A. Selected Financial
Data
The selected consolidated financial data present
the results for the five fiscal years ended and as of June 30, 2017, 2016, 2015, 2014, and 2013. Our historical results do not
necessarily indicate results expected for any future periods. The selected consolidated financial data below should be read in
conjunction with our consolidated financial statements and notes thereto, “Item 5. Operating and Financial Review and Prospects”
below, and the other information contained in this Form 20-F.
|
|
For the Years Ended June 30
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Statement of Income Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
56,292,093
|
|
|
$
|
53,418,112
|
|
|
$
|
202,009,160
|
|
|
$
|
175,327,717
|
|
|
$
|
124,218,213
|
|
Cost of Sales
|
|
$
|
(52,367,418
|
)
|
|
$
|
(48,713,456
|
)
|
|
$
|
(182,692,715
|
)
|
|
$
|
(157,904,729
|
)
|
|
$
|
(99,733,216
|
)
|
Gross Profit
|
|
$
|
3,924,675
|
|
|
$
|
4,704,656
|
|
|
$
|
19,316,445
|
|
|
$
|
17,422,988
|
|
|
$
|
24,484,997
|
|
Net(Loss)/Income
|
|
$
|
(27,949,507
|
)
|
|
$
|
(10,432,948
|
)
|
|
$
|
12,258,404
|
|
|
$
|
11,634,940
|
|
|
$
|
17,842,614
|
|
(Loss)/Income from operations
|
|
$
|
(28,427,244
|
)
|
|
$
|
(7,558,230
|
)
|
|
$
|
5,135,757
|
|
|
$
|
6,828,308
|
|
|
$
|
11,705,736
|
|
Comprehensive (Loss)/income
|
|
$
|
(30,309,130
|
)
|
|
$
|
(19,018,910
|
)
|
|
$
|
5,372,660
|
|
|
$
|
7,144,747
|
|
|
$
|
13,315,616
|
|
(Loss)/Earnings per share – basic
|
|
$
|
(2.87
|
)
|
|
$
|
(1.46
|
)
|
|
$
|
1.44
|
|
|
$
|
1.53
|
|
|
$
|
0.29
|
|
(Loss)/Earnings per share – diluted
|
|
$
|
(2.92
|
)
|
|
$
|
(1.46
|
)
|
|
$
|
1.44
|
|
|
$
|
1.53
|
|
|
$
|
0.29
|
|
Weighted average shares - basic
|
|
$
|
9,914,313
|
|
|
$
|
9,323,108
|
|
|
$
|
6,462,577
|
|
|
$
|
4,560,000
|
|
|
$
|
40,000,000
|
|
Weighted average shares - diluted
|
|
$
|
9,914,313
|
|
|
$
|
9,323,108
|
|
|
$
|
6,462,577
|
|
|
$
|
4,560,000
|
|
|
$
|
58,191,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working Capital (deficiency)
|
|
$
|
(33,639,559
|
)
|
|
$
|
(10,379,902
|
)
|
|
$
|
(10,419,909
|
)
|
|
$
|
(27,362,427
|
)
|
|
$
|
16,818,269
|
|
Total assets
|
|
$
|
135,919,497
|
|
|
$
|
176,144,150
|
|
|
$
|
225,724,786
|
|
|
$
|
206,531,300
|
|
|
$
|
143,644,914
|
|
Total liabilities
|
|
$
|
120,307,846
|
|
|
$
|
132,642,058
|
|
|
$
|
167,316,820
|
|
|
$
|
151,071,926
|
|
|
$
|
108,645,903
|
|
Total equity
|
|
$
|
15,611,650
|
|
|
$
|
43,502,092
|
|
|
$
|
58,407,966
|
|
|
$
|
55,459,374
|
|
|
$
|
34,999,011
|
|
Exchange Rate Information
We conduct our business in China and substantially all of our
revenues are denominated in Renminbi. However, periodic reports will be expressed in U.S. dollars using the then current exchange
rates. This annual report contains translations of Renminbi amounts into U.S. dollars at specified rates solely for the convenience
of the reader. No representation is made that the Renminbi amounts referred to in this annual report could have been or could be
converted into U.S. dollars at any particular rate or at all. On November 10, 2017, the daily exchange rate reported at www.ofx.com
was RMB6.6415 to US$1.00.
The following table sets forth information concerning exchange rates
between the Renminbi and the U.S. dollar for the periods indicated.
|
|
Renminbi per U.S. Dollar Noon Buying Rate
|
|
|
|
Average
(1)
|
|
|
High
|
|
|
Low
|
|
|
Period-
End
|
|
Year ended June 30, 2017
|
|
|
6.8124
|
|
|
|
6.9610
|
|
|
|
6.6199
|
|
|
|
6.7774
|
|
Year ended June 30, 2016
|
|
|
6.4399
|
|
|
|
6.6516
|
|
|
|
6.2010
|
|
|
|
6.6368
|
|
Year ended June 30, 2015
|
|
|
6.1375
|
|
|
|
6.2080
|
|
|
|
6.0933
|
|
|
|
6.1088
|
|
Year ended June 30, 2014
|
|
|
6.1467
|
|
|
|
6.1922
|
|
|
|
6.0901
|
|
|
|
6.1577
|
|
Year ended June 30, 2013
|
|
|
6.2814
|
|
|
|
6.3872
|
|
|
|
6.1583
|
|
|
|
6.1882
|
|
Year ended June 30, 2012
|
|
|
6.3630
|
|
|
|
6.4773
|
|
|
|
6.2936
|
|
|
|
6.3197
|
|
May 2017
|
|
|
6.8826
|
|
|
|
6.9057
|
|
|
|
6.8206
|
|
|
|
6.8206
|
|
June 2017
|
|
|
6.8092
|
|
|
|
6.8533
|
|
|
|
6.7790
|
|
|
|
6.7794
|
|
July 2017
|
|
|
6.7714
|
|
|
|
6.8060
|
|
|
|
6.7192
|
|
|
|
6.7192
|
|
August 2017
|
|
|
6.6597
|
|
|
|
6.7702
|
|
|
|
6.5211
|
|
|
|
6.5971
|
|
September 2017
|
|
|
6.5681
|
|
|
|
6.6715
|
|
|
|
6.4642
|
|
|
|
6.6536
|
|
October 2017
|
|
|
6.6276
|
|
|
|
6.6564
|
|
|
|
6.5790
|
|
|
|
6.6324
|
|
Source:
https://www.ofx.com/en-us/forex-news/historical-exchange-rates/
|
(1)
|
Annual averages are calculated from month-end rates. Monthly and interim period averages are calculated using the average of
the daily rates during the relevant period.
|
B. Capitalization and
indebtedness.
Not applicable.
C. Reasons for the
offer and use of proceeds.
Not applicable.
D. Risk factors.
You should carefully consider the following risk factors in addition
to the other information included or incorporated by reference in this report, including matters addressed in the section entitled
“Forward-Looking Statements”. We caution you not to place undue reliance on the forward-looking statements contained
in this report, which speak only as of the date hereof.
The risks and uncertainties described below include all of the material
risks applicable to us; however they are not the only risks and uncertainties that we face. Additional risks and uncertainties
not presently known to us or that we currently deem immaterial may also impair our business operations.
Risks related to Our Business
We are subject to the PRC's environmental protection measures.
Our business activities produce certain pollutants such as waste
water and waste gas, during the production process. The PRC has in recent years tightened its environmental protection measures
to be more in line with steps taken by developed countries.
Under the PRC Environmental Protection Law, any enterprise which
discharges pollutants is required to be registered with the relevant PRC governmental departments and to obtain a pollutant discharge
permit. Any such enterprise is also required to have waste water, waste gas, solid waste and noise pollution treatment facilities
that meet the relevant environmental standards and to have the pollutants treated before discharge. The provincial and municipal
governments of provinces, autonomous regions and municipalities may also set their own guidelines for the discharge of pollutants
within their own provinces or districts.
On October 20, 2012, Jiangsu Delta obtained the Pollutant Discharge
Permit of Zhenjiang issued by the Environment Protection Agency of Dantu District, Zhenjiang City for discharge of the key production
wastes, including inter alia, ammonia, nitrogen, total phosphorus, petroleum waste, benzene, toluene, dimethylbenzene, chlorobenzene,
soot, hydrochloric acid, hydrochloric acid, maleic anhydride and sulfur dioxide. Such discharges must be made in compliance with
national environmental regulation. The Pollutant Discharge Permit is valid from May, 2015 to May, 2018, after which it will be
due for renewal.
Additionally, our facilities may be subject to periodic and annual
environmental inspections. Penalties may be imposed for the discharge of pollutants that fail to meet relevant environmental standards.
The relevant governmental authorities may refuse to issue or renew a pollutant discharge permit if an enterprise fails environmental
inspections and in cases of severe violation of environmental standards, are also empowered to shut down any enterprise that causes
substantial environmental problems.
There is no assurance that the current PRC environmental protection
laws and regulations will not be amended in the future. In June 2012, as the local environmental protection criteria were amended
where more stringent standards were introduced by the relevant local authorities, Jiangsu Delta’s production activities were
temporarily suspended for approximately 45 days to enhance its waste water treatment facilities in order to meet the revised standards.
In July 2012, Jiangsu Delta was certified to have satisfied the new criteria and was allowed to re-commence its operations. If
more stringent environmental protection laws and regulations are introduced in the future, Jiangsu Delta may again need to cease
operations to adapt to any proposed new standards, which we may cause us to utilize significant financial and/or other resources
to ensure compliance, which would result in an increase in our operating costs and have an adverse effect on our profitability
and prospects.
Furthermore, if we are unable to comply with such stringent environmental
protection standards, penalties (including fines and/or shutdown of processing facilities) may be imposed on us, which in turn
may adversely affect our financial performance.
We depend on our key personnel for continued success.
We believe our success to date can largely be attributed to the
contributions, expertise and experience of our key management team, which is headed by our Chairman and Chief Executive Officer,
Xin Chao. He is responsible for identifying business opportunities and implementing overall business strategies to achieve our
corporate goals.
Our key management team also includes Xin Chao, Changguang Wu, Jianmin
Xia, Ming Chao and Hongming Dong. The continued success of our business is therefore dependent, to a large extent, on our ability
to retain the services of our directors and executive officers. Each of Chao Xin, Changguang Wu and Ming Chao has more than 15
years of experience in the fine chemical and/or related industries. The loss of the services of our key personnel without a suitable
and timely replacement, or the inability to attract and retain other qualified personnel, could adversely affect our operations
and hence, our financial results.
We are subject to fluctuations in the prices of principal
raw materials in our operations.
The key components and raw materials used in our production and
manufacturing processes are toluene, chlorine, benzene, styrene and phthalic anhydride, maleic anhydride, propylene glycol and
ethylene diglycol which in aggregate constituted approximately 75% of our total cost of sales. As these materials constitute key
components of our manufacturing processes, any fluctuation in the prices of such raw materials which may in turn have an impact
on our production costs. In line with industry practice, we do not have long-term supply contracts with our suppliers. A shortage
of any key raw materials or components could limit our production, and is likely to increase the costs of our products, thereby
depressing the margins for our products. Further, although we produce a number of intermediary materials such as MA, PCT and OCT
in-house for the production of PCT/OCT downstream products and UPR products, there can be no assurance that we will be able to
continue to do so in a cost-effective manner.
There is no assurance that we will be able to obtain an adequate
supply of key raw materials at competitive prices. Market prices of such raw materials may also be volatile due to factors beyond
our control, such factors include, inter alia, general economic conditions, changes in the level of global demand and the availability
of supply. Any substantial increase in the prices of these raw materials is likely to have a material adverse impact on our production
costs. In the event of any significant increase in the cost of such raw materials, and should we be unable to pass on such costs
to our customers on a timely basis, our business, profitability and financial performance will be adversely affected.
We are vulnerable to fluctuations in the prices of our products.
We are subject to fluctuations in demand for our products due to
a variety of factors, including general economic conditions, competition, product obsolescence, shifts in buying patterns, financial
difficulties and budget constraints of our actual and potential customers and other factors. Some of our products may experience
great price fluctuation.
While such factors may, in some periods, increase product sales,
fluctuations in demand can also negatively impact in product sales. If demand for our products declines or the prices of our products
decline because of general economic conditions or for other reasons, our revenues and gross margin could be adversely affected.
