in the production of our pipes and fittings. Our ability to produce steel strip in-house allows us to ensure the quality and consistency of our pipe and fitting products.

 

  · Steel Pipe: Our carbon steel and stainless steel pipes are primarily used in water and gas transmission systems. Carbon steel pipes are generally stronger than stainless steel, and therefore are typically used in applications that require high-pressure resistance, such as gas transmission and fire hydrants. Stainless steel pipes, in contrast, are more corrosion resistant and are commonly applied in cases that require clean transmission, such as drinking water and pharmaceutical liquid transmission.

 

  · Light Gauge Stainless Steel Pipe (LGSSP): We have production lines specifically designed to produce LGSSP, which have 40% thinner walls than regular stainless steel pipes. The reduction in the thickness of the pipe wall leads to a reduced manufacturing cost and weight and enhances installation flexibility due to its smaller size. LGSSP is an affordable option for household plumbing systems that require easy installation.

 

  · Pipe Connections and Fittings: We manufacture high-quality pipe connections and fittings that are used to connect pipes. Pipe fittings have wide applications for any piping and plumbing systems in both industrial and commercial applications. Fittings allow pipes to be joined or installed in the appropriate place and terminated or closed where necessary. We produce fittings in various shapes and sizes, with more than 10,000 different specifications. As most leakages are caused by misalignment or improper manufacture of connections and fittings, pipe connections and fittings, being the most crucial components of any piping system, require extremely precise production procedures.

 

Pipe production is very competitive in China. In order to distinguish ourselves from the other competitors in the industry, we have employed a team of engineers specializing in network design, CAD drawing, and special prototyping of piping systems to help our customers create a systematic solution based on their piping needs.

 

Our Growth Strategy

 

To maintain the growth of our business and sustain our leading position in the market, we anticipate to rely on these key drivers as part of our growth strategy:

 

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  · Expansion of manufacturing infrastructure and increased productivity for new businesses. Currently, we believe that our production volume can be improved with additional equipment and infrastructure. With investments that we plan to put into our infrastructure, we will be able to take on additional businesses contracts and increase our production volume.

 

  · Achieving a dominate position in the household plumbing market. With years of strategic preparations and planning behind us, we are seeing tremendous growth opportunities in this business segment, as consumers have started paying attention the health risks associated with unsafe household drinking water caused by problematic transmission system. We plan to focus our sales in this sector as our strategic priority for the next few years.

 

  · Further exploration of opportunities in emerging markets. We have recognized the great potentials of Siphonic Roof Drainage Systems (SRDS), a cutting edge drainage system mainly applied to large-span roof structures. It is widely anticipated that large-scale building development projects, such as airports and stadiums, will continue to grow at a rapid rate over the next few years and SRDS will see a surge in demand. We plan to invest in development of our own SRDS design software and we plan to continue our research in this area.

 

  · Rebranding ourselves as a premium, full-service solution provider. The combination of our top-notch manufacturing capabilities and our engineering expertise enable us to provide comprehensive solutions to our clients. In addition to our client-centric products we currently offer, our goal is to eventually provide all of our end users with collaborative services that would give us the opportunity to work alongside our clients as partners, and to execute in an effective and efficient manner.

 

  · Mergers and Acquisitions. We closely follow and investigate potentially profitable and strategic acquisitions and combinations within our industry. We continuously seek synergistic partnerships to acquire additional technologies, products, services, operations and/or geographic capabilities that can provide long-term growth. While we currently do not have any specific mergers or acquisition targets, we plan to explore the possibility of completing a few vertical or horizontal acquisitions in the next few years to expand our presence in the industry. There, however, is no assurance at this point we will be able to do so at this point.

 

Competitive Advantages

 

We have a number of competitive advantages that will enable us to maintain and further increase our market position in the pipe and fitting manufacture industry. Our competitive strengths include:

 

  · Solution-oriented products and services. Conventional manufacturers make products based on what prior customers ordered or pre-set prototypes, but we listen to our customers, engage in their projects, offer them engineering solutions and quickly respond to their demands. This differentiates us from other competitors who only supply products. By leveraging the flexibility of our product and providing systematic solutions to our customers, we strive to develop long-lasting partnerships with our clients.

 

  · Extensive Sales Network . To penetrate local markets and build lasting partnerships with the local water and gas supply companies, we have established a sales network with 27 sales representative posts in major urban hubs in China. To better serve our clientele, we also have worked with dozens of resellers across China. This extensive network ensures our products and services are easily accessible in all of China’s major cities.

 

  · Integrated Supply Chain. Most of our competitors outsource components from third-parties, and often encounter difficulties achieving the same low defect rate, high gross margin and production efficiency. Because we have the necessary production lines and machinery, we are able to decrease the cost of production by modifying raw steel strip to produce our own components and parts. As a result, we are able to achieve higher margins and ensure superior quality and consistency.

 

  · Technical and Engineering Capability. We understand that each project is unique, and as a result we cater to our clients’ unique needs on an individual basis. Our technical teams regularly consult and develop solutions that best cater to our clients’ objectives. Our sales team, engineers and construction teams work collaboratively to deliver the best service experience.

 

  · Rigorous Quality Control Benchmark. We have rigorous quality control mechanisms built into the manufacturing process to ensure that every product we make conforms with industrial quality standards. The following certificates attest to our focus on excellent quality control: ISO 9001:2008, DVGW, ISO14001:2004 and Global Manufacturer Certificate (GMC).

 

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Our Challenges and Risk Factors Summary

 

The following section outlines the primary challenges and risks inherent to our business model. Before deciding to invest in our Ordinary Shares, we strongly recommend a close reading and consider all of the risks in the section entitled “Risk Factors” beginning on page 13.

 

  · Risk of changes in the cost of raw materials and energy . Although the price of stainless steel and carbon steel strip has consistently dropped over the past few years while production supply levels remained stable, there is no certainty that the trend will continue in the future. As our manufacturing operations depend heavily on the availability of various raw materials and energy resources, price fluctuation of raw materials and energy could significantly affect our profitability.

 

  · Risk of intense competition in domestic market. The domestic market for pipe and fitting products is fragmented and highly competitive. Some of our pipe and fitting products compete on the basis of price and are sold in markets with low barriers to entry. New competition in these markets could force us to cut prices even further, resulting in further reduced margins in already low-margin products.

 

  · Risk related to our significant amount of short-term debt. As of September 30, 2016, we had 30 outstanding short-term loans provided by eight (8) banks, totaling RMB145,385,649 in the aggregate, or approximately $22 million. The amount of our indebtedness could have negative impacts on our ability to withstand adverse economic and industry conditions, and could limit our ability to redeploy our capital to other, more profitable areas. Associated debt service payments may limit the cash available for working capital, capital expenditures, acquisitions, joint ventures and other general corporate purposes.

 

  · Risk of severe financial hardship or bankruptcy of one or more of our major clients. Our clients’ sales and operations are generally sensitive to overall economic conditions. In particular, clients that operate in the real estate development and hospitality industry can have significant fluctuations in demand due to changes in the overall economy. Weakening of economic conditions, general economic fall-out in the aftermath of general financial difficulties or even bankruptcy filings could adversely affect our business. Additionally, our portfolio’s concentration of clients in specific industries, such as the water supply industry, may adversely impact our business if uncontrollable circumstances simultaneously affect multiple clients within the same industry.

 

Implications of Being an Emerging Growth Company

 

We qualify as an “emerging growth company” as defined in the Jumpstart our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies. These provisions include:

 

  · the ability to include only two years of audited financial statements and only two years of related management’s discussion and analysis of financial condition and results of operations disclosure; and

 

  · an exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002.

 

We may take advantage of these provisions for up to five years or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than $1.0 billion in annual revenue, have more than $700 million in market value of our Ordinary Shares held by non-affiliates or issue more than $1.0 billion of non-convertible debt over a three-year period.

 

9  

 

 

Corporate Information

 

We are a British Virgin Islands (also referred to as “BVI”) company limited by shares. Our current corporate structure is as follows prior to completion of this offering:

 

 

 

ZK International Group Co. Ltd. (“ZKIN”)

British Virgin Islands

(May 13, 2015)

 

 
 

 

 

 

 

100%

 

 

 

 

 

 

ZK Pipe Industry Co. Ltd. (“ZK Pipe”)

Hong Kong SAR

(May 28, 2015)

 

 
       
    100% Offshore
      Onshore
 

 

Wenzhou Weijia Pipeline Development Co., Ltd. (“Wenzhou Weijia”)

People’s Republic of China

(June 17, 2015)

 

 
 

 

 

 

 

99%

 

 

 

 

Zhejiang Zhengkang Industrial Co. Ltd.

(“Zhejiang Zhengkang”)

People’s Republic of China

(December 4, 2001)

 

 
 

 

 

 

 

100%

 

 

 

 

Wenzhou Zhengfeng Industry and Trade Co. Ltd.

(“Wenzhou Zhengfeng”)

People’s Republic of China

(December 24, 1999)

 

 

 

10  

 

 

Following completion of our initial public offering, ownership of ZK International will be as follows, assuming completion of the minimum and maximum offerings, respectively. To the extent we complete an offering between the minimum and maximum offerings, the percentage ownership of participants in our initial public offering will between the below amounts:

 

Minimum Offering   Maximum Offering
     
 

  

Our office and factory are situated on a 19,427 square meter parcel in Wenzhou in Southeastern Zhejiang Province. Our principal executive offices are located at c/o Zhejiang Zhengkang Industrial Co., Ltd., No. 678 Dingxiang Road, Binhai Industrial Park, Economic & Technology Development Zone, Wenzhou, Zhejiang Province, People’s Republic of China 325025. The telephone number of our principal executive offices is +86-0577-8685-2999. Our registered agent in the British Virgin Islands is Overseas Management Company Trust (B.V.I.) Ltd. Our registered office and our registered agent’s office in the British Virgin Islands are both at Wickham Cay 1, Road Town, Tortola, British Virgin Islands. Our registered agent in the United States is Vcorp Agent Services, Inc., with its office located at 25 Robert Pitt Drive, Suite 204 Monsey, NY 10952. We maintain a website at www.chinazhengkang.com, on which we plan to post our key corporate governance documents, including our board committee charters and our code of ethics. We do not incorporate the information on our website into this prospectus and you should not consider any information on, or that can be accessed through, our website as part of this prospectus.

 

The Offering

 

Shares Offered by Us:   Minimum: 1,000,000 Ordinary Shares
    Maximum: 1,500,000 Ordinary Shares
     
Shares Offered by Selling Shareholders:   1,500,000 Ordinary Shares
     
Shares Outstanding Prior to Completion of Offering:   12,000,000 Ordinary Shares. We have i) decreased par value of our Ordinary Shares from $1 per ordinary share to no par value, ii) effectuated a 180 for 1 forward stock split of every authorized, issued and outstanding Ordinary Shares, and iii) increased our authorized shares from 9,000,000 to 50,000,000 Ordinary Shares post-stock split.
     
Shares to be Outstanding after Offering:   Minimum: 13,000,000 Ordinary Shares
    Maximum: 13,500,000 Ordinary Shares
     
Assumed Offering Price per Share:   $5.00
     
Gross Proceeds to Us Before Expenses:   Minimum: $4,650,000
    Maximum: $6,985,000

 

11  

 

 

Proposed Nasdaq Capital Market Symbol:   “ZKIN”
     
Transfer Agent:  

Securities Transfer Corporation

2901 N Dallas Parkway, Suite 380

Plano, Texas 75093

     
Risk Factors:   Investing in these securities involves a high degree of risk. As an investor, you should be able to bear a complete loss of your investment. You should carefully consider the information set forth in the “Risk Factors” section of this prospectus before deciding to invest in our Ordinary Shares.
     
Closing of Offering:   The offering contemplated by this prospectus will terminate upon the earlier of: (i) a date mutually acceptable to us and the Underwriter after the minimum offering is sold or (ii) September 30, 2017. If we complete this offering, net proceeds will be delivered to us on the closing date (such closing date being the above mutually acceptable date on or before September 30, 2017, provided the minimum offering has been sold). We will not complete this offering unless our application to list on the Nasdaq Capital Market is approved. We will not be able to use such proceeds in China, however, until we complete certain remittance procedures in China.
     
Use of Proceeds:   We plan to devote the net proceeds of this offering on (i) research, development and promotion for our new products; (ii) purchase of new production equipment to increase production; (iii) talent acquisition and training to increase productivity; (iv) expenses in relation to compliance under the Sarbanes-Oxley Act of 2002 (“SOX”); and (v) general working capital.
     
Dividend Policy:   We have no present plans to declare dividends and plan to retain our earnings to continue to grow our business.

 

Summary Financial Information

 

In the table below, we provide you with historical selected financial data for the years ended September 30, 2016 and 2015. This information is derived from our consolidated financial statements included elsewhere in this prospectus. Historical results are not necessarily indicative of the results that may be expected for any future period. When you read this historical selected financial data, it is important that you read it along with the historical financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

    For Fiscal Years Ended September 30,  
    2016     2015  
    US$
(audited)
    US$
(audited)
 
Statement of operation data:                
Revenues     36,809,094       34,985,571  
Gross profit     11,475,776       10,172,365  
Operating expenses     (3,859,755 )     (2,566,822 )
Income from operations     7,616,021       7,605,543  
Other non-operating expenses, net     (1,207,890 )     (1,644,745 )
Provision for income taxes     (1,105,440 )     (952,117 )
Net income     5,302,691       5,008,681  
Earnings per share, basic and diluted   $ 0.59     $ 0.56  
Weighted average ordinary shares outstanding     9,000,000       9,000,000  
                 
Balance sheet data                
Current assets     38,862,534       29,352,729  
Total assets     45,550,956       36,701,630  
Current liabilities     35,972,034       32,036,574  
Total liabilities     35,972,034       32,036,574  
Total equity     9,578,922       4,665,056  

 

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Risk Factors

 

Before you decide to purchase our Ordinary Shares, you should understand the high degree of risk involved. You should consider carefully the following risks and other information in this prospectus, including our consolidated financial statements and related notes. If any of the following risks actually occur, our business, financial condition and operating results could be adversely affected. As a result, the trading price of our Ordinary Shares could decline, perhaps significantly.

 

Risks Related to Our Business and Industry

 

We may incur liability for unpaid taxes, including interest and penalties.

 

In the normal course of its business, our Company, including in particular Zhejiang Zhengkang and Wenzhou Zhengfeng, may be subject to challenges from various PRC taxing authorities regarding the amounts of taxes due. Although Zhejiang Zhengkang is currently entitled to a preferential income tax rate of 15% as we have been certified as a high-tech enterprise by the local agency and our management believe that the we have paid all taxes to date, PRC taxing authorities may take the position that the we owe more taxes than we have paid based on transactions conducted by ZK International or ZK Pipe, which may be deemed a resident enterprise, thereby resulting in taxable liability for Zhejiang Zhengkang. (See “Risk Factors - Under the Enterprise Income Tax Law, we may be classified as a ‘Resident Enterprise’ of China. Such classification will likely result in unfavorable tax consequences to us and our non-PRC stockholders.”).

 

We recorded a tax liability of $5,163,716 and $3,251,430 for the fiscal years ended September 30, 2016 and 2015, respectively. It is possible that the tax liability of the Company for past taxes may be higher than those amounts. We believe that we have sufficient cash on hand to adequately meet any tax liability for the underpayment of income and business taxes. Additionally, we believe that we may be able to negotiate with local PRC taxing authorities a reduction to any amounts that such authorities may believe are due and a reduction to any interest or penalties thereon. We have no guarantee that we will be able to negotiate such a reduction. To the extent we can negotiate such amounts, national-level taxing authorities may take the position that localities are without power to reduce such liabilities, and such PRC taxing authorities may attempt to collect unpaid taxes, interest and penalties in amounts greatly exceeding management’s estimates.

 

Our industry is very competitive in China.

 

The domestic market for pipe and fitting products is fragmented and highly competitive. We estimate that there are a few relatively large companies with which we compete against and more than one hundred smaller companies with regional presences. We also face competition from products imported to China or produced by manufacturers that are already globally recognized. The number of these companies varies from time to time. Some of our pipe and fitting products compete on the basis of price and are sold in fragmented markets with low barriers to entry, allowing less expensive domestic producers to gain market share and reduce our margins. To the extent these competitors are able to grow and consolidate, they may be able to take advantage of economies of scale, which could put further pressure on our margins.

 

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A weakening of the Chinese economy (and in particularly in real estate or hospitality sectors) could hurt demand for our products.

 

Through distributors and wholesalers, most of our products are sold domestically to end users in the real estate or hospitality industries, including those in local municipalities, hotels or residential complexes. As such, we have relied on consumer spending to drive sales in our products. Over the last five years, there are signs that China’s GDP growth rate has slowed. If China’s economy continues to slow, or if customer spending for decreases, demand for our products may be negatively impacted, which would adversely affect sales of our products to infrastructural, real estate or hotel developers and results of our operations.

 

Our inability to raise additional capital could have material adverse effect on our financial condition and results of operations.

 

Our production can be improved with additional production units and better infrastructure within the facility. We are raising additional capital through this offering in order for us to purchase additional equipment and build necessary infrastructure within our production facility to meet the demand of our customers. If we cannot raise additional capital and is unable to execute our business expansion plan successfully, our customers may experience substantial delay in receiving our products, which could have a material adverse effect on our business relationship with them and our financial performance.

 

Our revenue will decrease if the industries in which our customers operate experience a protracted slowdown.

 

Our products mainly serve as key components in projects and machines operated by our customers which are mostly in the construction industry. Therefore, we are subject to the general changes in economic conditions affecting those industry segments of the economy. If the industry segments in which our customers operate do not grow or if there is a contraction in those industries, demand for our products will decrease. Demand for our products is typically affected by a number of overarching economic factors, including, but not limited to, interest rates, the availability and magnitude of private and governmental investment in infrastructure projects and the health of the overall global economy. If there is a decline in economic activity in China and the other markets in which we operate or a protracted slowdown in industries on which we rely for our sales, demand for our products and our revenue will likewise decrease.

 

Any decline in the availability, or increase in the cost of raw materials could materially affect our earnings.

 

Our pipe and fitting manufacturing operations depend heavily on the availability of various raw materials and energy resources. The availability of raw materials and energy resources may decline and their prices may fluctuate greatly. If our suppliers are unable or unwilling to provide us with raw materials on terms favorable to us, we may be unable to produce certain products. This could result in a decrease in profit and damage to our reputation in our industry. In the event our raw material and energy costs increase, we may not be able to pass these higher costs on to our customers in full or at all. Any increase in the prices for raw materials or energy resources could materially increase our costs and therefore lower our earnings.

 

Outstanding bank loans may reduce our available funds.

 

We have approximately $26 million in outstanding bank loans and bank acceptance bills as of September 30, 2016. There can be no guarantee that we will be able to pay all amounts when due or refinance the amounts on terms that are acceptable to us or at all. If we are unable to make our payments when due or to refinance such amounts, our property could be foreclosed and our business could be negatively affected.

 

Weak liquidity may have material adverse effect on our results of operations.

 

For the years ended September 30, 2016 and 2015, we recorded negative cash flows from our operating activities of $1,201,109 and $2,780,259, respectively, largely due to the increases in accounts receivable from customers. In addition, some of our accounts receivable have carried balance for as many as 3 years. While we are actively collecting the remaining balance of these accounts receivable, we cannot assure you that we will be able to do so. We also cannot assure you that we will not experience another period of negative cash flows from our operating activities in the future. If we continue experiencing an increase in accounts receivable without substantial collection of them, the weak liquidity could have a material adverse effect on our financial performance.”

 

Reciprocal debt guarantees may reduce our assets if we are required to honor a guarantee made in favor of a third party.

 

In the past, we have occasionally entered into reciprocal debt guarantees with other local businesses in order to meet funding requirements of lenders, who sometimes require greater assets or income than we have individually, but that could be satisfied if similarly, situated businesses agreed to guarantee each other’s debts. These guarantees are typically time-limited and tend to be two years in length. Although we do not currently have a guarantee obligation, we could be subject to loss in the future if we undertake to guarantee another party’s debt and such third party subsequently defaults in payment.

 

Our limited operating history makes it difficult to evaluate our future prospects and results of operations.

 

We have a limited operating history, with our oldest subsidiary, Wenzhou Zhengfeng, having been founded in 1999. Accordingly, you should consider our future prospects in light of the risks and uncertainties experienced by early stage companies in evolving markets such as the growing market for pipe and fitting products in the PRC. Some of these risks and uncertainties relate to our ability to:

 

  · offer additional pipe and fitting products to attract and retain a larger customer base;
  · attract additional customers and increased spending per customer;
  · increase awareness of our brand and continue to develop customer loyalty;
  · respond to competitive market conditions;

 

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  · respond to changes in our regulatory environment;
  · manage risks associated with intellectual property rights;
  · maintain effective control of our costs and expenses;
  · raise sufficient capital to sustain and expand our business;
  · attract, retain and motivate qualified personnel; and
  · upgrade our technology to support additional research and development of new pipe and fitting products.

 

If we are unsuccessful in addressing any of these risks and uncertainties, our business may be materially and adversely affected.

 

The loss of any of our key customers could reduce our revenues and our profitability.

 

We consider our major customers in each period to be those customers that accounted for more than 10% of overall revenues in such period. We did not have any such customer during fiscal years ended September 30, 2016 and had only one such customer for during fiscal year ended September 30, 2015 due a large order. It is common practice for us rely on individual orders from such customers without any long-term contracts. Therefore, there can be no assurance that we will maintain or improve the relationships with these customers, or that we will be able to continue to supply these customers at current levels or at all. As the majority of our revenues are driven by individual orders for construction products, our major customers often change each period based on when a given order is placed. If we cannot maintain long-term relationships with major customers or replace major customers from period to period with equivalent customers, the loss of such sales could have an adverse effect on our business, financial condition and results of operations.

 

The loss of any of our key vendors could have a materially adverse effect on our results of operations.

 

We consider our major vendors in each period to be those vendors that accounted for more than 10% of overall purchases in such period. We have three such vendors during fiscal years ended September 30, 2016, who are Foshan Ruigangda Trading Co., Ltd, Wanzhouhong Steel Co., Ltd., and Foshan Oufo Metal Materials Co., Ltd., accounting for approximately 36%, 16%, 15% of overall purchases respectively. We have four such vendors during fiscal years ended September 30, 2015, who are Foshan Ruigangda Trading Co., Ltd, Foshan Oufo Metal Materials Co., Ltd., Sichuan Xinan Stainless Steel Co., Ltd. and Foshan Yaohua Stainless Steel Co., Ltd. accounting for approximately 24%, 19%, 11% and 10% of overall purchases respectively. We purchase raw materials on the market at prevailing market prices. We believe that we can locate replacement vendors readily on the market for prevailing prices and that we would not have significant difficulty replacing a given vendor, any difficulty in replacing such a vendor could adversely affect our company’s performance to the extent it results in higher prices, slower supply chain and ultimately less desirable results of operations.

 

Any disruption in the supply chain of raw materials and our products could adversely impact our ability to produce and deliver products.

 

As to the products we manufacture, we must manage our supply chain for raw materials and delivery of our products. Supply chain fragmentation and local protectionism within China further complicates supply chain disruption risks. Local administrative bodies and physical infrastructure built to protect local interests pose transportation challenges for raw material transportation as well as product delivery. In addition, profitability and volume could be negatively impacted by limitations inherent within the supply chain, including competitive, governmental, legal, natural disasters, and other events that could impact both supply and price. Any of these occurrences could cause significant disruptions to our supply chain, manufacturing capability and distribution system that could adversely impact our ability to produce and deliver products.

 

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We may be subject to violations under Article 10 of PRC Negotiable Instrument Law.

 

We have issued various Bank Acceptance Bills and Letter of Credit in the amount of RMB 26,000,000 (or approximately US $3.90 million) to increase deposit-to-loan ratio of the Company. While the issuance of such negotiable instruments violated the Article 10 of PRC Negotiable Instrument Law, which states “the issue, acquisition and transfer of an instrument shall follow the principle of good faith and reflect the true relationship of transaction and between the creditor and the debtor”, it is our PRC counsel’s opinion that such violation is a common practice in China and is not subject to administrative penalties stated in Article 103 of PRC Negotiable Instrument Law, nor it is an act of fraud as defined by Article 102 of PRC Negotiable Instrument Law and Article 194 of Criminal Law. In addition, our PRC counsel believes that the Company, along with its officers, directors or any affiliated party, will not be subject to any administrative penalty or criminal sanction. However, if our Company or our officers and directors are penalized for the violation, such penalty, whether financially or not, could have a materially adverse effect on our results of operation.

 

Our patent rights are limited in China.

 

We rely on many patented products to establish our market share for stainless pipe products. Our patent rights are granted by the State Intellectual Property Office of the PRC. While we have sold our products outside of the PRC and plan to continue expanding the export of our products overseas, we have not been granted any patent in countries outside of the PRC. As of the date hereof, most of our products are sold within the PRC. However, in the event that we begin to generate substantial revenue from sales abroad and if we cannot successfully protect our intellectual properties outside of the PRC, we may not be able to execute our business plan, which could have a material adverse effect on our financial performance.

 

Rapid expansion could significantly strain our resources, management and operational infrastructure, which could impair our ability to meet increased demand for our products and hurt our business results.

 

To accommodate our anticipated growth, we will need to expend capital resources and dedicate personnel to implement and upgrade our accounting, operational and internal management systems and enhance our record keeping and contract tracking system. Such measures will require us to dedicate additional financial resources and personnel to optimize our operational infrastructure and to recruit more personnel to train and manage our growing employee base. If we cannot successfully implement these measures efficiently and cost-effectively, we will be unable to satisfy the demand for our products, which will impair our revenue growth and hurt our overall financial performance.

 

We must manage growth in operations to maximize our potential growth and achieve our expected revenues and any failure to manage growth will cause a disruption of our operations and impair our ability to generate revenue.

 

In order to maximize potential growth in our current and potential markets, we believe that we must expand the scope of our pipe and fitting manufacturing and production facilities and capabilities and continue to develop new and improved valves. This expansion will place a significant strain on our management and our operational, accounting, and information systems. We expect that we will need to continue to improve our financial controls, operating procedures and management information systems. We will also need to effectively train, motivate and manage our employees. Our failure to manage our growth could disrupt our operations and ultimately prevent us from generating the revenues we expect.

 

We cannot assure you that our internal growth strategy will be successful, which may result in a negative impact on our growth, financial condition, results of operations and cash flow.

 

One of our strategies is to grow internally through increasing the development of new products and improve the quality of existing products. However, many obstacles to this expansion exist, including, but not limited to, increased competition from similar businesses, our ability to improve our products and product mix to realize the benefits of our research and development efforts, international trade and tariff barriers, unexpected costs, costs associated with marketing efforts abroad and maintaining attractive foreign exchange rates. We cannot, therefore, assure you that we will be able to successfully overcome such obstacles and establish our services in any additional markets. Our inability to implement this internal growth strategy successfully may have a negative impact on our growth, future financial condition, results of operations or cash flows.

 

We cannot assure you that our acquisition growth strategy will be successful, resulting in our failure to meet growth and revenue expectations.

 

In addition to our internal growth strategy, we plan to explore the possibility of growing through strategic acquisitions. We may pursue opportunities to acquire businesses in the PRC that are complementary or related in products and business structure to us. We do not presently have any commitments, agreements or understandings to acquire any businesses or assets of such businesses. We may not be able to locate suitable acquisition candidates at prices that we consider appropriate or to finance acquisitions on terms that are satisfactory to us. If we do identify an appropriate acquisition candidate, we may not be able to negotiate successfully the terms of an acquisition, or, if the acquisition occurs, integrate the acquired business into our existing business. Acquisitions of businesses or other material operations may require debt financing or additional equity financing, resulting in leverage or dilution of ownership. Integration of acquired business operations could disrupt our business by diverting management away from day-to-day operations. The difficulties of integration may be increased by the necessity of coordinating geographically dispersed organizations, integrating personnel with disparate business backgrounds and combining different corporate cultures.

 

We also may not be able to retain key employees or customers of an acquired business or realize cost efficiencies or synergies or other benefits we anticipated when selecting our acquisition candidates. In addition, we may need to record write-downs from future impairments of intangible assets, which could reduce our future reported earnings. At times, acquisition candidates may have liabilities or adverse operating issues that we fail to discover through due diligence prior to the acquisition. In addition to the above, acquisitions in the PRC, including state owned businesses, will be required to comply with the laws of the PRC, to the extent applicable. There can be no assurance that any given proposed acquisition will be able to comply with PRC requirements, rules and/or regulations, or that we will successfully obtain governmental approvals that are necessary to consummate such acquisitions, to the extent required. If our acquisition strategy is unsuccessful, we will not grow our operations and revenues at the rate that we anticipate.

 

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Failure to manage our growth could strain our management, operational and other resources, which could materially and adversely affect our business and prospects.

 

Our growth strategy includes building our brand, increasing market penetration of our existing products, developing new products, increasing our targeting of the pharmaceutical market in China, and increasing our exports. Pursuing these strategies has resulted in, and will continue to result in substantial demands on management resources. In particular, the management of our growth will require, among other things:

 

  · continued enhancement of our research and development capabilities;
  · information technology system enhancement;
  · stringent cost controls and sufficient liquidity;
  · strengthening of financial and management controls and information technology systems; and
  · increased marketing, sales and support activities; and hiring and training of new personnel.

 

If we are not able to manage our growth successfully, our business and prospects would be materially and adversely affected.

 

Our bank accounts are not insured or protected against loss.

 

We maintain our cash with various banks and trust companies located in the PRC. Our cash accounts are not insured or otherwise protected. While China is currently considering implementation of banking insurance policies, it has not yet done so. Should any bank or trust company holding our cash deposits become insolvent, or if we are otherwise unable to withdraw funds, we would lose the cash on deposit with that particular bank or trust company.

 

We are substantially dependent upon our senior management and key research and development personnel.

 

We are highly dependent on our senior management to manage our business and operations and our key research and development personnel for the development of new products and the enhancement of our existing products and technologies. In particular, we rely substantially on our Chief Executive Officer and Interim Chief Financial Offcier Jiancong Huang, to manage our operations.

 

While we provide the legally required personal insurance for the benefit of our employees, we do not maintain key man life insurance on any of our senior management or key personnel including our Chief Executive Officer and Chairman of the Board, Mr. Jiancong Huang. The loss of any one of them would have a material adverse effect on our business and operations. Competition for senior management and our other key personnel is intense and the pool of suitable candidates is limited. We may be unable to locate a suitable replacement for any senior management or key personnel that we lose. In addition, if any member of our senior management or key personnel joins a competitor or forms a competing company, they may compete with us for customers, business partners and other key professionals and staff members of our company. Although each of our senior management and key personnel has signed a confidentiality and non-competition agreement in connection with his employment with us, we cannot assure you that we will be able to successfully enforce these provisions in the event of a dispute between us and any member of our senior management or key personnel.

 

We compete for qualified personnel with other hardware manufacturing companies and related technology research institutions. Intense competition for these personnel could cause our compensation costs to increase, which could have a material adverse effect on our results of operations. Our future success and ability to grow our business will depend in part on the continued service of these individuals and our ability to identify, hire and retain additional qualified personnel. If we are unable to attract and retain qualified employees, we may not be able to meet our business and financial goals.

 

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We are heavily dependent upon the services of experienced personnel who possess skills that are valuable in our industry, and we may have to actively compete for their services.

 

We are heavily dependent upon our ability to attract, retain and motivate skilled personnel to serve our customers. Many of our personnel possess skills that would be valuable to all companies engaged in our industry. Consequently, we expect that we will have to actively compete for these employees. Some of our competitors may be able to pay our employees more than we are able to pay to retain them. Our ability to profitably operate is substantially dependent upon our ability to locate, hire, train and retain our personnel. There can be no assurance that we will be able to retain our current personnel, or that we will be able to attract and assimilate other personnel in the future. If we are unable to effectively obtain and maintain skilled personnel, the development and quality of our services could be materially impaired. See “Our Business – Employees.”

 

If we fail to protect our intellectual property rights, it could harm our business and competitive position.

 

We rely on a combination of patent, copyright, trademark and trade secret laws and non-disclosure agreements and other methods to protect our intellectual property rights. We own various patents in China covering our pipe and fitting production technology.

 

The process of seeking patent protection can be lengthy and expensive, our patent applications may fail to result in patents being issued, and our existing and future patents may be insufficient to provide us with meaningful protection or commercial advantage. Our patents and patent applications may also be challenged, invalidated or circumvented.

 

We also rely on trade secret rights to protect our business through non-disclosure provisions in employment agreements with employees. If our employees breach their non-disclosure obligations, we may not have adequate remedies in China, and our trade secrets may become known to our competitors.

 

Implementation of PRC intellectual property-related laws has historically been lacking, primarily because of ambiguities in the PRC laws and enforcement difficulties. Accordingly, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other western countries. Furthermore, policing unauthorized use of proprietary technology is difficult and expensive, and we may need to resort to litigation to enforce or defend patents issued to us or to determine the enforceability, scope and validity of our proprietary rights or those of others. Such litigation and an adverse determination in any such litigation, if any, could result in substantial costs and diversion of resources and management attention, which could harm our business and competitive position.

 

We may be exposed to intellectual property infringement and other claims by third parties which, if successful, could disrupt our business and have a material adverse effect on our financial condition and results of operations.

 

Our success depends, in large part, on our ability to use and develop our technology and know-how without infringing third party intellectual property rights. If we sell our branded products internationally, and as litigation becomes more common in China, we face a higher risk of being the subject of claims for intellectual property infringement, invalidity or indemnification relating to other parties’ proprietary rights. Our current or potential competitors, many of which have substantial resources and have made substantial investments in competing technologies, may have or may obtain patents that will prevent, limit or interfere with our ability to make, use or sell our branded products in either China or other countries, including the United States and other countries in Asia. In addition, the defense of intellectual property suits, including patent infringement suits, and related legal and administrative proceedings can be both costly and time consuming and may significantly divert the efforts and resources of our technical and management personnel. Furthermore, an adverse determination in any such litigation or proceedings to which we may become a party could cause us to:

 

  · pay damage awards;
  · seek licenses from third parties;
  · pay ongoing royalties;
  · redesign our branded products; or
  · be restricted by injunctions,

 

each of which could effectively prevent us from pursuing some or all of our business and result in our customers or potential customers deferring or limiting their purchase or use of our branded products, which could have a material adverse effect on our financial condition and results of operations.

 

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Risks Related to Doing Business in China

 

If we become directly subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and resolve the matter which could harm our business operations, this offering and our reputation and could result in a loss of your investment in our stock, especially if such matter cannot be addressed and resolved favorably.

 

Recently, U.S. public companies that have substantially all of their operations in China, have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered around financial and accounting irregularities, a lack of effective internal controls over financial accounting, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese companies has sharply decreased in value and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits and SEC enforcement actions and are conducting internal and external investigations into the allegations. It is not clear what effect this sector-wide scrutiny, criticism and negative publicity will have on our company, our business and this offering. If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate such allegations and/or defend the Company. This situation may be a major distraction to our management. If such allegations are not proven to be groundless, our company and business operations will be severely hampered and your investment in our stock could be rendered worthless.

 

Adverse changes in political and economic policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could reduce the demand for our products and materially and adversely affect our competitive position.

 

Substantially all of our business operations are conducted in China. Accordingly, our business, results of operations, financial condition and prospects are subject to economic, political and legal developments in China. Although the Chinese economy is no longer a planned economy, the PRC government continues to exercise significant control over China’s economic growth through direct allocation of resources, monetary and tax policies, and a host of other government policies such as those that encourage or restrict investment in certain industries by foreign investors, control the exchange between RMB and foreign currencies, and regulate the growth of the general or specific market. These government involvements have been instrumental in China’s significant growth in the past 30 years. In response to the recent global and Chinese economic downturn, the PRC government has adopted policy measures aimed at stimulating the economic growth in China. If the PRC government’s current or future policies fail to help the Chinese economy achieve further growth or if any aspect of the PRC government’s policies limits the growth of our industry or otherwise negatively affects our business, our growth rate or strategy, our results of operations could be adversely affected as a result.

 

Labor laws in the PRC may adversely affect our results of operations.

 

On June 29, 2007, the PRC government promulgated a new labor law, namely, the Labor Contract Law of the PRC, which became effective on January 1, 2008, which was further amended on December 28, 2012 (effective July 1, 2013). The Labor Contract Law imposes greater liabilities on employers and significantly affects the cost of an employer’s decision to reduce its workforce. Further, it requires certain terminations be based upon seniority and not merit. In the event we decide to significantly change or decrease our workforce, the Labor Contract Law could adversely affect our ability to enact such changes in a manner that is most advantageous to our business or in a timely and cost-effective manner, thus materially and adversely affecting our financial condition and results of operations. The Labor Contract Law also mandates that employers provide social welfare packages to all employees, increasing our labor costs. To the extent competitors from outside China are not affected by such requirements, we could be at a comparative disadvantage.

 

Imposition of trade barriers and taxes may reduce our ability to do business internationally, and the resulting loss of revenue could harm our profitability.

 

We may experience barriers to conducting business and trade in our targeted emerging markets in the form of delayed customs clearances, customs duties and tariffs. In addition, we may be subject to repatriation taxes levied upon the exchange of income from local currency into foreign currency, substantial taxes on profits, revenues, assets and payroll, as well as value-added tax. The markets in which we plan to operate may impose onerous and unpredictable duties, tariffs and taxes on our business and products, and there can be no assurance that this will not reduce the level of sales that we achieve in such markets, which would reduce our revenues and profits.

 

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Under the Enterprise Income Tax Law, we may be classified as a “Resident Enterprise” of China. Such classification will likely result in unfavorable tax consequences to us and our non-PRC stockholders.

 

China passed an Enterprise Income Tax Law (the “EIT Law”) and implementing rules, both of which became effective on January 1, 2008. Under the EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the EIT Law define de facto management as “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise.

 

On April 22, 2009, the State Administration of Taxation of China issued the Notice Concerning Relevant Issues Regarding Cognizance of Chinese Investment Controlled Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria of de facto Management Bodies, or the Notice, further interpreting the application of the EIT Law and its implementation to offshore entities controlled by a Chinese enterprise or group. Pursuant to the Notice, an enterprise incorporated in an offshore jurisdiction and controlled by a Chinese enterprise or group will be classified as a “non-domestically incorporated resident enterprise” if (i) its senior management in charge of daily operations reside or perform their duties mainly in China; (ii) its financial or personnel decisions are made or approved by bodies or persons in China; (iii) its substantial assets and properties, accounting books, corporate stamps, board and stockholder minutes are kept in China; and (iv) at least half of its directors with voting rights or senior management are often resident in China. A resident enterprise would be subject to an enterprise income tax rate of 25% on its worldwide income and must pay a withholding tax at a rate of 10% when paying dividends to its non-PRC stockholders. However, it remains unclear as to whether the Notice is applicable to an offshore enterprise controlled, but not necessarily owned, by a Chinese natural person. Therefore, it is unclear how tax authorities will determine tax residency based on the facts of each case.

 

If the PRC tax authorities determine that we are a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this would mean that income such as non-China source income would be subject to PRC enterprise income tax at a rate of 25%. Currently, we do not have any non-China source income, so this would minimal effect on us; however, if we develop non-China source income in the future, we could be adversely affected. Second, under the EIT Law and its implementing rules, dividends paid to us from our PRC subsidiaries would qualify as “tax-exempt income.” Finally, it is possible that future guidance issued with respect to the new “resident enterprise” classification could result in a situation in which a 10% withholding tax is imposed on dividends we pay to our non-PRC stockholders and with respect to gains derived by our non-PRC stockholders from transferring our shares.

 

If we were treated as a “resident enterprise” by PRC tax authorities, we would be subject to taxation in both the U.S. and China, and our PRC tax may not be creditable against our U.S. tax.

 

Since our operations and assets are located in the PRC, shareholders may find it difficult to enforce a U.S. judgment against the assets of our company, our directors and executive officers.

 

Our operations and assets are located in the PRC. In addition, most of our executive officers and directors are non-residents of the U.S., and substantially all the assets of such persons are located outside the U.S. As a result, it could be difficult for investors to effect service of process in the U.S., or to enforce a judgment obtained in the U.S. against us or any of these persons. See “Enforceability of Civil Liabilities.”

 

We may be exposed to liabilities under the Foreign Corrupt Practices Act and Chinese anti-corruption law.

 

In connection with this offering, we will become subject to the U.S. Foreign Corrupt Practices Act, or FCPA, and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute for the purpose of obtaining or retaining business. We are also subject to Chinese anti-corruption laws, which strictly prohibit the payment of bribes to government officials. We have operations, agreements with third parties, and make sales in China, which may experience corruption. Our activities in China create the risk of unauthorized payments or offers of payments by one of the employees, consultants or distributors of our company, because these parties are not always subject to our control. We are in process of implementing an anticorruption program, which prohibits the offering or giving of anything of value to foreign officials, directly or indirectly, for the purpose of obtaining or retaining business. The anticorruption program also requires that clauses mandating compliance with our policy be included in all contracts with foreign sales agents, sales consultants and distributors and that they certify their compliance with our policy annually. It further requires that all hospitality involving promotion of sales to foreign governments and government-owned or controlled entities be in accordance with specified guidelines. In the meantime, we believe to date we have complied in all material respects with the provisions of the FCPA and Chinese anti-corruption law.

 

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However, our existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants or distributors of our Company may engage in conduct for which we might be held responsible. Violations of the FCPA or Chinese anti-corruption law may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition. In addition, the government may seek to hold our Company liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.

 

Uncertainties with respect to the PRC legal system could adversely affect us.

 

We conduct all of our business through our subsidiaries in China. Our operations in China are governed by PRC laws and regulations. Our PRC subsidiaries are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws and regulations applicable to wholly foreign-owned enterprises. The PRC legal system is based on statutes. Prior court decisions may be cited for reference but have limited precedential value.

 

Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, 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. In particular, because these laws and regulations are relatively new, and because of the limited volume of published decisions and their nonbinding nature, the interpretation and enforcement of these laws and regulations involve uncertainties. In addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.

 

PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our PRC operating subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

 

In utilizing the proceeds of this offering in the manner described in “Use of Proceeds,” as an offshore holding company of our PRC operating subsidiaries, we may make loans to our PRC subsidiaries, or we may make additional capital contributions to our PRC subsidiaries.

 

Any loans to our PRC subsidiaries are subject to PRC regulations. For example, loans by us to our subsidiaries in China, which are FIEs, to finance their activities cannot exceed statutory limits and must be registered with the State Administration of Foreign Exchange, or SAFE. On August 29, 2008, SAFE promulgated Circular 142 (later supplemented by Circular 88, which was issued on July 18, 2011 and effective starting August 1, 2011), a notice regulating the conversion by a foreign-invested company of foreign currency into RMB by restricting how the converted RMB may be used. The notice requires that RMB converted from the foreign currency-denominated capital of a foreign-invested company may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC unless such investments are otherwise provided for in the business scope. The foreign currency-denominated capital shall be verified by an accounting firm before converting into RMB. In addition, SAFE strengthened its oversight over the flow and use of RMB funds converted from the foreign currency-denominated capital of a foreign-invested company. To convert such capital into RMB, the foreign-invested company must report the use of such RMB to the bank, and the RMB must be used to the reported purposes. According to Circular 142, change of the use of such RMB without approval is prohibited. In addition, such RMB may not be used to repay RMB loans if the proceeds of such loans have not yet been used. Violations of Circular 142 may result in severe penalties, including substantial fines as set forth in the Foreign Exchange Administration Rules.

 

Furthermore, SAFE promulgated Circular 59 on November 19, 2010, requiring the governmental authority to closely examine the authenticity of settlement of net proceeds from offshore offerings. In particular, it is specifically required that any net proceeds settled from offshore offerings shall be applied in the manner described in the offering documents.

 

21  

 

 

On May 10, 2013, SAFE released Circular 21, which came into effect on May 13, 2013. According to Circular 21, SAFE has simplified the foreign exchange administration procedures with respect to the registration, account openings and conversions, settlements of FDI-related foreign exchange, as well as fund remittances.

 

Circular 142, Circular 59 and Circular 21 may significantly limit our ability to convert, transfer and use the net proceeds from this offering and any offering of additional equity securities in China, which may adversely affect our liquidity and our ability to fund and expand our business in the PRC.

 

We may also decide to finance our subsidiaries by means of capital contributions. These capital contributions must be approved by the Ministry of Commerce of China, or MOFCOM, or its local counterpart. We may not be able to obtain these government approvals on a timely basis, if at all, with respect to future capital contributions by us to our PRC subsidiaries. If we fail to receive such approvals, we will not be able to use the proceeds of this offering and capitalize our PRC operations, which could adversely affect our liquidity and our ability to fund and expand our business.

 

Governmental control of currency conversion may affect the value of your investment.

 

The PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in RMB. Under our current corporate structure, our income is primarily derived from dividend payments from our PRC subsidiaries. Shortages in the availability of foreign currency may restrict the ability of our PRC subsidiaries to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. However, approval from appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our security-holders.

 

Fluctuations in exchange rates could adversely affect our business and the value of our securities.

 

Changes in the value of the RMB against the U.S. dollar, Euro and other foreign currencies are affected by, among other things, changes in China’s political and economic conditions. Any significant revaluation of the RMB may have a material adverse effect on our revenues and financial condition, and the value of, and any dividends payable on our shares in U.S. dollar terms. For example, to the extent that we need to convert U.S. dollars we receive from our initial public offering into RMB for our operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on RMB amount we would receive from the conversion. Conversely, if we decide to convert our RMB into U.S. dollars for the purpose of paying dividends on our Ordinary Shares or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us. In addition, fluctuations of the RMB against other currencies may increase or decrease the cost of imports and exports, and thus affect the price-competitiveness of our products against products of foreign manufacturers or products relying on foreign inputs.

 

Since July 2005, the RMB is no longer pegged to the U.S. dollar. Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.

 

We reflect the impact of currency translation adjustments in our financial statements under the heading “accumulated other comprehensive (loss)/income.” For the years ended September 30, 2016 and 2015, we had adjustment loss of $403,865 and $142,842, respectively, for foreign currency translations. Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions. While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currencies.

 

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PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident shareholders to penalties and limit our ability to inject capital into our PRC subsidiary, limit our PRC subsidiary’s ability to distribute profits to us, or otherwise adversely affect us.

 

On October 21, 2005, the SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Return Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or Notice 75, which became effective as of November 1, 2005. According to Notice 75, prior registration with the local SAFE branch is required for PRC residents to establish or to control an offshore company for the purposes of financing such offshore company with assets or equity interests in an onshore enterprise located in the PRC, or an offshore special purpose company. An amendment to registration or filing with the local SAFE branch by such PRC resident is also required for the injection of equity interests or assets of an onshore enterprise in the offshore special purpose company or overseas funds raised by such offshore company, or any other material change involving a change in the capital of the offshore special purpose company. Moreover, Notice 75 applies retroactively. As a result, PRC residents who have established or acquired control of offshore special purpose companies that have made onshore investments in the PRC in the past are required to have completed the relevant registration procedures with the local SAFE branch by March 31, 2006.

 

To further clarify the implementation of Circular 75, the SAFE issued Circular 19 on May 20, 2011. Under Circular 19, PRC subsidiaries of an offshore special purpose company are required to coordinate and supervise the filing of SAFE registrations by the offshore holding company’s shareholders or beneficial owners who are PRC residents in a timely manner. However, on May 11, 2013, Circular 19 was annulled by Circular 21, issued by the SAFE. Circular 21 has not yet given clear guidance as to how to complete the relevant registration procedures with the local SAFE branch.

 

Risks Related to Our Corporate Structure and Operation

 

We will incur additional costs as a result of becoming a public company, which could negatively impact our net income and liquidity.

 

Upon completion of this offering, we will become a public company in the United States. As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, Sarbanes-Oxley and rules and regulations implemented by the SEC and the Nasdaq Capital Market require significantly heightened corporate governance practices for public companies. We expect that these rules and regulations will increase our legal, accounting and financial compliance costs and will make many corporate activities more time-consuming and costly.

 

We do not expect to incur materially greater costs as a result of becoming a public company than those incurred by similarly sized U.S. public companies. If we fail to comply with these rules and regulations, we could become the subject of a governmental enforcement action, investors may lose confidence in us and the market price of our Ordinary Shares could decline.

 

The obligation to disclose information publicly may put us at a disadvantage to competitors that are private companies.

 

Upon completion of this offering, we will be a publicly listed company in the United States. As a publicly listed company, we will be required to file periodic reports with the Securities and Exchange Commission upon the occurrence of matters that are material to our company and shareholders. In some cases, we will need to disclose material agreements or results of financial operations that we would not be required to disclose if we were a private company. Our competitors may have access to this information, which would otherwise be confidential. This may give them advantages in competing with our company. Similarly, as a U.S.-listed public company, we will be governed by U.S. laws that our competitors, which are mostly private Chinese companies, are not required to follow. To the extent compliance with U.S. laws increases our expenses or decreases our competitiveness against such companies, our public listing could affect our results of operations.

 

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We are a “foreign private issuer,” and our disclosure obligations differ from those of U.S. domestic reporting companies. As a result, we may not provide you the same information as U.S. domestic reporting companies or we may provide information at different times, which may make it more difficult for you to evaluate our performance and prospects.

 

We are a foreign private issuer and, as a result, we are not subject to the same requirements as U.S. domestic issuers. Under the Exchange Act, we will be subject to reporting obligations that, to some extent, are more lenient and less frequent than those of U.S. domestic reporting companies. For example, we will not be required to issue quarterly reports or proxy statements. We will not be required to disclose detailed individual executive compensation information. Furthermore, our directors and executive officers will not be required to report equity holdings under Section 16 of the Exchange Act and will not be subject to the insider short-swing profit disclosure and recovery regime.

 

As a foreign private issuer, we will also be exempt from the requirements of Regulation FD (Fair Disclosure) which, generally, are meant to ensure that select groups of investors are not privy to specific information about an issuer before other investors. However, we will still be subject to the anti-fraud and anti-manipulation rules of the SEC, such as Rule 10b-5 under the Exchange Act. Since many of the disclosure obligations imposed on us as a foreign private issuer differ from those imposed on U.S. domestic reporting companies, you should not expect to receive the same information about us and at the same time as the information provided by U.S. domestic reporting companies.

 

An insufficient amount of insurance could expose us to significant costs and business disruption.

 

While we have purchased insurance to cover our certain assets and property of our business, the amounts and scope of coverage could leave our business inadequately protected from loss. If we were to incur substantial losses or liabilities due to fire, explosions, floods, other natural disasters or accidents or business interruption, our results of operations could be materially and adversely affected.

 

Risks Related to Our Initial Public Offering and Ownership of Our Ordinary Shares

 

We are an “emerging growth company,” and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make our Ordinary Shares less attractive to investors.

 

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years, although we could lose that status sooner if our revenues exceed $1 billion, if we issue more than $1 billion in non-convertible debt in a three year period, or if the market value of our Ordinary Shares held by non-affiliates exceeds $700 million as of any June 30 before that time, in which case we would no longer be an emerging growth company as of the following December 31. We cannot predict if investors will find our Ordinary Shares less attractive because we may rely on these exemptions. If some investors find our Ordinary Shares less attractive as a result, there may be a less active trading market for our Ordinary Shares and our stock price may be more volatile.

 

Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail our company of this exemption from new or revised accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

Our officers/directors have entered into an agreement to vote in concert, which provides control over majority of our Ordinary Shares and increases our influence on shareholder decisions.

 

ZK International was incorporated on May 13, 2015 under the laws BVI, with 100% of the founding shares held by Kai Chun Cheng. On the same date, Jiancong Huang, Mingjie Wang, Guolin Wang, Jiandi Wang and Yangming Wang entered into an agreement to vote in concert in ZK International with Mr. Huang appointed as proxy effective completion of transfer of the ordinary shares held by Mr. Cheng. Pursuant to the agreement, which has a term of 20 years from its effective date of May 13, 2015, if the parties are unable to reach a unanimous consent in relation to the matters requiring action in concert, a decision made by more than 50% of the voting rights of the parties will be deemed a decision unanimously passed by all parties and will be binding on all parties. On July 29, 2015, Mr. Cheng entered into equity interest transfer agreements with and transferred to these individuals 45%, 20%, 20%, 10% and 5%, respectively, of ZK International’s equity interest on October 12, 2015. All of these individuals are officers or directors of ZK International and/or our operating entity Zhejiang Zhengkang. Assuming the sale of the maximum offering, our officers and/or directors will, in the aggregate, beneficially own approximately 69.23% of our outstanding shares. Assuming the sale of the minimum offering, our officers and/or directors will, in the aggregate, beneficially own approximately 72% of our outstanding Ordinary Shares. As a result, our officers and directors will possess substantial ability to impact our management and affairs and the outcome of matters submitted to shareholders for approval. These shareholders, acting individually or as a group, could exert control and substantial influence over matters such as electing directors and approving mergers or other business combination transactions. This concentration of ownership and voting power may also discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of our Ordinary Shares. These actions may be taken even if they are opposed by our other shareholders, including those who purchase shares in this offering. See “Principal Shareholders.”

 

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As a “controlled company” under the rules of the Nasdaq Capital Market, we may exempt our company from certain corporate governance requirements that could adversely affect our public shareholders.

 

Because of the voting in concert agreement described elsewhere in this prospectus, we believe following this offering, our principal shareholders will continue collectively owning a majority of the voting power of our outstanding Ordinary Shares. Under Rule 5615(b)(1) of the Nasdaq Listing Requirement, a company of which more than 50% of the voting power is held by an individual, group or another company is a "controlled company" and is permitted to phase in its compliance with the independent committee requirements. Although we do not intend to rely on the "controlled company" exemption under the Nasdaq listing rules, we could elect to rely on this exemption in the future. If we elected to rely on the “controlled company” exemption, a majority of the members of our board of directors might not be independent directors and our nominating and corporate governance and compensation committees might not consist entirely of independent directors upon closing of the offering. Accordingly, while we remain a controlled company relying on the exemption and during any transition period following a time when we are no longer a controlled company, you would not have the same protections afforded to shareholders of companies that are subject to all of the Nasdaq Capital Market corporate governance requirements.

 

If we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Ordinary Shares may decline.

 

As a public company, we will be required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. In addition, beginning with our 2017 annual report on Form 20-F to be filed in 2018, we will be required to furnish a report by management on the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. We are in the process of designing, implementing, and testing the internal control over financial reporting required to comply with this obligation, which process is time consuming, costly, and complicated. In addition, our independent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting beginning with our annual report on Form 20-F following the date on which we are no longer an “emerging growth company,” which may be up to five full years following the date of this offering. If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting when required, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Ordinary Shares could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the Securities and Exchange Commission, or the SEC, or other regulatory authorities, which could require additional financial and management resources.

 

In order to raise sufficient funds to continue operations, we may have to issue additional securities that may result in substantial dilution to our shareholders.

 

Prior to the completion of this offering, we sold an aggregate of 2,500,000 Ordinary Shares, including the Resale Shares, for an aggregate purchase price of $1,300,000 through private placements. If we raise additional funds through the sale of equity or convertible debt, our current stockholders’ percentage ownership will be reduced. In addition, the Resale Shares may be sold to the market upon effectiveness of this prospectus. These transactions may dilute the value of our Ordinary Shares outstanding.

 

The requirements of being a public company may strain our resources and divert management’s attention.

 

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of the securities exchange on which we list, and other applicable securities rules and regulations. Despite recent reforms made possible by the JOBS Act, compliance with these rules and regulations will nonetheless increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources, particularly after we are no longer an “emerging growth company.” The Exchange Act requires, among other things, that we file annual, quarterly, and current reports with respect to our business and operating results.

 

As a result of disclosure of information in this prospectus and in filings required of a public company, our business and financial condition will become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and operating results could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business, brand and reputation and results of operations.

 

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We also expect that being a public company and these new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.

 

The market price of our Ordinary Shares may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the initial public offering price.

 

The initial public offering price for our Ordinary Shares will be determined through negotiations between the Underwriter and us and may vary from the market price of our Ordinary Shares following our initial public offering. If you purchase our Ordinary Shares in our initial public offering, you may not be able to resell those shares at or above the initial public offering price. We cannot assure you that the initial public offering price of our Ordinary Shares, or the market price following our initial public offering, will equal or exceed prices in privately negotiated transactions of our shares that have occurred from time to time prior to our initial public offering. The market price of our Ordinary Shares may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

 

· actual or anticipated fluctuations in our revenue and other operating results;
· the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;
· actions of securities analysts who initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;
· announcements by us or our competitors of significant products or features, technical innovations, acquisitions, strategic partnerships, joint ventures, or capital commitments;
· price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;
· lawsuits threatened or filed against us; and
· other events or factors, including those resulting from war or incidents of terrorism, or responses to these events.

 

In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. Stock prices of many companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have filed securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business, and adversely affect our business.

 

We have broad discretion in the use of the net proceeds from our initial public offering and may not use them effectively.

 

To the extent (i) we raise more money than required for the purposes explained in the section titled “Use of Proceeds” or (ii) we determine that the proposed uses set forth in that section are no longer in the best interests of our Company, we cannot specify with any certainty the particular uses of such net proceeds that we will receive from our initial public offering. Our management will have broad discretion in the application of such net proceeds, including working capital, possible acquisitions, and other general corporate purposes, and we may spend or invest these proceeds in a way with which our stockholders disagree. The failure by our management to apply these funds effectively could harm our business and financial condition. Pending their use, we may invest the net proceeds from our initial public offering in a manner that does not produce income or that loses value.

 

We do not intend to pay dividends for the foreseeable future.

 

We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable future. As a result, you may only receive a return on your investment in our Ordinary Shares if the market price of our Ordinary Shares increases.

 

There may not be an active, liquid trading market for our Ordinary Shares.

 

Prior to this offering, there has been no public market for our Ordinary Shares. An active trading market for our Ordinary Shares may not develop or be sustained following this offering. You may not be able to sell your shares at the market price, if at all, if trading in our shares is not active. The initial public offering price was determined by negotiations between us and the Underwriter based upon a number of factors. The initial public offering price may not be indicative of prices that will prevail in the trading market.

 

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Investors risk loss of use of funds allocated for purchases, with no right of return, during the offering period.

 

We cannot assure you that all or any shares will be sold. Boustead Securities, LLC, our Underwriter, is offering our shares on a “best efforts, minimum-maximum basis.” We have no firm commitment from anyone to purchase all or any of the shares offered. If offers to purchase a minimum of 1,000,000 shares are not received on or before September 30, 2017, escrow provisions require that all funds received be promptly refunded. If refunded, investors will receive no interest on their funds. During the offering period, investors will not have any use or right to return of the funds.

 

We will incur increased costs as a result of being a public company.

 

As a public company, we will incur legal, accounting and other expenses that we did not incur as a private company. For example, we must now engage U.S. securities law counsel and U.S. GAAP auditors that we did not require prior to this offering, and we will have annual payments for listing on a stock exchange if we are so listed. In addition, the Sarbanes-Oxley Act, as well as new rules subsequently implemented by the SEC and Nasdaq, have required changes in corporate governance practices of public companies. We expect these new rules and regulations to increase our legal, accounting and financial compliance costs and to make certain corporate activities more time-consuming and costly. In addition, we will incur additional costs associated with our public company reporting requirements. While it is impossible to determine the amounts of such expenses in advance, we expect that we will incur expenses of between $500,000 and $1 million per year that we did not experience prior to commencement of this offering.

 

We plan to have a classified board structure, which may prevent a change in our control.

 

We plan to divided our board of directors into three classes of directors, with the current terms of the directors to expire in 2018, 2019 and 2020. Directors of each class are chosen for three-year terms upon the expiration of their current terms, and each year the shareholders elect one class of directors. The staggered terms of our directors may reduce the possibility of a tender offer or an attempt at a change in control, even though a tender offer or change in control might be in the best interest of our shareholders. See “Management – Board of Directors and Board Committees.”

 

Shares eligible for future sale may adversely affect the market price of our Ordinary Shares, as the future sale of a substantial amount of outstanding Ordinary Shares in the public marketplace could reduce the price of our Ordinary Shares.

 

The market price of our shares could decline as a result of sales of substantial amounts of our shares in the public market, or the perception that these sales could occur. In addition, these factors could make it more difficult for us to raise funds through future offerings of our Ordinary Shares. An aggregate of 12,000,000 shares will be outstanding immediately before the consummation of this offering and 13,500,000 shares will be outstanding immediately after this offering, if the maximum offering is raised. All of the shares sold in the offering will be freely transferable without restriction or further registration under the Securities Act. The remaining shares will be “restricted securities” as defined in Rule 144. These shares may be sold in the future without registration under the Securities Act to the extent permitted by Rule 144 or other exemptions under the Securities Act. See “Shares Eligible for Future Sale.”

 

You will experience immediate and substantial dilution.

 

The initial public offering price of our shares is substantially higher than the pro forma net tangible book value per share of our Ordinary Shares. Assuming the completion of the minimum offering, if you purchase shares in this offering, you will incur immediate dilution of approximately $3.55 per share or approximately 71% in the pro forma net tangible book value per share from the price per share that you pay for the shares. Assuming the completion of the maximum offering, if you purchase shares in this offering, you will incur immediate dilution of approximately $3.38 or approximately 68% in the pro forma net tangible book value per share from the price per share that you pay for the Ordinary Shares. Accordingly, if you purchase shares in this offering, you will incur immediate and substantial dilution of your investment. See “Dilution.”

 

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British Virgin Islands companies may not be able to initiate shareholder derivative actions, thereby depriving shareholders of the ability to protect their interests.

 

British Virgin Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States. The circumstances in which any such action may be brought, and the procedures and defenses that may be available in respect to any such action, may result in the rights of shareholders of a British Virgin Islands company being more limited than those of shareholders of a company organized in the United States. Accordingly, shareholders may have fewer alternatives available to them if they believe that corporate wrongdoing has occurred. The British Virgin Islands courts are also unlikely to recognize or enforce against us judgments of courts in the United States based on certain liability provisions of U.S. securities law; and to impose liabilities against us, in original actions brought in the British Virgin Islands, based on certain liability provisions of U.S. securities laws that are penal in nature. There is no statutory recognition in the British Virgin Islands of judgments obtained in the United States, although the courts of the British Virgin Islands will generally recognize and enforce the non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits. This means that even if shareholders were to sue us successfully, they may not be able to recover anything to make up for the losses suffered.

 

The laws of the British Virgin Islands provide little protection for minority shareholders, so minority shareholders will have little or no recourse if the shareholders are dissatisfied with the conduct of our affairs.

 

Under the law of the British Virgin Islands, there is little statutory law for the protection of minority shareholders other than the provisions of the BVI Business Companies Act dealing with shareholder remedies. The principal protection under statutory law is that shareholders may bring an action to enforce the constituent documents of the corporation, our amended and restated memorandum and articles of association. Shareholders are entitled to have the affairs of the company conducted in accordance with the general law and the articles and memorandum.

 

There are common law rights for the protection of shareholders that may be invoked, largely dependent on English company law, since the common law of the British Virgin Islands for business companies is limited. Under the general rule pursuant to English company law known as the rule in Foss v. Harbottle, a court will generally refuse to interfere with the management of a company at the insistence of a minority of its shareholders who express dissatisfaction with the conduct of the company’s affairs by the majority or the board of directors. However, every shareholder is entitled to have the affairs of the company conducted properly according to law and the constituent documents of the corporation. As such, if those who control the company have persistently disregarded the requirements of company law or the provisions of the company’s memorandum and articles of association, then the courts will grant relief. Generally, the areas in which the courts will intervene are the following: (1) an act complained of which is outside the scope of the authorized business or is illegal or not capable of ratification by the majority; (2) acts that constitute fraud on the minority where the wrongdoers control the company; (3) acts that infringe on the personal rights of the shareholders, such as the right to vote; and (4) where the company has not complied with provisions requiring approval of a special or extraordinary majority of shareholders, which are more limited than the rights afforded minority shareholders under the laws of many states in the United States.

 

Special Note Regarding Forward-Looking Statements

 

This prospectus contains forward-looking statements. All statements contained in this prospectus other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in the “Risk Factors” section. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

 

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You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, we undertake no duty to update any of these forward-looking statements after the date of this prospectus or to conform these statements to actual results or revised expectations.

 

Use of Proceeds

 

After deducting the estimated placement discount and offering expenses payable by us, we expect to receive net proceeds of approximately $[●] from this offering if the minimum offering is sold and approximately $[●] if the maximum offering is sold. The net proceeds from this offering must be remitted to China before we will be able to use the funds to grow our business. The procedure to remit funds may take several months after completion of this offering, and we will be unable to use the funds in China until remittance is completed. See “Risk Factors – PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our PRC operating subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.”

 

We intend to use the net proceeds of this offering as follows after we complete the remittance process, and we have ordered the specific uses of proceeds in order of priority. We do not expect that our priorities for fund allocation would change if the amount we raise in this offering exceeds the size of the minimum offering but is less than the maximum offering. We expect to devote any funds raised over the minimum offering amount to our working capital needs, including devoting further resources to the below uses of proceeds.

 

Description of Use   Estimated Amount of Net Proceeds
(Minimum Offering)
    Estimated Amount of Net Proceeds
(Maximum Offering)
 
Product R&D and promotion   $ [●]     $ [●]  
New production equipment purchase     [●]       [●]  
Talent acquisition and training     [●]       [●]  
SOX compliance expenses     [●]       [●]  
Working capital     [●]       [●]  
Total   $ [●]     $ [●]  

 

Pending use of the net proceeds, we intend to invest our net proceeds in short-term, interest bearing, investment-grade obligations. We cannot predict whether the proceeds invested will yield a favorable return. Our management will have broad discretion in the application of the net proceeds we receive from this offering, and investors will be relying on the judgment of our management regarding the application of the net proceeds. These investments may have a material adverse effect on the U.S. federal income tax consequences of an investment in our Ordinary Shares. It is possible that we may become a passive foreign investment company for U.S. federal income taxpayers, which could result in negative tax consequences to you. These consequences are discussed in more detail in “Taxation.”

 

In using the proceeds of this offering, we are permitted under PRC laws and regulations as an offshore holding company to provide funding to our wholly foreign-owned subsidiary in China only through loans or capital contributions and to our consolidated variable interest entity only through loans, subject to the filings with government authorities and limit on the amount of capital contributions and loans. Subject to completion of applicable government filing and registration requirements, we may extend inter-company loans to our wholly foreign-owned subsidiary in China or make additional capital contributions to our wholly-foreign-owned subsidiary to fund its capital expenditures or working capital. If we provide funding to our wholly foreign-owned subsidiary through loans, the total amount of such loans may not exceed the difference between the entity’s total investment as approved by the foreign investment authorities and its registered capital. Such loans must be registered with SAFE or its local branches, which usually takes up to 20 working days to complete. We cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all.

 

Dividend Policy

 

We have never declared or paid any cash dividends on our Ordinary Shares. We anticipate that we will retain any earnings to support operations and to finance the growth and development of our business. Therefore, we do not expect to pay cash dividends in the foreseeable future. Any future determination relating to our dividend policy will be made at the discretion of our Board of Directors and will depend on a number of factors, including future earnings, capital requirements, financial conditions and future prospects and other factors the Board of Directors may deem relevant.

 

Under British Virgin Islands law, we may only pay dividends from surplus (the excess, if any, at the time of the determination of the total assets of our company over the sum of our liabilities, as shown in our books of account, plus our capital), and we must be solvent before and after the dividend payment in the sense that we will be able to satisfy our liabilities as they become due in the ordinary course of business; and the realizable value of assets of our company will not be less than the sum of our total liabilities, other than deferred taxes as shown on our books of account, and our capital.

 

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If we determine to pay dividends on any of our Ordinary Shares in the future, as a holding company, we will be dependent on receipt of funds from our operating subsidiaries. Current PRC regulations permit our PRC subsidiaries to pay dividends to ZK Pipe only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, each of our subsidiaries in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. Each of such entity in China is also required to further set aside a portion of its after-tax profits to fund the employee welfare fund, although the amount to be set aside, if any, is determined at the discretion of its board of directors. Although the statutory reserves can be used, among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings of the respective companies, the reserve funds are not distributable as cash dividends except in the event of liquidation. Our subsidiaries in China are required to set aside statutory reserves and have done so.

 

In addition, pursuant to the EIT Law and its implementation rules, dividends generated after January 1, 2008 and distributed to us by our PRC subsidiaries are subject to withholding tax at a rate of 10% unless otherwise exempted or reduced according to treaties or arrangements between the PRC central government and governments of other countries or regions where the non-PRC-resident enterprises are incorporated.

 

Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval of the State Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. Specifically, under the existing exchange restrictions, without prior approval of SAFE, cash generated from the operations in China may be used to pay dividends to our company.

 

Exchange Rate Information

 

Our financial information is presented in U.S. dollars. Our functional currency is Renminbi (“RMB”), the currency of the PRC. Transactions which are denominated in currencies other than RMB are translated into RMB at the exchange rate quoted by the People’s Bank of China at the dates of the transactions. Exchange gains and losses resulting from transactions denominated in a currency other than the RMB are included in statements of operations as foreign currency transaction gains or losses. Our financial statements have been translated into U.S. dollars in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 52, “Foreign Currency Translation”, which was subsequently codified within ASC 830, “Foreign Currency Matters”. The financial information is first prepared in RMB and then is translated into U.S. dollars at period-end exchange rates as to assets and liabilities and average exchange rates as to revenue and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred. The effects of foreign currency translation adjustments are included as a component of accumulated other comprehensive income (loss) in shareholders’ equity. The relevant exchange rates are listed below:

 

    For the Fiscal Years
Ended September 30
 
    2016     2015  
Period Ended RMB: USD exchange rate     6.6711       6.3668  
Period Average RMB : USD exchange rate     6.5333       6.1746  

 

We make no representation that any RMB or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or RMB, as the case may be, at any particular rate, or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of RMB into foreign exchange and through restrictions on foreign trade. We do not currently engage in currency hedging transactions.

 

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The following table sets forth information concerning exchange rates between the RMB and the U.S. dollar for the periods indicated. (www.oanda.com).

 

    Midpoint of Bid and Ask Prices
for RMB per U.S. Dollar
 
Period   Period-End     Average  
2011     6.3540       6.4633  
2012     6.3090       6.3115  
2013     6.1090       6.1938  
2014     6.1484       6.1458  
2015     6.4917       6.2288  
January     6.1732       6.1390  
February     6.1646       6.1509  
March     6.1197       6.1429  
April     6.0993       6.1075  
May     6.1065       6.1015  
June     6.1076       6.1109  
July     6.2098       6.1136  
August     6.3771       6.3333  
September     6.3568       6.3685  
October     6.3185       6.3503  
November     6.3982       6.3703  
December     6.4917       6.4509  
2016     6.5665       6.5272  
January     6.6058       6.5678  
February     6.5543       6.5497  
March     6.4889       6.5071  
April     6.4738       6.4783  
May     6.5825       6.5287  
June     6.5665       6.5718  
July     6.6431       6.6763  
August     6.6788       6.6492  
September     6.6702       6.6748  
October     6.7740       6.7238  
November     6.8872       6.8394  
December     6.9448       6.9311  
2017                
January     6.8817       6.9008  
February     6.8689       6.8727  
March     6.8912       6.8940  
April     6.8954       6.8888  

 

As of April 30, 2017, the exchange rate was RMB 6.8954 to $1.00. Until July 2015 and over the past several years, the Renminbi moved from a period of being tightly linked to the U.S. dollar to a period of revaluation and strengthening against the dollar. Since July 2015, however, the Renminbi has experienced a period of significant weakening against the U.S. dollar.

 

Capitalization

 

The following table sets forth our capitalization as of September 30, 2016 on a pro forma as adjusted basis giving effect to the sale of the minimum and maximum offering at an assumed public offering price of $5.00 per share and to reflect the application of the proceeds after deducting the estimated placement fees. You should read this table in conjunction with our financial statements and related notes appearing elsewhere in this prospectus and “Use of Proceeds” and “Description of Share Capital.”

 

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Minimum Offering (1,000,000 Ordinary Shares)

U.S. Dollars

 

    As of September 30, 2016  
    Actual     Pro forma (1)  
             
Cash and cash equivalent   $ 123,649     $ 4,898,649  
                 
Long-term debt, including current portion   $ 25,690,880     $ 25,690,880  
                 
Shareholders' equity:                
 Ordinary shares     -       -  
 Additional paid-in capital (2)     2,800,777       7,575,777  
 Statutory surplus reserve     579,994       579,994  
 Retained earnings     5,697,984       5,697,984  
 Accumulated other comprehensive income     411,239       411,239  
 Noncontrolling interest     88,928       88,928  
Total shareholders' equity     9,578,922       14,353,922  
                 
Total capitalization   $ 35,269,802     $ 40,044,802  

 

(1) Gives effect to: (i) the Recapitalization effectuated as of March 20, 2017, pursuant to which there are 12,000,000 Ordinary Shares issued and outstanding prior to the completion of this offering, and (ii) the sale of the minimum offering at an assumed public offering price of $5.00 per share and reflects the application of the proceeds after deducting the estimated underwriting commission (7%) and our estimated offering expenses.

 

(2) Pro forma adjusted for IPO additional paid-in capital reflects the net proceeds we expect to receive, after deducting underwriting discount, underwriter expense allowance and approximately $[●] in other expenses. In a minimum offering, we expect to receive net proceeds of approximately $[●] ($5,000,000 offering, $350,000 from full exercise of underwriter warrants, less out of pocket expense of $225,000 and offering expenses of $[●]).

