Ostin(US:OST)2024-01-30 16:00PART I Key Information Ostin Technology Group operates as a Cayman Islands holding company with primary operations in China, facing significant regulatory and financial risks including potential delisting - Ostin operates as a Cayman Islands holding company with main operations in China, exposing it to complex PRC laws and regulatory risks21 - PRC subsidiaries face restrictions on transferring net assets to the holding company, with $24,753,990 in restricted assets as of September 30, 202330 - The company's auditor is subject to PCAOB inspection, with ongoing uncertainties regarding PRC authority positions that pose a potential delisting risk under the HFCA Act2628 Intercompany Cash Transfers | Flow Direction | FY 2023 | FY 2022 | FY 2021 | | :--- | :--- | :--- | :--- | | Cash transferred to subsidiaries from Jiangsu Austin | $8,617,106 | $9,096,665 | - | | Cash transferred to Jiangsu Austin from subsidiaries | - | - | $7,640,965 | Risk Factors The company faces significant risks including customer concentration, substantial debt, potential Nasdaq delisting, and reduced investor protection due to its foreign private issuer status - The company faces significant customer concentration risk, with two major customers accounting for 47.5% and 17.8% of total revenue in FY2023 without long-term contracts126 - Substantial debt of approximately $43 million as of September 30, 2023, could restrict operations and reduce cash flow availability135 - Ordinary shares are at risk of Nasdaq delisting due to non-compliance with the $1.00 minimum bid price requirement as of January 19, 2024190 - Shareholders may face difficulties protecting their interests under Cayman Islands law, which is less developed than U.S. corporate law209 Information on the Company Ostin Technology Group designs, develops, and manufactures TFT-LCD display modules and polarizers in China, detailing its history, operations, and regulatory environment - The company completed a corporate reorganization in February 2022, terminating its VIE structure and now holding 97.85% of its primary operating subsidiary, Jiangsu Austin228 - Main products are display modules and polarizers, each accounting for 48% of revenue in FY2023243382 - The company has high supplier concentration, with two suppliers accounting for 42.55% and 6.8% of total purchases in FY2023141272 - The company is expanding into end-user products like the Pintura system and intelligent conference systems to diversify offerings and capture higher profit margins257371 History and Development of the Company The company's history details its evolution from Jiangsu Austin in 2010 to a Cayman Islands holding company, completing a VIE structure termination by June 2022 - The company began operations in 2010 via Jiangsu Austin, undergoing a reorganization in late 2019 to establish a Cayman Islands holding structure223 - VIE arrangements were fully terminated in February 2022, leading to 97.85% direct ownership of Jiangsu Austin, which became a wholly-owned subsidiary by June 2022228229 - The company asserts it is not in a foreign investment-restricted industry and has obtained all necessary PRC licenses for current operations231233 Business Overview The company's core business involves designing and manufacturing TFT-LCD modules and polarizers for consumer, automotive, and commercial displays, with a focus on high-end and new IoT products - The company designs, develops, and manufactures TFT-LCD modules and polarizers for consumer electronics, automotive, and commercial display markets238 Revenue by Product Category (FY2021-2023) | Product Category | FY 2023 Revenue | FY 2022 Revenue | FY 2021 Revenue | | :--- | :--- | :--- | :--- | | Display Modules | $27,793,530 | $35,113,651 | $96,087,963 | | Polarizers | $27,526,662 | $62,709,731 | $62,625,352 | Geographic Sales Breakdown (FY2021-2023) | Region | FY 2023 Sales | FY 2022 Sales | FY 2021 Sales | | :--- | :--- | :--- | :--- | | Mainland China | $54,466,044 (95%) | $96,449,118 (91%) | $133,852,929 (80%) | | Hong Kong and Taiwan | $3,059,656 (5%) | $8,948,112 (9%) | $32,244,188 (19%) | | Southeast Asia | - | $19,516 (<1%) | $1,647,684 (1%) | - A cooperation agreement with Shanghai Inabata provides key polarizer manufacturing equipment in exchange for exclusive substrate purchases, currently in automatic renewal276 Property, Plants and Equipment The company's PRC-based physical assets include facilities with a monthly production capacity of 470,000 TFT-LCD display modules and 700,000 square meters of polarizers, operating at 50% utilization - Designed