UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

x☒ ANNUAL REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL ~~YEAR~~YEARS ENDED DECEMBER 31, ~~2012~~2015 AND 2014

o☐ TRANSITION REPORT PURSUANT TO SECTION 13 OF 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER:

KEYUAN PETROCHEMICALS, INC.

(formerly Silver Pearl Enterprises, Inc.)

(Exact name of registrant as specified in its charter)

Nevada		45-0538522
(State or other jurisdiction of incorporation)		(I.R.S. Employer Identification or Organization No.)

Qingshi Industrial Park

Ningbo Economic & Technological Development Zone

Ningbo, Zhejiang Province

P.R. China 315803

(86) 574-8623-2955

(Address and telephone number of principal executive offices and principal place of business)

Securities registered under Section 12 (b) of the Exchange Act: NONE

Securities registered under Section 12 (g) of the Exchange Act:

COMMON STOCK WITH $0.001 PAR VALUE

(Title of Class)

Indicate by check mark if the Registrant is a well -known seasoned issuer as defined in Rule 405 of the securities Act. Yes o ☐ No x ☒

Indicate by check mark if Registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act. Yes o ☐ No x ☒

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x ☐ No o ☒

Indicate by check mark ifwhether ~~disclosure~~the ofregistrant ~~delinquent~~has ~~filers~~submitted ~~pursuant~~electronically toand ~~Item~~posted ~~405~~on ofits ~~Regulation~~corporate ~~S-K~~Website, isif ~~not~~any, ~~contained~~every ~~herein,~~Interactive Data ~~and~~File ~~will~~required ~~not~~to be ~~contained,~~submitted and posted pursuant to ~~the~~Rule ~~best~~405 of ~~Registrant’s~~Regulation ~~knowledge,~~S-T in(§ 229.405 ~~definitive~~of ~~proxy~~this orChapter) ~~information~~during the ~~statements~~preceding ~~incorporated~~12 bymonths ~~reference~~(or infor ~~Part~~such ~~III~~shorter ofperiod ~~this~~that ~~Form~~the ~~10-K~~registrant orwas ~~any~~required ~~amendment~~ to ~~this~~submit ~~Form~~and ~~10-K~~post such files). x Yes ☐ No ☒

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o☐ Accelerated Filer o☐ Non-accelerated filer o☐ Smaller reporting company x☒

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o ☐ No x ☒

The aggregate market value of the 910,~~871~~081,~~301~~725 shares of voting and non-voting common equity stock held by non-affiliates of the registrant was approximately $ 1311,~~918~~089,~~534.41~~898 as of June 2930, ~~2012~~2014, the last business day of the registrant’s ~~most~~second ~~recently~~fiscal ~~completed~~quarter ~~second~~of fiscal year ~~quarter~~2014, based on the last sale price of the registrant’s common stock on such date of $1.4110 per share*, as reported on the Over-the-Counter Bulletin Board (“OTCBB”).

AsThe aggregate market value of the 10,081,725 shares of voting and non-voting common equity stock held by non-affiliates of the registrant was approximately $332,697 as of June 330, ~~2013~~2015, the ~~Registrant~~last ~~has 57,646,160~~business ~~shares~~day of the registrant’s second fiscal quarter of fiscal year 2015 based on the last sale price of the registrant’s common stock ~~outstanding~~on such date of $0.033 per share, as reported on the Over-the-Counter Bulletin Board Pink Marketplace (“OTC Pink”).

~~KEYUAN~~As ~~PETROCHEMICALS~~of October 13, 2016, ~~INC~~the Registrant has 63,132,726 shares of common stock outstanding.

KEYUAN PETROCHEMICALS, INC.

TABLE OF CONTENTS

Annual Report on Form 10-K for the ~~Year~~Years Ended December 31, ~~2012~~2015 and 2014

	PART I	Page
		Page
Item 1	Business	1
	PART I
Item 1A	Risk Factors	24
Item 1.	Business.	1
Item 1B	Unsolved Staff Comments	41
Item 1A.	Risk Factors.	20
Item 2	Properties	41
Item 1B.	Unsolved Staff Comments.	36
Item 3	Legal Proceedings	42
Item 2.	Properties.	36
Item 4	Mine Safety Disclosures	42
Item 3.	Legal Proceedings.	36
Item 4.	Mine Safety Disclosures.	37
	PART II
Item 5	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Security	43
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Security.	38
Item 6	Selected Financial Data	47
Item 6.	Selected Financial Data.	40
Item 7	Management’s Discussion and Analysis of Financial Conditions and Results of Operations	48
Item 7.	Management’s Discussion and Analysis of Financial Conditions and Results of Operations.	41
Item 7A	Quantitative and Qualitative Disclosure about Market Risk	56
Item 7A.	Quantitative and Qualitative Disclosure about Market Risk.	51
Item 8	Financial Statements and Supplementary Data.	F-1
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	57
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.	52
Item 9A	Controls and Procedures	58
Item 9A.	Controls and Procedures.	53
Item 9B	Other Information	60
Item 9B.	Other Information.	55
	PART III
Item 10	Directors, Executive Officers and Corporate Governance	61
Item 10.	Directors, Executive Officers and Corporate Governance.	56
Item 11	Executive Compensation	65
Item 11.	Executive Compensation.	59
Item 12	Security Ownership of Certain Beneficial Owners and Management And Related Stockholder Matters	67
Item 12.	Security Ownership of Certain Beneficial Owners and Management And Related Stockholder Matters.	61
Item 13	Certain Relationships and Related Transactions and Director Independence	71
Item 13.	Certain Relationships and Related Transactions, and Director Independence.	62
Item 14	Principal Accountant Fees and Services	75
Item 14.	Principal Accountant Fees and Services.	63
	PART IV
Item 15	Exhibits and Financial Statements Schedules	76
Item 15.	Exhibits, Financial Statement Schedules.	64
	Signatures	78
	Signatures.	65

INTRODUCTORY NOTE

Except as otherwise indicated by the context, references in this ~~Annual~~annual ~~Report~~report on Form 10-K (this “Form 10-K”) to the “Company,”, “Keyuan” , “we,”, “us” or “our” are references to the combined business of Keyuan Petrochemicals, Inc. and its consolidated subsidiaries. References to “Sinotech Group” are references to our wholly-owned subsidiary, Sinotech Group Limited, a British Virgin Islands company, previously known as Keyuan International Group Limited”; references to “Keyuan HK” are references to our wholly-owned Hong Kong subsidiary, Keyuan Group Limited; references to “Ningbo Keyuan” are references to our wholly-owned subsidiary, Ningbo Keyuan Plastics Co., Ltd., a Chinese company; references to “Ningbo Keyuan Petrochemicals” are to our wholly-owned subsidiary, Ningbo Keyuan Petrochemicals Co., Ltd., a Chinese company; references to “Keyuan Synthetic Rubbers” are references to our wholly-owned subsidiary, Ningbo Keyuan Synthetic Rubbers Co., Ltd., a Chinese company; references to ”“Guangxi Keyuan” are references to our ~~wholly~~partially-owned subsidiary (67.1% as if Hengyun Energy has already made full payment under the Investment Cooperation Agreement as described herein below,) Guangxi Keyuan New Materials Co., Ltd., a Chinese company; and references to “Zhongkexuneng” are references to our wholly-owned subsidiary, Zhejiang ZhongkeXuneng Trading Co., Ltd, a Chinese company. A structure chart is found in Item 1(b). References to “China” or “PRC” are references to the People’s Republic of China. References to “RMB” are to Renminbi, the legal currency of China, and all references to “$” and dollar are to the U.S. dollar, the legal currency of the United States of America.

Special Note Regarding Forward-Looking Statements

This report contains forward-looking statements and information that are based on the beliefs of our management as well as assumptions made by and information currently available to us. Such statements should not be unduly relied upon. ~~When~~ ~~used in this report, forward~~Forward-looking statements include, ~~but~~statements ~~are~~about ~~not~~our ~~limited to~~expectations, ~~the words “anticipate~~beliefs,” ~~“believe~~plans,” ~~“estimate~~objectives,” ~~“expect~~intentions,” ~~“intend,”~~assumptions ~~“plan”~~ and ~~similar~~other ~~expressions,~~statements asthat ~~well~~are asnot historical ~~statements~~facts ~~regarding~~or ~~new~~that ~~and~~are ~~existing~~not ~~products,~~present ~~technologies~~facts ~~and~~or ~~opportunities,~~conditions. Forward-looking statements ~~regarding market~~ and ~~industry~~information ~~segment~~can ~~growth~~generally ~~and~~be ~~demand~~identified by ~~and~~the ~~acceptance~~use of ~~new~~forward-looking ~~and~~terminology ~~existing~~or ~~products~~words, ~~any~~such ~~projections~~as of“anticipate,” ~~sales~~“approximately,” ~~earnings~~“believe,” “continue,” ~~revenue~~“estimate,” ~~margins~~“expect,” or“forecast,” ~~other~~“intend,” ~~financial~~“may,” “ongoing,” ~~items~~“pending,” ~~any~~“perceive,” ~~statements~~“plan,” of“potential,” ~~the~~“predict,” “project,” ~~plans~~“seeks,” ~~strategies and objectives of management for future operations~~“should,” ~~any~~“views” ~~statements~~or ~~regarding~~similar ~~future~~words ~~economic~~or ~~conditions~~phrases or ~~performance~~variations thereon, ~~uncertainties~~or ~~related~~the tonegatives ~~conducting business in China, any statements~~ of ~~belief~~those words or ~~intention~~phrases, ~~and any statements~~ or ~~assumptions underlying any of the foregoing. These~~ statements ~~reflect~~that ~~our current view concerning future~~ events ~~and are subject to risks~~, ~~uncertainties~~conditions ~~and~~or ~~assumptions. There are important factors that could cause actual~~ results ~~to vary materially from those described in this report as anticipated~~“can,” ~~estimated or expected~~“will, ~~including~~” “may,” ~~but not limited to: competition in the industry in which we operate and the impact of such competition on pricing~~“must,” ~~revenues and margins~~“would,” ~~volatility in the securities market due to the general economic downturn; Securities and Exchange Commission (the~~ “~~SEC~~could”) ~~regulations~~or ~~which affect trading in the securities of~~ “~~penny stocks,~~should” ~~and~~occur ~~other risks and uncertainties. Except as required by law, we assume no obligation to update any forward-looking statements publicly,~~ or tobe ~~update~~achieved ~~the~~and similar ~~reasons~~expressions ~~actual~~in ~~results~~connection ~~could~~with ~~differ materially from those anticipated in~~ any ~~forward- looking statements~~discussion, ~~even~~expectation ifor ~~new~~projection ~~information~~of ~~becomes available in the~~ future~~. Depending~~ onoperating ~~the~~or ~~market~~financial ~~for our stock and other conditional tests~~performance, ~~a specific safe harbor under the Private Securities Litigation Reform Act of 1995 may be available. Notwithstanding the above~~ costs, ~~Section 27A of the Securities Act of 1933~~regulations, asevents ~~amended~~or ~~(the~~trends. ~~“Securities~~The ~~Act”)~~absence ~~and Section 21E~~ of ~~the~~these ~~Securities~~words ~~Exchange Act of 1934, as amended (the “Exchange Act”) expressly state that the safe harbor for forward-looking statements~~ does not ~~apply~~necessarily tomean ~~companies~~ that ~~issue~~a ~~penny~~statement ~~stock. Because~~is wenot ~~may from time to time be considered to be an issuer of penny stock, the safe harbor for~~ forward-looking ~~statements may not apply to us at certain times~~.

Forward-looking statements and information are based on management’s current expectations and assumptions, which are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict. These statements reflect our current view concerning future events and are subject to risks, uncertainties and assumptions. There are important factors that could cause actual results to vary materially from those described in this report as anticipated, estimated or expected, including, but not limited to, those factors and conditions described under “Item 1A. Risk Factors” as well as general conditions in the economy, petrochemicals industry and capital markets, Securities and Exchange Commission (the “SEC”) regulations which affect trading in the securities of “penny stocks,” and other risks and uncertainties. Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future. Depending on the market for our stock and other conditional tests, a specific safe harbor under the Private Securities Litigation Reform Act of 1995 may be available. Notwithstanding the above, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), expressly state that the safe harbor for forward-looking statements does not apply to companies that issue penny stock. Because we may from time to time be considered to be an issuer of penny stock, the safe harbor for forward-looking statements may not apply to us at certain times.

Explanatory Note

Keyuan Petrochemicals, Inc. is filing this annual report on Form 10-K for the fiscal years ended December 31, 2015 and 2014 (the “Form 10-K”) as part of its efforts to become current in its filing obligations under the Exchange Act. Although we have regularly made filings through current reports on Form 8-K when deemed appropriate, this Form 10-K is our first periodic filing with the SEC since the filing of our quarterly report on Form 10-Q for the quarter ended September 30, 2014. Included in this Form 10-K are our audited financial statements for the fiscal years ended December 31, 2014 and 2015, which have not been previously filed with the SEC.

Our audited financial statements and related notes for the fiscal years ended December 31, 2014 and 2015 were audited by Marcum Bernstein & Pinchuk LLP (“Marcum BP”).

PART I

ITEM 1. BUSINESS.

GENERAL OVERVIEW

(a)	Nature of business

We, through our PRC operating subsidiaries, Ningbo Keyuan ~~Plastics Co.~~, ~~Ltd. (“~~Ningbo Keyuan~~”),~~ ~~Ningbo Keyuan~~ Petrochemicals ~~Co.~~, ~~Ltd (“Ningbo~~ Keyuan ~~Petrochmicals”), Keyuan~~ Synthetic Rubbers ~~Co.~~, Guangxi ~~Ltd (“~~Keyuan ~~Synthetic Rubbers”)~~ and ~~Guangxi Keyuan Co.~~Zhongkexuneng,~~Ltd~~ ~~(“Guangxi Keyuan”) ,~~ are engaged in the manufacture and sale of petrochemical products and rubber in the PRC. Our operations include (i) a production facility with an annual petrochemical production capacity of 720,000 metric tons (MT) of a variety of petrochemical products, (ii) facilities for the storage and loading of raw materials and finished goods and (iii) a manufacturing technology that can support our manufacturing process with relatively low raw material costs and high utilization and yields, all of which are led by a management team consisting of petrochemical experts with proven track records from some of China’s largest state-owned enterprises in the petrochemical industry.:

Due to China’s growing demand for refined petrochemical products, we expanded our annual production capacity from 550,000 MT to 720,000 MT in April 2011. We also completed the construction of a Styrene-Butadience-Styrene (the “SBS”) production facility with an annual production capacity of 70,000 MT in September 2011 and began initial trial production in October and November 2011. One SBS production line began commercial production in December 2011 and the second line began commercial production in August, 2012.

	(1)	A production facility with an annual petrochemical production capacity of 720,000 metric tons (“MT”) of a variety of petrochemical products;

	(2)	A Styrene-Butadiene-Styrene (“SBS”) production facility with a designed annual production capacity of 70,000 MT;

	(3)	A Styrene-Ethylene-Butylene-Styrene (“SEBS”) production facility with a designed annual production capacity of 10,000 MT;

	(4)	Facilities for the storage and loading of raw materials and finished petrochemical and rubber goods; and

	(5)	Manufacturing technologies that can support our manufacturing process with relatively low raw material costs and high utilization and yields.

In January 2012, we signed a cooperation agreement with Fangchenggang City to build a new petrochemicals production facility, ~~Guangxi~~in Guangxi Keyuan New Materials Industrial Park, in Guangxi Province (the "“Guangxi Project"”). ~~Once~~The ~~the~~estimated ~~facility~~cost isfor ~~fully~~the Guangxi ~~operational,~~Project it is ~~expected~~approximately to$300 ~~have annual production capacity of 400,000 metric tons of Acrylonitrile Butadiene Styrene (the "ABS") and related products~~million. According Asto the ~~date~~cooperation ~~of this filing~~agreement, ~~we have been focused on~~ the ~~complex~~local ~~pre-construction~~ government ~~approval~~of ~~work~~Fangchenggang City ~~and~~agreed ~~on research~~ to ~~improve~~grant ~~the~~land ~~efficiency~~use ofrights ~~the~~for ~~production of Guangxi Project since~~ the ~~signing of the agreement~~facility.

~~(b) Organization~~On August 9, 2013, the Guangxi Project was approved by the local government of Fangchengang City. We were granted a land use right for 40 years for approximately 4,668,437 square feet of land, effective in 2014. In August 2013, we commenced engineering and facility construction. The preliminary investigation for foundation piling was completed in late October 2013. We completed the land leveling and finished the installation of waterpipes, electricity wires and basic pipelines at the end of 2014. We completed the technical design of the facility and the equipment at the end of 2015. We are currently arranging the tendering on the construction of the facility and major equipment. We expect to finish construction of the facility and installation of main equipment and pipelines by the end of 2017 and commence production by the end of 2018.

~~Keyuan~~We believe ~~Petrochemicals~~that the Guangxi Project, ~~Inc.~~as ~~(“Company”~~a orpart ~~“the~~of ~~Company”,~~our ~~formerly~~expansion ~~known~~plan, asonce ~~“Silver~~it ~~Pearl~~goes ~~Enterprises,~~into ~~Inc.”~~operation, ~~together~~will ~~with~~improve ~~its~~our ~~subsidiaries,~~competitive ~~herein~~positions by ~~referred~~extending toand asexpanding ~~“we”~~our ~~“us”~~supply chain and manufacturing base. The facility is expected to have an annual production capacity of 50,000 MT of Acrylonitrile Butadiene Styrene (“~~our~~ABS”). ~~was~~We ~~incorporated~~plan into fund the ~~State~~construction and operation of the ~~Texas~~Guangxi Project through outside financing. If such financing is not available on ~~May~~terms 4acceptable to us, ~~2004~~the project will be delayed until appropriate financing is available. As a result, the timelines for the Guangxi Project described above are subject to adjustment pending the status of outside financing.

On April 22, 2010, the Company entered into a share exchange agreement (the “Exchange Agreement”) with Keyuan International Group Limited (“Keyuan International”), a privately held investment holding company organized on June 11, 2009 under the laws of the British Virgin Islands, Delight Reward Limited (“Delight Reward”), the sole stockholder of Keyuan International and Denise D. Smith (“Smith”), the Company’s former principal stockholder. Pursuant to the terms of the Exchange Agreement, Delight Reward transferred to the Company all of its shares of Keyuan International in exchange for 47,658 shares of the Company’s Series M convertible preferred stock (the “Share Exchange”). On an “as converted” basis, the Series M convertible preferred stock represented approximately 95% of the Company’s outstanding common stock right after the Share Exchange. The Series M convertible preferred stock voted with the common stock on an “as converted basis” and was converted into 47,658,000 shares of the Company’s common stock on December 28, 2010.

As a result of the Share Exchange, Keyuan International became a wholly-owned subsidiary of the Company and Delight Reward became the controlling stockholder of the Company. The Share Exchange was accounted for as a reverse acquisition and recapitalization whereby Keyuan International is deemed to be the accounting acquirer (~~and the legal acquire~~b)~~. The~~ ~~common stock of the Company continues post the Share Exchange, while the retained deficit of the Company was eliminated as the historical operations are deemed to be those of Keyuan International.~~Organization

~~On May 12~~Keyuan Petrochemicals, ~~2010,~~Inc. ~~the~~(formerly ~~Company~~known ~~formed~~as a“Silver ~~corporation~~Pearl ~~under~~Enterprises, ~~the~~Inc.”) ~~laws~~was ofincorporated in the State of ~~Nevada~~Texas ~~called~~on May ~~Keyuan Petrochemicals~~4, ~~Inc.~~2004 and onredomiciled ~~the~~to ~~same~~Nevada ~~day,~~on ~~acquired~~February ~~100% of the entity’s stock for cash. As such~~28, ~~the entity became the Company’s wholly-owned subsidiary (the “Merger Subsidiary”)~~2007.

~~Effective~~On April ~~as of May 17~~22, 2010, ~~the~~we ~~Merger~~entered ~~Subsidiary~~into ~~was~~a ~~merged~~share exchange agreement (the “Exchange Agreement”) with ~~and~~Sinotech ~~into~~Group, Delight ~~the~~Reward ~~Company.~~Limited As(“Delight Reward”), a ~~result~~British ofVirgin ~~the~~Islands ~~merger,~~company ~~the~~and ~~Company’s~~sole ~~name~~stockholder ~~was~~of Sinotech ~~changed~~Group, toand ~~“Keyuan~~Denise ~~Petrochemicals~~D. Smith, ~~Inc~~our former principal stockholder.~~”. Prior~~ Pursuant to the ~~merger,~~terms of the ~~Merger~~Exchange ~~Subsidiary~~Agreement, ~~had~~Delight Reward notransferred ~~liabilities~~to ~~and~~us ~~nominal~~all ~~assets~~of ~~and,~~its asshares aof ~~result~~Sinotech Group in exchange for 47,658 shares of our Series M convertible preferred stock (the ~~merger~~“Share Exchange”). On an “as converted” basis, the ~~separate~~Series ~~existence~~M convertible preferred stock represented approximately 95% of ~~the~~our ~~merger~~outstanding ~~subsidiary~~common ~~ceased~~stock immediately after the Share Exchange. The ~~Company~~Series isM ~~the~~convertible ~~surviving~~preferred stock ~~corporation~~voted inwith the ~~merger~~common ~~and,~~stock ~~except~~on ~~for~~an ~~the~~“as ~~name~~converted ~~change,~~basis” ~~there~~and was noconverted ~~change~~into in47,658,000 ~~the~~shares ~~Company’s~~of ~~directors,~~our ~~officers,~~common stock ~~capital~~on ~~structure~~December or28, ~~business~~2010.

OnAs a ~~August~~result 8,of ~~2010~~the Share Exchange, ~~Keyuan~~Sinotech Group ~~Limited~~became ~~(“Keyuan HK”) established~~ a wholly -owned subsidiary inof ~~the~~us ~~People’s~~and ~~Republic~~Delight ofReward ~~China~~became ~~(“PRC”),~~our ~~Ningbo~~controlling stockholder. ~~Keyuan~~The ~~Petrochemicals,~~Share ~~which~~Exchange iswas ~~engaged~~accounted infor ~~the~~as ~~sale~~a ofreverse ~~petrochemical~~acquisition ~~products~~and inrecapitalization whereby Sinotech Group was deemed to be the ~~PRC~~accounting acquirer (and the legal acquiree).

On May ~~April 4~~12, ~~2012~~2010, ~~Guangxi~~we ~~Keyuan~~formed ~~was~~a ~~incorporated~~corporation byunder ~~Ningbo~~the laws of the State of Nevada called Keyuan Petrochemicals, Inc. as our wholly-owned subsidiary (~~75%~~the ~~ownership~~“Merger Subsidiary”). Effective as of May 17, 2010, the Merger Subsidiary was merged with and into us. As a result of the merger, our name was changed to “Keyuan HKPetrochemicals, ~~(25%~~Inc.” ~~ownership)~~Prior into ~~Guangxi~~the ~~province~~merger, ~~PRC~~the Merger Subsidiary had no liabilities and nominal assets and, as a ~~Sino-Foreign~~result ~~joint~~of ~~venture~~the ~~subsidiary~~merger, ~~for~~ the ~~purpose~~separate existence of ~~developing~~the merger subsidiary ceased. We are the ~~Guangxi~~surviving ~~Project~~corporation in the merger except for the name change, and there was no change in our directors, officers, capital structure or business.

On August ~~June 15~~8, ~~2012~~2010, ~~Ningbo~~we ~~Keyuan~~established ~~Synthetic~~a ~~Rubbers~~wholly ~~was~~owned ~~estiablished~~subsidiary asin aChina, ~~wholly-owned~~Ningbo ~~PRC~~Keyuan Petrochemicals, through our subsidiary ofKeyuan HK. Ningbo Keyuan Petrochemicals was initially set up to engage in the sales and marketing offor ~~various~~products ~~petrochemical~~produced ~~products~~by Ningbo Keyuan and, ~~specifically~~later, ~~synthetic~~by ~~rubbers~~Keyuan Synthetic Rubbers. However, in fact, Ningbo Keyuan and Keyuan Synthetic Rubbers have been selling their products directly and Ningbo Keyuan Petrochemicals has mostly assisted each subsidiary in training and recruiting sale persons as well as organizing marketing events.

On April ~~October 15~~4, 2012, a wholly-owned, indirect subsidiary, Guangxi Keyuan, ~~International~~was ~~Group~~formed ~~Limited~~for ~~changed~~the ~~its~~purpose ~~name~~of todeveloping ~~Sinotech~~the ~~Group~~Guangxi ~~Limited~~Project.

~~(c) History~~On June 15, 2012, Keyuan Synthetic Rubbers was established as a wholly-owned PRC subsidiary of Ningbo Keyuan to ~~International~~engage ~~before~~in the production ~~Share~~and ~~Exchange~~sales of SBS and SEBS.

~~Immediately~~On May ~~prior~~13, ~~to the date of the Share Exchange~~2014, ~~the~~Zhongkexuneng ~~Company~~ was aincorporated ~~shell~~by ~~company~~Sinotech ~~with~~Group nowhich ~~operations~~owns ~~and~~75% ~~a nominal amount~~ of ~~cash,~~Zhongkexuneng and ~~Keyuan~~Ningbo ~~International, through~~ Keyuan ~~Group~~which ~~Limited~~owns ~~(“Keyuan~~25% of ~~HK”)~~Zhongkexuneng ~~and~~in ~~its~~Zhejiang ~~indirect subsidiary~~province, ~~Ningbo~~China. ~~Keyuan,~~Zhongkexuneng was ~~engaged~~formed infor the ~~manufacturing~~purpose ~~and sale~~ of trading petrochemical products.

~~Keyuan HK was established in Hong Kong in 2009, and is a holding company with no significant assets or operations.~~ On ~~April~~September 2616, ~~2007~~2015, Ningbo Keyuan ~~was~~and Sinotech ~~established~~Group asentered ainto ~~wholly~~an ~~foreign~~investment ~~owned~~cooperation ~~enterprise~~agreement inwith Ningbo, ~~PRC~~Hengyun byEnergy ~~Hong~~Technology ~~Kong Keyuan PEC Investment Holdings Limited (“Hong Kong Keyuan”, 51%), Hong Kong Development Enterprise~~ Co., ~~Limited~~Ltd (“~~Hong Kong Development~~Hengyun Energy”~~, 26%~~) ~~and Wayes International Trading Limited~~ (the “~~Wayes~~Investment ~~International”,~~Cooperation ~~23%~~Agreement”)~~. Hong Kong Keyuan was controlled by Mr. Chunfeng Tao~~, ~~Hong~~pursuant ~~Kong~~to ~~Development~~which ~~was~~Sinotech ~~controlled~~Group byagreed Mrto transfer 32.88% ~~Jicun~~of ~~Wang~~its ~~and~~equity ~~Wayes~~interest ~~International~~in ~~was~~Guangxi ~~controlled~~Keyuan byto ~~Mr.~~Hengyun ~~Peijun~~Energy ~~Chen.~~subject ~~Ningbo~~to ~~Keyuan~~a ~~had~~payment anof ~~original~~consideration ~~registered capital~~ of ~~USD~~RMB ~~$12~~198,~~000~~284,~~000.~~300 ~~The~~by Hengyun ~~Ningbo~~Energy ~~Foreign~~(approximately ~~Trade~~$30.5 &million) ~~Economic~~to ~~Cooperation~~be ~~Bureau~~made ~~approved~~by ~~Ningbo~~December ~~Keyuan’s increase in its registered capital from USD$12~~31,~~000,000~~ ~~to USD$20,400,000 on February 27, 2009~~2016. ~~The~~As ~~registered~~the ~~capital~~date of ~~Ningbo~~this ~~Keyuan~~report, ~~was~~Hengyun ~~then~~Energy ~~increased~~has ~~from~~paid RMB ~~USD $20~~1,~~400~~380,000 to(approximately ~~USD~~$~~50,400,000~~0.2 ~~and a new Certificate of Approval was issued by the Ningbo Foreign Trade & Economic Cooperation Bureau on March 22, 2010~~million).