 

Maximum Offering (1,500,000 Ordinary Shares)

U.S. Dollars

 

    As of September 30, 2016  
    Actual     Pro forma  
             
Cash and cash equivalent   $ 123,649     $ 7,398,649  
                 
Long-term debt, including current portion   $ 25,690,880     $ 25,690,880  
                 
Shareholders' equity:                
 Ordinary shares     -       -  
 Additional paid-in capital     2,800,777       10,075,777  
 Statutory surplus reserve     579,994       579,994  
 Retained earnings     5,697,984       5,697,984  
 Accumulated other comprehensive income     411,239       411,239  
 Noncontrolling interest     88,928       88,928  
Total shareholders' equity     9,578,922       16,853,922  
                 
Total capitalization   $ 35,269,802     $ 42,544,802  

 

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(1) Gives effect to: (i) the Recapitalization effectuated as of March 20, 2017, pursuant to which there are 12,000,000 Ordinary Shares issued and outstanding prior to the completion of this offering, and (ii) the sale of the minimum offering at an assumed public offering price of $5.00 per share and reflects the application of the proceeds after deducting the estimated underwriting commission (7%) and our estimated offering expenses.

 

(2) Pro forma adjusted for IPO additional paid-in capital reflects the net proceeds we expect to receive, after deducting underwriting discount, underwriter expense allowance and approximately $525,000 in other expenses. In a minimum offering, we expect to receive net proceeds of approximately $[●] ($7,500,000 offering, $525,000 from full exercise of underwriter warrants, less out-of-pocket expense of $225,000 and offering expenses of $[●]).

 

Dilution

 

If you invest in our Ordinary Shares, your interest will be diluted to the extent of the difference between the initial public offering price per Ordinary Share and the pro forma net tangible book value per Ordinary Share after the offering. Dilution results from the fact that the per Ordinary Share offering price is substantially in excess of the book value per Ordinary Share attributable to the existing shareholders for our presently outstanding Ordinary Shares. Our net tangible book value attributable to shareholders at September 30, 2016 was $9,578,922 or approximately $1.06 per Ordinary Share. Net tangible book value per Ordinary Share as of September 30, 2016 represents the amount of total assets less intangible assets and total liabilities, divided by the number of Ordinary Shares outstanding.

 

If the minimum offering is sold, we will have 13,000,000 Ordinary Shares outstanding upon completion of the offering. Our post offering pro forma net tangible book value, which gives effect to receipt of the net proceeds from the offering and issuance of additional shares in the offering, but does not take into consideration any other changes in our net tangible book value after September 30, 2016, will be approximately $4,775,999 or $1.45 per Ordinary Share. This would result in dilution to investors in this offering of approximately $3.55 per Ordinary Share or approximately 71% from the assumed offering price of $5.00 per Ordinary Share. Net tangible book value per Ordinary Share would increase to the benefit of present shareholders by $0.38 per share attributable to the purchase of the Ordinary Shares by investors in this offering.

 

If the maximum offering is sold, we will have 13,500,000 Ordinary Shares outstanding upon completion of the offering. Our post offering pro forma net tangible book value, which gives effect to receipt of the net proceeds from the offering and issuance of additional shares in the offering, but does not take into consideration any other changes in our net tangible book value after September 30, 2016, will be approximately $7,275,000 or $1.62 per Ordinary Share. This would result in dilution to investors in this offering of approximately $3.38 per Ordinary Share or approximately 68% from the assumed offering price of $5.00 per Ordinary Share. Net tangible book value per Ordinary Share would increase to the benefit of present shareholders by $0.56 per share attributable to the purchase of the Ordinary Shares by investors in this offering.

 

The following table sets forth the estimated net tangible book value per Ordinary Share after the offering and the dilution to persons purchasing Ordinary Shares based on the foregoing minimum and maximum offering assumptions.

 

    Minimum
Offering  (1)
    Maximum
Offering  (2)
 
Assumed offering price per Ordinary Share   $ 5.00     $ 5.00  
Net tangible book value per Ordinary Share as of September 30, 2016   $ 1.06     $ 1.06  
Increase in net tangible book value per share after this offering   $ 0.38     $ 0.56  
Net tangible book value per Ordinary Share after the offering   $ 1.45     $ 1.62  
Dilution per Ordinary Share to new investors   $ 3.55     $ 3.38  

 

(1) Assumes gross proceeds from offering of 1,000,000 Ordinary Shares.
(2) Assumes gross proceeds from offering of 1,500,000 Ordinary Shares.

 

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Post-Offering Ownership

 

The following chart illustrates our pro forma proportionate ownership, upon completion of the offering under alternative minimum and maximum offering assumptions, by present shareholders and investors in this offering, compared to the relative amounts paid by each. The charts reflect payment by present shareholders as of the date the consideration was received and by investors in this offering at the offering price without deduction of commissions or expenses. The charts further assume no changes in net tangible book value other than those resulting from the offering.

 

    Shares Purchased     Total Consideration     Average Price  
    Amount     Percent     Amount     Percent     Per Share  
MINIMUM OFFERING                                        
Existing shareholders     12,000,000       92.31 %   $ 2,350,000       31.97 %   $ 0.20  
New investors     1,000,000       7.69 %   $ 5,000,000       68.03 %   $ 5.00  
Total     13,000,000       100 %   $ 7,350,000       100.0 %   $ 0.57  

 

    Shares Purchased     Total Consideration     Average Price  
    Amount     Percent     Amount     Percent     Per Share  
MAXIMUM OFFERING                                        
Existing shareholders     12,000,000       88.89 %   $ 2,350,000       23.86 %   $ 0.20  
New investors     1,500,000       11.11 %   $ 7,500,000       76.14 %   $ 5.00  
Total     13,500,000       100 %   $ 9,850,000       100 %   $ 1.37  

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear in this prospectus. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in “Risk Factors.” All amounts included herein with respect to the fiscal years ended September 30, 2016 and 2015 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The audited consolidated financial statements for the fiscal years ended September 30, 2016 and 2015 have been prepared in accordance with U.S. Generally Accepted Accounting Principles, or US GAAP.

 

Overview

 

Incorporated on May 13, 2015, under the laws of the British Virgin Islands (“BVI”), we primarily conduct our business through our subsidiary Zhejiang Zhengkang. Our core business focuses on providing systematic solutions to construction projects that require sophisticated piping systems. Leveraging our experience in the industry, we offer urban planners and real estate developers sophisticated pipe and fitting products and engineering expertise, enabling them to bring communities reliable and durable gas and water transmission systems. Our products are primarily sold in China, but are also exported and distributed in Europe and Southeast Asia. We have received numerous awards and recognitions domestically and internationally. Located within the Wenzhou Binhai Industrial Park, a national economic development zone, our facility occupies approximately five acres, consisting of business offices, manufacturing plants, a research and development center and storage facilities.

 

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We specialize in designing and producing pipes and fittings such as double-press thin-walled stainless steel tubes and fittings, carbon steel tubes and fittings and single-press tubes and fittings. Focused on the innovation and expansion of our product to meet the specific needs of our clients, we believe that we are a leading manufacturer and engineer of high-performance stainless steel pipes. Our products offer a comprehensive suite of superior solutions for use in the construction and infrastructure industries. Our innovative products are used in a broad range of applications, including water and gas transmission within urban infrastructural development, residential housing development, food and beverage production, oil and gas exploitation, and agricultural irrigation. Since Zhejiang Zhengkang’s founding in 2001, we have developed an array of patented pipe and fitting products that have been marketed and distributed both domestically and internationally.

 

We promote our brand through our sales staff, distributors, trade shows, trade fairs, forums, direct communications with potential customers, business networks, and the internet. In addition, we tailor our products to the needs of our clients and provide our clients with competitive pricing to establish long-term business relationships. We take pride in the cutting-edge technology and superb quality of our products, which have received recognitions such as the ISO9001 Quality Management System Certification, ISO14001 Environmental Management System Certification, and National Industrial Stainless Steel Production License, among other awards and honors. Our products have been used in well-known facilities such as Olympic stadiums, multinational hotel chains, and mega-sized apartment complexes.

 

Over the past few years, we have seen significant growth of our revenue and market share. In summary, we generated a revenue and net income of $36,809,094 and $5,302,691, respectively, for the year ended September 30, 2016, an increase of 5.21% and 5.33% respectively, compared to the fiscal year ended September 30, 2015, during which we generated $34,985,571 and $5,008,681.

 

Results of Operations

   

Comparison of Fiscal Year Ended September 30, 2016 and 2015

 

The following table presents an overview of our results of operations for the years ended September 30, 2016 and 2015:

(Amounts expressed in U.S. dollars)

 

    Year Ended Sept 30  
    2016     2015  
Revenues   $ 36,809,094     $ 34,985,571  
Cost of revenues     (25,333,318 )     (24,813,206 )
Gross profit     11,475,776       10,172,365  
                 
Operating expenses:                
Selling and marketing expenses     957,990       591,344  
General and administrative expenses     1,599,743       1,046,652  
Research and development expenses     1,302,022       928,826  
Total operating expenses     3,859,755       2,566,822  
                 
Income from operations     7,616,021       7,605,543  
                 
Other income (expenses):                
Interest expense     (1,417,745 )     (1,912,866 )
Interest income     51,058       132,747  
Other income, net     158,797       135,374  
Total other expenses     (1,207,890 )     (1,644,745 )
                 
Income before income taxes     6,408,131       5,960,798  
Income tax expense     (1,105,440 )     (952,117 )
                 
Net income     5,302,691       5,008,681  

 

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Revenue

 

We generated $36,809,094 in revenue for the fiscal year ended September 30, 2016, as compared to $34,985,571 for the fiscal year ended September 30, 2015. The increase in revenue is primarily due to our customers getting more government projects to replace the underground pipes and to improve local sewer systems.

 

Cost of Revenues

 

Total cost of revenue was $25,333,318 for the fiscal year ended September 30, 2016, compared to $24,813,206 for the fiscal year ended September 30, 2015. Total cost of revenue as a percentage of revenue decreased by 2.10% to 68.82% for the fiscal year ended September 30, 2016 compared to 70.92% for the fiscal year ended September 30, 2015. The decrease is primarily due to the improvement of our manufacturing technique which lowered our defect rate and thus decreased the cost of the production.

 

Selling and Marketing Expenses

 

We incurred $957,990 in selling and marketing expenses for the fiscal year ended September 30, 2016, compared to $591,344 for the fiscal year ended September 30, 2015. Selling and marketing expenses increased by $366,646, or 62%, during the fiscal year ended September 30, 2016 compared to the fiscal year ended September 30, 2015. This increase was primarily due to increases in advertisement expenses and compensation for the additional sales personnel we hired during the year.

 

General and Administrative expenses

 

We incurred $1,599,743 in general and administrative expenses for the fiscal year ended September 30, 2016, compared to $1,046,652 for the fiscal year ended September 30, 2015. General and administrative expenses increased by $553,091, or 52.84%, for the fiscal year ended September 30, 2016 compared to the fiscal year ended September 30, 2015. The increase was primarily due to the increase in administrative expenses relating to the increase in sales volume, plus increased auditing and consulting fees related to the IPO.

 

Research and Development Expenses

 

We incurred $1,302,022 in research and development expenses for the fiscal year ended September 30, 2016, compared to $928,826 for the fiscal year ended September 30, 2015. R&D expenses increased by $373,196, or 40.18%, for the fiscal year ended September 30, 2016 compared to the fiscal year ended September 30, 2015. The increase was primarily due to the hiring of additional R&D staff and the expenses relating to the materials and equipment we use to conduct our research for our new products.

 

Income from operations

 

As a result of the factors described above, operating income was $7,616,021 for the fiscal year ended September 30, 2016, compared to operating income of $7,605,543 for the fiscal year ended September 30, 2015, an increase of operating income of $10,478, or approximately 0.14%.

 

Other expenses

 

Our interest income and expenses were $51,058 and $1,417,745, respectively, for the fiscal year ended September 30, 2016, compared to interest income and expenses of $132,747 and $1,912,866, respectively, for the fiscal year ended September 30, 2015. We also had other income of $158,797 for the fiscal year ended September 30, 2016 compared to other income of $135,374 for the fiscal year ended September 30, 2015.

 

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Income Tax

 

We incurred income tax expense of $1,105,440 for the fiscal year ended September 30, 2016, compared to $952,117 for the fiscal year ended September 30, 2015. The increase is primary attributable to the increase of total income for fiscal year ended September 30, 2016.

 

Net Income

 

As a result of the factors described above, our net income for the fiscal year ended September 30, 2016 was $5,302,691, compared to net profit of $5,008,681 for the fiscal year ended September 30, 2015, an increase in profit of $294,070.

 

Foreign currency translation

 

Our consolidated financial statements are expressed in U.S. dollars but the functional currency of our operating subsidiaries is RMB. Results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period and equity is translated at historical exchange rates. Translation adjustments resulting from the process of translating the financial statements denominated in RMB into U.S. dollars are included in determining comprehensive income. Our foreign currency translation loss for the fiscal year ended September 30, 2016 was $403,865, compared to a foreign currency loss of $142,842 for the fiscal year ended September 30, 2015, an increase of $261,023. The increase is primarily due to the appreciation of RMB against the U.S. dollars.

 

Liquidity and Capital Resources

 

As of September 30, 2016 and 2015, we had cash and cash equivalents of $123,649 and $626,791 respectively. We believe that our current cash, cash to be generated from our operations and access to help from our related party will be sufficient to meet our working capital needs for at least the next twelve months. However, we do not have any amounts committed to be provided by our related party. We are also not dependent upon this offering to meet our liquidity needs for the next twelve months. However, we plan to expand our business to implement our growth strategies in the water supply market and strengthen our position in the marketplace. To do so, we will need more capital through equity financing to increase our production and meet market demands.

 

Substantially all of our operations are conducted in China and all of our revenues, expense, cash and cash equivalents are denominated in Renminbi (RMB). RMB is subject to the exchange control regulation in China, and, as a result, we may have difficulty distributing any dividends outside of China due to PRC exchange control regulations that restrict its ability to convert RMB into U.S. Dollars. Since all of the cash balance reported by us as of September 30, 2016, is foreign cash (RMB), the amount of foreign cash we have is the total amount of our cash, which is $123,649.

 

Under applicable PRC 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 at least 10% of its after-tax profit based on PRC accounting standards each year to its general reserves until the accumulative amount of such reserves reaches 50% of its registered capital. These reserves are not distributable as cash dividends. The board of directors of a foreign-invested enterprise has the discretion to allocate a portion of its after-tax profits to staff welfare and bonus funds, which may not be distributed to equity owners except in the event of liquidation. Under PRC law, RMB is currently convertible into U.S. Dollars under a company’s “current account,” which includes dividends, trade and service-related foreign exchange transactions, without prior approval of the State Administration of Foreign Exchange (SAFE), but is not from a company’s “capital account,” which includes foreign direct investments and loans, without the prior approval of the SAFE.

 

With respect to retained earnings accrued after such date, our Board of Directors may declare dividends after taking into account our operations, earnings, financial condition, cash requirements and availability and other factors as it may deem relevant at such time. Any declaration and payment, as well as the amount, of dividends will be subject to our By-Laws, charter and applicable Chinese and U.S. state and federal laws and regulations, including the approval from the shareholders of each subsidiary which intends to declare such dividends, if applicable.

 

We have limited financial obligations dominated in US dollars, thus the foreign currency restrictions and regulations in the PRC on the dividends distribution will not have a material impact on the liquidity, financial condition and results of operations of the Company.

 

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Cash Flow Summary

 

    Years ended September 30,  
    2016     2015  
Net cash provided by (used in) operating activities   $ (1,201,109 )   $ (2,780,259 )
Net cash provided by (used in) investing activities     (123,945 )     (289,956 )
Net cash provided by (used in) financing activities     840,501       2,741,934  
Effect of exchange rate changes on cash     (18,589 )     (22,383 )
Net increase (decrease) in cash   $ (503,142 )   $ (350,664 )
Cash at beginning of period     626,791       977,455  
Cash at end of period   $ 123,649     $ 626,791  

 

Operating Activities:

 

Net cash used in operating activities for the year ended September 30, 2016 was approximately $1.2 million, which was primarily attributable to a net profit approximately $5.3 million, adjusted for non-cash items for approximately $1.15 million and adjustments for changes in working capital approximately $7.65 million. The adjustments for changes in working capital mainly included:

 

(i) increase in accounts receivable of approximately $10.2 million – our accounts receivable increased significantly due to: 1) increase in credit sales in 2016 compared to in 2015, and 2) it took longer for our customers to make payments. For the fiscal year ended September 30, 2016, we had an overall sales outstanding of 193 days compared with 109 days in 2015. Since fiscal year ended September 30, 2015, we supplied products for construction companies that carry public utility projects, such as municipal water and gas supply pipeline and the typical payment term with those customers is 6 month. These construction projects are typically funded by the local governments. Our customers usually get small progress payments throughout the construction period and a larger payment until the inspection is done and when the projects are completed. When our customers request for payment extension, we carefully review the background of the projects and the status of each construction project. We only grant payment extension to our customers when they have healthy financial standings, have no records of delinquent payments and can demonstrate their ability to continuing making the payments. Our management team believes that the risk of writing off the accounts receivable is low because of the involvement of local municipalities.

 

The following table is our accounts receivable aging schedule as of September 30, 2016 and 2015:

 

    Total     < 1 Year     1 – 2 Years     2-3 Years     > 3 Years  
As of September 30, 2016   $ 23,843,980     $ 20,003,450     $ 3,345,126     $ 383,699     $ 111,705  
As of September 30, 2015   $ 15,225,136     $ 14,218,558     $ 336,988     $ 617,243     $ 52,347  

 

The following tables summarize the amount that we subsequently collected as of February 28, 2017 based on the aging schedules above:

 

For the period ended September 30, 2016:

 

    Total     < 1 Year     1 – 2 Years     2-3 Years     > 3 Years  
September 30, 2016   $ 23,843,980     $ 20,003,450     $ 3,345,126     $ 383,699     $ 111,705  
Subsequent collected   $ 12,507,756     $ 11,003,955     $ 1,360,463     $ 94,799     $ 48,539  

 

We expect the unreserved accounts receivable are all collectible within the next 12 months, as our customers keep making payment and there are no indications that we will not be able to collect the remaining balance.

 

(ii) increase in inventories of approximately $0.78 million – we purchased more raw materials because: 1) we believe the cost of the raw materials will increase so we purchased more to stock up, and 2) we expect we will receive more customer orders from our customers so we stocked more materials. For the fiscal year ended September 30, 2016, we had an inventory turnover ratio of 4.09 times compared with 3.34 times in fiscal year ended September 30, 2015. The improvement in inventory turnover ratio is mainly due to our improvement in the production cycle and overall inventory management;

 

(iii) increase in advances to suppliers of approximately $0.91 million – Because of the increase of our order for materials, our suppliers required us making more deposits;

 

  (iv) increase in accounts payables of approximately $0.80 million, primarily because of the increase of our purchases of raw materials. For the fiscal year ended September 30, 2016, we had an overall payable outstanding of 10.96 days compared with 5.07 days in 2015. The increase in number of days payable outstanding is primarily attributable to the increase of extension time that our vendors allowed us on the payment terms to help us mange our operating cash flows;
     
  (v) increase in advance from customers of approximately $1.4 million – Because of additional orders from our customers, we required more deposits from the customers;
     
  (vi) increase in income tax payable of approximately $2 million – due to higher taxable income in fiscal year ended September 30, 2016 compared to fiscal year ended September 30, 2015.

  

Net cash used in operating activities for the fiscal year ended September 30, 2015 was approximately $2.8 million, which was primarily attributable to a net profit approximately $5 million, adjusted for non-cash items for approximately $1.2 million and adjustments for changes in working capital approximately $9 million. The adjustments for changes in working capital mainly included:

 

  (i) increase in accounts receivable of approximately $10.6 million – our accounts receivable increased significantly due to: 1) increase in credit sales in 2015, and 2) it took longer for our customers to make payments. For the fiscal year ended September 30, 2015, we had an overall sales outstanding of 109 days. Since fiscal year ended October 1, 2014, we started supplying products for construction companies that carry public utility projects, such as municipal water and gas supply pipeline. These construction projects are typically funded by the local governments. Our customers usually get small progress payments throughout the construction period and a larger payment until the inspection is done and when the projects are completed. When our customers request for payment extension, we carefully review the background of the projects and the status of each construction project. We only grant payment extension to our customers when they have healthy financial standings, have no records of delinquent payments and can demonstrate their ability to continuing making the payments. Our management team believes that the risk of writing off the accounts receivable is low because of the involvement of local municipalities. Below is a summary of collections we made on September 30, 2015 accounts receivable after the year end and through the end of February 2017:

 

    Total     < 1 Year     1 – 2 Years     2-3 Years     > 3 Years  
September 30, 2015     $15,225,136       $14,218,558       $336,988       $617,243       $52,347  
Subsequent collected     $12,950,352       $12,395,109       $91,073       $411,823       $52,347  

 

  (ii) decrease in inventories of approximately $2.55 million – due to the combination of increased product sales and reaching maximum production capacity, we maintained overall less inventories on hand. We also improved our inventory turnover rate, which was mainly attributable to our improvement in production cycle and overall inventory management;

 

  (iii) increase in advance to suppliers of approximately $2.35 million – Because of the increase of our order for materials, our suppliers required us making more deposits;

 

  (iv) decrease in advance from customers of approximately $1.2 million – mainly due to an increase of our delivery of our products and recognition of customer advance from previous year as revenue.

 

  (v) increase in income tax payable around $2.9 million – due to an increase of taxable income.

 

Investing Activities:

 

Net cash used in investing activities was $123,945 for the year ended September 30, 2016. It was primarily attributable to the purchase of new equipment for production needs during the fiscal year.

 

Net cash provided by investing activities was $289,956 for the year ended September 30, 2015. It was primarily attributable to the purchase of new equipment for production needs during the fiscal year.

 

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Financing Activities:

 

Net cash provided by financing activities was approximately $840,501 for the year ended September 30, 2016. It was primarily attributable to the proceeds from short-term bank borrowings for an amount of $2,148,310 and repayments from related party with an amount of $1,485,555, offset by our repayments on note payable for $2,602,037 and capital contributions of $15,306 from non-controlling interests.

 

Net cash used in financing activities was approximately $2,741,934 for the year ended September 30, 2015. It was primarily attributable to the repayments from related parties with an amount of $2,034,454, plus proceeds from notes payable borrowings and short-term bank borrowings with the sum of $260,748.

 

Credit Facility

 

We mainly finance our operations through short-term revolving loans provided by a syndicate of banks, as listed in the table below. As of September 30, 2016, we had 30 outstanding short-term loans provided by eight (8) banks, totaling RMB145,385,649 in the aggregate, or approximately $21.8 million. Each of these borrowings has a term of six months to one year and, as per our agreement with these banks, all of the loans can be renewed and funds can be accessed immediately when the outstanding principal and interest are repaid in full. This ensures that each loan can be repaid on time by both our working capital and the funds from the prior loan. Some of these loans have fixed interest rate while others have a variable rate. The annual average interest rates were 5.638% and 6.271% for the years ended September 30, 2016 and 2015, respectively.

 

Short-term bank borrowings consisted of the following at September 30, 2016:

 

Bank Name   Amount - RMB     Amount - USD     Issuance Date   Expiration Sate   Interest  
Agricultural Bank - Longwan Branch     6,240,000       935,382     12/16/2015   12/11/2016     5.66 %
Agricultural Bank - Longwan Branch     2,500,000       374,752     3/17/2016   3/16/2017     4.57 %
Agricultural Bank - Longwan Branch     7,000,000       1,049,307     4/7/2016   3/26/2017     4.12 %
Agricultural Bank - Longwan Branch     2,210,000       331,281     4/12/2016   4/11/2017     4.51 %
Agricultural Bank - Longwan Branch     4,000,000       599,604     6/2/2016   5/26/2017     4.65 %
Agricultural Bank - Longwan Branch     2,040,000       305,798     6/13/2016   6/11/2017     4.65 %
Agricultural Bank - Longwan Branch     2,700,000       404,733     6/16/2016   6/11/2017     4.65 %
Agricultural Bank - Longwan Branch     5,750,000       861,931     8/26/2016   8/16/2017     5.22 %
Agricultural Bank - Longwan Branch     4,300,000       644,574     9/9/2016   7/26/2017     5.06 %
Agricultural Bank - Longwan Branch     6,000,000       899,406     9/22/2016   9/21/2017     5.00 %
Bank of China - Longwan Branch     13,000,000       1,948,713     8/26/2016   4/8/2017     4.79 %
CMBC-10802     7,600,000       1,139,248     5/25/2016   11/22/2016     5.44 %
CMBC-10802     5,400,000       809,465     6/15/2016   11/22/2016     5.66 %
CMBC-10802     5,000,000       749,505     6/17/2016   11/22/2016     5.66 %
Zhejiang Commerce Bank     2,000,000       299,802     2/5/2016   2/4/2017     6.00 %
Zhejiang Commerce Bank     1,500,000       224,851     2/5/2016   2/4/2017     6.00 %
Zhejiang Commerce Bank     1,500,000       224,851     2/6/2016   2/5/2017     6.00 %
Zhejiang Commerce Bank     5,000,000       749,505     3/2/2016   3/1/2017     6.00 %
Zhejiang Commerce Bank     5,000,000       749,505     3/7/2016   3/6/2017     6.00 %
Zhejiang Commerce Bank     5,000,000       749,505     3/9/2016   3/8/2017     6.00 %
Industrial Bank     6,481,268       971,549     9/25/2015   9/23/2016     7.00 %
Industrial Bank     6,500,000       974,356     9/25/2015   9/25/2016     7.00 %
Minsheng Bank     5,000,000       749,505     3/8/2016   10/19/2016     6.70 %
Minsheng Bank     3,500,000       524,653     4/16/2016   4/11/2017     5.00 %
Minsheng Bank     5,400,000       809,465     4/8/2016   4/8/2017     5.00 %
Pingan Bank     8,000,000       1,199,208     3/3/2016   3/3/2017     5.22 %
Agricultural Bank     1,964,381       294,463     12/31/2015   9/11/2016     5.79 %
Bank of Communications     5,000,000       749,505     5/20/2016   5/20/2017     6.53 %
Bank of Communications     5,000,000       749,505     5/23/2016   5/23/2017     7.60 %
Bank of Communications     4,800,000       719,525     5/24/2016   5/24/2017     7.60 %
Total     145,385,649       21,793,454                  

 

Short-term bank borrowings consisted of the following at September 30, 2015:

 

Bank Name   Amount - RMB     Amount - USD     Issuance Date   Expiration Sate   Interest  
Agricultural Bank - Longwan Branch     6,450,000       1,013,076     12/8/2014   11/16/2015     6.4400 %
Agricultural Bank - Longwan Branch     2,500,000       392,665     4/8/2015   3/21/2016     5.8850 %
Agricultural Bank - Longwan Branch     2,210,000       347,116     4/24/2015   4/21/2016     5.8850 %
Agricultural Bank - Longwan Branch     4,000,000       628,264     6/10/2015   5/26/2016     5.8650 %
Agricultural Bank - Longwan Branch     2,040,000       320,415     6/19/2015   6/16/2016     5.8650 %
Agricultural Bank - Longwan Branch     2,700,000       424,078     6/30/2015   6/26/2016     5.5775 %
Agricultural Bank - Longwan Branch     5,750,000       903,130     9/11/2015   8/26/2016     5.0600 %
Agricultural Bank - Longwan Branch     4,300,000       675,384     9/18/2015   9/16/2016     5.0600 %
Agricultural Bank - Longwan Branch     6,000,000       942,396     9/23/2015   9/21/2016     5.0600 %
Agricultural Bank - Longwan Branch     7,000,000       1,099,462     9/30/2015   9/26/2016     5.0600 %
Bank of China - Longwan Branch     4,500,000       706,797     10/9/2014   10/8/2015     6.3000 %
Bank of China - Longwan Branch     5,000,000       785,330     10/11/2014   10/11/2015     6.3000 %
Bank of China - Longwan Branch     5,000,000       785,330     10/14/2014   10/14/2015     6.3000 %
Zhejiang Commerce Bank - Wenzhou     5,000,000       785,330     2/9/2015   2/8/2016     5.8800 %
Zhejiang Commerce Bank - Wenzhou     5,000,000       785,330     3/2/2015   3/1/2016     5.8800 %
Zhejiang Commerce Bank - Wenzhou     5,000,000       785,330     3/11/2015   3/10/2016     5.8850 %
Zhejiang Commerce Bank - Wenzhou     5,000,000       785,330     3/13/2015   3/12/2016     5.8850 %
Industrial Bank     6,500,000       1,020,929     9/25/2015   9/23/2016     7.0000 %
Industrial Bank     6,500,000       1,020,929     9/25/2015   9/25/2016     7.0000 %
Industrial Bank     5,000,000       785,330     9/28/2015   5/28/2016     5.8333 %
Minsheng Bank     3,500,000       549,731     4/20/2015   4/13/2016     6.1525 %
Minsheng Bank     5,400,000       848,156     4/21/2015   4/13/2016     6.1525 %
Minsheng Bank     100,000       15,707     4/21/2015   12/31/2015     6.1525 %
Pingan Bank     5,000,000       785,330     3/2/2015   3/2/2016     7.0000 %
Pingan Bank     3,000,000       471,198     3/5/2015   3/5/2016     7.0000 %
Bank of Communications     7,400,000       1,162,288     2/11/2015   2/11/2016     8.3000 %
Bank of Communications     7,500,000       1,177,995     2/11/2015   2/11/2016     7.7000 %
Agricultural Bank - Longwan Branch     4,000,000       628,264     10/23/2014   10/18/2015     6.9000 %
Total     131,350,000       20,630,619                  

 

39  

 

 

These short-term bank borrowings are secured by the pledged assets listed below, and are guaranteed by certain shareholders, shareholders’ immediate family members and third-parties.

 

    Fiscal Year Ended Sept 30  
Pledged Assets:   2015     2016  
Buildings, net     3,987,929       3,704,284  
Land use rights, net     504,119       468,148  
Machinery, net     325,566       303,856  
Total     4,817,614       4,476,288  

 

Off-balance Sheet Commitments and Arrangements

 

There were no off-balance sheet arrangements for the fiscal year ended Sept 30, 2016 and 2015, or that in the opinion of management are likely to have, a current or future material effect on our financial condition or results of operations.

 

Critical Accounting Policies

 

We believe it is helpful to investors to understand the critical accounting policies underlying our financial statements and the following discussion of our Company’s financial condition and results of operations.

 

Accounts Receivable, net

 

Trade accounts receivable arise from the product sales in the normal course of business. Based on management’s assessment of the customer’s credit history and current relationships with them, management makes conclusions whether any balances outstanding at the end of the period will be deemed uncollectible on an individual basis and aging analysis basis. The Company reserves 5% of accounts receivable balances that have been outstanding between 1 year and 2 years, reserves 20% of accounts receivable balances that have been outstanding between 2 years and 3 years, reserves 40% of receivable balances that have been outstanding between 3 years to 5 years, and reserves 100% of receivable balances that have been outstanding more than 5 years.

 

Inventories

 

Inventories are stated at the lower of cost or market value. Cost of inventories is calculated using the weighted-average method. In addition to the purchasing cost of raw materials, work in progress and finished goods include direct labor costs and overhead. The Company periodically assesses the recoverability of all inventories to determine whether adjustments are required to record inventory at the lower of cost or market value. Inventory that the Company determines to be obsolete or in excess of forecasted usage are reduced to its estimated realizable value based on assumptions about future demand and market conditions. If actual demand is lower than the forecasted demand, additional inventory write-downs may be required.

 

Advance to Suppliers and Advance from Customers

 

Advance to suppliers refer to advances for purchase of materials or other service agreement, which are applied against trade accounts payable when the materials or services are received. Advance from customers refer to advances received from customers regarding product sales, which are applied against trade accounts receivable when products are sold.

 

The Company reviews a supplier's credit history and background information before advancing a payment. If the financial condition of its suppliers were to deteriorate, resulting in an impairment of their ability to deliver goods or provide services, the Company would recognize expense in the period they are considered unlikely to be collected.

 

Value-added Tax

 

Value-added taxes (“VAT”) collected from customers relating to product sales and remitted to governmental authorities are presented on a net basis. VAT collected from customers is excluded from revenue. The Company is subject to a VAT rate of 17%.

  

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Revenue recognition

 

The Company recognizes revenue in accordance with ASC 605, Revenue Recognition, regarding revenue recognition which specifies that revenue is realized or realizable and earned. Sales revenue is recognized when:

 

  1) Persuasive evidence of an arrangement exists;
  2) Delivery has occurred or services have been rendered (the risks, rewards and ownership of the products are transferred to customers); and
  3) The seller’s price to the buyer is fixed or determinable; and
  4) Collectability is reasonably assured.

 

Income Taxes

 

The Company accounts for income taxes using the asset and liability method whereby it calculates deferred tax assets or liabilities for temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, net operating loss carry forwards and credits by applying enacted tax rates applicable to future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Current income taxes are provided for in accordance with the laws of the relevant taxing authorities. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on the characteristics of the underlying assets and liabilities, or the expected timing of their use when they do not relate to a specific asset or liability.

 

Foreign Currency Translation

 

The financial records of the Group’s subsidiaries are maintained in their local currencies. Monetary assets and liabilities denominated in currencies other than their local currencies are translated into local currencies at the rates of exchange in effect at the balance sheet dates. Transactions denominated in currencies other than their local currencies during the year are converted into local currencies at the applicable rates of exchange prevailing when the transactions occur. Transaction gains and losses are recorded in other income/ (expense), net in the statements of income.

 

The reporting currency of the Group is the United States dollar (“US dollar”). When translating local financial reports of the Group’s subsidiaries into US dollar, assets and liabilities are translated at the exchange rates at the balance sheet date, equity accounts are translated at historical exchange rates and revenue, expenses, gains and losses are translated at the average rate for the period. Translation adjustments are reported as cumulative translation adjustments and are shown as a separate component of other comprehensive income in the statements of operations and comprehensive income.

 

Quantitative and Qualitative Disclosures About Market Risk

 

We are exposed to a variety of financial risks, including market risk (including currency risk, price risk and cash flow and fair value interest rate risk), credit risk and liquidity risk. Our overall risk management program focuses on preservation of capital and the unpredictability of financial markets and has sought to minimize potential adverse effects on our financial performance and position.

 

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Foreign Exchange Risk

 

While our reporting currency is the U.S. Dollar, all of our consolidated sales and consolidated costs and expenses are denominated in the RMB. All of our assets are denominated in the RMB. As a result, we are exposed to foreign exchange risk as our sales and results of operations may be affected by fluctuations in the exchange rate between the U.S. Dollar and the RMB. If the RMB depreciates against the U.S. Dollar, the value of our RMB sales, earnings and assets as expressed in our U.S. Dollar financial statements will decline. Assets and liabilities are translated at exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates and stockholders' equity is translated at historical exchange rates. Any resulting translation adjustments are not included in determining net income but are included in determining other comprehensive income, a component of stockholders' equity. We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk.

 

The value of the RMB against the U.S. dollar and other currencies is affected by, among other things, changes in China's political and economic conditions. Since July 2005, the RMB has not been pegged to the U.S. dollar and, although the People's Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the U.S. dollar or the Euro in the medium to long term. Moreover, it is possible that in the future, PRC authorities may lift restrictions on fluctuations in RMB exchange rate and lessen intervention in the foreign exchange market. Although the RMB strengthened against the U.S. dollar over the last five years, the RMB’s significant weakening against the U.S. dollar since July 2015 has largely undone such prior increases.

 

Credit Risk

 

Our cash and cash equivalents are invested primarily in savings and deposit accounts with original maturities of three months or less. Savings and deposit accounts generate a small amount of interest income.

 

Inflation

 

Inflationary factors such as increases in the cost of our product and overhead costs may adversely affect our operating results. Although we do not believe that inflation has had a material effect on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross profit and selling, general and administrative expenses as a percentage of net sales if the selling prices of our products do not increase with these increased costs.

 

Business

 

Overview

 

Incorporated on May 13, 2015, under the laws of the British Virgin Islands (“BVI”), we primarily conduct our business through our subsidiary Zhejiang Zhengkang. Our core business focuses on providing systematic solutions to construction projects that require sophisticated piping systems. Leveraging our experience in the industry, we offer urban planners and real estate developers sophisticated pipe and fitting products and engineering expertise, enabling them to bring communities reliable and durable gas and water transmission systems. Our products are primarily sold in China, but are also exported and distributed in Europe and Southeast Asia. We have received numerous awards and recognitions domestically and internationally. Located within the Wenzhou Binhai Industrial Park, a national economic development zone, our facility occupies approximately five acres, consisting of business offices, manufacturing plants, a research and development center and storage facilities.

 

We specialize in designing and producing pipes and fittings such as double-press thin-walled stainless steel tubes and fittings, carbon steel tubes and fittings and single-press tubes and fittings. Focused on the innovation and expansion of our products to meet the specific needs of our clients, we believe that we are a leading manufacturer and engineer of high-performance stainless steel pipes. Our products offer a comprehensive suite of superior solutions for use in the construction and infrastructure industries. Our innovative products are used in a broad range of applications, including water and gas transmission within urban infrastructural development, residential housing development, food and beverage production, oil and gas exploitation, and agricultural irrigation. Since Zhejiang Zhengkang’s founding in 2001, we have developed an array of patented pipe and fitting products that have been marketed and distributed both domestically and internationally.

 

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We promote our brand through our sales staff, distributors, trade shows, trade fairs, forums, direct communications with potential customers, business networks, and the internet. In addition, we tailor our products to the needs of our clients and provide our clients with competitive pricing to establish long-term business relationships. We take pride in the cutting-edge technology and superb quality of our products, which have received recognitions such as the ISO9001 Quality Management System Certification, ISO14001 Environmental Management System Certification, and National Industrial Stainless Steel Production License, among other awards and honors. Our products have been used in well-known facilities such as Olympic stadiums, multinational hotel chains, and mega-sized apartment complexes.

 

Safety, quality and productivity are three pillars of our operations and the hallmarks of our success. In the past year, we experienced another year of outstanding safety performance while continuing to improve safety standard for our workforce. We also plan to transform our value proposition from strictly being a product supplier to a solution provider, aiming to deliver both high-quality products and complete engineering solutions to our clients. We have compiled a team of engineers and pipe network designers who will work closely with the manufacturing team to respond to clients’ special construction demands, create rapid prototypes of our solutions, and enhance the utility of our products based on clients’ feedback. This work flow could also significantly improve the efficiency and performance of our engineers.

 

Industry Overview

 

We believe that we are in the early stages of four trends that are reshaping how water is accessed and managed by our community on a daily basis:

 

  · As urbanization continues, cities in China will face tremendous challenges providing clean and safe water distribution in urban areas
  · People are realizing that access to potable water in their home should not be a privilege, but a right. Many are now asking for improved water distribution systems.
  · Stainless steel is considered the safest and most environmental-friendly material for clean water transmission, and these features are being recognized by the market.
  · As water distribution systems are becoming more complex, water supply companies are seeking suppliers that not only supply products, but also engage in projects and are adaptable and responsive to ever-changing project demands.

 

These trends are creating an increasing number of new opportunities for organizations in the stainless steel pipe industry. We believe that the best opportunities are for the organizations that can continually make quality products and work with clients to solve problems and make improvements.

 

The Clean Water Supply Imperative

 

With almost 20% of the world’s population, but access to only 5% of the world’s renewable freshwater resources, it is easy to understand the reason that water resource management has been a high social priority in China. The Ministry of Water Resources notes on its website that out of 663 cities in China, more than 400 are suffering from water shortages, with 110 classified as “severe”. China’s move to upgrade its water distribution infrastructure comes as it faces tremendous challenges from two directions. On one side, water quality remains an issue, while on the other side, reliable water distribution networks in many cities are still in developmental stage.

 

Increasing Investment Towards the Drinking Water Distribution Industry

 

Like many other things, opportunities always come with challenges. There are both political and economic incentives in this field attracting investment from the government and private companies. As more investment has flowed into the water supply industry over the past several years, the number of large and medium water treatment and supply companies has increased by 145 to 1491 in 2015, as compared to 1346 in 2014. As reported by Ministry of Environmental Protection (MEP), the quality of drinking water has significantly improved as well – 76% of water sources are safe for drinking compared to 53.4% in 2004. Despite these improvements in drinking water quality, the distribution networks across China still falls short as many cities still rely on decades-old pipe networks that are outdated and rusted. It’s been reported, in 2013, that drinking water network coverage is only 3% throughout China (even in the biggest three cities is only 15%), which means only 3% of Chinese citizens have access to drinking water in their homes. In other words, distribution is the bottleneck of China’s entire drinking water supply system. The government and private capital have now turned their focus to updating cities’ water distribution networks. According to H2O China, one of the largest research institutes covering China’s water supply industry, fixed asset investment from both the government and private companies in the water supply and distribution industry has grown significantly, with a compound annual growth rate of 14.32% from 2011 to 2015, as illustrated below:

 

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(Source: H2O China, http://www.h2o-china.com/news/242939.html)

 

Generational Shift to Stainless Steel Pipe Network

 

To accommodate the enormous increase of clean water demand in urban cities, the distribution network has to be highly safe, reliable, durable, and environmentally friendly. Current pipe networks mainly consist of plastic (such as PPR and PVC), galvanized, and copper pipe, however, these materials don’t meet the standards of drinking water transmission. In some developed countries, stainless steel had been widely accepted as the best material for such application; Germany and Japan, for instance, have 80% and 90% of their water pipe networks using stainless steel, respectively, while the percentage in China is around 3%. The popular acceptance of stainless steel is due to the following advantages over other materials:

 

High Strength: Stainless steel pipe’s strength is 1.5 times higher than galvanized pipe, 2-3 times higher than copper pipe and 8-10 times higher than PPR pipe. Strength is an important factor and determines how shock resistant the pipe is.

 

Anti-corrosion: Stainless steel pipe is highly corrosion resistant. Even under high velocity water flow of 60m/s, stainless steel’s corrosion rate is below 0.003mm/year. This ensures stainless steel has more than 70 years of service life. As comparison, other materials can only be used for 10-20 years.

 

Low water resistance: Due to the smoothness of the inner pipe wall, stainless steel has a 40% lower water resistance than that of carbon and copper pipe. Low water resistance reduces scale and bacterial deposits on the inner pipe wall, improving overall water quality and also reduces the amount of electricity consumed by pump stations by half, provided that all downstream pipes are stainless steel.

 

Low Leakage Rate: Benefitting from its high strength and anti-corrosion features, stainless steel pipes and fittings have extremely low leakage rates. According to Best Practice: Water Leakage Prevention Controls published by New York City, replacing current pipe networks with stainless steel components is a major priority to prevent water leakage, which can cause water waste, secondary disasters such as poor water flow, road collapse, and flooding of buildings and inundation. Tokyo, an example used in the Best Practice document, decreased its leakage rate from 20% in 1956 to 3% in 2010, mostly attributed to the usage of stainless steel pipes in its network. (Source: http://www1.nyc.gov/assets/globalpartners/downloads/pdf/Tokyo_Energy_Water%20Leakage%20Controls.pdf)

 

Recyclable: Stainless steel is 100% recyclable, while plastic pipe can only be landfilled or incinerated, both causing pollution to environment.

 

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In addition to the significant potential market within the urban development and residential real estate industries, we anticipate that the demand of our services and products from hotels within China will also become an important target market. Currently, through local distributors, our products are provided to global hotel brands such as Kempinski, Sheraton and Holiday Inn within China. During the past ten years, through contractors, distributors and wholesalers, our products have been used in more than three hundred three- to five-star hotels. As we have become one of the industry-leading stainless pipe manufacturers, we plan to work with end users such as multinational global chains from the initial planning stage, assisting in the design of their pipe transmission systems, to the post-sale stage, providing maintenance and repair services as part of their daily operation. China’s hotel industry has experienced tremendous growth due to both inbound foreign travelers and domestic travelers, resulting in a $44 billion business with 2.5 million hotel rooms. However, the hotel penetration rate is only approximately 4 rooms per 1,000 capita in China, which is relatively low compared to that of developed nations. It is anticipated that the hospitality industry in China could reach $100 billion with 6.3 million rooms and 8 rooms per 1,000 capita. This therefore presents a significant opportunity for our company. As developers and travelers are becoming more sophisticated, the need for a sustainable and cost-effective solution is expected to increase. The quality of our products and our expertise servicing global hotel chains will provide us with a competitive advantage for future hotel construction projects.

 

Corporate Structure

 

Below is a chart illustrating our current corporate structure:

 

 

 

ZK International Group Co. Ltd. (“ZKIN”)

British Virgin Islands

(May 13, 2015)

 

 
 

 

 

 

 

100%

 

 

 

 

 

 

ZK Pipe Industry Co. Ltd. (“ZK Pipe”)

Hong Kong SAR

(May 28, 2015)

 

 
       
                   100% Offshore
      Onshore
 

 

Wenzhou Weijia Pipeline Development Co., Ltd.
(“Wenzhou Weijia”)

People’s Republic of China

(June 17, 2015)

 

 
 

 

 

 

 

99%

 

 

 

 

Zhejiang Zhengkang Industrial Co. Ltd.

(“Zhejiang Zhengkang”)

People’s Republic of China

(December 4, 2001)

 

 
 

 

 

 

 

100%

 

 

 

 

Wenzhou Zhengfeng Industry and Trade Co. Ltd.

(“Wenzhou Zhengfeng”)

People’s Republic of China

(December 24, 1999)

 

 

 

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ZK International Group Co., Ltd. (“ZK International”) was incorporated on May 13, 2015 under the laws British Virgin Islands (“BVI”). The registered capital is USD$50,000, with 100% issued and outstanding Ordinary Shares held by Kai Chun Cheng, a citizen of Hong Kong SAR. On July 29, 2015, Mr. Cheng entered into equity interest transfer agreements with Jiancong Huang, Mingjie Wang, Guolin Wang, Jiandi Wang and Yangming Wang and transferred to the five individuals 45%, 20%, 20%, 10% and 5%, respectively, of ZK International’s equity interest on October 12, 2015.

 

ZK Pipe Industry Co., Ltd. (“ZK Pipe”) was incorporated on May 28, 2015 under the law of Hong Kong SAR. The registered capital is HKD 1,000,000, with 40% of the equity interest held by ZK International and 60% held by Kai Chun Cheng initially. On August 5, 2015, Mr. Cheng transferred all of his equity in ZK Pipe to ZK International, making ZK Pipe a wholly-owned subsidiary of ZK International. The registered principal activities of ZK Pipe including technical research of metal pipe and fittings, metal take-up valve plumbing and water purifying plant, as well as importing and exporting of goods.

 

Wenzhou Weijia Pipeline Development Co., Ltd. (“Wenzhou Weijia”) was incorporated on June 17, 2015 in Wenzhou under the laws of the People’s Republic of China. A wholly-owned subsidiary of ZK Pipe and a wholly foreign-owned entity under the PRC laws, Wenzhou’s registered capital is RMB 20,000,000 and the registered principal activities of Wenzhou Weijia including (i) technical research, (ii) technical service and sales of metal pipe and fittings, (iii) technical service and sales of light industry machinery and (iv) equipment imports and exports of goods and technology.

 

Zhejiang Zhengkang Industrial Co., Ltd., or formerly known as Wenzhou Yafei Valve Manufacturing Co. Ltd (“Zhejiang Zhengkang”) was incorporated on December 4, 2001 under the laws of the People’s Republic of China. Zhejiang Zhengkang’s registered and paid in capital is RMB 20,000,000. Through equity transfers, Wenzhou Weijia holds 99% of the equity interest of Zhejiang Zhengkang, with the remaining 1% held by our Chief Executive Officer, Jiancong Huang. The principal activities of Zhejiang Zhengkang include (i) manufacturing and sales of stainless steel band , copper strip, welded stainless steel pipes and fittings, pipe fittings, valve, light industry machinery and equipment and other stainless steel products and (ii) imports and exports of goods and technology.

 

Wenzhou Zhengfeng Industry and Trade Co., Ltd. or formerly known as Wenzhou Zhengfeng Steel Strip Co., Ltd. (“Wenzhou Zhengfeng”) was incorporated on December 24, 1999. Wenzhou Zhengfeng’s registered and paid in capital is RMB 2,880,000. Through equity transfers, Wenzhou Zhengfeng is a wholly-owned subsidiary of Zhejiang Zhengkang and its principal activity is trading of steel strip that are mainly purchased from Zhejiang Zhengkang.

 

Our Products and Services

 

Our products focus primarily on the drinking water and gas transmission industries, while a minor portion of revenue is generated from the pharmaceutical, medical, food and beverage industries. Produced from different stages of our production line, our steel products can be broken down and sold as the following parts and components:

 

  · Steel Strip: We manufacture carbon steel and stainless steel strip for sale to traditional manufacturers who are not in the pipe and fitting industry and for our own internal use in the production of our pipes and fittings. Our ability to produce steel strip in-house allows us to ensure the quality and consistency of our pipe and fitting products.

 

  · Steel Pipe: Our carbon steel and stainless steel pipes are primarily used in water and gas transmission systems. Carbon steel pipes are generally stronger than stainless steel, and therefore are typically used in applications that require high-pressure resistance, such as gas transmission and fire hydrants. Stainless steel pipes, in contrast, are more corrosion resistant and are commonly applied in cases that require clean transmission, such as drinking water and pharmaceutical liquid transmission.

 

  · Light Gauge Stainless Steel Pipe (LGSSP): We have production lines specifically designed to produce LGSSP, which have 40% thinner walls than regular stainless steel pipes. The reduction in the thickness of the pipe wall leads to a reduced manufacturing cost and weight and enhances installation flexibility due to its smaller size. LGSSP is an affordable option for household plumbing systems that require easy installation.

 

  · Pipe Connections and Fittings: We manufacture high-quality pipe connections and fittings that are used to connect pipes. Pipe fittings have wide applications for any piping and plumbing systems in both industrial and commercial applications. Fittings allow pipes to be joined or installed in the appropriate place and terminated or closed where necessary. We produce fittings in various shapes and sizes, with more than 10,000 different specifications. As most leakages are caused by misalignment or improper manufacture of connections and fittings, pipe connections and fittings, being the most crucial components of any piping system, require extremely precise production procedures. Depending on the purposes served, our pipe fittings can be categorized as follows:

 

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· Pipe fittings to extend or terminate pipe runs: couplings, adapters, unions, caps and plugs pipe.

 

· Fittings to change a pipe's direction: elbows, three-way fittings

 

· Pipe fittings to connect two or more pipes: tees, cross, side-inlet elbows, wyes

 

· Pipe fittings to change pipe size: reducers, bushings, couplings

 

· Pipe fitting tools: pipe fasteners

 

· Pipe flanges

 

Our connections and fittings segment has grown significantly during 2016. The increased proportion of our revenue generated by the connections and fittings segment reflects a shift in our manufacturing and marketing priority to this segment. We have shifted our focus to connections and fittings because we could offer more value-add to our products than pipe or strip. More importantly, providing quality products in this segment is more likely to help us retain clients as consistency and quality of joints and fittings plays a big role in reducing maintenance costs and leakage rates for the customers.

 

Pipe production is very competitive in China. In order to distinguish ourselves from the other competitors in the industry, we have employed a team of engineers specializing in network design, CAD drawing, and special prototyping of piping systems to help our customers create a systematic solution based on their piping needs.

 

 

 

Our Growth Strategy

 

To maintain the growth of our business and sustain our leading position in the market, we anticipate to rely on these key drivers as part of our growth strategy:

 

  · Expansion of manufacturing infrastructure and increased productivity for new businesses. Currently, we believe that our production volume can be improved with additional equipment and infrastructure. With investments that we plan to put into our infrastructure, we will be able to take on additional businesses contracts and increase our production volume.

 

  · Achieving a dominate position in the household plumbing market. With years of strategic preparations and planning behind us, we are seeing tremendous growth opportunities in this business segment, as consumers have started paying attention the health risks associated with unsafe household drinking water caused by problematic transmission system. We plan to focus our sales in this sector as our strategic priority for the next few years.

 

  · Further exploration of opportunities in emerging markets. We have recognized the great potentials of Siphonic Roof Drainage Systems (SRDS). Siphonic Roof Drainage System (SRDS) is a cutting-edge roof drainage system mainly used for large roofing structure to prevent excessively heavy rainfall from damaging the roof and building. This drainage system is able to drain any water accumulation on the roof under heavy storm with very high efficiency and thus prevents excessive rainfall from damaging roof structure. This technology has potential to be widely applied to buildings with large-span roof structure, like airport, sport stadium, convention center and warehouse. While its use and standard has been mature in many developed countries, it has just been introduced to China recently and is still in the development stage. Stainless steel is widely regarded as the best material by for this system as it resists high inner pressure and requires minimal maintenance. Roof drainage is not the only application of siphonic drainage technology, other potential applications are bridge surface drainage, rainwater collection system and rainwater cycling. We believe our company can greatly benefit from this technology for its wide application potential and big business opportunities behind it. Therefore, we plan to invest in development of our own SRDS design software and continue our research in this area.

 

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  · Rebranding ourselves as a premium, full-service solution provider. The combination of our top-notch manufacturing capabilities and our engineering expertise enable us to provide comprehensive solutions to our clients. In addition to our client-centric products we currently offer, our goal is to eventually provide all of our end users with collaborative services that would give us the opportunity to work alongside our clients as partners, and to execute in an effective and efficient manner.

 

  · Mergers and Acquisitions. We closely follow and investigate potentially profitable and strategic acquisitions and combinations within our industry. We continuously seek synergistic partnerships to acquire additional technologies, products, services, operations and/or geographic capabilities that can provide long-term growth. While we currently do not have any specific mergers or acquisition targets, we plan to explore the possibility of completing a few vertical or horizontal acquisitions in the next few years to expand our presence in the industry. There, however, is no assurance at this point we will be able to do so in the near future.

 

Sales Channels and Long Term Opportunities

 

Extensive Sales Network within China. To market our products and brand to other regions within China, we have set up 26 sales representative posts in major cities across China by assigning our sales and engineer specialists to those regions to establish long-term business relationship with the local water and gas supply companies. In addition, we also have worked with 120 distributors across China to serve their local customers. This extensive sales network ensures our products and services are accessible in all of the cities within in 30 of the 34 provinces and territories in China.

 

Strategic Partners. There’re many water and gas transmission companies in China, and it would be very time-consuming if we negotiate with each of them one by one on the terms of our order contract. To better market our products to these utility companies, we have invited some of them to conduct on-site visit to check our production facility, quality control protocols, production capability, and research and development capacity to demonstrate our value as a supplier compared to other competitors on the market. Once approved by these utility companies’ internal assessment teams, we will be pre-approved as their “qualified supplier”, which would exempt our company form their production inspection process when they place orders. We have been pre-approved as “qualified supplier” by the following companies:

 

  · Towngas Investment Group
  · Changsha Water Investment Group
  · Shengzhen Water Supply Group
  · Shanghai SMI Water Group
  · Sichuan SPT Energy Group
  · Min Sheng Energy Group

 

All of these companies present us with potential long term opportunities for large scale project, which would require a large volume of piping products over multiple years. In addition, we would be able to advantage of their business network. We currently do not directly supply to some of our partners and instead we rely on local distributors and wholesalers to deal with specific projects due to the complex of each project. However, to provide goodwill and value-add to our customers in addition to our quality products, we prioritize the production of their orders and plan to offer them with engineering advisory and post-sales maintenance services in the future. We also have staffed experienced engineers available to resolve any installation or maintenance issues that these end users may encounter.

 

Customers and Suppliers

 

Customers

 

For carbon and stainless steel pipe products, we principally target our marketing efforts toward those clients in the water and gas supply industries which require high quality specialty steel pipes and fittings with precise “just-in-time” delivery as most of our clients do not carry inventory, technical consultancy or post-sale support. Our enhanced product quality and delivery capabilities, as well as our emphasis on customer oriented technical support and product planning, are critical factors in our ability to serve this segment of the market. In the near future, as we begin to transform our business to both a product supplier and a solution provider, we expect that customers will enjoy using our products and working with engineers since our integrated approach is expected to help our customers reduce planning, installation and maintenance costs.

 

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We find that primarily sold through distributors, our products are mostly embraced by two categories of end users: those within the water transmission industry and those within the gas transmission. Our clients scatter in diverse industries including, but not limited to, water treatment, real estate development, hospitality, hospital, gas supply, and school. We consider our major customers in each period to be those customers that accounted for more than 10% of overall revenues in such period. We did not have any single client accounting for more than 10% of sales revenue in 2016, while in 2015 we had one client accounting for 15% of total sales due to that client’s large order of our stainless steel pipe.

 

Suppliers

 

We consider our major vendors in each period to be those vendors that accounted for more than 10% of overall purchases in such period. We have three such vendors during fiscal years ended September 30, 2016, who are Foshan Ruigangda Trading Co., Ltd, Wanzhouhong Steel Co., Ltd., and Foshan Oufo Metal Materials Co., Ltd., accounting for approximately 36%, 16%, 15% of overall purchases respectively. We have four such vendors during fiscal years ended September 30, 2015, who are Foshan Ruigangda Trading Co., Ltd, Foshan Oufo Metal Materials Co., Ltd., Sichuan Xinan Stainless Steel Co., Ltd. and Foshan Yaohua Stainless Steel Co., Ltd. accounting for approximately 24%, 19%, 11% and 10% of overall purchases respectively. We purchase raw materials on the market at prevailing market prices. We purchase from a variety of suppliers and believe these raw materials are widely available. If we were unable to purchase from our primary suppliers, we do not expect we would face difficulties in locating another supplier at substantially the same price. We have secure and efficient access to all the raw materials necessary for the production of our products. We believe our relationships with the suppliers of these raw materials are strong. While the prices of such raw materials may vary greatly from time to time, we believe we could hedge such risk by adjusting our price, or absorb the higher cost at times if necessary.

  

Research and Development

 

We are committed to researching and developing stainless steel products for use in all industries that need water and gas transmission systems. We believe scientific and technological innovations will help our Company achieve its long-term strategic objectives. Our research and development efforts are an integral part of our operations and the crux of our competitive advantage and differentiation strategy.

 

The Research and Development team consists of dedicated researchers and analysts focusing on mechanical design, mechatronics, CAD design, mold design and welding. Quality control is an important aspect of the team’s work and ensuring quality at every stage of the process has been a key driver in maintaining and developing brand value for the Company.

 

Our Intellectual Property

 

We rely on our technology patents to protect our domestic business interests and ensure our competitive position in our industry. The issued patents we hold are as follows:

 

No.   Patent Name   Owner   Category   Patent Code.   Authorization Date
1.   Anti vibration groove   Zhejiang Zhengkang   Design Patent   2016303899813   12/21/2016
2.   Anti vibration groove connector for pipeline   Zhejiang Zhengkang   Utility Models Patent   2016208805658   01/18/2017
3.   High strength tensile mechanical compression type pipe joint   Zhejiang Zhengkang   Utility Models Patent   2016204183044   09/21/2016
4.   Tensile elastic ring   Zhejiang Zhengkang   Utility Models Patent   2016204163036   09/21/2016
5.   Special joint for gas   Zhejiang Zhengkang   Utility Models Patent   2016204209275   09/21/2016
6.   Self sealing ring   Zhejiang Zhengkang   Utility Models Patent   2016204162993   11/23/2016
7.   Warm jacket (45 degree elbow)   Zhejiang Zhengkang   Design Patent   2016300576444   07/20/2016
8.   Articulated bellows   Zhejiang Zhengkang   Utility Models Patent   2016201606371   07/27/2016
9.   Stainless steel pipe warm jacket   Zhejiang Zhengkang   Utility Models Patent   2016201606102   07/27/2016
10.   A new type of metal pipe fitting   Zhejiang Zhengkang   Utility Models Patent   2016201585303   07/27/2016
11.   Three way warm jacket   Zhejiang Zhengkang   Design Patent   2016300576459   07/27/2016

 

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12.   Warm jacket (90 degree elbow)   Zhejiang Zhengkang   Design Patent   2016300576463   07/27/2016
13.   Direct thermal cover   Zhejiang Zhengkang   Design Patent   2016300576482   09/07/2016
14.   Thin wall compression type metal pipe fitting type O sealing ring   Zhejiang Zhengkang   Utility Models Patent   2015202071764   08/05/2015
15.   Internal expansion type stainless steel pipe mouth shaping device   Zhejiang Zhengkang   Utility Models Patent   2015202074989   08/05/2015
16.   Full automatic stainless steel pipe high pressure water pressure testing machine   Zhejiang Zhengkang   Utility Models Patent   2015202070687   08/05/2015
17.   An elbow pipe automatic flat head machine   Zhejiang Zhengkang   Utility Models Patent   2015202072894   08/05/2015
18.   Full automatic steel pipe air tightness detecting machine   Zhejiang Zhengkang   Invention Patent   2014100189333   03/02/2016 
19.   Full automatic steel pipe air tightness detection device   Zhejiang Zhengkang   Utility Models Patent   2014200253551   06/25/2014
20.   Loading device of full automatic steel pipe air tightness testing machine   Zhejiang Zhengkang   Utility Models Patent   2014200262086   07/16/2014
21.   Material distributing device of full automatic steel pipe air tightness detecting machine   Zhejiang Zhengkang   Utility Models Patent   2014200261789   07/16/2014
22.   Multi-station semiautomatic fitting former   Zhejiang Zhengkang   Invention Patent   201310251507X   2015.08.26
23.    Double-cone double-clamp metal pipeline connecting piece   Zhejiang Zhengkang   Utility Models Patent   2013203622036   12/18/2013
24.    Semi-automatic multi-station pipe fitting forming machine   Zhejiang Zhengkang   Utility Models Patent   2013203622017   12/18/2013
25.   Pressing Former of Metal Pipe Fitting   Zhejiang Zhengkang   Invention Patent   200820035558.3   05/06/2009
26.    Convex-ring-free self-locking and hermetic-connecting device for thin-walled stainless steel pipe   Zhejiang Zhengkang   Utility Models Patent   2011202296878   01/11/2012
27.    LGSSP connecting piece without bulge loop and adopting self-locking sealing   Zhejiang Zhengkang   Utility Models Patent   2011202296806   02/15/2012
28.   Inner lining clamping press composite tube connecting pieces   Zhejiang Zhengkang   Utility Models Patent   2007201276813   07/23/2008

 

We have pending patents under application, as listed below:

 

No.   Patent Name   Owner   Category   Patent Code.   Application Date
1.   Nodal pattern bellows closes   Zhejiang Zhengkang   Invention Patent   201610118690.X   03/02/2016
2.   High-strength tensile mechanical pressure connection type pipe joint   Zhejiang Zhengkang   Invention Patent   201610305313.7   05/10/2016
3.   Automatic faced machine of elbow pipe   Zhejiang Zhengkang   Invention Patent   2015101648139   04/08/2015

 

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Description of Chinese Patent Categories:

 

Invention patents

 

As in Europe, this type of patent is granted for new technical solutions or improvements to a product or a process with practical applicability.

 

Utility patents

 

Granted for new technical solutions or improvement with a lower degree of ‘inventiveness’ than Invention patents, i.e., products with a new shape or structural physical features. Utility Models are also sometimes called ‘Utility Patents’ or ‘Petty Patents’ in other countries.

 

Design patents

 

Granted for innovations in the external features of a product, encompassing any of the following features: Shape; Pattern; Shape and Pattern; Shape and Color; Shape, Pattern and Color. Innovations must also be “fit for industrial application” (i.e., specifically usable by industry, producible in batches, etc.). 

 

Trademarks

 

In addition, we have the right to use the following trademark registrations issued in the PRC, all of which are held by the Zhejiang Zhengkang:

 

No.   Registrant   Trademark   Category   Certificate
Code
  Valid Through   Application Area
1   Zhengkang Industrial Co., Ltd.     6    4482840  

2008.2.14-

2018.2.13

  Metal Sheet and Plate, Metal Door Panel, Metal Binding Strap, Metal Flange, Metal Signboard, Metal Electrode

 

51  

 

 

2   Zhengkang Industrial Co., Ltd.     6    5584098  

2009.6.28-

2019.6.27

  Metal Sheet and Plate, Metal Pipe, Metal Partition Board, Metal Door, Metal Lock, Metal Band Hoop, Metal Screws, Metal Signboard, Metal Flange, Metal Electrode
                         
3   Zhengkang Industrial Co., Ltd.     6    5584100  

2009.10.21-

2019.10.20

  Metal Sheet and Plate, Metal Partition Board, Metal Binding Strap, Metal Screws, Metal Signboarb, Metal Strecther, Metal Electrode
                         
4   Zhengkang Industrial Co., Ltd.     11    5584101  

2009.8.14-

2019.8.13

  Faucet, Pipe Tap, Water Distribution Equipment, Pipeline of Medical Equipment, Plumbing Pipe and Fitting, Water Drainage Equipment, Mixer Tap, Running Water Coordination Equipment
                         
5   Zhengkang Industrial Co., Ltd.     6    5646751  

2009.7.14-

2019.7.13

  Metal Pipe, Steel Bar, Metal Signboard, Railway Metal Material, Metal Clip (for cable or pipe), Metal Mould, Metal Electrode, Iron Ores, Bronze Artwork, Metal Mooring Bollards  

 

52  

 

 

6   Zhengkang Industrial Co., Ltd.     41    7034175  

2010.10.14-

2020.10.13

  School (Education) , Training, Meeting Arrangement, Book Publication, Club Service (Entertainment or Education), TV Programme Production, Lottery
                         
7   Zhengkang Industrial Co., Ltd.     39    7034176  

2010.10.14-

2020.10.13

  Transportation,MarineTransportation, Truck Transportation, Air Transportation, Car Rental, Storage, Express Delivery, Travelling Agency, Pipe Transportation
                         
8   Zhengkang Industrial Co., Ltd.     28    7034178  

2010.12.28-

2020.12.27

  Christmas Tree with Synthetic Material, Fishing Tackle, Fishing Pole, Swimming Pool
                         
9   Zhengkang Industrial Co., Ltd.     20    7034179  

2010.10.28-

2020.10.27

  Plastic Elbow Pipe, Glass Mirror, Non-metal Plate, Drinking Straw, Non-metal Furniture Component, Non-metal Door Component

 

53  

 

 

10   Zhengkang Industrial Co., Ltd.     18    7034180  

2011.06.07-

2021.06.06

  Leather Bag, Handbag, Travelling Coat Pocket, Umbrella, Umbrella Cover, Crutch, Leather Belt, Sausage Casing
                         
11   Zhengkang Industrial Co., Ltd.     17    7034181  

2010.11.14-

2020.11.13

  Synthetic Rubber, Synthetic Resin, Asbestos Sole, Electro Insulating Material, Packge Rubber Bag, Firehose, Latex, Plexiglass
                         
12   Zhengkang Industrial Co., Ltd.     12    7034182  

2010.6.14-

2020.6.13

  Railway Carriage Couplings, Air Pump, Small-size Vehicle, Bicycl, Aerial Conveyer, Luggage Carrier, Sleigh Car, Vehicle Tire, Ferry
                         
13   Zhengkang Industrial Co., Ltd.     8    7034183  

2010.10.7-

2020.10.6

  Abrasive Tool, Garden Tool, Fish Spear, Shaver, Drills, Threader, Sculpting Tool, Scissor, Tableware

 

54  

 

 

14   Zhengkang Industrial Co., Ltd.       42    7086004  

2011.2.21-

2020.2.20

  Land Vehicle, Meteorological Info, Vehicle Performance Inspection, Package Design, Interior Design
                         
15   Zhengkang Industrial Co., Ltd.       7    7086005  

2010.7.14-

2020.7.13

  Vehicle Engine Radiator Tube, Machine Tool, Steam Elbow Pipe, Die-casting Mould, Sewing Machine, Leather-working Machine, Agricultural Machinery
                         
16   Zhengkang Industrial Co., Ltd.       45    7086006  

2010.8.7-

2020.8.6

  Security Surveillance, Security Consulting, Dress Rental, Lock Pick, Firefighting, Intellectual Property Consulting, IP License,  Software License
                         
17   Zhengkang Industrial Co., Ltd.       36    7086007  

2010.9.7-

20209.6

  Life Insurance, Insurance Consulting, Financial Loan, Security Trade Information, Artwork Appraisal, Guarantee, Charitable Fund Raising, Pawn Brokerage, Cerdit Card Service

 

55  

 

 

18   Zhengkang Industrial Co., Ltd.       6    7089246  

2010.7.7-

2020.7.6

  Metal Sheet and Plate, Metal Water Pipe, Metal Door Panel, Metal Valve, Metal Lock, Metal Band Hoop, Metal Screws, Metal Signboard, Metal Flange, Metal Pipe
                         
19   Zhengkang Industrial Co., Ltd.       6    7154484  

2010.7.21-

2020.7.20

  Metal Sheet and Plate, Metal Water pipe, Metal Door Panel, Metal Valve, Metal Lock, Metal Band Hoop, Metal Screws, Metal Signboard, Metal Flange, Metal Pipe
                         
20   Zhengkang Industrial Co., Ltd.       6    7287954  

2010.12.21-

2020.12.20

  Metal Sheet and Plate, Metal Water pipe, Metal Door Panel, Metal Lock, Metal Band Hoop, Metal Screws, Metal Signboard, Metal Flange, Metal Pipe
                         
21   Zhengkang Industrial Co., Ltd.       6    14997890   2015.8.7-2025.8.6   Metal Water pipe, Metal Door, Metal Binding Strap, Metal Screws, Metal Flange, Metal Sealing Cap, Metal Signboard, Metal Electrode

 

56  

 

 

Our Employees 

 

As of May 23, 2017, we employ a total of 347 employees working in departments including 5 within management, 10 within the Research and Development Department, 202 within the Production Department, 80 within the Sales Department and 50 within the Administrative Support Department. Our employees are not represented by a labor organization or covered by a collective bargaining agreement. We have not experienced any work stoppages. We are required under PRC law to make contributions to employee benefit plans at specified percentages of our after-tax profit. In addition, we are required by PRC law to cover employees in China with various types of social insurance. All of our employees are covered by worker compensation insurance arising from any job-related injuries. With respect to retirement benefits, as most of our employees are from other cities outside of Wenzhou where their retirement insurance are registered locally at their respective hometowns. The authorities in Wenzhou has instead required companies in Wenzhou to increase their coverage for Migrant Workers Medical Insurance in order to improve workers’ employment welfare. We have 318 employees, of which 32.79% of employees are covered by the five statutory social benefits, and 13.31% are covered by Migrant Workers Medical Insurance. Companies are not required to make contribution to the local Housing Pension in Wenzhou for the employees and since most employees are from other regions outside of Wenzhou, most of them have opted out. Currently, we are making contribution to the Housing Pension for six employees. Generally, we believe that we are in material compliance with the relevant PRC employment laws.

 

Legal Proceedings

 

Except as set forth below and disclosed elsewhere in the prospectus, currently there is no legal proceeding pending or threatened against to which we are a party of. However, from time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise.

 

During 2010, we entered into two loan agreements with Raozhou Dianli Ltd and Xianjin Cao, and advanced RMB 9 million on the first loan and RMB 1.5 million on the second loan, totaled TMB 10.5 million (approximately USD 1.52 million). The terms of these two loans are both one year. Both borrowers defaulted without making any repayment when the terms expired. We later sued these two parties and, pursuant to the final judgement ruled by Jiangsu High People’s Court, are entitled to a repayment of RMB 10.5 million plus interest with an interest rate that is four times higher than the normal interest rate in the corresponding period. The claim has been secured by real estate assets of Raozhou Dianli Ltd, which has been seized by the Court and has an appraised value of RMB 78 million, or about USD 11.3 million, which is much higher than our claim. We are listed as the first-in-line creditor and the management believes that we will receive repayment of RMB 10.5 million plus the outstanding interest. We recorded the entire RMB 10.5 million as Other Receivable. As of September 30, 2016 and 2015, the outstanding balance is RMB 7.4 million (USD 1.1 million) and RMB 8.9 million (USD 1.4 million), respectively.

 

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Chinese Laws and Regulations

  

Regulation on Product Liability

 

Manufacturers and vendors of defective products in the PRC may incur liability for losses and injuries caused by such products. Under the General Principles of the Civil Laws of the PRC, which became effective on January 1, 1987 and were amended on August 27, 2009, manufacturers or retailers of defective products that cause property damage or physical injury to any person will be subject to civil liability.

 

In 1993, the General Principles of the PRC Civil Law were supplemented by the Product Quality Law of the PRC (as amended in 2000 and 2009) and the Law of the PRC on the Protection of the Rights and Interests of Consumers (as amended in 2009), which were enacted to protect the legitimate rights and interests of end-users and consumers and to strengthen the supervision and control of the quality of products. If our products are defective and cause any personal injuries or damage to assets, our customers have the right to claim compensation from us.

 

The PRC Tort Law was promulgated on December 26, 2009 and became effective from July 1, 2010. Under this law, a patient who suffers injury from a defective medical device can claim damages from either the medical institution or the manufacturer of the defective device. If our pipe products and installation and construction services injure a patient, and if the patient claims damages from the medical institution, the medical institution is entitled to claim repayment from us. Pursuant to the PRC Tort Law, where a personal injury is caused by a tort, the tortfeasor shall compensate the victim for the reasonable costs and expenses for treatment and rehabilitation, as well as death compensation and funeral costs and expenses if it causes the death of the victim. There is no cap on monetary damages the plaintiffs may seek under the PRC Tort Law.