We may be affected by disruptions to our processing facilities.
Our processing facilities are located at Zhenjiang City, Jiangsu
Province, the PRC. The production facilities are subject to operational risks, such as industrial accidents, which could cause
personal injury or loss of human life, the breakdown or failure of equipment, power supplies or processes, performance below expected
levels of output or efficiency, obsolescence, labor disputes, natural disasters and the need to comply with relevant regulatory
and requirements. From time to time, we may need to carry out planned shutdowns of our processing plants for routine maintenance,
statutory inspections and testing and may need to shut down various plants for capacity expansions and equipment upgrades. In addition,
due to the nature of our business, and despite compliance with requisite safety requirements and standards, the production process
is still subject to operational risks, including discharges or releases of hazardous substances, exposure to contamination and
leakages from other factories and operations in the vicinity. These operational risks may cause personal injury or loss of human
life and could result in the imposition of civil and criminal penalties. The occurrence of any of these events could have a material
adverse effect on the productivity and profitability of a particular production facility and on our business, results of operations
and financial condition.
Although we have taken precautions to minimize the risk of any significant
operational problems at our production facilities, there can be no assurance that our business, results of operations and financial
condition may not be adversely affected by disruptions caused by operational hazards at our production facilities, or at other
factories and facilities in the vicinity. Moreover, our production processes are continuously being modified and updated. As a
result of manufacturing process updates and improvements, from time to time, we may experience shutdowns, and disruptions to the
operations.
The occurrence of any of the above events may cause us to stop or
suspend our processing operations and we may not be able to deliver the products to our customers on a timely basis, which would
have an adverse impact on its business, financial position and profitability.
Our insurance coverage may not adequately protect us against
certain operating and other hazards which may have an adverse effect on our business.
We make substantial investments in complex manufacturing and production
facilities and transportation equipment. Many of the production processes, raw materials and certain finished products are potentially
destructive and dangerous in uncontrolled or catastrophic circumstances, including operating hazards, fires and explosions, and
natural disasters such as typhoons, floods, earthquakes and major equipment failures for which insurance may not be obtainable
at a reasonable cost or at all. We maintain insurance policies covering losses due to fire and other calamities. We also maintain
insurance policies for fixed assets, such as vehicles, machineries, facilities and buildings which cover against damage caused
by certain accidents and natural disasters. Should an accident or natural disaster occur, it may cause significant property damage,
disruption to operations and personal injuries and our insurance coverage may be inadequate to cover such loss. Should an uninsured
loss or a loss in excess of insured limits occur, we could suffer from damage to our reputation or lose all or a portion of production
capacity as well as future revenues anticipated to derive from the relevant facilities. While we maintain coverage from insurance
policies for our production facilities which are in line with the industry norms, we cannot assure you that our insurance coverage
would be sufficient to cover all our potential losses.
Our profitability may be affected by a failure to compete
effectively in a competitive environment.
We operate in a highly competitive environment and are subject to
competition from both existing competitors and new market entrants. Rapid technological advances and aggressive pricing strategies
by our competitors may continue to increase competition. In order to remain competitive, we must continue to improve our materials
supply chain, foster production self-sufficiency, upgrade technology and manufacturing process and introduce new products to the
market in a timely manner. Our ability to do so depends on factors both within and outside of our control and may be constrained
by the distinct characteristics and production requirements of individual products. There can be no assurance that we will be able
to continue to improve production efficiency and maintain reasonable margins for all of our existing products, or that we will
be able to successfully introduce new products that are able to command higher margins. Some of our competitors may have superior
financial, marketing, manufacturing, research and development and technological resources, greater brand name recognition and larger
customer bases than it.
Accordingly, these competitors may have the ability to respond more
quickly to new or emerging technologies, adapt more quickly to changes in customer requirements and devote greater resources to
the development, promotion and sales of their products and/or services. There is no assurance that we will be able to continue
competing successfully against present and future competitors.
Our management believes that the important factors to achieving
success in our industry include maintaining customer loyalty by cultivating long-term customer relationships and maintaining the
quality of our products and services. If we are unable to attain these, we may lose customers to our competitors and this will
adversely affect our market share. Increased competition may also force us to lower our prices, thus reducing our profit margins
and affecting our financial performance and condition. Such competition may have a material adverse effect on our business, financial
position and results of operations.
Our business may be adversely affected if our customers place
lower than expected orders.
As is customary in our industry, we do not obtain firm and long-term
volume purchase commitments from our customers. Although we may from time to time enter into sales agreements with our key customers
which normally include general terms of sale, specification requirements and pricing policy, such agreements generally do not specify
a minimum purchase volume or a specific purchase price. The precise terms for each shipment, such as pricing, product specifications
and quantities, are normally confirmed at the time each order is placed.
Accordingly, we face the risk that our customers might place lower
than expected orders, if at all, or cancel existing plans for orders. Although the customers might be contractually obliged to
purchase products on specific terms from us for particular orders, we may be unable to or, for other business reasons, choose not
to enforce our contractual rights if the customers terminate their orders. Cancellations, reductions or instructions to delay production
by a significant customer could materially and adversely affect our results of operations by reducing our sales volume, as well
as by possibly causing a delay in the customers’ repayment of our expenditures for inventory and resulting in lower utilization
of the manufacturing facilities, all of which may result in lower gross margins.
Our reputation and business may suffer if we fail to manufacture
products within the acceptable quality range and optimal production yields, which could cause us to lose customers.
Product quality can be affected by a number of factors, including
the level of contaminants in the manufacturing environment, the contamination of raw materials, equipment malfunction, process
adjustments made to manufacture new products, interruptions in availability of utilities, deficiencies in quality control and inadequate
sample testing. Many of our customers require stringent quality requirements in the procurement of their supplies.
We have in place stringent quality control processes as set out
in the section “Quality Control” of this report and ensure that our raw materials, manufacturing systems and processes
and products meet the highest standards of quality. If we fail to maintain high quality production standards, our reputation may
suffer and customers may cancel their orders or return their products for replacement, which will materially and adversely affects
our results of operations and financial condition. In the event we are unable to maintain such stringent quality control, we may
be at risk of losing customers.
We may be unable to adapt to technological changes and other
industry standards.
We operate in a technologically dependent industry and are required
to quickly adapt to technological changes and industry standards as well as the changing needs of customers. In the event that
we are unable to keep up with the technological developments and develop new products on time, or if we fail to anticipate and
adapt to changes in our customers’ requirements, our current products and technology may face the risk of becoming obsolete
and we would not be able to fully meet our customers’ needs. This may then result in a decrease in demand for our products
and have a negative impact on our financial performance.
We may be exposed to risk of infringement of our intellectual
property rights.
We rely primarily on patent, trademark, trade secret, copyright
law and other contractual restrictions to protect our intellectual property. Nevertheless, these afford only limited protection
and the actions we may take to protect our intellectual property rights may not be adequate. Third parties may infringe or misappropriate
our proprietary technologies or other intellectual property rights, which could have a material adverse effect on our business,
financial condition, results of operations and prospects. As of the date of this report, we own nine patents in the PRC in respect
of UPR production and are in the midst of applying for four more patents.
Although our senior management personnel would, under the relevant
PRC laws relating to duties of directors or the terms of their employment contracts, have a general duty of confidentiality, there
is no assurance that there will be no unauthorized disclosure of our trade secrets or other proprietary information. In the event
that there is a leakage of such trade secrets or proprietary information to our competitors and other third parties, it may limit
our ability to maintain our competitive edge and to grow our business.
Further, as we have not yet received patent protection for some
of our proprietary information, there is no assurance that we will obtain adequate remedies in the event of an unauthorized disclosure
of the proprietary information to our competitors or other third parties. Should there be a loss of proprietary information, our
operations, financial position and prospects may be adversely affected.
We may not be able to ensure the successful implementation
of our future plans and strategies.
We intend to expand product lines and our distribution network.
Such initiatives involve various risks including but not limited to the investment costs in establishing a distribution network
within the PRC, setting up of new production facilities and offices and working capital requirements. There is no assurance that
such future plans can be successfully implemented as the successful execution of such future plans will depend on several factors,
some of which are not within our control, such as retaining and recruiting qualified and skilled staff, and the continued demand
for our products by our customers. Failure to implement any part of our future plans or executing such plan costs effectively,
may lead to a material adverse change in our operating environment or affect our ability to respond to market or industry changes,
which may, in turn, adversely affect our business and financial results.
We are exposed to the credit risks of our customers.
Our business and financial results are dependent on the credit
worthiness of our customers and this risk increases with, inter alia, the customer’s proportion of purchases from us. We
usually offer our customers credit terms of up to 120 days. There were certain collection problems for trade receivables during
fiscal year 2017 and the Company has already made sufficient doubtful debts provision during the year. There is no assurance that
we will not encounter more bad debt problems in the future. Should we experience any unexpected delay or difficulty in collections
from our customers, our cash flow and financial results may be adversely affected.
In addition, any deterioration in the financial position of our
customers may materially affect our profits and cash flow as these customers may default on their payments to us. We cannot assure
you that such defaults will not increase in the future or that we will not experience cash flow problems as a result of such defaults.
Should these develop into actual events, our business and financial results will be adversely affected.
We may require additional funding for future growth.
Our business and the nature of the industry in which we operate
will require us to make substantial capital expenditures in terms of both plants, equipment and operations and for research and
development capabilities. In particular, we may expand our production capacity in certain of our production facilities to cater
to the expected increase in demand. These capital expenditures will be spent in advance of any additional sales to be generated
by new or upgraded production facilities as a result of these expenditures. There is a risk that we may, in the future, incur operating
losses if our net operating revenue does not adequately recover our capital expenditures.
The additional funding and capital expenditures is expected to be
funded from proceeds from existing cash balances and credit lines, cash inflow from operations and existing and future bank borrowing.
However, in the event of adverse market conditions in the future or changes in our growth, manufacturing process, product technologies,
prices of machinery and equipment or interest rates, our actual expenditures may exceed our planned expenditures and we may not
have sufficient sources of liquidity to effect the current operational plan and would need to secure additional financing from
external sources. Our failure to obtain any required financing could impair our ability to both serve our existing clients base
and develop new clients and could result in both a decrease in revenue and an increase in our loss.
To the extent that we require financing, we would intend to seek
funding for our capital needs through the issuance of debt, preferred stock, common equity, loan guarantees, or a combination of
these types of instruments. We may also seek to obtain financing through a private placement or a public offering, a consequence
of which could include the sale or issuance of stock to third parties. To the extent additional funding is required, we cannot
assure you that it will be able to get additional financing on any terms acceptable to us, and, if it is able to raise funds, it
may be necessary for us to sell our securities at a price which is at a significant discount from the market price and on other
terms which may be disadvantageous to us. In connection with any such financing, we may be required to provide registration rights
to the investors. The price and terms of any financing which would be available to us could result in the issuance of a significant
number of shares. If we are required to issue a significant number of shares, stockholders could suffer substantial dilution.
We are dependent on our “DELTA” brand.
We rely on our “DELTA” brand in the marketing and distribution
of our products. We believe that we have built significant goodwill in our brand in terms of the quality of products and services
and it is widely recognized by the fine chemical industry in the PRC. We consider our “DELTA” brand to be vital in
promoting product recognition and customer loyalty. Hence, if there are any major defects in our products or adverse publicity
on our brand, the goodwill in our brand will be adversely affected and our customers may lose confidence in our products. This
will adversely affect our sales of products, hence affect our business and financial performance.
In order to protect our trademark, we registered our “DELTA”
label as a trademark in the PRC on September 14, 2014. We rely on PRC trademark laws but there is no assurance that this means
of protecting our trademark will be effective or that our competitors will not adopt product names or trademarks that are similar
to ours. We are also vulnerable to attempts by third parties to pass off their products as ours by using our trademark. Adequate
protection of our intellectual property is important to our business. Although we may take legal action against those who infringe
our intellectual property rights, it may need to incur substantial time and resources and there is no assurance that we will be
able to stop or prevent such infringement completely. Unauthorized use of our trademarks could adversely affect our performance
and business reputation. Should such counterfeit products be of inferior quality, the goodwill in our brand may be eroded. Hence,
our business and financial performance will be adversely affected if we are unable to protect our intellectual property rights
effectively.