OnThe ~~April~~current 1,shareholding ~~2008~~structure ~~Ningbo Litong Petrochemical (“Ningbo Litong”) acquired 12.75%~~ of the Company ~~shares~~is ofillustrated ~~Ningbo~~in ~~Keyuan~~the ~~from~~following ~~Hong Kong Keyuan on behalf of Mr~~diagram. ~~Chunfeng~~The ~~Tao. On~~diagram ~~November~~is ~~25,~~presented ~~2008~~as ~~Ningbo~~if ~~Kewei~~Hengyun ~~Investments~~Energy ~~Co.,~~has ~~Limited~~already ~~(“Ningbo~~made ~~Kewei”),~~full apayment ~~company~~under the ~~controlled~~Investment byCooperation Mr. Tao acquired 12.75% of Ningbo Keyuan from Ningbo Litong. On June 24, 2009, Ningbo Kewei acquired 15.75% of Ningbo Keyuan from Hong Kong Keyuan through a capital increase. On July 17, 2009, Hong Kong Keyuan acquired 28.5% shares from Ningbo Kewei. Through these transactions Mr. Tao’s 51% ownership of Ningbo Keyuan remained unchanged.Agreement:

In 2009, Apex Smart Limited, Best Castle Investments Limited, Chance Brilliant Holdings Limited, Delight Reward Limited and Keyuan International Group Limited were established in the British Virgin Island (BVI) and Keyuan HK was established in Hong Kong. Delight Reward Limited holds 100% of the equity interests of Keyuan International Group Limited which holds 100% of the equity interests of Keyuan HK. Delight Reward Limited is owned by:

● Apex Smart Limited (45.6132%), which was 100% held by Stewart Shiang Lor, subsequently by Mr. Brian Pak-Lun Mok and subsequently by Mr. Chunfeng Tao. ● Best Castle Investments Limited (23.2523%), which was 100% held by Mr. O. Wing Po and subsequently by Mr. Jicun Wang. ● Chance Brilliant Holdings Limited (20.5694%), which was 100% held by Mr. Lo Kan Kwan and subsequently by Mr. Peijun Chen. ● Harvest Point Limited (5.3896%), which was 100% held by Mr. Brian Pak-Lun Mok and subsequently by Ms. Muxia Duan. ● Strategic Synergy Limited (5.1755%), which was 100% held by Mr. Brian Pak-Lun Mok and subsequently Mr. Mok transfered one third of the ownership to Mr. Xin Yue

On November 16, 2009 Keyuan HK acquired 100% of Ningbo Keyuan from Hong Kong Keyuan, HongKong Development and Wayes International. Mr. Brian Pak-Lun Mok, Mr. O. Wing Po and Mr. Lo Kan Kwan also agreed to support Mr. Chunfeng Tao, Mr. Jicun Wang and Mr. Peijun Chen respectively to retain their controls in Delight Reward Limited and its subsidiaries. The reorganization is considered as restructuring under common control and Mr. Chunfeng Tao, Mr. Jicun Wang and Mr. Peijun Chen remained as the controlling parties.

On April 2, 2010, Mr. Brian Pak-Lun Mok, Mr. O. Wing Po, and Mr. Lo Kan Kwan, who indirectly held 100% of the equity interest in Delight Reward Limited, entered into certain share transfer agreements with Mr. Chunfeng Tao, Mr. Jicun Wang, Mr. Peijun Chen and Mr. Xin Yue, pursuant to which each of these persons agreed to transfer all of its interests in Apex Smart Limited, Best Castle Investments Limited and Chance Brilliant Holdings Limited, Harvest Point Limited and Strategic Synergy Limited (collectively the “BVI Holding Companies”), to Mr. Chunfeng Tao, Mr. Jicun Wang, Mr. Peijun Chen and Mr. Xin Yue respectively, subject to achievement of certain performance targets of Ningbo Keyuan. The performance targets are the Company achieving: at least $39 million of gross revenue for the three months commencing from July 2010 to September 2010; at least $40 million of gross revenue for the three months commencing from October 2010 to December 2010; and, at least $41 million of gross revenue for the three months commencing from January 2011 to March 2011.

Pursuant to the share transfer agreements, (i) Mr. Brian Pak-Lun Mok granted Mr.Chunfeng Tao an option to acquire 100% of the equity of Apex Smart Limited in three installments provided that certain performance targets are met; (ii) Mr. O. Wing Po granted Mr. Jicun Wang an option to acquire 100% of the Best Castle Investments Limited in three installments provided that certain performance targets are met; (iii) Mr. Lo Kan Kwan granted Mr. Peijun Chen an option to acquire 100% of the equity of Chance Brilliant Holdings Limited in three installments provided that certain performance targets are met; (iv) Mr. Brian Pak-Lun Mok granted Mr. Xin Yue an option to acquire 100% of the equity of Harvest Point Limited in three installments provided that certain performance targets are met; and (v) Mr. Brian Pak-Lun Mok granted Mr. Xin Yue an option to acquire 100% of the equity of Strategic Synergy Limited in three installments provided the performance targets are met (the share transfer agreements are herein referred as “Slow Walk Agreement(s)” or “Slow Walk”. Options are herein sometimes referred as “Slow Walk Option(s)”).

(dc) ~~Current~~ ~~Shareholding~~Events ~~Structure~~during of the ~~Company~~Last Three Years

On November 4, 2010, the Company exercised its conversion rights under the terms of the Series A Preferred Stock to convert all of outstanding shares of its Series A 6% Cumulative Convertible Preferred Stock into a total of 6,132,032 shares of Common Stock, $01.~~001~~ ~~par value per share. As a result, following the conversion, all 6,132,032 shares of Series A Preferred~~ Stock ~~that~~Repurchase ~~had been outstanding were cancelled and were automatically converted, without any delivery of conversion notice required on the part of the holders of Series A preferred stock~~Program.

On September ~~November~~17, 152012, ~~2010~~our Board of Directors authorized the repurchase of $2 million of our shares of common stock, ~~one-third~~par value $0.001 per share (the “Common Stock”) for up to $1.50 per share. On December 31, 2012, we engaged TriPoint Global Equities LLC (“TriPoint Global”) as our agent to design and execute the stock repurchase program in compliance with the requirements of Rule 10b5-1(c)(1) and Rule 10b-18 under the ~~Slow~~Exchange ~~Walk~~Act. ~~Options~~In ~~were~~July ~~exercised~~2014, ~~after~~we terminated the ~~first~~stock ~~performance~~repurchase program ~~target~~after ~~was~~we ~~met~~purchased an aggregate of 425,110 shares of Common Stock. The following is a chart that provides details of the repurchases that we made.

On December 28, 2010, the Company exercised its mandatory conversion rights under the terms of the Series M preferred stock to convert all of outstanding shares of its Series M preferred stock into a total of 47,658,000 shares of Common Stock, $0.001 par value per share, all of which are held by Delight Reward Limited.

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares that Remain Available for Purchased Under the Plans or Programs
December 1 - December 31, 2012		0	$	0.00		0	$	2,000,000
January 1 - January 31, 2013		11,200	$	0.73		11,200	$	1,991,861
February 1 - February 28, 2013		15,850	$	0.77		15,850	$	1,979,668
March 1 - March 31, 2013		90,504	$	1.25		90,504	$	1,866,488
April 1 - April 30, 2013		3,300	$	1.44		3,300	$	1,861,740
October 1 - October 31, 2013		618	$	0.99		618	$	1,861,126
November 1 - November 30, 2013		1,486	$	0.80		1,486	$	1,859,933
December 1 - December 31, 2013		3,190	$	0.78		3,190	$	1,857,440
January 1 - January 31, 2014		38,390	$	0.69		38,390	$	1,831,775
February 1 - February 28, 2014		55,366	$	0.95		55,366	$	1,779,177
March 1 - March 31, 2014		109,032	$	1.07		109,032	$	1,662,513
April 1- April 30, 2014		500	$	1.08		500	$	1,661,975
July 1 - July 31, 2014		95,674	$	1.15		95,674	$	1,551,950

~~On April 29, 2011, Harvest Point Limited transferred 1,028 shares of Delight Reward Limited’s stock to Strategic Synergy Limited, changing their ownership of Delight Reward Limited’s stock to 3~~2.~~334%~~ ~~and~~Settlement ~~7.232%~~with ~~respectively. On~~ the ~~same day, Mr~~SEC. Brian Pak-Lun Mok and Mr. Xin Yue transferred 33,333 shares and 16,667 shares of Harvest Point Limited, respectively, to Ms. Muxia Duan thus transferred 100% ownership of Harvest Point Limited to Ms. Muxia Duan.

~~After~~On July 2, 2013, the ~~second~~United District Court for the District of Columbia issued a final judgment approving a settlement between us and ~~third~~the ~~performance~~SEC. ~~targets~~The ~~were~~settlement ~~met~~was reached on February 28, ~~Mr.~~2013 ~~Peijun~~in ~~Chen~~a case filed by the SEC in the United States District Court for the District of Columbia against us, alleging that we have violated Sections 17(a)(2) and Mr17(a)(3) of the Securities Act which relate to making untrue statement or omitting a material fact resulting in misleading information during the sale of securities or a fraud or deceit upon purchasers. ~~Jicun~~Sections ~~Wang~~13(a) ~~exercised~~of ~~their~~the ~~remaining~~Exchange ~~two~~Act and Rule 13a-~~thirds~~13 and Rule 12-20 thereunder which require, among other things, an issuer to timely file its periodic reports and other reports under the Exchange Act; and, Section 13(b)(2)(A) and 13(b)(2)(B) of the ~~Slow~~Exchange ~~Walk~~Act ~~Options~~which onrelate ~~February~~to 15the requirements of making and keeping books, ~~2012. Mr.~~record ~~Chunfeng~~and ~~Tao~~accounts ~~exercised~~in ~~his~~reasonable details ~~remaining~~and ~~two-thirds~~accuracy, and maintaining an internal accounting control system to provide reasonable assurances to accurate financial statements. Under the terms of the ~~Slow~~settlement, ~~Walk~~we, ~~Options~~did onnot ~~November~~admit 15or deny the allegation of the complaint, ~~2012~~paid a civil penalty of US$1 million and were permanently enjoined from violating certain securities laws.

~~On April 8, 2012, Strategic Synergy Limited transferred 105 shares of Delight Reward shares to Happyvale Limited~~3. OnSettlement ~~October 23, 2012, Delight Reward repurchased 105 shares~~ of ~~Delight~~the ~~Reward~~Class ~~shares~~Action ~~from~~and ~~Happyvale Limited in a consideration of 100,000 shares of common stock of~~ the ~~Company~~Derivative Action.

On February ~~March 25~~13, ~~2013~~2014, ~~Best~~the ~~Castle~~Brown ~~Investments~~Law ~~Limited~~Firm ~~transferred~~filed 11a derivative action suit (the “Derivative Action”) on behalf of the Company alleging certain and former current officers and directors of the Company had violated their fiduciary duties during the period from at least April 22,~~626~~ ~~shares~~2010 to October 20, 2011. The Company and the plaintiff entered certain settlement of ~~Delight~~the ~~Reward~~Derivative Action ~~Limited~~pursuant to ~~Apex~~the ~~Smart~~terms ~~Limited,~~of ~~increasing~~a ~~Apex~~stipulation ~~Smart~~of ~~Limited~~settlement whereby we agreed to certain corporate governance reforms including expanding our nomination and corporate governance committee and adopting a related party transaction policy and an payment of $190,000 to plaintiff’s ~~ownership~~counsel. On October 5, 2015, United States District Court Southern District of ~~Delight~~New ~~Reward~~York ~~Limited~~entered an ~~from~~order 45granting final approval of the settlement.~~6132%~~ toThe 68Derivative Action was dismissed.~~864%.~~

On November 15, 2011, the Rosen Law Firm filed a class action suit (the “Class Action”) on behalf of certain stockholders, alleging the Company had violated federal securities laws by issuing materially false and misleading statements and omitting material facts with regard to disclosure of related party transactions and effectiveness of internal controls in past public filings. After litigating the case for several years, the parties entered a stipulation of settlement in the aggregate amount of $2,650,000 in cash, plus interests, the terms of which United States District Court Southern District of New York entered an order granting final approval of on October 9, 2015. The Class Action was dismissed.

As4. aSettlement ~~result,~~with the ~~shareholding~~holder ~~structure~~of ~~following~~Series ~~the~~B ~~restructuring~~preferred isshares asand ~~follows:~~Side Agreement with Majority Stockholder.

On October 28, 2014, Dragon State, an investor in our September 2010 Private Placement (eas defined below) ~~Independent~~, ~~Investigation~~filed a complaint against, among others, the Company and ~~Nasdaq~~Mr. ~~Delisting~~Chunfeng ~~Decision~~Tao (“Tao”), seeking rescission of the securities purchase agreement in the September 2010 Private Placement (as defined below) and the return of $20 million, and in the alternative, seeking monetary damages to be determined at trial but not less than $20 million (the “Complaint”). At the closing of the September 2010 Private Placement, Dragon State purchased from us for an aggregate price of $20 million, 5,333,340 shares of our Series B preferred stock, 800,001 series C warrants to purchase 800,001 common shares, at a price of $4.50 per share (subject to adjustments), and 800,001 series D warrants to purchase 800,001 common shares at a price of $5.25 per share (subject to adjustments).

~~During~~On July ~~the~~11, ~~process~~2016, ofwe ~~preparing~~entered ~~the~~into ~~Company’s~~a ~~Annual~~share ~~Report~~purchase onand ~~Form~~settlement ~~10-K~~agreement ~~for~~ (the ~~year~~“Settlement ~~ending~~Agreement”) with ~~December~~Dragon 31State, ~~2010~~Delight Reward, on orKeyuan ~~about~~HK, ~~March~~Ningbo 24Keyuan Petrochemicals, ~~2011~~Ningbo Keyuan, ~~KPMG~~and Keyuan Synthetic Rubbers (the Company, Keyuan HK, Ningbo Keyuan Petrochemicals, Ningbo Keyuan and Keyuan Synthetic Rubbers are collectively referred as the “Keyuan ~~Company’s~~Group”), ~~former~~Tao, ~~independent~~and ~~auditor~~Prax Capital Equity Management Co., ~~raised~~Ltd., ~~certain~~an ~~issues~~affiliated ~~primarily relating~~party to ~~unexplained~~Dragon ~~issues~~State. Pursuant ~~regarding~~to ~~certain~~the ~~cash~~Settlement ~~transactions~~Agreement, ~~and~~Dragon ~~recorded~~State ~~sales~~agreed ~~and~~to ~~requested~~transfer ~~that~~the securities purchased in the ~~Audit~~September ~~Committee~~2010 ~~conduct~~Private Placement to Delight Reward for a consideration of RMB 12,000,000 or the equivalent in US dollars at an ~~independent~~interbank ~~investigation~~RMB/U.S. dollar ~~Based~~exchange onrate published by the ~~issues~~People’s ~~raised~~Bank byof ~~KPMG,~~China on ~~March~~July 3111, ~~2011~~2016 (the “PBOC FX Rate”). In addition, ~~our~~Delight ~~Audit~~Reward ~~Committee~~and ~~elected~~Keyuan Group agreed to ~~commence~~pay, anand ~~independent~~Dragon ~~investigation~~State agreed to accept, a settlement of ~~the~~RMB ~~issues~~6,000,000 or ~~raised~~equivalent ~~and~~US ~~engaged~~dollars at the ~~services~~PBOX ofFX ~~independent~~Rate ~~counsel,~~to ~~Pillsbury~~waive ~~Winthrop~~all ~~Shaw~~claims ~~Pittman~~and ~~LLP~~liabilities ~~(“Pillsbury”),~~that ~~which~~Dragon inState ~~turn~~or ~~engaged~~its ~~Deloitte~~affiliated companies ~~Financial~~or ~~Advisory~~individuals ~~Services~~had ~~LLP~~brought ~~(“Deloitte”),~~or aswould ~~independent~~bring ~~forensic~~against ~~accountants~~Delight Reward, Keyuan Group, Tao and ~~King~~their &affiliates ~~Wood~~including the Complaint. These amounts were paid on July 15, as2016. ~~Audit~~On ~~Committee~~July ~~counsel~~19, in2016, the ~~People’s~~United ~~Republic~~States District Court Southern District of ~~China~~New ~~(Pillsbury,~~York ~~Deloitte~~entered ~~and~~an ~~King~~order &granting ~~Wood~~final ~~are~~approval ~~collectively~~of ~~referred~~the ~~herein~~settlement. asThe ~~“Investigation~~Complaint ~~Team”)~~was dismissed.

On August ~~September 28~~4, ~~2011~~2016, ~~the~~Delight ~~Investigation~~Reward ~~Team~~entered ~~completed~~into a side agreement with the ~~investigation~~Company (the “Side Agreement”). On Under ~~October~~the 3Side Agreement, ~~2011~~Delight Reward agreed not to claim, that the ~~Company~~warrants ~~provided~~transferred pursuant to the ~~Nasdaq~~Settlement Agreement ~~Hearings~~were ~~Panel~~exercisable, ~~with~~and aagreed ~~copy~~to ofpay us ~~the~~for ~~final~~each ~~investigation~~convertible ~~report~~share ~~along~~underlying ~~with~~the aSeries ~~comprehensive~~B ~~list~~preferred ofstock transferred ~~remedial~~pursuant ~~actions~~to the ~~Company~~Settlement ~~has~~Agreement, ~~taken~~the ~~and~~highest issale ~~committed~~price toof ~~taking~~the toCompany’s ~~remediate~~Common Stock per share as reported on the ~~accounting~~OTC ~~and~~Pink ~~internal~~during ~~control~~a ~~issues.~~period Oncommencing ~~October~~on 5,the ~~2011,~~date of the ~~Company~~Settlement ~~was~~Agreement ~~notified~~and ~~that~~ending ~~the~~on ~~Nasdaq~~August ~~Hearings~~4, ~~Panel~~2016, which ~~exercised~~was ~~its~~$0.005 ~~discretionary~~per ~~authority~~share ~~pursuant~~of toCommon ~~NASDAQ~~Stock. ~~Listing~~The ~~Rule~~aggregate ~~5101~~purchase toprice ~~delist~~for the ~~Company’s~~shares ~~securities~~of ~~from~~Common Stock underlying the ~~Nasdaq~~series B ~~Stock~~preferred ~~Market~~stock was therefore $27,465.01. AsOn aAugust ~~result~~8, ~~the~~2016, ~~Company’s~~these ~~shares~~funds ~~resumed~~were ~~trading~~paid in ~~the~~cash ~~pink~~by ~~sheets~~Delight ~~under~~Reward. On August 10, 2016, the ~~ticker~~shares ~~symbol~~of ~~KEYP.PK~~Series ~~beginning~~B ~~October~~preferred 7,stock ~~2011.~~were ~~The~~converted ~~Company’s~~into ~~common~~5,493,001 ~~stock~~shares isof ~~currently~~Common ~~traded~~Stock onpursuant to the terms ~~Over-~~of the~~-Counter~~ ~~Bulletin~~certificate ~~Board~~of ~~under~~designation of series B preferred stock and the ~~symbol~~Side ~~KEYP~~Agreement.

Production Suspension.

During the second quarter of 2013, we conducted routine maintenance of our entire production facilities and suspended production for 41 days. This routine maintenance is standard and necessary in the petrochemical production industry and is undertaken every two years, depending on the condition of the facilities. As a result of the suspension, our total production for fiscal year 2013 decreased by approximately 98,000 MT and revenue decreased by approximately $110 million compared to fiscal year 2012.

During the fiscal year 2015, we suspended production for 85 days. On January 29, 2015, our Board of Directors approved a temporary suspension of operations of Ningbo Keyuan and Keyuan Synthetic Rubbers. The decision was made in connection with the continuingly depressed oil price in international markets occurring in June 2014 which materially negatively impacted us and our downstream distributors. As a result, we then did not have enough capital to maintain operations during the suspension, but we performed routine maintenance of our facilities during such time. We resumed operation in April 2015 when we observed the recovery and stabilization of international oil prices.

~~(f) SEC~~As ~~Settlement~~a result of the suspension, our total production of finished products for the fiscal year 2015 decreased by approximately 71,000 MT and revenue for the fiscal year 2015 decreased by approximately $179 million compared to the total production of finished products and revenue for the fiscal year 2014, respectively.

~~The Company has reached a settlement in a case filed by the Securities and Exchange Commission~~ (~~“SEC”~~d) onOther ~~February~~Historical 28, 2013 in the United States District Count for the District of Columbia against the Company, alleging the Company violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934, and Rules 12b-20 and 13a-13 thereunder. Under the terms agreed to by the Company and the SEC, the Company, without admitting or denying the allegation of the complaint, will pay a civil penalty of $1million and will be permanently enjoined from violating certain securities law. The settlement remains subject to approval by the United District Court for the District of Columbia, which must approve its terms and enter the final judgment. As the date of this filing, the United District Court for the District of Columbia has not approved the settlement yet.Events

~~(g) FINANCINGS~~1. April-May 2010 Private Placement.

In April –and May, 2010, we offered and sold to an aggregate of 122 accredited investors 748,704 units of securities at a purchase price of $35 per unit, for a total gross proceed of $26,204,640, consisting of, in the aggregate, (a) 6,738,336 shares of Series A convertible preferred stock, par value $0.001 per share, convertible into the same number of shares of Common Stock (subject to adjustments), (b) 748,704 shares of Common Stock, (c) 748,704 three-year Series A warrants to purchase up to 748,704 shares of Common Stock, at an exercise price of $4.50 per share (subject to adjustments), and (d) 748,704 three-year Series B warrants to purchase up to 748,704 shares of Common Stock, at an exercise price of $5.25 per share (subject to adjustments) (the “April-May 2010 Private Placement”). The units were issued in accordance with the exemption from the registration provisions of the Securities Act. (Subsequent litigation relating to this private placement is described above.)

Following the Share Exchange, we entered into a securities purchase agreement with 122 accredited investors for the issuance and sale of 748,704 Units at a purchase price of $35 per unit, for aggregate gross proceeds of approximately $26,204,640 consisting of, in the aggregate, (a) 6,738,336 shares of Series A convertible preferred stock, par value $02.~~001~~ ~~per~~September share convertible into the same number of shares of Common Stock, (b) 748,704 shares of Common Stock, (c) three-year Series A Warrants to purchase up to 748,704 shares of Common Stock, at an exercise price of $4.50 per, and (d) three-year Series B Warrants to purchase up to 748,704 shares of Common Stock, at an exercise price of $5.25 per share (the “April-May 2010 Private Placement”).

InOn September ~~connection~~28, ~~with the April-May~~ 2010 ~~Private Placement~~, we ~~also~~closed ~~entered into~~ a ~~registration~~private ~~rights agreement with the investors~~placement, ~~in which we agreed to file a registration statement with the SEC to register~~ for ~~resale~~aggregate ofgross ~~the~~proceeds ~~Common Stock, the Common Stock issuable upon conversion~~ of ~~the Series A Preferred Stock~~$20, ~~the Series A Warrant Shares and the Series B Warrant Shares issued in the financing~~250,000, ~~within~~of 30a ~~calendar~~total ~~days~~ of ~~April 22~~540,001 ~~2010~~units ~~and to have such registration statement declared effective within 150 calendar days~~ of securities ~~April~~at ~~22,~~a ~~2010~~purchase orprice ~~within 180 calendar days~~ of ~~April~~$37.50 22per unit, ~~2010~~each inunit ~~the~~consisting ~~event~~ of (a) ~~full~~10 ~~review~~shares of ~~the~~Series ~~registration~~B ~~statement~~convertible bypreferred ~~the~~stock, (b) ~~SEC.~~1 Ifthree weyear ~~can~~Series ~~not~~C ~~comply~~warrant ~~with~~to ~~the~~purchase ~~foregoing~~1.5 ~~obligations~~shares ~~under~~of ~~the~~Common ~~registration rights agreement~~Stock, weat ~~will~~an beexercise ~~required~~price toof ~~pay~~$4.50 ~~liquidated~~per ~~damages~~share in(subject ~~cash~~ to ~~each investor~~ adjustments), atand ~~the~~(c) ~~rate of~~ 1% ofthree ~~the~~year ~~applicable~~Series ~~subscription~~D ~~amount~~warrant ~~for~~to ~~each~~purchase 301.5 ~~day~~shares ~~period~~of inCommon ~~which we are not in compliance; provided~~Stock, ~~that such liquidated damages will be capped~~ at ~~10%~~an ofexercise ~~the~~price ~~subscription amount~~ of ~~each~~$5.25 ~~investor~~per share ~~and~~(subject ~~will not apply~~ to ~~any~~adjustments) ~~registrable~~(the ~~securities~~“September ~~that~~2010 ~~may~~Private bePlacement”) ~~sold~~in ~~pursuant~~reliance toupon ~~Rule~~the ~~144~~exemption ~~under~~ from the ~~Securities~~registration ~~Act~~provisions ~~if all~~ of the ~~conditions~~Securities inAct. ~~Rule 144~~(~~i)(2)~~Subsequent ~~are~~litigation ~~satisfied~~relating ~~at the time of the proposed sale, or are subject~~ to anthis ~~SEC~~private ~~comment~~placement ~~with~~is ~~respect~~described ~~to Rule 415 promulgated under the Securities Act~~above.)

~~Accordingly, we filed a registration statement on Form S-1 in connection with the April-May 2010 private placement transaction~~3. ~~Amendment~~Independent ~~No.~~Investigation 4 to such Form S-1 which we filed on October 15, 2010 was declared effective on October 19, 2010. However, because of the delinquency of the Company’s annual report on Form 10-K for fiscal year ended December 31, 2010 and ~~interim~~NASDAQ ~~reports on Form 10-Q for three months ended March 31, 2011 and June 30, 2011 respectively, as of April 10, 2012, the Amendment No~~Delisting. 4 to such Form S-1 is no longer effective. As a result, we began to accrue penalties pursuant to the terms of the registration rights agreement from April, 2011 to November 1, 2011, the period that the registerable securities were not able to be sold pursuant to Rule 144 under the Securities Act.