 

Regulation on Foreign Exchange Control

 

Foreign exchange in China is primarily regulated by: 

 

  · The Foreign Currency Administration Regulations (1996), as amended on January 14, 1997 and August 5, 2008; and

 

  · The Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), or the Administration Rules.

 

Under the Foreign Currency Administration Regulations, the Renminbi is convertible for current account items, including the distribution of dividends, interest payments and trade and service-related foreign exchange transactions. Conversion of Renminbi into foreign currency for capital account items, such as, loans, investment in securities and repatriation of investments, however, remains subject to the registration of the SAFE or its local counterparts as required by law. Under the Administration Rules, foreign-invested enterprises may buy, sell and remit foreign currencies at banks authorized to conduct foreign exchange transactions for settlement of current account transactions after providing valid commercial documents and, in the case of capital account item transactions, only after registration with the SAFE and, as the case may be, other relevant PRC government authorities as required by law. Capital investments directed outside of China by foreign-invested enterprises are also subject to restrictions, which include registration filing with MOFCOM. If the investment is made to the sensitive countries, districts, or industries, it needs to be approved by MOFCOM.

 

The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions. The conversion of Renminbi into foreign currencies, including U.S. dollars, has been based on rates set by the People’s Bank of China. On July 21, 2005, the PRC government changed its policy of pegging the value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi will be permitted to fluctuate within a band against a basket of certain foreign currencies. We receive a significant portion of our revenue in Renminbi, which is not a freely convertible currency. Under our current structure, our income will be primarily derived from dividend payments from our subsidiaries in China. Even though we may remit the income from China to anywhere we want, the fluctuation of exchange rate may be a disadvantage to us if Renminbi depreciated.

 

Regulation on Foreign Exchange Registration of Offshore Investment by PRC Residents

 

The Notice on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, promulgated by SAFE on July 14, 2014 and designed to replace the former circular commonly known as “Notice 75”, requires registration of PRC residents with local branches of SAFE with respect to their direct establishment or indirect control of an offshore entity (referred to in Notice 37 as “special purpose vehicle.”), where such offshore entity are established for the purpose of overseas investment or financing, provided that PRC residents contribute their legally owned assets or equity into such entity.

 

58  

 

 

Notice 37 further requires amendment to the registration where any significant changes with respect to the special purpose vehicle capitalization or structure of the PRC resident itself (such as capital increase, capital reduction, share transfer or exchange, merger or spin off).

 

Regulation on Dividend Distributions

 

Our PRC subsidiary, Wenzhou Weijia, is a wholly foreign-owned enterprise under the PRC law. The principal regulations governing the distribution of dividends paid by wholly foreign-owned enterprises include:

 

  · Corporate Law (1993) as amended in 2005 and 2013;

 

  · The Wholly Foreign-Owned Enterprise Law (1986), as amended in 2000;

 

  · The Wholly Foreign-Owned Enterprise Law Implementation Regulations (1990), as amended in 2001; and

 

  · The Enterprise Income Tax Law (2007) and its Implementation Regulations (2007).

 

Under these regulations, wholly foreign-owned enterprises in China may pay dividends only out of their accumulated profits, if any, as determined in accordance with PRC accounting standards and regulations. In addition, an enterprise in China is required to set aside at least 10% of its after-tax profit based on PRC accounting standards each year to its general reserves until its cumulative total reserve funds reaches 50% of its registered capital. Our Company’s reserve fund has not yet reached this level. The board of directors of a wholly foreign-owned enterprise has the discretion to allocate a portion of its after-tax profits to its employee welfare and bonus funds. These reserve funds, however, may not be distributed as cash dividends.

 

On March 16, 2007, the National People’s Congress enacted the Enterprise Income Tax Law, and on December 6, 2007, the State Council issued the Implementation Regulations on the Enterprise Income Tax Law, both of which became effective on January 1, 2008. Under this law and its implementation regulations, dividends payable by a foreign-invested enterprise in the PRC to its foreign investor who is a non-resident enterprise will be subject to a 10% withholding tax, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with the PRC that provides for a lower withholding tax rate. See “Taxation.”

 

M&A Rules and Regulation on Overseas Listings

 

On August 8, 2006, six PRC regulatory agencies, MOFCOM, the State Assets Supervision and Administration Commission, the State Administration for Taxation, the State Administration for Industry and Commerce, CSRC and SAFE, jointly adopted the Regulation on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, which became effective on September 8, 2006. The M&A Rules purport, among other things, to require that offshore SPVs that are controlled by PRC companies or individuals and that have been formed for overseas listing purposes through acquisitions of PRC domestic interests held by such PRC companies or individuals, obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock exchange. On September 21, 2006, the CSRC published a notice on its official website specifying documents and materials required to be submitted to it by SPVs seeking CSRC approval of their overseas listings.

 

While the application of the M&A Rules remains unclear, our PRC counsel, Gaopeng & Partners, have advised us that, based on their understanding of the current PRC laws and regulations as well as the notice announced on September 21, 2006:

 

  · the CSRC currently has not issued any definitive rule or interpretation concerning whether offerings such as our offering are subject to the CSRC approval procedures under the M&A Rules; and

  · despite the lack of any definitive rule or interpretation from CSRC, the main purpose of the M&A rule is for national security and national industrial policy and so far none of the Chinese companies that have completed their public listing in the U.S. have obtained such approval; and

  · Our business operations in China do not belong to a prohibited industry by foreign investment; and

  · Our M&A to our Chinese subsidiary companies have all obtained properly the approval from local governmental authorizations; and

  · Our BVI company is not established by a Chinese citizen. Accordingly, although the purpose of BVI incorporation is for overseas listing, the M&A rule should not apply to us.

 

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Our PRC counsel also advises us, however, that there is still uncertainty as to how the M&A Rules will be interpreted and implemented. If the CSRC or other PRC regulatory agencies, subsequently determine that CSRC approval was required for this offering, we may need to apply for remedial approval from the CSRC and we may be subject to penalties and administrative sanctions administered by these regulatory agencies. These regulatory agencies may impose fines and penalties on our operations in the PRC, limit our operating privileges in the PRC, delay or restrict the repatriation of the proceeds from this offering into the PRC, or take other actions that could materially adversely affect our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our Ordinary Shares. The CSRC or other PRC regulatory agencies may also take actions requiring us, or making it advisable for us, to halt this offering before settlement and delivery of our Ordinary Shares. Consequently, even though our PRC counsel believes the probability for the aforementioned actions is small, if you engage in market trading or other activities in anticipation of, and prior to, settlement and delivery, you do so at the risk settlement and delivery may not occur.

 

In addition, if the CSRC later requires that we obtain its approval for this offering, we may be unable to obtain a waiver of the CSRC approval requirements, if and when procedures are established to obtain such a waiver. Any uncertainties or negative publicity regarding the CSRC approval requirements could have a material adverse effect on the trading price of our Ordinary Shares.

 

Restriction on Foreign Ownership

 

The principal regulation governing foreign ownership of businesses in the PRC is Guidance Catalogue for Industrial Structure Adjustments (2015 edition), effective as of April 10, 2015 (the “Catalogue”). The Catalogue classifies the various industries into three categories: encouraged, restricted and prohibited. Our company’s primary market is the hardware manufacturing industry. We are not engaged in any activities placing us in the encouraged, restricted or prohibited categories and so it could be inferred that we are engaged in a permitted industry for foreign investment. Such a designation offers businesses certain advantages. For example, businesses engaged in permitted industries:

 

  · are not subject to restrictions on foreign investment, and, as such, foreigners can own a majority interest in Sino-foreign joint ventures or establish wholly-owned foreign enterprises in the PRC;

  · provided such business has total investment of less than $100 million, are subject to regional (not central) government examination and approval which are generally more efficient and less time-consuming. Our current total investment is less than $100 million.

 

The National Development and Reform Commission and MOFCOM periodically jointly revise the Foreign Investment Industrial Guidance Catalogue. As such, there is a possibility that our company’s business may fall outside the scope of the definition of a permitted industry in the future. Should this occur, we would no longer benefit from such designation.

 

On January 19, 2015, China’s Ministry of Commerce issued a draft Foreign Investment Law. The effective date of the official publication of the law is yet unknown. In the draft, foreign investment in China will be classified into three categories: prohibited, restricted, and others. This idea of classification is similar as previously published Catalogue. If the foreign investment falls in the areas that are closely related to national security, then it will be prohibited; if the investment may have some impact on national security but could be controlled through conditions, then it can be done with restrictions or qualifications; if the investment falls outside of those two categories, then it will not need approval from China government to operate in China.

 

According to the current Catalogue, our company’s business does not fall in any prohibited or restricted industries. If China’s Ministry of Commerce adopts a list as same as the Catalogue along with the draft, the draft will have very limited impact on our business, if any. The probability that our business will be classified as prohibited or restricted industry is very low. However, If China’s Ministry of Commerce adopts a list by our business is prohibited or restricted, and it treats our business in China as foreign investment by deciding our actual controller is Mr. Jiancong Huang who is not a Chinese citizen, we may face certain restrictions or even be prohibited to conduct business in China.

 

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Regulations on Offshore Parent Holding Companies’ Direct Investment in and Loans to Their PRC Subsidiaries

 

An offshore company may invest equity in a PRC company, which will become the PRC subsidiary of the offshore holding company after investment. Such equity investment is subject to a series of laws and regulations generally applicable to any foreign-invested enterprise in China, which include the Wholly Foreign Owned Enterprise Law, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Contractual Joint Venture Enterprise Law, all as amended from time to time, and their respective implementing rules; the Tentative Provisions on the Foreign Exchange Registration Administration of Foreign-Invested Enterprise; and the Notice on Certain Matters Relating to the Change of Registered Capital of Foreign-Invested Enterprises.

 

Under the aforesaid laws and regulations, the increase of the registered capital of a foreign-invested enterprise is subject to the prior approval by the original approval authority of its establishment. In addition, the increase of registered capital and total investment amount shall both be registered with SAIC.

 

Shareholder loans made by offshore parent holding companies to their PRC subsidiaries are regarded as foreign debts in China for regulatory purposes, which debts are subject to a number of PRC laws and regulations, including the PRC Foreign Exchange Administration Regulations, the Interim Measures on Administration on Foreign Debts, the Tentative Provisions on the Statistics Monitoring of Foreign Debts and its implementation rules, and the Administration Rules on the Settlement, Sale and Payment of Foreign Exchange.

 

Under these regulations, the shareholder loans made by offshore parent holding companies to their PRC subsidiaries shall be registered with SAFE. Furthermore, the total amount of foreign debts that can be incurred by such PRC subsidiaries, including any shareholder loans, shall not exceed the difference between the total investment amount and the registered capital amount of the PRC subsidiaries, both of which are subject to governmental approval.

 

Regulations on Trademarks

 

Trademarks are protected by the PRC Trademark Law adopted in 1982, as subsequently amended, as well as the Implementation Regulations of the PRC Trademark Law adopted by the State Council in 2002 and 2013. The Trademark Office under the SAIC handles trademark registrations. Trademarks can be registered for a term of ten years and can be extended for another ten years if requested upon expiration of the first or any renewed ten-year term. The PRC Trademark Law has adopted a "first-to-file" principle with respect to trademark registration. Where a trademark for which a registration application has been made is identical or similar to another trademark which has already been registered or been subject to a preliminary examination and approval for use on the same type of or similar commodities or services, the application for such trademark registration may be rejected. Any person applying for the registration of a trademark may not prejudice the existing right first obtained by others, nor may any person register in advance a trademark that has already been used by another party and has already gained a "sufficient degree of reputation" through such other party's use. Trademark license agreements must be filed with the Trademark Office or its regional offices. Meanwhile, we have successfully applied on our own name 21 trademarks.

 

Regulations on Patents

 

The PRC Patent Law provides for patentable inventions, utility models and designs, which must meet three conditions: novelty, inventiveness and practical applicability. The State Intellectual Property Office is responsible for examining and approving patent applications. A patent is valid for a term of twenty years in the case of an invention and a term of ten years in the case of utility models and designs. We have obtained 25 patents, all of which we have ownership of, including a number of those that were originally under the ownership of certain individuals affiliated with our Company through ownership transfer.

 

PRC Enterprise Income Tax Law and Individual Income Tax Law

 

Under the Enterprise Income Tax Law or EIT Law, enterprises are classified as resident enterprises and non-resident enterprises. PRC resident enterprises typically pay an enterprise income tax at the rate of 25%. An enterprise established outside of the PRC with its "de facto management bodies" located within the PRC is considered a "resident enterprise," meaning that it can be treated in a manner similar to a PRC domestic enterprise for enterprise income tax purposes. The implementation rules of the EIT Law define "de facto management body" as a managing body that in practice exercises "substantial and overall management and control over the production and operations, personnel, accounting, and properties" of the enterprise.

 

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The SAT Circular 82 issued by the SAT in April 2009 provides certain specific criteria for determining whether the "de facto management body" of a PRC-controlled offshore incorporated enterprise is located in China. Pursuant to the SAT Circular 82, a PRC-controlled offshore incorporated enterprise has its "de facto management body" in China only if all of the following conditions are met: (a) the senior management and core management departments in charge of its daily operations function have their presence mainly in the PRC; (b) its financial and human resources decisions are subject to determination or approval by persons or bodies in the PRC; (c) its major assets, accounting books, company seals, and minutes and files of its board and shareholders' meetings are located or kept in the PRC; and (d) more than half of the enterprise's directors or senior management with voting rights habitually reside in the PRC. The SAT Bulletin 45, in effect from September 2011, provides more guidance on the implementation of the SAT Circular 82 and provides for procedures and administration details on determining resident status and administration on post-determination matters. Although the SAT Circular 82 and the SAT Bulletin 45 only apply to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreign individuals, the determining criteria set forth there may reflect the SAT's general position on how the "de facto management body" test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises or PRC enterprise groups or by PRC or foreign individuals. 

 

Due to the lack of applicable legal precedents, it remains unclear how the PRC tax authorities will determine the PRC tax resident treatment of a foreign company controlled by individuals. We may be classified as a PRC "resident enterprise" for PRC enterprise income tax purposes. Such classification would likely result in unfavorable tax consequences to us and our non-PRC shareholders and have a material adverse effect on our results of operations and the value of your investment.

 

Regarding other local taxes and VAT tax, please see the discussion in PRC Business Tax and PRC VAT Tax sections.

 

Employment Laws

 

In accordance with the PRC National Labor Law, which became effective in January 1995, and the PRC Labor Contract Law, which became effective in January 2008, as amended subsequently in 2012, employers must execute written labor contracts with full-time employees in order to establish an employment relationship. All employers must compensate their employees equal to at least the local minimum wage standards. All employers are required to establish a system for labor safety and sanitation, strictly abide by state rules and standards and provide employees with appropriate workplace safety training. In addition, employers in China are obliged to pay contributions to the social insurance plan and the housing fund plan for employees. We have contributed to the basic and minimum social insurance plan. Due to a high employee turnover rate in our industry, it is difficult for us to comply fully with the law. While we believe we have made adequate provision of such outstanding amounts of contributions to such plans in our financial statements, any failure to make sufficient payments to such plans would be in violation of applicable PRC laws and regulations and, if we are found to be in violation of such laws and regulations, we could be required to make up the contributions for such plans as well as to pay late fees and fines.

 

Description of Property

 

There is no private land ownership in China. Individuals and entities are permitted to acquire land use rights for specific purposes. We were granted land use rights for our facilities in Wenzhou, which expires on November 30, 2052. Following is a list of our properties, all of which we own the land use rights to:

 

Property   Duration of
Land Use Rights
  Space   Ground Floor
Area

No. 678 Dingxiang Road, Binhai Industrial Park

Economic & Technology Development Zone
Wenzhou, Zhejiang Province
P.R. China 325020

  December 1, 2002 - November 30, 2052   19,427 m 2   9,600 m 2
Longlian Plaza Building #3, Yongzhong Boulevarad, 167 North Luodong Road, Suite 702, Longwan District, Wenzhou, Zhejiang Province, P.R. China   August 19, 2016 – November 12 2051   47 m 2   -

  

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Our property in No. 678 Dingxiang Road, Binhai Industrial Park, Economic & Technology Development Zone, Wenzhou, Zhejiang Province, P.R. China 325020 is our central office and manufacturing facility. At this location, we have a variety of heavy equipment required to produce our steel strips, pipes and fittings, product testing equipment and laboratory equipment for research and development. Our office in Longlian Plaza, for which ownership belongs to Wenzhou Zhengfeng, is for administrative and sales purposes and contains customary office equipment. None of our properties are encumbered by debt, and we are not aware of any environmental concerns or limitations on the use of our properties for the purposes we currently use them or intend to use them in the future.

 

Recent Capital Expenditures and Divestitures

 

The following table sets forth our principal capital expenditures and divestitures (including interests in other companies) for years ended September 30, 2016 and 2015:

 

    Years ended September 30,  
    2016     2015  
Investments in equipment   $ 123,945     $ 289,956  
Total   $ 123,945     $ 289,956  

 

The source of funds for our expenditures in the years of 2016 and 2015 were primarily from operations. All expenditures were incurred in Wenzhou.

 

Management

 

Executive Officers and Directors

 

The following table provides information regarding our executive officers and directors as of January 10:

 

Name   Age     Position(s)
Jiancong Huang   52     Chief Executive Officer and Chairman of the Board
Shaochai Yang   37     Chief Financial Officer
Di Chen   27     Secretary
Guolin Wang   46     Director
Min Ni   42     Independent Director & Chairman of the Audit Committee
Lie Cao   40     Independent Director
Linge Zhou   39     Independent Director

 

The business address of each of the officers and directors is c/o c/o Zhejiang Zhengkang Industrial Co., Ltd., No. 678 Dingxiang Road, Binhai Industrial Park, Economic and Technology Development Zone, Wenzhou, Zhejiang, P.R. China 325025.

 

Jiancong Huang . Mr. Huang is one of the co-founders of our Company and has served as the Chief Executive Officer and Chairman of the Board since the beginning. Mr. Huang has extensive experience in manufacturing industry and held President position in two companies before Zhengkang was founded. He earned his EMBA from Renmin University of China and Engineering Professional Title, and was awarded as Top10 Wenzhou Entrepreneurship and appointed to be the Vice Director of China Construction and Building Standard and Safety Committee. He is also members of National Pipe Standard Committee and National Building Water Supply and Waste Standard Committee. Mr. Huang is an experienced corporate strategist and visionary with decades of experience on corporate management and innovation. He has a systematic ideology on the future of stainless steel pipe in the water and gas supply area. We believe his influence and expertise in the industry will greatly contribute to the growth of company and industry.

 

Shaochai Yang. Ms. Yang has more than 10 years experience in accounting and financial management. Prior to joining the company, she worked as the CFO at Kaidishi Industrial from 2009 to 2016, a company focuses on developing and manufacturing electrical lock and biometric fingerprint scanner, where she oversaw the day-to-day operations of accounting department. She worked as CFO at Weiduli Valve from 2002 to 2009, a company manufacturing valve and piping products. Through years of career in accounting and management, she has acquired extensive experience in manufacturing industry from her past career in various medium to large enterprises. Ms. Yang received her Bachelor degree in business administration from China Computer Science College with the major in Accounting.

 

Di Chen. Prior to joining the company at 2017, Mr. Chen served as the Senior Associate at Pacific Seaboard Investment, a corporate advisory firm based in Canada that focuses on guiding clients through IPO, M&A and private placement investments, for two years. His position focuses on leading the team to conduct industry research, due diligence, financial consulting, and preparing regulatory reporting. From 2012 to 2014 he worked as the accounting manager in Azizmalco, a property management company in Canada, where he oversaw the accounting department of Azizmalco’s subsidiaries. He received his Bachelor degree in Commerce from Lakehead University with the major in Accounting. His past experience provided him with a solid understanding of IFRS accounting principles, corporate finance, SEC regulations, company valuation and presentation and investor relationship management.

 

Guolin Wang . Mr. Wang is one of the co-founders of our Company. Prior to co-founding our subsidiary Wenzhou Zhengfeng in 1999, he was the head of research department in Wenzhou Shuangling Stainless Steel Co., Ltd. Mr. Wang has extensive experience in stainless steel industry and business administration, and is currently in charge of Company’s technical research, production, and exporting. Mr. Wang obtained an EMBA degree from Renmin University of China and is a member of National Building Water Supply and Drainage Committee, as well as that of Wenzhou Building Material Industry Association. Mr. Wang was appointed as a Director for his industry expertise.

 

Min Ni. Mr Ni is currently serving as the partner of CAN Partners LLP, a public accounting firm with offices in both Canada and China since 2013, and as the director of Bluehill CPA, an accounting advisory firm based in China since 2011. His focus of the two positions are to provide auditing and financial services to both private and public companies, and assist companies going public to improve internal control and compliances to meet regulatory requirements. Prior to his current positions, he worked as senior auditing manager at MNP LLP from 2008 to 2011 and Duffy & Associates in Toronto from 2006 to 2008, where he focused on financial auditing, internal control assessment, financial consulting and SEC filings review. Mr Ni has extensive experience in both US GAAP and IFRS reporting frameworks, Sarbanes-Oxley compliance, and regulatory compliances. Mr Ni was designated with CA, CPA in Canada and CPA in Illinois, US and he received his MBA from Toronto University – Rotman Business School. Based on his education and employment background, we have selected Mr. Ni as a director and chairman of the Audit Committee. In addition, because of his expertise in US GAAP accounting, the Board believes that Mr. Ni qualifies as a “financial expert” as defined by the SEC rules.

 .

Lie Cao. Mr. Cao currently is the Deputy Secretary General of National Water Supply & Sewerage Standard Committee, a regulatory body setting standard to water supply & sewerage industry, and Director of China Construction Metal Structure Association - Water Supply & Sewerage Division, a national trade association representing the technology and products of Chinese water supply & sewerage industry. Mr. Cao works closely with the government to oversee the water supply and sewerage industry, review and draft industrial technical standard, promote new materials and technology, organize anti-dumping and anti-trust investigation, and organize international communication conferences for the industry. His current and previous positions have provided him with a perspective and understanding on Chinese piping industry, and his management experience offered him a broad leadership and executive experience. We believe Mr. Cao qualifies to be our director because of his industry expertise.

 

Linge Zhou . Ms. Zhou currently is the General Manager of Zhejiang Bestware, a marketing and consulting company based in Hong Kong since 2016, where she focuses on guiding clients to expand business to international markets, including America and European Union. Prior to her current position, she was the General Manager of 121 E-Commerce, a children’s fashion company, from 2013 to 2016 where she oversees the operations, branding, and supply chain of the company. Ms. Zhou possesses outstanding experience in marketing, business development and operations. We expect her joining to our board will improve our company’s branding and marketing performance and introduce our products to more foreign markets. We believe Ms. Zhou qualifies to be our director because of her experience with business operation.

 

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Election of Officers

 

Our executive officers are appointed by, and serve at the discretion of, our board of directors, including our Chief Executive Officer Jiancong Huang, Chief Financial Officer Shaochai Yang and Secretary Di Chen. There is no family relationship among any of our directors or executive officers.

 

Board of Directors

 

Our board of directors currently consists of 5 directors, a majority of whom are independent as such term is defined by the Nasdaq Capital Market. We expect that all current directors will continue to serve after this offering.

 

A director may vote in respect of any contract or transaction in which he is interested, provided, however that the nature of the interest of any director in any such contract or transaction shall be disclosed by him at or prior to its consideration and any vote on that matter. A general notice or disclosure to the directors or otherwise contained in the minutes of a meeting or a written resolution of the directors or any committee thereof of the nature of a director’s interest shall be sufficient disclosure and after such general notice it shall not be necessary to give special notice relating to any particular transaction. A director may be counted for a quorum upon a motion in respect of any contract or arrangement which he shall make with our company, or in which he is so interested and may vote on such motion.

 

Mr. Jiancong Huang currently holds the positions of Chief Executive Officer and Chairman of the Board. These three positions have not been consolidated into one position; Mr. Huang simply holds both positions at this time. We do not have a lead independent director because of the foregoing reason and also because we believe our independent directors are encouraged to freely voice their opinions on a relatively small company board. We believe this leadership structure is appropriate because we are a relatively small company in the process of listing on a public exchange; as such we deem it appropriate to be able to benefit from the guidance of Mr. Huang as both our principal executive officer and Chair of the Board. Our Board of Directors plays a key role in our risk oversight. The Board of Directors makes all relevant Company decisions. As a smaller company with a small board of directors, we believe it is appropriate to have the involvement and input of all of our directors in risk oversight matters.

 

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Corporate Governance

 

The business and affairs of the company are managed under the direction of our Board. We have conducted Board meetings regularly since inception. Each of our directors has attended all meetings either in person, via telephone conference, or through written consent for special meetings. In addition to the contact information in this prospectus, the Board has adopted procedures for communication with the officers and directors as of May 22, 2017. Stockholders will be given specific information on how he/she can direct communications to the officers and directors of the Company at our annual stockholders’ meetings. All communications from stockholders are relayed to the members of the Board.

 

Board Committees

 

We have established and adopted charters for four standing committees under the board: the audit committee, the compensation committee, the nominating committee and governance committees. Each Committee consists of only independent directors of the Company.

 

The Board also adopted an insider trading policy that allows insiders to sell securities of the Company pursuant to pre-arranged trading plans.

 

This insider trading policy was put into place because effective October 23, 2000, the Securities and Exchange Commission (the “SEC”) adopted rules related to insider trading. One of these rules, Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, provides an exemption to the insider trading rules in the form of an affirmative defense. Rule 10b5-1 recognizes the creation of formal programs under which executives and other insiders may sell the securities of publicly traded companies on a regular basis pursuant to written plans that are entered into at a time when the plan participants are not aware of material non-public information and that otherwise comply with the requirements of Rule 10b5-1.

 

The Board also adopted a written disclosure policy, which applies to all directors, officers and employees of the Company and its wholly owned subsidiaries, to ensure that communications to the investing public about the Company are timely, factual and accurate and are broadly disseminated in accordance with all applicable legal and regulatory requirements.

 

In addition, the Board adopted a whistleblower procedure that provides the Audit Committee the responsibility to ensure proper procedure of the receipt, retention, and treatment of complaints about the Company’s accounting, internal accounting controls, or auditing matters. The Audit Committee must also provide for confidential, anonymous submission by the Company’s employees of concerns about questionable accounting or auditing matters.

 

Lastly, the Board adopted a corporate governance policy for its website content, as well as procedures for shareholder’s communication with Directors. With all of the above referenced charters and procedures in place, the Company is committed to corporate governance practices that are compliance with applicable laws, regulations and exchange requirements.

 

The functions of each committee the Company formed and adopted charters for as of the date of this prospectus are described below: 

 

Audit Committee

 

The Audit Committee shall make such examinations as are necessary to monitor the corporate financial reporting and external audits of the Company and its subsidiaries; to provide to the Board the results of its examinations and recommendations derived therefrom; to outline to the Board improvements made, or to be made, in internal accounting controls; to nominate an independent auditor; and to provide to the Board such additional information and materials as it may deem necessary to make the Board aware of significant financial matters requiring Board attention.

 

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Compensation Committee

 

The purpose of the Compensation Committee is to review and make recommendations to the Board regarding all forms of compensation to be provided to the executive officers and directors of the Company, including stock compensation and loans, and all bonus and stock compensation to all employees.

 

Nomination Committee

 

The purpose of the Nomination Committee shall be to review and make recommendations to the Board regarding matters concerning corporate governance; review the composition of and evaluate the performance of the Board; recommend persons for election to the Board and evaluate director compensation; review the composition of committees of the Board and recommend persons to be members of such committees; review and maintain compliance of committee membership with applicable regulatory requirements; and review conflicts of interest of members of the Board and corporate officers.

 

Governance Committee

 

The Governance Committee shall be is responsible for developing Company’s approach to the Board and corporate governance issues; helping to maintain an effective working relationship between the Board and management; exercising, within the limits imposed by the by-laws of the Company, by applicable laws, and by the Board, the powers of the Board for the management and direction of the affairs of the Company during the intervals between meetings of the Board; reviewing and making recommendations to the Board for the appointment of senior executives of the Company and for considering their terms of employment; reviewing succession planning, matters of compensation; recommending awards under the Company’s long term and short term incentive plans; assuming the role of administrator, whether by delegation or by statute, for the corporate-sponsored registered pension plans and the Supplementary Executive Retirement Plan of the Company and its wholly-owned subsidiaries and any future, additional or replacement plans relating to the plans; and monitoring the investment performance of the trust funds for the plans and compliance with applicable legislation and investment policies.

 

Copy of our committee charters are to be posted on our corporate website at www.chinazhengkang.com

 

Duties of Directors

 

Under British Virgin Islands law, our directors have a duty to act honestly, in good faith and with a view to our best interests. Our directors also have a duty to exercise the care, diligence and skills that a reasonably prudent person would exercise in comparable circumstances. See “Description of Share Capital—Differences in Corporate Law” for additional information on our directors’ fiduciary duties under British Virgin Islands law. In fulfilling their duty of care to us, our directors must ensure compliance with our amended and restated memorandum and articles of association. We have the right to seek damages if a duty owed by our directors is breached.

 

The functions and powers of our board of directors include, among others:

 

  · appointing officers and determining the term of office of the officers;
  · authorizing the payment of donations to religious, charitable, public or other bodies, clubs, funds or associations as deemed advisable;
  · exercising the borrowing powers of the company and mortgaging the property of the company;
  · executing checks, promissory notes and other negotiable instruments on behalf of the company; and
  · maintaining or registering a register of mortgages, charges or other encumbrances of the company.

 

Interested Transactions

 

A director may vote, attend a board meeting or sign a document on our behalf with respect to any contract or transaction in which he or she is interested. A director must promptly disclose the interest to all other directors after becoming aware of the fact that he or she is interested in a transaction we have entered into or are to enter into. A general notice or disclosure to the board or otherwise contained in the minutes of a meeting or a written resolution of the board or any committee of the board that a director is a shareholder, director, officer or trustee of any specified firm or company and is to be regarded as interested in any transaction with such firm or company will be sufficient disclosure, and, after such general notice, it will not be necessary to give special notice relating to any particular transaction.

 

Remuneration and Borrowing

 

The directors may receive such remuneration as our board of directors may determine from time to time. Each director is entitled to be repaid or prepaid all traveling, hotel and incidental expenses reasonably incurred or expected to be incurred in attending meetings of our board of directors or committees of our board of directors or shareholder meetings or otherwise in connection with the discharge of his or her duties as a director. The compensation committee will assist the directors in reviewing and approving the compensation structure for the directors. Our board of directors may exercise all the powers of the company to borrow money and to mortgage or charge our undertakings and property or any part thereof, to issue debentures, debenture stock and other securities whenever money is borrowed or as security for any debt, liability or obligation of the company or of any third party.

 

Qualification

 

There are no membership qualifications for directors. Further, there are no share ownership qualifications for directors unless so fixed by us in a general meeting. There are no other arrangements or understandings pursuant to which our directors are selected or nominated.

 

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Director Compensation

 

All directors hold office until the next annual meeting of shareholders at which their respective class of directors is re-elected and until their successors have been duly elected and qualified. Officers are elected by and serve at the discretion of the Board of Directors. Employee directors do not receive any compensation for their services. Non-employee directors are entitled to receive an as-yet undetermined cash fee for serving as directors and may receive option grants from our company. In addition, non-employee directors are entitled to receive compensation for their actual travel expenses for each Board of Directors meeting attended.

 

Limitation of Director and Officer Liability

 

Under British Virgin Islands law, each of our directors and officers, in performing his or her functions, is required to act honestly and in good faith with a view to our best interests and exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. British Virgin Islands law does not limit the extent to which a company’s memorandum and articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the British Virgin Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime.

  

Under our memorandum and articles of association, we may indemnify our directors, officers and liquidators against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred in connection with civil, criminal, administrative or investigative proceedings to which they are party or are threatened to be made a party by reason of their acting as our director, officer or liquidator. To be entitled to indemnification, these persons must have acted honestly and in good faith with a view to the best interest of the company and, in the case of criminal proceedings, they must have had no reasonable cause to believe their conduct was unlawful. Such limitation of liability does not affect the availability of equitable remedies such as injunctive relief or rescission. These provisions will not limit the liability of directors under United States federal securities laws.

 

We may indemnify any of our directors or anyone serving at our request as a director of another entity against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred in connection with legal, administrative or investigative proceedings. We may only indemnify a director if he or she acted honestly and in good faith with the view to our best interests and, in the case of criminal proceedings, the director had no reasonable cause to believe that his or her conduct was unlawful. The decision of our board of directors as to whether the director acted honestly and in good faith with a view to our best interests and as to whether the director had no reasonable cause to believe that his or her conduct was unlawful, is in the absence of fraud sufficient for the purposes of indemnification, unless a question of law is involved. The termination of any proceedings by any judgment, order, settlement, conviction or the entry of no plea does not, by itself, create a presumption that a director did not act honestly and in good faith and with a view to our best interests or that the director had reasonable cause to believe that his or her conduct was unlawful. If a director to be indemnified has been successful in defense of any proceedings referred to above, the director is entitled to be indemnified against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred by the director or officer in connection with the proceedings.

 

We may purchase and maintain insurance in relation to any of our directors or officers against any liability asserted against the directors or officers and incurred by the directors or officers in that capacity, whether or not we have or would have had the power to indemnify the directors or officers against the liability as provided in our amended and restated memorandum and articles of association.

 

Insofar as indemnification for liabilities arising under the Securities Act may be permitted for our directors, officers or persons controlling our company under the foregoing provisions, we have been informed that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

 

Involvement in Certain Legal Proceedings

 

To the best of our knowledge, none of our directors or officers has been convicted in a criminal proceeding, excluding traffic violations or similar misdemeanors, nor has any been a party to any judicial or administrative proceeding during the past five years that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities laws, except for matters that were dismissed without sanction or settlement. Except as set forth in our discussion below in “Related Party Transactions,” our directors and officers have not been involved in any transactions with us or any of our affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the SEC.

 

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Code of Business Conduct and Ethics

 

We have adopted a code of ethics as of the date of this prospectus that applies to our principal executive officer, principal financial officer, directors and principal accounting officer as well as our employees. Our standards are in writing and are to be posted on our website at www.chinazhengkang.com   at a future time. The following is a summation of the key points of the Code of Ethics we adopted:

 

  Honest and ethical conduct, including ethical handling of actual or apparent conflicts of interest between personal and professional relationships;

 

  Full, fair, accurate, timely, and understandable disclosure reports and documents that a small business issuer files with, or submits to, the Commission and in other public communications made by our Company;

 

  Full compliance with applicable government laws, rules and regulations;

 

  The prompt internal reporting of violations of the code to an appropriate person or persons identified in the code; and

 

  Accountability for adherence to the code.

 

Executive Compensation

 

Effective on May 22, 2017, our compensation committee is responsible to determine the compensation to be paid to our executive officers based on our financial and operating performance and prospects, and contributions made by the officers’ to our success. Each of the named officers will be measured by a series of performance criteria by the board of directors, or the compensation committee on a yearly basis. Such criteria will be set forth based on certain objective parameters such as job characteristics, required professionalism, management skills, interpersonal skills, related experience, personal performance and overall corporate performance.

 

Our compensation committee has adopted a charter for determining the amount of compensation paid to our executive officers. The compensation committee will make an independent evaluation of appropriate compensation to key employees, with input from management and has oversight of executive compensation plans, policies and programs.

  

Summary Compensation Table

 

The following table presents summary information regarding the total compensation awarded to, earned by, or paid to each of the named executive officers for services rendered to us for the year ended September 30, 2016 and 2015.  

 

Name and Principal Position   Fiscal Year   Salary ($)     Bonus ($)     Stock
Awards ($)
    All Other
Compensation ($)
    Total ($)  
Jiancong Huang (1)   2016     71,428       0       0       0       71,428  
Chief Executive Officer   2015     50,000       0       0       0       50,000  
Shaochai Yang (2)   2016     15,428       3,514       0       0       18,942  
Chief Financial Officer   2015     0       0       0       0       0  
Di Chen   2016     0       0       0       0       0  
Secretary   2015     0       0       0       0       0  

 

(1) We entered into an indefinite employment agreement with Jiancong Huang on April 15, 2016. Pursuant to the agreement, Mr. Huang has accepted the position of Chief Executive Officer and we have agreed to pay Mr. Huang an annual salary of RMB 500,000 (approximately US$71,428).
(2) We entered into a three-year employment agreement with Shaochai Yang on February 4, 2017. Pursuant to the agreement, Ms. Yang has accepted the position of Chief Financial Officer and we have agreed to pay Ms. Yang an annual salary of RMB 108,000 (approximately US$15,428) with additional annual bonus and/or allowance of RMB 24,600 (US$3,514).

  (3) We entered into a three-year employment agreement with Di Chen on January 1, 2017. Pursuant to the agreement, Mr. Chen has accepted the position of Secretary and we have agreed to pay Mr. Chen an annual salary of RMB 48,000 (approximately US$6,857) with additional annual bonus and/or allowance of RMB 24,000 (US$2,857).

 

Employment Agreements

 

Our employment agreements with our officers generally provide for employment for a specific term (typically approximately three years at a time) and pay annual salary, health insurance, pension insurance, and paid vacation and family leave time. The agreement may be terminated by either party as permitted by law. In the event of any termination of the agreement by our company that results in violation of applicable labor laws, we shall pay the employee all damages incurred from such termination. In the event of a breach or termination causing loss to our company by the employee, the employee shall pay all economic loss we had incurred as a result.

 

Director Compensation—Fiscal 2016 and 2015

 

During fiscal 2016 and 2015, no members of our Board of Directors received compensation in their capacity as directors.

 

Director Compensation—Non-Employee Directors

 

On May 10, 2017, we entered into service agreement with our independent directors. We have agreed to pay Lie Cao and Linge Zhou cash compensation of $12,000 per year and our audit committee chairman Min Ni cash compensation of $15,200 per year. For the years ended September 30, 2016 and 2015, we did not pay any non-employee directors because we did not have any non-employee directors.

 

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Related Party Transactions

 

In addition to the executive officer and director compensation arrangements discussed in “Executive Compensation,” below we describe transactions since October 1, 2013, to which we have been a participant, in which the amount involved in the transaction is material to our company and in which any of the following is a party: (a) enterprises that directly or indirectly through one or more intermediaries, control or are controlled by, or are under common control with, our Company; (b) associates; (c) individuals owning, directly or indirectly, an interest in the voting power of our Company that gives them significant influence over our Company, and close members of any such individual’s family; (d) key management personnel, that is, those persons having authority and responsibility for planning, directing and controlling the activities of our Company, including directors and senior management of companies and close members of such individuals’ families; and (e) enterprises in which a substantial interest in the voting power is owned, directly or indirectly, by any person described in (c) or (d) or over which such a person is able to exercise significant influence.

 

Net amounts due to related parties consisted of the following as of September 30, 2016 and 2015 :

 

Accounts   Name of related party   September 30,  
        2016     2015  
Related party payables   Shareholder, HUANG Jian Cong   $ 1,662,160     $ 219,573  
Total       $ 1,662,160     $ 219,573  

 

This represented unsecured, interest free borrowings between the Company and the shareholders.

 

In September 2015, Wenzhou Weijia acquired 99% equity percentage of Zhejiang Zhengkang and Zhejiang Zhengkang acquired 100% equity percentage of Wenzhou Zhengfeng from their previous shareholders with acquisition amount at par of $3,112,571 (RMB 19,800,000) and $452,738 (RMB 2,880,000) respectively. These acquisition costs have not been paid out, the acquisition was done via contracts and industrial and commercial registration. Considering the condition, the acquisition cost was recorded in additional paid-in capital in the consolidated financial statements.

 

Principal Shareholders

 

The following table sets forth information with respect to beneficial ownership of our Ordinary Shares as of May 24, 2017 by:

 

  · Each person who is known by us to beneficially own more than 5% of our outstanding Ordinary Shares;
  · Each of our director, director nominees and named executive officers; and
  · All directors and named executive officers as a group.

 

The number and percentage of Ordinary Shares beneficially owned before the completion of the offering are based on 12,000,000 Ordinary Shares issued and outstanding as of May 24, 2017. We have effectuated the Recapitalization by i) reducing our par value from $1 per ordinary share to no par value, ii) completing a 180:1 forward stock split whereby every authorized, issued and outstanding ordinary share was exchanged for 180 new ordinary shares, and iii) increasing our authorized shares from 9,000,000 to 50,000,000 ordinary shares. We have issued an aggregate of 3,000,000 Ordinary Shares in connection with three rounds of private placements. Information with respect to beneficial ownership has been furnished by each director, officer or beneficial owner of more than 5% of our Ordinary Shares. Beneficial ownership is determined in accordance with the rules of the SEC and generally requires that such person have voting or investment power with respect to securities. In computing the number of Ordinary Shares beneficially owned by a person listed below and the percentage ownership of such person, Ordinary Shares underlying options, warrants or convertible securities held by each such person that are exercisable or convertible within 60 days of May 24, 2017 are deemed outstanding, but are not deemed outstanding for computing the percentage ownership of any other person. Except as otherwise indicated in the footnotes to this table, or as required by applicable community property laws, all persons listed have sole voting and investment power for all Ordinary Shares shown as beneficially owned by them. Unless otherwise indicated in the footnotes, the address for each principal shareholder is in the care of our Company at No. 678 Dingxiang Road, Binhai Industrial Park, Economic & Technology Development Zone, Wenzhou, P.R. China 325020. As of the date of the Prospectus, we have seventeen (17) shareholders of record. 

 

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Named Executive Officers and Directors   Amount of
Beneficial
Ownership  (1)
    Pre-Offering
Percentage
Ownership (2)
    Post-
Minimum
Offering
Percentage
Ownership
    Post-
Maximum
Offering
Percentage
Ownership
 
Directors and Named Executive Officers:                                
Jiancong Huang, Chief Executive Officer and Chairman (3) (4)     9,000,000       75.00 %     69.23 %     66.67 %
Shaochai Yang, Chief Financial Officer     0       0 %     0 %     0 %
Di Chen, Secretary     0       0 %     0 %     0 %
Guolin Wang, Director  (4)     1,800,000       15 %     13.85 %     13.85 %
Min Ni     0       0 %     0 %     0 %
Lie Cao     0       0 %     0 %     0 %
Linge Zhou     0       0 %     0 %     0 %
All directors and executive officers as a group (6 persons)     9,000,000       75.00 %     69.23 %     66.67 %
                                 
5% Beneficial Owners:                                
Mingjie Wang (4)     1,800,000       15 %     13.85 %     13.85 %
Jiandi Wang (4)     900,000       7.5 %     6.92 %     6.67 %

 

(1) Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the ordinary shares. All shares represent only ordinary shares held by shareholders as no options are issued or outstanding.

(2) Calculation based on 12,000,000 Ordinary Shares issued and outstanding as of May 22, 2017.

(3) Mr. Huang individually holds 4,050,000 ordinary shares of the Company. He has been appointed as proxy for shares held by individuals noted in footnote (4).

(4) Individuals who entered into an agreement to vote in concert in ZK International on May 13, 2015. Pursuant to the agreement, which has a term of 20 years from its effective date of May 13, 2015, if the parties are unable to reach a unanimous consent in relation to the matters requiring action in concert, a decision made by more than 50% of the voting rights of the parties will be deemed a decision unanimously passed by all parties and will be binding on all parties.

 

Description of Share Capital

 

ZK International was incorporated on May 13, 2015 under the BVI Companies Act, 2004 as a company limited by shares. As of the date of this prospectus, we have authorized 50,000,000 Ordinary Shares with no par value. As a result of the Recapitalization and recent private placement financing, there are 12,000,000 Ordinary Shares issued and outstanding as of the date of this prospectus.

 

Neither our Articles nor Memorandum of Association, as amended, provides for the director’s power, in the absence of a quorum, to vote compensation to themselves. All decisions about director compensation will be recommended by the compensation committee, upon its formation, and approved by the Board of Directors as a whole, both acting only when a quorum of members is present.

 

The following are summaries of the material provisions of our amended and restated memorandum and articles of association that will be in force at the time of the closing of this offering and the BVI Business Companies Act, insofar as they relate to the material terms of our Ordinary Shares. The forms of our amended and restated memorandum and articles of association are filed as exhibits to the registration statement of which this prospectus is a part. As a convenience to potential investors, we provide the below description of BVI law and our memorandum and articles of association together with a comparison to similar features under Delaware law.

 

Ordinary Shares

 

General

 

All of our issued Ordinary Shares are fully paid and non-assessable. Certificates representing the Ordinary Shares are issued in registered form. Our shareholders who are non-residents of the British Virgin Islands may freely hold and vote their Ordinary Shares.

 

At the completion of this offering, there will be between 13,000,000 (assuming the sale of 1,000,000) and 13,500,000 (assuming the sale of 1,500,000) Ordinary Shares issued and outstanding.

 

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Listing

 

We plan to apply to list our Shares on the Nasdaq Capital Market under the symbol “ZKIN.” We have not applied and cannot guarantee that we will be successful in listing on Nasdaq; however, we will not complete this offering unless we are so listed.

 

Transfer Agent and Registrar

 

The transfer agent and registrar for the Ordinary Shares is expected to be Securities Transfer Corporation, 2901 N Dallas Parkway, Suite 380, Plano, Texas 75093.

 

Distributions

 

The holders of our Ordinary Shares are entitled to such dividends as may be declared by our board of directors subject to the BVI Business Companies Act, as amended.

 

Voting rights

 

Any action required or permitted to be taken by the shareholders must be effected at a duly called annual or special meeting of the shareholders entitled to vote on such action and may be effected by a resolution in writing. At each general meeting, each shareholder who is present in person or by proxy (or, in the case of a shareholder being a corporation, by its duly authorized representative) will have one vote for each Ordinary Share which such shareholder holds.

 

Election of directors

 

Delaware law permits cumulative voting for the election of directors only if expressly authorized in the certificate of incorporation. The laws of the British Virgin Islands, however, do not specifically prohibit or restrict the creation of cumulative voting rights for the election of our directors. Cumulative voting is not a concept that is accepted as a common practice in the British Virgin Islands, and we have made no provisions in our memorandum and articles of association to allow cumulative voting for elections of directors.

 

Meetings

 

We must provide written notice of all meetings of shareholders, stating the time, place and, in the case of a special meeting of shareholders, the purpose or purposes thereof, at least 7 days before the date of the proposed meeting to those persons whose names appear as shareholders in the register of members on the date of the notice and are entitled to vote at the meeting. Our board of directors shall call a special meeting upon the written request of shareholders holding at least 30% of our outstanding voting shares. In addition, our board of directors may call a special meeting of shareholders on its own motion. A meeting of shareholders held in contravention of the requirement to give notice is valid if shareholders holding at least 90 percent of the total voting rights on all the matters to be considered at the meeting have waived notice of the meeting and, for this purpose, the presence of a shareholder at the meeting shall constitute waiver in relation to all the shares which that shareholder holds.

 

The management of us is entrusted to our board of directors, who will make corporate decisions by board resolution. Our directors are free to meet at such times and in such manner and places within or outside the BVI as the directors determine to be necessary or desirable. A 3 days’ notice of a meeting of directors must be given. At any meeting of directors, a quorum will be present if half of the total number of directors is present, unless there are only 2 directors in which case the quorum is 2. If a quorum is not present, the meeting will be dissolved. If a quorum is present, votes of half of present directors are required to pass a resolution of directors.

 

As few as one third of our outstanding shares may be sufficient to hold a shareholder meeting. Although our memorandum and articles of association require that holders of at least one-third of our outstanding shares appear in person or by proxy to hold a shareholder meeting, to the extent we fail to have quorum on this initial meeting date, we can reschedule the meeting for the next business day or later, at which second meeting the holders of one third or more of our outstanding shares will constitute a quorum. As mentioned, at the initial date set for any meeting of shareholders, a quorum will be present if there are shareholders present in person or by proxy representing not less than one-third of the issued Ordinary Shares entitled to vote on the resolutions to be considered at the meeting. A quorum may comprise a single shareholder or proxy and then such person may pass a resolution of shareholders and a certificate signed by such person accompanied where such person be a proxy by a copy of the proxy instrument shall constitute a valid resolution of shareholder. If within two hours from the time appointed for the meeting a quorum is not present, the meeting, if convened upon the requisition of shareholders, shall be dissolved; in any other case it shall stand adjourned to the next business day in the jurisdiction in which the meeting was to have been held at the same time and place or to such other time and place as the directors may determine, and if at the adjourned meeting there are present within one hour from the time appointed for the meeting in person or by proxy not less than one third of the votes of the shares or each class or series of shares entitle to vote on the matter to be considered by the meeting, those present shall constitute a quorum but otherwise the meeting shall be dissolved. No business may be transacted at any general meeting unless a quorum is present at the commencement of business. If present, the chair of our board of directors shall be the chair presiding at any meeting of the shareholders.

 

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A corporation that is a shareholder shall be deemed for the purpose of our memorandum and articles of association to be present in person if represented by its duly authorized representative. This duly authorized representative shall be entitled to exercise the same powers on behalf of the corporation which he represents as that corporation could exercise if it were our individual shareholder.

 

Protection of minority shareholders

 

We would normally expect British Virgin Islands courts to follow English case law precedents, which permit a minority shareholder to commence a representative action, or derivative actions in our name, to challenge (1) an act which is ultra vires or illegal, (2) an act which constitutes a fraud against the minority by parties in control of us, (3) the act complained of constitutes an infringement of individual rights of shareholders, such as the right to vote and pre-emptive rights and (4) an irregularity in the passing of a resolution which requires a special or extraordinary majority of the shareholders.

 

Pre-emptive rights

 

There are no pre-emptive rights applicable to the issue by us of new Ordinary Shares under either British Virgin Islands law or our memorandum and articles of association.

 

Transfer of Ordinary Shares

 

Subject to the restrictions in our memorandum and articles of association and applicable securities laws, any of our shareholders may transfer all or any of his or her Ordinary Shares by written instrument of transfer signed by the transferor and containing the name and address of the transferee. Our board of directors may resolve by resolution to refuse or delay the registration of the transfer of any Ordinary Share. If our board of directors resolves to refuse or delay any transfer, it shall specify the reasons for such refusal in the resolution. Our directors may not resolve or refuse or delay the transfer of a Ordinary Share unless: (a) the person transferring the shares has failed to pay any amount due in respect of any of those shares; or (b) such refusal or delay is deemed necessary or advisable in our view or that of our legal counsel in order to avoid violation of, or in order to ensure compliance with, any applicable, corporate, securities and other laws and regulations.

 

Liquidation

 

If we are wound up and the assets available for distribution among our shareholders are more than sufficient to repay all amounts paid to us on account of the issue of shares immediately prior to the winding up, the excess shall be distributable pari passu among those shareholders in proportion to the amount paid up immediately prior to the winding up on the shares held by them, respectively. If we are wound up and the assets available for distribution among the shareholders as such are insufficient to repay the whole of the amounts paid to us on account of the issue of shares, those assets shall be distributed so that, to the greatest extent possible, the losses shall be borne by the shareholders in proportion to the amounts paid up immediately prior to the winding up on the shares held by them, respectively. If we are wound up, the liquidator appointed by us may, in accordance with the BVI Business Companies Act, divide among our shareholders in specie or kind the whole or any part of our assets (whether they shall consist of property of the same kind or not) and may, for such purpose, set such value as the liquidator deems fair upon any property to be divided and may determine how such division shall be carried out as between the shareholders or different classes of shareholders.

 

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Calls on Ordinary Shares and forfeiture of Ordinary Shares

 

Our board of directors may from time to time make calls upon shareholders for any amounts unpaid on their Ordinary Shares in a notice served to such shareholders at least 14 days prior to the specified time of payment. The Ordinary Shares that have been called upon and remain unpaid are subject to forfeiture.

 

Redemption of Ordinary Shares

 

Subject to the provisions of the BVI Business Companies Act, we may issue shares on terms that are subject to redemption, at our option or at the option of the holders, on such terms and in such manner as may be determined by our memorandum and articles of association and subject to any applicable requirements imposed from time to time by, the BVI Business Companies Act, the SEC, The Nasdaq Capital Market, or by any recognized stock exchange on which our securities are listed.

 

Modifications of rights

 

All or any of the special rights attached to any class of shares may, subject to the provisions of the BVI Business Companies Act, be amended only pursuant to a resolution passed at a meeting by a majority of the votes cast by those entitled to vote at a meeting of the holders of the shares of that class.

 

Changes in the number of shares we are authorized to issue and those in issue

 

We may from time to time by resolution of our board of directors:

 

  · amend our memorandum of association to increase or decrease the maximum number of shares we are authorized to issue;
  · subject to our memorandum, divide our authorized and issued shares into a larger number of shares; and
  · subject to our memorandum, combine our authorized and issued shares into a smaller number of shares.

 

Untraceable shareholders

 

We are entitled to sell any shares of a shareholder who is untraceable, provided that:

 

  · all checks or warrants in respect of dividends of these shares, not being less than three in number, for any sums payable in cash to the holder of such shares have remained uncashed for a period of twelve years prior to the publication of the notice and during the three months referred to in the third bullet point below;
  · we have not during that time received any indication of the whereabouts or existence of the shareholder or person entitled to these shares by death, bankruptcy or operation of law; and
  · we have caused a notice to be published in newspapers in the manner stipulated by our memorandum and articles of association, giving notice of our intention to sell these shares, and a period of three months has elapsed since such notice.

 

The net proceeds of any such sale shall belong to us, and when we receive these net proceeds we shall become indebted to the former shareholder for an amount equal to the net proceeds.

 

Inspection of books and records

 

Under British Virgin Islands Law, holders of our Ordinary Shares are entitled, upon giving written notice to us, to inspect (i) our memorandum and articles of association, (ii) the register of members, (iii) the register of directors and (iv) minutes of meetings and resolutions of members, and to make copies and take extracts from the documents and records. However, our directors can refuse access if they are satisfied that to allow such access would be contrary to our interests. See “Where You Can Find Additional Information.”

 

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Rights of non-resident or foreign shareholders

 

There are no limitations imposed by our memorandum and articles of association on the rights of non-resident or foreign shareholders to hold or exercise voting rights on our shares. In addition, there are no provisions in our memorandum and articles of association governing the ownership threshold above which shareholder ownership must be disclosed.

 

Issuance of additional Ordinary Shares

 

Our memorandum and articles of association authorizes our board of directors to issue additional Ordinary Shares from authorized but unissued shares, to the extent available, from time to time as our board of directors shall determine.

 

Differences in Corporate Law

 

The BVI Business Companies Act and the laws of the British Virgin Islands affecting British Virgin Islands companies like us and our shareholders differ from laws applicable to U.S. corporations and their shareholders. Set forth below is a summary of the material differences between the provisions of the laws of the British Virgin Islands applicable to us and the laws applicable to companies incorporated in the United States and their shareholders. 

 

Mergers and similar arrangements

 

Under the laws of the British Virgin Islands, two or more companies may merge or consolidate in accordance with Section 170 of the BVI Business Companies Act. A merger means the merging of two or more constituent companies into one of the constituent companies and a consolidation means the uniting of two or more constituent companies into a new company. In order to merge or consolidate, the directors of each constituent company must approve a written plan of merger or consolidation, which must be authorized by a resolution of shareholders.

 

While a director may vote on the plan of merger or consolidation even if he has a financial interest in the plan, the interested director must disclose the interest to all other directors of the company promptly upon becoming aware of the fact that he is interested in a transaction entered into or to be entered into by the company.

 

A transaction entered into by our company in respect of which a director is interested (including a merger or consolidation) is voidable by us unless the director’s interest was (a) disclosed to the board prior to the transaction or (b) the transaction is (i) between the director and the company and (ii) the transaction is in the ordinary course of the company’s business and on usual terms and conditions.

 

Notwithstanding the above, a transaction entered into by the company is not voidable if the material facts of the interest are known to the shareholders and they approve or ratify it or the company received fair value for the transaction.

 

Shareholders not otherwise entitled to vote on the merger or consolidation may still acquire the right to vote if the plan of merger or consolidation contains any provision which, if proposed as an amendment to the memorandum or articles of association, would entitle them to vote as a class or series on the proposed amendment. In any event, all shareholders must be given a copy of the plan of merger or consolidation irrespective of whether they are entitled to vote at the meeting to approve the plan of merger or consolidation.

 

The shareholders of the constituent companies are not required to receive shares of the surviving or consolidated company but may receive debt obligations or other securities of the surviving or consolidated company, other assets, or a combination thereof. Further, some or all of the shares of a class or series may be converted into a kind of asset while the other shares of the same class or series may receive a different kind of asset. As such, not all the shares of a class or series must receive the same kind of consideration.

 

After the plan of merger or consolidation has been approved by the directors and authorized by a resolution of the shareholders, articles of merger or consolidation are executed by each company and filed with the Registrar of Corporate Affairs in the British Virgin Islands.

 

A shareholder may dissent from a mandatory redemption of his shares, an arrangement (if permitted by the court), a merger (unless the shareholder was a shareholder of the surviving company prior to the merger and continues to hold the same or similar shares after the merger) or a consolidation. A shareholder properly exercising his dissent rights is entitled to a cash payment equal to the fair value of his shares.

 

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A shareholder dissenting from a merger or consolidation must object in writing to the merger or consolidation before the vote by the shareholders on the merger or consolidation, unless notice of the meeting was not given to the shareholder. If the merger or consolidation is approved by the shareholders, the company must give notice of this fact to each shareholder within 20 days who gave written objection. These shareholders then have 20 days to give to the company their written election in the form specified by the BVI Business Companies Act to dissent from the merger or consolidation, provided that in the case of a merger, the 20 days starts when the plan of merger is delivered to the shareholder.

 

Upon giving notice of his election to dissent, a shareholder ceases to have any shareholder rights except the right to be paid the fair value of his shares. As such, the merger or consolidation may proceed in the ordinary course notwithstanding his dissent.

 

Within seven days of the later of the delivery of the notice of election to dissent and the effective date of the merger or consolidation, the company must make a written offer to each dissenting shareholder to purchase his shares at a specified price per share that the company determines to be the fair value of the shares. The company and the shareholder then have 30 days to agree upon the price. If the company and a shareholder fail to agree on the price within the 30 days, then the company and the shareholder shall, within 20 days immediately following the expiration of the 30-day period, each designate an appraiser and these two appraisers shall designate a third appraiser. These three appraisers shall fix the fair value of the shares as of the close of business on the day prior to the shareholders’ approval of the transaction without taking into account any change in value as a result of the transaction.

 

Shareholders’ suits

 

There are both statutory and common law remedies available to our shareholders as a matter of British Virgin Islands law. These are summarized below:

 

Prejudiced members

 

A shareholder who considers that the affairs of the company have been, are being, or are likely to be, conducted in a manner that is, or any act or acts of the company have been, or are, likely to be oppressive, unfairly discriminatory or unfairly prejudicial to him in that capacity, can apply to the court under Section 184I of the BVI Business Companies Act, inter alia, for an order that his shares be acquired, that he be provided compensation, that the Court regulate the future conduct of the company, or that any decision of the company which contravenes the BVI Business Companies Act or our memorandum and articles of association be set aside.

 

Derivative actions

 

Section 184C of the BVI Business Companies Act provides that a shareholder of a company may, with the leave of the Court, bring an action in the name of the company to redress any wrong done to it.

 

Just and equitable winding up

 

In addition to the statutory remedies outlined above, shareholders can also petition for the winding up of a company on the grounds that it is just and equitable for the court to so order. Save in exceptional circumstances, this remedy is only available where the company has been operated as a quasi partnership and trust and confidence between the partners has broken down.

 

Indemnification of directors and executive officers and limitation of liability

 

British Virgin Islands law does not limit the extent to which a company’s articles of association may provide for indemnification of officers and directors, except to the extent any provision providing indemnification may be held by the British Virgin Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime.

 

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Under our memorandum and articles of association, we indemnify against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred in connection with legal, administrative or investigative proceedings for any person who:

 

  · is or was a party or is threatened to be made a party to any threatened, pending or completed proceedings, whether civil, criminal, administrative or investigative, by reason of the fact that the person is or was our director; or
  · is or was, at our request, serving as a director or officer of, or in any other capacity is or was acting for, another body corporate or a partnership, joint venture, trust or other enterprise.

 

These indemnities only apply if the person acted honestly and in good faith with a view to our best interests and, in the case of criminal proceedings, the person had no reasonable cause to believe that his conduct was unlawful. This standard of conduct is generally the same as permitted under the Delaware General Corporation Law for a Delaware corporation.

 

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers or persons controlling us under the foregoing provisions, we have been advised that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

  

Anti-takeover provisions in our memorandum and articles of association

 

Some provisions of our memorandum and articles of association may discourage, delay or prevent a change in control of our company or management that shareholders may consider favorable, including provisions that provide for a staggered board of directors and prevent shareholders from taking an action by written consent in lieu of a meeting. However, under British Virgin Islands law, our directors may only exercise the rights and powers granted to them under our memorandum and articles of association, as amended and restated from time to time, as they believe in good faith to be in the best interests of our company.

 

Directors’ fiduciary duties

 

Under Delaware corporate law, a director of a Delaware corporation has a fiduciary duty to the corporation and its shareholders. This duty has two components: the duty of care and the duty of loyalty. The duty of care requires that a director act in good faith, with the care that an ordinarily prudent person would exercise under similar circumstances. Under this duty, a director must inform himself of, and disclose to shareholders, all material information reasonably available regarding a transaction that is material to the company. The duty of loyalty requires that a director act in a manner he reasonably believes to be in the best interests of the corporation. He must not use his corporate position for personal gain or advantage. This duty prohibits self-dealing by a director and mandates that the best interest of the corporation and its shareholders take precedence over any interest possessed by a director, officer or controlling shareholder and not shared by the shareholders generally. In general, actions of a director are presumed to have been made on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the corporation. However, this presumption may be rebutted by evidence of a breach of one of the fiduciary duties. Should such evidence be presented concerning a transaction by a director, a director must prove the procedural fairness of the transaction and that the transaction was of fair value to the corporation.

 

Under British Virgin Islands law, our directors owe the company certain statutory and fiduciary duties including, among others, a duty to act honestly, in good faith, for a proper purpose and with a view to what the directors believe to be in the best interests of the company. Our directors are also required, when exercising powers or performing duties as a director, to exercise the care, diligence and skill that a reasonable director would exercise in comparable circumstances, taking into account without limitation, the nature of the company, the nature of the decision and the position of the director and the nature of the responsibilities undertaken. In the exercise of their powers, our directors must ensure neither they nor the company acts in a manner which contravenes the BVI Business Companies Act or our memorandum and articles of association, as amended and re-stated from time to time. A shareholder has the right to seek damages for breaches of duties owed to us by our directors.

 

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Shareholder action by written consent

 

Under the Delaware General Corporation Law, a corporation may eliminate the right of shareholders to act by written consent by amendment to its certificate of incorporation. British Virgin Islands law provides that shareholders may approve corporate matters by way of a written resolution without a meeting signed by or on behalf of shareholders sufficient to constitute the requisite majority of shareholders who would have been entitled to vote on such matter at a general meeting; provided that if the consent is less than unanimous, notice must be given to all non-consenting shareholders. Our memorandum and articles of association permit shareholders to act by written consent.

 

Shareholder proposals

 

Under the Delaware General Corporation Law, a shareholder has the right to put any proposal before the annual meeting of shareholders, provided it complies with the notice provisions in the governing documents. A special meeting may be called by the board of directors or any other person authorized to do so in the governing documents, but shareholders may be precluded from calling special meetings. British Virgin Islands law and our memorandum and articles of association allow our shareholders holding not less than 30% of the votes of the outstanding voting shares to requisition a shareholders’ meeting. We are not obliged by law to call shareholders’ annual general meetings, but our memorandum and articles of association do permit the directors to call such a meeting. The location of any shareholders’ meeting can be determined by the board of directors and can be held anywhere in the world.

  

Cumulative voting

 

Under the Delaware General Corporation Law, cumulative voting for elections of directors is not permitted unless the corporation’s certificate of incorporation specifically provides for it. Cumulative voting potentially facilitates the representation of minority shareholders on a board of directors since it permits the minority shareholder to cast all the votes to which the shareholder is entitled on a single director, which increases the shareholder’s voting power with respect to electing such director. As permitted under British Virgin Islands law, our memorandum and articles of association do not provide for cumulative voting. As a result, our shareholders are not afforded any less protections or rights on this issue than shareholders of a Delaware corporation.

 

Removal of directors

 

Under the Delaware General Corporation Law, a director of a corporation with a classified board may be removed only for cause with the approval of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. Under our memorandum and articles of association, directors can be removed from office, with cause, by a resolution of shareholders or by a resolution of directors passed at a meeting of directors called for the purpose of removing the director or for purposes including the removal of the director.

 

Transactions with interested shareholders

 

The Delaware General Corporation Law contains a business combination statute applicable to Delaware public corporations whereby, unless the corporation has specifically elected not to be governed by such statute by amendment to its certificate of incorporation, it is prohibited from engaging in certain business combinations with an “interested shareholder” for three years following the date that such person becomes an interested shareholder. An interested shareholder generally is a person or group who or which owns or owned 15% or more of the target’s outstanding voting shares within the past three years. This has the effect of limiting the ability of a potential acquirer to make a two-tiered bid for the target in which all shareholders would not be treated equally. The statute does not apply if, among other things, prior to the date on which such shareholder becomes an interested shareholder, the board of directors approves either the business combination or the transaction which resulted in the person becoming an interested shareholder. This encourages any potential acquirer of a Delaware public corporation to negotiate the terms of any acquisition transaction with the target’s board of directors. British Virgin Islands law has no comparable statute.

 

Dissolution; Winding Up

 

Under the Delaware General Corporation Law, unless the board of directors approves the proposal to dissolve, dissolution must be approved by shareholders holding 100% of the total voting power of the corporation. Only if the dissolution is initiated by the board of directors may it be approved by a simple majority of the corporation’s outstanding shares. Delaware law allows a Delaware corporation to include in its certificate of incorporation a supermajority voting requirement in connection with dissolutions initiated by the board. Under the BVI Business Companies Act and our memorandum and articles of association, we may appoint a voluntary liquidator by a resolution of the shareholders or by resolution of directors.

 

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Variation of rights of shares

 

Under the Delaware General Corporation Law, a corporation may vary the rights of a class of shares with the approval of a majority of the outstanding shares of such class, unless the certificate of incorporation provides otherwise. Under our memorandum and articles of association, if at any time our shares are divided into different classes of shares, the rights attached to any class may only be varied, whether or not our company is in liquidation, with the consent in writing of or by a resolution passed at a meeting by the holders of not less than 50 percent of the issued shares in that class.

 

Amendment of governing documents

 

Under the Delaware General Corporation Law, a corporation’s governing documents may be amended with the approval of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. As permitted by British Virgin Islands law, our memorandum and articles of association may be amended by a resolution of shareholders and, subject to certain exceptions, by a resolution of directors. Any amendment is effective from the date it is registered at the Registry of Corporate Affairs in the British Virgin Islands.

 

Shares Eligible for Future Sale

 

Before our initial public offering, there has not been a public market for our Ordinary Shares. Future sales of substantial amounts of shares of our Ordinary Shares in the public market after our initial public offering, or the possibility of these sales occurring, could cause the prevailing market price for our Ordinary Shares to fall or impair our ability to raise equity capital in the future.

 

The Ordinary Shares that were not offered and sold in our initial public offering are “restricted securities,” as that term is defined in Rule 144 under the Securities Act. These restricted securities are eligible for public sale only if they are registered under the Securities Act or if they qualify for an exemption from registration under Rule 144 or Rule 701 under the Securities Act, which are summarized below.

 

Rule 144

 

In general, under Rule 144 as currently in effect, once we have been subject to public company reporting requirements for at least 90 days, a person who is not deemed to have been one of our affiliates for purposes of the Securities Act at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least six months, including the holding period of any prior owner other than our affiliates, is entitled to sell those shares without complying with the manner of sale, volume limitation or notice provisions of Rule 144, subject to compliance with the public information requirements of Rule 144. If such a person has beneficially owned the shares proposed to be sold for at least one year, including the holding period of any prior owner other than our affiliates, then that person is entitled to sell those shares without complying with any of the requirements of Rule 144.

 

In general, under Rule 144, as currently in effect, our affiliates or persons selling shares on behalf of our affiliates are entitled to sell within any three-month period beginning 90 days after the date of this prospectus, a number of shares that does not exceed the greater of:

 

  · 1% of the number of Ordinary Shares then outstanding, which will equal between 13,000,000 (assuming closing of a minimum offering) and 13,500,000 (assuming closing of a maximum offering) shares immediately after our initial public offering, or
  · the average weekly trading volume of the Ordinary Shares during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale.

 

Sales under Rule 144 by our affiliates or persons selling shares on behalf of our affiliates are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about us.

 

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Rule 701

 

In general, under Rule 701 as currently in effect, any of our employees, consultants or advisors who purchase shares from us in connection with a compensatory stock or option plan or other written agreement in a transaction before the effective date of our initial public offering that was completed in reliance on Rule 701 and complied with the requirements of Rule 701 will be eligible to resell such shares 90 days after the date of this prospectus in reliance on Rule 144, but without compliance with certain restrictions, including the holding period, contained in Rule 144.

 

Shares Available for Future Sale

 

The following table summarizes the total shares potentially available for future sale. To the extent we sell a number of Ordinary Shares between the minimum and maximum offering, the below tables will be adjusted proportionately as to numbers of shares available for sale (as to share incentive and underwriter shares) and dates on which such shares may be sold (as to currently outstanding shares).

 

Minimum Offering    
Shares   Date Available for Sale
Currently Outstanding Ordinary Shares: 12,000,000 (1)   After 90 days from the date of effectiveness or commencement of sales of the public offering
   
Shares Offered in this Offering: 1,000,000   After the date of this prospectus, these shares will be freely tradable.

 

Maximum Offering     
Shares   Date Available for Sale
Currently Outstanding Ordinary Shares: 12,000,000 (1)   After 90 days from the date of effectiveness or commencement of sales of the public offering
   
Shares Offered in this Offering: 1,500,000   After the date of this prospectus, these shares will be freely tradable

 

(1) Including Ordinary Shares offered by the Selling Shareholders

 

Material Tax Consequences Applicable to U.S. Holders of Our Ordinary Shares

 

The following sets forth the material British Virgin Islands, Chinese and U.S. federal income tax consequences related to an investment in our Ordinary Shares. It is directed to U.S. Holders (as defined below) of our Ordinary Shares and is based upon laws and relevant interpretations thereof in effect as of the date of this prospectus, all of which are subject to change. This description does not deal with all possible tax consequences relating to an investment in our Ordinary Shares, such as the tax consequences under state, local and other tax laws.

 

The following brief description applies only to U.S. Holders (defined below) that hold Ordinary Shares as capital assets and that have the U.S. dollar as their functional currency. This brief description is based on the tax laws of the United States in effect as of the date of this prospectus and on U.S. Treasury regulations in effect or, in some cases, proposed, as of the date of this prospectus, as well as judicial and administrative interpretations thereof available on or before such date. All of the foregoing authorities are subject to change, which change could apply retroactively and could affect the tax consequences described below. Unless otherwise noted in the following discussion, this section is the opinion of Ortoli Rosenstadt LLP, our U.S. counsel, insofar as it relates to legal conclusions with respect to matters of U.S. federal income tax law, and of Gaopeng & Partners Law Firm, our PRC counsel, insofar as it relates to legal conclusions with respect to matters of Chinese tax law.

 

The brief description below of the U.S. federal income tax consequences to “U.S. Holders” will apply to you if you are a beneficial owner of shares and you are, for U.S. federal income tax purposes,

 

  · an individual who is a citizen or resident of the United States;
  · a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) organized under the laws of the United States, any state thereof or the District of Columbia;
  · an estate whose income is subject to U.S. federal income taxation regardless of its source; or
  · a trust that (1) is subject to the primary supervision of a court within the United States and the control of one or more U.S. persons for all substantial decisions or (2) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.

 

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WE URGE POTENTIAL PURCHASERS OF OUR SHARES TO CONSULT THEIR OWN TAX

ADVISORS CONCERNING THE U.S. FEDERAL, STATE, LOCAL AND NON-U.S. TAX

CONSEQUENCES OF PURCHASING, OWNING AND DISPOSING OF OUR SHARES.

 

Generally

 

ZK Internatinoal is a tax-exempt company incorporated in the British Virgin Islands. ZK Pipe is subject to Hong Kong profits tax rate. Wenzhou Weijia, Zhejiang Zhengkang and Wenzhou Zhengfeng are governed by PRC laws.

 

Our company pays PRC enterprise income taxes, value added taxes and business taxes in China for revenues from Wenzhou Weijia, Zhejiang Zhengkang and Wenzhou Zhengfeng and is governed by British Virgin Islands tax laws as to ZK International.

 

People’s Republic of China Enterprise Taxation

 

The following brief description of Chinese enterprise laws is designed to highlight the enterprise-level taxation on our earnings, which will affect the amount of dividends, if any, we are ultimately able to pay to our shareholders. See “Dividend Policy.”