Defective or non-compliant products may lead to significant
liability and exposure to negative publicity which would adversely affect our business and profits.
Our products are sold mainly to manufacturers. Although we have
not faced any adverse claims or complaints regarding our products to date, there can be no assurance that our products will not
cause personal injury or health complications to users. Further, in the event that our products are defective or non-compliant
with specifications, we may be liable to complaints, lawsuits and claims from our customers which in turn could generate negative
publicity and materially and adversely affect our business and financial condition. Any successful product liability claim against
us may adversely affect our business and reputation. A product liability claim, even without merit, could result in us incurring
significant expenses and expending substantial time and efforts of our management in defending such a claim. Even if we are able
to successfully defend any such claim, there can be no assurance that our customers will not lose confidence in our products, thereby
affecting our business and reputation.
Defective or non-compliant products may lead to significant
liability exposure as the company does not maintain product liability insurance coverage.
In the event our products are defective or non-compliant with specifications,
we may be liable to complaints, lawsuits and claims from our customers, which could result in liability claims. We do not maintain
any product liability insurance coverage to offset any such liability and, as a result, any such claims could potentially lead
to significant losses in the event of an adverse claim or complaint concerning our products.
Because our contracts are individual purchase orders and not
long-term agreements, the results of our operations can vary significantly from quarter to quarter.
We currently do not have any long-term contracts with our customers
for our products. While we do not depend on any single customer for a significant portion of our revenues, there is a risk that
existing customers will elect not to do business with us in the future or will experience financial difficulties. There is also
a risk that our customers will attempt to impose new or additional requirements on it that reduce the profitability of those customers
for us. If we do not develop relationships with new customers, we may not be able to increase, or even maintain, our revenue, and
our financial condition, results of operations, business and/or prospects may be materially adversely affected.
Our top customer accounts for approximately 15% of our total orders
and the loss of our top customer would negatively affect our business.
Our top customer accounts for approximately 15% of our overall business.
If we lose our top customer without finding a new customer or customers, this could result in a significant loss of revenue to
our business.
Our top supplier accounts for approximately 38% of our total goods
required for the products we develop and the loss of this supplier could cause significant disruption in our supply chain and the
development of our products.
Our largest supplier accounts for approximately 38% of the total
raw materials we require to produce our products. In the event we lose this supplier for any reason, there can be no assurance
that there will not be a significant disruption in the supply of raw materials to our business or that we would be able to locate
alternative suppliers of materials of comparable quality at an acceptable price, or at all. Identifying a suitable supplier is
an involved process that requires us to become satisfied with their quality control, responsiveness and service, financial stability
and labor and other ethical practices. Any delays, interruption or increased costs in the supply of materials could have an adverse
effect on our ability to meet customer demand for our products and result in lower net revenue and income from operations both
in the short and long-term.
Potential claims alleging infringement of third party’s
intellectual property by us could harm our ability to compete and result in significant expense to us and loss of significant rights.
From time to time, third parties may assert patent, copyright, trademark
and other intellectual property rights to technologies that are important to our business. Any claims that our products or processes,
whether in relation to the specific circumstances set out above or otherwise, infringe the intellectual property rights of others,
regardless of the merit or resolution of such claims, could cause us to incur significant costs in responding to, defending, and
resolving such claims, and may divert the efforts and attention of our management and technical personnel away from the business.
As a result of such intellectual property infringement claims, we could be required or otherwise decide it is appropriate to pay
third-party infringement claims; discontinue manufacturing, using, or selling particular products subject to infringement claims;
discontinue using the technology or processes subject to infringement claims; develop other technology not subject to infringement
claims, which could be time-consuming and costly or may not be possible; and/or license technology from the third-party claiming
infringement, which license may not be available on commercially reasonable terms. The occurrence of any of the foregoing could
result in unexpected expenses or require us to recognize an impairment of our assets, which would reduce the value of the assets
and increase expenses. In addition, if we alter or discontinue the production of affected items, our revenue could be negatively
impacted.
Risks Relating to Doing Business in the PRC
Our subsidiaries, main operations and assets are located in
the PRC. Shareholders may not be accorded the same rights and protection that would be accorded under the US law. In addition,
it would be difficult to enforce a U.S. judgment against our PRC subsidiaries and our officers and directors.
We are a holding company and all of our operations and assets are
held in overseas subsidiaries. Our PRC subsidiaries, Jiangsu Delta and Binhai Deda were established in the PRC, and their main
operations and assets are located in the PRC. Our PRC subsidiaries, main operations and assets are therefore subject to the relevant
laws and regulations of the PRC. In addition, a majority of our officers and directors are non-residents of the United States and
substantially all their assets are located outside the United States. As a result, it could be more difficult for investors to
effect service of process in the United States, or to enforce a judgment obtained in the United States against any of our PRC subsidiaries
or any of these persons.
Our business is subject to certain PRC laws and regulations.
Our business and operations in the PRC are subject to government
rules and regulations, including environmental, working safety, road transportation and health regulations. Any changes in such
government regulations may have a negative impact on our business.
Breaches or non-compliance with these PRC laws and regulations may
result in the suspension, withdrawal or termination of our business licenses or permits, or the imposition of penalties, by the
relevant authorities. Our PRC subsidiaries’ business licenses are also granted for a finite period and any extension thereof
is subject to the approval of the relevant authorities. Any suspension, withdrawal, termination or refusal to extend our PRC subsidiaries’
business licenses or permits would cause the cessation of production of certain or all of our products, and this would adversely
affect our PRC subsidiaries’ business, financial performance and prospects.
Uncertainty in the PRC legal system may make it difficult
for us to predict the outcome of any disputes that we may be involved in.
The PRC legal system is based on the PRC Constitution and is made
up of written laws, regulations, circulars and directives. The PRC government is still in the process of developing its legal system,
so as to meet the needs of investors and to encourage foreign investment. As the PRC economy is generally developing at a faster
pace than its legal system, some degree of uncertainty exists in connection with whether and how existing laws and regulations
will apply to certain events or circumstances.
Some of the laws and regulations, and the interpretation, implementation
and enforcement thereof, are still subject to policy changes. There is no assurance that the introduction of new laws, changes
to existing laws and the interpretation or application thereof or the delays in obtaining approvals from the relevant authorities
will not have an adverse impact on our PRC subsidiaries’ business, financial performance and prospects.
Further, precedents on the interpretation, implementation and enforcement
of the PRC laws and regulations are limited, and unlike other common law countries such as the United States, decisions on precedent
cases are not binding on lower courts. As such, the outcome of dispute resolutions may not be consistent or predictable as in the
other more developed jurisdictions and it may be difficult to obtain swift or equitable enforcement of the laws in the PRC, or
obtain enforcement of judgment by a court of another jurisdiction.
New rules on mergers and acquisitions of domestic enterprise
by foreign investors.
In particular, on August 8, 2006, Ministry of Commerce (“MOC”),
China Security and Regulatory Commission (“CSRC”), State Administration of Foreign Exchange (“SAFE”) and
State Administration for Industry and Commerce of the PRC (“SAIC”), State Administration for Taxation (“SAT”)
and National Development and Reform Commission (“NDRC”) promulgated the Provisions on the Mergers and Acquisitions
of Domestic Enterprise by Foreign Investors (“M&A Regulations” or “Provision 10”), which came into
effect on September 8, 2006 and was revised on June 22, 2009 by MOC. The Provision 10 was supplemented by the Provisions on indirect
issuance of securities overseas by a domestic enterprise or overseas listing of its securities for trading issued by CSRC on by
the Guidelines on Domestic Enterprises indirectly issuing securities overseas or listing and trading their securities overseas
("CSRC Guidelines") issued by the CSRC on September 21, 2006.
In the opinion of our PRC Counsel, Jingtian & Gongcheng, based
on its understanding of current PRC laws and regulations, Provision 10 does not apply to each of Jiangsu Delta acquisition by Zhengxin
International, Jiangsu Delta acquisition by Delta and Zhengxin R&D acquisition by Jiangsu Delta (collectively the “PRC
Acquisitions”), and hence the PRC Acquisitions are not subject to the MOC’s approval.
However, there is no assurance that the relevant Chinese government
agency, including the CSRC, would reach the same conclusion as our PRC Counsel. If the CSRC or any other Chinese regulatory bodies
subsequently determine that we need to obtain the CSRC approval for our acquisition of PRC subsidiaries, we may face regulatory
actions or other sanctions from the CSRC or other Chinese regulatory bodies. This may have a material adverse impact on our business,
financial condition, results of operations, remittance of profits as well as the trading prices of our shares.
Failure of our PRC resident shareholders to comply with regulations
on foreign exchange registration of overseas investment by PRC residents could cause us to lose our ability to contribute capital
to our PRC subsidiaries and remit profits out of the PRC as dividends.
The Notice on Relevant Issues Concerning Foreign Exchange Administration
for Domestic Residents to Engage in Overseas Financing and Round Trip Investment via Overseas Special Purpose Vehicles (“Circular
75”), issued by the SAFE and effective on November 1, 2005, regulates the foreign exchange matters in relation to the use
of a “special purpose vehicle” by PRC residents to seek offshore equity financing and conduct a “round trip investment”
in China. Under Circular 75, a “special purpose vehicle” refers to an offshore entity directly established or indirectly
controlled by PRC resident natural or legal persons (“PRC residents”) for the purpose of seeking offshore equity financing
using assets or interests owned by such PRC residents in onshore companies, while “round trip investment” refers to
the direct investment in China by such PRC residents through the “special purpose vehicles,” including, without limitation,
establishing foreign-invested enterprises and using such foreign-invested enterprises to purchase or control onshore assets through
contractual arrangements. Circular 75 requires that, before establishing or controlling a “special purpose vehicle”,
PRC residents and PRC entities are required to complete a foreign exchange registration with the competent local branches of the
SAFE for their overseas investments. After the completion of a round-trip investment or the overseas equity financing, the PRC
residents are required to go through foreign exchange registration alteration formalities of overseas investment in respect of
net assets of special purpose vehicles that such PRC residents hold and the variation thereof.
In addition, an amendment to the registration is required if there
is a material change in the “special purpose vehicle,” such as increase or reduction of share capital and transfer
of shares. Failure to comply with the registration procedures set forth in Circular 75 may result in restrictions on the foreign
exchange activities of the relevant foreign-invested enterprises, including the payment of dividends and other distributions, such
as proceeds from any reduction in capital, share transfer or liquidation, to its offshore parent or affiliate and the capital inflow
from the offshore parent, and may also subject the relevant PRC residents to penalties under PRC foreign exchange administration
regulations.
We have requested our current PRC resident shareholders and/or beneficial
owners to disclose whether they or their shareholders or beneficial owners fall within the scope of the Circular 75 and urged PRC
residents to register with the local SAFE branch as required under the Circular 75. Our affiliates subject to the SAFE registration
requirements, including Mr. Xin Chao and Mr. Lei Shen, have informed us that they have made their initial registrations with SAFE
dated June 5, 2013. The failure of our PRC resident shareholders and/or beneficial owners to timely amend their SAFE registrations
pursuant to the Circular 75 or the failure of our future shareholders and/or beneficial owners who are PRC residents to comply
with the registration requirement set forth in the Circular 75 may subject such shareholders, beneficial owners and/or our PRC
subsidiaries to fines and legal sanctions. Any such failure may also limit our ability to contribute additional capital into our
PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute dividends to us or otherwise adversely affect our business.
The PRC government could 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 certain expenses as they come due or may restrict which limit
the payment of dividends from the Company.
Our results and financial conditions are highly susceptible
to changes in the PRC’s political, economic and social conditions as our revenue is currently wholly derived from our operations
in the PRC.
Since 1978, the PRC government has undertaken various reforms of
its economic systems. Such reforms have resulted in economic growth for the PRC in the last three decades. However, many of the
reforms are unprecedented or experimental, and are expected to be refined and modified from time to time. Other political, economic
and social factors may also lead to further readjustment of the reform measures. This refinement and adjustment process may consequently
have a material impact on our operations in the PRC or a material adverse impact on our financial performance. Our results and
financial condition may be adversely affected by changes in the PRC’s political, economic and social conditions and by changes
in policies of the PRC government or changes in laws, regulations or the interpretation or implementation thereof.
