A. Selected Financial Data
The selected consolidated financial data
present the results for the five fiscal years ended and as of June 30, 2016, 2015, 2014, 2013 and 2012. 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,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
Statement of Income Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
53,418,112
|
|
|
$
|
202,009,160
|
|
|
$
|
175,327,717
|
|
|
$
|
124,218,213
|
|
|
$
|
95,627,051
|
|
Cost of Sales
|
|
$
|
(48,713,456
|
)
|
|
$
|
(182,692,715
|
)
|
|
$
|
(157,904,729
|
)
|
|
$
|
(99,733,216
|
)
|
|
$
|
(69,686,610
|
)
|
Gross Profit
|
|
$
|
4,704,656
|
|
|
$
|
19,316,445
|
|
|
$
|
17,422,988
|
|
|
$
|
24,484,997
|
|
|
$
|
25,940,441
|
|
(Loss) / Income from operations
|
|
$
|
(10,432,948
|
)
|
|
$
|
12,258,404
|
|
|
$
|
11,634,940
|
|
|
$
|
17,842,614
|
|
|
$
|
19,088,375
|
|
Net (Loss) / Income
|
|
$
|
(7,558,230
|
)
|
|
$
|
5,135,757
|
|
|
$
|
6,828,308
|
|
|
$
|
11,705,736
|
|
|
$
|
10,471,574
|
|
Comprehensive (Loss) / income
|
|
$
|
(4,635,699
|
)
|
|
$
|
5,372,660
|
|
|
$
|
7,144,747
|
|
|
$
|
13,315,616
|
|
|
$
|
11,803,575
|
|
(Loss) / Earnings per share - basic
|
|
|
(1.46
|
)
|
|
|
1.44
|
|
|
|
1.53
|
|
|
|
0.29
|
|
|
|
0.26
|
|
(Loss) / Earnings per share – diluted
|
|
|
(1.46
|
)
|
|
|
1.44
|
|
|
|
1.53
|
|
|
|
0.20
|
|
|
|
0.22
|
|
Weighted average shares - basic
|
|
|
9,323,108
|
|
|
|
6,462,577
|
|
|
|
4,560,000
|
|
|
|
40,000,000
|
|
|
|
40,000,000
|
|
Weighted average shares – diluted
|
|
|
9,323,108
|
|
|
|
6,462,577
|
|
|
|
4,560,000
|
|
|
|
58,191,973
|
|
|
|
58,191,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working Capital (deficiency)
|
|
$
|
107,379,902
|
|
|
$
|
(10,419,909
|
)
|
|
$
|
(27,362,427
|
)
|
|
$
|
(14,773,509
|
)
|
|
$
|
16,818,269
|
|
Total assets
|
|
$
|
176,144,150
|
|
|
$
|
225,724,786
|
|
|
$
|
206,531,300
|
|
|
$
|
167,039,000
|
|
|
$
|
143,644,914
|
|
Total liabilities
|
|
$
|
132,642,058
|
|
|
$
|
167,316,820
|
|
|
$
|
151,071,926
|
|
|
$
|
118,724,373
|
|
|
$
|
108,645,903
|
|
Total equity
|
|
$
|
45,502,091
|
|
|
$
|
58,407,966
|
|
|
$
|
55,459,374
|
|
|
$
|
48,314,627
|
|
|
$
|
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 11, 2016, the daily exchange rate reported
at wwww.usforex.com was RMB6.8127 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, 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 2016
|
|
|
6.5264
|
|
|
|
6.5833
|
|
|
|
6.4741
|
|
|
|
6.5833
|
|
June 2016
|
|
|
6.5876
|
|
|
|
6.5616
|
|
|
|
6.5620
|
|
|
|
6.6368
|
|
July 2016
|
|
|
6.6769
|
|
|
|
6.7080
|
|
|
|
6.6370
|
|
|
|
6.6374
|
|
August 2016
|
|
|
6.6492
|
|
|
|
6.6775
|
|
|
|
6.6223
|
|
|
|
6.6775
|
|
September 2016
|
|
|
6.6768
|
|
|
|
6.7304
|
|
|
|
6.6623
|
|
|
|
6.6676
|
|
October 2016
|
|
|
6.7249
|
|
|
|
6.7983
|
|
|
|
6.6331
|
|
|
|
6.7744
|
|
Source: http://www.usforex.com/forex-tools/historical-rate-tools/
|
(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, Wu Changguang
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. Although there has not been any material collection
problem for trade receivables or any other allowance for doubtful debts during the past three fiscal years, there is no assurance
that we will not encounter 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.
In connection with our business strategy,
we have continued to make regular capital investments and expenditures. We expect to incur further capital expenditures for the
fiscal year 2017 in connection with the construction and the expansion of production facilities.
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 affecting our business and financial performance.
In order to protect our trademark, we have
applied to register our “DELTA” label as a trademark in the PRC. 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
20% of our total orders and the loss of our top customer would negatively affect our business.
Our top customer accounts for approximately
20% 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
35% 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
35% 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.
The Company is 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 urges 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 it 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 owners” 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 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 prohibits 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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major catastrophic events;
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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, 2016 and we do not expect to be one for our taxable
year ending June 30, 2017 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 6,735,570 ordinary shares (warrants for the purchase of 6,175,570 shares and
a unit purchase option for 280,000 shares and warrants to purchase 280,000 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.
We have outstanding a dividend payable
of $35,000,000, the payment of which would be given preference ahead of our ordinary shareholders in the event of liquidation.