 

PRC enterprise income tax is calculated based on taxable income determined under PRC accounting principles. The Enterprise Income Tax Law (the “EIT Law”), effective as of January 1, 2008, enterprises pay a unified income tax rate of 25% and unified tax deduction standards are applied equally to both domestic-invested enterprises and foreign-invested enterprises. Under the EIT Law, an enterprise established outside of the PRC with “de facto management bodies” within the PRC is considered a resident enterprise and will normally be subject to the enterprise income tax at the rate of 25% on its global income. If the PRC tax authorities subsequently determine that we, ZK Pipe or any future non-PRC subsidiary should be classified as a PRC resident enterprise, then such entity’s global income will be subject to PRC income tax at a tax rate of 25%. In addition, under the EIT Law, payments from Zhejiang Zhengkang or Wenzhou Zhengfeng to us may be subject to a withholding tax. The EIT Law currently provides for a withholding tax rate of 20%. If ZK International or ZK Pipe is deemed to be a non-resident enterprise, then it will be subject to a withholding tax at the rate of 10% on any dividends paid by its Chinese subsidiaries to such entity. In practice, the tax authorities typically impose the withholding tax rate of 10% rate, as prescribed in the implementation regulations; however, there can be no guarantee that this practice will continue as more guidance is provided by relevant government authorities. We are actively monitoring the proposed withholding tax and are evaluating appropriate organizational changes to minimize the corresponding tax impact.

  

According to the Sino-U.S. Tax Treaty which was effective on January 1, 1987 and aimed to avoid double taxation disadvantage, income that is incurred in one nation should be taxed by that nation and exempted from the other nation, but for the dividend that is generated in China and distributed to foreigner in other nations, a rate 10% tax will be charged.

 

Our company will have to withhold that tax when we are distributing dividends to our foreign investors. If we do not fulfill this duty, we will receive a fine up to five times of the amount we are supposed to pay as tax or other administrative penalties from government. The worst case could be criminal charge of tax evasion to responsible persons. The criminal penalty for this offense depends on the tax amount the offender evaded, and the maximum penalty will be 3-7 years imprisonment plus fine.

 

PRC Value Added Tax

 

Pursuant to the Provisional Regulation of China on Value Added Tax and its implementing rules, issued in December 1993, all entities and individuals that are engaged in the businesses of sales of goods, provision of repair and placement services and importation of goods into China are generally subject to a VAT at a rate of 17% (with the exception of certain goods which are subject to a rate of 13%) of the gross sales proceeds received, less any VAT already paid or borne by the taxpayer on the goods or services purchased by it and utilized in the production of goods or provisions of services that have generated the gross sales proceeds.

 

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PRC Business Tax

 

Companies in China are generally subject to business tax and related surcharges by various local tax authorities at rates ranging from 3% to 20% on revenue generated from providing services and revenue generated from the transfer of intangibles. However, since May 1st of 2016, the Business Tax has been incorporated into Value Added Tax in China, which means there will be no more Business Tax and accordingly some business operations previously taxed in the name of Business Tax will be taxed in the manner of VAT thereafter. In general, this newly implemented policy is intended to relieve many companies from heavy taxes under currently slowing down economy. In the case of ZK International’s Chinese subsidiaries, even though the VAT rate is 17%, with the deductibles the company may get in the business process, it will bear less burden than previous Business Tax.

 

British Virgin Islands Taxation

 

Under the BVI Business Companies Act as currently in effect, a holder of Ordinary Shares who is not a resident of the British Virgin Islands is exempt from British Virgin Islands income tax on dividends paid with respect to the Ordinary Shares and all holders of Ordinary Shares are not liable to the British Virgin Islands for income tax on gains realized during that year on sale or disposal of such shares. The British Virgin Islands does not impose a withholding tax on dividends paid by a company incorporated or re-registered under the BVI Business Companies Act.

 

There are no capital gains, gift or inheritance taxes levied by the British Virgin Islands on companies incorporated or re-registered under the BVI Business Companies Act. In addition, shares of companies incorporated or re-registered under the BVI Business Companies Act are not subject to transfer taxes, stamp duties or similar charges.

 

There is no income tax treaty or convention currently in effect between the United States and the British Virgin Islands or between China and the British Virgin Islands.

 

United States Federal Income Taxation

 

The following does not address the tax consequences to any particular investor or to persons in special tax situations such as:

 

  · banks;
  · financial institutions;
  · insurance companies;
  · regulated investment companies;
  · real estate investment trusts;
  · broker-dealers;
  · traders that elect to mark-to-market;
  · U.S. expatriates;
  · tax-exempt entities;
  · persons liable for alternative minimum tax;
  · persons holding our Ordinary Shares as part of a straddle, hedging, conversion or integrated transaction;
  · persons that actually or constructively own 10% or more of our voting shares;
  · persons who acquired our Ordinary Shares pursuant to the exercise of any employee share option or otherwise as consideration; or
  · persons holding our Ordinary Shares through partnerships or other pass-through entities.

  

Prospective purchasers are urged to consult their own tax advisors about the application of the U.S. Federal tax rules to their particular circumstances as well as the state, local, foreign and other tax consequences to them of the purchase, ownership and disposition of our Ordinary Shares.

 

Tax Treaties

 

As above mentioned, according to the Sino-U.S. Tax Treaty which was effective on January 1st, 1987 and aimed to avoid double taxation disadvantage, income that is incurred in one nation should be taxed by that nation and exempted from the other nation, but for the dividend that is generated in China and distributed to foreigners in other nations, a rate 10% tax will be charged.

 

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Taxation of Dividends and Other Distributions on our Ordinary Shares

 

Subject to the passive foreign investment company rules discussed below, the gross amount of distributions made by us to you with respect to the Ordinary Shares (including the amount of any taxes withheld therefrom) will generally be includable in your gross income as dividend income on the date of receipt by you, but only to the extent that the distribution is paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). The dividends will not be eligible for the dividends-received deduction allowed to corporations in respect of dividends received from other U.S. corporations.

 

With respect to non-corporate U.S. Holders, including individual U.S. Holders, dividends will be taxed at the lower capital gains rate applicable to qualified dividend income, provided that (1) the Ordinary Shares are readily tradable on an established securities market in the United States, or we are eligible for the benefits of an approved qualifying income tax treaty with the United States that includes an exchange of information program, (2) we are not a passive foreign investment company (as discussed below) for either our taxable year in which the dividend is paid or the preceding taxable year, and (3) certain holding period requirements are met. Under U.S. Internal Revenue Service authority, Ordinary Shares are considered for purpose of clause (1) above to be readily tradable on an established securities market in the United States if they are listed on The Nasdaq Capital Market. You are urged to consult your tax advisors regarding the availability of the lower rate for dividends paid with respect to our Ordinary Shares, including the effects of any change in law after the date of this prospectus.

 

Dividends will constitute foreign source income for foreign tax credit limitation purposes. If the dividends are taxed as qualified dividend income (as discussed above), the amount of the dividend taken into account for purposes of calculating the foreign tax credit limitation will be limited to the gross amount of the dividend, multiplied by the reduced rate divided by the highest rate of tax normally applicable to dividends. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends distributed by us with respect to our Ordinary Shares will constitute “passive category income” but could, in the case of certain U.S. Holders, constitute “general category income.”

 

To the extent that the amount of the distribution exceeds our current and accumulated earnings and profits (as determined under U.S. federal income tax principles), it will be treated first as a tax-free return of your tax basis in your Ordinary Shares, and to the extent the amount of the distribution exceeds your tax basis, the excess will be taxed as capital gain. We do not intend to calculate our earnings and profits under U.S. federal income tax principles. Therefore, a U.S. Holder should expect that a distribution will be treated as a dividend even if that distribution would otherwise be treated as a non-taxable return of capital or as capital gain under the rules described above.

 

Taxation of Dispositions of Ordinary Shares

 

Subject to the passive foreign investment company rules discussed below, you will recognize taxable gain or loss on any sale, exchange or other taxable disposition of a share equal to the difference between the amount realized (in U.S. dollars) for the share and your tax basis (in U.S. dollars) in the Ordinary Shares. The gain or loss will be capital gain or loss. If you are a non-corporate U.S. Holder, including an individual U.S. Holder, who has held the Ordinary Shares for more than one year, you will be eligible for reduced tax rates of 0% (for individuals in the 10% or 15% tax brackets), 20% (for individuals in the 39.6% tax brackets) or 15% for all other individuals. The deductibility of capital losses is subject to limitations. Any such gain or loss that you recognize will generally be treated as United States source income or loss for foreign tax credit limitation purposes.

 

Passive Foreign Investment Company

 

Based on our current and anticipated operations and the composition of our assets, we do not expect to be a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for our current taxable year ending December 31, 2016. Our actual PFIC status for the current taxable year ending December 31, 2016 will not be determinable until the close of such taxable year and, accordingly, there is no guarantee that we will not be a PFIC for the current taxable year. Because PFIC status is a factual determination for each taxable year which cannot be made until the close of the taxable year. A non-U.S. corporation is considered a PFIC for any taxable year if either:

 

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  · at least 75% of its gross income is passive income, defined as income from interest, dividends, rents, royalties, gains on property producing foreign personal holding company income and certain other income that does not involve the active conduct of a trade or business; or
  · at least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that produce or are held for the production of passive income (the “asset test”).

 

We will be treated as owning our proportionate share of the assets and earning our proportionate share of the income of any other corporation in which we own, directly or indirectly, at least 25% (by value) of the stock.

 

We must make a separate determination each year as to whether we are a PFIC. As a result, our PFIC status may change. In particular, because the value of our assets for purposes of the asset test will generally be determined based on the market price of our Ordinary Shares, our PFIC status will depend in large part on the market price of our Ordinary Shares. Accordingly, fluctuations in the market price of the Ordinary Shares may cause us to become a PFIC. In addition, the application of the PFIC rules is subject to uncertainty in several respects and the composition of our income and assets will be affected by how, and how quickly, we spend the cash we raise in this offering. If we are a PFIC for any year during which you hold Ordinary Shares, we will continue to be treated as a PFIC for all succeeding years during which you hold Ordinary Shares. However, if we cease to be a PFIC, you may avoid some of the adverse effects of the PFIC regime by making a “deemed sale” election with respect to the Ordinary Shares.

 

If we are a PFIC for any taxable year during which you hold Ordinary Shares, you will be subject to special tax rules with respect to any “excess distribution” that you receive and any gain you realize from a sale or other disposition (including a pledge) of the Ordinary Shares, unless you make a “mark-to-market” election as discussed below. Distributions you receive in a taxable year that are greater than 125% of the average annual distributions you received during the shorter of the three preceding taxable years or your holding period for the Ordinary Shares will be treated as an excess distribution. Under these special tax rules:

  

  · the excess distribution or gain will be allocated ratably over your holding period for the Ordinary Shares;
  · the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we were a PFIC, will be treated as ordinary income, and
  · the amount allocated to each other year will be subject to the highest tax rate in effect for that year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year.

 

The tax liability for amounts allocated to years prior to the year of disposition or “excess distribution” cannot be offset by any net operating losses for such years, and gains (but not losses) realized on the sale of the Ordinary Shares cannot be treated as capital, even if you hold the Ordinary Shares as capital assets.

 

A U.S. Holder of “marketable stock” (as defined below) in a PFIC may make a mark-to-market election for such stock to elect out of the tax treatment discussed above. If you make a mark-to-market election for the Ordinary Shares, you will include in income each year an amount equal to the excess, if any, of the fair market value of the Ordinary Shares as of the close of your taxable year over your adjusted basis in such Ordinary Shares. You are allowed a deduction for the excess, if any, of the adjusted basis of the Ordinary Shares over their fair market value as of the close of the taxable year. However, deductions are allowable only to the extent of any net mark-to-market gains on the Ordinary Shares included in your income for prior taxable years. Amounts included in your income under a mark-to-market election, as well as gain on the actual sale or other disposition of the Ordinary Shares, are treated as ordinary income. Ordinary loss treatment also applies to the deductible portion of any mark-to-market loss on the Ordinary Shares, as well as to any loss realized on the actual sale or disposition of the Ordinary Shares, to the extent that the amount of such loss does not exceed the net mark-to-market gains previously included for such Ordinary Shares. Your basis in the Ordinary Shares will be adjusted to reflect any such income or loss amounts. If you make a valid mark-to-market election, the tax rules that apply to distributions by corporations which are not PFICs would apply to distributions by us, except that the lower applicable capital gains rate for qualified dividend income discussed above under “Taxation of Dividends and Other Distributions on our Ordinary Shares” generally would not apply.

 

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The mark-to-market election is available only for “marketable stock”, which is stock that is traded in other than de minimis quantities on at least 15 days during each calendar quarter (“regularly traded”) on a qualified exchange or other market (as defined in applicable U.S. Treasury regulations), including The Nasdaq Capital Market. If the Ordinary Shares are regularly traded on The Nasdaq Capital Market and if you are a holder of Ordinary Shares, the mark-to-market election would be available to you were we to be or become a PFIC.

 

Alternatively, a U.S. Holder of stock in a PFIC may make a “qualified electing fund” election with respect to such PFIC to elect out of the tax treatment discussed above. A U.S. Holder who makes a valid qualified electing fund election with respect to a PFIC will generally include in gross income for a taxable year such holder’s pro rata share of the corporation’s earnings and profits for the taxable year. However, the qualified electing fund election is available only if such PFIC provides such U.S. Holder with certain information regarding its earnings and profits as required under applicable U.S. Treasury regulations. We do not currently intend to prepare or provide the information that would enable you to make a qualified electing fund election. If you hold Ordinary Shares in any year in which we are a PFIC, you will be required to file U.S. Internal Revenue Service Form 8621 regarding distributions received on the Ordinary Shares and any gain realized on the disposition of the Ordinary Shares.

 

You are urged to consult your tax advisors regarding the application of the PFIC rules to your investment in our Ordinary Shares and the elections discussed above.

 

Information Reporting and Backup Withholding

 

Dividend payments with respect to our Ordinary Shares and proceeds from the sale, exchange or redemption of our Ordinary Shares may be subject to information reporting to the U.S. Internal Revenue Service and possible U.S. backup withholding at a current rate of 28%. Backup withholding will not apply, however, to a U.S. Holder who furnishes a correct taxpayer identification number and makes any other required certification on U.S. Internal Revenue Service Form W-9 or who is otherwise exempt from backup withholding. U.S. Holders who are required to establish their exempt status generally must provide such certification on U.S. Internal Revenue Service Form W-9. U.S. Holders are urged to consult their tax advisors regarding the application of the U.S. information reporting and backup withholding rules.

 

Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against your U.S. federal income tax liability, and you may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the U.S. Internal Revenue Service and furnishing any required information.

 

Under the Hiring Incentives to Restore Employment Act of 2010, certain United States Holders are required to report information relating to Ordinary Shares, subject to certain exceptions (including an exception for Ordinary Shares held in accounts maintained by certain financial institutions), by attaching a complete Internal Revenue Service Form 8938, Statement of Specified Foreign Financial Assets, with their tax return for each year in which they hold Ordinary Shares. U.S. Holders are urged to consult their tax advisors regarding the application of the U.S. information reporting and backup withholding rules. 

 

Enforceability of Civil Liabilities

 

We are incorporated under the laws of the British Virgin Islands with limited liability. We are incorporated in the British Virgin Islands because of certain benefits associated with being a British Virgin Islands corporation, such as political and economic stability, an effective judicial system, a favorable tax system, the absence of exchange control or currency restrictions and the availability of professional and support services. However, the British Virgin Islands has a less developed body of securities laws as compared to the United States and provides protections for investors to a lesser extent. In addition, British Virgin Islands companies may not have standing to sue before the federal courts of the United States.

 

Substantially all of our assets are located outside the United States. In addition, a majority of our directors and officers are nationals and/or residents of countries other than the United States, and all or a substantial portion of such persons’ assets are located outside the United States. As a result, it may be difficult for investors to effect service of process within the United States upon us or such persons or to enforce against them or against us, judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state thereof.

 

We have appointed Vcorp Agent Services, Inc. as our agent to receive service of process with respect to any action brought against us in the United States District Court for districts in the State of New York under the federal securities laws of the United States or of any State of the United States or any action brought against us in the Supreme Court of the State of New York under the securities laws of the State of New York.

 

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Gaopeng and Partners Law Firm, our counsel as to Chinese law, has advised us that there is uncertainty as to whether the courts of China would (1) recognize or enforce judgments of United States courts obtained against us or such persons predicated upon the civil liability provisions of the securities laws of the United States or any state thereof, or (2) be competent to hear original actions brought in each respective jurisdiction, against us or such persons predicated upon the securities laws of the United States or any state thereof.

 

Gaopeng and Partners Law Firm has advised us that the recognition and enforcement of foreign judgments are provided for under the Chinese Civil Procedure Law. Chinese courts may recognize and enforce foreign judgments in accordance with the requirements of the Chinese Civil Procedure Law based either on treaties between China and the country where the judgment is made or in reciprocity between jurisdictions. China does not have any treaties or other agreements with the British Virgin Islands or the United States that provide for the reciprocal recognition and enforcement of foreign judgments. As a result, it is uncertain whether a Chinese court would enforce a judgment rendered by a court in either of these two jurisdictions.

 

We have been advised by [●], our counsel as to British Virgin Islands law, that the United States and the British Virgin Islands do not have a treaty providing for reciprocal recognition and enforcement of judgments of courts of the United States in civil and commercial matters and that a final judgment for the payment of money rendered by any general or state court in the United States based on civil liability, whether or not predicated solely upon the U.S. federal securities laws, is unlikely to be enforceable in the British Virgin Islands. We have also been advised by [●] that a final and conclusive judgment obtained in U.S. federal or state courts under which a sum of money is payable as compensatory damages (i.e., not being a sum claimed by a revenue authority for taxes or other charges of a similar nature by a governmental authority, or in respect of a fine or penalty or multiple or punitive damages) may be the subject of an action on a debt in the court of the British Virgin Islands under the common law doctrine of obligation.

    

Underwriting

 

We have entered into an underwriting agreement with Boustead Securities, LLC (the “Underwriter”) . The Underwriter is not purchasing or selling any securities offered by this prospectus, nor is it required to arrange the purchase or sale of any specific number or dollar amount of securities, but rather it has agreed to use its best efforts to arrange for the sale of all of the securities offered hereby. Under the terms and subject to the conditions contained in the underwriting agreement, we have agreed to issue and sell to the public through the Underwriter, and the Underwriter have agreed to offer and sell, on a best efforts basis, at the public offering price less the underwriting fees and commissions set forth below a minimum of 1,000,000 ordinary shares and a maximum of 1,500,000 ordinary shares. The Underwriter may retain other brokers or dealers to act as a sub-agents or selected dealers on their behalf in connection with this offering.

 

The Underwriter must sell the minimum number of securities offered (1,000,000 ordinary shares) if any shares are sold. The Underwriter is required to use only its best efforts to sell the securities offered. The offering will terminate upon the earlier of: (i) a date mutually acceptable to us and our Underwriter after which the minimum offering is sold or (ii) September 30, 2017. On the closing date, the following will occur:

 

  we will receive funds in the amount of the aggregate purchase price of the shares being sold by us on such closing date;

 

  we will cause to be delivered the ordinary shares being sold on such closing date in book-entry form; and

 

  we will pay the Underwriter their commissions.

 

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Pursuant to an escrow agreement among us, the Underwriter and Signature Bank (the “Escrow Agent”), as escrow agent, until at least 1,000,000 ordinary shares are sold, all funds received in payment for securities sold in this offering will be required to be submitted by subscribers to a non-interest bearing escrow account with the Escrow Agent and will be held by the Escrow Agent for such account. The Underwriter and we shall require all investor checks for payment for the securities to be made payable to “Signature Bank, as the Escrow Agent for ZK International Group Co. Ltd. All subscription agreements and checks should be delivered to 585 Fifth Avenue, New York, NY 10017 USA, Attention: Steve Fay, VP. Failure to do so will result in checks being returned to the investor who submitted the check. The investors will have sole claim to the proceeds held in trust prior to the receipt of the minimum offering proceeds. The funds are held for the benefit of the investors until the minimum is reached. Prior to reaching the minimum claims may not be reached by creditors of the Company. If the Underwriter do not sell at least 1,000,000 ordinary shares by September 30, 2017, all funds will be returned within five [5] business days to subscribers without interest or deduction. If this Offering completes, then on the closing date, net proceeds will be delivered to us and we will issue the ordinary shares to purchasers. Unless purchasers instruct us otherwise, we will deliver the ordinary shares electronically upon receipt of purchaser funds to the accounts of those purchasers who hold accounts at the Underwriter, or elsewhere, as specified by the purchaser, within seven (7) business days upon the closing of the Offering. Alternately, purchasers who do not carry an account at the Underwriter may request that the shares be held in book-entry at the Company’s transfer agent, or may be issued in book-entry at the Company’s transfer agent and subsequently delivered electronically to the purchasers’ respective brokerage account upon request of the purchasers.

 

Fees, Commissions and Expense Reimbursement

 

The Underwriter will collectively receive an underwriting commission equal to between $350,000 in the case of a minimum offering and $525,000 in the case of a maximum offering, representing seven percent (7%) of the gross proceeds to be raised in this Offering.

 

The following table shows, for each of the minimum and maximum offering amounts, the per share and maximum total public offering price, underwriting fees and commissions to be paid to the Underwriter by us, and proceeds to us, before expenses and assuming a $5.00 per share offering price.

 

    Per Share     Minimum Offering     Maximum Offering  
Public Offering Price   $ 5.00     $ 5,000,000     $ 7,500,000  
Underwriting fees and commissions   $ 0.35     $ 350,000     $ 525,000  
Proceeds to Us, Before Expenses   $ 4.65     $ 4,650,000     $ 6,975,000  

 

Because the actual amount to be raised in this offering is uncertain, the actual total offering commissions are not presently determinable and may be substantially less than the maximum amount set forth above.

 

Our obligation to issue and sell securities to the purchasers is subject to the conditions set forth in the subscription agreement, which may be waived by us at our discretion. A purchaser’s obligation to purchase securities is subject to the conditions set forth in the subscription agreement as well, which may also be waived.

 

Under the Underwriting Agreement, we will pay our underwriter, Boustead Securities, LLC (the “Underwriter”) a fee and commission equal to 7% of the gross proceeds raised in the offering. In addition to the cash commission, we will also reimburse the Underwriter for the full amount of its reasonable out-of-pocket expenses, including its legal expenses in an amount not to exceed $75,000, $25,000 of travel expenses and $25,000 for a third party due diligence report incurred by the Underwriter in connection with the offering, and a financial advisory fee of $100,000.

 

We estimate that the total expenses of the offering, including registration, filing and listing fees, printing fees and legal and accounting expenses, but excluding Underwriter’ fees and commissions, will be approximately $[●], all of which are payable by us.

 

The Underwriter intend to offer our Ordinary Shares to their retail customers only in states in which we are permitted to offer our ordinary shares. We have relied on an exemption to the blue sky registration requirements afforded to “covered securities.” Securities listed on the Nasdaq Capital Market are “covered securities.” If we were unable to meet the Nasdaq Capital Market’s listing standards, then we would be unable to rely on the covered securities exemption to blue sky registration requirements and we would need to register the offering in each state in which we planned to sell shares. Consequently, we will not complete this offering unless we meet the Nasdaq Capital Market’s listing requirements.

 

The foregoing does not purport to be a complete statement of the terms and conditions of the underwriting agreement and subscription agreement. The underwriting agreement and a form of subscription agreement are included as exhibits to the registration statement of which this prospectus forms a part. 

 

86  

 

 

Lock-Up Agreements

 

Except for the Selling Shareholders, we and each of our officers, directors, and all existing stockholders agree not to offer, issue, sell, contract to sell, encumber, grant any option for the sale of or otherwise dispose of any shares of our Ordinary Shares or other securities convertible into or exercisable or exchangeable for Ordinary Shares for a period of six (6) months after the effective date of the registration statement of which this prospectus is a part without the prior written consent of the underwriter.

 

The underwriter may in its sole discretion and at any time without notice release some or all of the shares subject to lock-up agreements prior to the expiration of the lock-up period. When determining whether or not to release shares from the lock-up agreements, the underwriter will consider, among other factors, the security holder’s reasons for requesting the release, the number of shares for which the release is being requested and market conditions at the time.

 

Underwriters’ Warrants

 

We have agreed to issue to our underwriters warrants to purchase the number of ordinary shares in the aggregate equal to 7% of the gross proceeds received by the Company from the Closing. The warrants will be exercisable at any time, and from time to time, in whole or in part, during the period commencing 180 days from the effective date of the offering, which period shall not extend further than five years from the effective date of the offering in compliance with FINRA Rule 5110(f)(2)(G)(i). The warrants are exercisable at a per share price equal to 100% of the public offering price per share in the offering. The warrants are also exercisable on a cashless basis. The warrants have been deemed compensation by FINRA and are therefore subject to a 180-day lock-up pursuant to Rule 5110(g)(1) of FINRA. Neither our underwriters, nor permitted assignees under Rule 5110(g)(1), will sell, transfer, assign, pledge, or hypothecate these warrants or the securities underlying these warrants, nor will they engage in any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of the warrants or the underlying securities for a period of 180 days from the effective date of the offering. In addition, the warrants provide for registration rights upon request, in certain cases. The piggyback registration right provided will not be greater than seven years from the effective date of the offering in compliance with FINRA Rule 5110(f)(2)(G)(v). We will bear all fees and expenses attendant to registering the securities issuable on exercise of the warrants other than underwriting commissions incurred and payable by the holders. The exercise price and number of shares issuable upon exercise of the warrants may be adjusted in certain circumstances including in the event of a stock dividend, extraordinary cash dividend or our recapitalization, reorganization, merger or consolidation. The warrant exercise price and/or underlying shares may also be adjusted for issuances of shares of common stock at a price below the warrant exercise price.

  

Price Stabilization

 

The Underwriter will be required to comply with the Securities Act and the Exchange Act, including without limitation, Rule 10b-5 and Regulation M under the Exchange Act. These rules and regulations may limit the timing of purchases and sales of shares of capital stock by the Underwriter acting as principal. Under these rules and regulations, the Underwriter:

 

  may not engage in any stabilization activity in connection with our securities; and
     
  may not bid for or purchase any of our securities or attempt to induce any person to purchase any of our securities, other than as permitted under the Exchange Act, until it has completed its participation in the distribution.

  

Determination of Offering Price

 

The public offering price of the shares we are offering was determined by us in consultation with the Underwriter based on discussions with potential investors in light of the history and prospects of our company, the stage of development of our business, our business plans for the future and the extent to which they have been implemented, an assessment of our management, the public stock price for similar companies, general conditions of the securities markets at the time of the Offering and such other factors as were deemed relevant.

 

Electronic Offer, Sale and Distribution of Securities.

 

A prospectus in electronic format may be delivered to potential investors by the Underwriter. The prospectus in electronic format will be identical to the paper version of such prospectus. Other than the prospectus in electronic format, the information on the Underwriter’ website and any information contained in any other website maintained by the Underwriter is not part of the prospectus or the registration statement of which this Prospectus forms a part.

 

Foreign Regulatory Restrictions on Purchase of our Shares

 

We have not taken any action to permit a public offering of our shares outside the United States or to permit the possession or distribution of this prospectus outside the United States. People outside the United States who come into possession of this prospectus must inform themselves about and observe any restrictions relating to this Offering of our shares and the distribution of this prospectus outside the United States.

 

Indemnification

 

We have agreed to indemnify the underwriter against liabilities relating to the Offering arising under the Securities Act and the Exchange Act and to contribute to payments that the underwriter may be required to make for these liabilities.

 

Application for Nasdaq Market Listing

 

We intent to apply to have our ordinary shares approved for listing/quotation on the Nasdaq Capital Market under the symbol “ZKIN.” We will not consummate and close this offering without a listing approval letter from the Nasdaq Capital Market. Our receipt of a listing approval letter is not the same as an actual listing on the Nasdaq Capital Market. The listing approval letter will serve only to confirm that, if we sell a number of shares in this “best efforts, minimum-maximum basis” offering sufficient to satisfy applicable listing criteria, our ordinary shares will in fact be listed.

 

If our ordinary shares are listed on the Nasdaq Capital Market, we will be subject to continued listing requirements and corporate governance standards. We expect these new rules and regulations to significantly increase our legal, accounting and financial compliance costs.

  

Foreign Regulatory Restrictions on Purchase of our Shares

 

We have not taken any action to permit a public offering of our shares outside the United States or to permit the possession or distribution of this prospectus outside the United States. People outside the United States who come into possession of this prospectus must inform themselves about and observe any restrictions relating to this offering of our shares and the distribution of this prospectus outside the United States.

 

87  

 

 

Expenses Relating to This Offering

 

Set forth below is an itemization of the total expenses, excluding placement discounts and commissions, that we expect to incur in connection with this offering. With the exception of the SEC registration fee, the FINRA filing fee and the Nasdaq listing fee, all amounts are estimates.

 

Securities and Exchange Commission Registration Fee   $ 1,799.35  
Nasdaq Capital Market Listing Fee   50,000  
FINRA     [●]  
Legal Fees and Expenses     [●]  
Accounting Fees and Expenses     [●]  
Printing and Engraving Expenses     [●]  
Miscellaneous Expenses     [●]  
Total Expenses   $ [●]  

 

Under the Underwriting Agreement, we will pay our underwriter, Boustead Securities, LLC (the “Underwriter”) a fee and commission equal to 7% of the gross proceeds raised in the offering. In addition to the cash commission, we will also reimburse the Underwriter for the full amount of its reasonable out-of-pocket expenses, including its legal expenses in an amount not to exceed $75,000, $25,000 of travel expenses and $25,000 for a third party due diligence report incurred by the Underwriter in connection with the offering, and a financial advisory fee of $100,000.

 

Legal Matters

 

Ortoli Rosenstadt LLP is acting as counsel to our company regarding U.S. securities law matters. The validity of the ordinary shares offered hereby will be passed upon for us by [●]. Hunter Taubman Fischer & Li LLC is acting as counsel to the Underwriter. Certain legal matters as to PRC law will be passed upon for us by Gaopeng & Partners Law Firm. Ortoli Rosenstadt LLP may rely upon Gaopeng & Partners Law Firm with respect to matters governed by PRC law.

 

The current address of Ortoli Rosenstadt LLP is 501 Madison Avenue, 14 th Floor, New York, NY 10022. The current address of Gaopeng & Partners Law Firm is No. 107, Warwick Building, 8th Floor, Block A, Shigu Road, Nanjing, Jiangsu Province.

 

Experts

 

The consolidated financial statements for each of the years ended September 30, 2016 and 2015, as set forth in this prospectus and elsewhere in the registration statement have been so included in reliance on the report of Anton & Chia, LLP, an independent registered public accounting firm, given on their authority as experts in accounting and auditing. The current address of Anton & Chia, LLP is 3501 Jamboree Road, Suite 540, Newport Beach, CA 92660. 

 

Interests of Named Experts and Counsel

 

No expert or counsel named in this prospectus as having prepared or certified any part of this prospectus or having given an opinion upon the validity of the securities being registered or upon other legal matters in connection with the registration or offering of the common stock was employed on a contingency basis, or had, or is to receive, in connection with the offering, a substantial interest, direct or indirect, in the registrant. Nor was any such person connected with the registrant as a promoter, managing or principal Underwriter, voting trustee, director, officer, or employee.

 

Disclosure of Commission Position on Indemnification

 

Insofar as indemnification for liabilities arising under the Securities Act, may be permitted to our directors, officers or persons controlling us, we have been advised that it is the SEC’s opinion that such indemnification is against public policy as expressed in such act and is, therefore, unenforceable.

 

88  

 

 

Where You Can Find Additional Information

 

We have filed with the SEC a registration statement on Form F-1 under the Securities Act with respect to the Ordinary Shares offered hereby. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement or the exhibits filed therewith. For further information about us and the Ordinary Shares offered hereby, reference is made to the registration statement and the exhibits filed therewith. Statements contained in this prospectus regarding the contents of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily complete, and in each instance we refer you to the copy of such contract or other document filed as an exhibit to the registration statement. However, statements in the prospectus contain the material provisions of such contracts, agreements and other documents. We currently do not file periodic reports with the SEC. Upon closing of our initial public offering, we will be required to file periodic reports and other information with the SEC pursuant to the Exchange Act. A copy of the registration statement and the exhibits filed therewith may be inspected without charge at the public reference room maintained by the SEC, located at 100 F Street, NE, Washington, DC 20549, and copies of all or any part of the registration statement may be obtained from that office. Please call the SEC at 1-800-SEC-0330 for further information about the public reference room. The SEC also maintains a website that contains reports, information statements and other information regarding registrants that file electronically with the SEC. The address of the website is www.sec.gov.

 

89  

 

 

ZK INTERNATIONAL GROUP CO. LTD

 

TABLE OF CONTENTS

 

CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 2016 AND 2015

 

Consolidated Financial Statements  
   
Report of Independent Registered Public Accounting Firm F-2
   
Consolidated Balance Sheets as of September 30, 2016 and 2015 F-3
   
Consolidated Statements of Operations and Comprehensive Income for the Years Ended September 30, 2016 and 2015 F-4
   
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended September 30, 2016 and 2015 F-5
   
Consolidated Statements of Cash Flows for the Years Ended September 30, 2016 and 2015 F-6
   
Notes to Consolidated Financial Statements F-7

   

  F- 1  

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors  

ZK International Group Co., Ltd.

No. 678 Dingxiang Road, Binhai Industrial Park

Economic & Technology Development Zone

Wenzhou, Zhejiang Province

People’s Republic of China 325025

 

We have audited the accompanying consolidated balance sheets of ZK International Group Co., Ltd. (the "Company") as of September 30, 2016 and September 30, 2015, and their related consolidated statements of operations, changes in shareholders' equity and cash flows for the two years ended September 30, 2016 and September 30, 2015. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company was not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits include examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. Our audits also include assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2016 and September 30, 2015, and the results of its operations and its cash flows for the two years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

/s/ Anton & Chia, LLP  

Newport Beach, CA

 

January 17, 2017, except for the effects of the stock split, inclusion of Parent-Only Financials in Note 17 and the matters described in Note 18 – Subsequent Event as to which the date is May 23, 2017.

 

  F- 2  

 

 

ZK International Group Co., Ltd.

Consolidated Balance Sheets

As of September 30, 2016 and 2015

 

    September 30,  
    2016     2015  
ASSETS                
Current assets:                
Cash and cash equivalents   $ 123,649     $ 626,791  
Restricted cash     3,236,482       3,179,140  
Accounts receivable, net of allowance for doubtful accounts of $1,648,178 and $1,017,717, respectively     23,843,980       15,225,136  
Notes receivable     89,941       15,707  
Other receivables     1,625,872       1,647,337  
Inventories     6,444,088       5,956,543  
Advance to suppliers     3,251,295       2,549,418  
Deferred tax assets, current portion     247,227       152,657  
Total current assets     38,862,534       29,352,729  
                 
Property, plant and equipment, net     5,907,985       6,517,566  
Land use rights, net     468,148       504,119  
Other long-term assets     312,289       327,216  
TOTAL ASSETS   $ 45,550,956     $ 36,701,630  
                 
LIABILITIES AND EQUITY                
Current liabilities:                
Accounts payable   $ 1,141,803     $ 379,355  
Accrued expenses and other current liabilities     3,416,613       2,341,919  
Accrued payroll and welfare     375,428       341,144  
Advance from customers     1,618,216       333,476  
Related party payables     1,662,160       219,573  
Short-term bank borrowings     21,793,454       20,630,619  
Notes payable     3,897,426       6,753,838  
Income tax payable     2,066,934       1,036,650  
Total current liabilities and total liabilities     35,972,034       32,036,574  
                 
Equity:                

Common stock, no par value, 50,000,000 shares authorized, 9,000,000 shares issued and outstanding

    -       -  
Additional paid-in capital    

2, 800,777

     

2, 800,777

 
Statutory surplus reserve     579,994       -  
Retained earnings     5,697,984       1,028,441  
Accumulated other comprehensive income     411,239       811,698  
Total equity attributable to ZK International Group Co., Ltd.     9,488,994       4,640,916  
Equity attributable to non-controlling interests     88,928       24,140  
Total equity     9,578,922       4,665,056  
TOTAL LIABILITIES AND EQUITY   $ 45,550,956     $ 36,701,630  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

  F- 3  

 

 

ZK International Group Co., Ltd.

Consolidated Statements of Operations and Comprehensive Income

For the years ended September 30, 2016 and 2015

 

    2016     2015  
Revenues   $ 36,809,094     $ 34,985,571  
Cost of revenues     (25,333,318 )     (24,813,206 )
Gross profit     11,475,776       10,172,365  
                 
Operating expenses:                
Selling and marketing expenses     957,990       591,344  
General and administrative expenses     1,599,743       1,046,652  
Research and development expenses     1,302,022       928,826  
Total operating expenses     3,859,755       2,566,822  
                 
Income from operations     7,616,021       7,605,543  
                 
Other income (expenses):                
Interest expense     (1,417,745 )     (1,912,866 )
Interest income     51,058       132,747  
Other income, net     158,797       135,374  
Total other expenses     (1,207,890 )     (1,644,745 )
                 
Income before income taxes     6,408,131       5,960,798  
Income tax expense     (1,105,440 )     (952,117 )
                 
Net income     5,302,691       5,008,681  
Net income attributable to non-controlling interests     (53,154 )     -  
                 
Net income attributable to ZK International Group Co., Ltd.   $ 5,249,537     $ 5,008,681  
                 
Net income   $ 5,302,691     $ 5,008,681  
                 
Other comprehensive loss:                
Foreign currency translation loss     (403,865 )     (142,842 )
                 
Total comprehensive income     4,898,826       4,865,839  
Comprehensive income attributable to non-controlling interests     3,406       -  
                 
Comprehensive income attributable to ZK International Group Co., Ltd.   $ 4,902,232     $ 4,865,839  
                 
Basic and diluted earnings per share   $ 0.59     $ 0.56  
Weighted average number of shares outstanding     9,000,000       9,000,000  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

  F- 4  

 

 

ZK International Group Co., Ltd.

Consolidated Statement of Changes in Equity

For the years ended September 30, 2016 and 2015

 

    Shares     Amount     Additional
paid-in
capital
    Statutory
surplus
reserve
    Retained
earnings
    Accumulated
other
comprehensive
income
    Non-
controlling
interests
    Total
equity
(deficit)
 
                                                 
Balance at September 30, 2014     -       -     2,750,777     $ -     (3,980,240 )   $ 954,540     $ 24,140     $ (250,783 )
                                                                 
Shares issued to founders     9,000,000     $ 50,000       -       -       -       -       -       50,000  
Foreign currency translation loss     -       -       -       -       -       (142,842 )     -       (142,842 )
Net income     -       -       -       -       5,008,681       -       -       5,008,681  
                                                                 
Balance at September 30, 2015     9,000,000       50,000       2,750,777       -       1,028,441       811,698       24,140       4,665,056  
                                                                 
Capital contributions by non-controlling interest     -       -       -       -       -       -       15,040       15,040  
Foreign currency translation loss     -       -       -       -       -       (400,459 )     (3,406 )     (403,865 )
Net income     -       -       -       579,994       4,669,543       -       53,154       5,302,691  
                                                                 
Balance at September 30, 2016     9,000,000     $ 50,000     $ 2,750,777     $ 579,994     $ 5,697,984     $ 411,239     $ 88,928     9,578,922  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

  F- 5  

 

 

ZK International Group Co., Ltd.

Consolidated Statements of Cash Flows

For the years ended September 30, 2016 and 2015

 

    September 30,  
    2016     2015  
             
Cash Flows from Operating Activities:                
Net income   $ 5,302,691     $ 5,008,681  
Adjustments to reconcile net income to net cash used in operating activities:                
Depreciation expense     442,793       493,690  
Amortization expense     13,248       14,017  
Bad debt expense     691,156       691,777  
Changes in operating assets and liabilities:                
Accounts receivable     (10,200,868 )     (10,604,662 )
Other receivables     (381,751 )     18,822  
Notes receivable     (76,531 )     279,014  
Inventories     (775,275 )     2,546,046  
Advance to suppliers     (908,689 )     (2,352,385 )
Accounts payable     796,189       (277,621 )
Accrued expenses and other current liabilities     412,894       (325,564 )
Accrued payroll and welfare     50,897       63,728  
Advance from customers     1,400,622       (1,197,632 )
Income tax payable     2,031,515       2,861,830  
                 
Net cash used in operating activities     (1,201,109 )     (2,780,259 )
                 
Cash Flows from Investing Activities:                
Purchases of property, plant and equipment     (123,945 )     (289,956 )
                 
Net cash used in investing activities     (123,945 )     (289,956 )
                 
Cash Flows from Financing activities:                
Capital contributions from non-controlling interest     15,306       -  
Restricted cash     (206,633 )     446,732  
Proceeds from short-term bank borrowings     2,148,310       98,793  
Proceeds from notes payable borrowings     -       161,955  
Repayments on note payable     (2,602,037 )     -  
Repayments from related party     1,485,555       2,034,454  
                 
Net cash (used in) / provided by financing activities     840,501       2,741,934  
                 
Effect of exchange rate changes on cash and cash equivalents     (18,589 )     (22,383 )
                 
Net decrease in cash and cash equivalents     (503,142 )     (350,664 )
Cash and cash equivalents at the beginning of year     626,791       977,455  
                 
Cash and cash equivalents at the end of year   $ 123,649     $ 626,791  
                 
Supplemental cash flows information:                
Cash paid for income taxes   $ 108,825     $ 49,543  
Cash paid for interest expenses   $ 939,914     $ 1,272,903  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

  F- 6  

 

 

ZK International Group Co., Ltd.

Notes to Financial Statements

 

NOTE 1 – ORGANIZATION AND NATURE OF OPERATIONS

 

ZK International Group Co., Ltd. (“ZK International”)

 

ZK International was incorporated on May 13, 2015 in the British Virgin Islands (“BVI”). ZK International is a holding company with no operations.

 

The Company is authorized to issue 50,000,000 ordinary shares, with no par value. 9,000,000 shares were issued and outstanding as of September 30, 2016. The ownership interests described below are based on the shareholders’ portion of the authorized ordinary shares. Upon its founding on May 13, 2015, ZK International was 100% held by CHENG Kai Chun, a nominee shareholder, with no voting interest, and five mainland Chinese, HUANG Jian Cong, WANG Ming Jie, WANG Guo Lin, WANG Jian Di and WANG Yang Ming, who control 100% of ZK International’s voting interest. On October 12, 2015, 100% of ZK International’s equity interest was transferred to these five mainland Chinese, with HUANG Jian Cong holding 45%, WANG Ming Jie holding 20%, WANG Guo Lin holding 20%, WANG Jian Di holding 10% and WANG Yang Ming holding 5%. These five mainland Chinese entered an agreement on May 13, 2015 to vote their shares in concert in ZK International, covering all the periods presented afterwards.

 

ZK Pipe Industry Co., Ltd. (“ZK Pipe”)

 

ZK Pipe was incorporated on May 28, 2015 in Hong Kong. The registered capital is HKD 1,000,000 which was initially 40% held by ZK International and 60% held by CHENG Kai Chun, a nominee shareholder with no voting interest in ZK Pipe. On August 5, 2015, CHENG Kai Chun transferred all of his equity interest in ZK Pipe to ZK International. After the transfer, ZK International controls 100% of ZK Pipe’s voting interest and ZK Pipe became a wholly owned subsidiary of ZK International. The paid in capital was zero as of September 30, 2016.

 

The registered principal activities of ZK Pipe are technical research of metal pipe and fittings, metal take-up valve plumbing and water purifying plant; imports and exports of goods. ZK Pipe had not commenced operations as of September 30, 2016.

 

Wenzhou Weijia Pipeline Development Co., Ltd. (“Wenzhou Weijia”)

 

Wenzhou Weijia was incorporated on June 17, 2015 in Wenzhou and a wholly owned subsidiary of ZK Pipe. Wenzhou Weijia is a wholly-foreign owned enterprise organized the laws of the People’s Republic of China. The registered capital is USD 20,000,000 and the paid in capital was zero as of September 30, 2016.

 

The registered principal activities of Wenzhou Weijia are technical research, technical service and sales of metal pipe and fittings and light industry machinery and equipment; imports and exports of goods and technology. Wenzhou Weijia had not commenced operations as of September 30, 2016. 

 

Zhejiang Zhengkang Industrial Co., Ltd. (“Zhejiang Zhengkang”) (formerly: Wenzhou Yafei Valve Manufacturing Co. Ltd)

 

Zhejiang Zhengkang was incorporated on December 4, 2001 under the laws of the People’s Republic of China. The registered and paid in capital is RMB 20,000,000. Since May 24, 2006, Zhejiang Zhengkang was owned by five Mainland Chinese, with HUANG Jian Cong holding 45%, WANG Ming Jie holding 20%, WANG Guo Lin holding 20%, WANG Jian Di holding 10% and WANG Yang Ming holding 5%. Also, these five mainland Chinese entered an agreement on January 1, 2013 to vote their shares in concert in Zhejiang Zhengkang. The agreement has been in effect for all periods presented. On September 29, 2015, Wenzhou Weijia acquired 99% equity percentage of Zhejiang Zhengkang from these five mainland Chinese owners, HUANG Jian Cong, WANG Ming Jie, WANG Guo Lin, WANG Jian Di and WANG Yang Ming. After that, Zhejiang Zhengkang’s equity interest is 99% held by Wenzhou Weijia and 1% held by HUANG Jian Cong as of the year end.

 

  F- 7  

 

 

The principal activities of Zhejiang Zhengkang are manufacturing and sales of stainless steel band, copper strip, welded stainless steel pipes and fittings, pipe fittings, valve, light industry machinery and equipment and other stainless steel products; imports and exports of goods and technology.

 

Wenzhou Zhengfeng Industry and Trade Co., Ltd. (“Wenzhou Zhengfeng”) (formerly: Wenzhou Zhengfeng Steel Strip Co., Ltd.)

 

Wenzhou Zhengfang was incorporated on December 24, 1999 under the laws of the People’s Republic of China. The registered and paid in capital is RMB 2,880,000. Since January 1, 2013, Wenzhou Zhengfeng’s voting interest was controlled by the above mentioned five Mainland Chinese, HUANG Jian Cong, WANG Ming Jie, WANG Guo Lin, WANG Jian Di and WANG Yang Ming, through agreement with nominee shareholders. Also, these five mainland Chinese entered into an agreement on January 1, 2013 to vote their shares in concert in Wenzhou Zhengfeng. The agreement has been in effect for all periods presented. On June 8, 2015, 100% of Wenzhou Zhengfeng’s equity interest was transferred from nominee shareholders to these five mainland Chinese, with WANG Ming Jie holding 38.89%, WANG Guo Lin holding 27.78%, HUANG Jian Cong holding 22.57%, WANG Yang Ming holding 5.55% and WANG Jian Di holding 5.21%, respectively. On September 22, 2015, Zhejiang Zhengkang acquired 100% equity percentage of Wenzhou Zhengfeng, after that, Wenzhou Zhengfeng is a wholly owned subsidiary of Zhejiang Zhengkang.

 

The principal activities of Wenzhou Zhengfeng are trading of steel strip for the years then ended which are mainly purchased from Zhejiang Zhengkang.

 

Reorganization   

 

In or about September 2015, the Company engaged in a corporate reorganization to roll several controlled entities (now referred to as the subsidiaries) into one legal corporation (the Company). The specific transactions related to this reorganization are outlined below.  During the years presented in these financial statements, the control of the entities has never changed (always under the control of HUANG Jian Cong, WANG Ming Jie, WANG Guo Lin, WANG Jian Di and WANG Yang Ming ). Accordingly, the combination has been treated as a corporate restructuring (reorganization) of entities under common control and thus the current capital structure has been retroactively presented in prior periods as if such structure existed at that time and in accordance with ASC 805-50-45-5, the entities under common control are presented on a combined basis for all periods to which such entities were under common control. Since all of the subsidiaries were under common control for the entirety of the years ended September 30, 2016 and 2015, the results of these subsidiaries are included in the financial statements for both periods. Non-controlling interests in the subsidiaries are related parties and thus were not adjusted to fair value as a result of the reorganization.

 

The transactions leading up to and including the reorganization are as follows:

 

On September 29, 2015, Wenzhou Weijia acquired 99% equity percentage of Zhejiang Zhengkang from these five mainland Chinese owners, HUANG Jian Cong, WANG Ming Jie, WANG Guo Lin, WANG Jian Di and WANG Yang Ming. After that, Zhejiang Zhengkang’s equity interest is 99% held by Wenzhou Weijia and 1% held by HUANG Jian Cong as of the year end.

 

On September 22, 2015, Zhejiang Zhengkang acquired 100% equity percentage of Wenzhou Zhengfeng, after that, Wenzhou Zhengfeng is a wholly owned subsidiary of Zhejiang Zhengkang.

 

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

 

Presentation and Principles of Consolidation

 

The accompanying consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United Stated of America, including the assets and liabilities of ZK International Group Co., Ltd. and its subsidiaries (the “Company”), at their historical carrying values and the results of their operations and cash flows as if they were consolidated for all periods presented, or for the periods from their inception if formed after September 30, 2014. All inter-company transactions and balances have been eliminated in consolidation.

 

  F- 8  

 

 

The contributions of operating entities (Zhejiang Zhengkang to Wenzhou Weijia and Wenzhou Zhengfeng to Whenzhou Zhengkang) have been accounted for as transactions under common control at the carrying amount of the net assets and equity transferred since all entities in the Company are controlled by the above mentioned five mainland Chinese owners, HUANG Jian Cong, WANG Ming Jie, WANG Guo Lin, WANG Jian Di and WANG Yang Ming, who have agreed to vote their shares in concert for all periods presented.

  

Entity Name   Registered
Location
  Background   Recent Ownership as of the
issuance date of the report
ZK International   BVI  

· Incorporated on May 13, 2015

· Registered capital of USD 50,000, not paid

· A holding company with no operation activities itself for the years then ended

 

45% by HUANG Jian Cong

20% by WANG Ming Jie

20% by WANG Guo Lin

10% by WANG Jian Di

5% by WANG Yang Ming

ZK Pipe   HK  

· Incorporated on May 28, 2015

· Registered capital of HKD 1,000,000, not paid

· Have not commenced operations

  100% by ZK International
Wenzhou Weijia   Wenzhou  

· Incorporated on June 17, 2015

· Registered capital of USD 20,000,000, not paid

· Have not commenced operations

  100% by ZK Pipe
Zhejiang Zhengkang   Wenzhou  

· Incorporated on December 4, 2001

· Registered capital of RMB 30,000,000, fully paid

· Principally operated in manufacturing and sales of steel strip, steel pipe and fittings

 

99% by Wenzhou Weijia

1% by HUANG Jian Cong

Wenzhou Zhengfeng   Wenzhou  

· Incorporated on December 24, 1999

· Registered capital of RMB 2,880,000, fully paid

· Principally operated in trading of steel strip, mainly purchased from Zhejiang Zhengkang

  100% by Zhejiang Zhengkang

 

Use of Estimates

 

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Such estimates include, but are not limited to, revenue recognition, allowances of trade receivable, inventory valuation, useful life of property, plant and equipment, employee benefit accruals, income taxes, and fair value measurements. Actual results could differ materially from those estimates.

 

Foreign Currency Translation

 

The financial records of the Group’s subsidiaries are maintained in their local currencies. Monetary assets and liabilities denominated in currencies other than their local currencies are translated into local currencies at the rates of exchange in effect at the balance sheet dates. Transactions denominated in currencies other than their local currencies during the year are converted into local currencies at the applicable rates of exchange prevailing when the transactions occur. Transaction gains and losses are recorded in other income/ (expense), net in the statements of income.

 

The reporting currency of the Group is the United States dollar (“US dollar”). When translating local financial reports of the Group’s subsidiaries into US dollar, assets and liabilities are translated at the exchange rates at the balance sheet date, equity accounts are translated at historical exchange rates and revenue, expenses, gains and losses are translated at the average rate for the period. Translation adjustments are reported as cumulative translation adjustments and are shown as a separate component of other comprehensive income in the statements of operations and comprehensive income.

 

The relevant exchange rates are listed below:

 

    For the Fiscal Years
Ended September 30
 
    2016     2015  
Period Ended RMB: USD exchange rate     6.6711       6.3668  
Period Average RMB: USD exchange rate     6.5333       6.1746  

 

  F- 9  

 

 

Cash and Cash Equivalents

 

Cash and cash equivalents are stated at cost, which approximates fair value, and primarily consist of cash and deposits with financial institutions which are unrestricted as to withdrawal and use. Cash equivalents consist of highly liquid investments that are readily convertible to cash generally with maturities of three months or less when purchased.

 

Restricted Cash

 

Cash that is restricted as to withdrawal or usage is reported as restricted cash in the consolidated balance sheets and is not included in the beginning or ending balance of cash and cash equivalents in the consolidated statements of cash flows.

 

Restricted cash of $3,236,482 and $3,179,140 as of September 30, 2016 and 2015, respectively, represented short-term pledged bank deposits placed with a bank which were designated as security for bank acceptance bills granted by the financial institution and will be released upon acceptance of these bills payable; and deposits in bank for guarantees issued by bank and delivered to suppliers which will be deducted upon suppliers’ acceptance of these guarantees.

 

Accounts Receivable, net

 

Trade accounts receivable arise from the product sales in the normal course of business. Based on management’s assessment of the customer’s credit history and current relationships with them, management makes conclusions whether any balances outstanding at the end of the period will be deemed uncollectible on an individual basis and aging analysis basis. The Company reserves 5% of accounts receivable balances that have been outstanding between 1 year and 2 years, reserves 20% of accounts receivable balances that have been outstanding between 2 years and 3 years, reserves 40% of receivable balances that have been outstanding between 3 years to 5 years, and reserves 100% of receivable balances that have been outstanding more than 5 years.

 

The allowance for doubtful accounts recognized as of September 30, 2016 and 2015 was $1,648,178 and $1,017,717, respectively.

 

Inventories

 

Inventories are stated at the lower of cost or market value. Cost of inventories is calculated using the weighted-average method. In addition to the purchasing cost of raw materials, work in progress and finished goods include direct labor costs and overhead. The Company periodically assesses the recoverability of all inventories to determine whether adjustments are required to record inventory at the lower of cost or market value. Inventory that the Company determines to be obsolete or in excess of forecasted usage are reduced to its estimated realizable value based on assumptions about future demand and market conditions. If actual demand is lower than the forecasted demand, additional inventory write-downs may be required.

 

There were no write-downs for inventories recognized as of September 30, 2016 and 2015.

 

Advance to Suppliers and Advance from Customers

 

Advance to suppliers refer to advances for purchase of materials or other service agreement, which are applied against trade accounts payable when the materials or services are received. Advance from customers refer to advances received from customers regarding product sales, which are applied against trade accounts receivable when products are sold.

 

The Company reviews a supplier's credit history and background information before advancing a payment. If the financial condition of its suppliers were to deteriorate, resulting in an impairment of their ability to deliver goods or provide services, the Company would recognize expense in the period they are considered unlikely to be collected. There was no such expense recognized during the years ended September 30, 2016 and 2015.

 

Changes of advances to suppliers for the years ended September 30, 2016 and 2015 are as follow:

 

Beginning balance   $ 2,549,418     $ 277,379  
Less: products or services received   $ (20,841,688 )   $ (13,703,995 )
Add: payment to suppliers   $ 21,543,565     $ 15,976,034  
Ending balance   $ 3,251,295     $ 2,549,418  

 

Changes of advances from customers for the years ended September 30, 2016 and 2015 are as follow:

 

Beginning balance   $ 333,476     $ 1,546,028  
Add: payment from customers   $ 5,537,913     $ 3,761,248  
Less: products or services delivered   $ (4,253,173 )   $ (4,973,800 )
Ending balance   $ 1,618,216     $ 333,476  

 

  F- 10  

 

 

Fair Value of Financial Instruments

 

For certain of the Company’s financial instruments, including cash and equivalents, accounts receivable, accounts payable, and accrued expenses, the carrying amounts approximate their fair values due to their short maturities.

 

ASC Topic 820,  Fair Value Measurements and Disclosures,  requires disclosure of the fair value of financial instruments held by the Company. ASC Topic 825,  Financial Instruments , defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying amounts reported in the consolidated balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:

 

Level 1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.

 

Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets in inactive markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

 

Level 3 inputs to the valuation methodology use one or more unobservable inputs which are significant to the fair value measurement.

 

The Company analyzes all financial instruments with features of both liabilities and equity under ASC Topic 480,  Distinguishing Liabilities from Equity,  and ASC Topic 815,  Derivatives and Hedging.  As of September 30, 2016 and 2015, the Company did not identify any assets and liabilities required to be presented on the balance sheet at fair value.

 

Property, Plant and Equipment, net

 

Property, plant, and equipment are recorded at cost less accumulated depreciation. Depreciation commences upon placing the asset in usage and is recognized on a straight-line basis over the estimated useful lives of the assets, as follows:

 

  Useful Lives
Buildings 40 years
Machinery 8-20 years
Furniture, fixtures, and equipment 3-10 years
Motor vehicles 5-10 years

 

Upon retirement or disposition, the asset cost and related accumulated depreciation are removed with any gain or loss recognized in the consolidated statements of income. Repair and maintenance costs that do not extend the economic life of the underlying assets are expensed as incurred.

 

Costs incurred in constructing new facilities, including progress payments and other costs related to construction, are capitalized, and transferred to property, plant and equipment on completion, at which time depreciation commences.

 

Land Use Rights, net

 

Land use rights are recorded at cost and are amortized based on a straight-line basis over the usage period, which is 46 years.

 

  F- 11  

 

 

Impairment of Long-lived Assets

 

The Company management review the carrying values of long-lived assets whenever events and circumstances, such as a significant decline in the asset’s market value, obsolescence or physical damage affecting the asset, significant adverse changes in the assets use, deterioration in the expected level of the assets performance, cash flows for maintaining the asset are higher than forecast, indicate that the net book value of an asset may not be recovered through expected future cash flows from its use and eventual disposition. If this review indicates that there is impairment, the impaired asset is written down to its fair value, which is typically calculated using: (i) fair value less cost of disposal and/or (ii) future undiscounted net cash flows expected to result from the use of the assets and their eventual disposition.

 

There was no impairment charge for long-lived assets recognized as of September 30, 2016 and 2015.

 

Value-added Tax

 

Value-added taxes (“VAT”) collected from customers relating to product sales and remitted to governmental authorities are presented on a net basis. VAT collected from customers is excluded from revenue. The Company is subject to a VAT rate of 17%.

 

Revenue Recognition

 

The Company recognizes revenue in accordance with ASC 605, Revenue Recognition, regarding revenue recognition which specifies that revenue is realized or realizable and earned. Sales revenue is recognized when:

 

1) Persuasive evidence of an arrangement exists;
2) Delivery has occurred or services have been rendered (the risks, rewards and ownership of the products are transferred to customers); and
3) The seller’s price to the buyer is fixed or determinable; and
4) Collectability is reasonably assured.

 

Government Grant

 

Government grants are recognized when received and all the conditions for their receipt have been met.

Government grants as the compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the Company with no future related cost are recognized in profit or loss in the period in which they become receivable. During the period ended as of September 30, 2016 and 2015, $138,219 and $159,197, respectively, government grants were recognized as other income which were compensation for R&D or financial support to the Company.

 

Research and Development Costs

 

Research and development costs are expensed as incurred. Research and development reimbursements and grants are recorded by the Company as a reduction of research and development costs.

 

Income Taxes

 

The Company accounts for income taxes using the asset and liability method whereby it calculates deferred tax assets or liabilities for temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, net operating loss carry forwards and credits by applying enacted tax rates applicable to future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Current income taxes are provided for in accordance with the laws of the relevant taxing authorities. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on the characteristics of the underlying assets and liabilities, or the expected timing of their use when they do not relate to a specific asset or liability.

 

  F- 12  

 

 

Earnings Per Share

 

Earnings (loss) per share is calculated in accordance with Accounting Standards Codification (“ASC”) 260 Earnings per Share. Basic earnings (loss) per share is computed by dividing the net income (loss) attributable to shareholders of the Company by the weighted average number of common shares outstanding during the year. Diluted earnings per share is computed in accordance with the treasury stock method and based on the weighted average number of common shares and dilutive common share equivalents. Dilutive common share equivalents are excluded from the computation of diluted earnings per share if their effects would be anti-dilutive.

 

Consolidated Statement of Cash Flows

 

Consolidated Cash flows from the Company’s operations are calculated based upon the local currencies using the average translation rates. As a result, amounts related to assets and liabilities reported on the statements of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheets.

 

Concentration of Risks

 

Exchange Rate Risks

 

The Company operates in China, which may give rise to significant foreign currency risks from fluctuations and the degree of volatility of foreign exchange rates between the US$ and the RMB. As at September 30, 2016, cash and cash equivalents of $123,649 (RMB 824,870) is denominated in RMB and are held in PRC (September 30, 2015 - $626,791 (RMB 3,990,619)).

 

Currency Convertibility Risks

 

Substantially all of the Company’s operating activities are transacted in RMB, which is not freely convertible into foreign currencies. All foreign exchange transactions take place either through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other regulatory institutions requires submitting a payment application form together with other information such as suppliers’ invoices, shipping documents and signed contracts.

 

Concentration of Credit Risks

 

Financial instruments that potentially subject the Company to concentration of credit risks consist primarily of cash and cash equivalents, restricted cash and accounts receivable, the balances of which are stated on the consolidated balance sheets which represent the Company’s maximum exposure. The Company places its cash and cash equivalents and restricted cash in good credit quality financial institutions in Hong Kong and China. Concentration of credit risks with respect to accounts receivables is linked to the concentration of revenue. To manage credit risk, the Company performs ongoing credit evaluations of customers’ financial condition.

 

Interest Rate Risks

 

The Company is subject to interest rate risk. All interest-bearing loans are charged interest at variable rates based on the Bank rates.

 

  F- 13  

 

 

Subsequent Events

 

The Company’s management reviewed all material events through the date of the consolidated financial statements were issued for subsequent event disclosure consideration.

 

Segment Reporting

Under Accounting Standards Codification No. 280, "Segment Reporting", or ASC 280, operating segments are defined as components of an enterprise about which separate financial information is available that is regularly evaluated by the entity's chief operating decision maker, in deciding how to allocate resources and in assessing performance. ASC 280 specifies that an operating segment is a component of a public entity that has “all of the following characteristics”:

 

a. It engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same public entity);

 

b. Its operating results are regularly reviewed by the public entity’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance;

 

c. Its discrete financial information is available.

The Company has evaluated ASC 280 and has identified only one reporting segment as the Company’s Chief Operating Decision Maker (“CODM”) focuses on sales performance by sales channel and market segment using internally generated sales data and externally developed market consumption data acquired from independent sources. These information are focused on the overall industry and no discrete financial information is available for our different products.

 

Recent Accounting Pronouncements

 

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers" (ASU 2014-09), which contains new accounting literature relating to how and when a company recognizes revenue. Under ASU 2014-09, a company recognizes revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. In July 2015, the FASB decided to delay the effective date of the new standard by one year; as a result, the new standard will be effective for annual and interim reporting periods beginning after December 15, 2017. Early adoption will be permitted, but no earlier than 2017 for calendar year-end entities.

 

The standard allows for two transition methods - retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial adoption. We have not yet determined our method of transition and are evaluating the impact that this guidance will have on our financial statements.

 

In July 2015, the FASB issued guidance which requires entities to measure most inventory at the lower of cost and net realizable value, thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. The update is effective for fiscal years beginning after December 15, 2016, and interim periods therein. Early application is permitted. Management is currently evaluating the impact that this guidance will have on the Company's consolidated financial statements, if any.

 

In November 2015, the FASB issued Accounting Standards Update 2015-17, "Balance Sheet Classification of Deferred Taxes," which is intended to simplify the balance sheet presentation of deferred income taxes. Current accounting principles require an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in its balance sheet. The amendments require that deferred tax liabilities and assets be classified as noncurrent in its balance sheet. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Companies may apply the new provisions either retrospectively or on a prospective basis, and early adoption is permitted. We have not yet determined our method of transition. In January 2016, the FASB issued Accounting Standards Update 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities." The amendments require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, and separate presentation of financial assets and financial liabilities by measurement category and form of financial asset. Additionally, the amendments eliminate the requirement to disclose the methods and significant assumptions used to estimate the fair value of financial instruments. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Other than an amendment relating to presenting in comprehensive income the portion of the total change in the fair value of a liability resulting from a change in instrument-specific credit risk (if the entity has elected to measure the liability at fair value), early adoption is not permitted. The Company does not anticipate the amendment will have any impact on our financial statements.

 

In February 2016, the FASB issued guidance to provide a new comprehensive model for lease accounting. Under this guidance, lessees and lessors should apply a "right-of-use" model in accounting for all leases (including subleases) and eliminate the concept of operating leases and off-balance sheet leases. This guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2018. Early adoption is permitted. There is no impact on the Company but there could be if the Company enters into leases in the future.

 

Other accounting standards that have been issued by the FASB or other standards-setting bodies are not expected to have a material effect on the Company's financial position, result of operations or cash flows.

 

  F- 14  

 

 

NOTE 3 – ACCOUNTS RECEIVABLE

 

Accounts receivable consisted of the following as of September 30, 2016 and 2015:

 

    September 30,  
    2016     2015  
Accounts receivable, gross   $ 25,492,158     $ 16,242,853  
Less: allowance for doubtful accounts     (1,648,178 )     (1,017,717 )
Accounts receivable, net   $ 23,843,980     $ 15,225,136  

 

Bad debt expense recorded by the Company during the years ended September 30, 2016 and 2015 were $691,156 and $691,777, respectively.

 

Changes of allowance for doubtful accounts for the years ended September 30, 2016 and 2015 are as follow:

 

    September 30,  
    2016     2015  
Beginning balance   $ 1,017,717     $ 358,672  
Add: additional reserve through bad debt expense   $ 630,461     $ 659,045  
Ending balance   $ 1,648,178     $ 1,017,717  

 

NOTE 4 – NOTES RECEIVABLE AND OTHER RECEIVABLES

 

Notes receivable consisted of bank notes of $89,941 and $15,706 provided by the Company’s customers as of September 30, 2016 and 2015, respectively, These notes are guaranteed by the banks.

 

Other receivables consisted of mainly the legal claims of $1.1 million and $1.4 million to be collected from the Company’s debtors as of September 30, 2016 and 2015, respectively. See Note 13.

 

NOTE 5 – INVENTORIES

 

Inventories consisted of the following as of September 30, 2016 and 2015:

 

    September 30,  
    2016     2015  
Raw materials   $ 1,689,949     $ 889,962  
Work-in-process     2,350,568       1,718,570  
Finished goods     2,403,571       3,348,011  
Total   $ 6,444,088     $ 5,956,543  

 

There were no inventory write-downs recognized for the years ended September 30, 2016 and 2015.

 

NOTE 6 – PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment consisted of the following as of September 30, 2016 and 2015 :

 

    September 30,  
    2016     2015  
Buildings   $ 5,293,106     $ 4,487,886  
Machinery     3,852,205       3,990,164  
Furniture, fixtures and equipment     468,880       462,929  
Motor vehicles     130,622       147,751  
Total property plant and equipment, at cost     9,744,813       9,088,730  
Less: accumulated depreciation     (3,845,215 )     (3,574,631 )
      5,899,598       5,514,099  
Construction in progress     8,387       1,003,467  
Property, plant and equipment, net   $ 5,907,985     $ 6,517,566  

 

  F- 15  

 

 

Depreciation expense was $442,793 and $493,690 for the years ended September 30, 2016 and 2015, respectively.

 

As of September 30, 2016 and 2015, the Company pledged buildings to secure banking facilities granted to the Company. The carrying values of the pledged buildings to secure bank borrowings by the Company are shown in Note 10.

 

NOTE 7 – LAND USE RIGHTS

 

    September 30,  
    2016     2015  
Land use rights, cost   $ 596,807     $ 625,334  
Less: accumulated amortization     (128,659 )     (121,215 )
Land use rights, net   $ 468,148     $ 504,119  

 

This represents the Company's land use rights in Wenzhou's plant, which had been pledged to secure the Company’s banking facilities granted to the Company as of September 30, 2016 and 2015. The carrying values of the pledged land use rights to secure bank borrowings by the Company are shown in Note 10.

 

Amortization expense was $13,248 and $14,017 for the years ended September 30, 2016 and 2015, respectively.

 

The estimated amortization expenses for each of the five succeeding fiscal years since the year ended September 30, 2016 are as follows:

 

    1 st
succeeding
fiscal year
    2 nd
succeeding
fiscal year
    3 rd
succeeding
fiscal year
    4 th
succeeding
fiscal year
    5 th
succeeding
fiscal year
    Total  
Estimated amortization expenses   $ 13,666     $ 13,500     $ 13,500     $ 13,500     $ 13,500     $ 67,500  

 

NOTE 8 – LONG-TERM INVESTMENT

 

The Company made an investment in Wenzhou Longlian Development Co., Ltd. ("Longlian") in 2011 by RMB 2,083,300 with equity percentage of 2.0833%. The principal activities of Longlian are property and infrastructure construction. As of September 30, 2016 and 2015, the Company carried this investment at its cost in the amount of $312,289 and $327,216, respectively.

 

  F- 16  

 

 

NOTE 9 – RELATED PARTY TRANSACTIONS

 

Net a mounts due to related parties consisted of the following as of September 30, 2016 and 2015 :

 

Accounts   Name of related party   September 30,  
        2016     2015  
Related party payables   Shareholder, HUANG Jian Cong   $ 1,662,160     $ 219,573  
Total       $ 1,662,160     $ 219,573  

 

This represented unsecured, interest free borrowings between the Company and the shareholders.

 

NOTE 10 – ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

Accrued expenses and other current liabilities consisted of the following as of September 30, 2016 and 2015:

 

    September 30,  
    2016     2015  
VAT payable   $ 3,096,782     $ 2,214,780  
Tax payables     54,330       48,445  
Other     265,501       78,694  
Total   $ 3,416,613     $ 2,341,919  

 

NOTE 11 – SHORT-TERM BANK BORROWINGS

 

Short-term bank borrowings consisted of the following at September 30, 2016:

 

Bank Name   Amount - RMB     Amount - USD     Issuance Date   Expiration Sate   Interest  
Agricultural Bank - Longwan Branch     6,240,000       935,382     12/16/2015   12/11/2016     5.66 %
Agricultural Bank - Longwan Branch     2,500,000       374,752     3/17/2016   3/16/2017     4.57 %
Agricultural Bank - Longwan Branch     7,000,000       1,049,307     4/7/2016   3/26/2017     4.12 %
Agricultural Bank - Longwan Branch     2,210,000       331,281     4/12/2016   4/11/2017     4.51 %
Agricultural Bank - Longwan Branch     4,000,000       599,604     6/2/2016   5/26/2017     4.65 %
Agricultural Bank - Longwan Branch     2,040,000       305,798     6/13/2016   6/11/2017     4.65 %
Agricultural Bank - Longwan Branch     2,700,000       404,733     6/16/2016   6/11/2017     4.65 %
Agricultural Bank - Longwan Branch     5,750,000       861,931     8/26/2016   8/16/2017     5.22 %
Agricultural Bank - Longwan Branch     4,300,000       644,574     9/9/2016   7/26/2017     5.06 %
Agricultural Bank - Longwan Branch     6,000,000       899,406     9/22/2016   9/21/2017     5.00 %
Bank of China - Longwan Branch     13,000,000       1,948,713     8/26/2016   4/8/2017     4.79 %
CMBC-10802     7,600,000       1,139,248     5/25/2016   11/22/2016     5.44 %
CMBC-10802     5,400,000       809,465     6/15/2016   11/22/2016     5.66 %
CMBC-10802     5,000,000       749,505     6/17/2016   11/22/2016     5.66 %
Zhejiang Commerce Bank     2,000,000       299,802     2/5/2016   2/4/2017     6.00 %
Zhejiang Commerce Bank     1,500,000       224,851     2/5/2016   2/4/2017     6.00 %
Zhejiang Commerce Bank     1,500,000       224,851     2/6/2016   2/5/2017     6.00 %
Zhejiang Commerce Bank     5,000,000       749,505     3/2/2016   3/1/2017     6.00 %
Zhejiang Commerce Bank     5,000,000       749,505     3/7/2016   3/6/2017     6.00 %
Zhejiang Commerce Bank     5,000,000       749,505     3/9/2016   3/8/2017     6.00 %
Industrial Bank     6,481,268       971,549     9/25/2015   9/23/2016*     7.00 %
Industrial Bank     6,500,000       974,356     9/25/2015   9/25/2016*     7.00 %
Minsheng Bank     5,000,000       749,505     3/8/2016   10/19/2016     6.70 %
Minsheng Bank     3,500,000       524,653     4/16/2016   4/11/2017     5.00 %
Minsheng Bank     5,400,000       809,465     4/8/2016   4/8/2017     5.00 %
Pingan Bank     8,000,000       1,199,208     3/3/2016   3/3/2017     5.22 %
Agricultural Bank     1,964,381       294,463     12/31/2015   9/11/2016*     5.79 %
Bank of Communications     5,000,000       749,505     5/20/2016   5/20/2017     6.53 %
Bank of Communications     5,000,000       749,505     5/23/2016   5/23/2017     7.60 %
Bank of Communications     4,800,000       719,525     5/24/2016   5/24/2017     7.60 %
Total     145,385,649       21,793,454                  

 

* The Company paid off these short-term bank borrowings in October 2016.