Dividends payable to us by our PRC subsidiaries may be subject
to PRC withholding taxes, dividends distributed to our non-PRC investors and gains realized by our non-PRC shareholders from the
transfer of our securities may be subject to PRC withholding taxes under the Enterprise Income Tax Law.
The Enterprise Income Tax Law (“EIT Law”) imposes a
10% withholding income tax on dividends generated on or after January 1, 2008 and distributed by a resident enterprise to its foreign
investors, if such foreign investors are considered as non-resident enterprises without any establishment or place of business
within China or if the received dividends have no connection with such foreign investors’ establishment or place of business
within China, unless such foreign investors’ jurisdiction of incorporation has a tax treaty with China that provides for
a different withholding arrangement. The British Virgin Islands, where we are incorporated, does not have such tax treaty with
China. According to the Arrangement between Mainland of China and the Hong Kong Special Administrative Region on the Avoidance
of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income in August 2006, dividends paid by a foreign
invested enterprise, or FIE, to its foreign investors in Hong Kong will be subject to withholding tax at a preferential rate of
no more than 5% (if the foreign investor owns directly at least 25% of the shares of the FIE). The State Administration of Taxation
further promulgated a circular, or Circular 601, on October 27, 2009, which provides that tax treaty benefits will be denied to
“conduit” or shell companies without business substance and that a beneficial ownership analysis will be used based
on a “substance-over-form” principle to determine whether or not to grant the tax treaty benefits. Our subsidiaries
in China are directly invested in and held by a Hong Kong registered entity. If we are regarded as a non-resident enterprise and
our Hong Kong entity regarded as resident enterprise, then our Hong Kong entity may be required to pay a 10% withholding tax on
any dividends payable to it. If our Hong Kong entity is regarded as non-resident enterprises, then our subsidiaries in China will
be required to pay a 5% withholding tax for any dividends payable to our Hong Kong entities provided that specific conditions are
met. However, it is still unclear at this stage whether Circular 601 applies to dividends from our PRC subsidiaries paid to our
Hong Kong subsidiary and if our Hong Kong subsidiary were not considered as “beneficial owner” of any dividends from
our PRC subsidiaries, the dividends payable to our Hong Kong subsidiary would be subject to withholding tax at a rate of 10%. In
either case, the amount of funds available to us, including the payment of dividends to our shareholders, could be materially reduced.
In addition, because there remains uncertainty regarding the concept of “the place of de facto management body,” if
we are regarded as a resident enterprise, under the EIT Law, any dividends to be distributed by us to our non-PRC shareholders
will be subject to PRC withholding tax. We also cannot guarantee that any gains realized by such non-PRC shareholders from the
transfer of our shares will not be subject to PRC withholding tax. If we are required under the EIT Law to withhold PRC income
tax on dividends payable to our non-PRC shareholders or any gains realized by our non-PRC shareholders from transfer of our shares,
their investment in our shares may be materially and adversely affected.
We may be subject to a significant withholding tax should
equity transfers by our non-resident enterprises be determined to have been done without a reasonable business purpose.
In December 2009, the State Administration of Tax in China issued
a circular on strengthening the management of proceeds from equity transfers by non-resident enterprises and requires foreign entities
to report indirect sales of resident enterprises. If the existence of the overseas intermediary holding company is disregarded
due to lack of reasonable business purpose or substance, gains on such sale are subject to PRC withholding tax. Due to limited
guidance and implementation history of the circular, significant judgment is required in determining the existence of a reasonable
business purpose by considering multiple factors, such as the form and substance of the arrangement, time of establishment of the
foreign entity, relationship between each step of the arrangement, relationship between each component of the arrangement, implementation
of the arrangement and the changes in the financial position of all parties involved in the transaction. Although we believe that
our transactions during all the periods presented would be determined to have reasonable business purposes, should this not be
the case, we would be subject to a significant withholding tax that could materially and adversely impact our financial position,
results of operations and cash flows.
Uncertainty in the interpretation of PRC tax regulations may
have a negative impact on our business operations, our acquisition or restructuring strategy or the value of our investment in
it.
Pursuant to the Notice on Strengthening Administration of Enterprise
Income Tax for Share Transfers by Non-PRC Resident Enterprises, or SAT Circular 698, issued by the State Administration of Taxation
in December 2009, with retroactive effect from January 1, 2008, where a non-resident enterprise transfers the equity interests
of a PRC resident enterprise indirectly by disposition of the equity interests of an overseas non-public holding company, or an
Indirect Transfer, and such overseas holding company is located in a tax jurisdiction that: (i) has an effective tax rate of less
than 12.5% or (ii) does not impose income tax on foreign income of its residents, the non-resident enterprise, being the transferor,
must report to the competent tax authority of the PRC resident enterprise this Indirect Transfer. Using a “substance over
form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable
commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from
such Indirect Transfer may be subject to PRC withholding tax at a rate of up to 10%. SAT Circular 698 also provides that, where
a non-PRC resident enterprise transfers its equity interests in a PRC resident enterprise to its related parties at a price lower
than fair market value, the relevant tax authority has the power to make a reasonable adjustment to the taxable income of the transaction.
On March 28, 2011, the State Administration of Taxation released
SAT Public Notice (2011) No. 24, or SAT Public Notice 24, to clarify several issues related to Circular 698. SAT Public Notice
24 became effective on April 1, 2011. According to SAT Public Notice 24, the term “effective tax rate” refers to the
effective tax rate on the gain derived from disposition of the equity interests of an overseas holding company; and the term “does
not impose income tax” refers to the cases where the gain derived from disposition of the equity interests of an overseas
holding company is not subject to income tax in the country/region where the overseas holding company is a resident.
There is uncertainty as to the application of SAT Circular 698.
For example, while the term “Indirect Transfer” is not clearly defined, it is understood that the relevant PRC tax
authorities have jurisdiction regarding requests for information over a wide range of foreign entities having no direct contact
with China. Moreover, the relevant authority has not yet promulgated any formal provisions or made any formal declaration as to
the process and format for reporting an Indirect Transfer to the competent tax authority of the relevant PRC resident enterprise.
In addition, there are no formal declarations with regard to how to determine whether a foreign investor has adopted an abusive
arrangement in order to reduce, avoid or defer PRC tax. SAT Circular 698 may be determined by the tax authorities to be applicable
to previous investments by non-resident investors in its company, if any of such transactions were determined by the tax authorities
to lack reasonable commercial purpose. As a result, we and our existing non-resident investors may be at risk of being taxed under
SAT Circular 698 and may be required to expend valuable resources to comply with SAT Circular 698 or to establish that we should
not be taxed under SAT Circular 698, which may have a material adverse effect on our financial condition and results of operations
or such non-resident investors’ investments in us. We have conducted and may conduct transactions involving our corporate
structure. We cannot assure you that the PRC tax authorities will not, at their discretion, adjust any capital gains and impose
tax return filing obligations on us or require us to provide assistance for the investigation of PRC tax authorities with respect
thereto. Any PRC tax imposed on a transfer of our shares or any adjustment of such gains would cause us to incur additional costs
and may have a negative impact on the value of your investment in us.
PRC regulation of loans and direct investment by offshore
holding companies to PRC entities may delay or prevent us from using the proceeds from the offerings of any securities to make
loans or additional capital contributions to our PRC operating subsidiaries.
As an offshore holding company, our ability to make loans or additional
capital contributions to our PRC operating subsidiaries is subject to PRC regulations and approvals. These regulations and approvals
may delay or prevent us from using the proceeds we received in the past or will receive in the future from the offerings of securities
to make loans or additional capital contributions to our PRC operating subsidiaries, and impair our ability to fund and expand
our business which may adversely affect our business, financial condition and result of operations.
For example, the SAFE promulgated the Circular on the Relevant Operating
Issues concerning Administration Improvement of Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises,
or Circular 142, on August 29, 2008. Under Circular 142, registered capital of a foreign-invested company settled in RMB converted
from foreign currencies may only be used within the business scope approved by the applicable governmental authority and may not
be used for equity investments in the PRC. In addition, foreign-invested companies may not change how they use such capital without
the SAFE’s approval, and may not in any case use such capital to repay RMB loans if they have not used the proceeds of such
loans. Furthermore, the SAFE promulgated a circular on November 9, 2010, or Circular 59, which requires the authenticity of settlement
of net proceeds from offshore offerings to be closely examined and the net proceeds to be settled in the manner described in the
offering documents. In addition, to strengthen Circular 142, on November 9, 2011, the SAFE promulgated the Circular on Further
Clarifying and Regulating Relevant Issues Concerning the Administration of Foreign Exchange under Capital Account, or Circular
45, which prohibits a foreign invested company from converting its registered capital in foreign exchange currency into RMB for
the purpose of making domestic equity investments, granting entrusted loans, repaying inter-company loans, and repaying bank loans
that have been transferred to a third party. Circular 142, Circular 59 and Circular 45 may significantly limit our ability to transfer
the net proceeds from offerings of our securities or any future offering to our PRC subsidiaries and convert the net proceeds into
RMB, which may adversely affect our liquidity and our ability to fund and expand our business in the PRC.
Currency fluctuations and restrictions on currency exchange
may adversely affect our business, including limiting our ability to convert RMB into foreign currencies and, if RMB were to decline
in value, reducing our revenues and profits in U.S. dollar terms.
Our reporting currency is the U.S. dollar and our operations in
China use RMB as functional currencies. The majority of our revenues derived and expenses incurred are in Chinese RMB with a relatively
small amount in U.S. dollars. We are subject to the effects of exchange rate fluctuations with respect to any of these currencies.
For example, the value of the RMB depends to a large extent on Chinese government policies and China’s domestic and international
economic and political developments, as well as supply and demand in the local market. Starting July 2005, the Chinese government
changed its policy of pegging the value of the RMB to the U.S. dollar. Under the new policy, the RMB has fluctuated within a narrow
and managed band against a basket of certain foreign currencies. It is possible that the Chinese government will adopt a more flexible
currency policy, which could result in more significant fluctuations of the RMB against the U.S. dollar.
The income statements of our China operations are translated into
U.S. dollars at the average exchange rates in each applicable period. To the extent the U.S. dollar strengthens against foreign
currencies, the translation of these foreign currency-denominated transactions results in reduced revenues, operating expenses
and net income for our non-U.S. operations. Similarly, to the extent the U.S. dollar weakens against foreign currencies, the translation
of RMB denominated transactions results in increased revenues, operating expenses and net income for our non-U.S. operations. We
are also exposed to foreign exchange rate fluctuations as we convert the financial statements of our non-U.S. subsidiaries into
U.S. dollars in consolidation. If there is a change in foreign currency exchange rates, the conversion of the non-U.S. subsidiaries’
financial statements will similarly be affected.
We have not entered into agreements or purchased instruments to
hedge our exchange rate risks, although we may do so in the future. The availability and effectiveness of any hedging transaction
may be limited and we may not be able to successfully hedge our exchange rate risks.
Although Chinese governmental policies were
introduced in 1996 to allow the convertibility of RMB into foreign currency for current account items, conversion of RMB into foreign
exchange for most of the capital items, such as foreign direct investment, loans or securities, requires the approval of the State
Administration of Foreign Exchange, or SAFE. These approvals, however, do not guarantee the availability of foreign currency. We
cannot be sure that we will be able to obtain all required conversion approvals for our operations or that Chinese regulatory authorities
will not impose greater restrictions on the convertibility of RMB in the future. Because a significant amount of our future revenues
are in the form of RMB, our inability to obtain the requisite approvals or any future restrictions on currency exchanges could
limit our ability to utilize revenue generated in RMB to fund our business activities outside China, or to repay non-RMB-denominated
obligations, including our debt obligations, which would have a material adverse effect on our financial condition and results
of operations.
Restrictions on paying dividends or making
other payments to us by our subsidiaries in China.
We are a holding company and do not have any
assets or conduct any business operations in China other than our investments in our subsidiaries in China. As a result, if our
non-China operations require cash from China, we would depend on dividend payments from our subsidiaries in China. We cannot make
any assurance that we can continue to receive payments from our subsidiaries in China. In addition, under Chinese law, our subsidiaries
are only allowed to pay dividends to us out of their distributable earnings, if any, as determined in accordance with Chinese accounting
standards and regulations. Moreover, our Chinese subsidiaries are required to set aside at least 10% of their respective after-tax
profit each year, if any, to fund certain mandated reserve funds, unless these reserves have reached 50% of their registered capital.