monthly production capacity is 470,000 TFT-LCD display modules and 700,000 square meters of polarizers, currently at approximately 50% utilization361 - The new Phase II polarizer factory in Chengdu is complete and expected to commence OLED display production in the first half of 2024361 Principal Facilities | Location | Size (Square Meters) | Primary Use | Ownership | | :--- | :--- | :--- | :--- | | Nanjing, Jiangsu | 2,066 | Office | Owned | | Nanjing, Jiangsu | 8,888 | Manufacturing (Display Modules) | Leased | | Chengdu, Sichuan | 33,394 | Manufacturing (Polarizers) | Owned | | Luzhou, Sichuan | 5,987 | Manufacturing (Display Modules) | Leased | Operating and Financial Review and Prospects Management discusses a significant 45% sales decrease in FY2023, resulting in an $11.0 million net loss, attributed to reduced market demand, alongside details on liquidity, R&D, and critical accounting policies Financial Performance Summary (FY2021-2023) | Metric | FY 2023 | FY 2022 | FY 2021 | | :--- | :--- | :--- | :--- | | Sales | $57,525,700 | $105,416,746 | $167,744,801 | | Gross Profit | $2,053,603 | $12,612,315 | $17,359,078 | | Gross Margin | 3.6% | 12.0% | 10.3% | | Net (Loss)/Income | $(11,013,966) | $112,227 | $3,295,507 | - Sales decreased by 45% in FY2023, driven by a 56% drop in polarizer sales and a 21% drop in display module sales due to consumer electronics market slowdown382383385 - The auditor issued a "Going Concern" warning due to negative working capital, a $11.0 million net loss, and an $8.5 million accumulated deficit as of September 30, 2023132646681 Cash Flow Summary (FY2021-2023) | Cash Flow Activity | FY 2023 | FY 2022 | FY 2021 | | :--- | :--- | :--- | :--- | | Net cash from Operating | $(2,591,320) | $9,698,283 | $(17,664,259) | | Net cash from Investing | $(6,990,948) | $(6,878,518) | $(5,197,913) | | Net cash from Financing | $7,720,910 | $11,788 | $18,564,120 | Directors, Senior Management and Employees This section details the company's leadership, including five directors and executive compensation of $333,383 for FY2023, and a workforce of 226 employees, with CEO Tao Ling holding 27.9% beneficial ownership - The board comprises five members: Tao Ling (Chairman & CEO), Xiaohong Yin (Director), and three independent directors465486 - Aggregate compensation for executive officers and directors totaled $333,383 in FY2023, with an additional $18,977 in social benefits for executive officers477 Employee Headcount by Function (as of Sep 30, 2023) | Function | Number of Employees | Percentage | | :--- | :--- | :--- | | Administration | 56 | 24.8% | | Finance | 11 | 4.8% | | Technology | 18 | 8.0% | | Production | 127 | 56.2% | | Sales | 14 | 6.2% | | Total | 226 | 100% | Major Share Ownership (as of Jan 30, 2024) | Name of Beneficial Owner | Percentage of Outstanding Shares | | :--- | :--- | | Tao Ling (CEO & Chairman) | 27.9% | | Xiaohong Yin (Director) | 6.9% | | All directors and executive officers as a group | 35.0% | Major Shareholders and Related Party Transactions This section details significant shareholder information and related party transactions, including unsecured, interest-free advances from CEO Tao Ling and director Xiaohong Yin, and personal guarantees for bank loans - The company received $7.61 million in working capital advances from CEO Tao Ling, director Xiaohong Yin, and their family members in FY2023511512799 - Bank loans totaling $10,964,912 were guaranteed by CEO Tao Ling and his family members as of September 30, 2023, without guarantee fees513799 Outstanding Loans Due to Related Parties | Related Party | Balance as of Sep 30, 2023 | Balance as of Sep 30, 2022 | | :--- | :--- | :--- | | Xiaohong Yin (Director) | $1,710,347 | $0 | | Tao Ling (CEO) | $0 | $0 | | Bozhen Gong (Family of CEO) | $68,531 | $295,213 | | Yun Tan (Family of CEO) | $178,180 | $182,751 | | Total Due to Related Parties | $3,005,577 | $731,004 | Financial Information This section directs readers to the consolidated financial statements starting on page F-1 and confirms the company's policy of retaining all earnings for business growth, with no plans for future dividends - Consolidated financial statements are located at the end of the report, beginning on page F-1514 - The company has never paid dividends and plans to retain all earnings for operations and growth in the foreseeable future515 Additional Information This section covers the company's share capital, memorandum and articles of association, a comparison of Cayman Islands and U.S. corporate law, and taxation policies, including potential PFIC classification for