~~Pursuant~~In toconnection with the ~~terms~~preparation of our annual report on Form 10-K for the ~~securities~~year ~~purchase~~ended December ~~agreement~~31, 2010, on or about March 24, 2011, KPMG, our former independent auditor, raised certain issues primarily relating to certain cash transactions and ~~the~~recorded ~~terms~~sales ofand ~~the~~requested ~~Certificate~~that ofour ~~Designation~~Audit ofCommittee ~~Series~~conduct Aan ~~preferred~~independent ~~stock~~investigation. Based on the issues raised by KPMG, weon ~~exercised~~March 31, 2011, our ~~conversion~~Audit ~~rights~~Committee elected to ~~convert~~commence ~~all~~an ofindependent investigation (the ~~outstanding~~“Investigation”) on ~~Series~~the Aissues ~~preferred~~raised ~~stock~~and ~~into~~engaged athe ~~total~~services of 6independent counsel,~~132,032~~ ~~shares~~Pillsbury ofWinthrop ~~Common~~Shaw ~~Stock.~~Pittman AsLLP a(“Pillsbury”), which ~~result~~in ofturn ~~the~~engaged ~~conversation,~~Deloitte ~~since~~Financial ~~November~~Advisory 4,Services ~~2010~~LLP (“Deloitte”), weas ~~have~~independent noforensic ~~longer~~accountants, and ~~incurred~~King ~~the~~& ~~Series~~Wood AMallesons ~~dividends~~(“King & Wood”), ~~payable~~as ~~quarterly~~Audit Committee counsel in China (Pillsbury, atDeloitte and King & Wood are collectively referred herein as the ~~rate~~“Investigation ofTeam”). 6%On ~~per~~September ~~annum~~28, ~~for~~2011, ~~each~~the Investigation ~~outstanding~~Team ~~share~~completed the investigation.

~~September~~Prior to ~~2010~~the ~~Private~~Investigation, ~~Placement~~our Common Stock was quoted on the Nasdaq Stock Market under the symbol “KEYP”. On April 1, 2011, in connection with the commencement of the investigation, trading in our Common Stock was halted by Nasdaq Stock Market. On October 3, 2011, we provided the Nasdaq Hearings Panel with a copy of the final investigation report along with a comprehensive list of remedial actions we had taken and were committed to taking to remediate the accounting and internal control issues. On October 5, 2011, we were notified that the Nasdaq Hearings Panel exercised its discretionary authority pursuant to NASDAQ Listing Rule 5101 to delist our securities from the Nasdaq Stock Market. On October 7, 2011, our stock began trading on the OTC Pink under the symbol “KEYP”.

On September 28, 2010, we closed an offering for $20,250,000 consisting of a total of 540,001 units at a purchase price of $37.50 per unit, each unit consisting of, (a) ten (10) shares of Series B convertible preferred stock of the Company, (b) one and a half (1.5) three year Series C warrants to purchase one and a half (1.5) shares of Common Stock, at an exercise price of $4.50 per share, and (c) one and a half (1.5) three year Series D warrants to purchase one and a half (1.5 ) shares of Common Stock, at an exercise price of $5.25 per share (the “ September 2010 Private Placement”) in reliance upon the exemption from securities registration afforded by Regulation S as promulgated under the Securities Act of 1933.OUR PRODUCTS

We manufacture and supply a variety of petrochemical and rubber products, including petrochemical products such as Benzene Toluene-Xylene Aromatics (“BTX Aromatics”), propylene, styrene, liquid petroleum gas (“LPG”), Methyl Tertiary Butyl Ether (“MTBE”) and rubber products such as SBS and SEBS, each of which is described below, and other products.

In connection with the September 2010 Private Placement, we also entered into a Registration Rights Agreement with the investors, in which we agreed to file a registration statement with the Commission to register for resale the Common Stock issuable upon conversion of the Series B Preferred Stock, the Series C Warrant Shares and the Series D Warrant Shares, within 30 calendar days of October 19, 2010 and to have the registration statement declared effective within 150 calendar days of October 19, 2010 or within 180 calendar days of October 19, 2010 in the event of a full review of the registration statement by the Commission. If we do not comply with the foregoing obligations under the registration rights agreement, we will be required to pay cash liquidated damages to each Series B Investor, at the rate of 1% of the applicable subscription amount for each 30 day period in which the Company is not in compliance; provided, that such liquidated damages will be capped at 10% of the subscription amount of each investor and will not apply to any registrable securities that may be sold pursuant to Rule 144 under the Securities Act if all of the conditions in Rule 144(i)(2) are satisfied at the time of the proposed sale, or are subject to an SEC comment with respect to Rule 415 promulgated under the Securities Act.Petrochemical Products:

~~Accordingly,~~● weBTX ~~filed~~Aromatics: aconsisting ~~registration~~of ~~statement on Form S-1 in connection with the September 2010 private placement transaction. Amendment No. 2 to such Form S-1 which we filed on January 14~~benzene, ~~2011 was declared effective on January 19~~toluene, ~~2011.~~xylene ~~However, because of the delinquency of the Company’s annual report on Form 10-K for fiscal year ended December 31, 2010~~ and ~~interim~~other ~~reports~~chemical oncomponents ~~Form 10-Q~~ for ~~three~~further ~~months~~processing ~~ended~~into ~~March 31~~plastics, ~~2011~~gasoline and ~~June~~solvents ~~30,~~materials ~~2011~~widely ~~respective,~~used asin ~~of April 10~~paint, ~~2012~~ink, ~~Amendment~~construction ~~No.~~coating 2and ~~to such Form S-1 is no longer effective~~pesticide. As a result, we began to accrue penalties pursuant to; the terms of the registration rights agreement from April 2011to November 2011, the period that the registerable securitiess were not able to be sold pursuant to Rule 144 under the Securities Act.

~~(h) Mandatory~~● ~~Conversion~~Propylene: a chemical intermediate as one of ~~Series~~the Abuilding ~~Preferred~~blocks ~~Stock~~for an array of chemical and ~~Series~~ Mplastic ~~Preferred~~products ~~Stock~~that are commonly used to produce polypropylene, acrylonitrile, oxo alcohols, propylene oxide, cumene, isopropyl alcohol, acrylic acid and other chemicals for paints, household detergents, automotive brake fluids, indoor/outdoor carpeting, textile, insulating materials, auto parts and electrical appliances.

On● ~~November~~Styrene: 4,a ~~2010,~~precursor ~~we exercised our mandatory conversion rights under the terms of the Series A Preferred Stock~~ to ~~convert~~polystyrene ~~all~~and ofseveral ~~outstanding~~copolymers ~~shares~~widely ofused ~~its~~for ~~Series~~packaging Amaterials, 6%construction ~~Cumulative Convertible Preferred Stock into a total of 6~~materials,~~132,032~~ ~~shares~~electronic ~~of Common Stock. As a result~~parts, ~~following~~home ~~the conversion~~appliances, ~~all~~household 6goods,~~132,032~~ ~~shares~~home ~~of Series A Preferred Stock that had been outstanding were cancelled and automatically converted~~furnishings, ~~without any delivery of conversion notice required on the part of the holders of Series A Preferred Stock. Dividends on the Series A Preferred Stock accrued through November 3~~toys, ~~2010~~sporting ~~and~~goods ~~amounted to approximately $143,000~~ and ~~were paid to the holders of Series A Preferred Stock on the regularly scheduled payment date of January 31, 2011~~others.

As● LPG: a ~~result~~mixture of ~~foregoing,~~hydrocarbon asgases ofused ~~November~~as 4,fuel ~~2010,~~in weheating ~~longer~~appliances ~~incurred~~and ~~the~~vehicles. ~~Series~~It Ais ~~Dividend~~also ~~that~~a ~~was~~replacement ~~payable~~for ~~quarterly,~~chlorofluorocarbons atas ~~the~~an ~~rate~~aerosol ofpropellant 6%and ~~per~~a ~~annum for each outstanding share~~refrigerant, ~~payable~~which inwe ~~cash~~believe orreduces ~~common~~damage ~~stock~~to ~~dividends,~~the asozone ~~applicable~~layer.

On● ~~December~~MTBE ~~28,~~& ~~2010,~~Other weChemicals: ~~exercised~~MTBE, ~~our~~oil ~~mandatory~~slurry, ~~conversion~~sulphur ~~rights~~and ~~under~~others ~~the~~are ~~terms~~used offor ~~the Series M preferred stock to convert all of the outstanding shares of the Series M preferred stock into~~ a ~~total~~variety of ~~47,658,000~~applications ~~shares~~including offuel ~~Common Stock~~components, ~~$0.001~~refrigeration ~~par value per share. As a result~~systems, ~~following the conversion~~fertilizers, ~~all~~insecticides ~~47,658 shares of Series M preferred stock that had been outstanding were cancelled~~ and ~~were automatically converted, without any delivery of conversion notice required on the part of the holders of Series M Preferred Stock~~fungicides.

~~(i) Stock Repurchase Program~~Rubber Products:

On● ~~September~~SBS: ~~17,~~consisting ~~2012, our Board~~ of ~~Directors~~styrene authorized the repurchase of $2 million of the Company’s stock for up to $1.50 per share. On December 31, 2012, the Company engaged TriPoint Global Equities LLC (“TriPoint Global”) as its agent to design and ~~execute the stock repurchase program~~butadiene, ~~that~~widely ~~complies~~used ~~with~~for ~~the~~waterproofing ~~requirements~~building ~~of Rule 10b5-1(c)(1) and Rule 10b-18 under the Securities Exchange Act of 1934~~material, asasphalt ~~amended (the “Exchange Act”). As of March 31~~modification, ~~2013~~furniture, ~~the~~shoe ~~Company~~sole ~~has purchased 117~~material,~~554~~ ~~shares of common stock through the stock repurchase program. On April 17~~tubes, ~~2013~~tape, inauto ~~connection~~parts ~~with~~and ~~the~~electrical delay in filing our Annual Report on Form 10-K for the year ended December 31, 2012, we decided to temporarily suspend the stock repurchase program until we file all periodic reports required under Section 13 or 15(d) of the Securities Exchange Act of 1934appliances.

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
December 1 - December 31, 2012		0	$	0.00		0	$	2,000,000
January 1 - January 31, 2013		11,200	$	0.73		11,200	$	1,991,861
February 1 - February 28, 2013		15,850	$	0.77		15,850	$	1,979,668
March 1 - March 31, 2013		90,504	$	1.25		90,504	$	1,866,488
Total		117,554	$	1.14		117,554	$	1,866,488

●

SEBS: Styrene-Ethylene-Butylene-Styrene, a product similar to SBS but we believe with a more durable product feature.

In addition, we will start producing ABS once we complete the construction of the facility in Guangxi and the trail production.

PRODUCTION CAPACITY AND PRODUCTION FACILITIES

Our annual designed manufacturing capacity is 720,000 MT in the aggregate of these products. Our annual designed capacity for SBS production facility is to 70,000 MT and for SEBS production facility is to 10,000 MT. Additionally, we have a total of 134,000 MT of storage capacity, consisting of 84,000 MT of storage capacity for raw materials and 50,000 MT for finished products. We also own a dock in Ningbo, China which can directly unload foreign cargo vessels under the 50,000 MT cargo capacity to our dock.

In addition, the construction of an oil catalytic cracking processing facility was completed by the end of 2014. It is used as an extension of our catalytic pyrolysis processing equipment. This facility can reduce production costs and the market risk in the purchase of raw materials, and improve the stability and efficiency of project production of heavy oil to 200,000 MT of heavy oil per year.

~~OUR~~Facilities for ~~PRODUCTS~~Petrochemical Products

We manufacture and supply a variety of petrochemical products, including BenzeneToluene-Xylene Aromatics (BTX Aromatics), propylene, styrene, liquid petroleum gas (LPG), Methyl Tertiary Butyl Ether (MTBE), Styrene butadiene styrene (SBS), and other petrochemicals, each of which is described below:

Product	Amount of Production Lines	Location of Facility	Designed Manufacturing Capacity (MT)				Actually Production (MT)				Utilization Rate
			2014		2015		2014		2015		2014			2015
BTX Aromatics	1	Ningbo, Zhejiang Province		300,000		300,000		209,385		235,347		75	%		78	%
Propylene	1	Ningbo, Zhejiang Province		50,000		50,000		28,986		21,713		58	%		43	%
Styrene	1	Ningbo, Zhejiang Province		80,000		80,000		80,815		65,695		101	%(1)		82	%
LPG	1	Ningbo, Zhejiang Province		100,000		100,000		63,196		61,366		63	%		61	%
MTBE and other chemicals	1	Ningbo, Zhejiang Province		190,000		190,000		201,213		118,293		106	%(1)		62	%
Total	5	N/A		720,000		720,000		586,775		502,414		N/A			N/A

●(1) ~~BTX~~We ~~Aromatics:~~use ~~consists~~industrial ofstandard ~~benzene,~~designed ~~toluene,~~manufacturing ~~xylene~~capacity ~~and~~based ~~other~~on ~~chemical~~equipment ~~components used for further processing into plastics, gasoline~~ and ~~solvent~~facility. ~~materials~~In ~~widely used in paint, ink, construction coating and pesticide; ● Propylene: a chemical intermediate which is one of~~ the ~~building~~case ~~blocks for an array of chemical and plastic products~~ that are commonly used to produce polypropylene, acrylonitrile, oxo alcohols, propylene oxide, cumene, isopropyl alcohol, acrylic acid and other chemicals for paints, household detergents, automotive brake fluids, indoor/outdoor carpeting, textile, insulating materials, auto parts and electrical appliances; ● Styrene: a ~~precursor~~facility tois ~~polystyrene~~operated ~~and several copolymers widely used for packaging materials~~efficiently, ~~construction~~the ~~materials,~~actual ~~electronic~~production ~~parts,~~can ~~home~~exceed appliances, household goods, home furnishings, toys, sporting goods and other products; ● LPG: a mixture of hydrocarbon gases used as fuel in heating appliances and vehicles. A replacement for chlorofluorocarbons as an aerosol propellant and a refrigerant which reduces damage to the ~~ozone~~designed ~~layer;~~manufacturing ~~and~~capacity.

~~● MTBE & Other Chemicals: MTBE, oil slurry, sulphur and others which are used~~ Facilities for aAdvanced ~~variety~~Petrochemical ~~of applications including fuel components, refrigeration systems, fertilizers, insecticides~~ and ~~fungicides.~~Rubber Products

● Styrene butadiene styrene (SBS): a thermoplastic elastomer with features similar to rubber, widely used in the manufacture of resin, shoes, tape, tubes and asphalt.

Product	Amount of Production Lines	Location of Facility	Designed Manufacturing Capacity (MT)				Actually Production (MT)				Utilization Rate
			2014		2015		2014		2015		2014			2015
SBS (1)	2	Ningbo, Zhejiang Province		70,000		70,000		16,976		29,828		24	%		43	%
SEBS (2)	1	Ningbo, Zhejiang Province		10,000		10,000		1,746		2,355		17	%		24	%
Total	3	N/A		80,000		80,000		18,713		32,183		N/A			N/A

~~Production~~(1) ~~Capacity~~Our SBS facility was completed in September 2011. It currently has two production lines in commercial production. SBS generally has a higher product margin compared to other petrochemical products we are producing and ~~Expansion~~a wide range of applications in the footwear, adhesive, polymer modification and modified asphalt industries.

(2) Our ~~annual~~SEBS ~~designed~~facility ~~manufacturing~~started ~~capacity~~full ~~was 550,000 metric tons of a variety of petrochemical products at the end of 2010. We upgraded the catalytic pyrolysis processing equipment used in~~ production ~~facilities to expand the capacity from 550,000 MT to 720,000 MT. This capacity expansion project started~~ in ~~March~~fiscal ~~2011~~year ~~and was completed in April 2011~~2014.

In September 2011, we completed building a new facility designed for producing Styrene-Butadience-Styrene (the “SBS”), one of the Styreneic Block Copolymers. SBS is a product with higher product margin with significant applications in the footwear, adhesive, polymer modification and modified asphalt industries. The SBS facility was built on part of the 1.2 million square feet of land for which we obtained the right of use in August 2010. The construction started in September, 2010 and was completed as scheduled in September 2011. One SBS production line began commercial production in December 2011 and the second line began commercial production in August, 2012. The designed capacity of the SBS facility allows for production of up to 70,000 metric tons per year. The SBS facility achieved a 41% utilization rate in 2012, as the first full year of production, and generated approximately $71.1 million in sales and $7.7 million in profit. We expect to generate net profit margins of 10% from our production of SBS once the facility reaches normal production levels, which means the actual production volume reach more than 80% of the design capacity. However, market conditions, the volatility of feedstock and SBS product prices can significantly impact the estimated profitability and we cannot guaranty that our SBS production will reach more than 80% of the design capacity in the near future.

~~The following chart depicts our production capacity in 2012:~~EXPANSION

~~Breakdown~~All of our facilities, except for the SBS and SEBS facility, have been operating since 2009. Therefore, those older facilities generally provide us with a stable output. While we are continuously working on existing equipment upgrades to increase production, we realize that optimizing the utilization rates for our current facilities is currently not sufficient to meet increasing customer demands. More specifically, increasing market demand for tire and auto parts has resulted in increasing market demand for styrene and ABS; and higher requirements related to environmental protection imposed by the PRC government have led to greater demand for transformer oil and catalytic cracking oil. Based on these market trends, we completed the construction of ~~2012~~an ~~Capability~~oil catalytic cracking processing facility by the end of ~~693,895~~2014. ~~(MT)~~And we are more recently focused on the following improvements to our infrastructure to expand our manufacturing capacity:

In● ~~order~~Constructing toan ~~develop~~ABS ~~our~~production ~~business~~facility toin ~~meet~~Guangxi Province. We completed the ~~increasing~~technical ~~customer~~design ~~demands,~~of wethe ~~have~~facility ~~been~~and ~~working~~the toequipment ~~expand~~at ~~our~~the ~~manufacturing~~end ~~capacity~~of by2015. ~~focusing~~We are currently arranging the tendering on the ~~following~~construction ~~improvements~~of tothe ~~our~~facility ~~infrastructure~~and major equipment. InWe ~~anticipation~~expect to finish construction of the ~~market~~facility ~~demand~~and ~~for~~installation of main equipment and pipelines by the end of 2017 and commence production by the end of ~~finished~~2018 ~~goods~~with ~~and~~an ~~environmental~~annual ~~protection~~production ~~requirements~~capacity of 50,000 weMT ~~adjusted~~of ABS; ● Upgrading our facility for styrene to increase annual design capacity of ethylene-styrene from 80,000 MT to 200,000 MT, of which 120,000 MT can be used for producing synthetic materials and 80,000 MT can be sold to downstream petrochemical companies; ● Constructing a transformer oil facility using hydrogen from the ethylene-styrene facility so that we can complete a double hydrogenation process on original ~~expansion~~products ~~project~~(such as BTX Aromatic) for refining transformer oil and producing high value transformer oil with a design capability of 100,000 MT per year. Construction of the main facility column was completed at the end of October 2013. We are currently ~~working~~performing the assembly and installation and expect to ~~refine~~start production by the end of March 2017; and ● Adding 50,000 MT of new storage capacity, after which our ~~manufacturing~~total storage capacity will be 150,000 MT. We completed construction of two new tanks with approximately 34,000 MT of new storage in 2013 which became operational at the end of 2013 after being approved by the local environmental department. The facility for the remaining 16,000 MT of new storage capacity is under construction. We expect to ~~include:~~complete the construction at the end of 2016 and start operation in early 2017.

a)The total anestimated ~~ABS~~cost ~~production~~of ~~facility~~our inexpansion plan is approximately $372.5 million, including $300 million for Guangxi ~~Province~~Project, ~~which~~$30 ~~will~~million for ~~have~~the antransformer oil facility, $40 million for the increased annual design capacity of ethylene-styrene, and $2.5 million for additional storage capacity. Upon completion of our expansion described above, our total production capacity is expected to reach 1,270,000 MT per year comprised of ~~400~~our current petrochemical production of 720,000 MT, SBS of ~~ABS.~~70,000 ~~The~~MT, ~~Company~~SEBS ~~began~~of ~~pre-construction~~10,000 MT, ~~activities~~additional instyrene ~~February~~of ~~2012~~120,000 ~~and~~MT, ~~the~~catalytic ~~first~~cracking ~~phase~~oil isof ~~expected~~200,000 toMT, beABS ~~completed~~of by50,000 ~~the~~MT, ~~forth~~and ~~quarter~~transformer oil of ~~2014~~100,000 MT.

b)Our current anestimate ~~oil~~of ~~catalytic~~our ~~cracking~~expansion ~~processing~~schedule ~~facility~~is as anfollows. ~~extension of our catalytic pyrolysis processing equipment~~However, aswe ~~well~~are ascontinuing ~~the~~our ~~feed~~evaluation ~~way~~ of ~~the~~timelines ~~main~~for ~~raw~~our ~~materials~~expansion projects tobased ~~produce~~on ~~synthetic~~our ~~rubber.~~financial ~~This~~situation ~~facility can reduce production costs~~ and ~~the~~ market ~~risk in the purchase of raw materials, and improve the stability and efficiency of project production to 200,000 MT of heavy oil per year~~conditions.

c) an increased annual design capacity of our ethylene-styrene facility from 80,000 MT to 200,000 MT, among which 120,000 MT can be used for producing synthetic and 80,000 MT can be sold to downstream petrochemical companies. Ethylene-styrene is the main raw material (eg. Bezene) from the catalytic cracking oil processing facility to produce styrene. This facility can be considered the bridge between original products and high-value added products and will complete the integration of internal resources.

Expansion Project		Expected Completion Date
Ethylene-Styrene Facility		End of Q1, 2017
Transformer Oil Facility		End of Q1, 2017
ABS Production Facility		End of Q4, 2017⁽¹⁾
New storage capacity of 16,000 MT		End of Q4, 2016

(1)	The construction of the ABS facility and installation of main equipment and pipelines is expected to be completed by the end of 2017 and production is expected to be started by the end of 2018.

PETROCHEMICAL MARKET IN CHINA

Based on a report of China Petroleum and Chemical Federation, despite the declining growth in PRC economy and the drop in international crude oil price, the petroleum and chemical industry is expected to maintain a stable growth in 2016 with the support from PRC government. The net profit in the petroleum and chemical industry in 2015 was RMB 7 billion (approximately $1.12 billion), a decrease of 18.3% compared to 2014. The turnover of the petroleum industry in 2015 was RMB 3.9 million (approximately $0.6 million), a decrease of 20.5% compared to the turnover of RMB 4.9 million in 2014, and the turnover of chemical industry in 2015 was RMB 8.8 billion (approximately $1.4 billion), an increase of 1.5% compared to the turnover of RMB 8,709 million (approximately $1.4 billion) in 2014. (data source: http://www.askci.com/news/chanye/2016/02/14/1453914mc.shtml)

d)China’s increasing adomestic ~~transformer~~demand ~~oil~~for ~~facility~~petrochemical ~~using~~and ~~hydrogen~~rubber ~~from~~products has exceeded the ~~ethylene-styrene~~domestic ~~facility~~supply toin ~~complete~~the apast ~~double~~several ~~hydrogenation~~years, ~~process~~and as ona ~~original~~result, ~~products~~China ~~(BTX~~has ~~Aromatic)~~imported ~~for~~petrochemical ~~refining~~products ~~transformer~~to ~~oil,~~meet ~~and~~domestic ~~producing~~demand, ~~high~~which ~~value~~is ~~transformer~~expected ~~oil~~to ~~with~~continue for a ~~design~~number ~~capability~~ of years. ~~100,000~~More ~~MT per year.~~specifically,

e)● anChina ~~SSBR~~imported ~~(Solution~~1.2 ~~Polymerized~~million ~~Styrene~~MT ~~Butadiene~~of ~~Rubber~~benzene ~~)production~~in ~~facility~~2015 ~~with~~and a0.6 ~~design~~million ~~capability~~MT of ~~150,000~~benzene MTin ~~per~~2014 ~~year,~~● ~~that~~China’s ~~will~~import ~~use~~of ~~its~~xylene ~~own~~changed ~~production~~from ~~process~~85 ~~technology~~million MT in ~~synthetic~~2014 ~~rubber,~~to ~~combining~~73 ~~styrene~~million MT in 2015. ● China’s imported 305 million MT of propylene in 2014 and 277 million MT in 2015 ● China imported 374 MT of butadiene, toin ~~produce~~2015 ~~SSBR~~and 373 MT in 2014. ~~This~~● ~~product~~China ~~can~~imported be28 ~~used~~million asMT ~~raw~~of ~~materials~~styrene ~~for~~in ~~tires,~~2015 ~~instead~~and of20 ~~imported~~million ~~hexakis~~MT ~~(methoxymethy)~~in ~~melamine~~2014. (~~“HMMM”~~data source: data from the website of General Administration of Customs of PRC ).