These reserve funds are not payable or distributable as cash dividends. For Chinese subsidiaries with after-tax profits for the
periods presented, the difference between after-tax profits as calculated under PRC accounting standards and U.S. GAAP relates
primarily to share-based compensation expenses and intangible assets amortization expenses, which are not pushed down to our subsidiaries
under PRC accounting standards. In addition, under the EIT Law and its implementing Rules, dividends generated from our PRC subsidiaries
after January 1, 2008 and payable to their immediate holding company incorporated in Hong Kong generally will be subject to a withholding
tax rate of 10% (unless the PRC tax authorities determine that our Hong Kong subsidiary is a resident enterprise). If certain conditions
and requirements under the Arrangement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance
of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income entered into between Hong Kong and the
PRC and other related PRC laws and regulations are met, the withholding rate could be reduced to 5%.
The Chinese government also imposes controls
on the convertibility of RMB into foreign currencies and the remittance of currency out of China in certain cases. We have experienced
and may continue to experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency.
If we or any of our subsidiaries are unable to receive substantially all of the economic benefits from our operations through these
contractual or dividend arrangements, we may be unable to effectively finance our operations or pay dividends on our ordinary shares.
PRC laws and regulations establish more complex procedures
for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through
acquisitions in China.
A number of PRC laws and regulations, including the Regulations
on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors adopted by six PRC regulatory agencies in 2006, or the
M&A Rules, the Antimonopoly Law, and the Rules of Ministry of Commerce on Implementation of Security Review System of Mergers
and Acquisitions of Domestic Enterprises by Foreign Investors promulgated by the Ministry of Commerce in August 2011, or the Security
Review Rules, have established procedures and requirements that are expected to make merger and acquisition activities in China
by foreign investors more time consuming and complex. These include requirements in some instances that the Ministry of Commerce
be notified in advance of any change of control transaction in which a foreign investor takes control of a PRC domestic enterprise,
or that the approval from the Ministry of Commerce be obtained in circumstances where overseas companies established or controlled
by PRC enterprises or residents acquire affiliated domestic companies. PRC laws and regulations also require certain merger and
acquisition transactions to be subject to merger control review or security review.
The Security Review Rules were formulated to implement the Notice
of the General Office of the State Council on Establishing the Security Review System for Mergers and Acquisitions of Domestic
Enterprises by Foreign Investors, also known as Circular 6, which was promulgated in 2011. Under these rules, a security review
is required for mergers and acquisitions by foreign investors having “national defense and security” concerns and mergers
and acquisitions by which foreign investors may acquire the “de facto control” of domestic enterprises have “national
security” concerns. In addition, when deciding whether a specific merger or acquisition of a domestic enterprise by foreign
investors is subject to the security review, the Ministry of Commerce will look into the substance and actual impact of the transaction.
The Security Review Rules further prohibit foreign investors from bypassing the security review requirement by structuring transactions
through proxies, trusts, indirect investments, leases, loans, control through contractual arrangements or offshore transactions.
There is no requirement for foreign investors in those mergers and
acquisitions transactions already completed prior to the promulgation of Circular 6 to submit such transactions to the Ministry
of Commerce for security review. As we have already obtained the “de facto control” over our affiliated PRC entities
prior to the effectiveness of these rules, we do not believe we are required to submit our existing contractual arrangements to
the Ministry of Commerce for security review.
However, as these rules are relatively new and there is a lack of
clear statutory interpretation on the implementation of the same, there is no assurance that the Ministry of Commerce will not
apply these national security review-related rules to the acquisition of equity interest in our PRC subsidiaries. If we are found
to be in violation of the Security Review Rules and other PRC laws and regulations with respect to the merger and acquisition activities
in China, or fail to obtain any of the required approvals, the relevant regulatory authorities would have broad discretion in dealing
with such violation, including levying fines, confiscating our income, revoking our PRC subsidiaries’ business or operating
licenses, requiring us to restructure or unwind the relevant ownership structure or operations. Any of these actions could cause
significant disruption to our business operations and may materially and adversely affect our business, financial condition and
results of operations. Further, if the business of any target company that we plan to acquire falls into the ambit of security
review, we may not be able to successfully acquire such company either by equity or asset acquisition, capital contribution or
through any contractual arrangement. We may grow our business in part by acquiring other companies operating in our industry. Complying
with the requirements of the relevant regulations to complete such transactions could be time consuming, and any required approval
processes, including approval from the Ministry of Commerce, may delay or inhibit our ability to complete such transactions, which
could affect our ability to expand our business or maintain our market share.
The PRC Labor Contract Law and its implementing rules may
adversely affect our business and results of operations.
The PRC Labor Contract Law became effective and was implemented
on January 1, 2008. The PRC Labor Contract Law has reinforced the protection for employees who, under the PRC Labor Contract Law,
have the right, among others, to have written labor contracts, to enter into labor contracts with no fixed terms under certain
circumstances, to receive overtime wages and to terminate or alter terms in labor contracts. Furthermore, the PRC Labor Contract
Law establishes additional restrictions and increases the costs involved with dismissing employees. As the PRC Labor Contract Law
is relatively new, there remains significant uncertainty as to its interpretation and application by the PRC Government. In the
event that we decide to significantly reduce our workforce, the PRC Labor Contract Law could adversely affect our ability to do
so in a timely and cost effective manner, and our results of operations could be adversely affected. In addition, for employees
whose contracts include non-competition terms, the Labor Contract Law requires us to pay monthly compensation after such employment
is terminated, which will increase our operating expenses.
Failure by our PRC shareholders or beneficial owners to make
required foreign exchange filings and registrations may prevent us from distributing dividends and expose us to liabilities under
the PRC laws.
The Circular on Relevant Issues concerning Foreign Exchange Administration
of Overseas Investment and Financing and Return Investments Conducted by Domestic Residents through Overseas Special Purpose Vehicles
(“SAFE Circular No. 37”), which was promulgated by SAFE and became effective on July 14, 2014, requires a PRC individual
resident (“PRC Resident”) to register with the local SAFE branch before he or she contributes assets or equity interests
in an overseas special purpose vehicle (“Offshore SPV”) that is directly established or controlled by the PRC Resident
for the purpose of conducting investment or financing. Following the initial registration, the PRC Resident is also required to
register with the local SAFE branch for any major change in respect of the Offshore SPV, including, among other things, any major
change of a PRC Resident shareholder, name or term of operation of the Offshore SPV, or any increase or reduction of the Offshore
SPV’s registered capital, share transfer or swap, merger or division. Failure to comply with the registration procedures
of SAFE Circular No. 37 may result in penalties and sanctions, including the imposition of restrictions on the ability of the Offshore
SPV’s PRC subsidiary to distribute dividends to its overseas parent.
Our existing PRC Resident shareholders and beneficial owners currently
are subject to the registration procedures under SAFE Circular No. 37. However, as SAFE Circular No. 37 was recently promulgated,
it is unclear how this regulation and any future regulation concerning offshore or cross-border transactions will be interpreted,
amended or implemented by the relevant government authorities. It cannot be predicted that how these regulations will affect our
business operations or future strategies. Any failure by our PRC Resident shareholders or beneficial owners to make the updates
with SAFE may subject the relevant PRC Resident shareholders or beneficial owners to penalties, restrict our overseas or cross-border
investment activities, limit our PRC subsidiaries’ ability to make distributions or pay dividends, or affect our ownership
structure and capital inflow from our offshore subsidiaries. As such, our business, financial condition, results of operations
and liquidity as well as our ability to pay dividends or make other distributions to our shareholders may be materially and adversely
affected.
We may not be able to adequately protect our intellectual
property rights, and any failure to protect our intellectual property rights could adversely affect our revenues and competitive
position.
We believe that trademarks, trade secrets, patents, copyrights,
and other intellectual property we use are important to our business. We rely on a combination of trademark, copyright, patent
and trade secret protection laws in China and other jurisdictions, as well as confidentiality procedures and contractual provisions
to protect our intellectual property and our brand. We have invested significant resources to develop our own intellectual property
and acquire licenses to use and distribute the intellectual property of others. A failure to maintain or protect these rights could
harm our business. In addition, any unauthorized use of our intellectual property by third parties may adversely affect our current
and future revenues and our reputation.
The validity, enforceability and scope of protection available under
intellectual property laws in the PRC are uncertain and still evolving. Implementation and enforcement of PRC intellectual property-related
laws have historically been deficient and ineffective. Accordingly, protection of intellectual property rights in the PRC 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 our other intellectual
property 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.
There are defects in our titles of or rights to use our properties.
We have not received the record of completion acceptance from the
relevant authority for our facilities used in our production and storage (“Properties”). We do not have valid title
or right to the said Properties. Any dispute or claim in relation to the title to the Properties, including any litigation involving
allegations of illegal or unauthorized use of the Properties, may materially and adversely affect our operations, financial condition,
reputation and future growth. However, we are in the process of applying to the relevant authority to obtain the completion acceptance
for the Properties.
One of our subsidiaries is manufacturing certain products
that are beyond its business scope.
Jiangsu Delta has been producing UPR, which is beyond the business
scope of Jiangsu Delta. As a result, Jiangsu Delta may be penalized and, as a result, the business license of Jiangsu Delta may
be revoked by relevant authority. However, Jiangsu Delta is applying to relevant authority to enlarge its business scope to include
production of UPR. In the event that such approval is not obtained, Jiangsu Delta will have to suspend production of UPR, which
might adversely affect our financial prospect and results of operation.
One of our subsidiaries is conducting certain business that
is beyond its approved production capacity.
Jiangsu Delta is producing 30,000 tons of PCT/OCT series and downstream
products per annum, which are beyond the approved annual production capacity of 10,000 tons. As a result, Jiangsu Delta might face
a penalty of RMB 500,000 to RMB 1,000,000 by the relevant governmental authority. However, Jiangsu Delta has applied to relevant
authority to increase Jiangsu Delta’s annual approved production capacity to 30,000 tons. In the event that such application
is denied, Jiangsu Delta will have to reduce its actual production under the approved capacity. As a result, our production might
not keep up with the demand of our customers, which may adversely affect our revenue and financial conditions.
Risks Relating to Our Securities
The market price of our ordinary shares is volatile, leading
to the possibility of its value being depressed at a time when you want to sell your holdings.
The market price of our ordinary shares and warrants is volatile,
and this volatility may continue. Numerous factors, many of which are beyond our control, may cause the market price of our ordinary
shares to fluctuate significantly. These factors include:
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our earnings releases, actual or anticipated changes in our earnings,
fluctuations in our operating results or our failure to meet the expectations of financial market analysts and investors;
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changes in financial estimates by us or by any securities analysts
who might cover our stock;
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speculation about our business in the press or the investment community;
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significant developments relating to our relationships with our customers
or suppliers;
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stock market price and volume fluctuations of other publicly traded
companies and, in particular, those that are in the same industry as we are;
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customer demand for our products;
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·investor perceptions of the chemical industry in general and
our company in particular;
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the operating and stock performance of comparable companies;
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general economic conditions and trends;
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announcements by us or our competitors of new products, significant
acquisitions, strategic partnerships or divestitures;
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changes in accounting standards, policies, guidance, interpretation
or principles;
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loss of external funding sources;
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failure to maintain compliance with NASDAQ rules;
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sales of our ordinary shares, including sales by our directors, officers
or significant shareholders; and
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additions or departures of key personnel.
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Securities class action litigation is often instituted against companies
following periods of volatility in their share price. This type of litigation could result in substantial costs to us and divert
our management’s attention and resources. Moreover, securities markets may from time to time experience significant price
and volume fluctuations for reasons unrelated to operating performance of particular companies. For example, in July 2008, the
securities markets in the United States, China and other jurisdictions experienced the largest decline in share prices since September
2001. These market fluctuations may adversely affect the price of our ordinary shares, warrants and other interests in our company
at a time when you want to sell your interest in us.
If we fail to comply with the continued listing requirements
of NASDAQ, we would face possible delisting, which would result in a limited public market for our shares and make obtaining future
debt or equity financing more difficult for us.