 

  F- 17  

 

 

Short-term bank borrowings consisted of the following at September 30, 2015:

 

Bank Name   Amount - RMB     Amount - USD     Issuance Date   Expiration Sate   Interest  
Agricultural Bank - Longwan Branch     6,450,000       1,013,076     12/8/2014   11/16/2015     6.4400 %
Agricultural Bank - Longwan Branch     2,500,000       392,665     4/8/2015   3/21/2016     5.8850 %
Agricultural Bank - Longwan Branch     2,210,000       347,116     4/24/2015   4/21/2016     5.8850 %
Agricultural Bank - Longwan Branch     4,000,000       628,264     6/10/2015   5/26/2016     5.8650 %
Agricultural Bank - Longwan Branch     2,040,000       320,415     6/19/2015   6/16/2016     5.8650 %
Agricultural Bank - Longwan Branch     2,700,000       424,078     6/30/2015   6/26/2016     5.5775 %
Agricultural Bank - Longwan Branch     5,750,000       903,130     9/11/2015   8/26/2016     5.0600 %
Agricultural Bank - Longwan Branch     4,300,000       675,384     9/18/2015   9/16/2016     5.0600 %
Agricultural Bank - Longwan Branch     6,000,000       942,396     9/23/2015   9/21/2016     5.0600 %
Agricultural Bank - Longwan Branch     7,000,000       1,099,462     9/30/2015   9/26/2016     5.0600 %
Bank of China - Longwan Branch     4,500,000       706,797     10/9/2014   10/8/2015     6.3000 %
Bank of China - Longwan Branch     5,000,000       785,330     10/11/2014   10/11/2015     6.3000 %
Bank of China - Longwan Branch     5,000,000       785,330     10/14/2014   10/14/2015     6.3000 %
Zhejiang Commerce Bank - Wenzhou     5,000,000       785,330     2/9/2015   2/8/2016     5.8800 %
Zhejiang Commerce Bank - Wenzhou     5,000,000       785,330     3/2/2015   3/1/2016     5.8800 %
Zhejiang Commerce Bank - Wenzhou     5,000,000       785,330     3/11/2015   3/10/2016     5.8850 %
Zhejiang Commerce Bank - Wenzhou     5,000,000       785,330     3/13/2015   3/12/2016     5.8850 %
Industrial Bank     6,500,000       1,020,929     9/25/2015   9/23/2016     7.0000 %
Industrial Bank     6,500,000       1,020,929     9/25/2015   9/25/2016     7.0000 %
Industrial Bank     5,000,000       785,330     9/28/2015   5/28/2016     5.8333 %
Minsheng Bank     3,500,000       549,731     4/20/2015   4/13/2016     6.1525 %
Minsheng Bank     5,400,000       848,156     4/21/2015   4/13/2016     6.1525 %
Minsheng Bank     100,000       15,707     4/21/2015   12/31/2015     6.1525 %
Pingan Bank     5,000,000       785,330     3/2/2015   3/2/2016     7.0000 %
Pingan Bank     3,000,000       471,198     3/5/2015   3/5/2016     7.0000 %
Bank of Communications     7,400,000       1,162,288     2/11/2015   2/11/2016     8.3000 %
Bank of Communications     7,500,000       1,177,995     2/11/2015   2/11/2016     7.7000 %
Agricultural Bank - Longwan Branch     4,000,000       628,264     10/23/2014   10/18/2015     6.9000 %
Total     131,350,000       20,630,619                  

 

The Company’s short-term bank borrowings are pledged by its assets as listed below, and guaranteed by Wenzhou Ruifeng Industrial Co., Ltd. ("Ruifeng"), Wenzhou Wuxing Copper Co. Ltd. ("Wuxing"), HUANG Jian Cong, WANG Jian Di, WANG Guo Lin, WANG Min Jie, WANG Yang Ming, ZHANG Sai Pin (HUANG Jian Cong's wife), ZHEN Bao Le (Wuxing's director) and LIN Yu Lian (ZHEN Bao Le's wife).

 

The carrying values of the Company's pledged assets to secure short-term borrowings by the Company are as follows:

 

    September 30,  
    2016     2015  
Buildings, net   $ 3,987,929     $ 3,704,284  
Land use rights, net     504,119       468,148  
Machinery, net     325,566       303,856  
Total   $ 4,817,614     $ 4,476,288  

  

NOTE 12 – NOTES PAYABLE

 

Notes payable consisted of the following as of September 30, 2016 and 2015 :

 

As of September 30, 2016
Bank Name   Amount - RMB     Amount - USD     Issuance Date   Expiration Date   Nature
Agricultural Bank - Longwan Branch     4,000,000       599,604     6/21/2016   12/21/2016   Bank Acceptance Bill
Agricultural Bank - Longwan Branch     7,000,000       1,049,307     8/4/2016   2/4/2017   Bank Acceptance Bill
Foshan Ruigangda Trading Co., Ltd     5,000,000       749,505     7/12/2016   1/10/2017   Bank Acceptance Bill
Foshan Ruigangda Trading Co., Ltd     5,000,000       749,505     8/9/2016   2017/2/29   Bank Acceptance Bill
Zhejiang Zhengkang Industrial Co., Ltd.     5,000,000       749,505     9/28/2016   3/27/2017   Letter of Credit
Total     26,000,000       3,897,426              

 

As of September 30, 2015
Bank Name   Amount - RMB     Amount - USD     Issuance Date   Expiration Date   Nature
CMBC - Longwan Branch     4,000,000       628,264     2015/5/20   2015/11/20   Bank Acceptance Bill
CMBC - Longwan Branch     5,000,000       785,330     2015/5/21   2015/11/21   Bank Acceptance Bill
CMBC - Longwan Branch     6,200,000       973,809     2015/5/22   2015/11/22   Bank Acceptance Bill
CMBC - Longwan Branch     5,000,000       785,330     2015/6/16   2015/12/16   Bank Acceptance Bill
CMBC - Longwan Branch     5,800,000       910,983     2015/6/17   2015/12/17   Bank Acceptance Bill
CMBC - Longwan Branch     5,000,000       785,330     2015/7/2   2016/1/2   Bank Acceptance Bill
CMBC - Longwan Branch     5,000,000       785,330     2015/7/3   2016/1/3   Bank Acceptance Bill
Agricultural Bank - Longwan Branch     7,000,000       1,099,462     2015/8/4   2015/2/4   Bank Acceptance Bill
Total     43,000,000       6,753,838              

 

  F- 18  

 

 

NOTE 13 – COMMITMENT AND CONTINGENCIES

 

The Company, from time to time, may be a party to claims and legal proceedings generally incidental to its business.

 

As of September 30, 2016, Company only has the following pending legal claim against a third party:

 

During 2010, the Company entered into two loan agreements with Raozhou Dianli Ltd and Xianjin Cao, and advanced RMB 9 million on the first loan and RMB 1.5 million on the second loan, totaled TMB 10.5 million (approximately USD 1.52 million). The terms of these two loans are both one year. Both borrowers defaulted and didn’t make any repayment when the terms expired. The Company thus sued these two parties and pursuant to the final judgement ruled by Jiangsu High People’s Court, the Company is entitled to a repayment of RMB 10.5 million plus interest with an interest rate that is four times higher than the normal interest rate in the corresponding period. The claim has been secured by real estate assets of Raozhou Dianli Ltd, which has been seized by the Court and has an appraised value of RMB 78 million, or about USD 11.3 million, which is much higher than the Company’s claim. The Company is listed as the first-in-line creditor and the management believes that certainly it sill receive repayment of RMB 10.5 million plus the outstanding interest. The Company recorded the entire RMB 10.5 million as Other Receivable. As of September 30, 2016 and 2015, the outstanding balance is RMB 7.4 million (USD 1.1 million) and RMB 8.9 million (USD 1.4 million), respectively.

 

In the opinion of the management, after consultation with the Company’s legal counsel, there were no legal matters that are likely to have a material adverse effect on the Company’s financial position as of September 30, 2016 and 2015 and the results of operations or cash flows for the years ended September 30, 2016 and 2015.

 

In the normal course of its business, our Company, including in particular Zhejiang Zhengkang and Wenzhou Zhengfeng, may be subject to challenges from various PRC taxing authorities regarding the amounts of taxes due. Although the Company’s management believes the Company has paid all accrued for all taxes owed by the Company, from time to time, in order for our Company to stay competitive in the market, we may need to accept unfavorable contract terms from our clients, including the accrue of account receivables for the delivery of our products until the completion of a certain construction project and without recognizing the revenue in the interim. PRC taxing authorities may also take the position that the Company owes more taxes than it has paid based on transactions conducted by ZK Pipe, which may be deemed a resident enterprise, thereby resulting in taxable liability for Zhejiang Zhengkang.

  

In addition, the Company recorded a potential tax liability of $5,163,716 and $3,251,430 for the years ended September 30, 2016 and 2015, respectively, and for the possible underpayment of income and other taxes. It is possible that the tax liability of the Company for past taxes may be higher than those amounts. The Company’s management believes it has sufficient cash on hand to adequately meet any tax liability for the underpayment of income and business taxes. Additionally, the Company’s management believes it may be able to negotiate with local PRC taxing authorities a reduction to any amounts that such authorities may believe are due and a reduction to any interest or penalties thereon. We have no guarantee that we will be able to negotiate such a reduction. To the extent our Company is able to negotiate such amounts, national-level taxing authorities may take the position that localities are without power to reduce such liabilities, and such PRC taxing authorities may attempt to collect unpaid taxes, interest and penalties in amounts greatly exceeding management’s estimates. 

 

The Company has accrued tax liabilities of $5.1 million as of September 30, 2016, mostly related to its unpaid income tax and business tax, both of which are governed by local tax authority. The total amount of unpaid tax liabilities was accrued based on the calculation using the current prevailing tax rates without including potential interest and penalties because the Company’s management believes that it is unlikely that the interest and penalties would apply in the end if the Company negotiates with the local tax authority to pay all or part of the unpaid tax liabilities. The Company has had unofficial discussions with the local tax authority and the management believes that it is highly possible that the Company will reach an agreement with the local tax authority to result in a settlement of tax liability with a much less amount than the amount currently accrued, if the Company is able to successfully launch its IPO bid. Once the settlement is reached, any interest or penalties associated with those unpaid tax liabilities will most likely be waived or reduced. The management believes that it is very difficult to determine how much interest or penalties will eventually be, or if any of those will be assessed at all. Those potential interests or penalty liabilities are contingent upon the outcome of tax settlement and the management estimates if using current interest and penalty rate stipulated by the tax authority. 

 

  F- 19  

 

 

We have issued various Bank Acceptance Bills and Letter of Credit in the amount of RMB 26,000,000 (or approximately US $3.90 million) to increase deposit-to-loan ratio of the Company. While the issuance of such negotiable instruments violated the Article 10 of PRC Negotiable Instrument Law, which states “the issue, acquisition and transfer of an instrument shall follow the principle of good faith and reflect the true relationship of transaction and between the creditor and the debtor”, it is our PRC counsel’s opinion that such violation is a common practice in China and is not subject to administrative penalties stated in Article 103 of PRC Negotiable Instrument Law, nor it is an act of fraud as defined by Article 102 of PRC Negotiable Instrument Law and Article 194 of Criminal Law. In addition, our PRC counsel believes that the Company, along with its officers, directors or any affiliated party, will not be subject to any administrative penalty or criminal sanction. However, if our Company or our officers and directors are penalized for the violation, such penalty, whether financially or not, could have a materially adverse effect on our results of operation.

 

NOTE 14 – CUSTOMER AND SUPPLIER CONCENTRATION

 

Significant customers and suppliers are those that account for greater than 10% of the Company’s revenues and purchases.

 

The Company sold a substantial portion of products to one customer (15.3%) in 2015 and the Company has no significant concentration in fiscal 2016. As of September 30, 2015, amount due from this customer included in accounts receivable was $3,914,528. The loss of the significant customer or the failure to attract new customers could have a material adverse effect on our business, results of operations and financial condition for fiscal 2015.

 

The Company purchased a substantial portion of materials from three third-party vendors (67.2%) in 2016. As of September 30, 2016, net amounts due to the vendors (accounts payable - advance to vendors) was $654,014. As of September 30, 2015, there’re four such vendors that had aggregated sales accounted to 63.9% of total sales amount. Net amounts due to the four vendors (accounts payable - advance to vendors) was - $2,038,575.

 

The Company believes there are numerous other suppliers that could be substituted should the supplier become unavailable or non-competitive.

 

NOTE 15 – STOCKHOLDERS’ EQUITY

 

On October 12, 2015, 100% of ZK International’s equity was transferred from ZHENG Jia Jun to five Mainland Chinese, with HUANG Jian Cong holding 45%, WANG Ming Jie holding 20%, WANG Guo Lin holding 20%, WANG Jian Di holding 10% and WANG Yang Ming holding 5%.

 

On May 25, 2016, Zhengkang's Board of Directors resolved to increase Zhengkang's registered capital by RMB 10,000,000, from RMB 20,000,000 to RMB 30,000,000, and contribution by Wenzhou Weijia of RMB 9,900,000 and by HUANG Jian Cong of RMB 100,000, respectively. After this capital increase, there was no change on Zhangkang's shareholders’ investment proportion. Zhengkang received RMB 9,900,000 capital injection from Wenzhou Weijia on June 21, 2016 and received RMB 100,000 capital injection from HUANG Jian Cong on June 28, 2016. HUANG Jian Cong on June 28, 2016 became a 1% non-controlling interest holder. The Company has received its revised business license on August 1, 2016.

 

  F- 20  

 

 

Statutory surplus reserves

 

Pursuant to Chinese Company law applicable to foreign investment companies, the Company’s PRC subsidiaries are required to maintain statutory surplus reserves. The statutory surplus reserves are to be appropriated from net income after taxes, and should be at least 10% of the after tax net income determined in accordance with accounting principles and relevant financial regulations applicable to PRC enterprises (“PRC GAAP”). The Company has an option of not appropriating the statutory surplus reserve after the statutory surplus reserve is equal to 50% of the subsidiary’s registered capital. Statutory surplus reserves are recorded as a component of shareholders’ equity. The statutory surplus reserve as at September 30, 2016 is $579,994.

 

For the year ended September 30, 2016, ZK International Group appropriated $579,994 to the statutory surplus reserves. For the year ended September 30, 2015, statutory surplus reserves appropriated was $0.

 

ZK Pipe Industry Co., Ltd has not commenced operation since inception. No appropriation to the statutory surplus reserves.

 

Wenzhou Weijia Pipeline Development Co., Ltd has not commenced operation since inception. No appropriation to the statutory surplus.

 

Zhejiang Zhengkang Industrial Co., Ltd appropriated $579,994 to the statutory surplus reserves for the year ended September 30, 2016. For the year ended September 30, 2015, statutory surplus reserves appropriated was $0.

 

Wenzhou Zhengfeng Industry recorded no revenue for the year ended September 30, 2016 and a net loss for the year ended September 30, 2015 according to PRC GAAP, so no appropriation to the statutory surplus reserves and staff welfare and bonus fund was made.

 

Dividends declared by the Company’s PRC subsidiaries are based on the distributable profits as reported in their statutory financial statements reported in accordance with PRC GAAP, which differ from the results of operations reflected in the consolidated financial statements prepared in accordance with US GAAP. The Company’s ability to pay dividends is primarily dependent on the Company receiving distributions of funds from its PRC subsidiaries. As of September 30, 2016, the Company has no dividend payable.

 

Under PRC laws and regulations, statutory surplus reserves are restricted to set-off against losses, expansion of production and operation and increasing registered capital of the respective company, and are not distributable other than upon liquidation. The reserves are not allowed to be transferred to the Company in terms of cash dividends, loans or advances, nor are they allowed for distribution except under liquidation. Amounts restricted include the PRC subsidiaries’ paid-in capital and statutory surplus reserves of the Company’s PRC subsidiaries totaling $3,330,771 as of September 30, 2016 and $2,750,777 as of September 30, 2015.

 

Non-controlling interests

 

Non-controlling interests represent the interest of non-controlling shareholders in Zhejiang Zhengkang based on their proportionate interests in the equity of that company adjusted for its proportionate share of income or losses from operations. On September 29, 2015, Wenzhou Weijia acquired 99% equity percentage of Zhejiang Zhengkang from 5 individual shareholders: HUANG Jian Cong, WANG Ming Jie, WANG Guo Lin, WANG Jian Di and WANG Yang Ming. After that, Zhejiang Zhengkang’s equity interest is 99% held by Wenzhou Weijia and 1% held by HUANG Jian Cong as of the year end. The non-controlling interest in Zhejiang Zhengkang was 1% as of September 30, 2016 and 2015.

  

  F- 21  

 

 

NOTE 16 – INCOME TAXES

 

    September 30,  
    2016     2015  
Provision for income tax for the period   $ 1,200,010     $ 1,053,132  
Income tax benefit     (94,570 )     (101,015 )
Total   $ 1,105,440     $ 952,117  

 

    September 30,  
    2016     2015  
Deferred tax assets:                
Bad debt allowance recorded for accounts receivable   $ 247,227     $ 152,657  
Total   $ 247,227     $ 152,657  

 

Income taxes for the years ended September 30, 2016 and 2015 are attributed to the Company’s continuing operations in China and consisted of: 

 

    September 30,  
    2016     2015  
Current   $ 1,209,114     $ 1,055,883  
Deferred   $ (103,674 )   $ (103,766 )
Total   $ 1,105,440     $ 952,117  

 

Per the consolidated statements of operations and comprehensive income, the income tax expenses for the Company can be reconciled to the income before income taxes for the years ended September 30, 2016 and 2015 as follows:

 

    September 30,  
    2016     2015  
Income before income taxes   $ 6,656,140     $ 6,197,299  
PRC EIT tax rates     15 %     15 %
Tax at the PRC EIT tax rates     998,421       929,595  
Tax effect of 50% R&D expenses deduction     97,652       69,621  
Tax effect of deferred tax recognized     (103,673 )     (103,766 )
Tax effect of non-deductible expenses     113,040       56,667  
Income tax expenses   $ 1,105,440     $ 952,117  

 

Under the Law of the People's Republic of China on Enterprise Income Tax ("New EIT Law"), which was effective from January 1, 2008, both domestically- owned enterprises and foreign-invested enterprises are subject to a uniform tax rate of 25%.

 

Zhengkang was entitled High and New Technology Enterprise ("HNTE") and enjoyed preferential tax rate of 15% for a three-year validity period from April 16, 2009. And the HNTE certificate was renewed on October 29, 2012 and September 17, 2015, both with a three-year validity period respectively. Thus, Zhengkang is eligible for a 15% preferential tax rate from April 16, 2009 to September 16, 2018.

 

Zhengfeng and Weijia have applicable EIT rate of 25%.

 

  F- 22  

 

  

NOTE 17 – PARENT-ONLY FINANCIALS

 

ZK International Group Co., Ltd.

Balance Sheets

 

    September 30,     September 30,  
    2016     2015  
ASSETS                
    Due from related parties   $ 50,000     $ 50,000  
Total assets   $ 50,000     $ 50,000  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT                
    Accounts payable and accrued liabilities   $ -     $ -  
Total liabilities     -       -  
                 
STOCKHOLDERS’ EQUITY                
    Common stock, $0.001 par value, 50,000,000 shares authorized,                
        issued and outstanding     50,000       50,000  
    Retained earnings     -       -  
Total stockholders' equity     -       -  
                 
Total liabilities and stockholders’ equity   $ 50,000     $ 50,000  

 

 

ZK International Group Co., Ltd.

Statements of Operations

 

    For the year ended September 30,  
    2016     2015  
Operating expenses:                
    General and administrative expenses   $ -     $ -  
                 
Total operating expenses     -       -  
                 
Net loss   $ -     $ -  
                 
                 
                 
Net loss per common share – basic and diluted   $ -     $ -  
                 
Weighted average number of common shares outstanding – basic and diluted     9,000,000       9,000,000  

 

 

ZK International Group Co., Ltd.

Statements of Cash Flows

 

    For the year ended September 30,  
    2016     2015  
Cash Flows from Operating Activities   $ -     $ -  
                 
Cash Flows from Investing Activities     -       -  
                 
Cash Flows from Financing Activities     -       -  
                 
Changes in cash and cash equivalents     -       -  
Cash and cash equivalents, beginning of year     -       -  
                 
Cash and cash equivalents, end of year   $ -     $ -  
                 
Supplemental Cash Flows Information:                
    Income tax paid   $ -     $ -  
    Interest paid   $ -     $ -  
                 
Non-cash investing and financing activities:                
    Shares issued to founders   $ -     $ 50,000  

 

(a) Basis of presentation

 

The condensed financial information of ZK International Group Co., Ltd, has been prepared using the same accounting policies as set out in the consolidated financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted by reference to the consolidated financial statements.

 

As the result of September 2015 reorganization, the Company consolidates ZK Pipe, Wenzhou Weijia, Wenzhou Zhengkang and Wenzhou Zhengfeng because these entities are under common control.

 

Each of the Company’s PRC subsidiaries has restrictions on its ability to pay dividends to the Company under PRC laws and regulations. The subsidiaries did not pay any dividends to the Company for the years presented.

 

(b) Stockholders’ Equity

 

On October 12, 2015, 100% of ZK International’s equity, 9,000,000 shares were transferred from ZHENG Jia Jun to five Mainland Chinese, with HUANG Jian Cong holding 45%, WANG Ming Jie holding 20%, WANG Guo Lin holding 20%, WANG Jian Di holding 10% and WANG Yang Ming holding 5%. The Company recorded related party receivables of $50,000 from these individuals in 2015.

 

F- 23  

 

 

NOTE 18 – SUBSEQUENT EVENTS

 

On December 19, 2016, the Board of the Directors of the Company approved i) decrease of par value of the ordinary shares from $1 to no par value (the “Par Value Change”); ii) a 180 for 1 forward stock split whereby every authorized, issued and outstanding ordinary share was exchanged for 180 new ordinary shares (the “Stock Split”) and iii) increase of authorized shares from 9,000,000 to 50,000,000 ordinary shares (the “Share Increase”, collectively with Par Value Change and Forward Split referred as the “Recapitalization”). As of March 20, 2017, the Recapitalization are complete and effectuated. All share information included in the consolidated financial statements and notes thereto have been retroactively adjusted for the Recapitalization as if such stock split occurred on the first day of the first period presented.

 

In December 2016, the Company closed a Regulation S private placement offering pursuant to which the Company received $300,000 from four investors to fund the Company’s operations. The Company agreed to issue 1,500,000 ordinary shares at $0.20 per share to these individuals. Boustead Securities, LLC (“Boustead”) served as the placement agent, to whom the Company paid $21,000, representing 7% of the gross proceeds, in placement fee on the funds raised.

 

In March 2017, the Company closed a Regulation S private placement offering pursuant to which the Company received $1,000,000 from two investors to fund the Company’s operations. The Company agreed to issue 1,000,000 ordinary shares at $1.00 per share to these investors. Boustead served as the placement agent, to whom the Company paid $70,000, representing 7% of the gross proceeds, in placement fee on the funds raised.

 

In May 2017, the Company closed a Regulation S private placement offerings and a Regulation D private placement offerings pursuant to which the Company received an aggregate of $1,000,000 from six investors to fund the Company’s operations. The Company agreed to issue a total of 500,000 ordinary shares at $2.00 per share to these individuals or entities. Boustead served as the placement agent, to whom the Company paid $70,000, representing 7% of the gross proceeds, in placement fee on the funds raised.

 

The Company has evaluated all transactions from September 30, 2016 through May 23, 2017, the financial statement issuance date for subsequent disclosure consideration.

  

  F- 24  

 

 

1,000,000 Ordinary Shares
(minimum offering amount)

 

1,500,00 Ordinary Shares
(maximum offering amount)

 

 

 

ZK International Group Co., Ltd.

 

 

 

[●], 2017.  

 

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[RESALE PROSPECTUS ALTERNATE PAGE]

 

The information in this prospectus is not complete and may be changed. We will not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

  

PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED MAY [●] , 2017

 

1,500,000 Ordinary Shares

 

 

 

ZK International Group Co., Ltd.

 

 

 

This prospectus relates to 1,500,000   of our ordinary shares, no par value per share (the “Ordinary Shares”), of ZK International Group Co., Ltd. that may be sold from time to time by the selling shareholders named in this prospectus (the “Selling Shareholders”). We will not receive any of the proceeds from the sale of our Ordinary Shares by the Selling Shareholders.

 

Our securities are presently not traded on any market or securities exchange. We have applied to list our ordinary shares on the Nasdaq Capital Market under the symbol “ZKIN”.

 

Since there is currently no public market established for our securities, the Selling Shareholders will sell at a fixed price of $5.00 per share, the price at which we sell shares in our public offering pursuant to the registration statement of which this prospectus is a part. Once, and if, our Ordinary Shares are listed on the Nasdaq Capital Market and there is an established market for these resale shares, the Selling Shareholders may sell the resale shares from time to time at the market price prevailing on the Nasdaq Capital Market at the time of offer and sale, or at prices related to such prevailing market prices or in negotiated transactions or a combination of such methods of sale directly or through brokers.

 

Investing in our Ordinary Shares involves a high degree of risk. See “Risk Factors” beginning on page 13 to read about factors you should consider before investing in shares of our Ordinary Shares. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The date of this prospectus is [●], 2017.  

 

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TABLE OF CONTENTS  
   
Prospectus Summary 4
   
Risk Factors 13
   
Special Note Regarding Forward-Looking Statements 28
   
Use of Proceeds 29
   
Dividend Policy 29
   
Exchange Rate Information 30
   
Capitalization 31
   
Dilution 33
   
Post-Offering Ownership 34
   
Management’s Discussion and Analysis of Financial Condition and Results of Operations 34
   
Quantitative and Qualitative Disclosures About Market Risk 41
   
Business 42
   
Description of Property 62
   
Management 63
   
Executive Compensation 68
   
Related Party Transactions 69
   
Principal Shareholders 69
   
Description of Share Capital 70
   
Shares Eligible for Future Sale 78
   
Material Tax Consequences Applicable to U.S. Holders of Our Ordinary Shares 79
   
Enforceability of Civil Liabilities 84
   
Underwriting 85
   
Expenses Relating to This Offering 88
   
Legal Matters 88
   
Experts 88
   
Interests of Named Experts and Counsel 88
   
Disclosure of Commission Position on Indemnification 88
   
Where You Can Find Additional Information 89
   
Selling Shareholders  95
   
Plan of Distribution  96
   
Financial Statements F-1

  

Please read this prospectus carefully. It describes our business, our financial condition and results of operations. We have prepared this prospectus so that you will have the information necessary to make an informed investment decision.

 

You should rely only on information contained in this prospectus.  We have not authorized any other person to provide you with different information.  This prospectus is not an offer to sell, nor is it seeking an offer to buy, these securities in any state where the offer or sale is not permitted.  The information in this prospectus is complete and accurate as of the date on the front cover, but the information may have changed since that date.

 

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The Offering

 

Ordinary Shares Offered by the Selling Shareholders   1,500,000 ordinary shares.
     
Ordinary Shares Outstanding Before the Offering   12,000,000 (1)
     
Ordinary Shares Outstanding After the Offering   12,000,000 (1)
     
Terms of the offering   The Selling Shareholders will determine when and how they will sell the securities offered in this prospectus.
     
Use of proceeds   We are not selling any ordinary shares covered by this prospectus. As such, we will not receive any of the offering proceeds from the registration of the shares of ordinary shares covered by this prospectus.
     
Risk Factors  

See “Risk Factors” beginning on page 13 and other information included in this prospectus for a discussion of factors you should consider before deciding to invest in shares of our ordinary shares.

 

  (1) The number of our Ordinary Shares outstanding as of the date hereof, excludes up to 1,605,000 Ordinary Shares (including 105,000 ordinary shares underlying certain underwriter warrant) to be offered by us in a “best efforts, minimum/maximum” public offering concurrently herewith.

 

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[RESALE PROSPECTUS ALTERNATE PAGE]

 

Use of Proceeds

 

We will not receive any of the proceeds from the sale of our Ordinary Shares by the Selling Shareholders. The Selling Shareholders will receive all of the net proceeds from the sales of Ordinary Shares offered by them under this prospectus. We have agreed to bear the expenses relating to the registration of the Ordinary Shares for the Selling Shareholders

 

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[RESALE PROSPECTUS ALTERNATE PAGE]

 

Selling Shareholders

 

The Ordinary Shares being offered for resale by the Selling Shareholders consist of 1,500,000 Ordinary Share held by i) two (2) shareholders, who purchased the Ordinary Shares with registration rights pursuant to the Regulation S offering closed in March 2017 at an offering price of $1.00 per Ordinary Share; five (5) shareholders, who purchased the Ordinary Shares with registration rights pursuant to the Regulation S offering closed in May 2017 at an offering price of $2.00 per Ordinary Share; and one (1) shareholder who purchased the Ordinary Shares with registration rights pursuant to the Regulation D offering closed in May 2017 at an offering price of $2.00 per Ordinary Share.

 

The following table sets forth information with respect to the maximum number of Ordinary Share beneficially owned by the Selling Shareholders named below and as adjusted to give effect to the sale of the Ordinary Share offered hereby. The table lists the number of Ordinary Share beneficially owned by each Selling Shareholder as of the date of this prospectus, the Ordinary Shares covered by this prospectus that may be disposed of by each Selling Shareholder, and the number of Ordinary Shares that will be beneficially owned by the Selling Shareholders assuming all of the Ordinary Shares covered by this prospectus are sold.

 

The Ordinary Shares beneficially owned have been determined in accordance with rules promulgated by the SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose. The information in the table below is current as of the date of this prospectus. The Selling Shareholders may from time to time offer and sell pursuant to this prospectus any or all of the Ordinary Shares being registered. The Selling Shareholders are under no obligation to sell all or any portion of such Ordinary Shares nor are the Selling Shareholders obligated to sell any Ordinary Shares immediately upon effectiveness of this prospectus. All information with respect to share ownership has been furnished by the Selling Shareholders.

 

 

Name

  Shares
Beneficially
Owned
Prior
to Offering
    Percent
Beneficially
Owned
Prior to
Offering (1)
    Shares to 
be Offered
    Amount
Beneficially
Owned
After
Offering
    Percent
Beneficially
Owned
After
Offering(1)
 
Alizarin Corp.     530,000       4.61 %     530,000       0       0 %
The Wall Family Trust (2012)     470,000       4.09 %     470,000       0       0 %
Dean Fech     12,500       0.10 %     12,500       0       0 %
Gerald F. Kelly     18,750       0.16 %     18,750       0       0 %
Michael E. McAleer     18,750       0.16 %     18,750       0       0 %
Jarz Investments Ltd.     75,000       0.63 %     75,000       0       0 %
Noah Boeken     150,000       1.25 %     150,000       0       0 %
Taproot Investments, LLC     225,000       1.88 %     225,000       0       0 %
TOTAL     1,500,000       12.50 %     1,500,000       0       0 %

 

(1) Based on 12,000,000 Ordinary Shares issued and outstanding as of May 22, 2017.

 

None of the Selling Shareholders or their beneficial owners: 

 

  - has had a material relationship with us other than as a shareholder at any time within the past three years; or
     
  - has ever been one of our officers or directors or an officer or director of our predecessors or affiliates
     
  - are broker-dealers or affiliated with broker-dealers.

 

The Selling Shareholders named above acquired their respective Ordinary Shares in private placement offerings that were exempt from registration under the Securities Act pursuant to Regulation D or Regulation S. Boustead Securities, LLC served as placement agent for the private placement offerings and received 7% commission for each of these offerings.

 

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[RESALE PROSPECTUS ALTERNATE PAGE]

 

Plan of Distribution

 

Since there is currently no public market established for our securities, the Selling Shareholders will sell at a fixed price of $5.00 per share, the price at which we sell shares in our public offering pursuant to the registration statement of which this prospectus is a part. Once, and if, our Ordinary Shares are listed on the Nasdaq Capital Market and there is an established market for these resale shares, the Selling Shareholders may sell the resale shares from time to time at the market price prevailing on the Nasdaq Capital Market at the time of offer and sale, or at prices related to such prevailing market prices or in negotiated transactions or a combination of such methods of sale directly or through brokers.

 

The selling shareholders may use any one or more of the following methods when disposing of shares or interests therein:

 

  - ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;

 

  - block trades in which the broker-dealer will attempt to sell the shares as agent, but may position and resell a portion of the block as principal to facilitate the transaction;

 

  - purchases by a broker-dealer as principal and resale by the broker-dealer for its account;

 

  - an exchange distribution in accordance with the rules of the applicable exchange;

 

  - privately negotiated transactions;

 

  - short sales effected after the date the registration statement of which this Prospectus is a part is declared effective by the SEC;

 

  - through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;

 

  - broker-dealers may agree with the selling shareholders to sell a specified number of such shares at a stipulated price per share; and

 

  - a combination of any such methods of sale.

 

The Selling Shareholders may, from time to time, pledge or grant a security interest in some or all of the ordinary shares owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the ordinary shares, from time to time, under this prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act amending the list of selling shareholders to include the pledgee, transferee or other successors in interest as selling shareholders under this prospectus. The selling shareholders also may transfer the securities in other circumstances, in which case the transferees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus.

 

In connection with the sale of our Ordinary Shares or interests therein, the Selling Shareholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the ordinary shares in the course of hedging the positions they assume. The Selling Shareholders may also sell shares of our Ordinary Shares short and deliver these securities to close out their short positions, or loan or pledge the Ordinary Shares to broker-dealers that in turn may sell these securities. The Selling Shareholders may also enter into option or other transactions with broker-dealers or other financial institutions or the creation of one or more derivative securities which require the delivery to such broker-dealer or other financial institution of shares offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).

 

The aggregate proceeds to the Selling Shareholders from the sale of the ordinary shares offered by them will be the purchase price of the ordinary shares less discounts or commissions, if any. Each of the Selling Shareholders reserves the right to accept and, together with their agents from time to time, to reject, in whole or in part, any proposed purchase of ordinary shares to be made directly or through agents. We will not receive any of the proceeds from this offering.

 

Broker-dealers engaged by the Selling Shareholders may arrange for other broker-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the Selling Shareholders (or, if any broker-dealer acts as agent for the purchase of shares, from the purchaser) in amounts to be negotiated. The Selling Shareholders do not expect these commissions and discounts to exceed what is customary in the types of transactions involved, and in no case will the maximum compensation received by any broker-dealer exceed eight percent (8%).

 

The Selling Shareholders also may resell all or a portion of the shares in open market transactions in reliance upon Rule 144 under the Securities Act, provided that they meet the criteria and conform to the requirements of that rule.

 

Any underwriters, agents, or broker-dealers, and any Selling Shareholders who are affiliates of broker-dealers, that participate in the sale of the ordinary shares or interests therein may be “underwriters” within the meaning of Section 2(11) of the Securities Act. Any discounts, commissions, concessions or profit they earn on any resale of the shares may be underwriting discounts and commissions under the Securities Act. Selling Shareholders who are “underwriters” within the meaning of Section 2(11) of the Securities Act will be subject to the prospectus delivery requirements of the Securities Act. We know of no existing arrangements between any of the Selling Shareholders and any other shareholder, broker, dealer, underwriter, or agent relating to the sale or distribution of the shares, nor can we presently estimate the amount, if any, of such compensation. See “Selling Shareholders” for description of any material relationship that a shareholder has with us and the description of such relationship.

 

To the extent required, the shares of our ordinary shares to be sold, the names of the Selling Shareholders, the respective purchase prices and public offering prices, the names of any agents, dealer or underwriter, any applicable commissions or discounts with respect to a particular offer will be set forth in an accompanying prospectus supplement or, if appropriate, a post-effective amendment to the registration statement that includes this prospectus.

 

In order to comply with the securities laws of some states, if applicable, the ordinary shares may be sold in these jurisdictions only through registered or licensed brokers or dealers. In addition, in some states the ordinary shares may not be sold unless it has been registered or qualified for sale or an exemption from registration or qualification requirements is available and is complied with.

 

We have advised the Selling Shareholders that the anti-manipulation rules of Regulation M under the Exchange Act may apply to sales of shares in the market and to the activities of the Selling Shareholders and their affiliates. In addition, we will make copies of this prospectus (as it may be supplemented or amended from time to time) available to the Selling Shareholders for the purpose of satisfying the prospectus delivery requirements of the Securities Act. The Selling Shareholders may indemnify any broker-dealer that participates in transactions involving the sale of the shares against certain liabilities, including liabilities arising under the Securities Act.

 

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Legal Matters

 

Ortoli Rosenstadt LLP is acting as counsel to our company regarding U.S. securities law matters. The validity of the ordinary shares offered hereby will be passed upon for us by [●]. Certain legal matters as to PRC law will be passed upon for us by Gaopeng & Partners Law Firm. Ortoli Rosenstadt LLP may rely upon Gaopeng & Partners Law Firm with respect to matters governed by PRC law.

 

The current address of Ortoli Rosenstadt LLP is 501 Madison Avenue, 14 th Floor, New York, NY 10022. The current address of Gaopeng & Partners Law Firm is No. 107, Warwick Building, 8th Floor, Block A, Shigu Road, Nanjing, Jiangsu Province.

 

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1,500,000 Ordinary Shares  

 

ZK International Group Co., Ltd.

 

 

 

PROSPECTUS

 

 

 

[●], 2017

  

98  

 

 

PART II

 

INFORMATION NOT REQUIRED IN PROSPECTUS

 

Item 6. Indemnification of Directors and Officers

 

British Virgin Islands law does not limit the extent to which a company’s articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the British Virgin Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime. Under the memorandum and articles of association of the Registrant, the Registrant may indemnify its directors, officers and liquidators against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred in connection with civil, criminal, administrative or investigative proceedings to which they are party or are threatened to be made a party by reason of their acting as our director, officer or liquidator. To be entitled to indemnification, these persons must have acted honestly and in good faith with a view to the best interest of the Registrant and, in the case of criminal proceedings, they must have had no reasonable cause to believe their conduct was unlawful.

 

The Underwriting Agreement, the form of which will be filed as Exhibit 1.1 to this registration statement, will also provide for indemnification of the Registrant and its officers and directors.

 

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling the Registrant pursuant to the foregoing provisions, the Registrant has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

 

Item 7. Recent Sales of Unregistered Securities

 

Below describes in detail our sale of unregistered securities in the last past three (3) years.

 

Founding Transactions

 

ZK International was formed on May 13, 2015, with Kai Chun Cheng as the founder and sole shareholder. Mr. Cheng received 50,000 founder shares of our company upon incorporation. On July 29, 2015, Mr. Cheng entered into certain equity interest transfer agreements with Jiancong Huang, Guolin Wang, Mingjie Wang, Jiandi Wang and Yangming Wang and transferred to these five PRC citizens 22,500, 10,000, 10,000, 5,000 and 2,500 shares, respectively on October 12, 2015. The transactions was not registered under the Securities Act in reliance on an exemption from registration set forth in Section 4(2) thereof

 

Subsequent Recapitalization

 

As part of the Recapitalization that was effectuated on March 20, 2017, we completed a 180 for 1 forward split. As a result of the stock split, shares originally held by Jiancong Huang, Guolin Wang, Mingjie Wang, Jiandi Wang and Yangming Wang were split into 4,050,000, 1,800,000, 1800,000, 900,000, and 450,000 new Ordinary Shares.

 

Private Placement Financings

 

In December 2016, we sold through a Regulation S offering a total of 1,500,000 ordinary shares to four non-U.S. investors, at a price of $0.20 per share for an aggregate purchase price of $300,000. The transaction was not registered under the Securities Act in reliance on an exemption from registration set forth in Regulation S promulgated hereunder as a transaction by the Company not involving any public offering. The securities were sold in an offshore transaction by a foreign issuer, to foreign investors, not using any directed selling efforts in the United States. These securities may not be offered or sold in the United States in the absence of an effective registration statement or exemption from the registration requirements under the Securities Act.

 

In March 2017, we sold through a Regulation S offering a total of 1,000,000 ordinary shares to two non-U.S. investors, at a price of $1.00 per share for an aggregate purchase price of $1,000,000. The transaction was not registered under the Securities Act in reliance on an exemption from registration set forth in Regulation S promulgated hereunder as a transaction by the Company not involving any public offering. The securities were sold in an offshore transaction by a foreign issuer, to foreign investors, not using any directed selling efforts in the United States. These securities may not be offered or sold in the United States in the absence of an effective registration statement or exemption from the registration requirements under the Securities Act.

   

In May 2017, we sold through a Regulation S offering a total of 275,000 ordinary shares to five non-U.S. investors, at a price of $2.00 per share for an aggregate purchase price of $550,000. The transaction was not registered under the Securities Act in reliance on an exemption from registration set forth in Regulation S promulgated hereunder as a transaction by the Company not involving any public offering. The securities were sold in an offshore transaction by a foreign issuer, to foreign investors, not using any directed selling efforts in the United States. These securities may not be offered or sold in the United States in the absence of an effective registration statement or exemption from the registration requirements under the Securities Act.

 

In May 2017, we sold through a Regulation D offering a total of 225,000 ordinary shares one U.S. investor, at a price of $2.00 per share for an aggregate purchase price of $450,000. The transaction was not registered under the Securities Act in reliance on an exemption from registration set forth in Regulation D promulgated hereunder as a transaction by the Company not involving any public offering.

 

Item 8. Exhibits and Financial Statement Schedules

 

(a)  Exhibits.  The following exhibits are included herein or incorporated herein by reference:

 

99  

 

 

The following documents are filed as part of this registration statement: 

 

  1.1* Form of Underwriting Agreement.
  3.1† Memorandum and Articles of Association of ZK International Group Co. Ltd.
  3.2† Amended and Restated Memorandum and Articles of Association of ZK International Group Co. Ltd.
  4.1† Specimen Ordinary Share Certificate

  5.1* Opinion of BVI counsel of ZK International Group Co. Ltd., as to the validity of the Ordinary Shares.
  8.1* Opinion of Ortoli Rosenstadt LLP, counsel of ZK International Group Co. Ltd., as to U.S. federal tax matters.
  8.2† Opinion of Gaopeng & Partners Law Firm counsel of ZK International Group Co. Ltd., as to certain PRC tax matters.
  10.1* Form of Subscription Agreement

  10.2† Controlling shareholders’ agreement to vote in concert dated May 13, 2015.
  10.3† Equity transfer agreement between Kai Chun Cheng and Jiancong Huang dated October 12, 2015
  10.4† Equity transfer agreement between Kai Chun Cheng and Mingjie Wang dated October 12, 2015
  10.5† Equity transfer agreement between Kai Chun Cheng and Guolin Wang dated October 12, 2015
  10.6† Equity transfer agreement between Kai Chun Cheng and Jiandi Wang dated October 12, 2015
  10.7† Equity transfer agreement between Kai Chun Cheng and Yangming Wang dated October 12, 2015
  10.8† Summary translation of the employment agreement between Zhejiang Zhengkang Industrial Co. Ltd and Jiancong Huang dated April 15, 2016.
  10.9† Summary translation of the employment agreement between Zhejiang Zhengkang Industrial Co. Ltd and Shaochai Yang dated February 4, 2017.
  10.10† Form of Private Placement Subscription Agreement between the Company and the Regulation S Selling Shareholders
  10.11† Summary Translation of Form of Loan Agreement — Bank of China, Wenzhou Longwan Branch
  10.12† Summary Translation of Form of Loan Agreement — Industrial Bank,Wenzhou Branch
  10.13† Summary Translation of Form of Loan Agreement — Agricultural Bank of China, Wenzhou Longwan Branch
  10.14† Summary Translation of Form of Loan Agreement — PingAn Bank, Wenzhou Branch
  10.15† Summary Translation of Form of Loan Agreement — China Merchants Bank, Wenzhou Branch
  10.16† Summary Translation of Form of Loan Agreement — China Minsheng Bank, Wenzhou Branch
  10.17† Summary Translation of Form of Loan Agreement — China Zheshang Bank, Wenzhou Branch
  10.18* Escrow Agreement executed among ZK International Group Co. Ltd. And Securities Transfer Corporation
  10.19† Summary translation of the employment agreement between Zhejiang Zhengkang Industrial Co. Ltd and Di Chen dated .

  10.20† Offer Letter executed between ZK International Group Co. Ltd. And Min Ni dated May 10, 2017
  10.21† Offer Letter executed between ZK International Group Co. Ltd. And Lie Cao dated May 2, 2017
  10.22† Offer Letter executed between ZK International Group Co. Ltd. And Linge Zhou dated May 3, 2017
  10.23† Private Placement Subscription Agreement executed between the Company and the Regulation D Selling Shareholder
  10.24* Form of Subscription Agreement
  14.1† Code of Business Conduct and Ethics of the Company

  21.1† List of Subsidiaries.
  23.1† Consent of Anton and Chia, LLP
  23.2* Consent of BVI counsel of ZK International Group Co. Ltd. (included in Exhibit 5.1).
  23.3† Consent of Gaopeng & Partners Law Firm, PRC counsel of ZK International Group Co. Ltd. (included in Exhibit 8.2)

 

* To be filed by amendment.
Filed herewith.

 

 

(b)  Financial Statement Schedules.  All financial statement schedules are omitted because they are not applicable or the information is included in the Registrant’s consolidated financial statements or related notes.

 

Item 9. Undertakings

 

The undersigned registrant hereby undertakes to provide to the Underwriter at the closing specified in the placement agreements certificates in such denominations and registered in such names as required by the Underwriter to permit prompt delivery to each purchaser.

 

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

 

The undersigned registrant hereby undertakes:

 

(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

 

(i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933;

 

(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) (§ 230.424(b) of this chapter) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement.

 

(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;

 

100  

 

 

(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

(3) That, for the purpose of determining liability under the Securities Act to any purchaser:

 

(i) If the registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.

 

(4) That, for the purpose of determining liability of the registrant under the Securities Act to any purchaser in the initial distribution of the securities: The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:

 

(i) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;

 

(ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;

 

(iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and

 

(iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser. 

 

(5) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

 

(6) To file a post-effective amendment to the registration statement to include any financial statements required by “Item 8.A. of Form 20-F (17 CFR 249.220f)” at the start of any delayed offering or throughout a continuous offering and such other information necessary to ensure that all other information in the prospectus is at least as current as the date of those financial statements.

 

(7) That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities: The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:

 

(i) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424 (§ 230.424 of this chapter);

 

(ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;

 

(iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and

 

(iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.

 

(8) That, for purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

 

(9) That, for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

101  

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form F-1 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Wenzhou, Zhejiang Province, People’s Republic of China, on May 23, 2017.

 

  ZK INTERNATIONAL GROUP CO., LTD.
   
  By: /s/ Jiancong Huang
  Jiancong Huang
 

Chief Executive Officer & Chairman of the Board

(Principal Executive Officer)

Date: May 23, 2017

 

  By: /s/ Shaochai Yang
  Shaochai Yang
 

Chief Financial Officer
(Principal Accounting Officer)

Date: May 23, 2017

  

Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

 

Signature   Capacity   Date
         
/s/ Jiancong Huang   Chief Executive Officer & Chairman of the Board   May 23, 2017
Jiancong Huang        
         
/s/ Shaochai Yang    Chief Financial Officer   May 23, 2017
 Shaochai Yang        

 

 

 

 

 

/s/ Di Chen   Secretary    May 23, 2017
Di Chen        
         
/s/ Guolin Wang   Director   May 23, 2017
Guolin Wang        
         
/s/ Min Ni   Director   May 23, 2017
Min Ni        
         
/s/ Linge Zhou   Director   May 23, 2017
Linge Zhou        
         
/s/ Lie Cao   Director   May 23, 2017
Lie Cao        

 

SIGNATURE OF AUTHORIZED REPRESENTATIVE IN THE UNITED STATES

 

Pursuant to the Securities Act of 1933 as amended, the undersigned, the duly authorized representative in the United States of America, has signed this registration statement thereto in New York, NY on May 23, 2017.

 

  By: /s/ Mengyi “Jason” Ye, Esq .
    Mengyi “Jason” Ye, Esq.
   

Counsel

May 23, 2017

 

102  

 

Exhibit 3.1  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit 3.2

 

BVI Company No.: 1873870

 

TERRITORY OF THE BRITISH VIRGIN ISLANDS

THE BVI BUSINESS COMPANIES ACT,

2004 (the “Act”)

 

A COMPANY LIMITED BY SHARES

 

AMENDED AND RESTATED

 

MEMORANDUM AND ARTICLES

 

OF ASSOCIATION

 

OF

 

ZK International Group Co., Ltd

正康国际集团有限公司

 

Incorporated the 13th day of May, 2015
(Amended the 20 th day of Mach, 2017)

 

OVERSEAS MANAGEMENT COMPANY

TRUST (B.V.I.) LTD.

OMC Chambers

Wickhams Cay 1

Road Town, Tortola

British Virgin Islands

 

 

 

 

TERRITORY OF THE BRITISH VIRGIN ISLANDS

THE BVI BUSINESS COMPANIES ACT 2004 (the “Act”)

AMENDED AND RESTATED

MEMORANDUM OF ASSOCIATION

OF

 

ZK International Group Co., Ltd

正康国际集团有限公司

 

A COMPANY LIMITED BY SHARES

 

1. NAME

 

The name of the Company is ZK International Group Co., Ltd The Company has a foreign character name in addition to its English name. The foreign character name of the Company is 正康国际集团有限公司.

 

2. TYPE OF COMPANY

 

The Company is a company limited by shares.

 

3. REGISTERED OFFICE

 

The first Registered Office of the Company is located at NovaSage Chambers, P.O. Box 4389, Road Town, Tortola, British Virgin Islands.

 

The current registered office of the Company is located at OMC Chambers, Wickhams Cay 1, Road Town, Tortola, British Virgin Islands

 

4. REGISTERED AGENT

 

The first Registered Agent of the Company is NovaSage Incorporations (BVI) Limited.

 

The current Registered Agent of the Company is Overseas Management Company Trust (B.V.I.) Ltd.

 

5. CAPACITY AND POWERS

 

Subject to Clause 6 below, the objects for which the Company is established are unrestricted and the Company shall have full power and authority to carry out any object not prohibited by the BVI Business Companies Act, 2004 or as the same may be revised from time to time or any other law of the British Virgin Islands.

 

6. LIMITATIONS ON THE COMPANY’S BUSINESS

 

For the purposes of section 9(4) of the Act, the business and activities of the company are limited to those business and activities which are not prohibited from engaging in under any law for the time being in force in the British Virgin Islands.

 

7. NUMBER AND CLASSES OF SHARES

 

The Company is authorized to issue a maximum of 50,000,000 ordinary shares of a single class with no par value each.

 

8. CURRENCY

 

The shares in the Company shall be issued in the currency of the United States of America.

 

9. FRACTIONAL SHARES

 

The Company may issue fractional shares. A fractional share shall have the corresponding fractional liabilities, limitations, preferences, privileges, qualifications, restrictions, rights and other attributes of a whole share of the same class and series.

 

10. DESIGNATIONS, POWERS AND PREFERENCES OF SHARES

 

Each share in the Company confers upon the shareholder:

 

(a) the right to one vote at a meeting of the shareholders of the Company or on any resolution of shareholders;

 

(b) the right to an equal share in any dividend paid by the Company; and

 

(c) the right to an equal share in the distribution of the surplus assets of the Company on its liquidation.

 

1

 

 

The directors may at their discretion by resolution of directors redeem, purchase or otherwise acquire all or any of the shares in the Company subject to Regulation 3 of the Articles.

 

11. VARIATION OF RIGHTS

 

The rights attached to shares as specified in Clause 10 above may only, whether or not the Company is being wound up, be varied with the consent in writing of or by a resolution passed at a meeting by the holders of more than 50 per cent of the issued shares of that class.

 

12. RIGHTS NOT VARIED BY THE ISSUE OF SHARES PARI PASSU

 

The rights conferred upon the holders of the shares of any class issued with preferred or other rights shall not, unless otherwise expressly provided by the terms of issue of the shares of that class, be deemed to be varied by the creation or issue of further shares ranking pari passu therewith.

 

13. REGISTERED SHARES

 

13.1. The Company shall issue registered shares only.

 

13.2. The Company is not authorised to issue bearer shares, convert registered shares to bearer shares or exchange registered shares for bearer shares.

 

14. AMENDMENT OF MEMORANDUM AND ARTICLES

 

Subject to Clause 11, the Company may amend its Memorandum or Articles by a resolution of shareholders or by a resolution of directors, save that no amendment may be made by a resolution of directors:

 

(a) to restrict the rights or powers of the shareholders to amend the Memorandum or Articles;

 

(b) to change the percentage of shareholders required to pass a resolution of shareholders to amend the Memorandum or Articles;

 

(c) in circumstances where the Memorandum or Articles cannot be amended by the shareholders; or

 

(d) to Clauses 10, 11, 12 or this Clause 14.

 

15. DEFINITIONS

 

Words used in this Memorandum and not defined herein shall have the meanings set out in the Articles.

 

We, NovaSage Incorporations (BVI) Limited of NovaSage Chambers, P.O. Box 4389, Road Town, Tortola, British Virgin Islands in our capacity as registered agent for the Company hereby apply to the Registrar for the incorporation of the Company this 13th day of May, 2015.

 

Incorporator  
   
/s/ Rexella D Hodge  
Rexella D Hodge  
Authorised Signatory  
NovaSage Incorporations (BVI) Limited  

 

 

 

 

TERRITORY OF THE BRITISH VIRGIN ISLANDS

THE BVI BUSINESS COMPANIES ACT 2004 (the “Act”)

AMENDED AND RESTATED

ARTICLES OF ASSOCIATION

OF

 

ZK International Group Co., Ltd

正康国际集团有限公司

 

A COMPANY LIMITED BY SHARES

 

1. INTERPRETATION

 

References in these Articles of Association (“Articles”) to the Act shall mean the BVI Business Companies Act, 2004 (No. 16 of 2004) and any modification, extension, re-enactment or renewal thereof, any amendments thereto and the BVI Business Companies Regulations, 2012 and any other regulations made thereunder. The following Articles shall constitute the Articles of the Company. In these Articles, words and expressions defined in the Act shall have the same meanings and, unless otherwise required by the context, whenever the singular or plural number, or the masculine, feminine or neuter gender is used in these Articles, it shall equally, where the context admits, include the others.

 

“Person” means an individual, a corporation, a trust, the estate of a deceased individual, a partnership, an unincorporated association or any legal entity capable of having a legal existence.

 

2. SHARES

 

2.1. Every shareholder is entitled to a certificate signed by a director of the Company or under the seal specifying the number of shares held by him and the signature of the director and the seal may be facsimiles.

 

2.2. Any shareholder receiving a certificate shall indemnify and hold the Company and its directors and officers harmless from any loss or liability which it or they may incur by reason of any wrongful or fraudulent use or representation made by any person by virtue of the possession thereof. If a share certificate is worn out or lost it may be renewed on production of the worn out certificate or on satisfactory proof of its loss together with such indemnity as may be required by a resolution of directors.

 

2.3. If several persons are registered as joint holders of any shares, any one of such persons may give an effectual receipt for any distribution.

 

2.4. Shares and other securities may be issued at such times, to such persons, for such consideration and on such terms as the directors may by resolution of directors determine.

 

2.5. Without prejudice to the generality of the foregoing, the pre-emption rights set out in Section 46 of the Act shall not apply to the Company.

 

2.6. The Company may issue convertible shares, bonus shares, partly paid shares and nil paid shares.

 

2.7. A share may be issued for consideration in any form, including money, a promissory note, or other written obligation to contribute money or property, real property, personal property (including goodwill and know-how), services rendered or a contract for future services.

 

2.8. Shares may be issued for such amount of consideration as the directors may from time to time by resolution of directors determine, except that in the case of shares issued with a par value, the consideration paid or payable shall not be less than the par value.

 

2.9. Before issuing shares for a consideration other than money, the directors shall pass a resolution stating:

 

(a) the amount to be credited for the issue of the shares;

 

(b) their determination of the reasonable present cash value of the non-money consideration for the issue; and

 

(c) that, in their opinion, the present cash value of the non-money consideration for the issue is not less than the amount to be credited for the issue of the shares.

 

2.10. The Company shall keep a register of members containing:

 

(a) the names and addresses of the persons who hold shares;

 

(b) the number of each class and series of shares held by each shareholder;

 

(c) the date on which the name of each shareholder was entered in the register of members; and

 

 

 

 

(d) the date on which any person ceased to be a shareholder.

 

2.11. The register of members may be in such form as the directors may approve, but if it is in magnetic, electronic or other data storage form, the Company must be able to produce legible evidence of its contents. Until the directors otherwise determine, the magnetic, electronic or other data storage form shall be the original register of members.

 

2.12. A share is deemed to be issued when the name of the shareholder is entered in the register of members.

 

3. REDEMPTION OF SHARES AND TREASURY SHARES

 

3.1. The Company may purchase, redeem or otherwise acquire and hold its own shares save that the Company may not purchase, redeem or otherwise acquire its own shares without the consent of shareholders whose shares are to be purchased, redeemed or otherwise acquired unless the Company is permitted by the Act or any other provision in the Memorandum or Articles to purchase, redeem or otherwise acquire the shares without their consent.

 

3.2. The Company may only offer to acquire shares if at the relevant time the directors determine by resolution of directors that immediately after the acquisition the value of the Company’s assets will exceed its liabilities and the Company will be able to pay its debts as they fall due.

 

3.3. Subject to the provisions of the Act, the Company may make an offer to purchase, redeem or otherwise acquire its own shares from one or more or all of the shareholders:

 

(a) in accordance with Sections 60, 61 and 62 of the Act; or

 

(b) in accordance with a right of a shareholder to have his shares redeemed or to have his shares exchanged for money or other property of the Company; or

 

(c) in exchange for newly issued shares of equal value; or

 

(d) pursuant to the provisions of Section 179 of the Act.

 

3.4. Shares may only be held as treasury shares where, when aggregated with the number of shares of the same class already held by the Company as treasury shares, the total number of treasury shares does not exceed 50% of the shares of that class previously issued by the Company, excluding those shares that have been cancelled.

 

3.5. All rights and obligations attaching to a treasury share are suspended and shall not be exercised by or against the Company while it holds the share as a treasury share.

 

3.6. Treasury shares may be disposed of by the Company on such terms and conditions (not otherwise inconsistent with the Memorandum and Articles) as the Company may by resolution of directors determine.

 

3.7. Where shares are held by another body corporate of which the Company holds, directly or indirectly, shares having more than 50 per cent of the votes in the election of directors of the other body corporate, all rights and obligations attaching to the shares held by the other body corporate are suspended and shall not be exercised by the other body corporate.

 

4. MORTGAGES AND CHARGES OF SHARES

 

4.1. Shareholders may mortgage or charge their shares in the Company and upon satisfactory evidence thereof the Company shall give effect to the terms of any valid mortgage or charge except in so far as it may conflict with any requirements herein contained for consent to the transfer of shares.

 

4.2. In the case of the mortgage or charge of registered shares there may be entered in the register of members of the Company:

 

(a) a statement that the shares are mortgaged or charged;

 

(b) the name of the mortgagee or chargee; and

 

(c) the date on which the particulars specified in the preceding subparagraphs (a) and (b) are entered in the register of members.

 

4.3. Where particulars of a mortgage or charge are entered in the register of members, such particulars may be cancelled:

 

(a) with the written consent of the named mortgagee or chargee or anyone authorised to act on his behalf; or

 

(b) upon evidence satisfactory to the directors of the discharge of the liability secured by the mortgage or charge and the issue of such indemnities as the directors shall consider necessary or desirable.

   

  2

 

 

4.4. Whilst particulars of a mortgage or charge over shares are entered in the register of members pursuant to this Regulation:

 

(a) no transfer of any share the subject of those particulars shall be effected;

 

(b) the Company may not purchase, redeem or otherwise acquire any such share; and

 

(c) no replacement certificate shall be issued in respect of such shares, without the written consent of the named mortgagee or chargee.

 

4.5. The directors may not resolve to refuse or delay the transfer of a share pursuant to the enforcement of a valid security interest created over the share.

 

5. FORFEITURE

 

5.1. Shares that are not fully paid on issue are subject to the forfeiture provisions set forth in this Regulation and for this purpose shares issued for a promissory note, or other written obligation to contribute money or property, or a contract for future services are deemed to be not fully paid.

 

5.2. A written notice of call specifying the date for payment to be made shall be served on the shareholder who defaults in making payment in respect of the shares.

 

5.3. The written notice of call referred to in Sub-Regulation 5.2 shall name a further date not earlier than the expiration of 14 days from the date of service of the notice on or before which the payment required by the notice is to be made and shall contain a statement that in the event of non-payment at or before the time named in the notice the shares, or any of them, in respect of which payment is not made will be liable to be forfeited.

 

5.4. Where a written notice of call has been issued pursuant to Sub-Regulation 5.3 and the requirements of the notice have not been complied with, the directors may, at any time before tender of payment, forfeit and cancel the shares to which the notice relates.

 

5.5. The Company is under no obligation to refund any moneys to the shareholder whose shares have been cancelled pursuant to Sub-Regulation 5.4 and that shareholder shall be discharged from any further obligation to the Company.

 

6. TRANSFER OF SHARES

 

6.1. Shares may be transferred by a written instrument of transfer signed by the transferor and containing the name and address of the transferee, which shall be sent to the Company at the office of its registered agent for registration. In the case of the transfer of a share that imposes a liability to the Company on the transferee, the instrument of transfer shall also be signed by the transferee.

 

6.2. The Company shall, on receipt of an instrument of transfer complying with the above Sub-Regulation 6.1, enter the name of the transferee of a share in the register of members unless the directors resolve to refuse or delay the registration of the transfer for reasons that shall be specified in a resolution of directors.

 

6.3. The directors may not resolve to refuse or delay the transfer of a share unless the shareholder has failed to pay an amount due in respect of the share.

 

6.4. The transfer of a share is effective when the name of the transferee is entered on the register of members.

 

6.5. If the directors of the Company are satisfied that an instrument of transfer relating to shares has been signed but that the instrument has been lost or destroyed, they may resolve by resolution of directors:

 

(a) to accept such evidence of the transfer of shares as they consider appropriate; and

 

(b) that the transferee’s name should be entered in the register of members notwithstanding the absence of the instrument of transfer.

 

6.6. Subject to the Memorandum, the personal representative of a deceased shareholder may transfer a share even though the personal representative is not a shareholder at the time of the transfer.

 

7. MEETINGS OF MEMBERS

 

7.1. Any director of the Company may convene meetings of the members at such times and in such manner and places within or outside the British Virgin Islands as the director considers necessary or desirable.

 

7.2. Upon the written request of shareholders entitled to exercise 30% or more of the voting rights in respect of the matter for which the meeting is requested, the directors shall convene a meeting of shareholders within 28 days of receiving the written request. In the event that the directors fail to convene a meeting of shareholders within 28 days, then:

  

  3

 

 

(a) any one director;

 

(b) the company secretary; or

 

(c) the shareholder who issued the written request, or where there is more than one, any one of those shareholders,

 

may convene a meeting of shareholders, and the provisions of these Articles with regard to convening a meeting of shareholders shall apply, construing references to the directors as references to the party convening the meeting.

 

7.3. A member may be represented at a meeting of members by a proxy who may speak and vote on behalf of the member.

 

7.4. The instrument appointing a proxy shall be produced at the place designated for the meeting before the time for holding the meeting at which the person named in such instrument proposes to vote. The notice of the meeting may specify an alternative or additional place or time at which the proxy shall be presented.

 

7.5. The instrument appointing a proxy shall be in substantially the following form or such other form as the chairman of the meeting shall accept as properly evidencing the wishes of the member appointing the proxy.

 

[ Name of Company ]

 

I/We being a member of the above CompanyHEREBY APPOINT …………………………… of …………………………… or failinghim ………..……………… of ………………………..…… to be my/our proxy to vote for me/us at the meeting of members to be held on the …… day of …………..…………, 20…… and at any adjournment thereof.

 

(Any restrictions on voting to be inserted here.)

 

Signed this …… day of …………..…………, 20……

 

……………………………

Member

 

7.6. The following applies where shares are jointly owned:

 

(a) if two or more persons hold shares jointly each of them may be present in person or by proxy at a meeting of members and may speak as a member;

 

(b) if only one of the joint owners is present in person or by proxy he may vote on behalf of all joint owners; and

 

(c) if two or more of the joint owners are present in person or by proxy they must vote as one.

 

7.7. A member shall be deemed to be present at a meeting of members if he participates by telephone or other electronic means and all members participating in the meeting are able to hear each other.

 

8. NOTICE OF MEETINGS OF MEMBERS

 

8.1. The director convening a meeting shall give not less than seven days notice of a meeting of members to:

 

(a) those members whose names on the date the notice is given appear as members in the register of members of the Company and are entitled to vote at the meeting; and

 

(b) the other directors.

 

8.2. Notwithstanding Sub-Regulation 8.1, a meeting of members held in contravention of the requirement to give notice is valid if members holding at least 90 per cent of the total voting rights on all the matters to be considered at the meeting have waived notice of the meeting and, for this purpose, the presence of a member at the meeting shall constitute waiver in relation to all the shares which that member holds.

 

8.3. The inadvertent failure of a director who convenes a meeting to give notice of a meeting to a member or another director, or the fact that a member or another director has not received notice, does not invalidate the meeting.

   

  4

 

 

8.4. The director convening a meeting of members may fix as the record date for determining those members that are entitled to vote at the meeting the date notice is given of the meeting or such other date as may be specified in the notice, being a date not earlier than the date of the notice.

 

9. QUORUM FOR MEETINGS OF MEMBERS

 

9.1. The quorum for a meeting of members is duly constituted if, at the commencement of the meeting, there are present in person or by proxy not less than 50 per cent of the votes of the shares or class or series of shares entitled to vote on resolutions of members to be considered at the meeting. A quorum may comprise a single member or proxy and then such person may pass a resolution of members and a certificate signed by such person accompanied where such person be a proxy by a copy of the proxy instrument shall constitute a valid resolution of members.

 

9.2. If within two hours from the time appointed for the meeting a quorum is not present, the meeting, if convened upon the requisition of members, shall be dissolved; in any other case it shall stand adjourned to the next business day in the jurisdiction in which the meeting was to have been held at the same time and place or to such other time and place as the directors may determine, and if at the adjourned meeting there are present within one hour from the time appointed for the meeting in person or by proxy not less than one third of the votes of the shares or each class or series of shares entitled to vote on the matters to be considered by the meeting, those present shall constitute a quorum but otherwise the meeting shall be dissolved.

 

10. PROCEEDINGS OF MEETINGS OF MEMBERS

 

10.1. At any meeting of the members the chairman is responsible for deciding in such manner as he considers appropriate whether any resolution proposed has been carried or not and the result of his decision shall be announced to the meeting and recorded in the minutes of the meeting. If the chairman has any doubt as to the outcome of the vote on a proposed resolution, he shall cause a poll to be taken of all votes cast upon such resolution. If the chairman fails to take a poll then any member present in person or by proxy who disputes the announcement by the chairman of the result of any vote may immediately following such announcement demand that a poll be taken and the chairman shall cause a poll to be taken. If a poll is taken at any meeting, the result shall be announced to the meeting and recorded in the minutes of the meeting.

 

10.2. At every meeting of members, the chairman of the board shall preside as chairman of the meeting. If there is no chairman of the board or if the chairman of the board is not present at the meeting, the members present shall choose one of their numbers to be the chairman. If the members are unable to choose a chairman for any reason, then the person representing the greatest number of voting shares present in person or by proxy at the meeting shall preside as chairman failing which the oldest individual member or representative of a member present shall take the chair.

 

10.3. The chairman may, with the consent of the meeting, adjourn any meeting from time to time, and from place to place, but no business shall be transacted at any adjourned meeting other than the business left unfinished at the meeting from which the adjournment took place

 

10.4. Any person other than an individual which is a member of the Company may by resolution of its directors or other governing body authorise such individual as it thinks fit to act as its representative at any meeting of members or of any class of members, and the individual so authorised shall be entitled to exercise the same rights on behalf of the person which he represents as that person could exercise if it were an individual.

 

10.5. The chairman of any meeting at which a vote is cast by proxy or on behalf of any person other than an individual may call for a notarial certified copy of such proxy or authority which shall be produced within 7 days of being so requested or the votes cast by such proxy or on behalf of such person shall be disregarded.

 

10.6. Directors of the Company may attend and speak at any meeting of members and at any separate meeting of the holders of any class or series of shares.

 

10.7. An action that may be taken by the members at a meeting may also be taken by a resolution of members consented to in writing, without the need for any notice, but if any resolution of members is adopted otherwise than by the unanimous written consent of all members, a copy of such resolution shall forthwith be sent to all members not consenting to such resolution. The consent may be in the form of counterparts, each counterpart being signed by one or more members. If the consent is in one or more counterparts, and the counterparts bear different dates, then the resolution shall take effect on the earliest date upon which persons holding a sufficient number of votes of shares to constitute a resolution of members have consented to the resolution by signed counterparts.

 

10.8. If the Company shall have only one member the provisions herein contained for meetings of the members shall not apply and in lieu of minutes of a meeting shall record in writing and sign a note or memorandum of all matters requiring a resolution of members. Such a note or memorandum shall constitute sufficient evidence of such resolution for all purposes.

 

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11. DIRECTORS

 

11.1. Subject to any subsequent amendment to change the number of directors, the minimum number of directors shall be one.

 

11.2. No person shall be appointed as a director of the Company, an alternate director or nominated as a reserve director, unless he has consented in writing to act as a director, an alternate director or to be nominated as a reserve director.

 

11.3. The first directors of the Company shall be appointed by the first registered agent within six months of the incorporation date of the Company; and thereafter, the directors shall be elected by resolution of members or by resolution of directors for such term as the members or directors determine. If, before the Company has any members, the sole director or all of the directors appointed by the first registered agent, resign or die, or in the case of a director that is not an individual, ceases to exist, the first registered agent may appoint one or more further persons as directors of the Company.

 

11.4. Each director holds office for the term, if any, fixed by the resolution of members or resolution of directors appointing him, or until his earlier death, resignation or removal. If no term is fixed on the appointment of a director, the director serves indefinitely until his earlier death, resignation or removal.

 

11.5. A vacancy in the board of directors may be filled by a resolution of members or a resolution passed by the majority of the remaining directors.

 

11.6. A vacancy in relation to directors occurs if a director dies or otherwise ceases to hold office prior to the expiration of his term of office.

 

11.7. A director may be removed from office by a resolution of members or by resolution of directors. A resolution passed under this Regulation may only be passed at a meeting called for the purpose of removing the director or for purposes including the removal of the director or by a written resolution passed by at least seventy-five percent (75%) of the votes of the members or directors of the Company entitled to vote.

 

11.8. A director may resign his office by giving written notice of his resignation to the Company and the resignation has effect from the date the notice is received by the Company at the office of its registered agent or from such later date as may be specified in the notice. A director shall resign forthwith as a director if he is, or becomes, disqualified from acting as a director under the Act.

 

11.9. The Company shall keep a register of directors containing:

 

(a) the names and addresses of the persons who are directors of the Company;

 

(b) the date on which each person whose name is entered in the register was appointed as a director of the Company;

 

(c) the date on which each person named as a director ceased to be a director of the Company; and

 

(d) such other information as may be prescribed by the Act.

 

11.10. The register of directors may be kept in any such form as the directors may approve, but if it is in magnetic, electronic or other data storage form, the Company must be able to produce legible evidence of its contents. Until the directors otherwise determine, the magnetic, electronic or other data storage shall be the original register of directors.

 

11.11. The directors may, by a resolution of directors, fix the emoluments of directors with respect to services to be rendered in any capacity to the Company.

 

11.12. A director is not required to hold a share as a qualification to office.

 

12. POWERS OF DIRECTORS

 

12.1. The business and affairs of the Company shall be managed by, or under the direction or supervision of, the directors of the Company. The directors of the Company have all the powers necessary for managing, and for directing and supervising, the business and affairs of the Company. The directors may pay all expenses incurred preliminary to and in connection with the incorporation of the Company and may exercise all such powers of the Company as are not by the Act or by the Memorandum or the Articles required to be exercised by the members.

 

12.2. Each director shall exercise his powers for a proper purpose and shall not act or agree to the Company acting in a manner that contravenes the Memorandum, the Articles or the Act. Each director, in exercising his powers or performing his duties, shall act honestly and in good faith in what the director believes to be the best interests of the Company.

 

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12.3. If the Company is the wholly owned subsidiary of a holding company, a director of the Company may, when exercising powers or performing duties as a director, act in a manner which he believes is in the best interests of the holding company even though it may not be in the best interests of the Company.

 

12.4. Any director which is a body corporate may appoint any individual as its duly authorised representative for the purpose of representing it at meetings of the directors, with respect to the signing of consents or otherwise.

 

12.5. The continuing directors may act notwithstanding any vacancy in their body.

 

12.6. The directors may by resolution of directors exercise all the powers of the Company to incur indebtedness, liabilities or obligations and to secure indebtedness, liabilities or obligations whether of the Company or of any third party.

 

12.7. All cheques, promissory notes, drafts, bills of exchange and other negotiable instruments and all receipts for moneys paid to the Company shall be signed, drawn, accepted, endorsed or otherwise executed, as the case may be, in such manner as shall from time to time be determined by resolution of directors.

 

12.8. For the purposes of Section 175 ( Disposition of assets ) of the Act, the directors may by resolution of directors determine that any sale, transfer, lease, exchange or other disposition is in the usual or regular course of the business carried on by the Company and such determination is, in the absence of fraud, conclusive.