WeENVIRONMENTAL PROTECTION ~~registered~~AND ~~our~~SAFETY catalytic oil processing facility and transformer oil plant with the Ningbo local government in February 2013, and expect it to be completed and operational in late 2013, at which time, we will be able to produce medical use and edible products such as tubes and chewing gum.MEASURES

~~The~~We are ~~total~~committed ~~estimated~~to ~~cost~~environmental ofprotection, ~~processing equipment for product refinement and the SSBR production~~ facility issafety ~~approximately $149.3 million, including $49.8 million for processing equipment~~ and ~~$99.5~~quality ~~million~~control ~~for~~throughout the ~~SSBR~~ ~~production facility. We are currently going through the governmental approval and~~ design, ~~phase~~maintenance ~~of the ABS production facility~~ and ~~estimating~~growth ~~the related costs. Upon full completion~~ of our ~~expansion, our~~operating ~~total~~facilities production capacity will reach 2,443,000 MT per year including, but not limited to, our current petrochemical production of 720,000 MT, styrene of 200,000 MT, catalytic cracking oil of 200,000 MT, ABS of 400,000 MT, SSBR of 150,000 MT and ~~transformer~~manufacturing ~~oil of 100,000 MT~~process. ~~The following chart depicts the breakdown of our planned production capacity of 2,443,000 MT.~~

Capacity Breakdown after expansion projects (2,443,000 MT)

We are currently evaluating the timeline for our expansion projects. Our current estimate is as follows:

Expansion Project		Expected Completion Date
Oil Catalytic Processing Facility		End of Q4, 2013
Ethylene-Styrene Facility		End of Q4, 2014
Transformer Oil Facility		End of Q4, 2014
SSBR production facility		End of Q4, 2015
ABS Production Facility		End of Q4, 2014

Petrochemical Manufacturing Process

The following chart illustrates our petrochemical manufacturing process:

The following chart illustrates the manufacturing process of SBS:

Petrochemical Market in China

China has the world’s second largest petrochemical market after the U.S. in terms of production and consumption. China’s petrochemical output value grew from RMB 1,240 billion in 2000 to RMB 11,000 billion in 2011 representing a Compound Annual Growth Rate (CAGR) of 21.95%. China Petrol and Chemical Industry Association (CPCIA) expect that the total profits in the petrochemical industry will increase 12.5% in 2012. (Source: http://www.cu-market.com.cn/hgjj/2013-1-7/15504023.html)

Based on a report from China’s petroleum and chemical industry federation, production for the petroleum and chemical industry will remain stable, based on an assumed total output for 2013 of RMB14.25 trillion, and profits of RMB870 billion . (source:http://www.askci.com/news/201301/21/219524756358.shtml)

China’s increasing domestic demand for petrochemical products has exceeded the domestic supply in the past several years:

● China’s benzene supply grew from 2.13 million MT in 2002 to 6.626 million MT in 2011 representing a CAGR of 13.5%. China’s benzene demand increased from 2.08 million MT in 2002 to 5.609 million MT in 2011, representing a CAGR of 11.65%. (data source http://chem.oilchem.net/chemical/2_3_3662667.html )

● China’s toluene supply grew from 697,000 MT in 2002 to 2.55 million MT in 2011, representing a CAGR of 15.5%. China’s toluene demand increased from 1.56 million MT in 2002 to 2.30 million MT in 2010, representing a CAGR of 5%.(data source: http://info.pcrm.hc360.com/2012/02/020858176690.shtml )

● China’s xylene supply grew from 820,000 MT in 2002 to 6.5 million MT in 2010, representing a CAGR of 30%. China’s xylene demand increased from 1.1 million MT in 2002 to 7.5 million MT in 2009 representing a CAGR of 32%.(data source: www.stats.gov.cn ) (www.chem99.com)

● China’s propylene supply has grown from 3.78 million MT in 2000 to 15.93 million MT in 2012, representing a CAGR of 14.16%. China’s propylene demand has risen from 4.39 million MT in 2000 to 18.60 million MT in 2010, representing a CAGR of 16%.(data source: http://www.oilchem.net/chemical/5_3_37153.html)

● China’s styrene supply has grown from 0.89 million MT in 2002 to 3.806 million MT in 2010, representing a CAGR of 20%. China’s Styrene demand has increased from 2.69 million MT in 2002 to 7.3 million MT in 2010, representing a CAGR of 13%.(data http://chem.chem365.net/Web/jckxx_news/30869.htm, http://static.sse.com.cn/cs/zhs/scfw/gg/ssgs/2010-04-29/600481_20100429_3.pdf )

● China’s LPG supply has grown from 12.56 million MT in 2003 to 21.811 million MT in 2011 representing a CAGR of 7.14%. China’s LPG demand has increased from 18.77 million MT in 2003 to 23.64 million MT in 2010, representing a CAGR of 3%.(data source: http://www.oilchem.net:88/coalchem/2_1_2991360.html,)

As a result, China has imported petrochemical products to meet the domestic demand, which is expected to continue for a number of years (source: Publication by Business Monitor International Ltd.: China Petrochemicals Report, Includes 5 Year Forecast to 2014; Q2 2010):

● China imported 1.862 million MT of benzene between 2003 and 2011. (data source: http://chem.oilchem.net/chemical/5_3_54578.html)

● China imported 863,000 MT of toluene in 2002 and 659,630 MT in 2011 (data source: http://chem.oilchem.net/chemical/5_3_53435.html)

● China imported 271,000 MT of xylene in 2002 and 477,183 MT in 2012 (data source: http://chem.oilchem.net/chemical/5_3_54074.html)

● China’s imports of propylene increased from 210,000 MT in 2004 to 2.15 million MT in 2012 (data source: http://chem.oilchem.net/chemical/5_3_54205.html))

● China’s imports of styrene increased from 1.79 million MT in 2002 to 3.607 million MT in 2011 (data source: http://chem.oilchem.net/chemical/5_3_53475.html)

● China imported butadiene 344,826MT in 2012, increased 88% compared to butadiene imported in 2011,. (data source: http://finance.oilchem.net/bulk/108_8697.html,)

Asphalt Market in China and Pretreatment & Asphalt Process

In addition to its use as raw materials for emulsified, diluted and modified asphalt-based products, asphalt is widely used for highways, roads and airport pavements. At the end of 2011, the length of China’s highways has reached 85,000 km (52,816 miles) in the aggregate (http://www.ptbtv.com/news.asp?ID=78058), which made China rank the second in the world in terms of the length of its highway system. According to the PRC government plan, the length of China's highways will reach 100,000 km (62,137 miles) by 2020 (http://www.cngaosu.com/a/2010/1109/71783.html). In November 2008, the PRC Ministry of Communication issued a RMB 5 trillion investment plan and according to this plan, the average annual investment for construction of highways in the next five years will be RMB 980 billion, among which 60% will be used for construction of expressways, 20% for provincial highways and 20% for highways in the countryside.

To ensure the high-quality condition of roads and highways, the PRC government requires regular pavement maintenance every five years. In the past five years, the domestic demand for asphalt in China has exceeded supply with total imports of approximately 5.6 million MT in 2010.

The following chart depicts the pretreatment and asphalt process:

Environmental Protection and Safety Measures

We are committed to environmental protection, facility safety and quality control throughout the design, maintenance and growth of our operation facilities and manufacturing process.

Environmental Protection

We have taken various measures to meet national standards and ensure our environmental compliance. For example, we recycle the water for cooling in our production process and large amounts of water can be saved through recycling. ~~Sulfureted~~Sulfurated hydrogen generated in production is sent to the facility for sulfur recovery. The waste water and waste gas is treated by our sewage water treatment station and ~~emission~~emissions control facility to meet the national standards before discharge. The industrial residue and garbage is sent to qualified companies for safe treatment.

Currently we are in compliance with all environmental requirements and our facilities have passed inspections conducted by local environmental departments.

Safety Measures

~~Our~~We have not had any safety ~~control~~accidents ~~measures~~since the ~~include~~commencement of our operations except three accidents occurred during the year ended December 31, 2014. In May 2014, during an inspection of a solvent tower, a worker sent by the independent tower constructor accidently fell off the tower and drowned, and one of our employees fell and drowned after attempting a rescue. In June 2014, during the maintenance of the dock, three workers sent by an independent maintenance contractor commenced operations without pre-clearance with us and fell into the sea. Two were rescued and one drowned. In September 2014, there was an explosion in a temporary storage tank during the installation of a new pipeline causing one death and two injuries. These accidents caused a total loss of RMB 53 million (approximately $8.5 million). Though these accidents were caused by the workers’ failure to comply with the operational manual, we realized that we should create a more comprehensive safety management system:

1. Distribution control system; 2. Emergency shutdown mechanism; 3. Automatic interlocking system; 4. Detection & alarm system for flammable and toxic gas; 5. Fire detection & automatic sprinkler system; and 6. Real-time system and process monitoring system

	(1)	Prior to the end of 2014, our general manager of operation was also responsible for safety control. At the end of 2014, we hired a general manager in charge of safety control and management. The safety general manager overrides any operational decision that is not in compliance with safety measures and requirements. As of the date of this report, we have 15 employees in safety management and control department including 2 certified safety experts and 3 registered safety control engineers;

	(2)	We make every September 20 a “safety alert day” and organize safety training and seminars for all employees;

	(3)	In 2015, we improved our safety management system and incentivized operators and managers with monetary awards and penalties;

	(4)	We no longer operate during holidays and weekends except for urgent repairs;

	(5)	We set up triple checking procedures of operators’ protection equipment to ensure the safety of operators; and

	(6)	Our managers and safety department employees examine the facility every morning before commencing operation.

1410

Our current safety control measures include:

	(1)	A distribution control system;

	(2)	An emergency shutdown mechanism;

	(3)	An automatic interlocking system;

	(4)	A detection & alarm system for flammable and toxic gas;

	(5)	A fire detection & automatic sprinkler system; and

	(6)	A real-time system and process monitoring system.

We are currently in compliance with all governmental and internal safety requirements and all of our facilities have passed the inspection conducted by local authorities.

Quality Control

~~With~~Our petrochemical ~~our~~and ~~commitment~~rubber ~~to quality control, our petrochemical~~ products have met all applicable national standards for petrochemical and rubber products set by the General Administration of Quality Supervision, Inspection and Quarantine of the PRC. ~~For instance, the purity of our Styrene product exceeded the national standard of 99.7%, and the purity and our Propylene product exceeded the national standard of 99.5%.~~

~~Our~~OUR TECHNOLOGY ~~Competitive~~AND ~~Strengths~~INTELLECTUAL PROPERTY

AsWe have ~~an independent~~proprietary ~~petrochemical~~manufacturing ~~manufacturer and supplier, our competitive strengths include:~~technologies.

~~Technology~~Specifically, we ~~Advantage~~possess the technology to use heavy oil as one of our raw materials, instead of naphtha which is a commonly used feedstock in the petrochemical production industry. Heavy oil is approximately 15% cheaper per ton and more readily available than naphtha.

WeIn ~~have~~addition, ~~proprietary~~we ~~manufacturing~~use enhanced technologies in our production process so that ~~allow~~we spend less and have greater efficiency. Our proprietary catalytic pyrolysis process uses a set of dual risers for ~~better~~one ~~use~~precipitator and one regenerator, while the commonly used fluidized catalytic cracking process uses one riser for one precipitator and one regenerator. The set of ~~raw~~dual ~~materials~~risers for one precipitator and one regenerator are integrated into one complete process, which provides for ease of operation, higher ~~yield~~operation ~~rate~~efficiency and ~~enhanced~~higher ~~operational~~reaction ~~efficiency~~temperature. A catalytic pyrolysis process with high temperatures can generally produce more olefin hydrocarbon based products compared to other equipment using low temperatures for the same products.

~~Specifically,~~Our management weconsider ~~possess~~our ~~the~~manufacturing ~~technology~~technologies toand ~~use~~manufacturing ~~heavy~~design ~~oil,~~important ~~instead~~to ofour ~~naphtha~~business, ~~which is a commonly used feedstock in the petrochemical production industry. Heavy oil is approximately 15% cheaper per ton~~ and ~~more~~have ~~readily~~taken ~~available~~steps ~~than~~to protect ~~naphtha~~these technologies, ~~which~~including ~~provides us with competitive advantage in~~ the selection of raw materials. In addition, we use proprietary catalytic pyrolysis with higher reaction temperatures, which results in a 15% higher Olefin yield rate than that of conventional fluidized catalytic cracking processes. Finally, we use enhanced technologies in our production process that allow for lower capital investment and higher operations efficiency.following:

~~Our~~● ~~yield~~In ~~rate~~2011, inwe ~~2010~~were ~~for~~granted ~~our~~a ~~entire~~patent ~~production~~for ~~line~~our ~~indicated~~Multiple aEthylene ~~yield~~Propylene ~~rate~~(“MEP”) oftechnology 87(#ZL-2010-2-0191523.6%) ~~for~~by ~~finished~~the ~~products.~~National ~~The~~Intellectual ~~yield~~Property ~~rate~~Bureau in ~~2011~~China. ~~for~~MEP ~~our~~is ~~entire~~a ~~line~~technology ~~was~~used ~~87.2%~~in ~~for~~our ~~finished~~existing ~~products~~production process. ~~The~~We ~~yield~~developed ~~rate~~this inproprietary ~~2012~~production ~~for~~process ~~our~~that ~~entire~~improves ~~line~~the ~~was~~manufacturing ~~87.3%~~efficiency ~~for~~and ~~finished~~flexibility ~~products.~~for ~~Yield~~a ~~rate~~wide ~~represents~~range ~~the percentage~~ of ~~finished~~petrochemical ~~product~~products ~~produced~~and ~~from~~applies ~~input~~to ofa ~~raw~~processing ~~material~~technology ~~and~~used ~~net~~in ~~input~~the production of ~~unfinished~~ethylene ~~products~~ and ispropylene. ~~calculated~~It byallows ~~dividing~~us ~~the~~to ~~sum~~use oflower ~~crude~~grade ~~oil~~feedstock ~~and~~(such ~~net~~as ~~unfinished~~heavy ~~input~~oil) ~~into~~instead ~~the~~of ~~individual~~a ~~net~~higher ~~production~~grade offeedstock ~~finished~~commonly ~~products.~~used Ain ~~yield~~other ~~rate~~existing ofpetrochemical ~~87.3%~~production ~~means~~processes, ~~for~~and ~~instance,~~thus ~~100~~improves ~~tons~~the ofyield ~~heavy~~and ~~oil~~utilization ~~can~~rate ~~generate approximately 87.3 tons~~ of ~~finished~~the ~~products~~production line.

● In ~~addition~~2013, we ~~use~~received ~~enhanced~~patent ~~technologies~~approvals ~~in our production process that allow~~ for ~~lower~~three ~~capital~~devices ~~investment~~used ~~and~~in ~~higher~~the ~~operations~~production ~~efficiency.~~process ~~Our~~for ~~proprietary~~(1) ~~catalytic~~Acrylonitrile: ~~pyrolysis~~Fluidization ~~process~~Reaction ~~uses~~System ~~a set~~ of ~~dual~~Acrylonitrile ~~risers~~(#ZL-2012-2-0381020.4), ~~for~~(2) ~~one~~Cooler ~~precipitator~~of ~~and~~Acrylonitrile ~~one~~Gas ~~regenerator~~(#ZL-2012-2-0382047.5), ~~while~~and ~~the~~(3) ~~commonly~~Absorption ~~used~~Tower ~~fluidized~~of ~~catalytic~~Acrylonitrile ~~cracking~~(#ZL-2012-2-0381066.6), ~~process uses one riser for one precipitator and one regenerator~~ respectively. The ~~dual~~techniques ~~riser,~~behind ~~one~~these ~~precipitator~~devices ~~and~~were ~~one~~developed ~~regenerator~~together ~~are~~with ~~integrated~~East ~~into~~China ~~one~~University ~~complete process, which provides for ease~~ of ~~operation,~~Science ~~higher operation efficiency~~ and ~~higher reaction temperature~~Technology. ItThese ~~was~~devices ~~estimated~~improve ~~that~~our ~~the~~output ~~technology~~capacity ~~generates~~and arecovery ~~15%~~rates ~~higher~~in ~~olefin~~addition ~~yield rate than that of the fluidized catalytic cracking process, which allows us~~ to ~~produce~~decreasing ~~more~~discharge ~~higher-margin olefin products such as styrene and propylene~~waste.

~~Furthermore,~~● aIn ~~catalytic~~2013, ~~pyrolysis~~we ~~process~~were ~~with~~granted ~~high~~a ~~temperatures~~patent ~~can~~for ~~produce~~“the ~~more~~synthetic ~~olefin~~method ~~hydrocarbon~~for ~~based~~transparent ~~products~~segmented ~~compared~~copolymer” ~~with~~(#ZL-2012-1-0005678.9). ~~other~~This ~~equipment~~method ~~using~~is ~~low~~not ~~temperatures~~only ~~for~~to expand the ~~same~~range ~~product.~~of Inour ~~other~~SBS ~~words~~products, ~~our~~but ~~cost~~also isto ~~reduced~~increase ~~while producing~~ the ~~same~~“K ~~amount~~resin” ofcontent ~~the~~in ~~product~~styrene.

Our management considers our manufacturing technologies and manufacturing design critical to our business, and has taken steps to protect these technologies. In January 2011, we received the approval for our patent application for MEP technology (Multiple Ethylene Propylene) from the National Intellectual Property Bureau in China, #ZL-2010-2-0191523.6. In addition to patent protection, we also entered into confidentiality and license agreements with certain employees, customers and others to protect the confidentiality of our technologies.11

● In ~~2013~~2014, we received the patent notices for three devices used in the production process for Acrylonitrile: Fluidization Reaction System of Acrylonitrile (#ZL-2012-2-0381020.4), Cooler of Acrylonitrile Gas (#ZL-2012-2-0382047.5), and Absorption Tower of Acrylonitrile (#ZL-2012-2-0381066.6), respectively. These techniques were ~~developed~~granted ~~together~~two ~~with~~SEBS ~~East~~patents ~~China University Of Science and Technology (ECUST), and can be used~~ for ~~improving~~Keyuan ~~the~~Synthetic ~~output~~Rubber: ~~capacity~~KYSEBS1310 and ~~recovery~~KYSEBS1320 ~~rates,~~by ~~and~~National ~~for~~Intellectual ~~decreasing~~Property ~~discharge~~Bureau ~~waste~~in ~~to improve production efficiency~~China.

15● We submitted a trademark application for Ningbo Keyuan logo with the State Administration for Industry and Commerce, Trademark office in October, 24, 2012 and successfully granted such trademark in March 14, 2014, effective from March 14, 2014 to March 13, 2024.

OnIn addition ~~January~~to ~~10,~~patent ~~2012~~protection, we ~~started~~have anentered ~~application~~have ~~for~~confidentiality aand ~~patent~~license ~~called~~agreements ~~“the~~with ~~synthetic~~certain ~~method for transparent segmented copolymer”~~employees, ~~which~~customers ~~has been accepted~~ and others ~~posted~~to onprotect the ~~China~~confidentiality ~~patent data website in July 2012. Assuming there is no objection for this patent application during 2013, we will automatically obtain the patent in the end~~ of ~~2013. Obtaining this patent will not only expand~~ our ~~SBS products range and increase the “K resin” content in the styrene, which will further improve our product portfolio to avoid market risk; but also benefit us for applying for High Tech Company~~technologies. ~~For more details about this patent application, please ref to the following website:~~

~~http://dbpub.cnki.net/Grid2008/Dbpub/Detail.aspx?DBName=SCPD2012&FileName=CN102558466A&QueryID=4&CurRec=1~~OUR LOCATION

~~Elite~~Our ~~Workforce~~operation and storage facilities are located in a port at the ocean-front and next to the East China Sea, which is in close proximity to suppliers and customers. We believe that being located near a port provides us with the advantage of lower logistics cost and easier access to raw materials. In addition, being located in Qingshi Industrial in Ningbo gives us convenient access to skilled labor and industry resources.

~~Our~~We own ~~management~~an ~~team~~on-site ocean shipping dock with 50,000 ~~composed~~MT of ~~seasoned~~shipping ~~petrochemical~~capacity ~~experts~~and ~~with~~a ~~proven~~10-truck ~~track~~loading/unloading ~~records~~capacity. ~~from~~Approximately ~~China’s~~90% ~~largest~~of ~~state-owned~~our feedstock ~~enterprises,~~and ~~provides~~finished usproducts ~~with~~use ~~specialized~~this ~~operating~~shipping ~~management~~dock. ~~and~~We ~~technical~~are ~~administration.~~currently Inupgrading ~~addition~~the classification of our own dock so that we can unload foreign cargo vessels under the 50,000 MT cargo capacity to our dock directly. We expect that the upgrade will be completed by the end of 2017 and we ~~have~~will ~~allied~~be ~~with~~able ~~many~~to ~~industry-renowned~~save ~~technology~~additional ~~experts~~logistics costs and ~~advisors~~storage ~~assisting~~fees usonce it is completed, as we will be able to ~~achieve~~unload ~~consistent~~certain ~~technological~~cargoes ~~improvement~~directly rather than paying a third party to do so.

~~Ideal~~Our Guangxi ~~Location~~Project is located in Fangchengang city, an important port for Guangxi province, and other than Beihai, the only major Chinese port on the Tonkin Gulf. The storage and logistics costs are generally lower in Fanchengang city compared to in other ports in China.

~~Our~~SALES AND operation and storage facilities are at the ocean-front and in close proximity to suppliers and customers which provides us with an advantage of lower logistics cost and readily available access to raw materials and target customers. In addition, being located in Qingshi Chemical Park in Ningbo provides us with access to skilled labor and industry resources.PRICING

Sales and Pricing

Sales

~~In selling our products, most~~ Most of our customers pay ~~cash~~ in advance to buy our products. ~~For~~To core customers with excellent credit history, we may ~~make~~grant ~~an exception by conducting~~ credit sales, which is part of our strategy to maintain customer ~~relationship~~relationships.

In order to meet customers’ ~~demand~~demands, we have improved our manufacturing technologies and streamlined our conversion process to achieve an ~~approximately~~approximate 30 days’ raw material-to-sales cycle.

In order to facilitate our future growth, Ningbo Keyuan Petrochemicals was incorporated in Ningbo, China with a registered capital of $3 million as a wholly-owned subsidiary of Keyuan HK on August 27, 2010. Ningbo Keyuan Petrochemicals is responsible for the sales and marketing, raw materials sourcing and market analysis for the Company. Dr. Jingtao Ma was appointed as the General Manager of the new entity. Dr. Ma was the head of the former sales and marketing division of Ningbo Keyuan. This new entity will also serve as the “market thermometer” that can better monitor market conditions and obtain first hand market data through buying and selling activities. Management believes that the consolidation of the sales and marketing and raw material procurement function under one business unit will help efficiently manage the future expansion of the Company.

Pricing

Our raw material price fluctuations are primarily attributable to fluctuations of international oil prices and market ~~effects~~changes of supply and demand. We set our selling prices based upon benchmark prices published by national petrochemical companies, and/or through individually negotiated prices with customers. ~~Specifically, BTX aromatic prices are influenced by benchmark prices set by National Development and Reform Commission, or NDRC.~~

16CUSTOMERS

Customers

Customers for Petrochemicals Products

Our main customer base for petrochemicals products is downstream petrochemicals manufacturers ~~and~~who ~~distributors (trading companies) located in and near the Yangtze River Delta and Pearl River Delta. 14% of our sales are direct sales to petrochemical companies that~~ use our products as raw materials for their own products such as polystyrene, isoprene, dicyclopentadiene, acrylic acid, oil fuel products and other chemical products. and ~~86%~~distributors of(trading ~~our~~companies) ~~sales~~located ~~are~~in ~~through~~and near the ~~trading~~Yangtze ~~companies,~~River ~~i.e.,~~Delta ~~distributors~~and Pearl River Delta who sell our products to petrochemicals derivative companies and manufacturers. We engage distributors as customers mainly because: (1) distributors customarily pay the entire purchase price prior to shipment, while end-users often request credit payment terms; and (2) it decreases our overhead by allowing for a more streamlined sales force as distributors do not require regular client visits, entertaining or a highly specialized sales team to maintain the relationships.

In order to estimate the total orders for a year, we conduct surveys with our major customers to obtain their preliminary orders for the next one or two years and update the information annually. We enter into purchase contracts with customers on an order-to-order basis. In each contract, price is determined based on market price and the quantity is specified based on (1) the customer demand for a particular order and (2) our capability to satisfy that particular order. Our five largest customers accounted for 36% and 44 % of the sales for the years ended December 31, 2012 and 2011, respectively. We anticipate that our overall customer composition and the concentration of our top customers will change as we expand our business and modify our product portfolio to include new products and higher-margin products; however, we can give no assurance that this will be the case.12

We engage distributors as customers mainly because:

	(1)	Distributors customarily pay the entire purchase price prior to shipment, while end-users often request credit payment terms; and

	(2)	Using distributors decreases our overhead by allowing for a more streamlined sales force as distributors normally require less efforts in maintaining relationship and potentially order more than individual companies. For instance, end-users often require more regular visits and a more highly specialized sales team to work with.

Our five largest customers accounted for 33% and 27% of the sales for the years ended December 31, 2015 and 2014, respectively. We anticipate that our overall customer composition and the concentration of our top customers will decrease as we expand our business and modify our product portfolio to include new products and higher-margin products; however, we can give no assurance that this will be the case.

Customers for SBS Products

The sales for SBS products commenced at the end of 2011. ~~60%~~Our ofmain ~~our~~customer ~~SBS~~base ~~customers~~for ~~are~~SBS ~~trading~~products ~~agents~~is ~~and~~ the ~~rest~~trading ofagents ~~our customers are end-user factories. Most of our SBS customers are~~ located in the Yangtze River delta, South China and Northern cities in China such as Hebei and Shangdong. ~~The~~and end-user factories ~~purchase~~who purchase our SBS as raw materials for their various products, such as shoe sole material, adhesive, waterproof rolling material, asphalt and plastic modifier.

We ~~currently have~~controlled approximately 152.9% of the ~~Chinese~~domestic SBS market ~~for~~in ~~SBS~~2014. WeIn ~~engage~~2015, ~~agents as~~ our ~~main~~domestic ~~customers~~SBS ~~primarily~~market ~~because:~~share ~~(1)~~increased ~~trading~~to ~~agents pay 30~~5.1%. in(data ~~advance~~source: http://www.chem999.com) ~~when~~Our ~~placing~~main ~~their~~SBS ~~order~~products, ~~and~~such ~~pay~~as ~~the~~shoe ~~rest~~sole ~~before~~material ~~shipment,~~ and ~~(2)~~asphalt itmodifier, ~~decreases~~were ~~our~~traded ~~overhead~~through agents byin ~~allowing~~2015. ~~for~~We aengage ~~more~~agents ~~streamlined sales force~~ as ~~trading~~our ~~agents~~main docustomers ~~not~~primarily ~~require regular client visits, entertaining or a highly specialized sales team to maintain the relationships.~~because:

To maintain and develop our relationship with SBS customers, we set up a customer relationship department to closely monitor and timely respond to customers’ requests and feedback, as well as a technical team in charge of improving product quality and adjusting product chemical features to meet different requirements from customers. We also have monthly meetings with our major customers to obtain their preliminary orders. Because the price of SBS fluctuates monthly, and we do not have a warehouse distribution system, the price of SBS usually includes the shipment cost and profit. Our five largest customers accounted for 23% of the sales of SBS for the year ended December 31, 2012. We anticipate that our overall customer composition and the concentration of our top customers will change as we expand our business and modify our product portfolio to include new products and higher-margin products; however, we can give no assurance that this will be the case.

	(1)	Trading agents pay 30% in advance when placing their order and pay the rest before shipment, and

	(2)	Using trading agents decreases our overhead by allowing for a more streamlined sales force, as trading agents do not require regular client visits or a highly specialized sales team to maintain the relationships.

~~Intellectual~~To maintain ~~Property~~and develop our relationship with SBS customers, we set up a customer relationship department to closely monitor and timely respond to customers’ requests and feedback, as well as a technical team in charge of improving product quality and adjusting product chemical features to meet different requirements from customers. We also developed a team comprised of product managers, each of whom is responsible for one SBS product. They are given authority to work with the customer relationship department, the factory and the agent, to offer a prompt solution to various needs.

We also have monthly ameetings ~~pending trademark application for the Ningbo Keyuan company logo~~ with ~~the~~our ~~State~~major ~~Administration~~SBS ~~for~~customers ~~Industry~~to ~~and~~obtain ~~Commerce,~~their ~~Trademark~~preliminary ~~Office~~orders. OnBecause ~~January 25, 2011 we received approval for a patent related to~~ the ~~Company's~~price ~~proprietary~~of ~~production~~SBS ~~process,~~fluctuates frequently ~~called MEP (Multiple Ethylene Propylene). MEP is an exclusive~~ and ~~leading~~we ~~technology~~do ~~used~~not ~~in Keyuan's existing production process. Through the ingenuity of our CEO, Mr. Tao, we~~ have ~~developed this proprietary production process that improves the manufacturing efficiency and flexibility for~~ a ~~wide~~warehouse ~~range~~distribution ~~of petrochemicals. The utility model patent received~~system, ~~#ZL-2010-2-0191523.6, applies to a processing technology used in~~ the ~~production~~price of ~~ethylene~~SBS ~~and~~usually ~~propylene.~~includes ~~This~~shipment technology allows us to use lower grade feedstock (such as heavy oil) instead of a higher grade feedstock commonly used in other existing petrochemical production processes. It also allow us to improve the yield and utilization rate of its production line, resulting in a 15% cost ~~savings~~.