Our ordinary shares are traded and listed on the NASDAQ Capital
Market under the symbol “DELT” and our warrants are traded and listed on the NASDAQ Capital Market under the symbol
“DELTW.” The ordinary shares and warrants may be delisted if we fail to maintain certain listing requirements of the
Nasdaq Stock Market, or NASDAQ.
On April 1, 2016, we received a letter from the Listing Qualifications
staff of The Nasdaq Stock Market (“NASDAQ”) notifying us that for the preceding 30 consecutive business days our ordinary
share did not maintain a minimum closing bid price of at least $1.00 per share as required by Nasdaq Listing Rule 5550(a)(2). We
have a grace period of 180 calendar days, or until September 26, 2016, to regain compliance with the minimum closing bid price
requirement for continued listing. On July 6, 2016, NASDAQ notified the Company that it has regained compliance since the bid price
of the Company’s ordinary shares closed at or above $1.00 per share for the last 10 business days, from June 21, 2016 to
July 5, 2016.
If we fail to comply with the requirements for continued listing
on The NASDAQ Capital Market again in the future, we cannot assure you that we will be able to regain compliance. If our securities
lose their status on The NASDAQ Capital Market, our securities would likely trade in the over-the-counter market. If our securities
were to trade on the over-the-counter market, selling our securities could be more difficult because smaller quantities of securities
would likely be bought and sold, transactions could be delayed, and security analysts’ coverage of us may be reduced. In
addition, in the event our securities are delisted, broker-dealers have certain regulatory burdens imposed upon them, which may
discourage broker-dealers from effecting transactions in our securities, further limiting the liquidity of our securities. These
factors could result in lower prices and larger spreads in the bid and ask prices for our securities. Such delisting from The NASDAQ
Capital Market and continued or further declines in our share price could also greatly impair our ability to raise additional necessary
capital through equity or debt financing, and could significantly increase the ownership dilution to shareholders caused by our
issuing equity in financing or other transactions.
While we believe that we currently have adequate internal
control procedures in place, we are still exposed to potential risks from legislation requiring companies to evaluate controls
under Section 404 of the Sarbanes-Oxley Act of 2002.
Under the supervision and with the participation of our management,
we have evaluated our internal controls systems in order to allow management to report on the system and process evaluation and
testing required in an effort to comply with the management certification and auditor attestation requirements of Section 404.
As a result, we have incurred additional expenses and a diversion of management’s time.
If we fail to maintain effective internal control over financial
reporting in the future, a material misstatement of our financial statements may not be prevented or detected on a timely basis.
In addition, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting
in accordance with Section 404. This could in turn result in the loss of investor confidence in the reliability of our financial
statements and negatively impact the trading price of our shares. Furthermore, if we are not able to continue to meet the requirements
of Section 404 in a timely manner or with adequate compliance, we might be subject to sanctions or investigation by regulatory
authorities, such as the SEC or the NASDAQ. Any such action could adversely affect our financial results and the market price of
our ordinary shares and warrants.
As a foreign private issuer, we have limited reporting requirements
under the Securities Exchange Act of 1934, which makes us less transparent than a United States issuer.
As a foreign private issuer, the rules and regulations under the
Exchange Act provide us with certain exemptions from the reporting obligations of United States issuers. We are exempt from the
rules prescribing the furnishing and content of proxy statements, and our officers, directors and principal stockholders are exempt
from the reporting and short-swing profit recovery provisions. Also, we are not required to publish financial statements as frequently,
as promptly or containing the same information as United States companies. The result is that we will be less transparent than
a U.S. issuer.
As a foreign private issuer, we are not subject to certain
NASDAQ corporate governance rules applicable to public companies organized in the United States.
We rely on a provision in the NASDAQ Stock Market’s Listed
Company Manual that allows us to follow BVI law with regard to certain aspects of corporate governance. This allows us to follow
certain corporate governance practices that differ in significant respects from the corporate governance requirements applicable
to U.S. companies listed on the NASDAQ Stock Market.
For example, we are exempt from regulations of the NASDAQ Stock
Market that require listed companies organized in the United States to:
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have a majority of the board of directors consist of independent directors;
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have an audit committee consisting solely of independent directors;
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have a compensation committee consisting solely of independent directors;
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have a nominating committee consisting solely of independent directors.
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As a foreign private issuer, we are permitted to follow home country
practice in lieu of the above requirements. Accordingly, our shareholders may not have the same protections afforded to shareholders
of companies that are subject to these NASDAQ Stock Market requirements.
We are an “emerging growth company” and may not
be subject to requirements that other public companies are subject to, which could harm investor confidence in us and our securities.
We are an “emerging growth company” as defined in the
Jumpstart Our Business Act of 2012, or the JOBS Act, and, for as long as we continue to be an emerging growth company, we may choose
to take advantage of exemptions from various reporting requirements applicable to other public companies, including an exemption
from the requirement to comply with the auditor attestation requirements of Section 404 and an exemption from the requirement to
adopt and comply with new or revised accounting standards at the same time as other public companies. We will remain an emerging
growth company until the earliest of (a) the last day of our fiscal year during which we have total annual gross revenues of at
least US$1.0 billion; (b) the last day of our fiscal year following the fifth anniversary of the completion of our initial public
offering; (c) the date on which we have, during the previous three-year period, issued more than US$1.0 billion in non-convertible
debt; or (d) the date on which we are deemed to be a “large accelerated filer” under the Exchange Act, which would
occur if the market value of our ADSs that are held by non-affiliates exceeds US$700 million as of the last business day of our
most recently completed second fiscal quarter.
The JOBS Act provides that an emerging growth company can take advantage
of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting
standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards
would otherwise apply to private companies. However, we will elect to “opt out” of this provision and, as a result,
we will comply with any new or revised accounting standards as required when they are adopted for public companies. This decision
to opt out of the extended transition period under the JOBS Act is irrevocable.
If some investors find our securities less attractive because we
may rely on these exemptions, there may be a less active trading market for our securities and their price may be more volatile.
We may be classified as a passive foreign investment company
for United States federal income tax purposes, which could result in adverse United States federal income tax consequences to U.S.
Holders.
Based on the market price of our ordinary shares, the value of our
assets, and the composition of our assets and income, we do not believe that we were a passive foreign investment company (a “PFIC”)
for United States federal income tax purposes for our taxable year ended June 30, 2017 and we do not expect to be one for our taxable
year ending June 30, 2018 or to become one in the foreseeable future. Nevertheless, the application of the PFIC rules is subject
to ambiguity in several respects and, in addition, we must make a separate determination each year as to whether we are a PFIC
(after the close of each taxable year). Accordingly, we cannot assure you that we will not be a PFIC for the current or any other
taxable year. Moreover, although we do not believe we would be treated as a PFIC, we have not engaged any U.S. tax advisers to
determine our PFIC status. In addition, if you owned our ordinary shares at any time prior to our acquisition of Elite, you may
be considered to own stock of a PFIC by virtue of the fact that we may have been a PFIC during the period prior to our acquisition
of Elite, unless you made certain elections to opt out of PFIC treatment, as described in Item 10. E. – “Taxation –
U.S. Federal Income Taxation.”
A non-United States corporation, such as us, will be classified
as a PFIC for United States federal income tax purposes for any taxable year, if either (1) 75% or more of its gross income for
such year consists of certain types of “passive” income, or (2) 50% or more of its average quarterly assets as determined
on the basis of fair market value during such year produce or are held for the production of passive income. Because there are
uncertainties in the application of the relevant rules and PFIC status is a fact-intensive determination made on an annual basis,
no assurance can be given with respect to our PFIC status for the current or any other taxable year.
If we are characterized as a PFIC for any year, a U.S. holder may
incur significantly increased United States income tax on gain recognized on the sale or other disposition of our ordinary shares
and on the receipt of distributions on our ordinary shares to the extent such gain or distribution is treated as an “excess
distribution” under the United States federal income tax rules.
We have outstanding exercisable securities that may dilute
your holdings.
Our outstanding exercisable securities may adversely affect the
market price of our shares.
As of the date of this report, we have issued and outstanding securities
exercisable into 10,061,679 ordinary shares (warrants for the purchase of 6,175,570 shares). The sale or possibility of sale of the shares underlying these securities could
have an adverse effect on the market price for its securities or its ability to obtain future financing. If and to the extent these
securities are converted or exercised, you may experience dilution to your holdings.
One of our stockholders holds a significant percentage of
our outstanding voting securities.
Mr. Xin Chao, who is our Chief Executive Officer and Chairman of
the Board, directly or indirectly owns approximately 26.6% of our outstanding voting securities. As a result, he possesses significant
influence, giving him the ability, among other things, to elect a majority of its Board of Directors and to authorize or prevent
proposed significant corporate transactions. His ownership and control may also have the effect of delaying or preventing a future
change in control, impeding a merger, consolidation, takeover or other business combination or discourage a potential acquirer
from making a tender offer, all of which may prevent it from implementing its business strategies.
Risk Relating to British Virgin Islands
Rights of shareholders under British Virgin Islands law differ
from those under United States law, and, accordingly, our shareholders may have fewer protections.
Our corporate affairs are governed by our Memorandum and Articles
of Association, the BVI Business Companies Act, 2004 (as amended, the “BVI Act”) and the common law of the British
Virgin Islands. The rights of shareholders to take legal action against our directors, actions by minority shareholders and the
fiduciary responsibilities of our directors under British Virgin Islands law are to a large extent governed by the common law of
the British Virgin Islands and by the BVI Act. The common law of the British Virgin Islands is derived in part from comparatively
limited judicial precedent in the British Virgin Islands as well as from English common law, which has persuasive, but not binding,
authority on a court in the British Virgin Islands. The rights of our shareholders and the fiduciary responsibilities of our directors
under British Virgin Islands law are not as clearly established as they would be under statutes or judicial precedents in some
jurisdictions in the United States. In particular, the British Virgin Islands has a less developed body of securities laws as compared
to the United States, and some states (such as Delaware) have more fully developed and judicially interpreted bodies of corporate
law. As a result of the foregoing, holders of our ordinary shares may have more difficulty in protecting their interests through
actions against our management, directors or major shareholders than they would as shareholders of a U.S. company.
The laws of the British Virgin Islands provide limited protection
for minority shareholders, so minority shareholders will have limited or no recourse if they are dissatisfied with the conduct
of our affairs.
Under the laws of the British Virgin Islands, there is limited statutory
law for the protection of minority shareholders other than the provisions of the BVI Act dealing with shareholder. The principal
protection under statutory law is that shareholders may bring an action to enforce the constituent documents of a British Virgin
Islands company and are entitled to have the affairs of the company conducted in accordance with the BVI Act and the memorandum
and articles of association of the company. As such, if those who control the company have persistently disregarded the requirements
of the BVI Act or the provisions of the company’s memorandum and articles of association, then the courts will likely grant
relief. Generally, the areas in which the courts will intervene are the following: (i) an act complained of which is outside the
scope of the authorized business or is illegal or not capable of ratification by the majority; (ii) acts that constitute fraud
on the minority where the wrongdoers control the company; (iii) acts that infringe on the personal rights of the shareholders,
such as the right to vote; and (iv) acts 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 to minority shareholders under the laws
of many states in the United States.
It may be difficult to enforce judgments against us or our
executive officers and directors in jurisdictions outside the United States.
Under our Memorandum and Articles of Association, as amended, we
may indemnify and hold our directors harmless against all claims and suits brought against them, subject to limited exceptions.
Furthermore, to the extent allowed by law, the rights and obligations among or between us, any of our current or former directors,
officers and employees and any current or former shareholder will be governed exclusively by the laws of the British Virgin Islands
and subject to the jurisdiction of the British Virgin Islands courts, unless those rights or obligations do not relate to or arise
out of their capacities as such. Although there is doubt as to whether United States courts would enforce these provisions in an
action brought in the United States under United States securities laws, these provisions could make judgments obtained outside
of the British Virgin Islands more difficult to enforce against our assets in the British Virgin Islands or jurisdictions that
would apply British Virgin Islands law.
British Virgin Islands companies may not be able to initiate
shareholder derivative actions, thereby depriving shareholders of one avenue 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 of 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 judgments of courts in the United States based on certain liability
provisions of United States securities law or to impose liabilities, in original actions brought in the British Virgin Islands,
based on certain liability provisions of the United States 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 the Company successfully, they may not be able to recover anything to make up
for the losses suffered.
ITEM 4.