We presently have an outstanding dividend
payable of $35,000,000. On September 13, 2014, the directors of Delta approved a resolution for a cash dividends distribution of
$35,000,000. According to the resolution, the dividends are to be distributed to Mr. Yan Hong, Mr. Shen Lei and Mr. Chao Xin (together,
the “Dividend Recipients”) in accordance with their respective percentage shareholdings in Delta as follows: (i) $392,000
to Mr. Yan Hong; (ii) $392,000 to Mr. Shen Lei; and (iii) $34,216,000 to Mr. Chao Xin. As at June 30, 2016, the dividends were
not paid.
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 25% 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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A. History and Development of the Company
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.
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 360
th
and 390
th
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 260 employees, 30% of whom are highly-qualified
experts and technical personnel. We serve nearly 350 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 fast-growing 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,
unsaturated polyester resin (“UPR”), maleic acid (“MA”) 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 350 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, 2014, 2015 and 2016 were approximately $175 million, $202 million and $53 million, respectively, and our profit before
tax for the fiscal years ended June 30, 2014, 2015 and 2016 were $9.4 million, $15.9 million and loss before tax of $7.6 million,
respectively. The decrease in revenue for the year ended June 30, 2016 was a result of decreased 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 increases 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 at 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, 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
at 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, Zhenjiang
City, Jiangsu Province, PRC.
Products
Our products can be broadly divided into
two major series, namely (i) PCT/OCT and (ii) UPR, which account for approximately 8.56% and 88.61%, respectively of our total
revenue in the fiscal year 2016. PCT/OCT together with its downstream products can be widely used in pharmaceuticals, pesticides,
dyes and consumables manufacturing industries, whereas UPR is commonly used as (i) renovation materials for bathroom and kitchen,
(ii) manufacturing materials for trains, cars, aircrafts and vessels, and (iii) infrastructure materials such as anti-collusion
pipes and oil and gas pipelines. UPR is a light weight, relatively wear resistant and highly anti-corrosive material, and its unique
features make it a popular replacement material for plastic and steel. In the fiscal year 2016, we sold approximately 60% of the
PCT/OCT we produced and consumed the balance as raw materials for the manufacturing of PCT/OCT downstream products.
In addition, we manufacture MA, which is
an intermediate product in producing UPR. We consume most of the MA we produce as a production intermediary. A by-product of the
production process of MA is heat energy, which we consume efficiently for manufacturing our PCT/OCT products, where large-scale
heat energy is required.
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 it is 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 third quarter of 2017.
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 emphasize on the need for a short transportation time and the safety requirements.
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, which buy insurance and bear all risks until goods are delivered to our warehouses, and the remainder
is 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.
(a) 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 are 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
(b) UPR
Our UPR products are high-end
resin products. Due to UPR’s combination of unique strengths such as its lightness, toughness, durability, strength and anti-corrosive
properties, it is widely used by various industries, like the construction industry, industrial equipment industry, transport industry
and the infrastructure industry. Our production capacity for UPR was expanded from 9,000 tonnes in May 2010, to 18,000 tonnes annually
in December 2010. The simplified production process for the
UPR products is as follows:
Step 1: Reaction
Di-ols and Di-acids, including
MA, are the basic reactants for the production of UPR, which is a form of polyester. The reactants are delivered from their storage
tanks into a stainless steel reactor for a controlled esterification process in the presence of various catalysts. Depending on
the temperature and the types of catalyst used, the reaction will produce a crude mixture of semi-finished product or resin. We
can customize the qualities and characteristics of the UPR by varying the temperature, ratio and types of chemical reactants or
catalysts, which will result in the production of polyesters of different structures.
Step 2: Dilution and Further
Procession
The semi-finished product or
resin is transported into the Dilution Tank where Styrene and other chemicals are added in a dilution process. The Dilution Tank
is linked to a cooling and condensation mechanism which will condense the vapours or exhaust from the Dilution Tank. In the Dilution
Tank, the resin can be further adjusted as to viscosity, reactivity and other characteristics through the addition of chemical
inhibitors or promoters.
Step 3: Packaging
The final product is then transferred
to the storage tanks or sent for packaging.
(c) MA
MA accounts for 3% of our total
sales volume. Most of the MA produced, i.e. approximately 70%, is used for our own production of UPR, while about 30% will be sold
to customers. The oxidation process in the production of MA produces heat which is converted into steam for use in the production
of PCT/ OCT and other production areas where steam is needed.
Step 1: Oxidation
Benzene and air are catalyzed
and oxidized through a fixed bed Oxidation Reactor to generate MA vapor. The MA vapor is condensed and cooled to form MA in liquid
form which is delivered to the Crude Anhydride Tank. The vapor is passed through the Absorption Tower for further extraction and
isolation.
Step 2: Distillation
The MA solution and vapor which
has been absorbed in the absorption tower shall be dissolved and distilled as part of the purification process to extract the finished
product. The MA can be delivered to the storage tanks and packaged for sale, or be utilized for further production and processing.
Delivery or Pick-up by the Customers
We deliver around 60% of the products sold
to the customer sites while customers pick up about 40% of the finished products directly from our warehouses. We usually use three
transportation companies to truck the products to our customer sites. The newly incorporated Jiangsu Logistics will be responsible
for transporting the chemicals. 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 started operation in late 2010. The current capacity of
the MA Production line is at 12,500 tonnes per annum, which is fully utilized and went through an expansion during 2013.
|
|
(c)
|
Our UPR production line had two phases of development in May and December 2010, respectively.
|
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.