17Customers for SEBS Products

InOur ~~2013,~~SEBS wefacility ~~received~~started ~~the~~full ~~patent~~production in ~~notices~~fiscal ~~for~~year ~~three~~2014. ~~devices~~Customers ~~used~~of inSEBS products during the ~~production~~fiscal ~~process~~year ~~for~~2015 ~~Acrylonitrile: Fluidization~~and ~~Reaction~~2014 ~~System~~include oftrading ~~Acrylonitrile~~agents ~~(#ZL~~and end-~~2012-2-0381020~~user factories.~~4),~~ Most ~~Cooler~~ of ~~Acrylonitrile~~our ~~Gas~~SEBS ~~(#ZL-2012-2-0382047.5),~~customers are located in Southern and ~~Absorption~~Eastern ~~Tower~~China ofsuch ~~Acrylonitrile~~as ~~(#ZL-2012-2-0381066.6)~~Zhejiang, ~~respectively~~Jiangsu and Fujian. ~~These~~Advance ~~techniques~~payments ~~were~~or down ~~developed~~payments ~~together~~are ~~with~~required ~~ECUST,~~for all orders from both the agents and ~~can~~end beusers. ~~used~~We ~~for~~have ~~improving~~two ~~the~~SEBS ~~output~~patents ~~capacity~~for ~~and~~Keyuan ~~recovery~~Synthetic ~~rates,~~Rubber: KYSEBS1310 and KYSEBS1320. The sales to trading agents in 2015 accounted for ~~decreasing~~56% ~~discharge~~and ~~waste~~79% toof ~~improve~~the ~~production~~total ~~efficiency~~sales of SEBS under each patent license, respectively.

On January 10, 2012, we started an application for a patent called “the synthesis for transparent block copolymer”, which has been accepted and posted on the China patent data website in July 2012. Assuming there is no objection to this patent application during 2013, we will automatically obtain the patent at the end of 2013. Obtaining this patent will not only expand our SBS products range and increase the “K resin” content in styrene, which will further improve our product portfolio; but it will also benefit us in our application for status as a High Tech Company. For more details about this patent application, please refer to the following website:13

~~http://dbpub.cnki.net/Grid2008/Dbpub/Detail.aspx?DBName=SCPD2012&FileName=CN102558466A&QueryID=4&CurRec=1~~GOING CONCERN AND MANAGEMENT’S PLANS

~~Going~~For ~~Concern~~the ~~and~~year ~~Management’s~~ended ~~Plans~~December 31, 2015, we reported net loss of approximately $60.5 million. For the year ended December 31, 2015, net cash used in operating activities was $112.5 million. At December 31, 2015, we had working capital deficits of approximately $284.6 million.

~~Our~~Although we ~~audited~~continue ~~financial~~to ~~statements~~finance ~~for~~our ~~the~~operations ~~years~~primarily ~~ended~~through ~~December~~short-term ~~31,~~bank ~~2012~~borrowings and ~~2011~~management’s ~~have~~realignment ~~been~~of ~~prepared~~product profiles, ~~assuming~~along wewith ~~will~~the ~~continue~~general asstabilization aof ~~going~~the ~~concern.~~petrochemical Weindustry ~~reported~~in aChina, our operation resulted in net loss of ~~approximately~~ $560.85 5 million in ~~2012~~2015 ~~and~~compared ~~cash~~to ~~flows~~a ~~used~~net inloss ~~operations~~ of ~~approximately~~ $747.1 million ~~for~~in ~~the~~2014 ~~year~~and ~~ended December 31, 2012. At December 31, 2012, we had~~ a ~~working~~net ~~capital~~profit ~~deficit~~ of ~~approximately~~ $~~159~~4.6 million~~. The~~ ~~Report~~in of the Independent Registered Public Accounting Firm on our consolidated financial statements as of and for the year ended December 31, 2012 includes a going concern explanatory paragraph which means that the accounting firm has express substantial doubt about the Company’s ability to continue as a going concern2013.

~~We continue to finance its operations primarily through short-term bank borrowings.~~ Short-term bank borrowings and ~~bills~~notes payable amounted to approximately $~~397.8~~695 million at December 31, ~~2012, and have increased to approximately $414 million at May 28, 2013~~2015. ~~Management expects that short-term bank financing will continue to be available through at least the end of 2013.~~

WeThese ~~continue~~matters toraise ~~benefit~~substantial ~~from~~doubt ~~favorable~~about ~~PRC~~the ~~tax~~company’s ~~policies~~ability ~~related~~ to ~~consumption~~continue ~~tax,~~as ~~approximately~~a ~~$51.3~~going ~~million of which was refundable at December 31, 2012~~concern. Management believes that this amount will be refunded by June 30, 2013 and that additional consumption tax deposits of approximately $84.1 million through May 28, 2013 will be refunded more promptly in the second half of 2013.

WeManagement expects ~~are~~that ~~expanding~~short-term ~~our~~bank ~~production~~borrowings ~~line~~will continue to ~~include~~be ~~Styrene-Ethylene-Butylene-Styrene~~available ~~(“SEBS”). Management~~through ~~expects~~the ~~production~~following ~~and~~12 ~~sale~~months from the date of ~~SEBS~~this report. Since we have not defaulted on previous short-term bank borrowings, we believe the good credit history will allow us to ~~commence~~renew our inshort-term bank borrowing when they mature. Furthermore, management expects that the ~~second~~petrochemical ~~half~~industry ofin ~~2013~~China will continue to stabilize, and that ~~SEBS~~demand ~~will~~for ~~yield~~downstream aproducts ~~higher~~(such ~~gross~~as ~~margin~~auto, ~~than~~home ~~some~~appliances and dyes) will grow after several years of contraction. As such, management expects that the Company’s ~~current~~will ~~products~~resume profitability in the next few years.

WeAs ~~are~~reported ~~also~~in ~~exploring~~our ~~sources~~financial ofstatements for ~~additional~~the ~~financing~~years ended December 31, ~~including~~2015 ~~short-term~~and ~~financing~~2014, we continue to benefit from ~~vendors~~favorable ~~and~~PRC ~~other~~tax ~~parties~~policies related to consumption tax. In ~~addition~~As of December 31, ~~the~~2015, ~~Company~~we ishad ~~closely~~consumption ~~monitoring~~tax ~~its~~recoverable ~~cash~~of ~~balances~~approximately $44.4 million. As of July 31, ~~cash~~2016, ~~needs~~all ~~and~~outstanding ~~expense~~tax ~~levels~~recoverable as of December 31, 2015 was refunded.

~~The~~We ~~ability~~believe ofthat the Company’s tocash, ~~continue~~working ascapital aand ~~going~~access ~~concern is dependent upon management’s ability~~ to ~~implement~~cash through its ~~strategic~~bank ~~plan~~loans, ~~obtain~~assuming ~~additional~~they ~~capital~~will ~~and~~remain available ~~generate~~to ~~net~~us ~~income~~through ~~and~~the ~~positive~~following ~~cash~~12 ~~flows~~months from ~~operations. There~~the ~~can~~date beof nothis ~~assurance~~report, ~~that~~provide ~~these~~adequate ~~plans~~capital ~~will~~resources beto ~~sufficient~~fund orits operations ~~that~~and ~~additional~~working ~~financing~~capital ~~will~~needs bethrough ~~available~~at inleast ~~amounts~~12 ormonths ~~terms~~from ~~acceptable to~~ the ~~Company,~~date ifof atthis ~~all~~report.

~~Government~~We are ~~Regulation~~also exploring sources of additional financing, including short-term financing from our vendors and other parties and potential equity financing if the terms are acceptable to us. In addition, we are closely monitoring our cash balance, cash needs and expense levels.

InOur ability ~~addition~~ to ~~U.S.~~continue ~~securities~~as ~~laws,~~a ~~banking~~going ~~laws~~concern ~~and~~is ~~laws~~dependent ~~applicable~~upon tomanagement’s ~~all~~ability ~~companies,~~to ~~such~~implement asour ~~The~~expansion ~~Foreign Corrupt Practices Act~~plan, asobtain aadditional capital ~~China-based~~and ~~entity,~~generate wenet ~~are~~income ~~subject~~and topositive ~~various~~cash ~~Chinese~~flows ~~regulations~~from operations. ~~This~~There ~~section~~can ~~sets~~be ~~forth~~no aassurance ~~summary~~that ofthese ~~the~~plans ~~most~~will ~~significant~~be ~~China regulations~~ sufficient or ~~requirements~~ that ~~may~~additional ~~affect~~financing ~~our~~will ~~business~~be ~~activities~~available ~~operated~~ in ~~China~~amounts or ~~our~~terms ~~shareholders’~~acceptable ~~right~~ to ~~receive~~us, ~~dividends~~if ~~and~~at ~~other distributions of profits from the PRC subsidiary~~all.

Short-term Bank Borrowings

We have entered into short-term loan agreements with our primary lenders such as Bank of China, China Construction Bank and Agricultural Bank of China. As of December 31, 2015, December 31, 2014 and December 31, 2013, we had an aggregate principal amount of approximately $361 million, $568 million and $424 million outstanding under the loan agreements. The short-term borrowings usually mature from two months to twelve months and the loan agreements were mainly guaranteed by third parties and individual persons or secured by a lien on our property and equipment. Historically, all debts due have been paid back by the Company in a timely manner. All short-term bank loans are revolving loans, and the lenders generally agree to extend the loans upon maturity if we request. As the date of this report, we have timely repaid or renewed all short-term bank loans. As of December 31, 2015, December 31, 2014 and December 31, 2013, we were in compliance with the terms of our loan agreements. As such, management expects outstanding bank loans will be extended if not paid back upon maturity. Depending on our capital needs, we evaluate whether to apply for additional long-term bank loans. We currently have sufficient lines of credit with our primary lenders for both short-term and long-term borrowings for our operations.

GOVERNMENT REGULATION

As a U.S. public company and a Nevada corporation, we are subject to various U.S. and Nevada laws and regulations such as U.S. securities laws, banking laws and Nevada Revised Statutes. In addition, we are subject to various Chinese laws and regulations because we operate in China and have PRC subsidiaries. This section sets forth a summary of the most significant Chinese laws and regulations that may affect our operation in China or our stockholders’ right to receive dividends and other distributions of profits from our PRC subsidiaries.

Foreign Investment in PRC Operating Companies

~~The~~Under the ~~Foreign~~current ~~Investment~~Chinese ~~Industrial~~regulations, ~~Catalogue~~the ~~jointly~~petrochemical ~~issued by China's Ministry of Commerce (MOFCOM)~~ and ~~NDRC~~rubber inindustry ~~2007~~is ~~classified~~categorized ~~various~~as ~~industries/businesses~~an ~~into three different categories: (i) encouraged for foreign investment; (ii) restricted to foreign investment; and (iii) prohibited from foreign investment. For any~~ industry~~/business~~ ~~not~~in ~~covered~~which ~~by any of these three categories, they will be deemed industries/businesses permitted for~~ foreign investment. is ~~Except for those expressly provided with restrictions~~permitted, ~~encouraged and permitted industries/businesses are usually 100% open to foreign investment and ownership. With regard to those industries/businesses restricted to foreign investment~~therefore, ~~there~~our ~~is always a limitation on foreign investment and ownership. Foreign investment is prohibited in prohibited industries/business. The~~ PRC ~~subsidiary’s~~subsidiaries ~~business does not fall under the industry categories that~~ are ~~restricted~~permitted to, oraccept ~~prohibited from~~ foreign investment and ~~is not subject to limitation on foreign investment and~~ ownership.

Regulation of Foreign Currency Exchange

Foreign currency exchange in the PRC is governed by a series of regulations, including but not limited to the Foreign Currency Administrative Rules (of 1996), as amended, and the Administrative Regulations Regarding Settlement, Sale and Payment of Foreign Exchange of (1996), as amended. Under these regulations, ~~the Renminbi is freely convertible for trade and service-related~~ foreign ~~exchange transactions, but not for direct~~ investment, ~~loans~~enterprises or(the ~~investments~~“FIEs”) inmay ~~securities~~exchange RMB ~~outside~~into ~~the~~foreign ~~PRC~~currency without the ~~prior~~ approval of State Administration of Foreign Exchange (“SAFE”). Pursuant to the Administrative Regulations Regarding Settlement, Sale and Payment of Foreign Exchange (1996), foreign investment enterprises, or FIEs may purchase foreign exchange without the approval of SAFE for trade and service-related foreign exchange transactions by providing commercial documents evidencing these transactions. They may also retain foreign ~~exchange,~~currency ~~subject~~ to ~~a cap approved by SAFE, to satisfy foreign exchange liabilities or to~~ pay dividends. However, the relevant Chinese ~~government~~governmental authorities may limit or eliminate the ability of FIEs to purchase and retain foreign currencies in the future. In addition, foreign exchange transactions for direct investment, loan and investment in securities outside the PRC are still subject to ~~limitations and require~~ approvals from SAFE.

Regulation of FIEs’ Dividend Distribution

The principal laws and regulations in ~~the~~China ~~PRC~~ governing distribution of dividends by FIEs include:

(i1) The Sino-foreign Equity Joint Venture Law (of 1979), as amended, and the Regulations for the Implementation of the Sino-foreign Equity Joint Venture Law (of 1983), as amended;

(ii2) The Sino-foreign Cooperative Enterprise Law (of 1988), as amended, and the Detailed Rules for the Implementation of the Sino-foreign Cooperative Enterprise Law (of 1995), as amended; and

(~~iii~~3) The Foreign Investment Enterprise Law (of 1986), as amended, and the Regulations of Implementation of the Foreign Investment Enterprise Law (of 1990), as amended.

Under these regulations, FIEs in ~~the~~China ~~PRC~~ may pay dividends only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, ~~the~~a wholly-owned foreign ~~enterprises~~enterprise in the PRC ~~are~~is required to set aside at least 10% of ~~their~~its respective accumulated profits each year, if any, toas ~~fund~~reserved ~~certain reserve~~ funds unless such ~~reserve~~reserved funds have reached 50% of ~~their~~its ~~respective~~ registered capital. These ~~reserves~~reserved funds are not distributable as cash dividends.

Regulation of a Foreign ~~Currency’s~~Direct ~~Conversion into RMB and~~ Investment byin ~~FIEs~~China

OnUnder current ~~August~~Chinese ~~29,~~regulations ~~2008,~~including ~~SAFE~~but ~~issued~~not alimited ~~Notice~~to ofCircular ~~the General Affairs Department~~ of ~~the~~Further ~~State~~Improving ~~Administration~~and ofAdjusting Foreign Exchange ~~on the Relevant Operating Issues concerning the Improvement of the~~ Administration Policies ofon ~~Payment and Settlement of~~ Foreign ~~Currency~~Direct ~~Capital~~Investment ofpromulgated ~~Foreign-Invested~~by ~~Enterprises~~SAFE ~~or Notice 142, to further regulate the foreign exchange of FIEs. According to Notice 142, FIEs shall obtain a verification report from a local accounting firm before converting its registered capital~~ in ~~foreign~~November ~~currency~~2012 ~~into Renminbi,~~ and ~~the~~Circular ~~converted~~on ~~Renminbi~~Printing ~~shall~~and beDistributing ~~used for~~ the Provisions ~~business~~on ~~within~~Foreign ~~its~~Exchange ~~permitted~~Administration ~~business~~over ~~scope.~~Domestic ~~Notice~~Direct ~~142~~Investment ~~explicitly~~by ~~prohibits~~Foreign ~~FIEs~~Investors ~~from~~promulgated ~~using~~by ~~RMB~~SAFE ~~converted from foreign capital to make equity investments~~ in May ~~the PRC~~2013, ~~unless~~foreign ~~the~~institution ~~domestic equity investment is within the approved business scope of the FIE~~ and ~~has~~individuals ~~been~~must ~~approved~~register bywith SAFE inand/or ~~advance. In addition, SAFE strengthened~~ its ~~oversight~~local ~~over~~branches ~~the~~for ~~flow~~their ~~and~~direct ~~use~~investment ofin China. ~~Renminbi~~When ~~funds~~opening ~~converted~~various ~~from~~special ~~the~~purposes foreign ~~currency-dominated~~exchange ~~capital~~accounts ~~of a FIE~~(e.g., ~~The~~pre-establishment ~~use~~expenses ofaccount, ~~such~~foreign ~~Renminbi~~exchange capital ~~may~~account, ~~not~~and beguarantee ~~changed without approval from SAFE~~account), ~~and~~banks ~~may~~process ~~not~~foreign beexchange ~~used~~relating to ~~repay Renminbi loans if~~ the ~~proceeds~~direct ofinvestment ~~such loans have not yet been used. Violations of Notice 142 may result~~ in ~~severe~~China ~~penalties,~~based ~~including~~on ~~substantial~~the registration ~~fines~~information asprovided ~~set~~by ~~forth~~SAFE inand ~~the~~its ~~SAFE rules~~branches.

Regulation of Foreign Exchange in Certain Onshore and Offshore Transactions

In October 2005, SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Return Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or(the ~~SAFE~~ “Notice 75~~, which became effective as of November 1, 2005~~”). SAFE ~~has~~ also issued implemented rules to ~~SAFE~~ Notice 75. ~~SAFE~~ Notice 75 and its implementation rules require PRC residents (including both corporate entities and natural persons) to register with SAFE or its competent local branch in connection with their direct or indirect shareholding in any company outside of China referred to as an “~~offshore~~ special purpose company” ~~established for~~ (the ~~purpose of raising fund from overseas to acquire assets of, or equity interests in, PRC companies~~“SPV”). Under ~~SAFE~~ Notice 75, an ~~a “special purpose vehicle”, or~~ SPV, refers to an offshore entity established or controlled, directly or indirectly, by PRC residents for the purpose of seeking offshore equity financing using assets or interests owned by such PRC residents in onshore companies. In addition, any PRC resident that is the ~~shareholder~~stockholder of an ~~offshore~~SPV ~~special purpose company~~ is required to amend his or her SAFE registration with the SAFE or its competent local branch, with respect to that ~~offshore~~SPV ~~special purpose company~~ in connection with any of ~~its~~ increase or decrease of capital, transfer of shares, merger, division, equity investment or creation of any security interest over any assets located in China. The SAFE regulations require retroactive approval and registration of direct or indirect investments previously made by PRC residents in ~~offshore special purpose companies~~SPVs. PRC subsidiaries of an ~~offshore~~SPV ~~special purpose company~~ are required to coordinate and supervise the filing of SAFE registrations by the offshore holding company’s ~~shareholders~~stockholders who are PRC residents in a timely manner. In the event that a PRC ~~resident~~residential ~~shareholder~~stockholder with a direct or indirect investment in an offshore parent company fails to obtain the required SAFE approval and make the required registration, the PRC subsidiaries of such offshore parent company may be prohibited from making distributions of ~~profit~~profits to the offshore parent and from paying the offshore parent proceeds from any reduction in capital, share transfer or liquidation in respect of the PRC subsidiaries. Further, failure to comply with ~~the various~~ SAFE approval and registration requirements described above, ~~as currently drafted,~~ could result in liability under PRC law for foreign currency exchange evasion.

19Uncertainty remains as to how certain procedures and requirements under the aforesaid SAFE regulations will be enforced, and it remains unclear how these existing regulations, and any future legislation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant government authorities. Although we have requested PRC residents who, to our knowledge, hold direct or indirect interests in our Company to make the necessary applications, filings and amendments as required under Notice 75 and other related rules, we do not believe that our PRC residential stockholders have completed such approvals and registrations required by the SAFE regulations. We will attempt to comply, and attempt to ensure that all of our stockholders subject to these rules comply with the relevant requirements. We cannot, however, assure the compliance of all of our China-resident stockholders. Any current or future failure to comply with the relevant requirements could subject us to fines or sanctions imposed by the Chinese government, including restrictions on certain of our subsidiaries’ ability to pay dividends or hinder our investment in those subsidiaries or affect our ownership structure, which could adversely affect our business and prospects.

There still remain uncertainties as to how certain procedures and requirements under the aforesaid SAFE regulations will be enforced, and it remains unclear how these existing regulations, and any future legislation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant government authorities. Although we have requested PRC residents who, to our knowledge, hold direct or indirect interests in our Company to make the necessary applications, filings and amendments as required under the SAFE Notice 75 and other related rules, our PRC resident beneficial holders have not completed such approvals and registrations required by the SAFE regulations. We will attempt to comply, and attempt to ensure that all of our shareholders subject to these rules comply with the relevant requirements. We cannot, however, assure the compliance of all of our China-resident shareholders. Any current or future failure to comply with the relevant requirements could subject us to fines or sanctions imposed by the Chinese government, including restrictions on certain of our subsidiaries’ ability to pay dividends or hinder our investment in those subsidiaries or affect our ownership structure, which could adversely affect our business and prospects.

Regulations on Employee Stock Option Plans

In December 2006, the People’s Bank of China promulgated the Administrative Measures of Foreign Exchange Matters for Individuals, which set forth the respective requirements for foreign exchange transactions by individuals (both PRC or non-PRC citizens) under either the current account or the capital account. In ~~January~~February ~~2007~~2012, SAFE issued implementing rules for the Administrative Measures of Foreign Exchange Matters for Individuals, which, among other things, specified approval requirements for certain capital account transactions such as a PRC citizen’s participation in the employee stock ownership plans or stock option plans of an overseas publicly-listed company. In March 2007, SAFE promulgated the ~~Application~~Notice ~~Procedures~~on ofIssues Related to Foreign Exchange Administration ~~for~~on Domestic Individuals' ~~Participating~~Participation in ~~Employee~~Equity ~~Stock~~Incentive ~~Ownership~~Plans ~~Plan or Stock Option Plan~~ of Overseas-Listed Company~~, or the Stock Option Rules~~. Under ~~these~~current effective rules, ~~PRC~~if ~~citizens~~a ~~who~~PRC ~~participate~~resident participates in anany ~~employee~~equity ~~stock~~incentive ~~ownership~~ plan orof ~~a stock option plan in~~ an ~~overseas~~oversea publicly-listed company, a ~~are~~qualified ~~required~~PRC todomestic ~~register~~agent ~~with~~must, ~~SAFE~~among ~~or its local branch and complete certain~~ other ~~procedures.~~things, ~~For~~file ~~participants~~on behalf of ansuch ~~employee~~participant ~~stock ownership plan,~~ an ~~overseas~~application ~~custodian~~with ~~bank~~SAFE ~~should~~to ~~be retained by~~ conduct the ~~PRC~~SAFE ~~agent,~~registration ~~which~~with ~~could~~respect ~~be the PRC subsidiary of such overseas publicly-listed company,~~ to ~~hold on trusteeship all overseas assets held by~~ such ~~participants~~equity ~~under~~incentive ~~the employee share ownership~~ plan. Inand ~~the~~obtain ~~case~~approval offor aan ~~stock~~annual ~~option~~allowance ~~plan,~~with ~~the~~respect ~~PRC agent is required~~ to ~~retain a financial institution with stock brokerage qualification at~~ the purchase ~~place~~of ~~where~~foreign ~~the~~exchange ~~overseas publicly-listed company is listed or a qualified institution designated by the overseas publicly-listed company to handle matters~~ in connection with the exercise or sale of stock options ~~for~~or ~~the~~other ~~stock~~securities ~~option~~such ~~plan~~participant ~~participants~~holds. Such ~~For~~participating ~~participants~~PRC ~~who~~residents' ~~had~~foreign ~~already~~exchange ~~participated~~income inreceived anfrom ~~employee~~the ~~stock~~sale ~~ownership~~of ~~plan or~~ stock ~~option~~and ~~plan~~dividends ~~before~~distributed ~~the~~by ~~date of~~ the ~~Stock~~overseas publicly-listed ~~Option~~company ~~Rules,~~must ~~the~~be ~~Stock~~fully ~~Option~~remitted ~~Rules~~into ~~require~~a ~~their~~ PRC ~~employers~~collective orforeign ~~PRC~~currency ~~agents~~account toopened ~~complete~~and ~~the~~managed ~~relevant~~by ~~formalities~~the ~~within~~PRC ~~three~~agent before ~~months~~distribution ofto ~~the~~such ~~date of this rule~~participants.

Further, the aMinistry ~~notice~~of ~~concerning~~Finance, and the ~~individual~~State ~~income~~Administration ~~tax~~of onTaxation ~~earnings~~(the ~~from~~“SAT”) ~~employee share options~~ jointly issued bya ~~Ministry~~notice ofand ~~Finance,~~its implementing orrules ~~the~~concerning ~~MOF, and~~ the ~~State~~individual ~~Administration~~income oftax ~~Taxation,~~on orearnings ~~the~~from ~~SAT,~~employee ~~and~~share ~~its implementing rules~~options, ~~provide~~which require that domestic companies that implement employee share option programs shall (a1) file with the ~~employee~~local ~~share~~tax ~~option~~authorities ~~plans~~having ~~and~~jurisdiction ~~other~~over ~~relevant~~them ~~documents to~~ (i) the ~~local~~employee ~~tax~~share ~~authorities~~option ~~having~~plans ~~jurisdiction~~and ~~over~~other ~~them~~relevant documents before implementing such employee share option plans; and (bii) ~~file~~ share option exercise notices and other relevant documents ~~with the local tax authorities having jurisdiction over them~~ before ~~exercise by~~ the employees ofexercise ~~the~~ share options,; ~~and~~(2) clarify whether ~~the~~ shares issuable under ~~the~~ employee share options ~~mentioned in the notice~~ are the shares of publicly listed companies; and (c3) withhold taxes from ~~the~~ PRC employees in connection with ~~the~~ PRC individual income tax.

We and our PRC citizen employees who participate in the employee stock incentive plan, which we adopted in 2010, will be subject to these regulations. We and our PRC option grantees have not completed the registrations under these regulations. We cannot assure you that we and our PRC option grantees will be able to complete the required registrations. Any current or future failure to comply with the relevant requirements could subject us to fines or sanctions imposed by the Chinese government, which could adversely affect our business and prospects.16

20We and our PRC employees who participated in the employee stock incentive plan, which we adopted in 2010, are subject to these regulations. We and our PRC option grantees have not completed the registrations under these regulations. We cannot assure you that we and our PRC option grantees will be able to complete the required registrations. Any current or future failure to comply with the relevant requirements could subject us to fines or sanctions imposed by the Chinese government, which could adversely affect our business and prospects.