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INFORMATION ON THE COMPANY
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History and development of the company.
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We were formed under the name of “CIS Acquisitions Ltd.”
on November 28, 2011, under the laws of the British Virgin Islands. We were formed to acquire, through a merger, stock exchange,
asset acquisition, stock purchase or similar acquisition transaction, one or more operating businesses. Although we were not limited
to a particular geographic region or industry, we intended to focus on operating businesses with primary operations in Russia and
Eastern Europe. We had no operations and generated no operating revenues until we completed the acquisition of Elite as more fully
discussed below.
We are an emerging growth company, as defined in the Jumpstart Our
Business Startups Act.
Initial Public Offering
On December 21, 2012, we consummated our initial public offering
of 4,000,000 units at a public offering price of $10.00 per unit, generating gross proceeds of $40,000,000. Each unit consisted
of one redeemable Class A Share, par value $0.0001 per share, and one redeemable warrant. Each redeemable warrant entitled the
holder to purchase one ordinary share at a price of $10.00. Immediately prior to the consummation of the IPO, we completed a private
placement of 4,500,000 warrants at a price of $0.75 per warrant, for an aggregate purchase price of $3,375,000, to our founding
shareholders and their designees. We sold to the underwriters of the IPO, as additional compensation, an aggregate of 136,000 Class
A Shares for $2,720.
A total of $41,600,000, which included a portion of the $3,375,000
of proceeds from the private placement of warrants to the founding shareholders and their designees, were placed in trust (the
“Trust Account”) pending the completion of our initial acquisition transaction.
Acquisition of Elite
On September 19, 2014, upon closing of a stock purchase agreement
dated September 16, 2014, by and among the Company, Elite Ride Limited, a British Virgin Islands corporation (“Elite”),
Delta Advanced Materials Limited, a Hong Kong corporation (“Delta”) and the shareholders of Elite (the “Elite
Shareholders”), we acquired all the outstanding shares of Elite in exchange for the issuance to the Elite Shareholders an
aggregate of 6,060,000 ordinary shares, of which 4,560,000 shares were issued at closing and 1,500,000 shares (“Earnout Payment
Shares”) are held in escrow and will be released upon meeting of certain performance targets as specified in the stock purchase
agreement (the “Acquisition”). Thus far, we have released 500,000 of the Earnout Payment Shares as a result of Delta
meeting its performance targets for the fiscal year ending June 30, 2015. Delta did not meet its performane targets for the fiscal
years ended June 30, 2016 and June 30, 2017 and accordingly, the remaining 1,000,000 Earnout Payment Shares were retired.
The Earnout Payment Shares, if any, will be released as follows:
(a) 500,000 shares if the Company achieves Adjusted Net Income (as defined in the stock purchase agreement) of at least $8 million
for the period starting July 1, 2014 and ending June 30, 2015; (b) 500,000 shares if the Company achieves Adjusted Net Income of
at least $9.2 million for the period starting July 1, 2015 and ending June 30, 2016; (c) 500,000 shares if the Company achieves
Adjusted Net Income of at least $10.6 million for the period starting July 1, 2016 and ending June 30, 2017 (collectively, the
“Net Income Targets”). Further, during the thirteen months post-closing, all material acquisitions made by the Company
must be accretive to Company earnings. The Net Income Targets are to be met on an all-or-nothing basis, and there shall be no partial
awards.
Concurrently with the Acquisition, we also issued 500,000 ordinary
shares to Kyle Shostak and CIS Acquisition Holding Co. Ltd. (collectively, the “CIS Sponsor”).
We have agreed that in the event that there is any exercise of the
redeemable warrants which were issued in the IPO or the warrants to purchase ordinary shares issued to any CIS Sponsor, any proceeds
of such exercise shall be paid to certain shareholders of Elite. We will not retain any portion of the proceeds of such exercise.
In addition, we entered into a call agreement with the CIS Sponsor
pursuant to which we were permitted to require the CIS Sponsor to sell to us up to 1,500,000 ordinary shares at a price of $5.00
per share between the 360th and 390th after the closing date. To date, the Company has not exercised its call options under this
agreement.
In connection with the Acquisition, we amended the 4,500,000 warrants
owned by the CIS Sponsor to provide that such warrants may be redeemed in the event our ordinary shares trade at a price of $17.50
per share for a period of ten consecutive trading days and that such warrants may not be exercised on a cashless basis.
Immediately after the closing, our Board of Directors consisted
of five directors, composed of four nominees designated by Elite, of which one designees qualified as an independent director under
the Exchange Act of 1934, as amended (the “Exchange Act”), and the rules of The NASDAQ Stock Market, and one nominee
designated by us qualified as an independent director under the Exchange Act and the rules of The NASDAQ Stock Market. The parties
to the stock purchase agreement entered into a mutually agreed upon voting agreement relating to nominees to our Board of Directors
for a period of thirteen months following the closing.
We entered into a registration rights agreement with the CIS Sponsor
and any other such parties with the rights to require us to register any of our securities held by such parties under the Securities
Act of 1933, as amended, to terminate their demand registration rights and grant such parties piggyback registration rights.
Due to the short amount of time available before September 21, 2014,
we did not conduct a tender offer to redeem publicly traded shares. Instead, we elected to redeem all holders of publicly traded
shares that have not elected to convert their Series A Shares into Series C Shares, which was completed shortly after September
21, 2014.
As a result of the consummation of the Acquisition, Elite became
our wholly subsidiary. Elite is the holding company of all the shares of Delta which, at the time of the consummation of the Acquisition,
held all the equity interests in the operating subsidiaries in the PRC including Jiangsu Delta, Jiangsu Logistics, Jiangsu Zhengxin
R&D and Binhai Deda.
Through Delta, we engaged in the business of producing and distributing
organic compound including para-chlorotoluene (“PCT”), ortho-chlorotoluene (“OCT”), PCT/OCT downstream
products, unsaturated polyester resin (“UPR”), maleic acid (“MA”) and other by-product chemicals. The end
application markets of our products include automotive, pharmaceutical, agrochemical, dye & pigments, aerospace, ceramics,
coating-printing, clean energy and food additives. We currently have approximately 218 employees, 30% of whom are highly-qualified
experts and technical personnel. We serve nearly 230 clients in various industries.
Following the Acquisition, we changed our name from “CIS Acquisition
Ltd.” to “Delta Technology Holdings Limited” to more accurately reflect our current business and operations.
B. Business overview.
Headquartered in Zhenjiang city, Jiangsu province, we are a fine
and specialty chemical manufacturer, primarily engaged in manufacturing and selling of organic compound including para-chlorotoluene
(“PCT”), ortho-chlorotoluene (“OCT”), PCT/OCT downstream products, and other by-product chemicals and distributing
fine and specialty chemicals to end application markets including automotive, pharmaceutical, agrochemical, dye & pigments,
aerospace, ceramics, coating-printing, clean energy and food additives.
We collaborate with reputable universities, such as the East China
Normal University in order to secure our position as a market leader. We also closely monitor the market for development, trends
and technological innovations and solicit customer feedback so as to keep abreast with market demands and industrial development.
As at the date of this report, we have a diversified clientele with
more than 230 customers based either in domestic or overseas market. Approximately 90% of our sales are to domestic customers based
in Jiangsu province, Anhui province, Zhejiang province, Hubei province, Guangdong province and Chongqing Metropolitan, and the
rest of its products are exported via distributors or trading companies to countries outside the PRC which include but not limited
to India, Brazil, Japan, European Union member countries and America.
Our revenue for the fiscal years ended June 30, 2015, 2016 and 2017
were approximately $202 million, $53 million and $56 million, respectively, and our profit before tax for the fiscal years ended
June 30, 2015, 2016 and 2017 were $5.1 million, loss before tax of $7.6 million and $28.4 million , respectively. The slightly
increase in revenue for the year ended June 30, 2017 was a result of increased demand for our products in the PRC.
Our Subsidiaries
Elite Ride Limited
Elite owns 100% of the ordinary shares of Delta and was formed solely
in contemplation of the Acquisition. It has not commenced any operations, has only nominal assets and has no liabilities or contingent
liabilities, nor any outstanding commitments other than as set forth herein. Elite has not incurred any obligations, engaged in
any business activities or entered into any agreements or arrangements with any third parties other than as set forth herein.
Delta
Delta, formerly China Deltachem Holdings Limited, was incorporated
in Hong Kong as an investment holding company on June 17, 2010. Delta acquired Jiangsu Delta for a consideration of $28.8 million
pursuant to a sale and purchase agreement dated May 20, 2010 by and between Delta and Zhengxin International Investment Limited,
a Hong Kong corporation (“Zhengxin International”) and currently holds the entire equity interest in Jiangsu Delta.
On May 26, 2011, Delta carried out a bonus share issue, whereby
an additional 39,990,000 ordinary shares of Delta were allotted and issued as bonus shares at a price of HK$1.00 each to all the
then shareholders of Delta at the ratio in proportion to their existing shareholding percentage, and credited as fully paid up
on a capitalization of the reserve of HK$39,990,000 from the capital reserve of Delta. Subsequent to the bonus issue, Delta’s
total issued and paid-up share capital increased to HK$40 million, comprising 40 million shares of HK$1.00 each. After the bonus
share issue, Delta was owned as to 39,104,000 shares by Mr. Yu Lan (97.76%), 448,000 shares by Mr. Shen Lei (1.12%) and 448,000
shares by Mr. Hong Yan (1.12%). On December 12, 2011, Mr. Yu Lan transferred all of his 39,104,000 shares in Delta to Mr. Xin Chao
for a total consideration of HK$67,102,464.
Delta entered into a series of Securities Purchase Agreements dated
January 31, 2011, May 16, 2011 and June 30, 2011, respectively, with the funds managed by Korea Investment Partners Co. Ltd. and
Kleiner, Perkins, Caufield & Byers (the “Noteholders”), pursuant to which it has issued convertible notes (“Convertible
Notes”) for an aggregate principal amount of US$18 million. The Convertible Notes have a compound interest rate of 6.00%
per annum if converted into shares and a compound interest rate at maturity of 15.00% if redeemed or liquidated. The principal
and interests accrued on such Convertible Notes are convertible in whole or in part into the ordinary shares in Delta, on such
terms and subject to the conditions of the Securities Purchase Agreements. On September 13, 2014, each of Mr. Xin Chao, Mr. Shen
Lei and Mr. Hong Yan transferred all of their respective shareholdings in Delta to Elite. Elite became the sole shareholder of
Delta after the transfer.
On September 15, 2014, Delta entered into a Settlement Deed with
the Noteholders pursuant to which all of the outstanding obligations under Convertible Notes were settled. Pursuant to the Settlement
Deed, Delta agreed to (i) cause Elite to issue an aggregate of 20,347 of its shares in consideration for the forgiveness of an
aggregate of $8,897,000 of the Convertible Notes due to the Noteholders, and (ii) cause Master Kingdom Holdings Ltd., a British
Virgin Islands company (“Master Kingdom”), which is 100% owned by Mr. Xin Chao, the principal shareholder of Elite,
to enter into a Novation Deed with each of the Noteholders with respect to the repayment of the balance of the Convertible Notes
to the Noteholders. Accordingly, on September 18, 2014, Delta, Master Kingdom and the Noteholders entered in a Novation Deed pursuant
to which Master Kingdom agreed to assume and repay the remaining indebtedness due to the Noteholders in the aggregate amount of
$19,322,981.28. As a result of the foregoing, Delta has no more Convertible Notes outstanding.
Jiangsu Delta
On June 15, 2007, Jiangsu Delta was established by S&S International
Investment Holding (HK) Limited (“S&S International”), a Hong Kong based investment holding company, as a wholly
foreign-owned enterprise (with an initial registered capital of US$42 million, which was later reduced to US$ 28.8 million) located
in Zhenjiang city, Jiangsu province, the PRC.
Pursuant to a share transfer agreement entered into on April 13,
2008, Mr. Xin Chao acquired the entire equity interest in Jiangsu Delta from S&S International through Zhengxin International
and became the controller of Jiangsu Delta since then. On May 21, 2008, the acquisition of Jiangsu Delta by Zhengxin International
was approved by the Jiangsu Foreign Trade and Economic Cooperation Department in accordance with “The Approval of Alteration
of Equities in and Amendment of the Articles of Association of Jiangsu Yantze River Delta Fine Chemical Co, Ltd.” issued
by the same authority.