 

12.9. The directors may from time to time and at any time by an instrument in writing appoint any person, firm or corporate body whether appointed directly or indirectly as its attorney either generally or in relation to a specific matter.

 

12.10. An act of an attorney appointed under Sub-Regulation 12.9 in accordance with the instrument under which the attorney was appointed binds the Company.

 

12.11. An instrument appointing an attorney under Sub-Regulation 12.9 may either be executed as a deed or signed by a person acting under the express or implied authority of the Company.

 

13. PROCEEDINGS OF DIRECTORS

 

13.1. Any one director of the Company may call a meeting of the directors by sending a written notice to each other director.

 

13.2. The directors of the Company or any committee thereof may meet at such times and in such manner and places within or outside the British Virgin Islands as the directors may determine to be necessary or desirable.

 

13.3. A director is deemed to be present at a meeting of directors if he participates by telephone or other electronic means and all directors participating in the meeting are able to hear each other.

 

13.4. A director shall be given not less than 3 days’ notice of meetings of directors, but a meeting of directors held without 3 days’ notice having been given to all directors shall be valid if all the directors entitled to vote at the meeting waive notice of the meeting, and for this purpose the presence of a director at a meeting shall constitute waiver by that director. The inadvertent failure to give notice of a meeting to a director, or the fact that a director has not received the notice, does not invalidate the meeting.

 

13.5. A director of the Company may appoint any other director or any other person, not disqualified from an appointment as a director, as his alternate to exercise the appointing director’s powers and carry out the appointing director’s responsibilities.

 

(a) An alternate director has the same rights as the appointing director in relation to any director’s meeting and any written resolution circulated for written consent.

 

(b) Subject to the Act and Regulation 17, an alternate director is liable for his own acts and omission as an alternate director whilst acting in that capacity.

 

(c) The appointment and termination of an alternate director must be in writing and written notice of the appointment and termination must be given by the appointing director to the Company as soon as reasonably practicable.

 

(d) The appointing director may, at any time, voluntarily terminate the alternate director’s appointment which shall take effect from the time when the written notice of this termination is given to the Company.

 

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(e) The rights of an alternate director shall terminate upon the death of the appointing director or if the appointing director, otherwise ceases to hold office.

 

13.6. A meeting of directors is duly constituted for all purposes if at the commencement of the meeting there are present in person or by alternate not less than one-half of the total number of directors, unless there are only 2 directors in which case the quorum is 2.

 

13.7. If the Company has only one director the provisions herein contained for meetings of directors do not apply and such sole director has full power to represent and act for the Company in all matters as are not by the Act, the Memorandum or the Articles required to be exercised by the shareholders. In lieu of minutes of a meeting the sole director shall record in writing and sign a note or memorandum of all matters requiring a resolution of directors. Such a note or memorandum constitutes sufficient evidence of such resolution for all purposes.

 

13.8. At meetings of directors at which the chairman of the board is present, he shall preside as chairman of the meeting. If there is no chairman of the board or if the chairman of the board is not present, the directors present shall choose one of their numbers to be chairman of the meeting.

 

13.9. An action that may be taken by the directors or a committee of directors at a meeting may also be taken by a resolution of directors or a resolution of a committee of directors consented to in writing or by telex, telegram, cable or other written electronic communication, without the need for any notice by a majority of the directors or members of the committee of directors, but if any resolution is adopted otherwise than by the unanimous written consent of all directors or all members of a committee of directors, a copy of such resolution shall forthwith be sent to all directors or all members of a committee of directors not consenting to such resolution. The consent may be in the form of counterparts each counterpart being signed by one or more directors. If the consent is in one or more counterparts, and the counterparts bear different dates, then the resolution shall take effect on the date upon which sufficient number of directors to constitute a resolution of directors or a resolution of a committee of directors has consented to the resolution by signed counterparts.

 

14. COMMITTEES

 

14.1. The directors may, by resolution of directors, designate one or more committees, each consisting of one or more directors, and delegate one or more of their powers, including the power to affix the seal, to the committee.

 

14.2. The directors have no power to delegate to a committee of directors any of the following powers:

 

(a) to amend the Memorandum or the Articles;

 

(b) to change the registered office or agent;

 

(c) to designate committees of directors;

 

(d) to delegate powers to a committee of directors;

 

(e) to appoint or remove directors;

 

(f) to appoint or remove an agent;

 

(g) to fix emoluments of directors;

 

(h) to approve a plan of merger, consolidation or arrangement;

 

(i) to make a declaration of solvency for the purposes of Section 198(1)(a) of the Act or to approve a liquidation plan;

 

(j) to make a determination under Section 57(1) of the Act that the Company will, immediately after a proposed distribution, satisfy the solvency test; or

 

(k) to authorize the Company to continue as a Company incorporated under the laws of a jurisdiction outside the British Virgin Islands.

 

14.3. Sub-Regulation 14.2(c) and (d) do not prevent a committee of directors, where authorised by the resolution of directors appointing such committee or by a subsequent resolution of directors, from appointing a sub-committee and delegating powers exercisable by the committee to the sub-committee.

 

14.4. The meetings and proceedings of each committee of directors consisting of 2 or more directors shall be governed mutatis mutandis by the provisions of the Articles regulating the proceedings of directors so far as the same are not superseded by any provisions in the resolution of directors establishing the committee.

 

14.5. Where the directors delegate their powers to a committee of directors they remain responsible for the exercise of that power by the committee, unless they believed on reasonable grounds at all times before the exercise of the power that the committee would exercise the power in conformity with the duties imposed on directors of the Company under the Act.

 

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15. OFFICERS AND AGENTS

 

15.1. The Company may by resolution of directors appoint officers of the Company at such times as may be considered necessary or expedient. Such officers may consist of a chairman of the board of directors, a president and one or more vice-presidents, secretaries and treasurers and such other officers as may from time to time be considered necessary or expedient. Any number of offices may be held by the same person.

 

15.2. The officers shall perform such duties as are prescribed at the time of their appointment subject to any modification in such duties as may be prescribed thereafter by resolution of directors. In the absence of any specific prescription of duties it shall be the responsibility of the chairman of the board to preside at meetings of directors and shareholders, the president to manage the day to day affairs of the Company, the vice-presidents to act in order of seniority in the absence of the president but otherwise to perform such duties as may be delegated to them by the president, the secretaries to maintain the register of members, minute books and records (other than financial records) of the Company and to ensure compliance with all procedural requirements imposed on the Company by applicable law, and the treasurer to be responsible for the financial affairs of the Company.

 

15.3. The emoluments of all officers shall be fixed by resolution of directors.

 

15.4. The officers of the Company shall hold office until their successors are duly appointed, but any officer elected or appointed by the directors may be removed at any time, with or without cause, by resolution of directors. Any vacancy occurring in any office of the Company may be filled by resolution of directors.

 

15.5. The directors may, by a resolution of directors, appoint any person, including a person who is a director, to be an agent of the Company. An agent of the Company shall have such powers and authority of the directors, including the power and authority to affix the seal, as are set forth in the Articles or in the resolution of directors appointing the agent, except that no agent has any power or authority with respect to the matters specified in Sub-Regulation 14.2. The resolution of directors appointing an agent may authorise the agent to appoint one or more substitutes or delegates to exercise some or all of the powers conferred on the agent by the Company. The directors may remove an agent appointed by the Company and may revoke or vary a power conferred on him.

 

16. CONFLICT OF INTERESTS

 

16.1. A director of the Company shall, forthwith after becoming aware of the fact that he is interested in a transaction entered into or to be entered into by the Company, disclose the interest to all other directors of the Company.

 

16.2. For the purposes of Sub-Regulation 16.1, a disclosure to all other directors to the effect that a director is a member, director or officer of another named entity or has a fiduciary relationship with respect to the entity or a named individual and is to be regarded as interested in any transaction which may, after the date of the entry or disclosure, be entered into with that entity or individual, is a sufficient disclosure of interest in relation to that transaction.

 

16.3. A director of the Company who is interested in a transaction entered into or to be entered into by the Company may:

 

(a) vote on a matter relating to the transaction;

 

(b) attend a meeting of directors at which a matter relating to the transaction arises and be included among the directors present at the meeting for the purposes of a quorum; and

 

(c) sign a document on behalf of the Company, or do any other thing in his capacity as a director, that relates to the transaction,

 

and, subject to compliance with the Act shall not, by reason of his office be accountable to the Company for any benefit which he derives from such transaction and no such transaction shall be liable to be avoided on the grounds of any such interest or benefit.

 

17. INDEMNIFICATION

 

17.1. Subject to the limitations hereinafter provided the Company shall indemnify against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred in connection with legal, administrative or investigative proceedings any person who:

 

(a) is or was a party or is threatened to be made a party to any threatened, pending or completed proceedings, whether civil, criminal, administrative or investigative, by reason of the fact that the person is or was a director of the Company; or

 

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(b) is or was, at the request of the Company, serving as a director of, or in any other capacity is or was acting for, another body corporate or a partnership, joint venture, trust or other enterprise.

 

17.2. The indemnity in Sub-Regulation 17.1 only applies if the person acted honestly and in good faith with a view to the best interests of the Company and, in the case of criminal proceedings, the person had no reasonable cause to believe that their conduct was unlawful.

 

17.3. The decision of the directors as to whether the person acted honestly and in good faith and with a view to the best interests of the Company and as to whether the person had no reasonable cause to believe that his conduct was unlawful is, in the absence of fraud, sufficient for the purposes of the Articles, unless a question of law is involved.

 

17.4. The termination of any proceedings by any judgment, order, settlement, conviction or the entering of a nolle prosequi does not, by itself, create a presumption that the person did not act honestly and in good faith and with a view to the best interests of the Company or that the person had reasonable cause to believe that his conduct was unlawful.

 

17.5. The Company may purchase and maintain insurance in relation to any person who is or was a director, officer or liquidator of the Company, or who at the request of the Company is or was serving as a director, officer or liquidator of, or in any other capacity is or was acting for, another body corporate or a partnership, joint venture, trust or other enterprise, against any liability asserted against the person and incurred by the person in that capacity, whether or not the Company has or would have had the power to indemnify the person against the liability as provided in the Articles.

 

18. RECORDS

 

18.1. The Company shall keep the following documents at the office of its registered agent:

 

(a) the Memorandum and the Articles;

 

(b) the register of members, or a copy of the register of members;

 

(c) the register of directors, or a copy of the register of directors; and

 

(d) copies of all notices and other documents filed by the Company with the Registrar of Corporate Affairs in the previous ten (10) years.

 

18.2. If the Company maintains only a copy of the register of members or a copy of the register of directors at the office of its registered agent, it shall:

 

(a) within 15 days of any change in either register, notify the registered agent in writing of the change; and

 

(b) provide the registered agent with a written record of the physical address of the place or places at which the original register of members or the original register of directors is kept.

 

18.3. The Company shall keep the following records and underlying documentation at the office of its registered agent or at such other place or places, within or outside the British Virgin Islands, as the directors may determine:

 

(a) minutes of meetings and resolutions of members and classes of members; and

 

(b) minutes of meetings and resolutions of directors and committees of directors.

 

18.4. The records and underlying documentation shall be retained for a period of 5 years from the date of completion of the transaction to which the records and underlying documentation relate or from the date that the Company terminates the business relationship to which the records and underlying documentation relate.

 

18.5. Where any original records and underlying documentation referred to in this Regulation are maintained other than at the office of the registered agent of the Company, the Company shall provide the registered agent with a written record of the physical address of the place or places at which the records and underlying documentation are kept.

 

18.6. Where the place at which the original records and underlying documentation of the Company changes, the Company shall provide its registered agent with the physical address of the new location of the records and underlying documentation within 14 days of the change of the location.

 

18.7. The records and underlying documentation of the Company referred to in this Regulation shall be in such form as are sufficient to show and explain the Company’s transactions and will, at any time, enable the financial position of the Company to be determined with reasonable accuracy.

 

18.8. The records kept by the Company under this Regulation shall be in written form or either wholly or partly as electronic records complying with the requirements of the Electronic Transactions Act (No. 5 of 2001).

 

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19. SEAL

 

The Company shall have a common seal and the directors shall provide for the safe custody of the seal and for an imprint thereof to be kept at the office of the registered agent of the Company. Except as otherwise expressly provided herein, the seal when affixed to any written instrument shall be witnessed and attested to by the signature of any one director or other person so authorised from time to time by resolution of directors. Such authorisation may be before or after the seal is affixed, may be general or specific and may refer to any number of sealings. The directors may provide for a facsimile of the seal and of the signature of any director or authorised person which may be reproduced by printing or other means on any instrument and it shall have the same force and validity as if the seal had been affixed to such instrument and the same had been attested to as hereinbefore described.

 

20. DISTRIBUTIONS

 

20.1. The directors of the Company may, by resolution of directors, authorise a distribution by way of dividend at such time at such amount as they think fit if they are satisfied, on reasonable grounds, that, immediately after the distribution, the value of the Company’s assets will exceed its liabilities and the Company will be able to pay its debts as they fall due.

 

20.2. Dividends may be paid in money, shares, or other property.

 

20.3. Notice of any dividend that may have been declared shall be given to each shareholder as specified in Sub-Regulation 23.1 and all dividends unclaimed for 3 years after having been declared may be forfeited by resolution of directors for the benefit of the Company.

 

20.4. No dividend shall bear interest as against the Company and no dividend shall be paid on treasury shares.

 

20.5. The directors may, before making any distributions, set aside out of the profits of the Company such sum as they think proper as a reserve fund, and may invest the sum so set apart as a reserve fund upon such securities as they may select.

 

20.6. The directors may determine in their sole discretion to issue bonus shares from time to time.

 

20.7. A division of the issued and outstanding shares of a class or series of shares into a larger number of shares of the same class or series having a proportionately smaller par value does not constitute the issue of a bonus share.

 

21. ACCOUNTS

 

21.1. The Company shall keep records that are sufficient to show and explain the Company’s transactions and that will, at any time, enable the financial position of the Company to be determined with reasonable accuracy.

 

21.2. The Company may by resolution of shareholders call for the directors to prepare periodically and make available a profit and loss account and a balance sheet. The profit and loss account and balance sheet shall be drawn up so as to give respectively a true and fair view of the profit and loss of the Company for a financial period and a true and fair view of the assets and liabilities of the Company as at the end of a financial period.

 

22. AUDIT

 

22.1. The Company may by resolution of shareholders call for the accounts to be examined by auditors.

 

22.2. The first auditors shall be appointed by resolution of directors; subsequent auditors shall be appointed by a resolution of shareholders.

 

22.3. The auditors may be shareholders, but no director or other officer shall be eligible to be an auditor of the Company during their continuance in office.

 

22.4. The remuneration of the auditors of the Company:

 

(a) in the case of auditors appointed by the directors, may be fixed by resolution of directors; and

 

(b) subject to the foregoing, shall be fixed by resolution of shareholders or in such manner as the Company may by resolution of shareholders determine.

 

22.5. The auditors shall examine each profit and loss account and balance sheet required to be laid before a meeting of the shareholders or otherwise given to shareholders and shall state in a written report whether or not:

 

(a) in their opinion the profit and loss account and balance sheet give a true and fair view respectively of the profit and loss for the period covered by the accounts, and of the assets and liabilities of the Company at the end of that period; and

 

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(b) all the information and explanations required by the auditors have been obtained.

 

22.6. The report of the auditors shall be annexed to the accounts and shall be read at the meeting of shareholders at which the accounts are laid before the Company or shall be otherwise given to the shareholders.

 

22.7. Every auditor of the Company shall have a right of access at all times to the books of account and vouchers of the Company, and shall be entitled to require from the directors and officers of the Company such information and explanations as he thinks necessary for the performance of the duties of the auditors.

 

22.8. The auditors of the Company shall be entitled to receive notice of, and to attend any meetings of shareholders at which the Company’s profit and loss account and balance sheet are to be presented.

 

23. NOTICES

 

23.1. Any notice, information or written statement to be given by the Company to shareholders may be given by personal service or by mail addressed to each shareholder at the address shown in the register of members.

 

23.2. Any summons, notice, order, document, process, information or written statement to be served on the Company may be served by leaving it, or by sending it by registered mail addressed to the Company, at its registered office, or by leaving it with, or by sending it by registered mail to, the registered agent of the Company.

 

23.3. Service of any summons, notice, order, document, process, information or written statement to be served on the Company may be proved by showing that the summons, notice, order, document, process, information or written statement was delivered to the registered office or the registered agent of the Company or that it was mailed in such time as to admit to its being delivered to the registered office or the registered agent of the Company in the normal course of delivery within the period prescribed for service and was correctly addressed and the postage was prepaid.

 

24. VOLUNTARY WINDING UP AND DISSOLUTION

 

24.1. The Company may voluntarily commence to wind up and dissolve if

 

(a) it has no liabilities; or

 

(b) is able to pay its debts as they fall due,

 

by a resolution of shareholders or if, the Company has never issued shares, by a resolution of directors.

 

24.2. The Company may by a resolution of shareholders or by a resolution of directors appoint a voluntary liquidator.

 

24.3. Where a liquidator has been appointed by a resolution of directors, the shareholders of a company may by a resolution of the shareholders appoint an eligible person, subject to the Act, as an additional voluntary liquidator to act jointly with the voluntary liquidator appointed.

 

25. CONTINUATION

 

The Company may by resolution of shareholders or by a resolution passed unanimously by all directors of the Company continue as a company incorporated under the laws of a jurisdiction outside the British Virgin Islands in the manner provided under those laws.

 

We, NovaSage Incorporations (BVI) Limited of NovaSage Chambers, P.O. Box 4389, Road Town, Tortola, British Virgin Islands in our capacity as registered agent for the Company hereby apply to the Registrar for the incorporation of the Company this 13th day of May, 2015.

 

Incorporator  
   
/s/ Rexella D Hodge  
Rexella D Hodge  
Authorised Signatory  
NovaSage Incorporations (BVI) Limited  

 

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Exhibit 4.1  

 

 

 

 

 

 

 

Exhibit 8.2

 

 

 

PRC Legal opinion on Certain PRC Legal Matters

 

22/F, JinyuanTower, No. 181 North Huju Road,

 

Nanjing, Jiangsu Province, 210003, PRC

 

Tel : (025)84207294       Fax: (025)84207501

 

April 26, 2017

 

  1  

 

 

To the Board of Directors

ZK International Group Co., Ltd.

No. 678 Dingxiang Road, Binhai Industrial Park

Economic & Technology Development Zone

Wenzhou, Zhejiang Province

People’s Republic of China 325025

 

Re: PRC Legal opinion on Certain PRC Legal Matters

 

Dear Sir or Madam,

 

We are qualified lawyers of the People’s Republic of China (the “ PRC ”, for purposes of this legal opinion, excluding the Hong Kong Special Administrative Region, the Macau Special Administrative Region and Taiwan), and are qualified to issue this legal opinion under the laws and regulations of the PRC.

 

We are acting as the PRC counsel to ZK International Group Co., Ltd. (the “Company”), a company incorporated under the laws of the British Virgin Islands, in connection with (A) the Company’s registration statement on Form F-1 including all amendments or supplements thereto (the “Registration Statement”) to be filed with the United States Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended (the “Securities Act”) relating to the initial public offering by the Company of a certain number of the Company’s ordinary shares and (B) the proposed listing and trading of the Company’s ordinary shares on the Nasdaq Capital Market (the “Offering”). According to the provisions of the relevant laws and regulations in the PRC, we have been requested to give an opinion as to the matters (referred to the matters of the PRC Law in this opinion) set forth below

 

I. Definitions.

 

As used herein, the following terms are defined as follows:

 

(a) “ PRC Law ” means all applicable laws, regulations, rules, orders, decrees, guidelines, judicial interpretations and other legislations of the PRC in effect and available to the public on the date of this opinion;

 

(b) “ PRC Companies ” means the entities listed in Appendix I (A) hereto (each a “PRC Company”, collectively “PRC Companies”);

 

(c) “ Governmental Authority ” means any national, provincial or local governmental, regulatory or administrative authority, agency or commission in the PRC, or any court, tribunal or any other judicial or arbitral body in the PRC, or anybody exercising, or entitled to exercise, any administrative, judicial, legislative, policy, regulatory, or taxing authority or power of similar nature in the PRC (other than the Hong Kong Special Administrative Region, Macao Special Administrative Region and Taiwan Province).

 

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II. PRC LAWS

 

This opinion is rendered on the basis of the PRC laws, regulations, rules, orders, decrees, guidelines or notices effective and publicly available as of the date hereof and there is no assurance that any PRC Laws will not be changed, amended or replaced in the future with or without retrospective effect.

 

We do not purport to be an expert on or to be generally familiar with or qualified to express legal opinions based on any laws other than the PRC Law. Accordingly, we express or imply no opinion directly or indirectly on the laws of any jurisdiction other than the PRC.

 

III. ASSUMPTIONS

 

For the purpose of this opinion, we have examined the originals or copies, certified or otherwise identified to our satisfaction, of documents provided to us by or on behalf of the Company and such other documents, corporate records, certificates issued by governmental authorities in the PRC and officers of the Company and other instruments as we have deemed necessary or advisable for the purposes of rendering this opinion.

 

In examination of the documents and for the purpose of giving this opinion, we have relied upon the following assumptions, which we have not independently verified: (i) all signatures, seals and chops are genuine and made or affixed with due authority; (ii) all documents submitted to us as originals are authentic and all documents submitted to us as copies are complete and conform to their authentic originals; (iii) none of the documents as they were presented to us has been revoked, amended, varied or supplemented, without us being notified or made aware thereof. Where important facts were not independently established to us, we have relied upon certificates issued by governmental agents and representatives of the Company with proper authority and upon representations, made in or pursuant to the documents.

 

IV. OPINIONS

 

Based upon the foregoing examinations and assumptions and subject to the qualifications set forth herein, we are of the opinion that:

 

(i) Each of the PRC Companies has been duly incorporated and validly exists as a company with limited liability and enterprise legal person status under the PRC Laws. The registration certificate of each of the PRC Companies is in full force and effect under and in full compliance with the PRC Laws. All of the registered capital of each of the PRC Companies has been fully paid for, except Wenzhou Weijia Pipeline Development Co., Ltd, and all the equity interest in the registered capital of each of the PRC Companies is owned by its shareholders currently registered with the competent Administration for Industry and Commerce. The current articles of association and the business license of each of the PRC Companies comply with applicable PRC Laws and are in full force and effect.

 

(ii) Wenzhou Weijia Pipeline Development Co. Ltd is a limited liability company wholly-owned by ZK Pipeline Industry Co. Ltd (a Hong Kong Enterprise) with a registered capital of $20 million. The proceeds received by ZK Pipeline Industry Co. Ltd from oversea financing activities will be used for contributing in the registered capital of Wenzhou Weijia Pipeline Development Co. Ltd (the “Contribution”).

 

  3  

 

 

After verification, Wenzhou Weijia Pipeline Development Co. Ltd has been granted the Certificate of Approval for Taiwan, Hong Kong, and Macao Investment in PRC Enterprise , with a total investment of $50 million, and a registered capital of $20 million. We are of the opinion that the Contribution is compliant with relevant laws and regulations, and no potential penalty should be caused by this matter.

 

(iii)To the best of our knowledge after due and reasonable inquiries, none of the PRC Companies has taken any action nor have any steps been taken or legal or administrative proceedings been commenced or threatened for the winding up, dissolution, bankruptcy or liquidation, or for the appointment of a liquidation committee of any of the PRC Companies, or for the suspension, withdrawal, revocation or cancellation of any of the business licenses of the PRC Companies.

 

(iv) The Company has duly completed all relevant governmental authorizations required under the applicable laws, regulations or rules concerning foreign exchange; the shareholders of the Company have duly completed all relevant governmental authorizations required under applicable laws, regulations or rules concerning foreign exchange.

 

(v) The corporate structure of the PRC Companies as described in the Registration Statement is in compliance with applicable regulatory requirements set forth in the PRC Laws.

 

(vi) To the best of our knowledge after due and reasonable inquiries, there are no legal, governmental, administrative or arbitrative proceedings, actions, initiatives, decisions, rulings, demands or orders before any competent court or arbitration body of the PRC or before or by any competent Governmental Agency pending or threatened against, or involving the business or assets of any of the PRC Companies, except the Company’s pending legal claim against Raozhou Dianli, Cao Xianjin, which is disclosed in the Registration Statement.

 

(vii) PRC courts may recognize and enforce foreign judgments in accordance with the requirements of PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions. China does not have any treaties or other form of reciprocity with the United States or the British Virgin Islands that provide for the reciprocal recognition and enforcement of foreign judgments. 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 or the British Virgin Islands.

 

(viii) All statements set forth in the Registration Statements that describe or summarize PRC legal or regulatory matters, or documents, agreements or proceedings governed by PRC Laws, are true and accurate in all material aspects, and are fairly disclosed and correctly set forth therein, and nothing has been omitted from such statements which would make the same misleading in all material aspects.

 

This opinion is subject to the following qualifications:

 

  (a) This opinion is limited to matters of the PRC Law in effect on the date of this opinion.

 

  (b) We have not investigated and do not express or imply any opinion on accounting, auditing, or laws of any other jurisdiction.

 

  4  

 

 

  (c) This opinion is subject to the effects of (i) certain legal or statutory principles affecting the enforceability of contractual rights generally under the concepts of public interest, national security, good faith and fair dealing, applicable statutes of limitation, and the limitations of bankruptcy, insolvency, reorganization or similar laws affecting the enforcement of creditor’s rights generally; (ii) any circumstance in connection with the formulation, execution or performance of any legal documents that would be deemed materially mistaken, clearly unconscionable or fraudulent; (iii) judicial discretion with respect to the availability of injunctive relief, the calculation of damages, and any entitlement to attorneys’ fees and other costs; and (iv) the discretion of any competent PRC legislative, administrative or judicial bodies in exercising their authority in connection with the interpretation, implementation and application of relevant PRC Laws.

 

This opinion is given for the benefit of the persons to whom it is addressed upon the request by, and in its capacity as PRC legal counsel to, the Company. It may not, except with the prior permission of the Company and us, be relied upon by anyone other than the Company, the underwriters and their legal counsel, and financial advisors and investors in connection with this the public offering or used for any other purpose.

 

Gaopeng & Partners consent to being named in the Company’s registration statement. Additionally, Gaopeng & Partners consent to the use of its name and the opinion expressed in the “Enforceability of Liabilities” section and other sections of the Company’s registration statement where our firm’s name, Gaopeng & Partners, is referred to.

 

This opinion is intended to be used in the context which is specifically referred to herein and each paragraph should be considered as a whole and no part should be extracted and referred to independently.

 

We hereby consent to the quotation or summarization of this opinion in, and the filing hereof, as an exhibit to the Registration Statement.

 

This opinion is limited to the matters referred to herein and shall not be construed as extending to any other matter or document not referred to herein.

 

Yours faithfully

/s/ Gaopeng & Partners

 

  5  

 

 

Appendix I

 

PRC Companies:

 

(1) Wenzhou Weijia Pipeline Development Co., Ltd. (referred to as “温州维佳管道发展有限公司” in Chinese)

 

(2) Zhejiang Zhengkang Industrial Co., Ltd. (referred to as “浙江正康实业股份有限公司” in Chinese)

 

(3) Wenzhou Zhengfeng Industry and Trade Co., Ltd. (referred to as “温州正丰工贸有限公司” in Chinese)

 

  6  

 

Exhibit 10.2

 

ACTING-IN-CONCERT AGREEMENT

 

This Acting-in-Concert Agreement is executed by the following parties:

Party A: HUANG, Jiancong

Address: No. 678 Dingxiang Road, Binhai Industrial Park

Economic & Technology Development Zone

Wenzhou, Zheijiang Province

People’s Republic of China 325025

 

Party B: WANG, Guolin

Address: No. 678 Dingxiang Road, Binhai Industrial Park

Economic & Technology Development Zone

Wenzhou, Zheijiang Province

People’s Republic of China 325025

 

Party C: WANG, Mingjie

Address: No. 678 Dingxiang Road, Binhai Industrial Park

Economic & Technology Development Zone

Wenzhou, Zheijiang Province

People’s Republic of China 325025

 

Party D: WANG, Jiandi

Address: No. 678 Dingxiang Road, Binhai Industrial Park

Economic & Technology Development Zone

Wenzhou, Zheijiang Province

People’s Republic of China 325025

 

Party E: WANG, Yangming

Address: No. 678 Dingxiang Road, Binhai Industrial Park

Economic & Technology Development Zone

Wenzhou, Zheijiang Province

People’s Republic of China 325025

 

(collectively, the “Parties” and each a “Party”)

 

WHEREAS:

Parties A, B, C and D and E jointly hold 50,000 ordinary shares, par value $1.00 per share of ZK International Group. Co. Ltd. (including its predecessors, hereinafter referred to as the “Company”).

 

NOW THEREFORE , in order to maximize the profits for the Parties, and to maintain the control of the Parties over a certain proportion of the voting rights and shareholdings of the Company, the Parties agree unanimously to the following arrangements:

 

1. During the term of this agreement, the Parties shall be deemed as actors in concert, and shall act in concert in relation to all matters that require the decisions of the shareholders of the Company, including but not limited to voting unanimously to approve, reject, or to abstain from voting in relation to motions that need to be resolved at shareholders meetings, and to jointly sign all necessary documents.

 

2. Before the Parties act in concert, they shall vote on the matters that require action in concert, and joint action shall be taken based on the results of the voting. Each of the Parties agree and confirm that, if the Parties are unable to reach a unanimous consent in relation to the matters that require action in concert, a decision that is made by a total of more than 50% of voting rights of the Parties shall be deemed as a decision that is unanimously passed by the Parties and shall be binding on all the Parties. Each of the Parties shall act in concert with other Parties based on the contents of the aforesaid decision.

 

 

 

 

3. The Parties may, prior to the convening of a Company shareholder meeting, appoint Jiancong Huang as a proxy, and issue an authorization letter to such a proxy to authorize the proxy to exercise voting rights on behalf of the Parties at the Company shareholder meeting based on the contents of the unanimous decision that has been reached.

 

4. This agreement shall come into force from the date that the Parties sign the agreement, and the agreement shall remain effective for a period of twenty (20) years.

 

5. During the effective period of this agreement, if any of the Parties transfers its shares of the Company, as a prerequisite, unless waived in writing by all of other Parties, it shall ensure that the transferee is bound by the provisions of this agreement, and the transferee upon receiving the transfer of the shares shall be deemed as having agreed to the provisions of this agreement and having agreed to be bound by the provisions of this agreement.

 

6. This agreement shall be governed by the legal jurisdiction of the British Virgin Islands and shall be interpreted in accordance with the laws of the British Virgin Islands.

 

7. This agreement is executed by the Parties on the May 13, 2015.

 

Party A:  
   
/s/ Huang Jiancong  
Huang, Jiancong (holding 22,500, or 45% ordinary shares)  
   
Party B:  
   
/ s/ Wang Guolin  
WANG, Guolin (holding 10,000, or 20% ordinary shares)  
   
Party C:  
   
/s/ Wang Mingjie  
WANG, Mingjie (holding 10,000, or 20% ordinary shares)  
   
Party D:  
   
/s/ Wang Jiandi  
WANG, Jiandi (holding 5,000, or 20% ordinary shares)  
   
Party E:  
   
/s/ Wang Yangming  
WANG, Yangming (holding 2,500, or 20% ordinary shares)  

 

 

 

 

Exhibit 10.3  

 

 

 

 

 

 

 

 

Exhibit 10.4  

 

 

 

 

 

 

 

 

Exhibit 10.5

 

 

 

 

 

 

 

 

Exhibit 10.6

 

 

 

 

 

 

 

 

Exhibit 10.7

 

 

 

 

 

 

 

 

Exhibit 10.8

 

Employment Contract – Jiancong Huang

 

Employer  (Party A): Zhejiang Zhengkang Industrial Co. Ltd

 

Address: 678 Dingxiang Road, Binghai Industry Park, Economic Development Area, Wenzhou Zhejiang Province.

 

Employee  (Party B): Jiancong Huang, male; college education; Hukou in Wenzhou, Zhejiang Province

 

I. Contract period

 

This contract is unfixed-term contract starting from April 15, 2016 through the time when conditions specified in this contract occurs.

 

II. Employment location and title

 

Party B agrees to work with Party A in the Office of Chief Officers in   Wenzhou based on the job requirement and with the job title as Chairman of Board of Directors.

 

III. Labor remuneration

 

The annual salary of Party B is RMB500,000 per year which is after-tax salary and shall be paid at the fifteenth day of every month.

 

The annual salary of Party B includes the basic salary, the house benefits and transportation benefits, the overtime work compensation, laid off economic compensation, non competition compensation, social security benefits and other benefits and bonus etc.

 

Party B dully understands the salary system of Party B and accepts such salary payment. The parties can stipulate the other salary standard through negotiation and put such agreement in writing.

 

Party A shall fully pay the salary to Party B monthly in cash and shall not delay or hold it without reason.

 

IV. Work hours, Rest and Leave

 

Party A adopts the standard work hour system and the other work hour system permitted by the laws and regulations of PRC.

 

Party B enjoys all holidays and vacation rights under the national regulations during the contract period.

 

V. Social insurance

 

Following the related national and local social insurance law, Party A shall pay social insurance fee on behalf of Party B; Party A shall deduct from Party B’s salary the individual payment part for the social security fee.

 

Upon the termination of the contract, Party A shall perform relevant social insurance procedure for Party B.

 

Any other benefits shall be based on relevant policies and regulations by the national and local government.

 

 

 

 

VI. Employment protection, work condition and protection against occupational hazards

 

Party A shall strictly follow all laws and regulations related to labor protection by the national and local government of PRC and shall provide Party B with necessary work conditions and tools, establish safe production process, design standard operating instructions, work specifications and labor safety and health system.

 

If Party B involves in occupational hazards, Party A shall follow the national regulations to perform pre-service and post-service occupational health check; and shall provide regular health examinations during the contract period.

 

If Party A provides Party B occupational trainings and pays the training fees, the parties can execute training service agreement specifying the service duration and breach liability

  

VII. Labor disciplines and regulations:

 

Party A shall make all legally designed labor disciplines and regulations public to Party B. Party B shall strictly follow regulations and rules of Party A and shall complete all tasks, improve his/her professional skills and execute all labor disciplines and ethics. If Party B violates any regulations, Party A can give appropriate administrative sanctions or terminate the contract under worse scenario according to its disciplines and regulations.

 

Party B shall keep confidential all the information he received about the business secret and other confidential information.

 

VIII. Modification, revision, termination of the contract

 

When the labor contract expires or the termination condition of the labor contract stipulated by the two parties occurs, the labor contract shall be terminated. Upon mutual consent, the parties can renew the labor contract. The modification of the labor contract shall be carried out in accordance with the relevant regulations and laws of PRC.

 

IX. Financial compensation and damages:

 

If Party A terminates the contract and is in violation of relevant labor laws and regulations, it shall pay Party B financial compensation and economic damages incurred if Party B suffers such damages.

 

If Party B terminates this contract and in breach of the contract provisions herein, he shall pay Party A following loss:

 

a. all training fees paid by Party A,

 

b. the direct economic loss caused to Party A, and

 

c. The breach compensation to Party A due to Party B’s violation of business confidentiality and non -competition agreement.

 

d. Other compensation costs mentioned in the contract.

 

X. Other stipulations

 

Party A has the right to knowledge the basic information of Part B before Party B signs this labor contract.

 

 

 

 

XI. Dispute resolution:

 

Any labor dispute regarding performance of this contract can be brought up for medication and arbitration If any party could not agree with the result of the arbitration, it can initiate litigation or negotiate to solve such disputes.

 

Upon the disputes, the party who would like to proceed via arbitration shall submit written application to Labor Dispute Arbitration Committee for arbitration. Either party can initiate litigation in court within 15 days since it receives the arbitration award if it could not agree with the agreement.

 

XI. Miscellaneous

 

The bylaws and regulations of Party A are appendix to this labor contract, which shall constitute the whole

labor contract with this contract.

 

Any unresolved issue of this contract, parties can revolve through negotiation. If provisions of this contract conflict with laws and regulations of PRC, such provisions shall be nullified and the associate national laws and regulations shall prevail.

 

This contract is written in duplicate with each party holding one copy. The contract will come into force upon execution or stamp of both parties.

 

Party A: Zhejiang Zhengkang Industrial Co. Ltd

 

Party B: Jiancong Huang

 

The contract was signed on April 15, 2016.

 

 

 

Exhibit 10.9

 

Employment Contract – Chaochai Yang

 

Employer  (Party A): Zhejiang Zhengkang Industrial Co. Ltd

 

Address: 678 Dingxiang Road, Binghai Industry Park, Economic Development Area, Wenzhou Zhejiang Province.

 

Employee  (Party B): Shaochai Yang, female; college education; Hukou in Wenzhou, Zhejiang Province

 

I. Contract period

 

2017-2-4 through 2020-2-3.

 

II. Employment location and title

 

Party B agrees to be in charge of the Finance Department of Party A in   Wenzhou based on the job requirement and with the job title as Chief Financial Officer.

 

III. Work hours

 

It is standard work hours of 8 hours/day; any overtime arrangement will follow relevant regulations by the government and as agreed on by both parties. Party B enjoys all holidays and vacation rights under the national regulations during the contract period.

 

IV. Employment protection, work condition and protection against occupational hazards

 

Party A shall strictly follow all laws and regulations related to labor protection by the national and local government of PRC and shall provide Party B with necessary work conditions and tools, establish safe production process, design standard operating instructions, work specifications and labor safety and health system.

 

If Party B involves in occupational hazards, Party A shall follow the national regulations to perform pre-service and post-service occupational health check; and shall provide regular health examinations during the contract period.

 

If Party A provides Party B occupational trainings and pays the training fees, the parties can execute training service agreement specifying the service duration and breach liability.

 

V. Compensation

 

Party B shall be paid RMB9,000 per month with an additional bonus and/or allowance of RMB2050. Party B will also be paid the additional compensation, which includes the overtime work compensation, laid off economic compensation, non competition compensation, social security benefits and other benefits etc. Party B’s salary in the probation duration is RMB8,000 per month with an additional bonus and/or allowance of RMB2,050.

 

Party A shall fully pay Party B’s salary in cash.

 

VI. Social insurance and benefits:

 

Following the related national and local social insurance law, Party A shall cover social insurance fee on behalf of Party B; Party A shall deduct from Party B’s salary the individual payment part for the social security fee.

 

Upon the termination of the contract, Party A shall perform relevant social insurance procedure for Party B.

 

 

 

  

Any other benefits shall be based on relevant policies and regulations by the national and local government.

  

VII. Labor disciplines and regulations:

 

Party A shall make all legally designed labor disciplines and regulations accessible to Party B. Party B shall strictly follow regulations and rules of Party A and shall complete all tasks, improve his/her professional skills and execute all labor disciplines and ethics. If Party B violates any regulations, Party A can give appropriate administrative sanctions or terminate the contract under worse scenario according to its disciplines and regulations.

 

VIII. Modification, revision, termination of the contract

 

When the labor contract expires or the termination condition of the labor contract stipulated by the two parties occurs, the labor contract shall be terminated. Upon mutual consent, the parties can renew the labor contract. The modification of the labor contract shall be carried out in accordance with the relevant regulations and laws of PRC.

 

Pursuant to the provision 40, 41 of the Labor Contract Law of the PRC, Party A can terminate the labor contract, but shall notify Party B in writing 30 days in advance, and shall not violate the provision 40, 41 of the Labor Contract Law. Party B can terminate the labor contract and shall notify Party A in writing 30 days in advance. In the probation period, Party B shall notify Party A in writing 3 days in advance.

 

Party A can terminate the labor contract at any time pursuant to the provision 39 of Labor Contract Law, and Party B can terminate the labor contract at any time pursuant to the provision 38 of Labor Contract Law

 

The contract can be terminated with both parties’ consent, or under any other situation provided by law.

 

IX. Financial compensation and damages:

 

If Party A terminates the contract and is violation of relevant labor laws and regulations, it shall pay Party B financial compensation and economic damages incurred if Party B suffers such damages.

 

If Party B terminates this contract and is in breach of the contract provisions herein, it shall pay Party A following loss:

 

a. all training fees paid by Party A,

 

b. the direct economic loss caused to Party A, and

 

c. The breach compensation to Party A due to Party B’s violation of business confidenality and non competition agreement.

 

d. other compensation costs incurred from the contract.

 

X. Other stipulations

 

The salary paid to Party B has included the severance for termination of the employment relationship.

 

The parties have executed a Confidentiality and Non-competition Agreement, Party A shall pay the compensation for non competition restriction and such compensation shall be covered by the salary.

 

Party B promised that she has terminated her prior labor relationship before she become an employee of Party A. Party B shall indemnify all the damages Party A suffered to the claims of Party A’s prior employer if Party B fails to terminates the relationship.

 

 

 

  

XI. Dispute resolution:

 

Any labor dispute regarding performance of this contract can be brought up for medication and arbitration If any party could not agree with the result of the arbitration, it can initiate litigation or negotiate to solve such disputes.

 

Upon the disputes, the party who would like to proceed via arbitration shall submit written application to Labor Dispute Arbitration Committee for arbitration. Either party can initiate litigation in court within 15 days since it receives the arbitration award if it could not agree with the agreement. 

 

XI. Miscellaneous

 

The bylaws and regulations of Party A are appendix to this labor contract, which shall constitute the whole

labor contract with this contract.

 

Any unresolved issue of this contract, parties can revolve through negotiation. If provisions of this contract conflict with laws and regulations of PRC, such provisions shall be nullified and the associate national laws and regulations shall prevail.

 

This contract is written in duplicate with each party holding one copy. The contract will come into force upon execution or stamp of both parties.

 

Party A: Zhejiang Zhengkang Industrial Co. Ltd

 

Party B: Shaochai Yang

 

The contract was signed on February 4, 2017.

 

 

 

 

Exhibit 10.10

 

PRIVATE PLACEMENT SUBSCRIPTION AGREEMENT

 

THIS PRIVATE PLACEMENT SUBSCRIPTION AGREEMENT (the “Agreement”) is made this _____th day of March, 2017, among (i) ZK International Group Co., Ltd. (the "Company"), a British Virgin Islands limited liability company, and (ii) each purchaser identified on the signature pages to this Agreement (each a “Purchaser” and collectively, the “Purchasers”).

 

Purchase of Ordinary Shares

 

1. Subscription

 

1.1                        The undersigned Purchasers (each a “Purchaser”) hereby subscribe for and agree to purchase from the Company for cash (the “Subscription Proceeds”, on the basis of the representations and warranties and subject to the terms and conditions set forth herein, ordinary shares, of the Company, no par value per share (the “Ordinary Shares”) and in an amount for subscription shares as set out on each Subscriber’s signature page hereto (each such subscription an agreement to purchase being a “Subscription”) at a purchase price of US$1.00 per ordinary share.

 

1.2                        Subject to the terms hereof, the Subscription will be effective upon its acceptance by the Company. The Purchasers acknowledge that there is no minimum required to close any subscription under the offering.

 

2. Payment

 

2.1                        Each Purchaser acknowledges and agrees that its commitment to purchase Ordinary Shares of the Company hereunder is and shall be irrevocable upon delivery of the Subscription Proceeds and an executed counterpart original of this Subscription Agreement, an investor questionnaire, form of which is attached hereto as Exhibit A (the “Investor Questionnaire”) and Registration Rights Agreement, form of which is attached hereto as Exhibit B (the “Registration Rights Agreement”), to the Company. The Subscription Proceeds must accompany or precede this Subscription Agreement and shall be paid by wire transfer to the following bank account.

 

  Title of the Account: ZK Pipe Industry Co. Limited
  Account #: 20133112
  Beneficiary Bank: China Merchants Bank Co. Ltd, Hong Kong Branch
  Swift Code: CMBCHKHH
  Bank Address: 21/F Bank of America Tower
    12 Harcourt Road, Central, Hong Kong

 

 

 

 

3. Deliveries at or Prior to Closing

 

3.1                        Prior to acceptance of this Subscription Agreement by the Company, each Purchaser must complete, sign and return to the Company, or Company’s counsel Ortoli Rosenstadt LLP, an executed copy of this Subscription Agreement and Registration Rights Agreement with completed and executed Investor Questionnaire and wire transfer the Subscription Proceeds as described in Section 2.1, above.

 

3.2                        Each Purchaser shall complete, sign and return to the Company as soon as possible, on request by the Company, any documents, questionnaires, notices and undertakings as may be required by regulatory authorities or by applicable law.

 

3.3                        The Company shall deliver to each Purchaser the following:

 

(a) at the Closing (as defined below), a counterpart of this Subscription Agreement and Registration Rights Agreement, duly executed by an authorized signatory of the Company;

 

(b) within 10 business days of the Closing Date (as defined below), a certificate or evidence of electronic book entry representing the Ordinary Shares in the amount set forth on the signature page hereto.

 

4. Closing

 

4.1                        Completion of the sale of the Ordinary Shares contemplated in this Subscription Agreement (any such completion, a " Closing " ) shall occur on or before March 23, 2017, or on a such date to be mutually agreed upon by the Company and the Purchaser.

 

4.2                        The Company may, at its discretion, elect to close the Offering in one or more closings, in which event the Company may agree with one or more of the Purchasers (including the Purchaser hereunder) to complete delivery of the Ordinary Shares to such Purchaser(s) against payment therefore at any time on or prior to the furthest most date set by Section 4.1.

 

5. Conditions to Closing

 

5.1                        Upon acceptance of this Subscription Agreement, the obligations of the Company to Close on the Closing Date are subject to the following conditions:

 

(a) Delivery of the transaction documents as set forth in Section 3.1 and 3.2.

 

(b) that all of the representations and warranties of the Purchaser made in this Subscription Agreement, the Investor Questionnaire and the Registration Rights Agreement are accurate in all material respects when made and on the Closing Date;

 

(c) that all of the obligations, covenants and agreements of the Purchaser required to be performed at or prior to the Closing Date shall have been performed; and

 

 

 

 

(d) that the Company shall have received the Subscription Proceeds.

 

5.2                        The obligations of the Purchaser hereunder to Close on the Closing Date are subject to the following conditions:

 

(a) that all of the representations and warranties of the Company made in this Subscription Agreement and Registration Rights Agreement are accurate in all material respects when made and on the Closing Date; and

 

(b) that all of the obligations, covenants and agreements of the Company required to be performed at or prior to the Closing Date shall have been performed.

 

6. The Company’s Covenant

 

6.1                        Company shall not offer equity securities, or any securities convertible into or exchangeable for equity securities, to any person or engages in any transaction that could have a dilutive effect on the beneficial ownership of the Purchaser unless first obtaining a written consent by each Purchaser. This right of approval will terminate immediately prior to the closing of any underwritten initial public offering of the Ordinary Shares pursuant to a Registration Statement under the Securities Act of 1933, as amended.

 

7. Representations, Warranties, Acknowledgements and Covenants of the Purchaser

 

7.1                        Each Purchaser severally and not jointly hereby acknowledges and agrees as of the date hereof and as of the Closing Date that:

 

(a) none of the Ordinary Shares have been registered under the Securities Act of 1933, as amended, or under any state securities or "blue sky" laws of any state of the United States or any other jurisdiction;

 

(b) the Company is obligated to pay a placement fee to Boustead Securities, LLC (the “Placement Agent”) pursuant to a separate agreement between such Placement Agent and the Company, which shall include an amount not to exceed seven percent (7%) of the Subscription Proceeds;

 

(c) the decision to execute this Subscription Agreement and acquire the Ordinary Shares hereunder has not been based upon any oral or written representation (other than representations set out in this Agreement) as to fact or otherwise made by or on behalf of the Company;

 

(d) there are risks associated with an investment in the Company and the Ordinary Shares, including, but not limited to, (i) the risk of changes in the cost of raw materials and energy, (ii) the r isk of intense competition in the PRC domestic market, (iii) risks related to our significant amount of short-term debt and (iv) the r isk of severe financial hardship or bankruptcy of one or more of our major clients;

 

 

 

 

(e) it has received all the information it considers necessary or appropriate for purposes of deciding whether to purchase the Ordinary Shares. Each Purchaser further represents that it has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the Ordinary Shares and regarding the business, properties, prospects and financial condition of the Company, and to obtain additional information (to the extent the Company possessed such information or could acquire it without unreasonable effort or expense) necessary to verify the accuracy of any information furnished to it or to which it had access;

 

(f) it has been advised to consult its own legal, tax and other advisors with respect to the merits and risks of an investment in the Ordinary Shares and with respect to applicable resale restrictions;

 

(g) it understands that the Company is making no representations and warranties regarding tax consequences for your investment in the Ordinary Shares, the US Foreign Corrupt Practices Act or the securities law of the home or residential jurisdiction of any Purchaser.

 

7.2                        Each Purchaser severally and not jointly hereby represents and warrants to, and covenants with, the Company (which representations, warranties and covenants shall survive the Closing) as of the date hereof and as of the Closing Date that:

 

(a) it has the legal capacity and competence to enter into and execute this Subscription Agreement and to take all actions required hereby and, if the Purchaser is a corporation, it is duly incorporated and validly existing under the laws of its jurisdiction of incorporation and all necessary approvals by its directors, shareholders and others have been obtained to authorize execution and performance of this Subscription Agreement on its behalf;

 

(b) the entering into of this Subscription Agreement and the transactions contemplated hereby do not result in the violation of any of the terms and provisions of any law or regulation applicable to the Purchaser or of any agreement, written or oral, to which the Purchaser may be a party or by which the Purchaser is or may be bound;

 

(c) the Purchaser has duly executed and delivered this Subscription Agreement and it constitutes a valid and binding agreement of the Purchaser enforceable against the Purchaser in accordance with its terms;

 

(d) All information furnished in the Investor Questionnaire completed is true and correct in all respects.

 

(e) the Purchaser is not a “U.S. Person” as defined in Rule 902 under the 1933 Act and is resident in the jurisdiction set out under the heading "Name and Address of Purchaser" on the signature page of this Subscription Agreement;

 

 

 

 

(f) At the time Purchaser executed and delivered this Agreement, Purchaser was outside the United States and is outside of the United States as of the date of the execution and delivery of this Agreement;

 

(g) Purchaser is acquiring the Ordinary Shares for its own account and not on behalf of any U.S. person, and the sale has not been pre-arranged with a purchaser in the United States;

 

(h) Purchaser represents and warrants and hereby agrees that all offers and sales of any of the Ordinary Shares prior to the expiration of a period commencing on the Closing Date and ending twelve months thereafter, unless adjusted as hereinafter provided (the " Restricted Period "), shall only be made in compliance with the safe harbor contained in Regulation S, pursuant to registration of the Ordinary Shares under the 1933 Act or pursuant to an exemption from registration, and all offers and sales after the Restricted Period shall be made only pursuant to such a registration or to such exemption from registration;

 

(i) the Purchaser (i) has such knowledge and experience in business matters as to be capable of evaluating the merits and risks of its prospective investment in the Ordinary Shares; and (ii) has the ability to bear the economic risks of its prospective investment and can afford the complete loss of such investment;

 

(j) the Purchaser is not aware of any advertisement of any of the Ordinary Shares and is not acquiring any of the Ordinary Shares as a result of any form of general solicitation or general advertising including advertisements, articles, notices or other communications published in any newspaper, magazine or similar media or broadcast over radio or television, or any seminar or meeting whose attendees have been invited by general solicitation or general advertising;

 

(k) no person has made any written or oral representations to the Purchaser:

 

(i) that any person will resell or repurchase any of the Ordinary Shares;

 

(ii) that any person will refund the purchase price of any of the Ordinary Shares; or

 

(iii) as to the future price or value of any of the Ordinary Shares; and

 

(l) the Purchaser will indemnify and hold harmless the Company and, where applicable, its directors, officers, employees, agents, advisors and shareholders, from and against any and all loss, liability, claim, damage and expense whatsoever (including, but not limited to, any and all fees, costs and expenses whatsoever reasonably incurred in investigating, preparing or defending against any claim, lawsuit, administrative proceeding or investigation whether commenced or threatened) arising out of or based upon any representation or warranty of the Purchaser contained herein or in any document furnished by the Purchaser to the Company in connection herewith being untrue in any material respect or any breach or failure by the Purchaser to comply with any covenant or agreement made by the Purchaser to the Company in connection therewith.

 

 

 

 

7.3                        Between the date of this Agreement and the Closing, the Purchaser shall notify the Company if any of the above representations and warranties ceases to be true.

 

7.4                        Each Purchaser, severally but not jointly, acknowledges that the representations and warranties contained herein are made by it with the intention that they may be relied upon by the Company and its legal counsel in determining such Purchaser's eligibility to purchase the Ordinary Shares for which it is subscribing under applicable securities legislation. Each Purchaser further agrees that by accepting delivery of the certificates representing the Ordinary Shares on the Closing Date, it will be representing and warranting that the representations and warranties contained herein are true and correct as at the Closing Date with the same force and effect as if they had been made by the Purchaser at the Closing Date and that they will survive the purchase by the Purchaser of Ordinary Shares and will continue in full force and effect notwithstanding any subsequent disposition by the Purchaser of such Ordinary Shares.

 

8. Representations and Warranties of the Company

 

8.1                        The Company acknowledges and agrees that each Purchaser is entitled to rely upon the representations and warranties of the Company, contained in this Agreement and further acknowledges that each Purchaser will be relying upon such representations and warranties in purchasing the Ordinary Shares. The Company represents and warrants as follows:

 

(a) The Company is duly incorporated, validly existing and in good standing under the laws of the British Virgin Islands.

 

(b) The Company has the requisite power and authority to own and use its properties and assets and to carry on its business as currently conducted.

 

(c) The Company is not in violation or default of any of the provisions of its articles of incorporation or bylaws. The Company is duly qualified to conduct its business and is in good standing as a foreign corporation or other entity in each jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, except where the failure to be so qualified or in good standing, as the case may be, could not reasonably be expected to result in (i) a material adverse effect on the legality, validity or enforceability of this Subscription Agreement, (ii) a material adverse effect on the results of operations, assets, business or financial condition of the Company, taken as a whole, or (iii) a material adverse effect on the Company’s ability to perform in any material respect on a timely basis its obligations under this Subscription Agreement (any of (i), (ii) or (iii) being hereafter referred to as a “Material Adverse Effect” ), and no proceeding has been instituted in any such jurisdiction revoking, limiting or curtailing or seeking to revoke, limit or curtail such power and authority or qualification.

 

(d) The Company has the requisite corporate power and authority to enter into and to consummate the transactions contemplated by this Subscription Agreement and to carry out its obligations hereunder. The execution and delivery of this Subscription Agreement by the Company and the consummation by it of the transactions contemplated hereby have been duly authorized by all necessary action on the part of the Company and no further corporate authorization is required by the Company in connection therewith.

 

 

 

 

(e) Upon delivery, this Subscription Agreement will have been duly executed by the Company and will constitute the valid and binding obligation of the Company enforceable against the Company in accordance with its terms except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally and (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies.

 

(f) Upon execution and delivery of this Subscription Agreement and the performance by the Company of the obligations imposed on it in this Subscription Agreement, including the issuance and sale of the Ordinary Shares, will not (i) conflict with or violate any provision of the Company’s certificate or articles of incorporation, bylaws or other organizational or charter documents, or (ii) conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any material agreement, credit facility, debt or other instrument (evidencing a Company debt or otherwise) or other agreement to which the Company is a party or by which any material property or material asset of the Company, or (iii) conflict with or result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which the Company is subject, or by which any material property or material asset of the Company is bound, except, in each case, as could not reasonably be expected to result in a Material Adverse Effect.

 

(g) Except for consents from individuals and entities as set forth on Schedule 8.1(g), the Company is not required to obtain any consent, waiver, authorization or order of, give any notice to, or make any filing or registration with, any court or other federal, state, local or other governmental authority or other person in connection with the execution, delivery and performance by the Company of this Subscription Agreement.

 

(h) The Ordinary Shares are duly authorized and, when issued and paid for in accordance with this Subscription Agreement, will be validly issued as fully paid and non-assessable, free and clear of all liens and encumbrances other than restrictions provided for in this Subscription Agreement and applicable law.

 

(i) The issuance and sale of the Ordinary Shares will not obligate the Company to issue Ordinary Shares or other securities to any person (other than the Purchasers and their designees) and will not result in a right of any holder of the Company’s securities to adjust the exercise, conversion, exchange or reset price under such securities.

 

 

 

 

9. Legending of Subject Securities.

 

10.1                     The Purchaser hereby acknowledges that upon the issuance thereof, and until such time as the same is no longer required under the applicable securities laws and regulations, any certificates representing the Ordinary Shares may bear a restrictive legend pursuant to applicable laws and may include language substantially similar to the below:

 

“THE SECURITIES REPRESENTED HEREBY HAVE BEEN OFFERED IN AN OFFSHORE TRANSACTION TO A PERSON WHO IS NOT A U.S. PERSON (AS DEFINED HEREIN) PURSUANT TO REGULATION S UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"). NONE OF THE SECURITIES REPRESENTED HEREBY HAVE BEEN REGISTERED UNDER THE 1933 ACT, OR ANY U.S. STATE SECURITIES LAWS, AND, UNLESS SO REGISTERED, MAY NOT BE OFFERED OR SOLD, DIRECTLY OR INDIRECTLY, IN THE UNITED STATES (AS DEFINED HEREIN) OR TO U.S. PERSONS EXCEPT IN ACCORDANCE WITH THE PROVISIONS OF REGULATION S UNDER THE 1933 ACT, PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE 1933 ACT, OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE 1933 ACT AND IN EACH CASE ONLY IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS. IN ADDITION, HEDGING TRANSACTIONS INVOLVING THE SECURITIES MAY NOT BE CONDUCTED UNLESS IN COMPLIANCE WITH THE 1933 ACT. "UNITED STATES" AND "U.S. PERSON" ARE AS DEFINED BY REGULATION S UNDER THE 1933 ACT.”

 

10. Costs

 

10.1                     The Purchaser acknowledges and agrees that all costs and expenses incurred by the Purchaser (including any fees and disbursements of any special counsel retained by the Purchaser) relating to the purchase of the Ordinary Shares shall be borne by the Purchaser.

 

11. Governing Law

 

11.1                     This Subscription Agreement is governed by the laws of the State of New York and the federal laws of the United States applicable therein. The Purchaser, in its personal or corporate capacity and irrevocably attorns to the jurisdiction of the state and federal courts located in New York County, New York. Each party agrees that the state and federal courts located in New York County, New York shall be the exclusive jurisdiction for settling all disputes hereunder.

 

 

 

 

12. Independent Nature of Purchaser’s Obligations and Rights

 

12.1                      The obligations of each Purchaser under this Subscription Agreement are several and not joint with the obligations of any other Purchaser, and no Purchaser shall be responsible in any way for the performance of the obligations of any other Purchaser. Nothing contained herein, and no action taken by any Purchaser pursuant thereto, shall be deemed to constitute the Purchasers as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Purchasers are in any way acting in concert or as a group with respect to such obligations or the transactions contemplated by this Subscription Agreement. Each Purchaser shall be entitled to independently protect and enforce its rights, including without limitation, the rights arising out of this Subscription Agreement, and it shall not be necessary for any other Purchaser to be joined as an additional party in any proceeding for such purpose. Each Purchaser has been represented by its own separate legal counsel in their review and negotiation of this Subscription Agreement or it has knowingly waived its right to do so and has proceeded without benefit of counsel.

 

13. Survival

 

13.1                      This Subscription Agreement, including without limitation the representations, warranties and covenants contained herein, shall survive and continue in full force and effect and be binding upon the parties hereto notwithstanding the completion of the purchase of the Ordinary Shares by the Purchaser pursuant hereto.

 

14. Assignment

 

14.1                      This Subscription Agreement is not transferable or assignable without written consent by both the Company and Purchaser.

 

15. Severability

 

15.1                      If any provision of this Agreement is held to be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Agreement shall not in any way be affected or impaired thereby and the parties will attempt to agree upon a valid and enforceable provision that is a reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Agreement.

 

16. Entire Agreement

 

16.1                      Except as expressly provided in this Subscription Agreement and in the agreements, instruments and other documents contemplated or provided for herein, this Subscription Agreement contains the entire agreement between the parties with respect to the sale of the Ordinary Shares and there are no other terms, conditions, representations or warranties, whether expressed, implied, oral or written, by statute or common law, by the Company or by anyone else.

 

 

 

 

17. Notices

 

17.1                      All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given at the date received if mailed or transmitted by any standard form of telecommunication (including email, but not including facsimile). Notices to the Purchaser shall be directed to the address on the signature page of this Subscription Agreement and notices to the Company shall be directed to it at

 

Mr. Jiancong Huang

c/o Wenzhou Zhengkang Industrial Co., Ltd.

No. 678 Dingxiang Road, Binhai Industrial Park

Economic & Technology Development Zone

Wenzhou, Zhejiang Province 325025

People’s Republic of China

Email: zjzk@cn-zk.cn

 

With a copy to (failure to provide such copy shall mean that no notice has been given hereunder):

 

William S. Rosenstadt

Mengyi “Jason” Ye

Ortoli Rosenstadt LLP

501 Madison Avenue

New York, New York 10022

USA

Email: wsr@ortolirosenstadt.com

     jye@ortolirosenstadt.com

 

18. Counterparts and Electronic Means

 

18.1                      This Subscription Agreement may be executed in any number of counterparts, each of which, when so executed and delivered, shall constitute an original and all of which together shall constitute one instrument. Delivery of an executed copy of this Subscription Agreement by electronic facsimile transmission or other means of electronic communication capable of producing a printed copy will be deemed to be execution and delivery of this Subscription Agreement as of the date hereinafter set forth.

 

19. Amendment and Waiver

 

19.1                      No provision of this Agreement may be waived or amended except in a written instrument signed, in the case of an amendment, by the Company and each Purchaser or, in the case of a waiver, by the party against whom enforcement of any such waiver is sought. No waiver of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any subsequent default or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of either party to exercise any right hereunder in any manner impair the exercise of any such right.

 

 

 

 

[SIGNATURE PAGES TO FOLLOW]

 

 

 

 

IN WITNESS WHEREOF the Purchaser has duly executed this Subscription Agreement as of the date of acceptance by the Company.

 

     
(Amount of Subscription)   (Name of Purchaser – Please type or print)
     
     
(Number of Ordinary Shares Subscribed)   (Signature and, if applicable, Office)
     
     
    (Address of Purchaser)
     
     
  (City, State/Province,
    Postal Code of Purchaser)
     
     
    (Country of Purchaser)

 

 

 

 

ACCEPTANCE

 

The above-mentioned Subscription Agreement in respect of the Ordinary Shares is hereby accepted by ZK International Group Co., Ltd.

 

DATED at _______________________________________, the ___________ day of _________________, 2017.

 

ZK INTERNATIONAL GROUP CO., LTD.  
   
   
By:    
Name: Jiancong Huang  
Title: Chief Executive Officer  
     

 

 

 

 

Schedule 8.1(g)

 

1. Kefi Bain

 

2. Sean McCarroll

 

3. Endeavour Resource Limited

 

4. Vantablack LLC

 

 

 

 

Exhibit A

 

Regulation S Investor Questionnaire

 

Confidential Investor Questionnaire

 

To:    

 

ZK INTERNATIONAL GROUP CO., LTD., a BVI corporation (the “Company”), is offering, to Non-U.S. persons pursuant to an accompanying Subscription Agreement ( the “ Subscription Agreement ”), shares of its common stock, par __________ value $______ per share (the “ Shares ”) and a warrants purchase the Shares (the “ Warrants ”, and together with the Shares, the “Securities”).

 

I.              SUITABILITY (please answer each question)

 

(a)           For an individual subscriber, please describe your current employment, including the company by which you are employed and its principal business:

 

     
     
     
     

 

(b)           For an individual subscriber, please describe any college or graduate degrees held by you:

 

     
     

 

(c)           For all subscribers, please list types of prior investments:

 

     
     
     

 

(d)          For all subscribers, please state whether you have you participated in other private placements before:

 

  YES ¨   NO ¨

 

(e)           If your answer to question (d) above was “YES”, please indicate frequency of such prior participation in private placements of:

  

  Public   Private  
  Companies   Companies  
         
Frequently        
Occasionally        
Never        

 

(f)           For individual subscribers, do you expect your current level of income to significantly decrease in the foreseeable future:

 

  YES ¨   NO ¨

 

 

 

 

Regulation S Investor Questionnaire

 

(g)          For trust, corporate, partnership and other institutional subscribers, do you expect your total assets to significantly decrease in the foreseeable future:

 

  YES ¨   NO ¨

 

(h)          For all subscribers, do you have any other investments or contingent liabilities which you reasonably anticipate could cause you to need sudden cash requirements in excess of cash readily available to you:

 

  YES ¨   NO ¨

 

(i)           For all subscribers, are you familiar with the risk aspects and the non-liquidity of investments such as the Securities for which you seek to subscribe?

 

  YES ¨   NO ¨

 

(j) For all subscribers, do you understand that there is no guarantee of financial return on this investment and that you run the risk of losing your entire investment?

 

  YES ¨   NO ¨

 

II. MANNER IN WHICH TITLE IS TO BE HELD . (circle one)

 

(a) Individual Ownership
(b) Community Property
(c) Joint Tenant with Right of Survivorship (both parties must sign)
(d) Partnership*
(e) Tenants in Common
(f) Corporation* Trust*
(g) Limited Liability Company*
(h) Other

(i)

 

*If Securities are being subscribed for by an entity, please provide a copy of the entity formation documents as we as written approvals or designations for the authorized signer(s). Also, all signers must provide a copy of their photo ID (drivers’ license or passport) in English.

  

II.           Disqualification Events.

 

1.           Certain Criminal Convictions .

Have you been convicted, within the past ten (10) years (or five (5) years, in the case of the Company, its predecessors and affiliated issuers), of any felony or misdemeanor involving:

 

· in connection with the purchase or sale of any security;
· involving the making of any false filing with the U.S. Securities and Exchange Commission (the “ SEC ”); or
· arising out of the conduct of the business of an underwriter, broker, dealer, municipal securities dealer, investment advisor or paid solicitor of purchasers of securities?

 

 

 

 

Regulation S Investor Questionnaire

 

¨   Yes. If yes, please explain: __________________________________________________________________

 
 
 

 

¨    No.

 

2.            Certain Court Injunctions and Restraining Orders .

Are you subject to any order, judgment or decree of any court of competent jurisdiction that was entered within the past five (5) years and currently restrains or enjoins you from engaging in any conduct or practice:

 

· in connection with the purchase or sale of any security;
· involving the making of any false filing with the SEC; or
· arising out of the conduct of the business of an underwriter, broker, dealer, municipal securities dealer, investment adviser or paid solicitor of purchasers of securities?

 

¨   Yes. If yes, please explain: __________________________________________________________________

 
 
 

 

¨    No.

 

3.             Final Orders of Certain State and Federal Regulators.

Are you subject to a Final Order (as defined below) of state regulators of securities, insurance, banking, savings associations or credit unions; federal banking agencies; the Commodity Futures Trading Commission; or the National Credit Union Administration that:

 

· bars you from:
· associating with an entity regulated by any of the aforementioned regulators;
· engaging in the business of securities, insurance or banking; or
· engaging in savings association or credit union activities; or
· constitutes a Final Order based on a violation of any law or regulation that prohibits fraudulent, manipulative, or deceptive conduct entered within the past ten (10) years?

 

¨   Yes. If yes, please explain: __________________________________________________________________

 
 
 

 

¨    No.

 

The term “ Final Order ” means a written directive or declaratory statement issued by a federal or state agency described in Rule 506(d)(1)(iii) under the Securities Act of 1933 under applicable statutory authority that provides for notice and an opportunity for a hearing, which constitutes a final disposition or action by that federal or state agency.

 

 

 

 

Regulation S Investor Questionnaire

 

4.             SEC Disciplinary Orders .

Are you subject to any order of the SEC that currently:

 

· suspends or revokes your registration as a broker, dealer, municipal securities dealer or investment adviser;
· places limitations on the activities, functions or operations of, or imposes civil money penalties on, such person; or
· bars you from being associated with any entity or from participating in the offering of any penny stock? 1

 

¨   Yes. If yes, please explain: __________________________________________________________________

 
 
 

 

¨    No.

 

5.             SEC Cease-and-Desist Orders .

Are you subject to any order of the SEC that was entered within the past five (5) years and currently orders you to cease and desist from committing or causing a future violation of:

 

· any scienter-based (intent-based) anti-fraud provision of the federal securities laws (including, for example, but not limited to):
· Section 17(a)(1) of the Securities Act of 1933,
· Section 10(b) of the Exchange Act and Rule 10b-5, and
· Section 15 (c) (1) of the Securities Exchange Act); or
· Section 5 of the Securities Act of 1933, which generally requires that securities be registered and prohibits the sale of unregistered securities.

 

¨   Yes. If yes, please explain: __________________________________________________________________

 
 
 

 

¨    No.

 

6.             SRO Suspension/Expulsion .

Have you been suspended or expelled from membership in, or suspended or barred from association with a member of, a securities self-regulatory organization (“ SRO ”, such as a registered national securities exchange or a registered national or affiliated securities association, including FINRA) for any act or omission to act constituting conduct inconsistent with just and equitable principles of trade?

 

¨   Yes. If yes, please explain: __________________________________________________________________

 
 
 

 

¨    No.

 

 

1 A disqualification based on a suspension or limitation of activities expires when the suspension or limitation expires.

 

 

 

 

Regulation S Investor Questionnaire

 

7.             SEC Stop Orders .

Have you filed (as a registrant or issuer), or were you named as an underwriter in any registration statement or Regulation A offering statement filed with the SEC that, within the past five (5) years, was the subject of a refusal order, stop order, or order suspending the Regulation A exemption, or is currently the subject of an investigation or proceeding to determine whether a stop order or suspension order should be issued?

 

¨   Yes. If yes, please explain: __________________________________________________________________

 
 
 

 

¨    No.

 

8.            USPS False Representations Order .

Are you subject to a United States Postal Service (“ USPS ”) false representation order entered within the past five (5) years, or are you currently subject to a temporary restraining order or preliminary injunction with respect to conduct alleged by the USPS to constitute a scheme or device for obtaining money or property through the mail by means of false representations?

 

¨   Yes. If yes, please explain: __________________________________________________________________

 
 
 

 

¨    No.

   

IV.    The undersigned is informed of the significance to the Company of the foregoing representations and answers contained in this Questionnaire contained herein and such answers have been provided under the assumption that the Company will rely on them.

 

V.       The undersigned understands and agrees that the Company may request further information of the undersigned in verification or amplification of the undersigned’s knowledge of business affairs, the undersigned’s assets and the undersigned’s ability to bear the economic risk involved in an investment in the securities of the Company.

 

VI.       The undersigned represents to you that (a) the information contained herein is complete and accurate on the date hereof and may be relied upon by you, (b) the undersigned will notify you immediately of any change in any such information occurring prior to the acceptance of the subscription and will promptly send you written confirmation of such change. The undersigned hereby certifies that he, she or it has read and understands the Subscription Agreement related hereto and (c) the undersigned acknowledges that you may be required to publicly disclose the information provided in this Questionnaire and that he, she or it consents to such public disclosure.

 

 

 

 

Regulation S Investor Questionnaire

 

VII.        In order for the Company to comply with applicable anti-money laundering/U.S. Treasury Department Office of Foreign Assets Control (“OFAC”) rules and regulations, subscriber is required to provide the following information:

 

1. Payment Information

 

(a) Name and address (including city and country) of the bank from which subscriber’s payment to the Company is being wired (the “ Wiring Bank ”):

   
   
   
   
   

 

(b) Subscriber’s wiring instructions at the Wiring Bank:

   
   
   
   
   

  

(c) Is the Wiring Bank located in the U.S. or another “ FATF Country ”*?

  

¨ Yes         ¨ No

  

(d) Is Subscriber a customer of the Wiring Bank?

 

¨ Yes         ¨ No

 

2. Additional Information

 

For Individual Subscribers:

 

___ A government issued form of picture identification ( e.g ., passport or drivers license) in English.

 

___ Proof of the individual’s current address ( e.g. , current utility bill), if not included in the form of picture identification.

 

 

 

* As of the date hereof, countries that are members of the Financial Action Task Force on Money Laundering (“ FATF Country ”) are: Argentina, Australia, Austria, Belgium, Brazil, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Iceland, Ireland, Italy, Japan, Luxembourg, Mexico, Kingdom of the Netherlands, New Zealand, Norway, Portugal, Russian Federation, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, United Kingdom and the United States of America.

 

 

 

 

Regulation S Investor Questionnaire

 

___ A certificate of due formation and organization and continued authorization to conduct business in the jurisdiction of its organization ( e.g. , certificate of good standing).

 

For Funds of Funds or Entities that Invest on Behalf of Third Parties:

 

___ A certificate of due formation and organization and continued authorization to conduct business in the jurisdiction of its organization ( e.g. , certificate of good standing).

 

___ An “incumbency certificate” attesting to the authority and title of the individual executing these subscription materials on behalf of the prospective investor.

 

___ A completed copy of a certification that the entity has adequate anti-money laundering policies and procedures (“AML Policies and Procedures”) in place that are consistent with the USA PATRIOT Act, OFAC and other relevant federal, state or non-U.S. anti-money laundering laws and regulations (with a copy of the entity’s current AML Policies and Procedures to which such certification relates).

 

___ A letter of reference any entity not located in the U.S. or other FATF Country, from the entity’s local office of a reputable bank or brokerage firm that is incorporated, or has its principal place of business located, in the U.S. or other FATF Country certifying that the prospective investor maintains an account at such bank/brokerage firm for a length of time and containing a statement affirming the prospective investor’s integrity.