U.S. investors - As of January 30, 2024, 14,006,250 ordinary shares were issued and outstanding from an authorized capital of 499,000,000 ordinary shares517 - The company is an exempted company under Cayman Islands law, offering privileges like exemption from annual general meetings and public inspection of the register of members526 - There is a risk of classification as a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes, potentially leading to adverse tax consequences for U.S. shareholders201593 - If deemed a PRC resident enterprise, the company's global income could face a 25% PRC enterprise income tax, with dividends to non-PRC shareholders potentially subject to a 10% withholding tax577 Quantitative and Qualitative Disclosures About Market Risk This section identifies primary market risks including foreign exchange risk due to RMB/USD fluctuations, credit risk from unsecured receivables, and interest rate risk on loans - The company faces foreign exchange risk from RMB operations and USD financial reporting, where RMB/USD fluctuations can impact reported results608609 - Credit risk arises from unsecured accounts receivable and uninsured cash deposits in PRC financial institutions610 - The company is exposed to interest rate risk, as fixed-rate loans may face adverse rate changes upon refinancing734 PART II Material Modifications to the Rights of Security Holders and Use of Proceeds This section reports the full utilization of approximately $12.5 million IPO proceeds for plant construction, R&D, and working capital, and an additional $500,000 raised in January 2024 for working capital - Net proceeds of approximately $12.5 million from the April 2022 IPO have been fully utilized for plant construction ($2.5 million), R&D ($2.8 million), working capital ($3.8 million), and new materials research ($3.4 million)615 - In January 2024, an additional $500,000 was raised through a senior unsecured convertible note for working capital616617 Controls and Procedures Management concluded that disclosure controls were ineffective, but internal control over financial reporting was effective as of September 30, 2023, with no attestation report required for this emerging growth company - Management concluded that disclosure controls and procedures were not effective as of the end of the annual report period618 - Despite disclosure control issues, management concluded that internal control over financial reporting was effective as of September 30, 2023620 Corporate Governance and Other Matters This section covers corporate governance, identifying Mr. Qiang He as the audit committee financial expert, detailing fees paid to TPS Thayer, LLC, and noting the company's use of foreign private issuer exemptions from Nasdaq rules - Mr. Qiang He has been determined by the board to qualify as an "audit committee financial expert" per SEC rules622 - The company has adopted a code of ethics, publicly available on its website623 Principal Accountant Fees | Fee Category | FY 2023 | FY 2022 | | :--- | :--- | :--- | | Audit fees | $180,000 | $180,025 | | Audit-related fees | $0 | $0 | | Tax fees | $0 | $0 | | All other fees | $0 | $0 | - The company uses the foreign private issuer exemption to follow home country practice instead of Nasdaq's shareholder approval requirement for certain dilutive events630 PART III Financial Statements This section presents the company's audited consolidated financial statements for FY2021-2023, prepared under U.S. GAAP, with the independent auditor's report highlighting a "Going Concern" uncertainty - The independent auditor's report includes a "Going Concern" paragraph, citing negative working capital, net loss, and accumulated deficit as factors raising substantial doubt about the company's ability to continue646 Consolidated Balance Sheet Summary | Metric | As of Sep 30, 2023 | As of Sep 30, 2022 | | :--- | :--- | :--- | | Total Current Assets | $24,437,682 | $31,908,303 | | Total Current Liabilities | $40,531,407 | $31,555,984 | | Working Capital | $(16,093,725) | $352,319 | | Total Assets | $56,548,761 | $57,233,785 | | Total Liabilities | $42,460,629 | $31,608,574 | | Total Shareholders' Equity | $14,088,132 | $25,625,211 | Consolidated Statement of Income Summary | Metric | FY 2023 | FY 2022 | FY 2021 | | :--- | :--- | :--- | :--- | | Sales | $57,525,700 | $105,416,746 | $167,744,801 | | Gross Profit | $2,053,603 | $12,612,315 | $17,359,078 | | Operating (Loss) Income | $(10,255,904) | $450,421 | $3,217,363 | | Net (Loss) Income | $(11,013,966) | $112,227 | $3,295,507 | | Basic and Diluted EPS | $(0.78) | $0.02 | $0.30 |