Government Regulations Relating to Taxation

OnAccording to ~~March 16, 2007,~~ the ~~National People’s Congress or NPC, approved and promulgated the~~ PRC Enterprise Income Tax Law, ~~which we refer to as~~ (the ~~New~~ “EIT Law.”) ~~The~~promulgated ~~New~~by ~~EIT Law took effect on January 1, 2008. Under~~ the ~~New~~National ~~EIT~~People’s ~~Law~~Congress, FIEs and domestic companies are subject to a uniform tax rate of 25%. The New EIT Law provides a five-year transition period starting from its effective date for those enterprises which were established before the promulgation date of the New EIT Law and which were entitled to a preferential lower tax rate under the then-effective tax laws or regulations.

OnThe EIT ~~December~~Law ~~26,~~and ~~2007,~~its ~~the~~implementing ~~State~~rules ~~Council~~provide ~~issued~~that aan ~~Notice~~income ontax ~~Implementing~~rate ~~Transitional~~of ~~Measures~~10% ~~for~~may ~~Enterprise~~be ~~Income~~applicable ~~Tax,~~to ordividends ~~the~~payable ~~Notice,~~to ~~providing~~non-PRC investors that ~~the~~are “non-resident enterprises” that ~~have~~(1) ~~been~~do ~~approved~~not tohave ~~enjoy~~an aestablishment ~~low~~or ~~tax~~place ~~rate~~of ~~prior~~business toin the ~~promulgation~~PRC, or (2) have such establishment or place of business in the ~~New~~PRC ~~EIT~~but ~~Law~~the ~~will~~relevant beincome ~~eligible~~is ~~for~~not aeffectively ~~five-year~~connected ~~transition~~with ~~period~~the ~~beginning~~establishment or ~~January~~place 1,of ~~2008~~business, ~~during~~to ~~which~~the ~~time~~extent such dividends are derived from sources within the ~~tax~~PRC. ~~rate~~The ~~will~~income betax ~~increased~~for ~~step~~non-resident byenterprises shall ~~step~~be subject to withholding at the ~~25%~~income ~~unified~~source, ~~tax~~with ~~rate~~the ~~set~~payer ~~out~~acting inas the ~~New~~obligatory withholder under the EIT Law., ~~From~~and therefore ~~January~~such 1,income ~~2008,~~taxes ~~for~~generally ~~the~~called ~~enterprises~~withholding ~~whose~~tax ~~applicable~~in practice. Such income tax ~~rate~~may ~~was~~be ~~15%~~exempted ~~before~~or reduced by the ~~promulgation~~State Council of the ~~New~~PRC ~~EIT~~or ~~Law,~~pursuant ~~the~~to a tax ~~rate~~treaty ~~will~~between bethe ~~increased~~PRC toand ~~18%~~the ~~for~~jurisdictions ~~2008,~~in ~~20%~~which ~~for~~our ~~2009~~non-PRC stockholders reside. For example, 22the 10% ~~for~~withholding ~~2010,~~tax 24is reduced to 5% ~~for~~pursuant ~~2011,~~to the Double Tax Avoidance Agreement Between Hong Kong and Mainland China if a Hong Kong resident enterprise owns more than 25% ~~for~~of ~~2012.~~the ~~For~~registered capital in a company in the ~~enterprises~~PRC and ~~whose~~is ~~applicable~~determined by the competent PRC tax ~~rate~~authority ~~was~~to ~~24%~~have satisfied the other conditions and requirements under such Double Tax Avoidance Agreement Between Hong Kong and Mainland China and other applicable laws. We are a U.S. holding company and substantially all of our income is derived from dividends we receive from our subsidiaries located in the PRC. Thus, if Keyuan HK are considered as a “non-resident enterprise” under the ~~tax~~EIT ~~rate~~Law ~~will~~and bethe ~~changed~~dividends paid to ~~25%~~Keyuan ~~from~~HK ~~January~~by 1our subsidiaries in the PRC are considered income sourced within the PRC, ~~2008~~such dividends may be subject to a withholding tax at a rate up to 10%.

~~The New EIT Law and Implementation Rules of~~ For the ~~New~~years ~~EIT~~ended ~~Law~~December ~~provide that an income tax rate of 10% may be applicable to dividends payable to non-PRC investors that are “non-resident enterprises”~~31, ~~which~~2015 ~~(i)~~and ~~do not have an establishment or place of business in the PRC~~2014, orNingbo ~~(ii) have such establishment or place of business in the PRC but the relevant income is not effectively connected with the establishment or place of business~~Keyuan, toNingbo ~~the~~Keyuan ~~extent such dividends are derived from sources within the PRC. The income tax for non-resident enterprises shall be subject to withholding at the income source~~Petrochemical, ~~with~~Keyuan ~~the~~Synthetic ~~payor acting as the obligatory withholder under the New EIT Law~~Rubbers, Zhongkexuneng and ~~therefore~~Guangxi ~~such~~Keyuan ~~income~~were ~~taxes~~subject ~~generally~~to ~~called~~25% ~~withholding~~ tax ~~in practice~~rate. ~~Such~~On ~~income~~June ~~tax~~30, ~~may~~2014, beGuangxi ~~exempted~~Keyuan orhas ~~reduced~~obtained by the ~~State~~recognition ~~Council~~from of the ~~PRC or pursuant to a~~ tax ~~treaty~~authorities for ~~between~~ the ~~PRC~~qualification ~~and~~to ~~the~~enjoy ~~jurisdictions in which our non-PRC shareholders reside. For example,~~ the ~~10%~~Western ~~withholding~~Development ~~tax~~Enterprise isPreferential ~~reduced to 5% pursuant to the Double~~ Tax ~~Avoidance~~Policy, ~~Agreement~~which ~~Between~~applies ~~Hong Kong and Mainland China if~~ a ~~Hong~~favorable ~~Kong~~tax ~~resident~~rate of ~~enterprise owns more than 25~~15% offrom the ~~registered~~year ~~capital~~that init agenerates ~~company~~revenue ~~in the PRC and is determined by the competent PRC tax authority~~ to ~~have~~year ~~satisfied the other conditions and requirements under such Double Tax Avoidance Agreement Between Hong Kong and Mainland China and other applicable laws~~2020. We ~~are~~expect aGuangxi ~~U.S. holding company and substantially all of our income is derived from dividends we receive from our subsidiaries located in the PRC. Thus, if~~ Keyuan ~~HK are considered as a “non-resident enterprise” under the New EIT Law and the dividends paid~~ to ~~Keyuan~~generate HKrevenue ~~by our subsidiaries~~ in ~~the PRC are considered income sourced within the PRC, such dividends may be subject to a withholding tax at a rate up to 10%~~2018.

The new tax law provides only a framework of the enterprise tax provisions, leaving many details on the definitions of numerous terms as well as the interpretation and specific applications of various provisions unclear and unspecified. Any increase in the combined Company’s tax rate in the future could have a material adverse effect on our financial condition and results of operations.

For the years ended December 31, 2012, 2011 and 2010, the Company was subject to the 25% tax rate. In order to support the growth of certain local enterprises, the local government granted certain credit back to Ningbo Keyuan. In the first two profitable years, the local government will credit back to the Company the entire local portion of the income tax which equals to 40% of the whole Enterprise Income Tax the Company paid applying the 25% tax rate.; in the subsequent three profitable years, the local government will credit back 50% of the local income tax the Company paid under the 25% tax rate. The Company will recognize the subsidy related to income tax at the time the cash is received.

Regulations on Work Safety

~~On June 29, 2002, the~~ Work Safety Law (“WSL”) of the PRC was adopted by Standing Committee of the 9th National People’s Congress and came into effect on November 1, 2002, as amended on August 27, 2009. The WSL provides general work safety ~~requirements for entities engaging~~ in ~~manufacturing~~China ~~and~~is ~~business~~governed ~~activities~~primarily ~~within the PRC. Additionally, Regulation on Work Safety Licenses (“RWSL”), as adopted~~ by the ~~State~~following Council on January 7, 2004 effective on January 13, 2004, requires enterprises engaging in the manufacture of dangerous chemicals to obtain a work safety license with a term of three years. If a work safety license needs to be extended, the enterprise must go through extension procedures with authorities three months prior to its expiration. In addition, on May 17, 2004, the Measures for Implementation of Work Safety Licenses of Dangerous Chemicals Production was promulgated as implementing measures to the Regulation on Work Safety Licenses which provides that entities producing dangerous chemicals are required to obtain work safety licenses pursuant to specific requirements. Without work safety licenses, no entity may engage in the formal manufacture of dangerous chemicals. The Measures for Implementation of Work Safety Licenses of Dangerous Chemicals Production was amended on August 5, 2011 and the amended regulation will become effective on December 1, 2011. The amended regulation provides for more detailed and comprehensive requirements and conditions for obtaining work safety licenses for dangerous chemicals production.regulations:

211. The 2002 Work Safety Law of the PRC, as amended, providing general work safety requirements for entities engaging in manufacturing and business activities within the PRC.

2. The ~~Regulations~~2002 Regulation on ~~the~~Work Safety ~~Administration~~Licenses, ofas ~~Dangerous~~amended ~~Chemicals~~ (“~~RSADC~~RWSL”), ~~was~~adopted ~~promulgated~~ by the State Council ~~on January 26~~, ~~2002,~~requiring ~~effective~~enterprises asengaging ~~of March 15, 2002. It sets forth general requirements for manufacturing and storage of dangerous chemicals~~ in ~~China. The RSADC requires that companies manufacturing dangerous chemicals establish and strengthen their internal regulations and rules on safety control and fulfill~~ the ~~national~~manufacture ~~standards and other relevant provisions~~ of ~~the State. In addition, according to the RSADC, companies that manufacture, store, transport or use~~ dangerous chemicals ~~shall be required~~ to obtain ~~corresponding~~a ~~approvals~~work orsafety ~~licenses~~license with ~~the~~a ~~State~~term ~~Administration~~ of ~~Work~~three ~~Safety and its local branches and other proper authorities~~years. Companies that manufacture or store dangerous chemicals without approval or registration with the proper authorities can be shut down, ordered to stop manufacturing or ordered to destroy the dangerous chemicals. Such companies can also be subject to fines. If criminal law is violated, the persons chiefly liable, along with other personnel directly responsible for such impropriety, shall be subject to relevant criminal liability. The RSADC was amended on March 2, 2011 and the amended regulation will become effective on December 1, 2011. The amended regulation strengthens the administration of dangerous chemicals production.

3. The ~~Company~~2004 ~~has~~Measures ~~put~~for ~~work~~Implementation ~~place~~of ~~safety~~Work asSafety ~~one~~Licenses of ~~the~~Dangerous ~~top~~Chemicals ~~priorities for our work. In order to comply with the aforementioned rules and regulations~~Production, as ~~of December of 2012~~amended, wepromulgated ~~have~~as ~~made~~implementing ~~considerable~~measures ~~investment~~to ~~for~~RWSL, ~~major~~providing ~~equipment~~that ~~with~~entities aproducing ~~total~~dangerous ~~estimated~~chemicals ~~amount~~are ofrequired ~~RMB~~to ~~23.25~~obtain ~~million~~work ~~(about~~safety ~~USD~~licenses ~~3.7~~pursuant ~~million).~~to Wespecific ~~have installed a distribution control system (DCS)~~requirements, ~~emergency shutdown system, electric explosion protection, automatic interlocking system, detecting & alarming system for inflammable~~ and ~~toxic~~detailed ~~gas, fire fighting~~ and ~~fire~~comprehensive ~~detecting~~requirements ~~system, auto-sprinkling system, pressure release~~ and ~~control~~conditions ~~system.~~for ~~The~~obtaining ~~Company’s operating subsidiary Ningbo Keyuan has obtained a~~ work safety ~~license~~licenses ~~effective from March 25, 2011 to March 24, 2014~~ for ~~producing~~dangerous ~~petrochemical~~chemicals ~~products~~production.

	4.	The 2002 Regulations on the Safety Administration of Dangerous Chemicals, as amended (“RSADC”), setting forth general requirements for manufacturing and storage of dangerous chemicals in China. The RSADC requires that companies manufacturing dangerous chemicals establish and strengthen their internal regulations and rules on safety control and fulfill the national standards and other relevant provisions of the PRC. In addition, according to the RSADC, companies that manufacture, store, transport or use dangerous chemicals shall be required to obtain corresponding approvals or licenses with the State Administration of Work Safety and its local branches and other proper authorities. Companies that manufacture or store dangerous chemicals without approval or registration with the proper authorities can be shut down, suspended or ordered to destroy the dangerous chemicals. Such companies can also be subject to fines.

The 2012 Implementing Measures on the Permits for Safe Use of Hazardous Chemicals, promulgated by the State Administration of Work Safety which sets forth the detailed procedures, conditions and documents required for application for permits for safe use of dangerous chemicals.

The Company has put work place safety as one of the top priorities for our operation. In order to comply with the aforementioned rules and regulations, as of December 31, 2015, we have invested approximately $1.6 million in improving work place safety systems. We have installed a distribution control system (DCS), emergency shutdown system, electric explosion protection system, automatic interlocking system, detecting & alarming system for inflammable and toxic gas, fire protection and fire detecting system, auto-sprinkling system, and pressure release and control system. The Company’s manufacturing subsidiaries Ningbo Keyuan, Keyuan Synthetic Rubbers and Guangxi Keyuan have obtained all necessary work safety licenses. We are in compliance with all relevant work safety laws and regulations.

Regulations on Environmental Protection

~~According~~The Environmental toProtection ~~the~~Law ~~Prevention and Control~~ of ~~Water Pollution Law~~1989, as ~~adopted~~amended bysets ~~the~~forth ~~Standing~~enhanced ~~Committee~~governmental ofauthority ~~the~~in ~~10th~~enforcing ~~National~~the environmental ~~People’s~~protection ~~Congress~~law. onFor ~~February 28~~example, ~~2008~~the ~~and~~environmental ~~effective~~protection onbureau ~~June~~may ~~1, 2008, China adopted a licensing system for pollutant discharge. Companies~~ directly orfreeze ~~indirectly~~assets ~~responsible for discharge~~ of ~~industrial waste water or medical sewage to waters are required to obtain~~ a ~~pollutant~~polluter; ~~discharge license. All companies are prohibited from discharging wastewater and sewage to waters without~~ the police ~~license~~may ordetain ~~in violation of~~ the ~~terms~~responsible ofperson; the ~~pollutant~~administrative ~~discharge~~fines ~~license.~~will Asaccrue ~~Ningbo city is currently working~~ on ~~setting~~daily upbasis anwithout ~~inspection~~a ~~system~~cap; ofand non-governmental ~~the~~organizations ~~pollutant~~may ~~discharge,~~initiate ~~there~~litigation isagainst nopolluters ~~specific~~in pollutant discharge license for our operating subsidiary Ningbo Keyuan. However, Ningbo Keyuan’s facilities have passed inspection with Ningbo city environmental protection authorities which includes an approval for the ~~pollutant~~public ~~discharge~~interest.

~~The~~According to ~~Regulations~~the onPrevention ~~the~~and ~~Administration~~Control of ~~Construction~~Water ~~Projects~~Pollution ~~Environmental Protection (“RACPEP”)~~Law, asthe PRC adopted bya ~~the~~licensing ~~State~~system ~~Council~~for onpollutant ~~November~~discharge. ~~18,~~A ~~1998~~company directly ~~and~~or ~~effective~~indirectly onresponsible ~~November~~for ~~29,~~discharge ~~1998,~~of ~~governs~~industrial ~~construction~~waste ~~projects~~water ~~and~~or ~~the~~medical ~~impact~~sewage ~~such~~to ~~projects~~waters ~~will~~is ~~have~~required onto ~~the~~obtain ~~environment.~~a pollutant ~~Pursuant~~discharge tolicense. ~~the~~Without ~~RACPEP,~~a ~~the~~pollutant ~~governing~~discharge ~~body~~license isor ~~responsible~~an ~~for~~approval ~~supervising~~from the ~~implementation~~competent ofauthority, acompanies ~~three~~are prohibited ~~tiered~~from ~~system~~discharging ~~that~~wastewater ~~includes~~and ~~(i)~~sewage ~~reviewing~~to ~~and~~waters. ~~approving~~As aNingbo ~~construction~~city ~~project,~~is ~~(ii)~~currently ~~overseeing~~working ~~the~~on ~~construction~~setting ~~project~~up ~~and~~an ~~(iii)~~inspection ~~inspecting~~system of the ~~finished~~pollutant ~~construction~~discharge, ~~project~~there ~~and~~is ~~ensuring~~no ~~that~~specific ~~all~~pollutant ~~harmful~~discharge ~~pollutants~~license ~~are~~for ~~disposed~~our ofoperating ~~correctly.~~subsidiaries ~~Manufacturing~~Ningbo ~~companies~~Keyuan ~~are~~and Keyuan ~~required~~Synthetic toRubbers. ~~apply~~However, ~~for~~Ningbo ~~inspection~~Keyuan ~~with~~and ~~environmental~~Keyuan ~~protection~~Synthetic ~~authorities~~Rubbers’ ~~upon~~facilities ~~completion~~have ofpassed ainspection ~~construction~~with ~~project.~~Ningbo city ~~Our~~environmental ~~facilities~~protection ~~have~~authorities ~~passed~~which ~~the~~includes ~~inspection~~an byapproval for the ~~environmental~~ ~~protection~~pollutant ~~authorities~~discharge.

22The Regulations on the Administration of Construction Projects Environmental Protection of 1998, as amended (“RACPEP”), governs construction projects and their environmental impacts. Pursuant to the RACPEP, the governing body is responsible for supervising the implementation of a three tiered system that includes (1) reviewing and approving a construction project, (2) overseeing the construction project and (3) inspecting the finished construction project and ensuring that all harmful pollutants are disposed of correctly. Manufacturing companies are required to apply for inspection with environmental protection authorities upon completion of a construction project. All of our facilities have passed the inspection by the environmental protection authorities.

In order to meet the above mentioned requirements for environmental protection, we have invested about RMB 40 million (~~about USD~~ approximately $6.3 million) and built facilities including a sewage treatment facility, a sulphur recovery facility, a sea water desulphurization facility, a flue gas treatment facility and a real-time monitoring system for environmental protection. With these facilities, we believe we are able to meet all the environmental protection standards set by the relevant government agencies, and we are currently in compliance with all applicable environmental laws and regulations.

Research and Development

We consider ourselves as a technology driven innovative Company. Our senior management combined has over one hundred years of industry experience. We continue to enhance our technology through internal and external research and development. During the fiscal year ended December 31, 2015 and 2014, we spent approximately $3.9 million and $1.6 million on research and development activities, respectively.

On January 25, 2011 we received approval for a patent related to the Company's proprietary production process, called MEP (Multiple Ethylene Propylene). MEP is an exclusive and leading technology used in Keyuan's existing production process. The utility model patent received, #ZL-2010-2-0191523.6, applies to a processing technology used in the production of ethylene and propylene. This technology allows us to use lower grade feedstock (such as heavy oil) instead of a higher grade feedstock commonly used in other existing petrochemical production processes. It also allows us to improve the yield and utilization rate of its production line.18

On February 1, 2011, we signed an agreement with Ningbo Institute of Technology, an affiliate of Zhejiang University, to jointly develop commercial applications for Butadiene Styrene Resin. This is one component of Keyuan's long-term strategy to invest in technology advancement. Keyuan will work with researchers from the Ningbo Institute of Technology to research and develop synthesis technology for Butadiene Styrene Resin over the next 2 years. Butadiene Styrene Resin is a block co-polymer with excellent transparency and anti-impact properties, including flexibility and durability. It is currently used in packaging and plastic products such as medical instruments and toys. This partnership will focus on developing commercial applications for Butadiene Styrene Resin in synthetic rubber products. We and Ningbo Institute of Technology will share the rights to products and technologies developed from this cooperation.

In 2013, we received the patent notices for three devices used in the production process for Acrylonitrile: Fluidization Reaction System of Acrylonitrile (#ZL-2012-2-0381020.4), Cooler of Acrylonitrile Gas (#ZL-2012-2-0382047.5), and Absorption Tower of Acrylonitrile (#ZL-2012-2-0381066.6), respectively. These techniques were developed together with ECUST, and can be used for improving the output capacity and recovery rates, and for decreasing discharge waste to improve production efficiency.

Description of Property

We have acquired the state-granted use rights to land set forth in the table below.

Address	~~Address~~	Size	Leased/Owned/Granted	Function
1.	Qingshi Industrial Park, Beilun District, Ningbo, Zhejiang, China	231,~~084~~749 ~~Square~~square meters (approximately 2,494,525 square feet)	Granted use rights	Plant land
2.	~~No.8~~Qishi ~~Lianhe~~Industrial ~~Road 239 Block~~Park, ~~Qijiashan~~Gangkou ~~Neighborhood, Beilun~~ District, ~~Ningbo~~Fangchengang, ~~Zhejiang~~Guangxi, China	4433,~~948~~712 ~~Square~~square meters (approximately 4,668,437 square feet)	~~Owned~~Granted use rights	~~Dormitory~~Plant ~~Building~~land
3.	No.8 Lianhe Road 239 Block, Qijiashan Neighborhood, Beilun District, Ningbo, Zhejiang, China	4,948 square meters (approximately 53,260 square feet)	Owned	Dormitory building
4.	Shipping Dock located in Beilun District, Ningbo	N/A	Owned	Shipping dock

23Our facilities include the follows:

Facility	Location	Owned/Leased	Product
Ningbo Keyuan facility	Ningbo, Zhejiang	Owned	Petrochemical products and rubber products(SBS and SEBS)
Guangxi facility	Fangchengang, Guangxi	Owned	ABS

Employees

As of December 31, ~~2012~~2015, we had ~~535~~573 full-time employees, including 16 executive ~~officer~~officers, ~~and~~16 12accounting ~~other senior management members~~staff, 357 engineers and developers, 2118 sales people, ~~8 researchers~~ and ~~developers~~8 ~~and 33~~ administrative staff. The remaining ~~457~~468 full-time employees are production facility ~~manufacturers~~workers. All of the employees have signed labor contracts with us and receive monthly salaries as well as other social benefits including pension insurance, unemployment insurance, accidental insurance, and medical insurance and housing funds, ~~etc~~as applicable. We do not have any other employees inother ~~addition~~than to our full-time employees.

We are ~~compliant~~in compliance with local prevailing wage, contractor licensing and insurance regulations~~, and have good relations with our employees~~.

As required by PRC regulations, we ~~participate~~are inrequired to ~~various~~make ~~employee~~contributions ~~benefit~~to ~~plans~~various ~~that~~defined ~~are~~contribution plans organized by municipal and provincial ~~governments,~~PRC ~~including pension, work-related injury benefits, maternity insurance, and medical and unemployment benefit plans~~governments. WeThe contributions are ~~required~~made ~~under~~for each PRC ~~laws to make contributions to the~~ employee ~~benefit plans~~ at ~~specified~~rates ~~percentages~~ranging offrom ~~the~~26.7% ~~salaries,~~to ~~bonuses~~28.7% ~~and~~on ~~certain~~a ~~allowances~~standard ofsalary ~~our~~base ~~employees,~~as updetermined ~~to a maximum amount specified~~ by the local ~~government from time to time~~security bureau. Members of the retirement plan are entitled to a pension equal to a fixed proportion of the salary prevailing at the member’s retirement date. For each of the years ended December 31, 2015 and 2014, contributions to the defined contribution plans were approximately $1 million and $1 million, respectively.

Executive Offices

Our offices are located at Qingshi Industrial Park, Ningbo Economic & Technological Development Zone, Ningbo, Zhejiang Province, ~~P. R.~~ China 315803.

FOR ADDITIONAL INFORMATION

We are a reporting company and file annual, quarterly and current reports, ~~proxy statements~~ and other information with the SEC. For further information with respect to the Company, you may read and copy ~~its~~our reports, ~~proxy statements~~ and other information, at the SEC public reference rooms at 100 F. Street, N.E., Washington, D.C. 20549. You can request copies of these documents by writing to the SEC and paying a fee for the copying cost. Please call the SEC at 1-800-SEC-0330 for more information about the operation of the public reference rooms. The Company’s SEC filings are also available at the SEC’s web site at http://www.sec.gov.

Copies of Company’s Annual Reports on Form 10K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are all available at our website (http://www.keyuanpetrochemicals.com/) free of charge, within a week after we file same with the SEC or by sending a request for a paper copy to our outside securities counsel: Hunter Taubman Weiss LLP, c/o Keyuan Petrochemicals, Inc., 17 State Street, Suite 2000, New York, NY 10004.19

ITEM 1A. RISK FACTORS.

THE FOLLOWING MATTERS MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION, AND LIQUIDITY, RESULTS OF OPERATIONS OR PROSPECTS, FINANCIAL OR OTHERWISE. ~~REFERENCE TO THIS CAUTIONARY STATEMENT IN THE CONTEXT OF A FORWARD-LOOKING STATEMENT OR STATEMENTS SHALL BE DEEMED TO BE A STATEMENT THAT~~ ANY ONE OR MORE OF THE FOLLOWING FACTORS MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENT OR STATEMENTS.

Risks Related to Our Business

Our independent registered public accounting firm added an emphasis paragraph to ~~their~~its audit report describing an uncertainty related to our ability to continue as a going concern.

Due to our ~~continued losses and~~ limited capital resources, our independent registered public accounting firm has issued a report that describes an uncertainty related to our ability to continue as a going concern. The auditors’ report discloses that we ~~incurred a net loss and we~~ consumed cash in operating activities in ~~2012~~2015 and that we had a working capital deficiency at December 31, ~~2012~~2015. These conditions raise substantial doubt about our ability to continue as a going concern and may make it difficult for us to raise capital and make our securities an unattractive investment for potential investors. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. We may be unable to continue operations if we cannot generate revenues in excess of our expenses.

Our limited operating history ~~makes evaluation of our business difficult.~~

We have a limited operating history and have encountered and expect to continue to encounter many of the difficulties and uncertainties often faced by early -stage companies. Our limited operating history makes it difficult to evaluate our future prospects, including our ability to develop a wide customer and distribution network for our ~~services~~products, to expand our operations to include additional products ~~services~~ and to control raw material costs, all of which are critical to our success. To date, we have been primarily focused on the stabilization and realignment of our production, and our original expansion plan has been delayed, extended and adjusted due to various reasons. This limited history also makes evaluating our business and future prospects difficult, and may increase the risk of your investment. We have limited experience as a consolidated operating entity, particularly with commercialization activities, and have not yet demonstrated an ability to successfully overcome many of the risks and uncertainties frequently encountered by a young company. An investor must consider our business and our prospects in light of the risks, uncertainties and difficulties common to early stage companies. We may encounter unanticipated problems, expenses and delays in ~~developing~~carrying ~~and~~out ~~marketing~~ our ~~services~~expansion ~~and securing additional blending and storage facilities~~plan. We may not be able to successfully address these risks. If we are unable to address these risks, our business may not grow, our stock price may suffer, and we may be unable to stay in business.

Key employees are essential to growing our business.