 

For all other Entity Subscribers:

 

___ A certificate of due formation and organization and continued authorization to conduct business in the jurisdiction of its organization (e.g., certificate of good standing).

 

___ An “incumbency certificate” attesting to the authority and title of the individual executing these subscription materials on behalf of the prospective investor.

 

___ A letter of reference from the entity’s local office of a reputable bank or brokerage firm that is incorporated, or has its principal place of business located, in the U.S. or other FATF Country certifying that the prospective investor maintains an account at such bank/brokerage firm for a length of time and containing a statement affirming the prospective investor’s integrity.

 

___ If the prospective investor is a privately-held entity, a certified list of the names of every person or entity who is directly or indirectly the beneficial owner of 25% or more of any voting or non-voting class of equity interests of the Subscriber, including (i) country of citizenship (for individuals) or principal place of business (for entities) and, (ii) for individuals, such individual’s principal employer and position.

 

___ If the prospective investor is a trust, a certified list of (i) the names of the current beneficiaries of the trust that have, directly or indirectly, 25% or more of any interest in the trust, (ii) the name of the settlor of the trust, (iii) the name(s) of the trustee(s) of the trust, and (iv) the country of citizenship (for individuals) or principal place of business (for entities).

 

 

 

 

Regulation S Investor Questionnaire

 

VIII. ADDITIONAL INFORMATION .

 

A TRUST MUST ATTACH A COPY OF ITS DECLARATION OF TRUST OR OTHER GOVERNING INSTRUMENT, AS AMENDED, AS WELL AS ALL OTHER DOCUMENTS THAT AUTHORIZE THE TRUST TO INVEST IN THE SECURITIES. ALL RESOLUTIONS AND DOCUMENTATION MUST BE COMPLETE AND

 

VIII. ADDITIONAL QUESTIONS AND INFORMATION .

 

Are you, your spouse, or any other immediate family members, including parents, in-laws, and siblings that are dependents, an officer, director or greater than ten percent (10%) shareholder of the Company?

 

¨ ¨
Yes No

 

Are you, your spouse, or any other immediate family members, including parents, in-laws, and siblings that are dependents, employed by or associated with the securities industry (for example, investment advisor, sole proprietor, partner, officer, director, branch manager or broker at a broker-dealer firm or municipal securities dealer) or a financial regulatory agency, such as FINRA or the New York Stock Exchange?

 

¨ ¨
Yes No

 

If Yes, please provide the name and contact information for such firm.

 

 

 

 

 

 

 

 

 

Are you a senior military, governmental or political official in a non-US country?

 

¨ ¨
Yes No

 

If Yes, please provide the name of the country.

 

 

 

A TRUST MUST ATTACH A COPY OF ITS DECLARATION OF TRUST OR OTHER GOVERNING INSTRUMENT, AS AMENDED, AS WELL AS ALL OTHER DOCUMENTS THAT AUTHORIZE THE TRUST TO INVEST IN THE SECURITIES. ALL RESOLUTIONS AND DOCUMENTATION MUST BE COMPLETE AND CORRECT AS OF THE DATE HEREOF.

 

IX. INFORMATION VERIFICATION CONSENT .

 

BY SIGNING THIS QUESTIONNAIRE, SUBSCRIBER HEREBY GRANTS THE COMPANY PERMISSION TO REVIEW ALL PUBLICLY AVAILABLE INFORMATION REGARDING SUBSCRIBER, INCLUDING, BUT NOT LIMITED TO INFORMATION PROVIDED BY OFAC FOR THE PURPOSE OF VERIFYING INFORMATION PROVIDED BY SUBSCRIBER HEREIN.

 

[SIGNATURE PAGE FOLLOWS]

 

 

 

 

 

Regulation S Investor Questionnaire

 

     
Signature   Signature (if purchasing jointly)
     
     
Name Typed or Printed   Name Typed or Printed
     
     
Entity Name   Entity Name
     
     
Address   Address
     
     
City and Country   City and Country
     
     
Email Address   Email Address
     
     
Tax ID # of Signer   Tax ID # of Signer
     
     
Tax ID # of Entity   Tax ID # of Entity

 

 

 

 

Exhibit B

 

REGISTRATION RIGHTS AGREEMENT

 

This Registration Rights Agreement (this “ Agreement ”) is made and entered into as of March ______, 2017, among (i) ZK International Group Co., Ltd. (the "Company"), a British Virgin Islands limited liability company, and (ii) each purchaser identified on the signature pages to this Agreement (each a “Holder” and collectively, the “Holders”).

 

This Agreement is made pursuant to the Private Placement Subscription Agreement, dated as of the date hereof among the Company and the Holders (the “ Purchase Agreement ”).

 

The Company and the Holders hereby agree as follows:

 

A.             Definitions . Capitalized terms used and not otherwise defined herein that are defined in the Purchase Agreement shall have the meanings given such terms in the Purchase Agreement. As used in this Agreement, the following terms shall have the following meanings:

 

Advice ” shall have the meaning set forth in Section 6(d).

 

“Cutback Shares” shall have the meaning set forth in Section 2(c).

 

Effectiveness Date ” means the 135 th calendar day following the earlier of the actual filing date of the F-1 (as defined herein).

 

Effectiveness Period ” shall have the meaning set forth in Section 2(a).

 

Event ” shall have the meaning set forth in Section 2(b).

 

Event Date ” shall have the meaning set forth in Section 2(b).

 

Filing Date ” means, the date on which the F-1 is filed.

 

Holder ” or “ Holders ” means the holder or holders, as the case may be, from time to time of Registrable Securities.

 

Indemnified Party ” shall have the meaning set forth in Section 5(c).

 

Indemnifying Party ” shall have the meaning set forth in Section 5(c).

 

Losses ” shall have the meaning set forth in Section 5(a).

 

Proceeding ” means an action, claim, suit, investigation or proceeding (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or threatened.

 

 

 

 

Prospectus ” means the prospectus included in a Registration Statement (including, without limitation, a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by a Registration Statement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus.

 

Registrable Securities ” means all of the Company’s ordinary shares issued pursuant to the Purchase Agreement.

 

Registration Statement ” means the registration statements required to be filed hereunder and any additional registration statements, including (in each case) the Prospectus, amendments and supplements to such registration statement or Prospectus, including pre- and post-effective amendments, all exhibits thereto, and all material incorporated by reference or deemed to be incorporated by reference in such registration statement.

 

Rule 415 ” means Rule 415 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same purpose and effect as such Rule.

 

Rule 424 ” means Rule 424 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same purpose and effect as such Rule.

 

SEC ” means the United States Securities and Exchange Commission.

 

SEC Restrictions ” shall have the meaning set forth in Section 2(c).

 

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

 

Selling Shareholder Questionnaire ” shall have the meaning set forth in Section 3(a).

 

B.             Registration .

 

  1.           The Company shall register for resale of some or all (depending on the limitations set out in this Agreement) of the Registrable Securities with the Commission simultaneous with the filing of a registration statement with the Commission for the initial public offering of shares of the Company’s ordinary shares on Form F-1 (the “F-1”).

 

 

 

 

  2.           Subject to the terms of this Agreement, the Company shall use its best efforts to cause a Registration Statement to be declared effective under the Securities Act as promptly as possible after the filing thereof, but in any event prior to the applicable Effectiveness Date, and shall use its best efforts to keep such Registration Statement continuously effective under the Securities Act until all Registrable Securities covered by such Registration Statement have been sold or may be sold without volume restrictions pursuant to Rule 144(k) as determined by the counsel to the Company pursuant to a written opinion letter to such effect, addressed and acceptable to the Company’s transfer agent and the affected Holders (the “ Effectiveness Period ”)

 

 3.           If the registration is being made pursuant to a registered public offering that is to be made by underwriter(s), the Company shall so advise the Holders of the Registrable Securities eligible for inclusion in such Registration Statement pursuant to Section 3. In that event, the right of any Holder to registration shall be conditioned upon such Holder’s participation and the inclusion of such Holder’s Registrable Securities in such registered public offering to the extent provided herein. Notwithstanding any other provision of this Agreement, if at any time the SEC takes the position that the offering of some or all of the Registrable Securities in a Registration Statement is not eligible to be made on a delayed or continuous basis under the provisions of Rule 415 under the Securities Act, the Company shall use commercially reasonable efforts to persuade the SEC that the offering contemplated by the Registration Statement is a valid secondary offering and not an offering “by or on behalf of the issuer” as defined in Rule 415. The Holder shall have the right to participate in any meetings or discussions regarding the SEC’s position and to comment on any written submission made to the SEC with respect thereto. In the event that, despite the Company’s commercially reasonable efforts and compliance with the terms of this Section 2(c), the SEC refuses to alter its position, the Company shall (i) remove from the Registration Statement such portion of the Registrable Securities (the “ Cut Back Shares ”) and/or (ii) agree to such restrictions and limitations on the registration and resale of the Registrable Securities as the SEC may require to assure the Company’s compliance with the requirements of Rule 415 (collectively, the “ SEC Restrictions ”); provided however , that the Company shall not agree to name any Holder as an “underwriter” in such Registration Statement without the prior written consent of such Holder. The Company shall so advise all Holders (except those Holders who failed to timely elect to include their Registrable Securities or have indicated to the Company their decision not to do so), and indicate to each such Holder the number of shares of Registrable Securities that may be included in the registration. The number of ordinary shares that may be included in the F-1, subject to the SEC Restrictions if any, shall be allocated first to the Company and then, subject to obligations and commitments existing as of the date hereof, to all selling stockholders, including the Holders, who have requested to sell in the registration on a pro rata basis according to the number of shares requested to be included therein.

 

C.             Registration Procedures

 

 1.           In connection with the Company’s registration obligations hereunder, the Company shall:

 

 

 

 

 2.           Not less than five business days prior to the filing of each Registration Statement or any related Prospectus or any amendment or supplement thereto (including any document that would be incorporated or deemed to be incorporated therein by reference), the Company shall, (i) furnish to each Holder copies of all such documents proposed to be filed, which documents (other than those incorporated or deemed to be incorporated by reference) will be subject to the review of such Holders, and (ii) cause its officers and directors, counsel and independent certified public accountants to respond to such inquiries as shall be necessary, in the reasonable opinion of respective counsel to conduct a reasonable investigation within the meaning of the Securities Act. The Company shall not file a Registration Statement or any such Prospectus or any amendments or supplements thereto to which the Holders of a majority of the Registrable Securities shall reasonably object in good faith, provided that, the Company is notified of such objection in writing no later than 4 business days after the Holders have been so furnished copies of such documents.

 

  3.           (i) Prepare and file with the Commission such amendments, including post-effective amendments, to a Registration Statement and the Prospectus used in connection therewith as may be necessary to keep a Registration Statement continuously effective as to the applicable Registrable Securities for the Effectiveness Period and prepare and file with the Commission such additional Registration Statements in order to register for resale under the Securities Act all of the Registrable Securities; (ii) cause the related Prospectus to be amended or supplemented by any required Prospectus supplement (subject to the terms of this Agreement), and as so supplemented or amended to be filed pursuant to Rule 424; (iii) respond as promptly as reasonably possible to any comments received from the Commission with respect to a Registration Statement or any amendment thereto and as promptly as reasonably possible provide the Holders true and complete copies of all correspondence from and to the Commission relating to a Registration Statement; and (iv) comply in all material respects with the provisions of the Securities Act and the Exchange Act with respect to the disposition of all Registrable Securities covered by a Registration Statement during the applicable period in accordance (subject to the terms of this Agreement) with the intended methods of disposition by the Holders thereof set forth in such Registration Statement as so amended or in such Prospectus as so supplemented.

 

 

 

 

 4.           Notify the Holders of Registrable Securities to be sold (which notice shall, pursuant to clauses (ii) through (vi) hereof, be accompanied by an instruction to suspend the use of the Prospectus until the requisite changes have been made) as promptly as reasonably possible (and, in the case of (i)(A) below, not less than five business days prior to such filing) and (if requested by any such Person) confirm such notice in writing no later than one business day following the day (i)(A) when a Prospectus or any Prospectus supplement or post-effective amendment to a Registration Statement is proposed to be filed; (B) when the Commission notifies the Company whether there will be a “review” of such Registration Statement and whenever the Commission comments in writing on such Registration Statement (the Company shall provide true and complete copies thereof and all written responses thereto to each of the Holders); and (C) with respect to a Registration Statement or any post-effective amendment, when the same has become effective; (ii) of any request by the Commission or any other Federal or state governmental authority for amendments or supplements to a Registration Statement or Prospectus or for additional information; (iii) of the issuance by the Commission or any other federal or state governmental authority of any stop order suspending the effectiveness of a Registration Statement covering any or all of the Registrable Securities or the initiation of any Proceedings for that purpose; (iv) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any Proceeding for such purpose; (v) of the occurrence of any event or passage of time that makes the financial statements included in a Registration Statement ineligible for inclusion therein or any statement made in a Registration Statement or Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires any revisions to a Registration Statement, Prospectus or other documents so that, in the case of a Registration Statement or the Prospectus, as the case may be, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; and (vi) the occurrence or existence of any pending corporate development with respect to the Company that the Company believes may be material and that, in the determination of the Company, makes it not in the best interest of the Company to allow continued availability of a Registration Statement or Prospectus; provided that any and all of such information shall remain confidential to each Holder until such information otherwise becomes public, unless disclosure by a Holder is required by law; provided , further , notwithstanding each Holder’s agreement to keep such information confidential, the Holders make no acknowledgement that any such information is material, non-public information.

 

 5.           Use its best efforts to avoid the issuance of, or, if issued, obtain the withdrawal of (i) any order suspending the effectiveness of a Registration Statement, or (ii) any suspension of the qualification (or exemption from qualification) of any of the Registrable Securities for sale in any jurisdiction, at the earliest practicable moment.

 

 6.           Promptly deliver to each Holder, without charge, as many copies of the Prospectus or Prospectuses (including each form of prospectus) and each amendment or supplement thereto as such Persons may reasonably request in connection with resales by the Holder of Registrable Securities. Subject to the terms of this Agreement, the Company hereby consents to the use of such Prospectus and each amendment or supplement thereto by each of the selling Holders in connection with the offering and sale of the Registrable Securities covered by such Prospectus and any amendment or supplement thereto, except after the giving on any notice pursuant to Section 3(c).

 

 

 

 

  7.           Prior to any resale of Registrable Securities by a Holder, use its commercially reasonable efforts to register or qualify or cooperate with the selling Holders in connection with the registration or qualification (or exemption from the Registration or qualification) of such Registrable Securities for the resale by the Holder under the securities or Blue Sky laws of such jurisdictions within the United States as any Holder reasonably requests in writing, to keep each registration or qualification (or exemption therefrom) effective during the Effectiveness Period and to do any and all other acts or things reasonably necessary to enable the disposition in such jurisdictions of the Registrable Securities covered by each Registration Statement; provided, that the Company shall not be required to qualify generally to do business in any jurisdiction where it is not then so qualified, subject the Company to any material tax in any such jurisdiction where it is not then so subject or file a general consent to service of process in any such jurisdiction.

 

 8.           If requested by the Holders, cooperate with the Holders to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be delivered to a transferee pursuant to a Registration Statement, which certificates shall be free, to the extent permitted by the Purchase Agreement, of all restrictive legends, and to enable such Registrable Securities to be in such denominations and registered in such names as any such Holders may request.

 

 9.           Upon the occurrence of any event contemplated by this Section 3, as promptly as reasonably possible under the circumstances taking into account the Company’s good faith assessment of any adverse consequences to the Company and its stockholders of the premature disclosure of such event, prepare a supplement or amendment, including a post-effective amendment, to a Registration Statement or a supplement to the related Prospectus or any document incorporated or deemed to be incorporated therein by reference, and file any other required document so that, as thereafter delivered, neither a Registration Statement nor such Prospectus will contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. If the Company notifies the Holders in accordance with clauses (ii) through (vi) of 3(c) above to suspend the use of any Prospectus until the requisite changes to such Prospectus have been made, then the Holders shall suspend use of such Prospectus. The Company will use its best efforts to ensure that the use of the Prospectus may be resumed as promptly as is practicable. The Company shall be entitled to exercise its right under this Section to suspend the availability of a Registration Statement and Prospectus, subject to the payment of partial liquidated damages pursuant to Section 2(b), for a period not to exceed 60 days (which need not be consecutive days) in any 12 month period.

 

 10.          Comply with all applicable rules and regulations of the Commission.

 

 11.          The Company may require each selling Holder to furnish to the Company a certified statement as to the number of ordinary shares beneficially owned by such Holder and, if required by the Commission, the person thereof that has voting and dispositive control over those ordinary shares. During any periods that the Company is unable to meet its obligations hereunder with respect to the registration of the Registrable Securities solely because any Holder fails to furnish such information within three business days of the Company’s request, any liquidated damages that are accruing at such time as to such Holder only shall be tolled and any Event that may otherwise occur solely because of such delay shall be suspended as to such Holder only, until such information is delivered to the Company.

 

 

 

 

D.             Registration Expenses . All fees and expenses incident to the performance of or compliance with this Agreement by the Company shall be borne by the Company whether or not any Registrable Securities are sold pursuant to a Registration Statement. The fees and expenses referred to in the foregoing sentence shall include, without limitation, (i) all registration and filing fees (including, without limitation, fees and expenses (A) with respect to filings required to be made with the Trading Market on which the Company’s ordinary shares is then listed for trading, (B) in compliance with applicable state securities or Blue Sky laws reasonably agreed to by the Company in writing (including, without limitation, fees and disbursements of counsel for the Company in connection with Blue Sky qualifications or exemptions of the Registrable Securities and determination of the eligibility of the Registrable Securities for investment under the laws of such jurisdictions as requested by the Holders) and (C) if not previously paid by the Company in connection with an Issuer Filing, with respect to any filing that may be required to be made by any broker through which a Holder intends to make sales of Registrable Securities with NASD Regulation, Inc. pursuant to the NASD Rule 2710, so long as the broker is receiving no more than a customary brokerage commission in connection with such sale, (ii) printing expenses (including, without limitation, expenses of printing certificates for Registrable Securities and of printing prospectuses if the printing of prospectuses is reasonably requested by the holders of a majority of the Registrable Securities included in a Registration Statement), (iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of counsel for the Company, (v) Securities Act liability insurance, if the Company so desires such insurance, and (vi) fees and expenses of all other Persons retained by the Company in connection with the consummation of the transactions contemplated by this Agreement. In addition, the Company shall be responsible for all of its internal expenses incurred in connection with the consummation of the transactions contemplated by this Agreement (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit and the fees and expenses incurred in connection with the listing of the Registrable Securities on any securities exchange as required hereunder. In no event shall the Company be responsible for any broker or similar commissions or, except to the extent provided for in the Transaction Documents, any legal fees or other costs of the Holders.

 

E.             Indemnification

 

 1.           Indemnification by Holders . Each Holder shall, severally and not jointly, indemnify and hold harmless the Company, its directors, officers, agents and employees, each Person who controls the Company (within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the directors, officers, agents or employees of such controlling Persons, to the fullest extent permitted by applicable law, from and against all Losses, as incurred, to the extent arising out of or based solely upon: (x) such Holder’s failure to comply with the prospectus delivery requirements of the Securities Act or (y) any untrue or alleged untrue statement of a material fact contained in any Registration Statement, any Prospectus, or any form of prospectus, or in any amendment or supplement thereto or in any preliminary prospectus, or arising out of or relating to any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading (i) to the extent, but only to the extent, that such untrue statement or omission is contained in any information so furnished in writing by such Holder to the Company specifically for inclusion in such Registration Statement or such Prospectus or (ii) to the extent that (1) such untrue statements or omissions are based solely upon information regarding such Holder furnished in writing to the Company by such Holder expressly for use therein, or to the extent that such information relates to such Holder or such Holder’s proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in a Registration Statement, such Prospectus or such form of Prospectus or in any amendment or supplement thereto or (2) in the case of an occurrence of an event of the type specified in Section 3(c)(ii)-(vi), the use by such Holder of an outdated or defective Prospectus after the Company has notified such Holder in writing that the Prospectus is outdated or defective and prior to the receipt by such Holder of the Advice contemplated in Section 6(d). In no event shall the liability of any selling Holder hereunder be greater in amount than the dollar amount of the net proceeds received by such Holder upon the sale of the Registrable Securities giving rise to such indemnification obligation.

 

 

 

 

 2.           Conduct of Indemnification Proceedings . If any Proceeding shall be brought or asserted against any Person entitled to indemnity hereunder (an “ Indemnified Party ”), such Indemnified Party shall promptly notify the Person from whom indemnity is sought (the “ Indemnifying Party ”) in writing, and the Indemnifying Party shall have the right to assume the defense thereof, including the employment of counsel reasonably satisfactory to the Indemnified Party and the payment of all fees and expenses incurred in connection with defense thereof; provided, that the failure of any Indemnified Party to give such notice shall not relieve the Indemnifying Party of its obligations or liabilities pursuant to this Agreement, except (and only) to the extent that it shall be finally determined by a court of competent jurisdiction (which determination is not subject to appeal or further review) that such failure shall have prejudiced the Indemnifying Party.

 

 An Indemnified Party shall have the right to employ separate counsel in any such Proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed in writing to pay such fees and expenses; (2) the Indemnifying Party shall have failed promptly to assume the defense of such Proceeding and to employ counsel reasonably satisfactory to such Indemnified Party in any such Proceeding; or (3) the named parties to any such Proceeding (including any impleaded parties) include both such Indemnified Party and the Indemnifying Party, and such Indemnified Party shall reasonably believe that a material conflict of interest is likely to exist if the same counsel were to represent such Indemnified Party and the Indemnifying Party (in which case, if such Indemnified Party notifies the Indemnifying Party in writing that it elects to employ separate counsel at the expense of the Indemnifying Party, the Indemnifying Party shall not have the right to assume the defense thereof and the reasonable fees and expenses of one separate counsel shall be at the expense of the Indemnifying Party). The Indemnifying Party shall not be liable for any settlement of any such Proceeding effected without its written consent, which consent shall not be unreasonably withheld. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement of any pending Proceeding in respect of which any Indemnified Party is a party, unless such settlement includes an unconditional release of such Indemnified Party from all liability on claims that are the subject matter of such Proceeding.

 

 

 

 

 Subject to the terms of this Agreement, all reasonable fees and expenses of the Indemnified Party (including reasonable fees and expenses to the extent incurred in connection with investigating or preparing to defend such Proceeding in a manner not inconsistent with this Section) shall be paid to the Indemnified Party, as incurred, within ten business days of written notice thereof to the Indemnifying Party; provided , that the Indemnified Party shall promptly reimburse the Indemnifying Party for that portion of such fees and expenses applicable to such actions for which such Indemnified Party is not entitled to indemnification hereunder, determined based upon the relative faults of the parties.

 

 3.           Contribution . If the indemnification under Section 5(a) or 5(b) is unavailable to an Indemnified Party or insufficient to hold an Indemnified Party harmless for any Losses, then each Indemnifying Party shall contribute to the amount paid or payable by such Indemnified Party, in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and Indemnified Party in connection with the actions, statements or omissions that resulted in such Losses as well as any other relevant equitable considerations. The relative fault of such Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission of a material fact, has been taken or made by, or relates to information supplied by, such Indemnifying Party or Indemnified Party, and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such action, statement or omission. The amount paid or payable by a party as a result of any Losses shall be deemed to include, subject to the limitations set forth in this Agreement, any reasonable attorneys’ or other reasonable fees or expenses incurred by such party in connection with any Proceeding to the extent such party would have been indemnified for such fees or expenses if the indemnification provided for in this Section was available to such party in accordance with its terms.

 

 The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 5(d) were determined by pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to in the immediately preceding paragraph. Notwithstanding the provisions of this Section 5(d), no Holder shall be required to contribute, in the aggregate, any amount in excess of the amount by which the proceeds actually received by such Holder from the sale of the Registrable Securities subject to the Proceeding exceeds the amount of any damages that such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission, except in the case of fraud by such Holder.

 

 The indemnity and contribution agreements contained in this Section are in addition to any liability that the Indemnifying Parties may have to the Indemnified Parties.

 

 

 

 

F.            Miscellaneous

 

1.           Remedies . In the event of a breach by the Company or by a Holder, of any of their obligations under this Agreement, each Holder or the Company, as the case may be, in addition to being entitled to exercise all rights granted by law and under this Agreement, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. The Company and each Holder agree that monetary damages would not provide adequate compensation for any losses incurred by reason of a breach by it of any of the provisions of this Agreement and hereby further agrees that, in the event of any action for specific performance in respect of such breach, it shall waive the defense that a remedy at law would be adequate.

 

2.           Compliance . Each Holder covenants and agrees that it will comply with the prospectus delivery requirements of the Securities Act as applicable to it in connection with sales of Registrable Securities pursuant to a Registration Statement.

 

3.           Discontinued Disposition . Each Holder agrees by its acquisition of such Registrable Securities that, upon receipt of a notice from the Company of the occurrence of any event of the kind described in Section 3(c), such Holder will forthwith discontinue disposition of such Registrable Securities under a Registration Statement until such Holder’s receipt of the copies of the supplemented Prospectus and/or amended Registration Statement or until it is advised in writing (the “ Advice ”) by the Company that the use of the applicable Prospectus may be resumed, and, in either case, has received copies of any additional or supplemental filings that are incorporated or deemed to be incorporated by reference in such Prospectus or Registration Statement. The Company will use its best efforts to ensure that the use of the Prospectus may be resumed as promptly as it practicable. The Company agrees and acknowledges that any periods during which the Holder is required to discontinue the disposition of the Registrable Securities hereunder shall be subject to the provisions of Section 2(b).

 

4.           Amendments and Waivers . The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the same shall be in writing and signed by the Company and Holder’s holding at least 51% of the then outstanding Registrable Securities. Notwithstanding the foregoing, a waiver or consent to depart from the provisions hereof with respect to a matter that relates exclusively to the rights of Holders and that does not directly or indirectly affect the rights of other Holders may be given by Holders of all of the Registrable Securities to which such waiver or consent relates; provided , however , that the provisions of this sentence may not be amended, modified, or supplemented except in accordance with the provisions of the immediately preceding sentence.

 

5.           Notices . Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be delivered as set forth in the Purchase Agreement.

 

 

 

 

6.           Successors and Assigns . This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of each of the parties and shall inure to the benefit of each Holder. The Company may not assign its rights or obligations hereunder without the prior written consent of all of the Holders of the then-outstanding Registrable Securities. Each Holder may assign their respective rights hereunder in the manner and to the Persons as permitted under the Purchase Agreement.

 

7.           No Inconsistent Agreements . Neither the Company nor any of its subsidiaries has entered, as of the date hereof, nor shall the Company or any of its subsidiaries, on or after the date of this Agreement, enter into any agreement with respect to its securities, that would have the effect of impairing the rights granted to the Holders in this Agreement or otherwise conflicts with the provisions hereof.

 

8.           Execution and Counterparts . This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and, all of which taken together shall constitute one and the same Agreement. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature were the original thereof.

 

9.           Governing Law . All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be determined with the provisions of the Purchase Agreement.

 

10.          Cumulative Remedies . The remedies provided herein are cumulative and not exclusive of any remedies provided by law.

 

11.          Severability . If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their commercially reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable.

 

12.          Headings . The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof.

 

 

 

 

13.          Independent Nature of Holders’ Obligations and Rights . The obligations of each Holder hereunder are several and not joint with the obligations of any other Holder hereunder, and no Holder shall be responsible in any way for the performance of the obligations of any other Holder hereunder. Nothing contained herein or in any other agreement or document delivered at any closing, and no action taken by any Holder pursuant hereto or thereto, shall be deemed to constitute the Holders as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Holders are in any way acting in concert with respect to such obligations or the transactions contemplated by this Agreement. Each Holder shall be entitled to protect and enforce its rights, including without limitation the rights arising out of this Agreement, and it shall not be necessary for any other Holder to be joined as an additional party in any proceeding for such purpose.

 

*************************

 

 

 

 

IN WITNESS WHEREOF the Holder and the Company have duly executed this Registration Rights Agreement as of the date first written above.

 

     
    (Name of Holder – Please type or print)
     
     
    (Signature and, if applicable, Office)

 

ZK INTERNATIONAL GROUP CO., LTD.  
   
By:    
Name: Jiancong Huang  
Title: Chief Executive Officer  
     

 

 

 

 

Exhibit 10.11

 

Liquid Capital Loan Contract

 

(Contract No. :   [●] )

 

Borrower: Zhejiang Zhengkang Industrial Co. Ltd

 

Address: No. 678 Dingxiang Road, Binhai Industrial Park, Economic & Technology Development Zone, Wenzhou, Zhejiang Province, People’s Republic of China 325025

 

Loaner: Bank of China, Wenzhou Dragon Bay Branch

 

Address: Wanxin Jinyuan Yongzhong Street Longwan District Wenzhou, Zhejiang 325000

 

I. Loan Amount:

 

Currency: RMB.

 

Amount: ¥ [●]

 

II. Loan period:

 

The loan period is [●] months, starting from the actual withdrawal date. If Borrower withdraws the loan by installment, the loan period starts from the date of first actual withdrawal.

 

III. Loan purpose:

 

1. The purpose of this loan is for repayment of the government’s emergency fund.

 

2. Without written consent of Loaner, Borrower could not change the loan purpose

 

IV. Loan interest rate, interest calculation and interest settlement:

 

1. Loan Prime Rate shall be adjusted annually.

 

2. Loan interest rate is calculated pursuant to No. [ 2 ]

 

1) Fixed rate: Loan interest rate is calculated pursuant to the LPR published by People’s Bank on the date one business day prior to execution of this contract plus [●] bp. and the annual interest rate is [●]% until the maturity date.

 

2) Fluctuated rate: the actual withdrawal date (or the first withdrawal date if installment withdrawal) will be the starting date, and every [●] months will be a fluctuation period.

 

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3. Loan Interest Rate shall be settled quarterly. The [●] th of last month of each quarter is the interest settlement date, and the [●] of last month of each quarter is the interest payment date.

 

4. If Borrower does not repay the loan on time, the penalty interest will be increased [●] % of the loan interest under this contract.

 

5. If the loan is used in violation of the purpose of this agreement, the penalty interest will be increased [●] % of the loan interest under this contract.

 

V. Repayment of Loan Principal

 

1. Borrower shall repay all the loan under this contract (RMB [●] ) no later than [●] .

 

VI. Guarantee

 

The guarantee type for performance of this contract is guarantee.

 

Name of Guarantor   Contract No.   Guarantee Type
         

 

VII. Miscellaneous:

 

1. Any disputes arising from the performance of the contract shall be submitted to the court located in the place where Loaner resides.

 

2. This contract comes into effect upon execution by legal representative of each party and stamped by both parties.

 

3. This contract is written in 2 copies with each party holding one copy, and each copy has same legal effect.

 

Borrower: Zhejiang Zhengkang Industrial Co. Ltd

 

Loaner: Bank of China. Wenzhou Longwan Branch.

 

Execution time: [●]

 

  2  

 

Exhibit 10.12

 

Liquid Capital Loan Contract

 

(Contract No. :  3520160546 )

 

Borrower: Zhejiang Zhengkang Industrial Co. Ltd

 

Business License Number: 330305000005201

 

Address: No. 678 Dingxiang Road, Binhai Industrial Park, Economic & Technology Development Zone, Wenzhou, Zhejiang Province, People’s Republic of China 325025

 

Loaner: Industrial Bank Co Ltd. Wenzhou Branch

 

Address: No. 1 Municipal Road Wenzhou Zhejiang Province PRC. 325000

 

Phone: 86 55699696

 

I. Loan Amount:

 

Currency: RMB.

 

Amount: ¥ [●]

 

II. This contract is a dependent legal document between Loaner and Borrower.

 

III. Loan period:

 

The load period is [●] months, starting from the [●] , and the maturity date is [●] , 2017.

 

IV. Loan purpose:

 

1. The purpose of this loan is to buy raw materials.

 

2. Without written consent of the Loaner, the Borrower cannot change the loan purpose.

 

V. Loan interest rate, interest calculation and interest settlement:

 

1. Loan Prime Rate shall be settled annually.

 

2. Loan interest rate = Loan Prime Interest + [●] %

 

3. Interest is calculated since the actual withdrawal date.

 

4. Loan interest rate is calculated pursuant to No. [ 2_]

 

1) Fixed rate: Loan interest rate of year would be [●] % without fluctuating during the period of the contract.

 

2) Fluctuated rate: the actual withdrawal date (or the first withdrawal date if installment withdrawal) will be the starting date, and every [●] months will be a fluctuation period.

 

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5. The [●] day of each month would be the pay date for loan interest.

 

6. All the interest shall be settled prior to the maturity date of the loan under this contract.

 

7. If the loan is used in violation of the purpose of this agreement, the penalty interest will be calculated and the penalty interest will be increased [●] % of the loan interest under this contract.

 

8. If Borrower does not repay the loan on time and no agreement is reached between the Borrower and the Loaner, the penalty interest will be increased [●] % of the loan interest under this contract.

 

VI. Condition of withdrawal:

 

1. Borrower should meet the flowing conditions to withdraw the loan:

 

a) Borrow has provided necessary documents to Loaner;

 

b) Borrower is legally registered organization and have legal fund to repay the loan.

 

c) The purpose of the loan is clear and legal.

 

d) Borrower has opened an account for performance of this contract pursuant to the request of Loaner.

 

e) Borrower has filled out all necessary forms related to the loan.

 

f) Borrower has good standing and has no bad records..

 

2. Borrower hereto agrees that: upon execution of this contract, if borrow does not meet the withdraw condition or loan payment condition, Loaner has the right to terminate the loan or cancel the contract, Borrower shall take all the responsibilities accordingly.

 

VII. Repayment of Loan Principal

 

1. The loan principal under this contract shall be fully repaid by one time prior to the maturity date of the loan under this contact.

 

2. If Borrower needs to extend the repayment date, Borrower shall notify Loaner in writing [●] days prior to the maturity date of this contract.

 

3. If Loaner wants to ask Borrower to repay the loan in part or in whole prior to the maturity date, Loaner shall notify borrower in writing [●] days in advance.

 

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VIII.  List of Guarantee Contract

 

1. Maximum Guarantee

 

Contract number: [●]

 

Guarantee Type: Guarantee

 

Guarantor: [●]

 

2. Maximum Individual Guarantee

 

Contract number: [●]

 

Guarantee Type: Guarantee

 

Guarantor: [●]

 

IX. Miscellaneous:

 

1. Any disputes arising from the performance of the contract shall be submitted to the court which is located in the place where Loaner resides.

 

2. This contract is written in 4 copies and each copy has same legal effect.

 

X. Supplemental Clause:

 

The following are Additional Guarantee contracts:

 

7. Maximum Individual Guarantee Contract

 

Contract number: [●]

 

Guarantee Type: Guarantee

 

Guarantor: [●]

 

Borrower: Zhejiang Zhengkang Industrial Co. Ltd

 

Loaner: Industrial Bank Co Ltd. Wenzhou Branch

 

Execution time: [●]

 

Execution time: Wenzhou

 

  3  

Exhibit 10.13

 

Liquid Capital Loan Contract of Agricultural Bank of China

 

(Contract No. :   [●] )

 

Borrower: Zhejiang Zhengkang Industrial Co. Ltd

 

Address: No. 678 Dingxiang Road, Binhai Industrial Park, Economic & Technology Development Zone, Wenzhou, Zhejiang Province, People’s Republic of China 325025

 

Loaner: Agricultural Bank of China. Wenzhou Longwan Branch

 

Phone: [●]

 

I. Loan Amount:

Currency: RMB.

Amount: ¥ [●]

 

II. Loan period:

 

The loan period is [●] year, starting from the [●] , and the maturity date is [●] .

 

III. Loan purpose:

 

The purpose of this loan is for capital turnover.

 

IV. Loan interest rate, interest calculation and interest settlement:

 

1. Loan Prime Rate shall be adjusted annually.
2. Loan interest rate is calculated pursuant to No. [ 1 ]

 

1) Fixed rate: Loan interest rate is calculated pursuant to the LPR published by People’s Bank on the date one business day prior to execution of this contract plus [●] bp. and the annual interest rate is [●]% until the maturity date.

 

2) Fluctuated rate: the actual withdrawal date (or the first withdrawal date if installment withdrawal) will be the starting date, and every [●] months will be a fluctuation period.

 

3. Loan Interest Rate shall be settled monthly. The [●] th of each month would be interest settlement date. Borrower shall pay loan interest on the date of interest settlement.

 

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4. If the loan is used in violation of the purpose of this agreement, the penalty interest will be calculated and the penalty interest will be increased [●] % of the loan interest under this contract.

 

5. If Borrower does not repay the loan on time and no agreement is reached between Borrower and Loaner, the penalty interest will be increased [●] % of the loan interest under this contract.

 

6. Compound interest: if Borrower fails to pay the loan interest, Borrower needs to pay the compound interest since the breach date on monthly basis.

 

V. Repayment of Loan Principal

 

1. Borrower shall deposit the loan due on the account appointed by Loaner one day prior to the maturity day and irrevocably authorize Loaner to transfer the funds away.

 

2. If Borrower needs to extend the repayment date, Borrower shall submit an application to Loaner [●] days prior to the maturity date of this contract. Upon Loaner’s approval, Borrower can execute an agreement to extend the maturity date.

 

3. If Borrower wants repay the loan prior to the maturity date, Borrower shall notify borrower in writing [●] days in advance. If both parties reach the agreement, Borrower can repay the loan before the maturity date pursuant to the provisions of this contract.

 

VI. Guarantee

 

1. The guarantee type for performance of this contract is pledge.

 

2. The contract number of Maximum Guarantee Contract is [●].

 

VII. Miscellaneous:

 

1. Any disputes arising from the performance of the contract shall be submitted to the court located in the place where Loaner resides.

 

2. This contract is written in 3 copies and each copy has same legal effect.

 

Borrower: Zhejiang Zhengkang Industrial Co. Ltd

 

Loaner: Agricultural Bank of China. Wenzhou Dragon Bay Branch.

 

Execution time: [●]

 

  2  

 

 

Exhibit 10.14

 

Liquid Capital Loan Contract of Agricultural Bank of China

 

(Contract No. :  NO [●] )

 

Loaner: Ping An Bank Co., Ltd, Wenzhou Longwan Branch

 

Borrower: Zhejiang Zhengkang Industrial Co. Ltd

 

Address: No. 678 Dingxiang Road, Binhai Industrial Park, Economic & Technology Development Zone, Wenzhou, Zhejiang Province, People’s Republic of China 325025

 

I. Loan Amount:

Currency: RMB.

Amount: ¥ [●]

 

II. Loan purpose:

 

The purpose of this loan is for purchase of stainless steel band.

 

III. Loan period:

 

The loan period is one year. The starting date is the date specified on the loan receipt.

 

IV. Loan interest rate, interest calculation and interest settlement:

 

1. Loan interest rate is the interest rate published by People’s Bank on the day of the loan withdrawal plus [●] %.

 

2. Fixed rate will be applied during the whole contract period.

 

3. Loan Interest Rate shall be settled monthly. The [●] th of each month would be interest settlement date. The last settlement date will be the maturity date of the contract. Borrower shall pay all loan interest and principal on the date of interest settlement.

 

V. Loan repayment

 

1. Borrower shall repay all the loan principal at one time before the contract maturity date.

 

2. Borrower shall deposit the loan due on the account appointed by Loaner prior to the maturity day.

 

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3. If Borrower wants to repay the loan prior to the maturity date, Borrower shall notify Borrower in writing [●] days in advance. Upon approval of Loaner, such written application cannot be revoked.

 

VI. Breach

 

1. If Borrower fails to repay the loan on time, Loaner has right to charge Borrower the penalty interest which will be calculated as the penalty interest rate times the number of days due.

 

The penalty interest rate = the interest rate specified in this contract plus [●] % of the interest rate

 

2. If Borrower uses the loan in violation of the purpose of this agreement, Loaner has right to charge Borrower the penalty interest which will be calculated as the penalty interest rate times the number of days due.

 

The penalty interest rate = the interest rate specified in this contract plus [●] % of the interest rate.

 

3. If Borrower fails to pay the loan interest, Borrower needs to pay the compound interest since the breach date.

 

VII. Miscellaneous:

 

1. Any disputes arising from the performance of the contract shall be solved through negotiation, if no agreement could be reached, such disputes shall be submitted to the court located in the place where Loaner resides.

 

2. This contract is written in 3 copies with Loaner holding 2 copies and borrower holding 1 copy.

 

Loaner: Ping An Bank Co., Ltd, Wenzhou Dragon Bay Branch.

 

Borrower: Zhejiang Zhengkang Industrial Co. Ltd

 

Execution time: [●]

 

  2  

 

Exhibit 10.15

 

LOAN CONTRACT

 

(Contract No. :   [●]  )

 

Loaner: China Merchants Bank Co., Ltd, Wenzhou Dragon Bay Branch

 

Borrower: Zhejiang Zhengkang Industrial Co. Ltd

 

I. Loan purpose:

 

The purpose of this loan is for [●] .

 

II. Loan Amount:

 

Currency: RMB.

 

Amount: ¥ [●]

 

III. Loan period:

 

The loan period is [●] months, starting from the [●] , and the maturity date is [●] .

 

IV. Loan rate and interest:

 

1. Loan interest rate is fixed rate.

 

2. The fixed interest rate is calculated pursuant to the LPR published by People’s Bank on the date one business day prior to price determination date plus [●] bp.

 

3. If Borrower uses this loan in violation of the purpose of this agreement, the penalty interest will be increased [●] % of the loan interest under this contract upon the due day shall pay all the loan when the loan period is due.

 

4. If Borrower does not repay the principal loan on time, Borrower shall pay the penalty interest which will be increased [●] % of the loan interest under this contract upon the due day.

 

5. Loan Interest shall be calculated since the actual date Borrower received the loan, and the loan interest shall be settled monthly. The [●] th of every month would be the interest settlement date.

 

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V. Miscellaneous:

 

1. This contract shall come into force upon execution by the authorized person(s) of each party and stamped by both parties.

 

2. This contract is written in 2 copies with each party holding on copy, and each copy has same legal effect.

 

Borrower: Zhejiang Zhengkang Industrial Co. Ltd

 

Loaner: China Merchants Bank Co., Ltd, Wenzhou Dragon Bay Branch

 

Execution time: [●]

 

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Exhibit 10.16

 

FINANCIAL SERVICE CONTRACT

 

(Contract No. :   [●] )

 

Borrower: Zhejiang Zhengkang Industrial Co. Ltd

 

Address: No. 678 Dingxiang Road, Binhai Industrial Park, Economic & Technology Development Zone, Wenzhou, Zhejiang Province, People’s Republic of China 325025

 

Loaner: China Mingsheng Banking Corp. Ltd. Wenzhou Lucheng Branch

 

Address:

 

I. Loan Amount:

 

Currency: RMB.

 

Amount: ¥ [●]

 

II. Loan period:

 

The loan period starts from the [●] , and the maturity date is [●] .

 

III. Guarantee

 

The following company or individual guarantee the repayment to Loaner by Borrower.

 

Name of Guarantor   Contract No.   Contract Name
         

IV. Special Provision

 

Borrower promises that it will repay the principal of RMB [●] to Loaner before [●]

 

V. Loan purpose:

 

1. The purpose of this loan shall be determined by the Quota Application of Withdrawal,

 

2. Without written consent of Loaner, Borrower cannot change the loan purpose.

 

VI. Loan interest calculation.

 

1. The loan interest shall be determined based on the Loan Receipt of each loan.

 

2. The period of interest calculation and interest settlement: The interest of the loan shall be calculated on daily basis, and the loan interest shall be settled monthly. The [●] th of each month would be interest settlement date. But the last interest settlement date is the maturity date of the loan.

 

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3. If Borrower does not repay the principal loan on time, Borrower shall pay the penalty interest which will be increased [●] % of the loan interest under this contract upon the due day. If Borrower could not pay the loan interest or penalty interest, the compound interest will be charged according to loan interest of the settlement day. It will be calculated based on the days the loan is due, all the interest will be added up per month.

 

4. If the loan is used in violation of the purpose of this agreement, the penalty interest will be calculated and the penalty interest will be increased [●] % of the loan interest under this contract upon the due day.

 

VII. Repayment of Loan Principal

 

1. Borrower shall pay all the loan when the loan period is due. 

 

VIII. Miscellaneous:

 

1. Any disputes arising from the performance of the contract shall be submitted to the court located in the place where Loaner resides.

 

2. This contract shall come into force upon execution by the authorized person(s) of each party and stamped by both parties.

 

3. This contract is written in 2 copies with each party holding on copy, and each copy has same legal effect.

 

Borrower: Zhejiang Zhengkang Industrial Co. Ltd

 

Loaner: China Mingsheng Banking Corp. Ltd. Wenzhou Lucheng Branch

 

Execution time: [●]

 

  2  

 

Exhibit 10.17

 

LOAN CONTRACT

 

(Contract No. :   [●] )

 

Borrower: Zhejiang Zhengkang Industrial Co. Ltd

 

Loaner: China Zheshang Bank Co., Ltd, Wenzhou Branch

 

I. Loan purpose:

 

The purpose of this loan is for purchase of goods.

 

II. Loan Amount:

 

Currency: RMB.

 

Amount: ¥ [●]

 

III. Loan period:

 

The loan period starts from the [●] , and the maturity date is [●] .

 

IV. Loan interest rate, interest calculation and interest settlement:

 

1. Loan interest rate is calculated pursuant to No. [ 2 ]

 

1) Fluctuated rate: the basic loan interest rated published by People’s Bank of PRC for the same loan period on the date of actual withdrawal plus or minus [ ]%, and every [ ] months will be a fluctuation period.

 

2) Fixed rate: the annual loan interest rate is [●] %.

 

2. Loan Interest shall be settled quarterly. The [●] th of last month of every month would be the interest settlement date.

 

V. Repayment of Loan Principal

 

1. If Borrower repays the loan prior to the maturity date, the loan interest shall be the interest specified in this contract plus [●] %.

 

2. If Borrower does not repay the principal loan on time, Borrower shall pay the penalty interest which will be increased [●] % of the loan interest under this contract upon the due day.

 

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3. If Borrower uses this loan in violation of the purpose of this agreement, the penalty interest will be increased [●] % of the loan interest under this contract upon the due day shall pay all the loan when the loan period is due.

 

VI. Guarantee

 

1. The guarantee type for performance of this contract is guarantee.

 

2. The following company or individual guarantee the repayment to Loaner by Borrower a. [●]

 

Miscellaneous:

 

1. Any disputes arising from the performance of the contract shall be submitted to the court located in the place where Loaner resides.

 

2. This contract shall come into force upon execution by the authorized person(s) of each party or stamped by both parties.

 

3. This contract is written in 2 copies with each party holding on copy, and each copy has same legal effect.

 

Borrower: Zhejiang Zhengkang Industrial Co. Ltd

 

Loaner: China Zheshang Bank Co., Ltd

 

Execution time: [●]

 

  2  

 

Exhibit 10.19 

 

Employment Contract – Di Chen

 

Employer  (Party A): Zhejiang Zhengkang Industrial Co. Ltd

 

Address: 678 Dingxiang Road, Binghai Industry Park, Economic Development Area, Wenzhou Zhejiang Province.

 

Employee  (Party B): Di Chen, Male; college education; Hukou in Zaoahuang, Shandong Province

 

I. Contract period

 

2017-1-1 through 2020-12-33.

 

II. Employment location and title

 

Party B agrees to be in the Board Secretary of Party A in   Wenzhou based on the job requirement and with the job title as Secretary.

 

III. Work hours

 

It is standard work hours of 8 hours/day; any overtime arrangement will follow relevant regulations by the government and as agreed on by both parties. Party B enjoys all holidays and vacation rights under the national regulations during the contract period.

 

IV. Employment protection, work condition and protection against occupational hazards

 

Party A shall strictly follow all laws and regulations related to labor protection by the national and local government of PRC and shall provide Party B with necessary work conditions and tools, establish safe production process, design standard operating instructions, work specifications and labor safety and health system.

 

If Party B involves in occupational hazards, Party A shall follow the national regulations to perform pre-service and post-service occupational health check; and shall provide regular health examinations during the contract period.

 

If Party A provides Party B occupational trainings and pays the training fees, the parties can execute training service agreement specifying the service duration and breach liability.

 

V. Compensation

 

Party B shall be paid RMB4,000 per month with an additional bonus and/or allowance of RMB2,000. Party B will also be paid the additional compensation, which includes the overtime work compensation, laid off economic compensation, non competition compensation, social security benefits and other benefits etc.

 

Party A shall fully pay Party B’s salary in cash.

 

VI. Social insurance and benefits:

 

Following the related national and local social insurance law, Party A shall cover social insurance fee on behalf of Party B; Party A shall deduct from Party B’s salary the individual payment part for the social security fee.

 

Upon the termination of the contract, Party A shall perform relevant social insurance procedure for Party B.

 

Any other benefits shall be based on relevant policies and regulations by the national and local government.

 

 

 

 

VII. Labor disciplines and regulations:

 

Party A shall make all legally designed labor disciplines and regulations accessible to Party B. Party B shall strictly follow regulations and rules of Party A and shall complete all tasks, improve his/her professional skills and execute all labor disciplines and ethics. If Party B violates any regulations, Party A can give appropriate administrative sanctions or terminate the contract under worse scenario according to its disciplines and regulations.

 

VIII. Modification, revision, termination of the contract

 

When the labor contract expires or the termination condition of the labor contract stipulated by the two parties occurs, the labor contract shall be terminated. Upon mutual consent, the parties can renew the labor contract. The modification of the labor contract shall be carried out in accordance with the relevant regulations and laws of PRC.

 

Pursuant to the provision 40, 41 of the Labor Contract Law of the PRC, Party A can terminate the labor contract, but shall notify Party B in writing 30 days in advance, and shall not violate the provision 40, 41 of the Labor Contract Law. Party B can terminate the labor contract and shall notify Party A in writing 30 days in advance. In the probation period, Party B shall notify Party A in writing 3 days in advance.

 

Party A can terminate the labor contract at any time pursuant to the provision 39 of Labor Contract Law, and Party B can terminate the labor contract at any time pursuant to the provision 38 of Labor Contract Law

 

The contract can be terminated with both parties’ consent, or under any other situation provided by law.

 

IX. Financial compensation and damages:

 

If Party A terminates the contract and is violation of relevant labor laws and regulations, it shall pay Party B financial compensation and economic damages incurred if Party B suffers such damages.

 

If Party B terminates this contract and is in breach of the contract provisions herein, it shall pay Party A following loss:

 

a. all training fees paid by Party A,

 

b. the direct economic loss caused to Party A, and

 

c. The breach compensation to Party A due to Party B’s violation of business confidential and non competition agreement.
d. other compensation costs incurred from the contract.

 

X. Other stipulations

 

The salary paid to Party B has included the severance for termination of the employment relationship.

 

The parties have executed a Confidentiality and Non-competition Agreement, Party A shall pay the compensation for non competition restriction and such compensation shall be covered by the salary.

 

Party B promised that she has terminated her prior labor relationship before she become an employee of Party A. Party B shall indemnify all the damages Party A suffered to the claims of Party A’s prior employer if Party B fails to terminates the relationship.

 

 

 

 

XI. Dispute resolution:

 

Any labor dispute regarding performance of this contract can be brought up for medication and arbitration If any party could not agree with the result of the arbitration, it can initiate litigation or negotiate to solve such disputes.

 

Upon the disputes, the party who would like to proceed via arbitration shall submit written application to Labor Dispute Arbitration Committee for arbitration. Either party can initiate litigation in court within 15 days since it receives the arbitration award if it could not agree with the agreement.

 

XI. Miscellaneous

 

The bylaws and regulations of Party A are appendix to this labor contract, which shall constitute the whole

labor contract with this contract.

 

Any unresolved issue of this contract, parties can revolve through negotiation. If provisions of this contract conflict with laws and regulations of PRC, such provisions shall be nullified and the associate national laws and regulations shall prevail.

 

This contract is written in duplicate with each party holding one copy. The contract will come into force upon execution or stamp of both parties.

 

Party A: Zhejiang Zhengkang Industrial Co. Ltd

 

Party B: Di Chen

 

The contract was signed on January 1, 2017.

 

 

 

 

Exhibit 10.20

 

 

 

April 28, 2017

 

Board Candidate – Min Ni

 

Re:  Offer to Join the Board of Directors of ZK International Group Co. Ltd.

 

Dear Mr. Ni:

 

I am pleased to extend you an offer to join the Board of Directors (the “ Board ”) of ZK International Group Co. Ltd. (“ ZK International ”). Your appointment to the Board is subject to the approval of ZK International Group Co. Ltd. Board of Directors, and the following outlines certain of your responsibilities as a member of the Board, which responsibilities will commence as soon thereafter as Board of Director approval is obtained:

 

    Generally : You shall have all responsibilities of a Director of the Company imposed by Nevada or applicable law, the Certificate of Incorporation, as may be amended from time to time, and Bylaws, as may be amended from time to time, of ZK International Group Co., Ltd. These responsibilities shall include, but shall not be limited to, the following:

 

Attendance : Use best efforts to attend scheduled meetings of the Board;

 

Act as a Fiduciary : Represent the shareholders and the interests of ZK International Group Co. Ltd. as a fiduciary;

 

Participation : Participate as a full voting member of the Board in setting overall objectives, approving plans and programs of operation, formulating general policies, offering advice and counsel, serving on Board Committees, and reviewing management performance; and

 

As a member of the Board, you agree to execute an acknowledgement in the form attached hereto. In addition, upon your joining the Board, ZK International Group Co. Ltd. will enter into a customary indemnification agreement with you.

 

In consideration for your joining the Board, the Company will grant you a cash compensation of $3,800 per quarter.

 

I trust that this offer is satisfactory to you and look forward to you joining the Company as a member of the Board. Please indicate your acceptance of this offer by signing below and returning one copy of this offer to me by May 10, 2017. By signing below you acknowledge that you have read this agreement and fully understand the nature and effect of it and the terms contained herein and that the said terms are fair and reasonable and correctly set out your understanding and intention.

 

 

 

 

Mr. Min Ni, I look forward to having you on board with ZK International Group Co. Ltd. and trust your relationship with ZK International Group Co. Ltd. will be challenging and exciting.

 

Yours very truly,

 

/s/ Jiancong Huang  
   
Jiancong Huang  
President and Chief Executive Officer  
ZK International Group Co. Ltd.  

 

I, Min Ni, accept the offer as stated above.

 

Signature:  

/s/ Min Ni

Date: May 10, 2017  

 

 

 

 

Exhibit 10.21

 

 

 

April 28, 2017

 

Board Candidate – Lie Cao

 

Re:  Offer to Join the Board of Directors of ZK International Group Co. Ltd.

 

Dear Mr. Cao:

 

I am pleased to extend you an offer to join the Board of Directors (the “ Board ”) of ZK International Group Co. Ltd. (“ ZK International ”). Your appointment to the Board is subject to the approval of ZK International Group Co. Ltd. Board of Directors, and the following outlines certain of your responsibilities as a member of the Board, which responsibilities will commence as soon thereafter as Board of Director approval is obtained:

 

Generally : You shall have all responsibilities of a Director of the Company imposed by Nevada or applicable law, the Certificate of Incorporation, as may be amended from time to time, and Bylaws, as may be amended from time to time, of ZK International Group Co., Ltd. These responsibilities shall include, but shall not be limited to, the following:

 

Attendance : Use best efforts to attend scheduled meetings of the Board;

 

Act as a Fiduciary : Represent the shareholders and the interests of ZK International Group Co. Ltd. as a fiduciary;

 

Participation : Participate as a full voting member of the Board in setting overall objectives, approving plans and programs of operation, formulating general policies, offering advice and counsel, serving on Board Committees, and reviewing management performance; and

 

As a member of the Board, you agree to execute an acknowledgement in the form attached hereto. In addition, upon your joining the Board, ZK International Group Co. Ltd. will enter into a customary indemnification agreement with you.

 

In consideration for your joining the Board, the Company will grant you a cash compensation of $3,000 per quarter.

 

I trust that this offer is satisfactory to you and look forward to you joining the Company as a member of the Board. Please indicate your acceptance of this offer by signing below and returning one copy of this offer to me by May 10, 2017. By signing below you acknowledge that you have read this agreement and fully understand the nature and effect of it and the terms contained herein and that the said terms are fair and reasonable and correctly set out your understanding and intention.

 

 

 

 

Mr. Cao, I look forward to having you on board with ZK International Group Co. Ltd. and trust your relationship with ZK International Group Co. Ltd. will be challenging and exciting.

 

Yours very truly,

 

/s/ Jiancong Huang  
   
Jiancong Huang  
President and Chief Executive Officer  
ZK International Group Co. Ltd.  

 

I, Lie Cao, accept the offer as stated above.

 

Signature:  

/s/ Lie Cao

 
Date: May 2, 2017  

 

 

 

 

Exhibit 10.22

 

 

 

April 28, 2017

 

Board Candidate – Linge Zhou

 

Re:  Offer to Join the Board of Directors of ZK International Group Co. Ltd.

 

Dear Ms. Zhou:

 

I am pleased to extend you an offer to join the Board of Directors (the “ Board ”) of ZK International Group Co. Ltd. (“ ZK International ”). Your appointment to the Board is subject to the approval of ZK International Group Co. Ltd. Board of Directors, and the following outlines certain of your responsibilities as a member of the Board, which responsibilities will commence as soon thereafter as Board of Director approval is obtained:

 

Generally : You shall have all responsibilities of a Director of the Company imposed by Nevada or applicable law, the Certificate of Incorporation, as may be amended from time to time, and Bylaws, as may be amended from time to time, of ZK International Group Co., Ltd. These responsibilities shall include, but shall not be limited to, the following:

 

Attendance : Use best efforts to attend scheduled meetings of the Board;

 

Act as a Fiduciary : Represent the shareholders and the interests of ZK International Group Co. Ltd. as a fiduciary;

 

Participation : Participate as a full voting member of the Board in setting overall objectives, approving plans and programs of operation, formulating general policies, offering advice and counsel, serving on Board Committees, and reviewing management performance; and

 

As a member of the Board, you agree to execute an acknowledgement in the form attached hereto. In addition, upon your joining the Board, ZK International Group Co. Ltd. will enter into a customary indemnification agreement with you.

 

In consideration for your joining the Board, the Company will grant you a cash compensation of $3,000 per quarter.

 

I trust that this offer is satisfactory to you and look forward to you joining the Company as a member of the Board. Please indicate your acceptance of this offer by signing below and returning one copy of this offer to me by May 10, 2017. By signing below you acknowledge that you have read this agreement and fully understand the nature and effect of it and the terms contained herein and that the said terms are fair and reasonable and correctly set out your understanding and intention.

 

 

 

 

Ms. Zhou, I look forward to having you on board with ZK International Group Co. Ltd. and trust your relationship with ZK International Group Co. Ltd. will be challenging and exciting.

 

Yours very truly,

 

/s/Jiancong Huang  
   
Jiancong Huang  
President and Chief Executive Officer  
ZK International Group Co. Ltd.  

 

I, Linge Zhou, accept the offer as stated above.

 

Signature:  

/s/ Linge Zhou

 
Date: May 3, 2017  

 

 

 

 

Exhibit 10.23

 

PRIVATE PLACEMENT SUBSCRIPTION AGREEMENT

 

THIS PRIVATE PLACEMENT SUBSCRIPTION AGREEMENT (the “Agreement”) is made this _____th day of May, 2017, among (i) ZK International Group Co., Ltd. (the "Company"), a British Virgin Islands limited liability company, and (ii) each purchaser identified on the signature pages to this Agreement (each a “Purchaser” and collectively, the “Purchasers”).

 

Purchase of Ordinary Shares

 

1. Subscription

 

1.1                            The undersigned Purchasers (each a “Purchaser”) hereby subscribe for and agree to purchase from the Company for cash (the “Subscription Proceeds”, on the basis of the representations and warranties and subject to the terms and conditions set forth herein, ordinary shares, of the Company, no par value per share (the “Ordinary Shares”) and in an amount for subscription shares as set out on each Subscriber’s signature page hereto (each such subscription an agreement to purchase being a “Subscription”) at a purchase price of US$2.00 per Ordinary Share.

 

1.2                            Subject to the terms hereof, the Subscription will be effective upon its acceptance by the Company. The Purchasers acknowledge that there is no minimum required to close any subscription under the offering.

 

2. Payment

 

2.1                            Each Purchaser acknowledges and agrees that its commitment to purchase Ordinary Shares of the Company hereunder is and shall be irrevocable upon delivery of the Subscription Proceeds and an executed counterpart original of this Subscription Agreement, an investor questionnaire, form of which is attached hereto as Exhibit A (the “Investor Questionnaire”) and Registration Rights Agreement, form of which is attached hereto as Exhibit B (the “Registration Rights Agreement”), to the Company. The Subscription Proceeds must accompany or precede this Subscription Agreement and shall be paid by wire transfer to the following bank account.

 

Title of the Account: ZK Pipe Industry Co. Limited
Account #: 20133112
Beneficiary Bank: China Merchants Bank Co. Ltd, Hong Kong Branch
Swift Code: CMBCHKHH
Bank Address: 21/F Bank of America Tower
  12 Harcourt Road, Central, Hong Kong

  

3. Deliveries at or Prior to Closing

 

3.1                            Prior to acceptance of this Subscription Agreement by the Company, each Purchaser must complete, sign and return to the Company, or Company’s counsel Ortoli Rosenstadt LLP, an executed copy of this Subscription Agreement and Registration Rights Agreement with completed and executed Investor Questionnaire and wire transfer the Subscription Proceeds as described in Section 2.1, above.

 

 

 

  

3.2                            Each Purchaser shall complete, sign and return to the Company as soon as possible, on request by the Company, any documents, questionnaires, notices and undertakings as may be required by regulatory authorities or by applicable law.

 

3.3                            The Company shall deliver to each Purchaser the following:

 

(a) at the Closing (as defined below), a counterpart of this Subscription Agreement and Registration Rights Agreement, duly executed by an authorized signatory of the Company;

 

(b) within 10 business days of the Closing Date (as defined below), a certificate or evidence of electronic book entry representing the Ordinary Shares in the amount set forth on the signature page hereto.

 

4. Closing

 

4.1                            Completion of the sale of the Ordinary Shares contemplated in this Subscription Agreement (any such completion, a " Closing " ) shall occur on or before April 25, 2017, or on a such date to be mutually agreed upon by the Company and the Purchaser.

 

4.2                            The Company may, at its discretion, elect to close the Offering in one or more closings, in which event the Company may agree with one or more of the Purchasers (including the Purchaser hereunder) to complete delivery of the Ordinary Shares to such Purchaser(s) against payment therefore at any time on or prior to the furthest most date set by Section 4.1.

 

5. Conditions to Closing

 

5.1                            Upon acceptance of this Subscription Agreement, the obligations of the Company to Close on the Closing Date are subject to the following conditions:

 

(a) Delivery of the transaction documents as set forth in Section 3.1 and 3.2.

 

(b) that all of the representations and warranties of the Purchaser made in this Subscription Agreement, the Investor Questionnaire and the Registration Rights Agreement are accurate in all material respects when made and on the Closing Date;

 

(c) that all of the obligations, covenants and agreements of the Purchaser required to be performed at or prior to the Closing Date shall have been performed; and

 

(d) that the Company shall have received the Subscription Proceeds.

 

5.2                            The obligations of the Purchaser hereunder to Close on the Closing Date are subject to the following conditions:

 

(a) that all of the representations and warranties of the Company made in this Subscription Agreement and Registration Rights Agreement are accurate in all material respects when made and on the Closing Date; and

 

(b) that all of the obligations, covenants and agreements of the Company required to be performed at or prior to the Closing Date shall have been performed.

 

 

 

 

 

6. The Company’s Covenant

 

6.1                            Company shall not offer equity securities, or any securities convertible into or exchangeable for equity securities, to any person or engages in any transaction that could have a dilutive effect on the beneficial ownership of the Purchaser unless first obtaining a written consent by each Purchaser. This right of approval will terminate immediately prior to the closing of any underwritten initial public offering of the Ordinary Shares pursuant to a Registration Statement under the Securities Act of 1933, as amended (the “Securities Act”).

 

7. Representations, Warranties, Acknowledgements and Covenants of the Purchaser

 

7.1                            Each Purchaser severally and not jointly hereby acknowledges and agrees as of the date hereof and as of the Closing Date that:

 

(a) none of the Ordinary Shares have been registered under the Securities Act, or under any state securities or "blue sky" laws of any state of the United States or any other jurisdiction, and the Purchaser may not to make any disposition of all or any portion of the Securities unless and until the disposition of such shares is registered in an effective registration statement under the Securities Act or is exempt from registration thereunder:

 

(b) the Company is obligated to pay a placement fee to Boustead Securities, LLC (the “Placement Agent”) pursuant to a separate agreement between such Placement Agent and the Company, which shall include an amount not to exceed seven percent (7%) of the Subscription Proceeds;

 

(c) the decision to execute this Subscription Agreement and acquire the Ordinary Shares hereunder has not been based upon any oral or written representation (other than representations set out in this Agreement) as to fact or otherwise made by or on behalf of the Company;

 

(d) there are risks associated with an investment in the Company and the Ordinary Shares, including, but not limited to, (i) the risk of changes in the cost of raw materials and energy, (ii) the r isk of intense competition in the PRC domestic market, (iii) risks related to our significant amount of short-term debt and (iv) the r isk of severe financial hardship or bankruptcy of one or more of our major clients;

 

(e) it has received all the information it considers necessary or appropriate for purposes of deciding whether to purchase the Ordinary Shares. Each Purchaser further represents that it has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the Ordinary Shares and regarding the business, properties, prospects and financial condition of the Company, and to obtain additional information (to the extent the Company possessed such information or could acquire it without unreasonable effort or expense) necessary to verify the accuracy of any information furnished to it or to which it had access;

 

(f) it has been advised to consult its own legal, tax and other advisors with respect to the merits and risks of an investment in the Ordinary Shares and with respect to applicable resale restrictions;

 

(g) it understands that the Company is making no representations and warranties regarding tax consequences for your investment in the Ordinary Shares, the US Foreign Corrupt Practices Act or the securities law of the home or residential jurisdiction of any Purchaser.

 

 

 

  

7.2                            Each Purchaser severally and not jointly hereby represents and warrants to, and covenants with, the Company (which representations, warranties and covenants shall survive the Closing) as of the date hereof and as of the Closing Date that:

 

(a) it has the legal capacity and competence to enter into and execute this Subscription Agreement and to take all actions required hereby and, if the Purchaser is a corporation, it is duly incorporated and validly existing under the laws of its jurisdiction of incorporation and all necessary approvals by its directors, shareholders and others have been obtained to authorize execution and performance of this Subscription Agreement on its behalf;

 

(b) the entering into of this Subscription Agreement and the transactions contemplated hereby do not result in the violation of any of the terms and provisions of any law or regulation applicable to the Purchaser or of any agreement, written or oral, to which the Purchaser may be a party or by which the Purchaser is or may be bound;

 

(c) the Purchaser has duly executed and delivered this Subscription Agreement and it constitutes a valid and binding agreement of the Purchaser enforceable against the Purchaser in accordance with its terms;

 

(d) All information furnished in the Investor Questionnaire completed is true and correct in all respects;

 

(e) the Purchaser acknowledges that the sale of the Ordinary Shares hereunder is being made pursuant to an exemption from registration under the Securities Act in compliance with Regulation D promulgated under the Securities Act, and that the Purchaser is an “accredited investor”, as defined in Rule 501 of Regulation D, as set out in the Investor Questionnaire;

 

(f) the Purchaser is acquiring the Ordinary Shares for investment purposes for its own account and not on behalf of any U.S. person, and not with a view to a distribution of all or any part thereof. The Purchaser is aware that there are legal and practical limits on its ability to sell or dispose of the Ordinary Shares and therefore, that the Purchaser must bear the economic risk of its investment for an indefinite period of time. The Purchaser has adequate means of providing for its current needs and anticipated contingencies and has no need for liquidity of this investment. The Purchaser’s commitment to illiquid investments is reasonable in relation to its net worth;

 

(g) the Purchaser (i) has such knowledge and experience in business matters as to be capable of evaluating the merits and risks of its prospective investment in the Ordinary Shares; and (ii) has the ability to bear the economic risks of its prospective investment and can afford the complete loss of such investment;

 

(h) the Purchaser is not aware of any advertisement of any of the Ordinary Shares and is not acquiring any of the Ordinary Shares as a result of any form of general solicitation or general advertising including advertisements, articles, notices or other communications published in any newspaper, magazine or similar media or broadcast over radio or television, or any seminar or meeting whose attendees have been invited by general solicitation or general advertising;

 

 

 

  

(i) no person has made any written or oral representations to the Purchaser:

 

(i) that any person will resell or repurchase any of the Ordinary Shares;

 

(ii) that any person will refund the purchase price of any of the Ordinary Shares; or

 

(iii) as to the future price or value of any of the Ordinary Shares; and

 

(j) the Purchaser will indemnify and hold harmless the Company and, where applicable, its directors, officers, employees, agents, advisors and shareholders, from and against any and all loss, liability, claim, damage and expense whatsoever (including, but not limited to, any and all fees, costs and expenses whatsoever reasonably incurred in investigating, preparing or defending against any claim, lawsuit, administrative proceeding or investigation whether commenced or threatened) arising out of or based upon any representation or warranty of the Purchaser contained herein or in any document furnished by the Purchaser to the Company in connection herewith being untrue in any material respect or any breach or failure by the Purchaser to comply with any covenant or agreement made by the Purchaser to the Company in connection therewith.

 

7.3                            Between the date of this Agreement and the Closing, the Purchaser shall notify the Company if any of the above representations and warranties ceases to be true.

 

7.4                            Each Purchaser, severally but not jointly, acknowledges that the representations and warranties contained herein are made by it with the intention that they may be relied upon by the Company and its legal counsel in determining such Purchaser's eligibility to purchase the Ordinary Shares for which it is subscribing under applicable securities legislation. Each Purchaser further agrees that by accepting delivery of the certificates representing the Ordinary Shares on the Closing Date, it will be representing and warranting that the representations and warranties contained herein are true and correct as at the Closing Date with the same force and effect as if they had been made by the Purchaser at the Closing Date and that they will survive the purchase by the Purchaser of Ordinary Shares and will continue in full force and effect notwithstanding any subsequent disposition by the Purchaser of such Ordinary Shares.

 

8. Representations and Warranties of the Company

 

8.1                            The Company acknowledges and agrees that each Purchaser is entitled to rely upon the representations and warranties of the Company, contained in this Agreement and further acknowledges that each Purchaser will be relying upon such representations and warranties in purchasing the Ordinary Shares. The Company represents and warrants as follows:

 

(a) The Company is duly incorporated, validly existing and in good standing under the laws of the British Virgin Islands.

 

(b) The Company has the requisite power and authority to own and use its properties and assets and to carry on its business as currently conducted.

 

 

 

  

(c) The Company is not in violation or default of any of the provisions of its articles of incorporation or bylaws. The Company is duly qualified to conduct its business and is in good standing as a foreign corporation or other entity in each jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, except where the failure to be so qualified or in good standing, as the case may be, could not reasonably be expected to result in (i) a material adverse effect on the legality, validity or enforceability of this Subscription Agreement, (ii) a material adverse effect on the results of operations, assets, business or financial condition of the Company, taken as a whole, or (iii) a material adverse effect on the Company’s ability to perform in any material respect on a timely basis its obligations under this Subscription Agreement (any of (i), (ii) or (iii) being hereafter referred to as a “Material Adverse Effect” ), and no proceeding has been instituted in any such jurisdiction revoking, limiting or curtailing or seeking to revoke, limit or curtail such power and authority or qualification.

 

(d) The Company has the requisite corporate power and authority to enter into and to consummate the transactions contemplated by this Subscription Agreement and to carry out its obligations hereunder. The execution and delivery of this Subscription Agreement by the Company and the consummation by it of the transactions contemplated hereby have been duly authorized by all necessary action on the part of the Company and no further corporate authorization is required by the Company in connection therewith.

 

(e) Upon delivery, this Subscription Agreement will have been duly executed by the Company and will constitute the valid and binding obligation of the Company enforceable against the Company in accordance with its terms except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally and (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies.

 

(f) Upon execution and delivery of this Subscription Agreement and the performance by the Company of the obligations imposed on it in this Subscription Agreement, including the issuance and sale of the Ordinary Shares, will not (i) conflict with or violate any provision of the Company’s certificate or articles of incorporation, bylaws or other organizational or charter documents, or (ii) conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any material agreement, credit facility, debt or other instrument (evidencing a Company debt or otherwise) or other agreement to which the Company is a party or by which any material property or material asset of the Company, or (iii) conflict with or result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which the Company is subject, or by which any material property or material asset of the Company is bound, except, in each case, as could not reasonably be expected to result in a Material Adverse Effect.

 

(g) Except for consents from individuals and entities as set forth on Schedule 8.1(g), the Company is not required to obtain any consent, waiver, authorization or order of, give any notice to, or make any filing or registration with, any court or other federal, state, local or other governmental authority or other person in connection with the execution, delivery and performance by the Company of this Subscription Agreement.

 

 

 

  

(h) The Ordinary Shares are duly authorized and, when issued and paid for in accordance with this Subscription Agreement, will be validly issued as fully paid and non-assessable, free and clear of all liens and encumbrances other than restrictions provided for in this Subscription Agreement and applicable law.