Jiangsu Delta commenced its commercial operations in 2009 with one
production line and approximately 150 employees. It was primarily engaged in the manufacturing and production of fine chemicals
such as OCT and PCT as well as their down-steam products with approximately 100 customers.
With a view to expanding its business and catering for the demand
of its customers, in 2010, Jiangsu Delta’s principal business scope was expanded to be producing and selling a variety of
fine chemicals such as (i) pharmaceutical, pesticide and dye intermediates (mainly including Cis-Anhydride, P-(O) Chlorotoluene,
(2, 4 Dichlorotoluene)), (ii) unsaturated polyester resin, (iii) maleic acid and (iv) other by-products chemicals, all of which
are mainly used in pharmaceutical and agriculture industries. In addition, during the same period, Jiangsu Delta installed additional
production facilities to substantially increase its production capacity from 7,000 tonnes to 25,000 tonnes per annum.
Due to the corporate restructuring effort to consolidate the business
of Jiangsu Delta under a pure investment holding entity, pursuant to a sale and purchase agreement dated May 20, 2010 between Zhengxin
International and Delta, Jiangsu Delta was acquired by Zhengxing International for a consideration of US$28.8 million.
On August 30, 2010, the acquisition of Jiangsu Delta by Delta was
approved by the Jiangsu Foreign Trade and Economic Cooperation Department in accordance with “The Approval of Share Transfer
of and Amendment of the Articles of Association of Jiangsu Chang San Jiao Chemical Co., Ltd.” issued by the same authority.
Jiangsu Zhengxin R&D
On August 18, 2012, Zhengxin International and Jiangsu Delta entered
into a sale and purchase agreement, pursuant to which the entire equity interest of Jiangsu Zhengxin New Material R&D Co.,
Limited (“Jiangsu Zhengxin R&D”) was acquired by Jiangsu Delta from Zhengxin International for a consideration
of RMB3.3 million. The acquisition of Jiangsu Zhengxin R&D was approved by the Danyang Bureau of Commerce on September 18,
2012 in accordance with “The Approval and Transfer of and the Alteration of Nature of Zhengxin New Material R&D Co.,
Limited”. On March 12, 2015, we sold Jiangsu Zhengxin R&D to a third party for a total sales price of RMB64,555,386.90
(approximately $10.5 million) as the Company would like to focus on and allocate more resources to the core business.
Jiangsu Logistics
On December 17, 2013, Jiangsu Logistics was established by Jiangsu
Delta with an initial registered capital of RMB 10 million (approximately $1.63 million) located in Dantu District, Zhenjiang City,
Jiangsu Province, PRC. We disposed of this property on March 20, 2015 for RMB 10 million (approximately $1.51 million). As a result
of the Company’s disposition of Jiangsu Logistics, we no longer provide the supply chain management for third-party clientele
including manufacturers, distributors and retailers of chemical products.
Binhai Deda
On June 8, 2013, Binhai Deda was established by Jiangsu Delta with
an initial registered capital of RMB 5 million (approximately $814,664) located in Binhai County, Yangcheng City, Jiangsu Province,
PRC.
Products
Our products presently fall within the PCT/OCT series as we have
largely terminated production of unsaturated polyester resin (“UPR”) and maleic acid (“MA”) products.
PCT/OCT together with its downstream products can be widely used in pharmaceuticals, pesticides, dyes and consumables manufacturing
industries. In the fiscal year 2017, we sold approximately 80% of the PCT/OCT we produced and consumed the balance as raw materials
for the manufacturing of PCT/OCT downstream products.
We place great emphasis on the research and development of our products
to ensure our continued success. As of the date of this report, we have successfully registered nine patents in the PRC in relation
to UPR production technologies, and PCT/OCT production technology, and environmental protection equipment technology, and we are
also in the process of applying for four more patents in relation to PCT/OCT and MA productions technologies and production of
PCT/OCT environmental protection equipment.
We recently supplied an experimental sample of prothioconazole to
a large pesticide manufacturer and trader in India. The Company views India as country with significant growth prospects for our
products. At present, our experimental equipment can produce 500kg of prothioconazole per month. We plan to further expand the
scale of lab production from medium to large-scale production and are working on the design of industrial mass production of prothioconazole
which we anticipate starting in the second quarter of 2018. The Company is currently at the first stage of applying for relevant licenses and approvals from
the government for such expansion. It has sent an invitation letter to Economic and Information Technology Commission of Zhenjiang
City, inviting the examiners to visit the Company’s factory in Zhenjiang and provide necessary initial approvals for the
Company’s application.
Production Process
We primarily engage in manufacturing and sale of organic compound
including PCT, OCT, UPR, MA and other by-product chemicals. Please see below the production flow diagrams for more details on how
PCT/OCT, MA and UPR products are manufactured by us.
The business operations model begins with the sourcing of raw materials,
which are then delivered to us and stored in our warehouses until being processed in-house in our factory:
Purchase of Raw Materials
The major raw materials which we purchase include: toluene, chlorine,
benzene, styrene and phthalic anhydride. Toluene and chlorine are the two major raw materials for the PCT/OCT production. Benzene
is the major raw material for MA production. Styrene and Phthalic Anhydride are the two major raw materials for UPR production.
We source our raw materials from a spread of proximate suppliers,
and use our own PCT/OCT and MA production as raw materials for PCT/OCT downstream products and UPR products. Most of our suppliers
are located within the Yangtze River Delta region, and due to the hazardous nature of the raw materials, we are focused on the
need for a short transportation time and safety measures.
PCT/OCT raw materials take about one week for delivery on request,
while MA raw materials take about three to five days, and UPR raw materials take about seven to ten days.
Delivery and Storage
About 90% of the raw materials we use are delivered to us by the
suppliers, who insure and bear all risks until goods are delivered to our warehouses. The remainder raw materials are picked up
by our employees.
We have on-site warehousing capacity, which allows us to store up
to 6,000 tonnes of liquid or solid chemical materials.
Manufacturing and Processing
Manufacturing and processing occurs at our factory in Zhenjiang,
which has an annual production capacity of 30,000 tons of PCT/OCT production and PCT/OCT downstream production, 25,000 tons of
MA production and 18,000 tons of UPR production. Please see below the production flow diagrams for the various products for more
details on how PCT/OCT, MA and UPR products are manufactured in our factory.
PCT/ OCT
PCT/OCT forms the basic or intermediate products from which down-stream
extended products can be further manufactured. Our annual capacity for PCT/OCT series is at 30,000 tons, and the factory operates
at almost its maximum capacity presently. The simplified production process for the PCT/OCT products is as follows:
Step 1: Chlorination Process
Chorine and Toluene, which form the basic reactants for the production
of PCT/OCT, are delivered into the Chlorination Tower for a controlled reaction to take place in the presence of various catalysts.
Depending on the temperature and the types of catalyst used, the reaction will produce a mixture of crude products with a certain
isomeric ratio of PCT/OCT.
The exhaust is delivered to the Chlorination Tower, cooled and condensed
before being treated for safe discharge. The crude product solution is then delivered into the Distillation Tower where the products
are isolated and purified.
Step 2: Fractional Distillation
Within the Distillation Tower, the crude reactant product undergoes
separation by way of fractional distillation and PCT and OCT are segregated based on their different boiling points, and separately
delivered to a PCT Tower and an OCT Tower for storage or packaging as necessary.
Step 3: Further Processing
The isolated, purified compounds can then undergo further value-added
treatment pursuant to customized treatments to manufacture down-stream derivative products. We re-process about 40% of the PCT/OCT
products received through the manufacturing process into some 13 different downstream chemical products such as:
(1) 2,4-Dichloro toluene (“2,4DCT”) 2,4
(2) 3,4-Dichloro toluene (“3,4DCT”) 3,4
(3) O-chlorobenzaldehyde
(4) p-chlorobenzaldehyde
(5) 2,4-Dichlorobenzaldehyde 2,4
(6) O-chlorobenzyl chloride
(7) Chlorobenzyl chloride
(8) 2,4-Dichloro-chloride 2,4
(9) O-chlorobenzoic acid
(10) O-Chloro benzonitrile
(11) Chlorobenzonitrile
(12) 2,4-Dichlorobenzonitrile 2,4
(13) 3,4-Dichlorobenzonitrile 3,4
Delivery or Pick-up by the Customers
We deliver around 90% of the products sold to the customer sites
while customers pick up about 10% of the finished products directly from our warehouses. We usually use three transportation companies
to truck the products to our customer sites. Delivery typically takes up to one week, although actual time will vary depending
on the location of our customers.
Production Facilities, Capacity and Utilization
Our production facilities are located in Zhenjiang city, Jiangsu
province, the PRC.
We have three main production lines centered on our core products:
(a) Our PCT/OCT series
production facility was designed by Tianjin University and built in 2008. It was first put into use in January 2009 and went through
an expansion during 2011.
(b) Our MA production line
was designed by the China Academy of Science and started operations in late 2010. The current capacity of the MA Production line
is at 12,500 tonnes per annum.
(c) Our UPR production
line had two phases of development in May and December 2010, respectively and has a capacity of 18,000 tonnes per annum.
We no longer manufacture UPR and MA products. We may from time to
time look into further expansion of our existing facilities to improve output capacity.
Quality Control
We are committed to providing our customers with quality and reliable
products. Through our corporate quality management system, we are committed to ensuring that the products we produce are of high
quality and are able to meet the expectations of our customers.
Our quality assurance department is currently comprised of 13 quality
assurance personnel. They are responsible for overall quality control at every stage of our production process and ensure that
it is in accordance with our quality control guidelines.
Quality Assurance and Safety Processes
We conduct quality checks on all the products manufactured and oversee
the implementation of the quality controls at every stage of our production process in line with our quality management system.
The following quality control procedures have been implemented:
(a) Establishment of
quality control standards
For manufacturing of chemical systems and components and catalysts,
we have set in place stringent quality control standards to implement strict measures for quality control in the manufacturing.
Such standards follow strictly in accordance with the national and industry standards as well as the standards and guidance set
in accordance with the ISO 9001 Quality System. We also take into account customers’ specifications and requirements and
quality feedback from our previous customers to supplement our quality control standards.
For our system design, we ensure the design of every project is
carried out in line with (i) the relevant PRC laws and regulations; (ii) the relevant technical specifications and industry standards;
and (iii) our customers’ requirements.
(b) Quality control
during procurement
Direct materials are purchased only from pre-selected suppliers
after evaluation and testing by our procurement personnel, quality control personnel and production personnel based on stringent
selection criteria such as quality of their raw materials and services, material sources, pricing, accreditations, track record,
financial condition and market reputation.
Our quality assurance department will conduct random sample inspection
upon receipt of the raw materials. Raw materials that do not meet our quality requirements are returned to the suppliers for them
to remedy the problems or defects or for exchange. Procurement plans from the various suppliers are subject to review by our senior
management on an annual basis.
(c) Quality control
during manufacturing process
Quality guidelines are provided to the relevant production workers
at each production stage before production commences.
Before the production, incoming direct materials are inspected by
way of sampling by our quality control personnel to ensure that they are supplied by approved suppliers, and that the quality,
grade and quantity of such direct materials conform to its specifications and requirements as well as our quality control standards.
Direct materials which fail to comply with these specifications will be rejected.
We continuously monitor our manufacturing process and carry out
sample-testing at systematic intervals throughout the process to ensure consistency in the quality of the chemical systems and
components and catalysts. Our quality control personnel and production personnel conduct sample-testing and inspections at the
various stages of production to ensure that defective semi-completed products do not proceed to the next stage of the production.
(d) Quality control on
finished products
We conduct overall inspections and testing on finished products
before they are dispatched to customers. We have implemented a strict sample-based testing system, which is carried out every batch
of our finished products before they are arranged for packing. For OCT/PCT and MA products, the main criterion to be examined is
its degree of purity, whereas for UPR products, the focus is on its shock-resistance and chromaticity. This final stage of inspection
is carried out to ensure that the finished products that are packed and delivered conform to the exact specifications of our customers.
We also provide after sales servicing, and will attend to complaints, if any, regarding defects in the products or the services.
To continually improve our quality management system, we will take
into account the feedbacks from our employees who are involved in each of the quality control processes and feedbacks from these
employees or our customers.