Mr. Chunfeng Tao, ~~Mr.~~is ~~Jingtao Ma, Mr. Shifa Wang, and Mr. Mingliang Liu are~~ essential to our ability to continue to grow our business. ~~They~~He ~~have~~has established relationships with customers and suppliers within the industries in which we operate. In addition, in December, 2012, Mr. Shifa Wang was appointed as the new General Manager of Ningbo Keyuan Plastics replacing Dr. Jingtao Ma, with responsibility for daily operations, management and efficiency improvements. If ~~one~~he ~~or more of these key employees~~ were to leave us, our relationships with our customers and suppliers may become strained, and our growth strategy might be hindered, which could limit our ability to increase revenue.

In addition, ~~although~~ we ~~are located in an area with a good supply of skilled labor, we~~ still face competition from other companies located in the same area for attracting skilled ~~personnel~~workers. If we fail to attract and retain qualified ~~personnel~~workers to meet our current and future needs, this could slow our ~~ability to grow our~~ business growth, which could result in a decrease in market share and affect our revenues and stock price.

We continue to be dependent on bank loans ~~and other short term financing~~ in order to fund our purchases of raw materials.

In order to operate our business efficiently, we rely on short -term bank ~~financing~~loans to fund the purchase of raw materials. As of December 31, ~~2012~~2015, we had approximately $~~295~~361 million of short -term debt, and lines of credit from 1411 banks. Typically, the term for a short term bank loan is one year. Bank loans are renewable at the banks’ option. In ~~2012~~2015, we ~~paid back~~ repaid approximately $~~730~~792 million and borrowed approximately $~~828~~596 million in the form of short-term ~~terms~~bank loans. ~~As of December 31, 2012, we had approximately $295of short term debt.~~ If one or more of these banks were to revoke ~~their~~its line of credit or we fail to renew ~~such~~bank ~~line~~loans ~~of credit~~ when they itbecome is due, we would be unable to continue to purchase raw materials in the amounts necessary to continue production at our current capacity. Any such inability will cause us to lose potential revenues.

~~We continue to have significant concentration with regard to our capital sources, revenue and raw material purchases.~~20

AtWe continue ~~December~~to ~~31,~~have ~~2012~~significant ~~and~~concentration ~~2011,~~with ~~we held~~regard ~~cash~~to ~~and~~our ~~pledged~~revenue ~~bank deposits in financial institutions of approximately $225 million~~ and ~~$164~~raw ~~million,~~material ~~respectively~~purchases. ~~They were primarily held in major financial institutions located in mainland China and the Hong Kong Special Administrative Region, which institutions we believe have high credit ratings.~~

For the year ended December 31, 2015, our five largest customers accounted for 33% of our total sales. For the year ended December 31, 2014, our five largest customers accounted for 27% of our total sales. Sales to one major customer accounted for 139% and 186% of our total annual net revenue for the fiscal ~~year~~years ~~2012~~2015 and ~~2011~~2014, respectively. Though our customer base may change from year-to-year, during such years that the customer base is comparatively highly concentrated, the loss of, or reduction of our sales to, any of our major customers could have a material adverse effect on our business, operating results and financial condition.

We currently buy a majority of our heavy oil, an important component of our products, from three suppliers. Although there are a limited number of suppliers of the particular heavy oil used in production, management believes that other suppliers could provide similar heavy oil on comparable terms. A change in suppliers, however, could cause a delay in manufacturing and a possible loss of sales, which would affect operating results adversely. Purchases (net of VAT) from the largest three suppliers for the years ended December 31, ~~2012~~2015 and ~~2011~~2014 were approximately $~~549~~308.3 million and $~~377~~609.7 million, respectively., in the aggregate. These purchases represented 7849% and 8379%, respectively of all of our purchases for the years ended December 31, ~~2012~~2015 and ~~2011~~2014. The ~~Our~~ Company’s largest supplier accounted for approximately $~~473~~ 115.0 million and $~~305~~525.8 million, or 6818% and 6768% of total purchases for the years ended December ~~2012~~2015 and ~~2011~~2014, respectively. InThere are ~~addition,~~a ~~the~~limited ~~supplier~~number ~~provided short-term financing to us~~ of ~~approximately~~suppliers ~~$29 million during 2012,~~ of ~~which~~the ~~$20~~particular ~~million~~heavy ~~was~~oil ~~included~~we use in ~~accounts~~production. ~~payable~~A atchange ~~December 31, 2012 and was repaid~~ in ~~January 21~~suppliers, ~~2013. Interest~~if ~~paid~~we ~~for~~can ~~this~~find ~~financing amounted to approximately $0.43 million. In addition~~one, could oncause ~~December 27, 2012, the supplier provided~~ a ~~non-interest~~delay ~~bearing advance of approximately $10 million to the Company, that was repaid~~ in ~~full~~manufacturing onand ~~January~~a ~~8, 2013. These types of short-term financings from vendors bear the risk of~~ possible ~~violation~~loss of the terms of our letters of credit. We are planning to establish policies and procedures to provide for the complete and timely analysis of contingencies associated with these transactions and the evaluation of legal and regulatory considerations related to those business activities. Howeversales, atwhich ~~present~~would weaffect ~~cannot~~operating ~~assure~~results ~~that these short term financings will not result in violations of the terms of our existing credit facilities or PRC law or regulation~~adversely.

We need additional capital to ~~expand~~carry ~~our~~out ~~manufacturing facility and we may not be able to obtain it at acceptable terms, or at all, which could adversely affect~~ our ~~ability~~expansion ~~to increase our production capacity and expand our business~~plan.

The total estimated cost of ~~additional processing~~our ~~equipment~~expansion ~~for~~plan ~~product refinement and the SSBR production facility~~ is approximately $~~149~~372.35 million, including $~~49.8~~300 million for ~~additional~~Guangxi ~~processing~~Project, ~~equipment and~~ $~~99.5~~30 million for ~~our~~the ~~SSBR~~transformer ~~production~~oil facility., We$40 ~~plan~~million tofor ~~fund~~the ~~these~~increased ~~expansions~~annual ~~through~~design ~~short~~capacity of ethylene-~~term~~ ~~borrowings~~styrene, ~~cash from operations~~ and ~~potential equity financing~~$2.5 ~~However,~~million for ~~our ability to obtain~~ additional ~~capital~~storage ~~on acceptable terms is subject to a variety of uncertainties, including, but not limited to:~~capacity.

●We plan ~~investors’~~to ~~perception~~fund ~~of,~~these ~~and~~expansions ~~demand~~through ~~for~~short-term borrowings, ~~securities~~cash offrom ~~petrochemical~~operations, ~~manufacturing~~potential ~~and~~long-term ~~supply~~borrowings ~~companies;~~and ●equity ~~conditions~~financing. However, ofour ~~the~~ability ~~U.S.~~to ~~and~~obtain ~~other~~additional capital ~~markets~~on inacceptable ~~which~~terms weis ~~may~~subject ~~seek~~ to ~~raise~~a ~~funds;~~variety ~~● our future results~~ of ~~operations~~uncertainties, ~~financial~~including, ~~condition~~but not ~~and~~limited ~~cash flow; ● PRC governmental regulation of foreign investment in petrochemical manufacturing companies in China;~~to:

● our future results of operations, financial condition and cash flow; ● PRC governmental regulations of foreign investment in petrochemical manufacturing companies in China; ● economic, political and other conditions in China; and ● PRC governmental policies relating to foreign currency borrowings

25We cannot assure you that we will be successful in our expansion plan. If we are not successful, or the costs exceed our expectations, the expansion may not be accretive, and we may not recoup the costs spent. This can affect our stock price, revenues and profitability.

Our operations may be ~~adversely~~ affected by the cyclical nature of the ~~petroleum~~petrochemical and ~~petrochemical~~synthetic rubbers market and by the volatility of prices of our raw materials and ~~petrochemical~~finished products.

All of our revenues are attributable to petrochemical products, ~~which have historically been cyclical~~ and ~~sensitive~~synthetic ~~to the availability and price of raw materials and general economic conditions~~rubbers. Markets for many of our products are sensitive to changes in industry capacity and output levels, cyclical changes in regional and global economic conditions, the price and availability of substitute products and changes in consumer demand, which from time to time have had a significant impact on product prices in the regional and global markets. Historically, the markets for ~~these~~petrochemical and rubber products have experienced ~~alternating~~ periods of tight supply, causing prices and margins to increase, followed by periods of capacity additions, ~~finally~~ resulting in oversupply and declining prices and margins. As tariffs and other import restrictions are reduced and the control of product pricing is relaxed in China, the markets for many of our products have become increasingly subject to the cyclicality of regional and global markets. ~~Raw material costs accounted for more than 90% of our Cost of Goods Sold. Volatility of raw material costs could have significant negative impact on our profitability.~~

~~Our operation may be interrupted by weather conditions and power shutdowns and our operating results may therefore be adversely affected~~21

~~Our~~Raw material ~~operating~~costs ~~results~~accounted ~~depend~~for ~~largely~~48% onand ~~the~~61% ~~uninterrupted operation~~ of our ~~business.~~cost ~~Our~~of ~~facilities~~goods ~~are~~sold ~~located~~for atfiscal ~~Beilun,~~years ~~Ningbo,~~2015 ~~China~~and 2014, ~~by the east coast~~respectively. ~~Severe~~The ~~weather~~markets ~~conditions~~for these ~~and~~raw ~~natural~~materials ~~disasters,~~- ~~such as hurricanes~~namely, ~~storms,~~oil ~~floods,~~- ~~and~~have ~~other~~been ~~severe~~volatile ~~weather~~historically, ~~events~~may ~~could~~continue ~~disrupt~~to ~~our~~be ~~operations.~~volatile ~~Additionally, we are located~~ in ~~an industrial park where~~ the ~~infrastructure~~future, ~~such~~and asare ~~the~~beyond our ~~electricity~~control ~~grid~~based ison ina ~~need~~number of ~~periodic~~potential ~~upgrade~~factors. ~~Disruptions~~These tofactors ~~our~~include, ~~operations~~but ~~due~~are tonot ~~natural~~limited ~~conditions discussed above and/or mandatory power shutdowns due~~ to, the periodic electricity grid upgrades could significantly affect our ability to manufacture and/or sell products, which would result in a substantial loss of sales and revenues and substantial harm to our operating results.following:

~~Our~~● ~~manufacturing~~The ~~processes~~worldwide ~~could~~supply ~~expose~~of, usand demand for, oil; ● Volatility and trading patterns in the markets; ● The cost of exploring for, developing, producing, transporting, and marketing oil; ● The level of global oil inventories; ● Weather conditions; ● The ability of the members of the Organization of the Petroleum Exporting Countries (“OPEC”) and other producing nations to ~~substantial~~agree ~~product~~to ~~liability~~and ~~claims~~maintain production levels; ● The worldwide military and political environment; ● Civil and political unrest in Africa and the Middle East; ● Uncertainty or instability resulting from the escalation or additional outbreak of armed hostilities, ~~which~~or ~~may~~acts ~~negatively~~of ~~impact~~terrorism ~~our~~in ~~profitability~~the united states or elsewhere; ● The effect of worldwide energy conservation and environmental protection efforts; ● The price and availability of alternative and competing fuels; ● The level of foreign imports of oil; ● Governmental laws, regulations, and taxes; ● The proximity to, and capacity of, pipelines and other transportation facilities; and ● General economic conditions worldwide.

WeThe long-term ~~face~~effect ~~an inherent business risk~~ of ~~exposure~~these toand ~~product~~other ~~liability~~factors ~~claims~~on in the ~~event~~prices ~~that the use~~ of ~~our~~oil ~~products~~ is ~~alleged to have resulted in adverse side effects~~uncertain. ~~Side~~Prolonged ~~effects~~ or ~~marketing~~further ordeclines ~~manufacturing problems pertaining to any of our products could result~~ in ~~product~~these ~~liability~~commodity prices ~~claims~~may ~~or adverse publicity. These risks will exist for those products in clinical development and with respect to those products that~~ have received regulatory approval for commercial sale. To date, we have not experienced any product liability claims. However, that does not mean that we will not have any such claims with respect to our products in the ~~future~~following ~~which~~negative ~~may~~effects ~~negatively~~on ~~impact~~ our ~~profitability.~~business:

In● ~~the~~Adversely ~~past~~affecting ~~several~~our ~~years~~financial wecondition, ~~have~~liquidity, ~~derived~~ability ato ~~significant~~finance ~~portion~~planned capital expenditures, and results of ~~our~~operations; ~~revenues~~● ~~from~~Causing aus ~~small~~to ~~group~~delay ofor ~~customers~~postpone ~~and~~our weexpansion ~~have~~plan; ~~purchased~~● ~~raw~~Reducing ~~material~~our ~~from~~revenues, aoperating ~~small~~income, ~~group~~or ofcash ~~suppliers.~~flows; If● weTemporarily ~~are~~causing us to ~~remain~~shut ~~dependent~~down ~~upon~~our ~~only~~operations auntil ~~few~~prices ~~customers~~rise; and a● ~~few~~Limiting ~~raw~~our ~~material~~access ~~suppliers~~to, ~~such~~or ~~dependency~~increasing ~~could~~the ~~negatively~~cost ~~impact~~of, ~~our~~sources ~~business,~~of ~~operating~~capital ~~results~~such as equity and ~~financial~~debt ~~condition~~securities and long-term debt.

~~For~~Our operation the year ended December 31, 2012, our five largest customers accounted for 35% of our total sales. For the year ended December 31, 2011, our five largest customers accounted for 44% of our total sales. Sales to one major customer accounted for 13% and 18% of our total annual net revenue for the fiscal years 2012 and 2011, respectively. As our customer base may ~~change~~be ~~from~~interrupted ~~year-to-year,~~by ~~during~~weather ~~such~~conditions years that the customer base is comparatively highly concentrated, the loss of, or reduction of our sales to, any of such major customers could have a material adverse effect on our business, operating results and ~~financial~~power ~~condition.~~shutdowns

WeOur operating ~~currently~~results ~~buy~~depend alargely ~~majority~~on ~~of our~~the ~~heavy~~uninterrupted ~~oil,~~operation ~~an important component~~ of our ~~products, from three suppliers~~business. ~~Although~~Our ~~there~~current facilities are alocated ~~limited~~at ~~number of suppliers of the particular heavy oil used in production~~Beilun, Ningbo, ~~management~~China ~~believes that other suppliers could provide similar heavy oil~~ on ~~comparable~~China’s ~~terms~~east coast. ASevere ~~change~~weather inconditions ~~suppliers, however, could cause a delay in manufacturing~~ and anatural ~~possible loss of sales~~disasters, ~~which~~such ~~would~~as ~~affect operating results adversely. Purchases (net of VAT) from the largest three suppliers for the years ended December 31~~hurricanes, ~~2012 and 2011 were approximately $549 million and $377 million~~storms, ~~respectively. These purchases represented 78%~~ floods, and ~~83%,~~other ~~respectively~~severe ofweather ~~all~~events ofcan disrupt our ~~purchases for the years ended December 31, 2012 and 2011~~operations. ~~Our largest supplier accounted for approximately $473 million and $305 million~~Additionally, orwe ~~68%~~are ~~and~~located ~~67%~~in ofan ~~total~~industrial ~~purchases~~park ~~for~~where the ~~years~~infrastructure such ~~ended~~as ~~December 2012 and 2011, respectively. In addition,~~ the ~~supplier~~electricity ~~provided~~grid ~~short-term~~is ~~financing~~in toneed us of ~~approximately~~periodic ~~$29~~upgrade. ~~million~~Natural ~~during~~conditions ~~2012,~~discussed ofabove ~~which $20 million was included in accounts payable at December 31, 2012~~ and/or mandatory ~~was~~power ~~repaid~~shutdowns due ~~in January 21, 2013. Interest paid for this financing amounted~~ to ~~approximately $0.43 million. In addition, on December 27, 2012,~~ the ~~supplier~~periodic ~~provided~~electricity agrid ~~non-interest~~upgrades ~~bearing~~may ~~advance~~cause ofdisruptions ~~approximately $10 million~~ to ~~the~~our ~~Company,~~operations ~~that~~which ~~was~~can ~~repaid~~significantly inaffect ~~full on January 8, 2013. These types of short-term financing from vendors bear the risk of possible violation of the terms of~~ our ~~letters of credit. We are planning~~ ability to ~~establish~~manufacture ~~policies~~ and/or ~~procedures~~sell toproducts, ~~provide~~resulting ~~for~~in ~~the~~a ~~complete~~substantial ~~and~~loss ~~timely analysis~~ of ~~contingencies~~sales ~~associated~~and ~~with~~revenues ~~these transactions~~ and ~~the~~ ~~evaluation~~substantial ofharm ~~legal and regulatory considerations related~~ to ~~those business activities. However, at present, we cannot assure that these short term financings will not result in violations of the terms of~~ our ~~existing~~ ~~credit facilities or PRC law or regulation~~operating results.

26We may be exposed to risks relating to our disclosure controls and our internal controls.

We may be exposed to risks relating to our disclosure controls and our internal controls and may need to incur significant costs to comply with applicable requirements.

Effective internal controls are necessary for us to provide reliable financial reports and to effectively prevent fraud. We maintain a system of internal controls over financial reporting, which is defined as a process designed by, or under the supervision of, our principal executive officer and principal financial officer, or persons performing similar functions, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

During the process of preparing the Company’s Annual Report on Form 10-K for the year ending December 31, 2010, on or about March 24, 2011, KPMG, the Company’s prior independent auditor, raised certain issues primarily relating to the unexplained issues regarding certain cash transactions and recorded sales and requested that the Audit Committee conduct an independent investigation. Based on the issues raised by KPMG, on March 31, 2011, our Audit Committee elected to commence an independent Investigation of the issues raised and engaged the services of the Investigation Team. Following the Investigation, the Audit Committee identified, among other issues, inadequate disclosure and issues regarding internal control and procedures. In order to improve corporate governance and enhance internal controls, management and our Board of Directors are committed to adopting and implementing the recommendations of the Audit Committee in addition to all of the corrective actions the Company has taken to date. For more details of the corrective actions, please refer to Item 9A Controls and Procedures herein after. 22

~~Notwithstanding~~During the ~~foregoing~~process ~~corrective~~of ~~actions,~~preparing wethe ~~cannot~~Company’s Annual ~~currently~~Report ~~ensure~~on ~~that~~Form ~~our~~10-K ~~controls~~for ~~and~~the ~~procedures~~year ~~will~~ended beDecember ~~effective~~31, at2010, ~~any~~in ~~time~~March, in2011, KPMG, the ~~immediate~~Company’s ~~future. Moreover~~former independent auditor, inraised ~~order~~certain issues primarily relating to ~~improve~~certain ~~our~~cash ~~controls~~transactions and ~~procedures~~recorded wesales and ~~anticipate~~requested that wethe Audit ~~will~~Committee ~~continue~~conduct toan ~~incur~~independent ~~significant costs~~investigation. ~~Failure~~ toBased ~~properly~~on ~~improve~~the ~~our~~issues ~~controls~~raised ~~and~~by ~~procedures~~KPMG, ~~could~~our ~~result~~Audit inCommittee ~~our~~elected ~~failure~~ to ~~meet~~commence an ~~our~~independent ~~reporting~~investigation ~~obligations,~~of ~~result~~the inissues ~~the~~raised. ~~restatement~~Following ofthe investigation, our ~~past~~Audit ~~financial~~Committee ~~statements~~identified, ~~cause~~among ~~harm~~other ~~to our operating results~~issues, inadequate ~~subject~~disclosure usand toissues ~~regulatory~~regarding ~~scrutiny~~internal control and ~~sanction,~~procedures. In ~~cause~~order ~~investors~~ to ~~lose~~improve ~~confidence~~corporate ingovernance ~~our~~and enhance ~~reported~~internal ~~financial~~controls, management ~~information~~ and ~~have~~our aBoard ~~negative~~of ~~effect~~Directors oncommitted ~~the~~to ~~market~~adopting ~~price~~and ~~for~~implementing ~~shares~~the recommendations of the ~~our~~Audit ~~common stock~~Committee, ~~all~~some of which ~~present~~we ~~significant~~have ~~risk~~not yet rectified. For more details of the corrective actions, please refer to ~~our~~Item ~~investors~~9A Controls and Procedures.

~~Insurance~~We cannot ~~coverage~~currently ensure that our controls and procedures will be effective at any time in the immediate future. Moreover, in order to improve our controls and procedures we anticipate that we will continue to incur significant costs. Failure to properly improve our controls and procedures could result in our failure to meet our reporting obligations, result in the restatement of our past financial statements, cause harm to our operating results, subject us to regulatory scrutiny and sanction, cause investors to lose confidence in our reported financial information and have a negative effect on the market price for ~~some~~shares of our ~~operations~~Common Stock, ~~may~~all beof ~~insufficient~~which present significant risk to ~~cover~~our ~~losses~~investors.

~~The insurance industry in China is still at an early stage of its development. Insurance companies in China offer limited business insurance products or offer them at a high price.~~ We are dorequired ~~not~~to ~~maintain~~comply ~~insurance~~with ~~coverage for various risks, including~~ environmental ~~claims.~~laws ~~A significant uninsured claim against us would have a material adverse effect on our financial position~~ and ~~results of operations~~regulations.

~~Failure~~We are subject to ~~comply~~various ~~with~~PRC environmental laws and regulations ~~may~~that ~~have~~require aus ~~material~~to ~~adverse~~obtain ~~effect~~environmental onpermits for our ~~business~~operations. If ~~and~~we ~~results~~fail to obtain all required environmental permits for our operations, or fail to comply with the provisions of any permit, we could be subject to fines, criminal charges or other sanctions by regulators, including the suspension or termination of our operations. We are required to comply with extensive and complex environmental laws and regulations at various levels in the PRC relating to, among other things:

We● ~~are~~The ~~subject~~handling toof ~~various~~petrochemical ~~environmental laws~~ and ~~regulations~~rubber ~~that require us to obtain environmental permits for our operations. We have obtained relevant environmental licenses or approvals to conduct the manufacturing of petrochemical~~ products; in● ~~our~~The ~~operating~~operation ~~subsidiary Ningbo Keyuan. If we fail to obtain all required environmental permits for our operations, or comply with the provisions~~ of ~~our~~product ~~permit,~~storage wefacilities; ~~could~~● beWorkplace ~~subject~~safety; to● ~~fines,~~Environmental ~~criminal~~damage; ~~charges or other sanctions by regulators, including the suspension or termination of our operations. We are required to comply with extensive~~ and ~~complex~~● ~~environmental~~Hazardous ~~laws~~waste ~~and regulations at various levels in the PRC relating to, among other things:~~disposal.

●If we ~~the~~are ~~handling~~involved in a spill or other accident involving hazardous substances, or if we are found to be in violation of ~~petrochemical~~environmental laws ~~products;~~or ●regulations, ~~the~~we ~~operation~~will be subject to liabilities that could have a material adverse effect on our business, financial condition and results of ~~petrochemical~~operations. ~~product~~If ~~storage~~we ~~facilities;~~fail ●to ~~workplace~~comply ~~safety;~~with ●applicable environmental ~~damage;~~regulations, we will be subject to substantial fines or penalties and ●to ~~hazardous~~civil ~~waste~~and ~~disposal~~criminal liability. We cannot assure you that at all times we will be in compliance with environmental laws and regulations or our environmental permits or that we will not be required to expend significant funds to comply with, or discharge liabilities arising under, environmental laws, regulations and permits.

~~If we are involved in a spill~~ Accidents or ~~other~~injuries ~~accident involving hazardous substances, or if we are found to be~~ in ~~violation of environmental laws~~ or ~~regulations,~~around weour ~~could~~facility bemay ~~subject~~adversely toaffect ~~liabilities that could have a material adverse effect on~~ our ~~business,~~reputation ~~financial condition~~ and ~~results of operations. If we should fail to comply with applicable environmental regulations, we could be~~ subject tous ~~substantial fines or penalties and~~ to ~~civil and criminal~~ liability. Our facilities passed inspection by the Ningbo City environmental protection authorities after the completion of construction. However, we cannot assure you that at all times we will be in compliance with environmental laws and regulations or our environmental permits or that we will not be required to expend significant funds to comply with, or discharge liabilities arising under, environmental laws, regulations and permits.

27As of the date of this report, we had three safety related accidents (as described in Item 1 Business above) in our facilities all of which happened in 2014 and caused a cost to us of approximately $8.5 million. There are inherent risks of accidents or injuries when working in or around our manufacturing facilities. Serious accidents or injuries could prevent us from renewing our safety licenses or result in suspension of our operation. One or more accidents or injuries at our facility could adversely affect our reputation among customers and potential customers and increase our costs if we are required to take additional measures to make our safety precautions more effective. We may not be adequately insured to cover the costs and liabilities associated with accidents.

~~Our~~We must ~~failure to~~ protect our technologies ~~could have a negative impact on our business~~.

Our manufacturing technologies and process, ~~which~~some ~~have~~of orwhich have not been patented or registered as our property, are key components of our competitive advantage and our growth strategy. On January 25, 2011 we received approval for a patent related to the Company's proprietary production process, called MEP (Multiple Ethylene Propylene). MEP is an exclusive and leading technology used in Keyuan's existing production process. The utility model patent received, #ZL-2010-2-0191523.6, applies to a processing technology used in the production of ethylene and propylene. Working with East China University Of Science and Technology (ECUST), we discovered the technique to improve recovery rate and output capacity of Acrylonitrile. Based on that discovery, the Company applied for patents for three devices in the production process in August, 2012, which are Fluidization Reaction System of Acrylonitrile (#ZL-2012-2-0381020.4), Cooler of Acrylonitrile Gas (#ZL-2012-2-0382047.5) and Absorption Tower of Acrylonitrile (#ZL-2012-2-0381066.6). These three technology inventions are used for improving the output capacity and recovery rate, decreasing discharge waste to improve production efficiency. In March 2013, we received the patent notices from Patent Office, which means its application has been approved..We ~~also~~ rely on confidentiality and license agreements with certain of our employees, customers and others to protect ~~the confidentiality of~~ our technologies. If we are unable to adequately protect the confidentiality of these technologies, our business, results of operations, financial condition and prospects could be materially and adversely affected.

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

Though we are currently a smaller reporting company (with a market cap less than $75 million,~~000,000),~~ we have incurred ~~significant~~and will incur significant legal, accounting and other expenses that we did not or otherwise would not incur as a private company. Additionally, from April 2011 to September 2011, we have incurred approximately $5,000,000 in connection with the Independent Investigation commenced by our Audit Committee at the request of our former auditor KPMG. We may continue to incur costs for the various corrective actions we are taking and committed to taking to improve our internal controls and procedures, as well as corporate governance. Furthermore, if the Company’s market cap exceeds $75 million, we will be subject to the requirements of the Sarbanes-Oxley Act Section 404. In addition, the Sarbanes-Oxley Act, as well as ~~new~~ rules subsequently implemented by the SEC, has required changes in corporate governance practices of public companies. We expect these rules and regulations, along with the corrective actions to improve our controls and procedures, to increase our legal, accounting and financial compliance costs and to make certain corporate activities more time-consuming and costly. We ~~are currently evaluating and monitoring developments with respect to these rules, and we~~ cannot predict or estimate the amount of additional costs we may incur or the timing of ~~such costs. Additionally, if we are unable to comply with~~ the ~~Sarbanes-Oxley~~occurrence ~~Act’s~~of ~~internal~~such ~~controls requirements, we may not be able to obtain the independent auditor certifications that Sarbanes-Oxley Act requires publicly-traded companies to obtain~~costs.