 

(i) The issuance and sale of the Ordinary Shares will not obligate the Company to issue Ordinary Shares or other securities to any person (other than the Purchasers and their designees) and will not result in a right of any holder of the Company’s securities to adjust the exercise, conversion, exchange or reset price under such securities.

 

9. Legending of Subject Securities.

 

9.1                            The Purchaser hereby acknowledges that upon the issuance thereof, and until such time as the same is no longer required under the applicable securities laws and regulations, any certificates representing the Ordinary Shares may bear a restrictive legend pursuant to applicable laws and may include language substantially similar to the below:

 

“THE SECURITIES REFERENCED HEREIN HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN A FORM SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933.”

 

10. Costs

 

10.1                            The Purchaser acknowledges and agrees that all costs and expenses incurred by the Purchaser (including any fees and disbursements of any special counsel retained by the Purchaser) relating to the purchase of the Ordinary Shares shall be borne by the Purchaser.

 

11. Governing Law

 

11.1                          This Subscription Agreement is governed by the laws of the State of New York and the federal laws of the United States applicable therein. The Purchaser, in its personal or corporate capacity and irrevocably attorns to the jurisdiction of the state and federal courts located in New York County, New York. Each party agrees that the state and federal courts located in New York County, New York shall be the exclusive jurisdiction for settling all disputes hereunder.

 

12. Independent Nature of Purchaser’s Obligations and Rights

 

12.1                          The obligations of each Purchaser under this Subscription Agreement are several and not joint with the obligations of any other Purchaser, and no Purchaser shall be responsible in any way for the performance of the obligations of any other Purchaser. Nothing contained herein, and no action taken by any Purchaser pursuant thereto, shall be deemed to constitute the Purchasers as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Purchasers are in any way acting in concert or as a group with respect to such obligations or the transactions contemplated by this Subscription Agreement. Each Purchaser shall be entitled to independently protect and enforce its rights, including without limitation, the rights arising out of this Subscription Agreement, and it shall not be necessary for any other Purchaser to be joined as an additional party in any proceeding for such purpose. Each Purchaser has been represented by its own separate legal counsel in their review and negotiation of this Subscription Agreement or it has knowingly waived its right to do so and has proceeded without benefit of counsel.

 

 

 

 

 

13. Survival

 

13.1                          This Subscription Agreement, including without limitation the representations, warranties and covenants contained herein, shall survive and continue in full force and effect and be binding upon the parties hereto notwithstanding the completion of the purchase of the Ordinary Shares by the Purchaser pursuant hereto.

 

14. Assignment

 

14.1                          This Subscription Agreement is not transferable or assignable without written consent by both the Company and Purchaser.

 

15. Severability

 

15.1                          If any provision of this Agreement is held to be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Agreement shall not in any way be affected or impaired thereby and the parties will attempt to agree upon a valid and enforceable provision that is a reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Agreement.

 

16. Entire Agreement

 

16.1                          Except as expressly provided in this Subscription Agreement and in the agreements, instruments and other documents contemplated or provided for herein, this Subscription Agreement contains the entire agreement between the parties with respect to the sale of the Ordinary Shares and there are no other terms, conditions, representations or warranties, whether expressed, implied, oral or written, by statute or common law, by the Company or by anyone else.

 

17. Notices

 

17.1                          All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given at the date received if mailed or transmitted by any standard form of telecommunication (including email, but not including facsimile). Notices to the Purchaser shall be directed to the address on the signature page of this Subscription Agreement and notices to the Company shall be directed to it at

  

Mr. Jiancong Huang

c/o Wenzhou Zhengkang Industrial Co., Ltd.

No. 678 Dingxiang Road, Binhai Industrial Park

Economic & Technology Development Zone

Wenzhou, Zhejiang Province 325025

People’s Republic of China

Email: zjzk@cn-zk.cn

 

With a copy to (failure to provide such copy shall mean that no notice has been given hereunder):

 

William S. Rosenstadt

Mengyi “Jason” Ye

Ortoli Rosenstadt LLP

501 Madison Avenue

New York, New York 10022

USA

Email: wsr@ortolirosenstadt.com

jye@ortolirosenstadt.com

 

 

 

  

18. Counterparts and Electronic Means

 

18.1                          This Subscription Agreement may be executed in any number of counterparts, each of which, when so executed and delivered, shall constitute an original and all of which together shall constitute one instrument. Delivery of an executed copy of this Subscription Agreement by electronic facsimile transmission or other means of electronic communication capable of producing a printed copy will be deemed to be execution and delivery of this Subscription Agreement as of the date hereinafter set forth.

 

19. Amendment and Waiver

 

19.1                          No provision of this Agreement may be waived or amended except in a written instrument signed, in the case of an amendment, by the Company and each Purchaser or, in the case of a waiver, by the party against whom enforcement of any such waiver is sought. No waiver of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any subsequent default or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of either party to exercise any right hereunder in any manner impair the exercise of any such right.

 

 

 

[SIGNATURE PAGES TO FOLLOW]

 

 

 

 

IN WITNESS WHEREOF the Purchaser has duly executed this Subscription Agreement as of the date of acceptance by the Company.

 

     
(Amount of Subscription)   (Name of Purchaser – Please type or print)
     
     
(Number of Ordinary Shares Subscribed)   (Signature and, if applicable, Office)
     
     
    (Address of Purchaser)
     
     
    (City, State/Province,
    Postal Code of Purchaser)
     
     
    (Country of Purchaser)

   

 

 

 

A C C E P T A N C E

 

The above-mentioned Subscription Agreement in respect of the Ordinary Shares is hereby accepted by ZK International Group Co., Ltd.

 

DATED at                                                              , the                            day of                     , 2017.

 

 

ZK INTERNATIONAL GROUP CO., LTD.
     
     
By:    
Name: Jiancong Huang  
Title: Chief Executive Officer  

 

 

 

 

Exhibit A

  

Investor Questionnaire

 

The purpose of this Statement is to obtain information relating to whether or not you are an accredited investor as defined in Securities and Exchange Regulation D as well as your knowledge and experience in financial and business matters and to your ability to bear the economic risks of an investment in the Company.

 

As used in Regulation D, the following terms shall have the meaning indicated:

 

a.       Accredited investor. Accredited investor  shall mean any person who comes within any of the following categories, or who the issuer reasonably believes comes within any of the following categories, at the time of the sale of the securities to that person:

 

1. Any bank as defined in  section 3(a)(2)  of the Act, or any savings and loan association or other institution as defined in  section 3(a)(5)(A)  of the Act whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to  section 15  of the Securities Exchange Act of 1934; any insurance company as defined in  section 2(13)  of the Act; any investment company registered under the  Investment Company Act of 1940  or a business development company as defined in  section 2(a)(48)  of that Act; any Small Business Investment Company licensed by the U.S. Small Business Administration under section 301(c) or (d) of the Small Business Investment Act of 1958; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5,000,000; any employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974 if the investment decision is made by a plan fiduciary, as defined in  section 3(21)  of such act, which is either a bank, savings and loan association, insurance company, or registered investment adviser, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors;

 

2. Any private business development company as defined in  section 202(a)22 of the Investment Advisers Act of 1940 ;

 

3. Any organization described in  section 501(c)3 of the Internal Revenue Code , corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000;

 

4. Any director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer;

 

5. Any natural person whose individual net worth, or joint net worth with that person's spouse, at the time of his purchase exceeds $1,000,000, excluding the value of the person’s primary residence, but including any excess liability between the value of the residence and the amount of any obligation(s) thereon;

 

 

 

  

6. Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year;

 

7. Any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person as described in  Rule 506(b)(2)(ii)  and

 

8. Any entity in which all of the equity owners are accredited investors.

 

Please provide the following information:

 

1. Name, Home Address and Telephone Number:

 

________________________________________________________________________

 

Name

________________________________________________________________________

 

Address

 

Telephone (_____) ______________________________

 

2. Residence

 

(a) If an individual, what is your principal place of residence?

 

__________________________________________________________________

 

__________________________________________________________________

 

(b) If  not  an individual:

 

(1) Where is your principal place of business?

 

____________________________________________________________

  

____________________________________________________________

  

(2) Where are your executive headquarters?

 

____________________________________________________________

 

____________________________________________________________

 

(3) If a partnership, in which states(s) does (do) each of your partners reside?

 

____________________________________________________________

 

____________________________________________________________

 

 

 

 

(4) If a corporation, what is your state of incorporation?

 

____________________________________________________________

 

____________________________________________________________

 

(5) If a trust, in which state(s) does (do) each of the beneficiaries reside?

 

____________________________________________________________

 

____________________________________________________________

 

3. Business or occupation (including title):

 

________________________________________________________________________

 

________________________________________________________________________

 

4. Educational background (level, degrees completed):

 

________________________________________________________________________

 

5. Net Worth, Partners' Capital or Total Assets (check one):

 

_____ $5,000,000 or more

 

_____ $1,000,000-$5,000,000

 

_____ Less than $1,000,000

 

 

6. For individual or married persons only  - Gross income for each of the last 2 years (check one):

 

_____ $300,000 or more

 

_____ $200,000 - $300,000

 

_____ Less than $200,000

 

Is this income amount combined with that of your spouse?

 

Yes _____

 

No _____

 

Do you expect to reach the same level of income in the current year?

 

Yes ______

 

No _____

 

 

 

  

7. In connection with my investment activities, I utilize the services of the following attorney, accountant or other advisor to assist me in analyzing investment opportunities:

 

(a) Name of advisor: ______________________________________

 

(b) Position or occupation: _________________________________

 

(c) Business address: _____________________________________

 

___________________________________________________

 

8. Personal data:

 

Age: _______________________

 

Marital Status: _______________

 

Number of dependents: ________

 

9. I am an “accredited investor” as defined in Rule 501(a) of Securities and Exchange Commission Regulation D. _______________  (Initials)

 

10. I have adequate means of providing my current needs, and possible personal contingencies, and have no need for liquidity in an investment in the Company. _______________  (Initials)

 

11. I, together with my advisors, have specific knowledge and experience in related financial and business matters so as to be capable of evaluating the relative economic and operational merits and risks of an investment in the stock. _______________  (Initials)

 

12. I hereby certify that I have answered the foregoing questions to the best of my knowledge and that my answers hereto are complete and accurate. _______________  (Initials)

 

_______________________________

 

Name (Please Print)

 

       
Signature   Date  

  

 

 

 

Exhibit B

 

Form of Registration Rights Agreement.

 

 

 

 

 

 

Exhibit B to the

 

Private Placement

 

Subscription Agreement

 

REGISTRATION RIGHTS AGREEMENT

 

This Registration Rights Agreement (this “ Agreement ”) is made and entered into as of April ______, 2017, among (i) ZK International Group Co., Ltd. (the "Company"), a British Virgin Islands limited liability company, and (ii) each purchaser identified on the signature pages to this Agreement (each a “Holder” and collectively, the “Holders”).

 

This Agreement is made pursuant to the Private Placement Subscription Agreement, dated as of the date hereof among the Company and the Holders (the “ Purchase Agreement ”).

 

The Company and the Holders hereby agree as follows:

 

A.               Definitions . Capitalized terms used and not otherwise defined herein that are defined in the Purchase Agreement shall have the meanings given such terms in the Purchase Agreement. As used in this Agreement, the following terms shall have the following meanings:

 

Advice ” shall have the meaning set forth in Section 6(d).

 

“Cutback Shares” shall have the meaning set forth in Section 2(c).

 

Effectiveness Date ” means the 135 th calendar day following the earlier of the actual filing date of the F-1 (as defined herein).

 

Effectiveness Period ” shall have the meaning set forth in Section 2(a).

 

Event ” shall have the meaning set forth in Section 2(b).

 

Event Date ” shall have the meaning set forth in Section 2(b).

 

Filing Date ” means, the date on which the F-1 is filed.

 

Holder ” or “ Holders ” means the holder or holders, as the case may be, from time to time of Registrable Securities.

 

Indemnified Party ” shall have the meaning set forth in Section 5(c).

 

Indemnifying Party ” shall have the meaning set forth in Section 5(c).

 

Losses ” shall have the meaning set forth in Section 5(a).

 

Proceeding ” means an action, claim, suit, investigation or proceeding (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or threatened.

 

 

 

  

Prospectus ” means the prospectus included in a Registration Statement (including, without limitation, a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by a Registration Statement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus.

 

Registrable Securities ” means all of the Company’s ordinary shares issued pursuant to the Purchase Agreement.

 

Registration Statement ” means the registration statements required to be filed hereunder and any additional registration statements, including (in each case) the Prospectus, amendments and supplements to such registration statement or Prospectus, including pre- and post-effective amendments, all exhibits thereto, and all material incorporated by reference or deemed to be incorporated by reference in such registration statement.

 

Rule 415 ” means Rule 415 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same purpose and effect as such Rule.

 

Rule 424 ” means Rule 424 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same purpose and effect as such Rule.

 

SEC ” means the United States Securities and Exchange Commission.

 

SEC Restrictions ” shall have the meaning set forth in Section 2(c).

 

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

 

Selling Shareholder Questionnaire ” shall have the meaning set forth in Section 3(a).

 

B.               Registration .

 

1.                  The Company shall register for resale of some or all (depending on the limitations set out in this Agreement) of the Registrable Securities with the Commission simultaneous with the filing of a registration statement with the Commission for the initial public offering of shares of the Company’s ordinary shares on Form F-1 (the “F-1”).

 

2.                  Subject to the terms of this Agreement, the Company shall use its best efforts to cause a Registration Statement to be declared effective under the Securities Act as promptly as possible after the filing thereof, but in any event prior to the applicable Effectiveness Date, and shall use its best efforts to keep such Registration Statement continuously effective under the Securities Act until all Registrable Securities covered by such Registration Statement have been sold or may be sold without volume restrictions pursuant to Rule 144(k) as determined by the counsel to the Company pursuant to a written opinion letter to such effect, addressed and acceptable to the Company’s transfer agent and the affected Holders (the “ Effectiveness Period ”)

 

 

 

  

3.                  If the registration is being made pursuant to a registered public offering that is to be made by underwriter(s), the Company shall so advise the Holders of the Registrable Securities eligible for inclusion in such Registration Statement pursuant to Section 3. In that event, the right of any Holder to registration shall be conditioned upon such Holder’s participation and the inclusion of such Holder’s Registrable Securities in such registered public offering to the extent provided herein. Notwithstanding any other provision of this Agreement, if at any time the SEC takes the position that the offering of some or all of the Registrable Securities in a Registration Statement is not eligible to be made on a delayed or continuous basis under the provisions of Rule 415 under the Securities Act, the Company shall use commercially reasonable efforts to persuade the SEC that the offering contemplated by the Registration Statement is a valid secondary offering and not an offering “by or on behalf of the issuer” as defined in Rule 415. The Holder shall have the right to participate in any meetings or discussions regarding the SEC’s position and to comment on any written submission made to the SEC with respect thereto. In the event that, despite the Company’s commercially reasonable efforts and compliance with the terms of this Section 2(c), the SEC refuses to alter its position, the Company shall (i) remove from the Registration Statement such portion of the Registrable Securities (the “ Cut Back Shares ”) and/or (ii) agree to such restrictions and limitations on the registration and resale of the Registrable Securities as the SEC may require to assure the Company’s compliance with the requirements of Rule 415 (collectively, the “ SEC Restrictions ”); provided however , that the Company shall not agree to name any Holder as an “underwriter” in such Registration Statement without the prior written consent of such Holder. The Company shall so advise all Holders (except those Holders who failed to timely elect to include their Registrable Securities or have indicated to the Company their decision not to do so), and indicate to each such Holder the number of shares of Registrable Securities that may be included in the registration. The number of ordinary shares that may be included in the F-1, subject to the SEC Restrictions if any, shall be allocated first to the Company and then, subject to obligations and commitments existing as of the date hereof, to all selling stockholders, including the Holders, who have requested to sell in the registration on a pro rata basis according to the number of shares requested to be included therein.

 

C.               Registration Procedures

 

In connection with the Company’s registration obligations hereunder, the Company shall:

 

1.                  Not less than five business days prior to the filing of each Registration Statement or any related Prospectus or any amendment or supplement thereto (including any document that would be incorporated or deemed to be incorporated therein by reference), the Company shall, (i) furnish to each Holder copies of all such documents proposed to be filed, which documents (other than those incorporated or deemed to be incorporated by reference) will be subject to the review of such Holders, and (ii) cause its officers and directors, counsel and independent certified public accountants to respond to such inquiries as shall be necessary, in the reasonable opinion of respective counsel to conduct a reasonable investigation within the meaning of the Securities Act. The Company shall not file a Registration Statement or any such Prospectus or any amendments or supplements thereto to which the Holders of a majority of the Registrable Securities shall reasonably object in good faith, provided that, the Company is notified of such objection in writing no later than 4 business days after the Holders have been so furnished copies of such documents.

 

2.                  (i) Prepare and file with the Commission such amendments, including post-effective amendments, to a Registration Statement and the Prospectus used in connection therewith as may be necessary to keep a Registration Statement continuously effective as to the applicable Registrable Securities for the Effectiveness Period and prepare and file with the Commission such additional Registration Statements in order to register for resale under the Securities Act all of the Registrable Securities; (ii) cause the related Prospectus to be amended or supplemented by any required Prospectus supplement (subject to the terms of this Agreement), and as so supplemented or amended to be filed pursuant to Rule 424; (iii) respond as promptly as reasonably possible to any comments received from the Commission with respect to a Registration Statement or any amendment thereto and as promptly as reasonably possible provide the Holders true and complete copies of all correspondence from and to the Commission relating to a Registration Statement; and (iv) comply in all material respects with the provisions of the Securities Act and the Exchange Act with respect to the disposition of all Registrable Securities covered by a Registration Statement during the applicable period in accordance (subject to the terms of this Agreement) with the intended methods of disposition by the Holders thereof set forth in such Registration Statement as so amended or in such Prospectus as so supplemented.

 

 

 

  

3.                  Notify the Holders of Registrable Securities to be sold (which notice shall, pursuant to clauses (ii) through (vi) hereof, be accompanied by an instruction to suspend the use of the Prospectus until the requisite changes have been made) as promptly as reasonably possible (and, in the case of (i)(A) below, not less than five business days prior to such filing) and (if requested by any such Person) confirm such notice in writing no later than one business day following the day (i)(A) when a Prospectus or any Prospectus supplement or post-effective amendment to a Registration Statement is proposed to be filed; (B) when the Commission notifies the Company whether there will be a “review” of such Registration Statement and whenever the Commission comments in writing on such Registration Statement (the Company shall provide true and complete copies thereof and all written responses thereto to each of the Holders); and (C) with respect to a Registration Statement or any post-effective amendment, when the same has become effective; (ii) of any request by the Commission or any other Federal or state governmental authority for amendments or supplements to a Registration Statement or Prospectus or for additional information; (iii) of the issuance by the Commission or any other federal or state governmental authority of any stop order suspending the effectiveness of a Registration Statement covering any or all of the Registrable Securities or the initiation of any Proceedings for that purpose; (iv) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any Proceeding for such purpose; (v) of the occurrence of any event or passage of time that makes the financial statements included in a Registration Statement ineligible for inclusion therein or any statement made in a Registration Statement or Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires any revisions to a Registration Statement, Prospectus or other documents so that, in the case of a Registration Statement or the Prospectus, as the case may be, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; and (vi) the occurrence or existence of any pending corporate development with respect to the Company that the Company believes may be material and that, in the determination of the Company, makes it not in the best interest of the Company to allow continued availability of a Registration Statement or Prospectus; provided that any and all of such information shall remain confidential to each Holder until such information otherwise becomes public, unless disclosure by a Holder is required by law; provided , further , notwithstanding each Holder’s agreement to keep such information confidential, the Holders make no acknowledgement that any such information is material, non-public information.

 

4.                  Use its best efforts to avoid the issuance of, or, if issued, obtain the withdrawal of (i) any order suspending the effectiveness of a Registration Statement, or (ii) any suspension of the qualification (or exemption from qualification) of any of the Registrable Securities for sale in any jurisdiction, at the earliest practicable moment.

 

5.                  Promptly deliver to each Holder, without charge, as many copies of the Prospectus or Prospectuses (including each form of prospectus) and each amendment or supplement thereto as such Persons may reasonably request in connection with resales by the Holder of Registrable Securities. Subject to the terms of this Agreement, the Company hereby consents to the use of such Prospectus and each amendment or supplement thereto by each of the selling Holders in connection with the offering and sale of the Registrable Securities covered by such Prospectus and any amendment or supplement thereto, except after the giving on any notice pursuant to Section 3(c).

 

6.                  Prior to any resale of Registrable Securities by a Holder, use its commercially reasonable efforts to register or qualify or cooperate with the selling Holders in connection with the registration or qualification (or exemption from the Registration or qualification) of such Registrable Securities for the resale by the Holder under the securities or Blue Sky laws of such jurisdictions within the United States as any Holder reasonably requests in writing, to keep each registration or qualification (or exemption therefrom) effective during the Effectiveness Period and to do any and all other acts or things reasonably necessary to enable the disposition in such jurisdictions of the Registrable Securities covered by each Registration Statement; provided, that the Company shall not be required to qualify generally to do business in any jurisdiction where it is not then so qualified, subject the Company to any material tax in any such jurisdiction where it is not then so subject or file a general consent to service of process in any such jurisdiction.

 

 

 

  

7.                  If requested by the Holders, cooperate with the Holders to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be delivered to a transferee pursuant to a Registration Statement, which certificates shall be free, to the extent permitted by the Purchase Agreement, of all restrictive legends, and to enable such Registrable Securities to be in such denominations and registered in such names as any such Holders may request.

 

8.                  Upon the occurrence of any event contemplated by this Section 3, as promptly as reasonably possible under the circumstances taking into account the Company’s good faith assessment of any adverse consequences to the Company and its stockholders of the premature disclosure of such event, prepare a supplement or amendment, including a post-effective amendment, to a Registration Statement or a supplement to the related Prospectus or any document incorporated or deemed to be incorporated therein by reference, and file any other required document so that, as thereafter delivered, neither a Registration Statement nor such Prospectus will contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. If the Company notifies the Holders in accordance with clauses (ii) through (vi) of 3(c) above to suspend the use of any Prospectus until the requisite changes to such Prospectus have been made, then the Holders shall suspend use of such Prospectus. The Company will use its best efforts to ensure that the use of the Prospectus may be resumed as promptly as is practicable. The Company shall be entitled to exercise its right under this Section to suspend the availability of a Registration Statement and Prospectus, subject to the payment of partial liquidated damages pursuant to Section 2(b), for a period not to exceed 60 days (which need not be consecutive days) in any 12 month period.

 

9.                  Comply with all applicable rules and regulations of the Commission.

 

10.              The Company may require each selling Holder to furnish to the Company a certified statement as to the number of ordinary shares beneficially owned by such Holder and, if required by the Commission, the person thereof that has voting and dispositive control over those ordinary shares. During any periods that the Company is unable to meet its obligations hereunder with respect to the registration of the Registrable Securities solely because any Holder fails to furnish such information within three business days of the Company’s request, any liquidated damages that are accruing at such time as to such Holder only shall be tolled and any Event that may otherwise occur solely because of such delay shall be suspended as to such Holder only, until such information is delivered to the Company.

 

D.               Registration Expenses . All fees and expenses incident to the performance of or compliance with this Agreement by the Company shall be borne by the Company whether or not any Registrable Securities are sold pursuant to a Registration Statement. The fees and expenses referred to in the foregoing sentence shall include, without limitation, (i) all registration and filing fees (including, without limitation, fees and expenses (A) with respect to filings required to be made with the Trading Market on which the Company’s ordinary shares is then listed for trading, (B) in compliance with applicable state securities or Blue Sky laws reasonably agreed to by the Company in writing (including, without limitation, fees and disbursements of counsel for the Company in connection with Blue Sky qualifications or exemptions of the Registrable Securities and determination of the eligibility of the Registrable Securities for investment under the laws of such jurisdictions as requested by the Holders) and (C) if not previously paid by the Company in connection with an Issuer Filing, with respect to any filing that may be required to be made by any broker through which a Holder intends to make sales of Registrable Securities with NASD Regulation, Inc. pursuant to the NASD Rule 2710, so long as the broker is receiving no more than a customary brokerage commission in connection with such sale, (ii) printing expenses (including, without limitation, expenses of printing certificates for Registrable Securities and of printing prospectuses if the printing of prospectuses is reasonably requested by the holders of a majority of the Registrable Securities included in a Registration Statement), (iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of counsel for the Company, (v) Securities Act liability insurance, if the Company so desires such insurance, and (vi) fees and expenses of all other Persons retained by the Company in connection with the consummation of the transactions contemplated by this Agreement. In addition, the Company shall be responsible for all of its internal expenses incurred in connection with the consummation of the transactions contemplated by this Agreement (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit and the fees and expenses incurred in connection with the listing of the Registrable Securities on any securities exchange as required hereunder. In no event shall the Company be responsible for any broker or similar commissions or, except to the extent provided for in the Transaction Documents, any legal fees or other costs of the Holders.

 

 

 

   

E.               Indemnification

 

1.                  Indemnification by Holders . Each Holder shall, severally and not jointly, indemnify and hold harmless the Company, its directors, officers, agents and employees, each Person who controls the Company (within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the directors, officers, agents or employees of such controlling Persons, to the fullest extent permitted by applicable law, from and against all Losses, as incurred, to the extent arising out of or based solely upon: (x) such Holder’s failure to comply with the prospectus delivery requirements of the Securities Act or (y) any untrue or alleged untrue statement of a material fact contained in any Registration Statement, any Prospectus, or any form of prospectus, or in any amendment or supplement thereto or in any preliminary prospectus, or arising out of or relating to any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading (i) to the extent, but only to the extent, that such untrue statement or omission is contained in any information so furnished in writing by such Holder to the Company specifically for inclusion in such Registration Statement or such Prospectus or (ii) to the extent that (1) such untrue statements or omissions are based solely upon information regarding such Holder furnished in writing to the Company by such Holder expressly for use therein, or to the extent that such information relates to such Holder or such Holder’s proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in a Registration Statement, such Prospectus or such form of Prospectus or in any amendment or supplement thereto or (2) in the case of an occurrence of an event of the type specified in Section 3(c)(ii)-(vi), the use by such Holder of an outdated or defective Prospectus after the Company has notified such Holder in writing that the Prospectus is outdated or defective and prior to the receipt by such Holder of the Advice contemplated in Section 6(d). In no event shall the liability of any selling Holder hereunder be greater in amount than the dollar amount of the net proceeds received by such Holder upon the sale of the Registrable Securities giving rise to such indemnification obligation.

 

2.                  Conduct of Indemnification Proceedings . If any Proceeding shall be brought or asserted against any Person entitled to indemnity hereunder (an “ Indemnified Party ”), such Indemnified Party shall promptly notify the Person from whom indemnity is sought (the “ Indemnifying Party ”) in writing, and the Indemnifying Party shall have the right to assume the defense thereof, including the employment of counsel reasonably satisfactory to the Indemnified Party and the payment of all fees and expenses incurred in connection with defense thereof; provided, that the failure of any Indemnified Party to give such notice shall not relieve the Indemnifying Party of its obligations or liabilities pursuant to this Agreement, except (and only) to the extent that it shall be finally determined by a court of competent jurisdiction (which determination is not subject to appeal or further review) that such failure shall have prejudiced the Indemnifying Party.

 

An Indemnified Party shall have the right to employ separate counsel in any such Proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed in writing to pay such fees and expenses; (2) the Indemnifying Party shall have failed promptly to assume the defense of such Proceeding and to employ counsel reasonably satisfactory to such Indemnified Party in any such Proceeding; or (3) the named parties to any such Proceeding (including any impleaded parties) include both such Indemnified Party and the Indemnifying Party, and such Indemnified Party shall reasonably believe that a material conflict of interest is likely to exist if the same counsel were to represent such Indemnified Party and the Indemnifying Party (in which case, if such Indemnified Party notifies the Indemnifying Party in writing that it elects to employ separate counsel at the expense of the Indemnifying Party, the Indemnifying Party shall not have the right to assume the defense thereof and the reasonable fees and expenses of one separate counsel shall be at the expense of the Indemnifying Party). The Indemnifying Party shall not be liable for any settlement of any such Proceeding effected without its written consent, which consent shall not be unreasonably withheld. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement of any pending Proceeding in respect of which any Indemnified Party is a party, unless such settlement includes an unconditional release of such Indemnified Party from all liability on claims that are the subject matter of such Proceeding.

 

 

 

  

Subject to the terms of this Agreement, all reasonable fees and expenses of the Indemnified Party (including reasonable fees and expenses to the extent incurred in connection with investigating or preparing to defend such Proceeding in a manner not inconsistent with this Section) shall be paid to the Indemnified Party, as incurred, within ten business days of written notice thereof to the Indemnifying Party; provided , that the Indemnified Party shall promptly reimburse the Indemnifying Party for that portion of such fees and expenses applicable to such actions for which such Indemnified Party is not entitled to indemnification hereunder, determined based upon the relative faults of the parties.

 

3.                  Contribution . If the indemnification under Section 5(a) or 5(b) is unavailable to an Indemnified Party or insufficient to hold an Indemnified Party harmless for any Losses, then each Indemnifying Party shall contribute to the amount paid or payable by such Indemnified Party, in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and Indemnified Party in connection with the actions, statements or omissions that resulted in such Losses as well as any other relevant equitable considerations. The relative fault of such Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission of a material fact, has been taken or made by, or relates to information supplied by, such Indemnifying Party or Indemnified Party, and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such action, statement or omission. The amount paid or payable by a party as a result of any Losses shall be deemed to include, subject to the limitations set forth in this Agreement, any reasonable attorneys’ or other reasonable fees or expenses incurred by such party in connection with any Proceeding to the extent such party would have been indemnified for such fees or expenses if the indemnification provided for in this Section was available to such party in accordance with its terms.

 

The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 5(d) were determined by pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to in the immediately preceding paragraph. Notwithstanding the provisions of this Section 5(d), no Holder shall be required to contribute, in the aggregate, any amount in excess of the amount by which the proceeds actually received by such Holder from the sale of the Registrable Securities subject to the Proceeding exceeds the amount of any damages that such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission, except in the case of fraud by such Holder.

 

The indemnity and contribution agreements contained in this Section are in addition to any liability that the Indemnifying Parties may have to the Indemnified Parties.

 

 

 

  

F.               Miscellaneous

 

1.                  Remedies . In the event of a breach by the Company or by a Holder, of any of their obligations under this Agreement, each Holder or the Company, as the case may be, in addition to being entitled to exercise all rights granted by law and under this Agreement, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. The Company and each Holder agree that monetary damages would not provide adequate compensation for any losses incurred by reason of a breach by it of any of the provisions of this Agreement and hereby further agrees that, in the event of any action for specific performance in respect of such breach, it shall waive the defense that a remedy at law would be adequate.

 

2.                  Compliance . Each Holder covenants and agrees that it will comply with the prospectus delivery requirements of the Securities Act as applicable to it in connection with sales of Registrable Securities pursuant to a Registration Statement.

 

3.                  Discontinued Disposition . Each Holder agrees by its acquisition of such Registrable Securities that, upon receipt of a notice from the Company of the occurrence of any event of the kind described in Section 3(c), such Holder will forthwith discontinue disposition of such Registrable Securities under a Registration Statement until such Holder’s receipt of the copies of the supplemented Prospectus and/or amended Registration Statement or until it is advised in writing (the “ Advice ”) by the Company that the use of the applicable Prospectus may be resumed, and, in either case, has received copies of any additional or supplemental filings that are incorporated or deemed to be incorporated by reference in such Prospectus or Registration Statement. The Company will use its best efforts to ensure that the use of the Prospectus may be resumed as promptly as it practicable. The Company agrees and acknowledges that any periods during which the Holder is required to discontinue the disposition of the Registrable Securities hereunder shall be subject to the provisions of Section 2(b).

 

4.                  Amendments and Waivers . The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the same shall be in writing and signed by the Company and Holder’s holding at least 51% of the then outstanding Registrable Securities. Notwithstanding the foregoing, a waiver or consent to depart from the provisions hereof with respect to a matter that relates exclusively to the rights of Holders and that does not directly or indirectly affect the rights of other Holders may be given by Holders of all of the Registrable Securities to which such waiver or consent relates; provided , however , that the provisions of this sentence may not be amended, modified, or supplemented except in accordance with the provisions of the immediately preceding sentence.

 

5.                  Notices . Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be delivered as set forth in the Purchase Agreement.

 

 

 

  

6.                  Successors and Assigns . This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of each of the parties and shall inure to the benefit of each Holder. The Company may not assign its rights or obligations hereunder without the prior written consent of all of the Holders of the then-outstanding Registrable Securities. Each Holder may assign their respective rights hereunder in the manner and to the Persons as permitted under the Purchase Agreement.

 

7.                  No Inconsistent Agreements . Neither the Company nor any of its subsidiaries has entered, as of the date hereof, nor shall the Company or any of its subsidiaries, on or after the date of this Agreement, enter into any agreement with respect to its securities, that would have the effect of impairing the rights granted to the Holders in this Agreement or otherwise conflicts with the provisions hereof.

 

8.                  Execution and Counterparts . This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and, all of which taken together shall constitute one and the same Agreement. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature were the original thereof.

 

9.                  Governing Law . All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be determined with the provisions of the Purchase Agreement.

 

10.              Cumulative Remedies . The remedies provided herein are cumulative and not exclusive of any remedies provided by law.

 

11.              Severability . If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their commercially reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable.

 

12.              Headings . The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof.

 

13.              Independent Nature of Holders’ Obligations and Rights . The obligations of each Holder hereunder are several and not joint with the obligations of any other Holder hereunder, and no Holder shall be responsible in any way for the performance of the obligations of any other Holder hereunder. Nothing contained herein or in any other agreement or document delivered at any closing, and no action taken by any Holder pursuant hereto or thereto, shall be deemed to constitute the Holders as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Holders are in any way acting in concert with respect to such obligations or the transactions contemplated by this Agreement. Each Holder shall be entitled to protect and enforce its rights, including without limitation the rights arising out of this Agreement, and it shall not be necessary for any other Holder to be joined as an additional party in any proceeding for such purpose.

 

*************************

 

 

 

 

IN WITNESS WHEREOF the Holder and the Company have duly executed this Registration Rights Agreement as of the date first written above.

 

     
  (Name of Holder – Please type or print)  
     
     
  (Signature and, if applicable, Office)  

 

 

ZK INTERNATIONAL GROUP CO., LTD.  
     
     
By:    
Name: Jiancong Huang  
Title: Chief Executive Officer  

 

 

 

 

Schedule 8.1(g)

 

 

 

1. Kefi Bain

 

2. Sean McCarroll

 

3. Endeavour Resource Limited

 

4. Vantablack LLC

 

5. Alizarin Corp.

 

6. The Wall Family Trust (2012)

 

 

 

 

Exhibit 14.1

 

CODE OF BUSINESS CONDUCT AND ETHICS

 

PURSUANT TO NASDAQ RULE 5600 Sec(c)(1)

 

 

 

Copyright/permission to reproduce

 

Materials in this document were produced or compiled by The Governance Box (GBX) for the purpose of providing Public Companies with governance information and outlining their corporate and public market obligations to shareholders in accordance with the applicable laws and policies of the Securities and Exchange Commission and relevant stock market exchanges of the United States of America.

 

The materials in this manual are covered by the provisions of the Copyright Act, by other US laws, policies, regulations, and by international agreements. Such provisions serve to identify the information source and, in specific instances, to prohibit reproduction of materials without written permission.

 

Adopted by ZK International Group Co. Ltd. Board of Directors on this 22 day of May 2017.

 

 

 

 

 CODE OF BUSINESS CONDUCT AND ETHICS

 

TABLE OF CONTENTS

 

INTRODUCTION 1
   
COMPLIANCE IS EVERYONE'S BUSINESS 2
   
YOUR RESPONSIBILITIES TO THE CORPORATION AND ITS STOCKHOLDERS 3
   
General Standards of Conduct 3
Applicable Laws 3
Conflicts of Interest 3
Employment/Outside Employment 4
Outside Directorships 4
Business Interests 4
Related Parties 4
Other Situations 5
Corporate Opportunities 5
Protecting the Corporation's Confidential Information 5
Proprietary Information and Invention Agreement 6
Disclosure of Corporate Confidential Information 6
Requests by Regulatory Authorities 7
Corporate Spokespeople 7
Obligations under Securities Laws-” Insider” Trading 7
Prohibition against Short Selling of Corporate Stock 8
Use of Corporation's Assets 8
General 8
Physical Access Control 9
Corporate Funds 9
Computers and Other Equipment 9
Software 10
Electronic Usage 10
Maintaining and Managing Records 10
Records on Legal Hold 10
Payment Practices 11
Accounting Practices 11
Political Contributions 11
Prohibition of Inducements 11
Foreign Corrupt Practices Act 12
Export Controls 12

 

 

 

 

RESPONSIBILITIES TO OUR CUSTOMERS AND OUR SUPPLIERS

13
Customer Relationships 13
Payments or Gifts from Others 13
Publications of Others 13
Handling the Confidential Information of Others 14
Appropriate Nondisclosure Agreements 14
Need-to-Know 14
Notes and Reports 14
Competitive Information 15
Selecting Suppliers 15
Government Relations 15
Lobbying 15
Government Contracts 16
Free and Fair Competition 16
Industrial Espionage 17
   
WAIVERS 17
   
DISCIPLINARY ACTIONS 17
   
ACKNOWLEDGMENT OF RECEIPT OF DOCUMENTS 18

 

 

 

 

I. INTRODUCTION

 

This Code of Business Conduct and Ethics (the “Code”) helps ensure compliance with legal requirements and our standards of business conduct. This Code applies to directors, officers, and employees of ZK International Group Co. Ltd. (the “Corporation”). Therefore, all directors, officers and employees of the Corporation are expected to read and understand this Code, uphold these standards in day-to-day activities, comply with all applicable policies and procedures, and ensure that all agents and contractors are aware of, understand and adhere to these standards.

 

Because the principles described in this Code are general in nature, all corporate directors, officers, and employees should also review all applicable corporate policies and procedures for more specific instruction, and contact the CFO with any questions.

 

The Corporation is committed to continuously reviewing and updating its policies and procedures.

 

Therefore, this Code is subject to modification. This Code supersedes all other such codes, policies, procedures, instructions, practices, rules or written or verbal representations to the extent they are inconsistent.

 

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II. COMPLIANCE IS EVERYONE'S BUSINESS

 

Ethical business conduct is critical to the business of the Corporation. Each director, officer or employee has a responsibility is to respect and adhere to these practices. Many of these practices reflect legal or regulatory requirements. Violations of these laws and regulations can create significant liability for the violator, the Corporation, its directors, officers, and other employees.

 

Part of the job and ethical responsibility of each director, officer and employee is to help enforce this Code. Each director, officer and employee should be alert to possible violations and report possible violations to the CFO.

 

Each director, officer and employee must cooperate in any internal or external investigations of possible violations.

 

Reprisal, threats, retribution, or retaliation against any person who has in good faith reported a violation or a suspected violation of law, this Code or other corporate policies, or against any person who is assisting in any investigation or process with respect to such a violation, is prohibited.

 

Violations of law, this Code, or other corporate policies or procedures should be reported to the CFO.

 

Violations of law, this Code or other corporate policies or procedures by corporate directors, officers or employees can lead to disciplinary action up to and including termination.

 

In trying to determine whether any given action is appropriate, use the following test. Imagine that the words you are using or the action you are taking is going to be fully disclosed in the media with all the details, including your photo. If you are uncomfortable with the idea of this information being made public, perhaps you should think again about your words or your course of action.

 

In all cases, if you are unsure about the appropriateness of an event or action, please seek assistance in interpreting the requirements of these practices by contacting the CFO.

 

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III. YOUR RESPONSIBILITIES TO THE CORPORATION AND ITS STOCKHOLDERS

 

A. General Standards of Conduct

 

The Corporation expects all directors, officers, employees, agents, and contractors to exercise good judgment to ensure the safety and welfare of employees, agents, and contractors and to maintain a cooperative, efficient, positive, harmonious, and productive work environment and business organization. These standards apply while working on our premises, at offsite locations where our business is being conducted, at Corporate-sponsored business and social events, or at any other place where any director, officer or employee is acting as a representative of the Corporation. Directors, officers, employees, agents, or contractors who engage in misconduct or whose performance is unsatisfactory may be subject to corrective action, up to and including termination. Each director, officer and employee should review the employment handbook for more detailed information.

 

B. Applicable Laws

 

All Corporate directors, officers, employees, agents, and contractors must comply with all applicable laws, regulations, rules, and regulatory orders. Corporate directors, officers and employees located outside of the United States must comply with laws, regulations, rules, and regulatory orders of the United States, including the Foreign Corrupt Practices Act and the U.S. Export Control Act, in addition to applicable local laws. Each director, officer, employee, agent, and contractor must acquire appropriate knowledge of the requirements relating to his or her duties sufficient to enable him or her to recognize potential dangers and to know when to seek advice from the CFO on specific Corporate policies and procedures. Violations of laws, regulations, rules, and orders may subject the director, officer, employee, agent or contractor to individual criminal or civil liability, as well as to discipline by the Corporation. Such individual violations may also subject the Corporation to civil or criminal liability or the loss of business.

 

C. Conflicts of Interest

 

Each director, officer and employee has a responsibility to the Corporation, the stockholders and each other.

 

Although this duty does not prevent any director, officer, and employee from engaging in personal transactions and investments, it does demand avoiding situations where a conflict of interest might occur or appear to occur. The Corporation is subject to scrutiny from many different individuals and organizations.

 

Each director, officer and employee should always strive to avoid even the appearance of impropriety.

 

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What constitutes conflict of interest? A conflict of interest exists where the interests or benefits of one person or entity conflict with the interests or benefits of the Corporation.

 

Examples include:

 

(i)   Employment/Outside Employment . In consideration of the appointment or employment with the Corporation, each director, officer, and employee is expected to devote full attention to the business interests of the Corporation. Engaging in any activity that interferes with one’s performance or responsibilities to the Corporation or is otherwise in conflict with or prejudicial to the Corporation is prohibited. The Corporation’s policies prohibit any director, officer, or employee from accepting simultaneous employment with a Corporate supplier, customer, developer, or competitor, or from taking part in any activity that enhances or supports a competitor's position. Additionally, each director, officer and employee must disclose to the Corporation any interest that may conflict with the business of the Corporation. Any questions on this requirement should be directed to a supervisor or the CFO.

 

(ii)   Outside Directorships . It is a conflict of interest to serve as a director of any company that competes with the Corporation. Although a director, officer and employee may serve as a director of a Corporate supplier, customer, developer, or other business partner, the

Corporation’s policy requires that approval first be obtained from the Corporation's Board of Directors (the “Board”) before accepting a directorship. Any compensation received should be commensurate to the responsibilities of holding such position.

 

Such approval may be conditioned upon the completion of specified actions.

 

(iii)   Business Interests . If a director, officer, and employee is considering investing in a Corporate customer, supplier or competitor, great care must be taken to ensure that these investments do not compromise any responsibilities owed to the Corporation. Many factors should be considered in determining whether a conflict exists, including the size and nature of the investment; the ability to influence the Corporation’s decisions; access to confidential information of the Corporation or of the other company; and the nature of the relationship between the Corporation and the other company.

 

(iv)   Related Parties . As a rule, conducting Corporate business with a relative or significant other, or with a business in which a relative or significant other is associated in any significant role, should be avoided. Relatives include spouse, sister, brother, daughter, son, mother, father, grandparents, aunts, uncles, nieces, nephews, cousins, step relationships, and in-laws. Significant others include persons living in a spousal (including same sex) or familial fashion with an employee.

 

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If such a related party transaction is unavoidable, the nature of the related party transaction must be fully disclosed to the Corporation's Chief Financial Officer (“CFO”). If determined to be material to the Corporation by the CFO, the Corporation's Audit Committee must review and approve in writing in advance such related party transactions. The most significant related party transactions, particularly those involving the Corporation's directors or executive officers, must be reviewed, and approved in writing in advance by the Corporation's Board. The Corporation must report all such material related party transactions under applicable accounting rules, federal securities laws, and SEC rules and regulations, and securities market rules. Any dealings with a related party must be conducted in such a way that no preferential treatment is given to this business.

 

The Corporation discourages the employment of relatives and significant others in positions or assignments within the same department and prohibits the employment of such individuals in positions that have a financial dependence or influence (e.g., an auditing or control relationship, or a supervisor/subordinate relationship). The purpose of this policy is to prevent the organizational impairment and conflicts that are a likely outcome of the employment of relatives or significant others, especially in a supervisor/subordinate relationship. If a question arises about whether a relationship is covered by this policy, the CFO is responsible for determining whether this policy covers an applicant or transferee’s acknowledged relationship. The CFO shall advise all affected applicants and transferees of this policy. Willful withholding of information regarding a prohibited relationship/reporting arrangement may be subject to corrective action, up to and including termination. If a prohibited relationship exists or develops between two employees, the employee in the senior position must bring this to the attention of his/her supervisor. The Corporation retains the prerogative to separate the individuals at the earliest possible time, either by reassignment or by termination, if necessary.

 

(v)   Other Situations . Because other conflicts of interest may arise, it would be impractical to attempt to list all possible situations. Directors, officers, and employees should consult the CFO if a proposed transaction or situation raises any questions or doubts.

 

D. Corporate Opportunities

 

Employees, officers, and directors may not exploit for their own personal gain opportunities that are discovered using corporate property, information, or position unless the opportunity is disclosed fully in writing to the Corporation’s Board and the Board declines to pursue such opportunity.

 

E. Protecting the Corporation's Confidential Information

 

The Corporation's confidential information is an asset. The Corporation’s confidential information includes our database of customer contacts; details regarding our equipment procurement sources; names and lists of customers, suppliers, and employees; and financial information. This information is the property of the Corporation and may be protected by patent, trademark, copyright, and trade secret laws. All confidential information must be used for Corporate business purposes only. Every director, officer, employee, agent, and contractor must safeguard it.

 

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THIS RESPONSIBILITY INCLUDES NOT DISCLOSING THE CORPORATION’S CONFIDENTIAL INFORMATION SUCH AS INFORMATION REGARDING THE CORPORATION'S PRODUCTS OR BUSINESS OVER THE INTERNET .

 

Each director, officer and employee is also responsible for properly labeling all documentation shared with or correspondence sent to the CFO or outside counsel as “Attorney-Client Privileged.” This responsibility includes the safeguarding, securing and proper disposal of confidential information in accordance with the Corporation's policy on Maintaining and Managing Records set forth in Section III.I of this Code. This obligation extends to confidential information of third parties, which the Corporation has rightfully received under Non-Disclosure Agreements. See the Corporation's policy dealing with Handling Confidential Information of Others set forth in Section IV.D of this Code.

 

(i) Proprietary Information and Invention Agreement . Upon joining the Corporation, each director, officer, and employee signed an agreement to protect and hold confidential the Corporation's proprietary information. This agreement remains in effect for the entire term of employment with the Corporation and remains in effect thereafter. Under this agreement, the Corporation's confidential information may not be disclosed to anyone or used to benefit anyone other than the Corporation without the prior written consent of an authorized Corporate officer.

 

(ii) Disclosure of Corporate Confidential Information . To further the Corporation's business from time to time, confidential information of the Corporation may be disclosed to potential business partners. However, such disclosure should never be done without careful consideration of its potential benefits and risks. If, in consultation with a manager and other appropriate Corporate management, it is determined that disclosure of confidential information is necessary, the CFO should be contacted to ensure that an appropriate written nondisclosure agreement is signed prior to the disclosure. The Corporation has standard nondisclosure agreements suitable for most disclosures. A third party's nondisclosure agreement must not be signed and no changes should be accepted to the Corporation's standard nondisclosure agreements without review and approval by the CFO. In addition, all Corporate materials that contain Corporate confidential information, including presentations, must be reviewed, and approved by the CFO prior to publication or use.

 

Furthermore, any employee publication or publicly made statement that might be perceived or construed as attributable to the Corporation, made outside the scope of his or her employment with the Corporation, must be reviewed in advance and approved in writing by the CFO and must include the Corporation's standard disclaimer that the publication or statement represents the views of the specific author and not of the Corporation.

 

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(iii) Requests by Regulatory Authorities . The Corporation and its directors, officers, employees, agents, and contractors must cooperate with appropriate government inquiries and investigations. In this context, however, it is important to protect the legal rights of the Corporation with respect to its confidential information. All government requests for information, documents or investigative interviews must be referred to the CFO. No financial information may be disclosed without the prior approval of the CFO.

 

(iv) Corporate Spokespeople . Specific policies have been established regarding who may communicate information to the press and the financial analyst community. All inquiries or calls from the press and financial analysts should be referred to the CFO. The Corporation has designated its Chief Executive Officer (“CEO”) and CFO as official Corporate spokespeople for financial matters. These designees are the only people who may communicate with the press on behalf of the Corporation.

 

F. Obligations under Securities Laws-” Insider” Trading

 

Obligations under the U.S. securities laws apply to everyone. In the normal course of business, officers, directors, employees, agents, contractors, and consultants of the Corporation may come into possession of significant, sensitive information. This information is the property of the Corporation, and any director, officer, or employee in possession of such information has been entrusted with it. No director, officer or employee may profit from it by buying or selling securities on their own behalf, or passing on the information to others to enable them to profit or for them to profit on behalf of such director, officer, or employee. The purpose of this policy is both to inform all Corporate employees of the legal responsibilities and to make clear that the misuse of sensitive information is contrary to Corporate policy and U.S. securities laws.

 

Insider trading is a crime, penalized by fines of up to $5,000,000 and 20 years in jail for individuals. In addition, the SEC may seek the imposition of a civil penalty of up to three times the profits made or losses avoided from the trading. Insider traders must also disgorge any profits made, and are often subjected to an injunction against future violations. Finally, insider traders may be subjected to civil liability in private lawsuits.

 

Employers and other controlling persons (including supervisory personnel) are also at risk under U.S. securities laws. Controlling persons may, among other things, face penalties of the greater of $5,000,000 or three times the profits made or losses avoided by the trader if they recklessly fail to take preventive steps to control insider trading.

 

Thus, it is important that insider-trading violations not occur. Stock market surveillance techniques are becoming increasingly sophisticated, and the chance that U.S. federal or other regulatory authorities will detect and prosecute even small-level trading is significant. Insider trading rules are strictly enforced, even in instances when the financial transactions seem small. Any questions about the ability to trade should be directed to the CFO.

 

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The Corporation has imposed a trading blackout period on members of the Board, executive officers, and certain designated employees who, because of their position with the Corporation, are more likely to be exposed to material nonpublic information about the Corporation. These directors, executive officers and employees generally may not trade in Corporate securities during the blackout periods.

 

For more details, and to determine whether a trade restriction applies during trading Blackout periods, each director, officer, and employee should review the Corporation’s Insider Trading Compliance Program carefully, paying attention to the specific policies and the potential criminal and civil liability and disciplinary action for insider trading violations. Directors, officers, employees, agents, and contractors of the Corporation who violate this policy are also be subject to disciplinary action by the Corporation, which may include termination of employment or of business relationship. All questions regarding the Corporation's Insider Trading Compliance Program should be directed to the Corporation's CFO.

 

G. Prohibition against Short Selling of Corporate Stock

 

No Corporate director, officer or other employee, agent or contractor may, directly or indirectly, sell any equity security, including derivatives, of the Corporation (1) if he or she does not own the security sold, or (2) if he or she owns the security, does not deliver it against such sale (a “short sale against the box”) within twenty days thereafter, or does not within five days after such sale deposit it in the mails or other usual channels of transportation. No Corporate director, officer or other employee, agent or contractor may engage in short sales. A short sale, as defined in this policy, means any transaction whereby one may benefit from a decline in the Corporation's stock price. While law from engaging in short sales of Corporation’s securities does not prohibit employees who are not executive officers or directors, the Corporation has adopted as policy that employees may not do so.

 

H. Use of Corporation’s Assets

 

(i) General. Protecting the Corporation's assets is a key fiduciary responsibility of every director, officer, employee, agent, and contractor. Care should be taken to ensure that assets are not misappropriated, loaned to others, or sold or donated, without appropriate authorization. All Corporate directors, officers, employees, agents, and contractors are responsible for the proper use of Corporate assets, and must safeguard such assets against loss, damage, misuse, or theft.

 

Directors, officers, employees, agents, or contractors who violate any aspect of this policy or who demonstrate poor judgment in the way they use any Corporate asset may be subject to disciplinary action, up to and including termination of employment or business relationship at the Corporation's sole discretion. Corporate equipment and assets are to be used for Corporate business purposes only. Directors, officers, employees, agents, and contractors may not use Corporate assets for personal use, nor may they allow any other person to use Corporate assets. All questions regarding this policy should be brought to the attention of the CFO.

 

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(ii) Physical Access Control . The Corporation has and will continue to develop procedures covering physical access control to ensure privacy of communications, maintenance of the security of the Corporation communication equipment, and safeguard Corporate assets from theft, misuse, and destruction. Each director, officer and employee is personally responsible for complying with the level of access control that has been implemented in the facility where such director, officer and employee works on a permanent or temporary basis and must not defeat or cause to be defeated the purpose for which the access control was implemented.

 

(iii) Corporate Funds . Every Corporate director, officer or employee is personally responsible for all Corporate funds over which he or she exercises control. Corporate agents and contractors should not be allowed to exercise control over Corporate funds. Corporate funds must be used only for Corporate business purposes. Every Corporate director, officer, employee, agent, and contractor must take reasonable steps to ensure that the Corporation receives good value for Corporate funds spent, and must maintain accurate and timely records of each expenditure. Expense reports must be accurate and submitted in a timely manner. Corporate directors, officers, employees, agents, and contractors must not use Corporate funds for any personal purpose.

 

(iv) Computers and Other Equipment . The Corporation strives to furnish directors, officers, and employees with the equipment necessary to do their jobs efficiently and effectively. Each director, officer and employee must care for that equipment and use it responsibly only for Corporate business purposes. If Corporate equipment is used at home or off site, precautions must be taken to protect it from theft or damage. All Corporate equipment must be returned immediately upon termination of employment. While computers and other electronic devices are made accessible to directors, officers and employees to assist them to perform their jobs and to promote the Corporation's interests, all such computers and electronic devices, whether used entirely or partially on the Corporation's premises or with the aid of the Corporation's equipment or resources, must remain fully accessible to the Corporation and, to the maximum extent permitted by law, will remain the sole and exclusive property of the Corporation.

 

Directors, officers, employees, agents, and contractors should not maintain any expectation of privacy with respect to information transmitted over, received by, or stored in any electronic communications device owned, leased, or operated in whole or in part by or on behalf of the Corporation. To the extent permitted by applicable law, the Corporation retains the right to gain access to any information received by, transmitted by, or stored in any such electronic communications device, by and through its directors, officers, employees, agents, contractors, or representatives, at any time, either with or without a director’s, officer’s, employee's or third party's knowledge, consent, or approval.

 

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(v) Software . All software used by directors, officers, and employees to conduct Corporate business must be appropriately licensed. Directors, officers, and employees should never make or use illegal or unauthorized copies of any software, whether in the office, at home, or on the road, since doing so may constitute copyright infringement and may expose such director, officer, employee and the Corporation to potential civil and criminal liability. In addition, use of illegal or unauthorized copies of software may subject the director, officer, and employee to disciplinary action, up to and including termination. The Corporation's Information Technology Department will inspect Corporate computers periodically to verify that only approved and licensed software has been installed. Any non-licensed/supported software will be removed.

 

(vi) Electronic Usage . The purpose of this policy is to make certain that directors, officers, and employees utilize electronic communication devices in a legal, ethical, and appropriate manner. This policy addresses the Corporation's responsibilities and concerns regarding the fair and proper use of all electronic communications devices within the organization, including computers, e-mail, connections to the Internet, intranet and extranet and any other public or private networks, voice mail, video conferencing, facsimiles, and telephones. Posting or discussing information concerning the Corporation's products or business on the Internet without the prior written consent of the Corporation's CFO is prohibited. Any other form of electronic communication used by directors, officers, or employees currently or in the future is also intended to be encompassed under this policy. It is not possible to identify every standard and rule applicable to the use of electronic communications devices. Directors, officers, and employees are therefore encouraged to use sound judgment whenever using any feature of our communications systems and are expected to review, understand and follow such policies and procedures.

 

I. Maintaining and Managing Records

 

The purpose of this policy is to set forth and convey the Corporation's business and legal requirements in managing records, including all recorded information regardless of medium or characteristics. Records include paper documents, CDs, computer hard disks, email, floppy disks, microfiche, microfilm, or all other media. Local, state, federal, foreign, and other applicable laws, rules, and regulations require the Corporation to retain certain records and to follow specific guidelines in managing its records. Civil and criminal penalties for failure to comply with such guidelines can be severe for directors, officers, employees, agents, contractors and the Corporation, and failure to comply with such guidelines may subject the director, officer, employee, agent, or contractor to disciplinary action, up to and including termination of employment or business relationship at the Corporation's sole discretion. All original executed documents that evidence contractual commitments or other obligations of the Corporation must be forwarded to the CFO promptly upon completion. Such documents will be maintained and retained in accordance with the Corporation’s record retention policies.

 

J. Records on Legal Hold.

 

A legal hold suspends all document destruction procedures to preserve appropriate records under special circumstances, such as litigation or government investigations. The CFO determines and identifies what types of Corporate records or documents are required to be placed under a legal hold. Every Corporate director, officer, employee, agent, and contractor must comply with this policy. Failure to comply with this policy may subject the director, officer, employee, agent, or contractor to disciplinary action, up to and including termination of employment or business relationship at the Corporation's sole discretion.

 

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The CFO will notify any director, officer, or employee if a legal hold is placed on records for which that person is responsible. The necessary records must thereafter be preserved and protected in accordance with instructions from the CFO.

 

RECORDS OR SUPPORTING DOCUMENTS THAT HAVE BEEN PLACED UNDER A LEGAL HOLD MUST NOT BE DESTROYED, ALTERED, OR MODIFIED UNDER ANY CIRCUMSTANCES .

 

A legal hold remains effective until it is officially released in writing by the CFO.

 

Any questions about whether a document has been placed under a legal hold should be directed to the CFO and the document should be preserved and protected until the CFO provides clarification.

 

K. Payment Practices

 

(i) Accounting Practices. The Corporation's responsibilities to its stockholders and the investing public require that all transactions be fully and accurately recorded in the Corporation's books and records in compliance with all applicable laws. False or misleading entries, unrecorded funds or assets, or payments without appropriate supporting documentation and approval are strictly prohibited and violate Corporate policy and the law.

 

Additionally, all documentation supporting a transaction should fully and accurately describe the nature of the transaction and be processed in a timely fashion.

 

(ii) Political Contributions . The Corporation reserves the right to communicate its position on important issues to elected representatives and other government officials. It is the Corporation's policy to comply fully with all local, state, federal, foreign, and other applicable laws, rules and regulations regarding political contributions. The Corporation's funds or assets must not be used for, or be contributed to, political campaigns or political practices under any circumstances without the prior written approval of the CFO and, if required, the Board.

 

(iii) Prohibition of Inducements . Under no circumstances may directors, officers, employees, agents, or contractors offer to pay, make payment, promise to pay, or issue authorization to pay any money, gift, or anything of value to customers, vendors, consultants, or other party that is perceived as intending, directly or indirectly, to improperly influence any business decision, any act or failure to act, any commitment of fraud, or opportunity for the commission of any fraud. Inexpensive gifts, infrequent business meals, celebratory events, and entertainment, provided that they are not excessive or create an appearance of impropriety, do not violate this policy.

 

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Questions regarding whether a payment or gift violates this policy should be directed to the CFO.

 

L. Foreign Corrupt Practices Act .

 

The Corporation requires full compliance with the Foreign Corrupt Practices Act (FCPA) by all its directors, officers, employees, agents, and contractors.

 

The anti-bribery and corrupt payment provisions of the FCPA make illegal any corrupt offer, payment, promise to pay, or authorization to pay any money, gift, or anything of value to any foreign official, or any foreign political party, candidate or official, for the purpose of influencing any act or failure to act in the official capacity of that foreign official or party; or inducing the foreign official or party to use influence to affect a decision of a foreign government or agency, in order to obtain or retain business for anyone, or direct business to anyone.

 

All Corporate directors, officers, employees, agents, and contractors, whether located in the United States or abroad, are responsible for FCPA compliance and the procedures to ensure FCPA compliance.

 

All managers and supervisory personnel are expected to monitor continued compliance with the FCPA to ensure compliance with the highest moral, ethical, and professional standards of the Corporation. FCPA compliance includes the Corporation's policy on Maintaining and Managing Records in Section III.I of this Code.

 

Laws in most countries outside of the United States also prohibit or restrict government officials or employees of government agencies from receiving payments, entertainment, or gifts for winning or keeping business. No contract or agreement may be made with any business in which a government official or employee holds a significant interest, without the prior approval of the CFO.

 

M. Export Controls

 

Several countries maintain controls on the destinations to which products or software may be exported. Some of the strictest export controls are maintained by the United States against countries that the U.S. government considers unfriendly or as supporting international terrorism. The U.S. regulations are complex and apply both to exports from the United States and to exports of products from other countries, when those products contain components or technology of U.S. origin. Software created in the United States is subject to these regulations even if duplicated and packaged abroad. In some circumstances, an oral presentation containing technical data made to foreign nationals in the United States may constitute a controlled export. The CFO can provide guidance on which countries are prohibited destinations for Corporate products or whether a proposed technical presentation to foreign nationals may require a U.S. Government license.

 

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IV. RESPONSIBILITIES TO OUR CUSTOMERS AND OUR SUPPLIERS

 

A. Customer Relationships

 

Each time a director, officer or employee meets any Corporate customers or potential customers, that director, officer, or employee represents the Corporation and should therefore act in a manner that creates value for the Corporation’s customers and helps to build a relationship based upon trust. The Corporation and its employees have provided products and services for many years and have built up significant goodwill over that time. This goodwill is one of our most important assets, and the Corporation employees, agents and contractors must act to preserve and enhance our reputation.

 

B. Payments or Gifts from Others

 

Under no circumstances may directors, officers, employees, agents, or contractors accept any offer, payment, promise to pay, or authorization to pay any money, gift, or anything of value from customers, vendors, consultants, or other party that is perceived as intended, directly or indirectly, to influence any business decision, any act or failure to act, any commitment of fraud, or opportunity for the commission of any fraud. Inexpensive gifts, infrequent business meals, celebratory events, and entertainment, if they are not excessive or create an appearance of impropriety, do not violate this policy. Questions regarding whether a payment or gift violates this policy are to be directed to the CFO.

 

Gifts given by the Corporation to suppliers or customers or received from suppliers or customers should always be appropriate to the circumstances and should never be of a kind that could create an appearance of impropriety. The nature and cost must always be accurately recorded in the Corporation's books and records.

 

C. Publications of Others

 

The Corporation subscribes to many publications that help directors, officers and employees do their jobs better. These include newsletters, reference works, online reference services, magazines, books, and other digital and printed works. Copyright law generally protects these works, and their unauthorized copying and distribution constitute copyright infringement. Consent of the publisher of a publication must be obtained before copying publications or significant parts of them. Any questions about whether a publication may be copied should be directed to the CFO.

 

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D. Handling the Confidential Information of Others

 

The Corporation has many kinds of business relationships with many companies and individuals. Sometimes such other companies and individuals will volunteer confidential information about their products or business plans to induce the Corporation to enter a business relationship with them. At other times, the Corporation may request that a third party provide confidential information to permit the Corporation to evaluate a potential business relationship with that party. The Corporation must take special care to handle the confidential information of others responsibly, regardless of how it was obtained. Such confidential information should be handled in accordance with the agreements with such third parties. See also the Corporation's policy on Maintaining and Managing Records in Section III.I of this Code.

 

(i) Appropriate Nondisclosure Agreements . Confidential information may take many forms, including an oral presentation about a company's product development plans, which may contain protected trade secrets; a customer list or employee list; or a demo of an alpha version of a company's new software, which may contain information protected by trade secret and copyright laws.

 

Employees, officers, and directors should never accept information offered by a third party that is represented as confidential, or which appears from the context or circumstances to be confidential, unless an appropriate nondisclosure agreement has been signed with the party offering the information.

 

THE CFO CAN PROVIDE NONDISCLOSURE AGREEMENTS TO FIT ANY SITUATION, AND WILL COORDINATE APPROPRIATE EXECUTION OF SUCH AGREEMENTS ON BEHALF OF THE CORPORATION.

 

Even after a nondisclosure agreement is in place, directors, officers, and employees should accept only the information necessary to accomplish the purpose of receiving it, such as a decision on whether to proceed to negotiate a deal. If more detailed or extensive confidential information is offered and it is not necessary for immediate purposes, it should be refused.

 

(ii) Need to Know . Once a third party's confidential information has been disclosed to the Corporation, the Corporation has an obligation to abide by the terms of the relevant nondisclosure agreement and limit its use to the specific purpose for which it was disclosed and to disseminate it only to other Corporate employees with a need to know the information. Every director, officer, employee, agent and contractor involved in a potential business relationship with a third party must understand and strictly observe the restrictions on the use and handling of confidential information. Any questions about how to handle any such information should be directed to the CFO.

 

(iii) Notes and Reports . Any notes taken while reviewing the confidential information of a third party under a nondisclosure agreement, or any reports summarizing the results of the review or drawing conclusions about the suitability of a business relationship, can include confidential information disclosed by the other party and should be retained only long enough to complete the evaluation of the potential business relationship. Subsequently, they should be either destroyed or turned over to the CFO for safekeeping or destruction. As with any other disclosure of confidential information, these notes or reports should be marked as confidential and distributed only to those the Corporation employees with a need to know.

 

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(iv) Competitive Information . No director, officer or employee should attempt to obtain a competitor's confidential information by improper means, and should never contact a competitor regarding their confidential information. While the Corporation may, and does, employ former employees of competitors, it recognizes and respects the obligations of those employees not to use or disclose the confidential information of their former employers.

 

E. Selecting Suppliers

 

The Corporation's suppliers make significant contributions to the success of the Corporation. To create an environment where Corporate suppliers have an incentive to work with the Corporation, they must be confident that they will be treated lawfully and in an ethical manner. The Corporation's policy is to purchase supplies based on need, quality, service, price and terms and conditions. The Corporation's policy is to select significant suppliers or enter significant supplier agreements though a competitive bid process where possible. Under no circumstances should any Corporate director, officer, employee, agent, or contractor attempt to coerce suppliers in any way. The confidential information of a supplier is entitled to the same protection as that of any other third party and must not be received before an appropriate nondisclosure agreement has been signed. A supplier's performance should never be discussed with anyone outside the Corporation. A supplier to the Corporation is generally free to sell its products or services to any other party, including competitors of the Corporation. In some cases where the products or services have been designed, fabricated, or developed to our specifications the agreement between the parties may contain restrictions on sales.

 

F. Government Relations

 

It is the Corporation's policy to comply fully with all applicable laws and regulations governing contact and dealings with government employees and public officials, and to adhere to high ethical, moral, and legal standards of business conduct. This policy includes strict compliance with all local, state, federal, foreign, and other applicable laws, rules, and regulations.

 

Any questions concerning government relations should be directed to the CFO.

 

G. Lobbying

 

Directors, officers, employees, agents, or contractors whose work requires lobbying communication with any member or employee of a legislative body or with any government official or employee in the formulation of legislation must have prior written approval of such activity from the CFO. Activity covered by this policy includes meetings with legislators or members of their staffs or with senior executive branch officials. Preparation, research, and other background activities that are done in support of lobbying communication are also covered by this policy even if the communication ultimately is not made.

 

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H. Government Contracts

 

It is the Corporation's policy to comply fully with all applicable laws and regulations that apply to government contracting. It is also necessary to strictly adhere to all terms and conditions of any contract with local, state, federal, foreign, or other applicable governments.

 

The CFO must review and approve all contracts with any government entity.

 

I. Free and Fair Competition

 

Most countries have well-developed bodies of law designed to encourage and protect free and fair competition. The Corporation is committed to obeying both the letter and spirit of these laws. The consequences of not doing so can be severe.

 

These laws often regulate the Corporation's relationships with its distributors, resellers, dealers, and customers. Competition laws generally address the following areas: pricing practices (including price discrimination), discounting, terms of sale, credit terms, promotional allowances, secret rebates, exclusive dealerships or distributorships, product bundling, restrictions on carrying competing products, termination, and many other practices.

 

Competition laws also govern, usually quite strictly, relationships between the Corporation and its competitors. As a rule, contacts with competitors should be limited and should always avoid subjects such as prices or other terms and conditions of sale, customers, and suppliers. Employees, agents, or contractors of the Corporation may not knowingly make false or misleading statements regarding its competitors or the products of its competitors, customers, or suppliers. Participating with competitors in a trade association or in a standards creation body is acceptable when the association has been properly established, has a legitimate purpose, and has limited its activities to that purpose.

 

No director, officer, employee, agent or contractor shall at any time or under any circumstances enter into an agreement or understanding, written or oral, express or implied, with any competitor concerning prices, discounts, other terms or conditions of sale, profits or profit margins, costs, allocation of product or geographic markets, allocation of customers, limitations on production, boycotts of customers or suppliers, or bids or the intent to bid or even discuss or exchange information on these subjects. In some cases, legitimate joint ventures with competitors may permit exceptions to these rules, as may bona fide purchases from or sales to competitors on non-competitive products, but the CFO must review all such proposed ventures in advance. These prohibitions are absolute and strict observance is required.

 

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Collusion among competitors is illegal, and the consequences of a violation are severe. Although the spirit of these laws, known as “antitrust,” “competition,” “consumer protection” or unfair competition laws, is straightforward, their application to situations can be quite complex. To ensure that the Corporation complies fully with these laws, each director, officer, and employee should have a basic knowledge of them and should involve the CFO early on when questionable situations arise.

 

J. Industrial Espionage

 

It is the Corporation's policy to lawfully compete in the marketplace. This commitment to fairness includes respecting the rights of competitors and abiding by all applicable laws during competing. The purpose of this policy is to maintain the Corporation's reputation as a lawful competitor and to help ensure the integrity of the competitive marketplace. The Corporation expects its competitors to respect the rights of the Corporation to compete lawfully in the marketplace, and the Corporation must respect the competitors’ rights equally. Corporate directors, officers, employees, agents, and contractors may not steal or unlawfully use the information, material, products, intellectual property, or proprietary or confidential information of anyone including suppliers, customers, business partners or competitors.

 

V. WAIVERS

 

Any waiver of any provision of this Code for a member of the Corporation’s Board or an executive officer must be approved in writing by the Corporation’s Board and promptly disclosed. Any waiver of any provision of this Code with respect any other employee, agent or contractor must be approved in writing by the CFO.

 

VI. DISCIPLINARY ACTIONS

 

The matters covered in this Code are of the utmost importance to the Corporation, its stockholders, and its business partners, and are essential to the Corporation's ability to conduct its business in accordance with its stated values. The Corporation expects all its directors, officers, employees, agents, contractors, and consultants to adhere to these rules in carrying out their duties for the Corporation.

 

The Corporation will take appropriate action against any director, officer, employee, agent, contractor, or consultant whose actions are found to violate these policies or any other policies of the Corporation. Disciplinary actions may include immediate termination of employment or business relationship at the Corporation's sole discretion. Where the Corporation has suffered a loss, it may pursue its remedies against the individuals or entities responsible. Where laws have been violated, the Corporation will cooperate fully with the appropriate authorities.

 

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VII. ACKNOWLEDGMENT OF RECEIPT OF CODE OF BUSINESS CONDUCT AND ETHICS

 

I have received and read the Corporation's Code of Business Conduct and Ethics. I understand the standards and policies contained in the Code and understand that there may be additional policies or laws specific to my job. I further agree to comply with the Code.

 

If I have questions concerning the meaning or application of the Code, any Corporation policies, or the legal and regulatory requirements applicable to my job, I know I can consult my manager or the CFO, knowing that my questions or reports to these sources will be maintained in confidence. I acknowledge that I may report violations of the Code to the CFO.

 

   
Director, Officer, or Employee Name  
   
Date  
   
Please sign and return this form to the CFO.  

 

Company Seal:

 

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Exhibit 21.1

 

List of Subsidiaries

 

Subsidiary   Jurisdiction of incorporation or organization
     
ZK Pipe Industry Co. Ltd.   Hong Kong SAR
     
Wenzhou Weijia Pipeline Development Co., Ltd.   People’s Republic of China
     
Zhejiang Zhengkang Industrial Co. Ltd.   People’s Republic of China
     
Wenzhou Zhengfeng Industry and Trade Co. Ltd.   People’s Republic of China

 

 

Exhibit 23.1

 

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors of ZK International Group Co., Ltd.

  

We consent to the inclusion in the forgoing Form F-1 of ZK International Group Co., Ltd. (the “Company”) of our report dated May 23, 2017 relating to our audit of the consolidated balance sheets of ZK International Group Co., Ltd. (the “Company”) as of September 30, 2016 and September 30, 2015 and their related consolidated statements of operations, changes in shareholders' equity and cash flows for the two years ended September 30, 2016 and

September 30, 2015.

 

We also consent to the reference to us under the caption “Experts” in the prospectus.

 

/s/ Anton & Chia, LLP

 

Newport Beach, California

 

May 23, 2017