We may lose our property and/or equipment if we fail to repay the short-term bank loans.

We enter into short-term bank loan agreements with our primary lenders to fund our operation. As of December 31, 2015 and 2014, we had an aggregate principal amount of approximately $361 million and $568 million outstanding under the loan agreements. Some of these loans are secured by a lien on our property and/or equipment. We may be unable to repay these loans if our cash and liquidity position changes or our operation is not successful, which may cause us to lose the possession of our property and/or equipment, and adversely impact our operation. If we lose our equipment we may be unable to produce our products until we replace the equipment, if we can, and which would cause us to lose business and we may not be able to continue operating.

We may be subject to penalties or fines from the Chinese government as a result of possible violations of PRC laws or regulations

Our management and our Board of Directors have reviewed our past practices and have been advised that several of ~~these~~the ~~practices~~following practices may result in possible violation of PRC laws or regulations. Specifically, a) we maintained an off-balance account to pay service providers who were not able to issue formal invoices, to distribute cash bonus to our key employees and officers, to pay rental for certain officers’ dormitories whose residences are far from our factory, etc. However, we are advised that such practices may result in violation of PRC laws. As a result, we ceased the use of such off-balance account in April 2011 and have recorded, and will record, all transactions in that account into our financial statement in the relevant annual report and interim report. b) In September 2010, we adopted a numbering system to bar scan our products to avoid any misrepresentation of the nature of our products. In the past we sometimes accommodated requests from our customers to change the name of products so that our customers could save on freight costs. c) in the past, in order to overcome the restrictions regarding the use of certain bank loans or to satisfy the banks’ internal requirements to demonstrate the usage of the loans , we engaged with certain related and other parties in short term financings. . Though we are current on our loan payments and as a general rule, the risk of prosecution and or civil liabilities is diminished if the loans have been repaid, we are advised that such practices may have been in violation of PRC banking laws. d) in 2010, RMB 21 million was transferred by Ningbo Keyuan to one of its employees with no collateral or written agreement. The RMB 21 million was subsequently returned by the employee. The funds were used by the employee to assist an investor in the September 2010 Private Placement, in converting RMB to U.S. dollars. Though we have discontinued the above mentioned practices, such action may violate PRC foreign exchange laws and regulations. If Ningbo Keyuan is held responsible for any such violation conducted by the employee and the investor, Ningbo Keyuan may be subject to penalties. Additionally, Ningbo Keyuan discounted and continues to discount bank notes in order to use its effective credit lines and finance our growth. Though Ningbo Keyuan is current on its loan payments and we have been advised by our PRC counsel that as long as payments to bank loans are current, the chance that Ningbo Keyuan will be subject to a fine, penalty or civil liability because of discounting bank notes is remote; there is a risk that such practice may be a potential violation of PRC banking laws. Therefore, we cannot assure you that we may not be subject to penalties or fines from the Chinese regulators if they decide to proceed against us and we cannot assure you that there will be no other violation of any current PRC laws or regulations identified by the relevant government regulators in the future.:

28● In the past, we sometimes accommodated requests from our customers to change the name of products so that our customers could save on freight costs. In September 2010, we adopted a numbering system to bar scan our products to avoid any misrepresentation of the nature of our products; ● In the past, in order to overcome the restrictions regarding the use of certain bank loans or to satisfy the banks’ internal requirements to demonstrate the usage of the loans, we engaged with certain related and other parties in short term financings. We were advised that such practices might have been in violation of PRC banking laws; ● In 2010, RMB 21 million was transferred by Ningbo Keyuan to one of its employees with no collateral or written agreement. The RMB 21 million was subsequently returned by the employee. This arrangement was made to assist an investor in the September 2010 Private Placement, in converting RMB to U.S. dollars, which may violate PRC foreign currency exchange laws and regulations; and ● Ningbo Keyuan discounted and continue to discount bank notes in order to use its effective credit lines and finance our growth. Such practice may be a potential violation of PRC banking laws.

We cannot assure you that we may ~~face~~not ~~litigation~~be ~~and/~~subject to penalties or ~~regulatory~~fines ~~action~~from asthe aChinese ~~result~~regulators if they decide to proceed against us and we cannot assure you that there will be no other violation of ~~recent~~any ~~events~~current PRC laws or regulations identified by the relevant government regulators.

~~In November 2011, The Rosen Law Firm filed a class action law suit against us.~~ We believe there is no basis to the law suit and intend to defend the law suit vigorously. Moreover, as a result of recent events, including but not limited to the delisting of our stock from the NASDAQ, our failure to file periodic reports as they are due for approximately six months and our failure to comply with certain registration requirements related to common shares underlying our preferred stock and warrants, we may ~~become~~face ~~subject to~~ litigation ~~from shareholders~~ and ~~other investors. Additionally, we may also become subject to regulatory enforcement actions in either the U.S. and~~/or ~~China. If we are forced to defend either a civil law suit brought by outside shareholders or investors and/or a~~ regulatory action, weas ~~will~~a beresult ~~required to expend significant additional funds that could otherwise be utilized for business purposes. Additionally, defense~~ of ~~such~~certain ~~claims will result in management expending additional time and focus in connection with such defense that may materially impact its ability to effectively run our business~~events.

As a result of certain events, including but not limited to the delisting of our Common Stock from the Nasdaq Stock Market, our failure to file periodic reports as they were due and our failure to comply with certain registration requirements related to common shares underlying our preferred stock and warrants, we became subject to litigation from stockholders and other investors. In November 2013, The Rosen Law Firm filed a class action law suit against us. In February 2014, The Brown Law Firm filed a derivative law suit against us and certain directors and officers. In addition, in October 2014, Dragon State filed the Complaint against us. As of today, these three litigations have been settled. Additionally, we may also become subject to regulatory enforcement actions in either the U.S. and/or China. If we are forced to defend either a civil law suit brought by outside stockholders or investors and/or a regulatory action, we will be required to expend significant additional funds that could otherwise be utilized for business purposes. Defense of such claims would also require management to expend additional time and focus in connection with such defense which may materially impact its ability to effectively run our business, regardless of whether we are ultimately successful.

We have accepted continuing obligations related to our corporate governance.

In February 2014, a derivative action was filed alleging breach of fiduciary duties arising primarily out of transactions which occurred in 2009 and 2010 between us and certain related parties or other parties. Because the derivative litigation would be expensive and distracting, we settled the lawsuit in July 2015 without admitting to any wrongdoing. We agreed, among other matters, to make certain modifications to our corporate governance including expanding our nomination and corporate governance committee and adopting a related-party transaction policy. The settlement agreement is filed as Exhibit 10.4 to this report. We continue to implement the modifications we agreed to under the settlement agreement. If we do not fully comply with the terms of the settlement agreement, we could be sued for breach of the settlement agreement. Any lawsuit could be costly for us, reduce our share price, and deviate our management’s time away from running our business.

We may be subject to penalties or fines from the U.S. tax authorities as a result of possible violations of federal and state tax laws or regulations

Keyuan Petrochemicals Inc., as a U.S. public company and Nevada corporation, is subject to various U.S. and Nevada laws and regulations. U.S. federal tax law generally requires U.S. corporations to file U.S. tax returns every year. Keyuan Petrochemicals, Inc. may be subject to penalties for failure to file U.S. federal tax returns. In addition, we may be required to file certain foreign tax disclosures on forms 5471 and 5472 on an annual basis. In general, penalties for failure to file forms 5471 and 5472 are $10,000 per failure, per year.

We may be subject to penalties or fines from the Hong Kong tax authorities as a result of possible violations of Hong Kong tax laws or regulations

Keyuan HK, as a HK company, is subject to various Hong Kong laws and regulations. Hong Kong tax law generally requires Hong Kong companies to file Hong Kong tax returns. Keyuan HK may be subject to penalties for failure to file Hong Kong tax returns.

Risks Relating to Regulation of Our Business

Uncertainties with respect to the governing regulations could have a material and adverse effect on us.

There are substantial uncertainties regarding the interpretation and application of the PRC laws and regulations, including, but not limited to, the laws and regulations governing our business and our ownership of the equity interests in our PRC subsidiaries~~, both of~~ which are classified as wholly owned foreign ~~owned~~entities ~~enterprise~~(the “WOFEs”) under the PRC laws. ~~These~~PRC laws and regulations are ~~relatively~~frequently ~~new~~modified ~~and~~due ~~may be subject~~ to ~~change,~~rapid economic and ~~their~~social ~~official~~developments ~~interpretation~~ and ~~enforcement~~many ~~may~~of ~~involve~~them ~~substantial~~have ~~uncertainty.~~been ~~The effectiveness of~~ newly enacted ~~laws,~~within ~~regulations~~the orlast twenty ~~amendments may be delayed, resulting in detrimental reliance by foreign investors~~years. ~~New~~Certain new laws and regulations that affect existing and proposed future businesses may also be applied retroactively.

The PRC government has broad discretion in dealing with violations of laws and regulations, including levying fines, revoking business permits and other licenses and requiring actions necessary for compliance. In particular, licenses and permits issued or granted to the PRC ~~subsidiary~~subsidiaries by relevant governmental bodies may be revoked at a later time by higher regulatory bodies. We cannot predict the effect of the interpretation of existing or new PRC laws or regulations on our businesses. We cannot assure you that our current ownership and operating structure would not be found to be in violation of any current or future PRC laws or regulations. As a result, we may be subject to sanctions, including fines, and could be required to restructure our operations or cease to ~~provide certain services~~ operate. In addition, any litigation in relation thereto in China may be protracted and result in substantial costs and diversion of resources and management attention. Any of these or similar actions could significantly disrupt our business operations or restrict us from conducting a substantial portion of our business operations, which could materially and adversely affect our business, financial condition and results of operations.

29Our PRC subsidiaries are subject to restrictions on dividend payments.

~~Our~~We conduct all of our business through our consolidated subsidiaries incorporated in the PRC. We rely on dividends paid by these consolidated subsidiaries ~~will~~for beour cash needs, including the funds necessary to pay any dividends and other cash distributions to our stockholders, to service any debt we may incur and to pay our operating expenses. The payment of dividends by entities established in the PRC is subject to ~~restrictions~~limitations. Current regulations in the PRC permit PRC subsidiaries to pay dividends to us only out of their accumulated distributable profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, our PRC subsidiaries are required to set aside a reserve of at least 10% (up to an aggregate amount equal to half of its registered capital) of each subsidiary’s accumulated profits each year. Such cash reserve may not be distributed as cash dividends. In addition, if any PRC subsidiary incurs debt on ~~dividend~~its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments to us.

We conduct all of our business through our consolidated subsidiaries incorporated in the PRC. We rely on dividends paid by these consolidated subsidiaries for our cash needs, including the funds necessary to pay any dividends and other cash distributions to our stockholders, to service any debt we may incur and to pay our operating expenses. The payment of dividends by entities established in the PRC is subject to limitations. Current regulations in the PRC would permit the PRC subsidiary to pay dividends to us only out of its accumulated distributable profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, our PRC subsidiaries will be required to set aside at least 10% (up to an aggregate amount equal to half of its registered capital) of its accumulated profits each year. Such cash reserve may not be distributed as cash dividends. In addition, if the PRC subsidiary incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments to us. Under U.S. GAAP (Financial Accounting Standard Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 740-30, no deferred tax expense is required to be recorded on the earnings of foreign subsidiaries when the parent company establishes that the earnings will be permanently reinvested outside the U.S. If dividend payments are made by our subsidiaries to the US parent, additional U.S. tax could become due in future years. At the time of the repatriation or investment in U.S. property, the U.S. will tax the foreign earnings as a dividend and will allow a foreign tax credit for any foreign taxes previously paid on the earnings. To the extent that dividend payments are made by our PRC subsidiaries to our US Parent additional tax may be due.25

~~PRC~~Additionally, under ~~regulations~~Financial Accounting Standard Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 740-30, no deferred tax expense is required to be recorded on ~~loans~~the ~~and~~earnings ~~direct~~of ~~investments~~foreign subsidiaries when the parent company establishes that the earnings will be permanently reinvested outside the U.S. If dividend payments are made by ~~overseas~~our ~~holding~~subsidiaries to ~~companies~~the Company, additional U.S. tax could become due in ~~PRC~~future ~~entities~~years. At ~~may~~the ~~delay~~time of the repatriation or ~~prevent~~investment usin toU.S. property, ~~make~~the ~~overseas~~U.S. ~~loans~~will ortax ~~additional~~the ~~capital~~foreign ~~contributions~~earnings toas a dividend and will allow a foreign tax credit for any foreign taxes previously paid on the earnings. To the extent that dividend payments are made by our PRC ~~subsidiary~~subsidiaries to the Company, additional tax may be due.

~~Under the~~ PRC regulates ~~laws, foreign investors may make~~ loans ~~to their PRC subsidiaries or foreign investors may make additional capital contributions to their PRC subsidiaries. Any loans to such PRC subsidiaries are subject to the PRC regulations~~ and ~~foreign~~direct ~~exchange~~investments ~~loan registrations, i.e. loans~~ by ~~foreign~~overseas ~~investors~~holding tocompanies ~~their~~in PRC ~~subsidiaries to finance their activities cannot exceed statutory limits and must be registered with the State Administration of Foreign Exchange (the “SAFE”), or its local branch~~entities. Foreign investors may also decide to finance their PRC subsidiaries by means of additional capital contributions. These capital contributions must be examined and approved by the Ministry of Commerce of the People’s Republic of China (the “MOFCOM”), or its local branch in advance.

Under PRC laws, foreign investors may make loans to their PRC subsidiaries or foreign investors may make additional capital contributions to their PRC subsidiaries. Any loans to such PRC subsidiaries are subject to the PRC ~~Enterprise~~regulations ~~Income~~and ~~Tax~~foreign ~~Law~~exchange loan registrations, i.e. weloans ~~may~~by foreign investors to their PRC subsidiaries to finance their activities cannot exceed statutory limits and must be ~~classified~~registered aswith athe ~~“resident~~SAFE ~~enterprise”~~or its local branch. Foreign investors may also decide to finance their PRC subsidiaries by means of ~~China,~~additional capital contributions. These capital contributions must be examined and ~~such~~approved ~~classification~~by ~~would~~the ~~likely~~SAFE, ~~result~~or its local branch in ~~unfavorable~~advance. ~~tax~~These ~~consequences~~registration toor approval procedures may delay or prevent us ~~and~~from making overseas loans or additional capital contributions to our ~~non-~~PRC ~~stockholders~~subsidiaries.

~~On March 16, 2007,~~ Under the ~~National People’s Congress (the “NPC”), approved and promulgated the~~ PRC Enterprise Income Tax Law ~~(herein referred as the “New EIT Law”). The New EIT Law took effect on January 1~~, ~~2008.~~we ~~Under~~may ~~the~~be ~~New~~classified ~~EIT~~as ~~Law, Foreign Investment Enterprises (“FIEs”), and domestic companies are subject to~~ a ~~uniform tax rate of 25%. In addition, an enterprise established outside of China with~~ “~~de facto management bodies” within China is considered a “~~resident enterprise” ~~which~~of ~~means that we may be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes~~China.

Under the ~~New~~ EIT Law, anFIEs enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the New EIT Law define de facto management as “substantial and ~~overall~~domestic ~~management~~companies and control over the production and operations, personnel, accounting, and properties” of the enterprise. On April 22, 2009, the State Administration of Taxation, or the SAT, issued a circular, or SAT Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China, which include all of the following conditions: (a) the location where senior management members responsible for an enterprise’s daily operations discharge their duties; (b) the location where financial and human resource decisions are ~~made~~subject or approved by organizations or persons; (c) the location where the major assets and corporate documents are kept; and (d) the location where more than half (inclusive) of all directors with voting rights or senior management have their habitual residence. Although the SAT Circular 82 only applies to ~~offshore~~a ~~enterprises~~uniform controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners, the determining criteria set forth in the SAT Circular 82 may reflect the SAT’s general position on how the “de facto management body” text should be applied in determining the tax ~~resident~~rate ~~status~~ of ~~all offshore enterprises, regardless of whether they are controlled by PRC enterprises or individuals~~25%. Due to the short history of the New EIT Law and lack of applicable legal precedents, it remains unclear how the PRC tax authorities will determine the PRC tax resident treatment of a foreign company controlled by individuals like us.

30In addition, under the EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the EIT Law define de facto management as “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise. The specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China, includes all of the following factors: (a) the location where senior management members responsible for an enterprise’s daily operations discharge their duties; (b) the location where financial and human resource decisions are made or approved by organizations or persons; (c) the location where the major assets and corporate documents are kept; and (d) the location where more than half (inclusive) of all directors with voting rights or senior management have their habitual residence. Although the above only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners, the determining criteria may reflect the SAT’s general position on how the “de facto management body” text should be applied in determining the tax resident status of all offshore enterprises, regardless of whether they are controlled by PRC enterprises or individuals. Due to lack of applicable legal precedents, it remains unclear how the PRC tax authorities will determine the PRC tax resident treatment of a foreign company controlled by individuals like us.

If the PRC tax authorities determine that we are “resident enterprises” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this would mean that income such as interest on offering proceeds and non-China source income would be subject to PRC enterprise income tax at a rate of 25%. Second, although under the ~~New~~ EIT Law and its implementing rules, dividends paid to us from our PRC subsidiaries would qualify as “tax-exempt income,” we cannot guarantee that such dividends will not be subject to a 10% withholding tax. ~~Finally,~~It it is possible that “resident enterprise” classification could result in a situation in which a 10% withholding tax is imposed on dividends we pay to our non-PRC enterprise stockholders and with respect to gains derived by our non-PRC enterprise stockholders from transferring our shares and a 20% withholding tax is imposed on dividends we pay to our non-PRC individual stockholders and with respect to gains derived by our non-PRC individual stockholders from transferring our shares.. We are actively monitoring the possibility of “resident enterprise” treatment for the applicable tax years and are evaluating appropriate organizational changes to avoid this treatment, to the extent possible.

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

IfWe face weuncertainty ~~receive any dividends~~ from ~~our~~China’s ~~PRC~~Circular ~~subsidiaries~~on inStrengthening the ~~future,~~Administration ~~the~~of ~~dividends~~Enterprise ~~may~~Income beTax ~~subject~~on toNon-Resident ~~PRC~~Enterprises' Share ~~withholding tax~~Transfer.

The SAT ~~New~~released ~~EIT~~a ~~Law~~circular ~~and~~(“Circular ~~the~~698”) ~~Implementation~~in ~~Rules~~December of2009 ~~the New EIT Law provides~~ that anaddresses ~~income~~the ~~tax~~transfer ~~rate~~ of ~~10%~~shares ~~may~~by benonresident companies. ~~applicable~~Circular to698, ~~dividends~~which ~~payable~~is toeffective ~~non-PRC~~retroactively ~~investors~~to ~~that~~January ~~are~~1, ~~“non-resident enterprises”~~2008, ~~which~~has ~~(i)~~had doa ~~not~~significant ~~have~~impact anon ~~establishment~~many orcompanies ~~place~~that use ofoffshore ~~business~~holding incompanies ~~the~~to ~~PRC,~~invest orin ~~(ii)~~China. ~~have~~Pursuant ~~such~~to ~~establishment~~Circular or698, ~~place~~where ~~of business in~~ the ~~PRC~~withholding ~~but~~agent ~~the~~does ~~relevant income is~~ not ~~effectively~~withhold ~~connected~~in accordance with ~~the~~laws ~~establishment~~ or ~~place~~can’t ofperform ~~business, to~~ the ~~extent~~withholding ~~such~~obligation, ~~dividends are derived from sources within~~ the ~~PRC. The income tax for~~ non-resident enterprises ~~shall~~must befile ~~subject~~a totax ~~withholding at the income source,~~ declaration with the ~~payer~~PRC ~~acting~~tax asauthority ~~the~~located ~~obligatory~~at ~~withholder under~~ the ~~New~~place ~~EIT~~of ~~Law, and therefore such income taxes are generally called withholding tax in practice. It is currently unclear in what circumstances a source will be considered as located within~~ the ~~PRC.~~resident Weenterprise ~~are~~whose anequity ~~offshore~~has ~~holding~~been ~~company. Thus~~transferred, ifwithin ~~Keyuan~~seven HKdays after isthe ~~considered~~date asof athe ~~“non-resident~~equity ~~enterprise”~~transfer provided under the ~~New~~contracts, ~~EIT~~or ~~Law and~~ the ~~dividends~~date ~~paid to us by our subsidiaries in~~ the ~~PRC~~transferor ~~are~~receives ~~considered income sourced within~~ the ~~PRC~~income, ~~such~~whichever is ~~dividends may be subject to a withholding tax at a rate up to 10%~~earlier.

InWhere a ~~January~~foreign ~~2009,~~investor ~~the~~indirectly ~~State~~transfers ~~Administration~~equity ofinterests ~~Taxation,~~in ora ~~SAT~~Chinese resident enterprise by selling the shares in an offshore holding company, ~~promulgated~~and the ~~Provisional~~latter ~~Measures~~is ~~for~~located in a country or jurisdiction where the ~~Administration~~effective oftax ~~Withholding~~burden ofis ~~Enterprise~~less ~~Income~~than ~~Tax~~12.5% ~~for~~or ~~Non-resident~~where the ~~Enterprises~~offshore ~~(“Measures”),~~income ~~pursuant~~of tohis, ~~which~~her, ~~the~~or ~~entities~~its ~~which~~residents ~~have~~is not taxable, the ~~direct~~foreign ~~obligation~~investor is required to ~~make~~provide the ~~following~~tax ~~payment~~authority in tocharge aof ~~non-~~that Chinese resident enterprise ~~shall~~with be the relevant ~~tax~~information ~~withholders~~within ~~for~~30 ~~such~~days ~~non-resident~~upon ~~enterprise,~~the ~~and~~execution ~~such~~of ~~payment~~the ~~includes: incomes from~~ equity ~~investment~~transfer agreement. ~~(including~~Moreover, ~~dividends~~where ~~and~~a ~~other~~foreign ~~return~~investor onindirectly ~~investment),~~transfers equity interests, ~~rents,~~in ~~royalties,~~a ~~and~~Chinese ~~incomes~~resident ~~from~~enterprise ~~assignment~~through formation of ~~property~~an asorganization ~~well~~and asthere ~~other~~are ~~incomes~~no ~~subject~~reasonable tocommercial purposes such that the enterprise income tax ~~received~~liability byis ~~non-resident~~avoided, ~~enterprises~~the PRC intax ~~China.~~authority ~~Given~~will ~~these~~have ~~Measures,~~the ~~our~~power ~~PRC~~to ~~subsidiaries~~re-assess ~~have~~the annature ~~obligation~~of tothe ~~withhold~~equity ~~income~~transfer ~~tax~~ in ~~respect~~accordance with PRC’s “substance-over-form” principle and deny the existence of the ~~dividends~~offshore ~~paid~~holding tocompany ~~non-resident~~that ~~enterprise~~is ~~investors~~used for tax avoidance purposes.

~~The~~If Circular ~~new~~698 ~~tax~~were ~~law~~to ~~provides~~apply ~~only~~to aus, ~~framework~~it ofwould ~~the~~negatively ~~enterprise~~affect ~~tax provisions~~us, ~~leaving many details on the definitions of numerous terms~~ as ~~well~~it aswould ~~the~~subject ~~interpretation~~us ~~and~~to ~~specific~~additional ~~applications~~taxes, ~~of various provisions unclear~~ and ~~unspecified.~~we ~~Any~~would ~~increase~~be inliable for ~~the~~not ~~combined~~complying ~~company’s~~with ~~tax~~Circular ~~rate~~698 ~~in the future could have a material adverse effect on our financial conditions and results of operations~~earlier.

31Our PRC subsidiaries are obligated to withhold and pay PRC individual income tax on behalf of our employees who are subject to PRC individual income tax.

WeUnder PRC ~~face~~laws, ~~uncertainty~~Ningbo ~~from~~Keyuan, ~~China’s~~Ningbo ~~Circular~~Keyuan onPetrochemicals, ~~Strengthening~~Zhongkexuneng, ~~the~~Keyuan ~~Administration~~Synthetic Rubbers and Guangxi Keyuan are obligated to withhold and pay individual income tax on behalf of ~~Enterprise~~our ~~Income~~employees ~~Tax~~who are subject to PRC individual income tax. If any PRC subsidiary fails to withhold and/or pay such individual income tax in accordance with PRC laws, it may be subject to certain sanctions and other penalties and may become subject to liability under PRC laws. We withheld individual income tax on ~~Non-Resident~~all ~~Enterprises'~~amount ~~Share~~paid ~~Transfer~~to employees, ~~(Circular~~senior ~~698~~management ~~that~~members ~~was~~and ~~released~~outside individual service providers in ~~December~~2014 ~~2009~~and ~~with~~2015. ~~retroactive~~If ~~effect~~we ~~from~~fail ~~January~~to 1follow these regulations in the future, ~~2008~~we may be subject to certain sanctions and other penalties and may become subject to liability under applicable tax laws in China.)

~~The~~In addition, ~~Chinese~~the ~~State~~SAT ~~Administration~~has ofissued ~~Taxation~~several ~~released~~circulars aconcerning ~~circular~~employee ~~(“Circular~~stock ~~698”)~~options. onUnder ~~December~~these 10circulars, ~~2009~~our ~~that~~employees ~~addresses~~working in the ~~transfer~~PRC of(which ~~shares~~could byinclude ~~nonresident~~both ~~companies.~~PRC ~~Circular~~employees ~~698,~~and ~~which~~expatriate isemployees ~~effective~~subject ~~retroactively~~ to ~~January~~PRC 1,individual ~~2008,~~income ~~may~~tax) ~~have~~who aexercise stock ~~significant~~options ~~impact~~will onbe ~~many~~subject ~~companies that use offshore holding companies~~ to ~~invest~~PRC inindividual ~~China~~income tax. ~~Pursuant~~Each toof ~~Circular~~our ~~698,~~PRC ~~where~~subsidiaries ~~the~~has ~~withholding~~obligations ~~agent~~to ~~does~~file ~~not~~documents ~~withhold~~related to inemployee ~~accordance~~stock options with ~~laws~~relevant ortax ~~can’t~~authorities ~~perform~~and ~~the~~withhold ~~withholding~~and ~~obligation,~~pay ~~the~~individual ~~non-resident~~income ~~enterprises~~taxes ~~shall~~for ~~file~~those aemployees ~~tax~~who ~~declaration~~exercise their ~~with~~stock ~~the~~options. ~~PRC~~While tax ~~authority~~authorities ~~located~~may atadvise ~~the~~us ~~place~~that ofour ~~the~~policy ~~resident~~is ~~enterprise whose equity has been transferred~~compliant, ~~within~~they ~~seven~~may ~~days~~also ~~agree~~change ~~the~~their ~~date~~policy, ofand we ~~the~~could ~~equity~~be ~~transfer~~subject ~~provided~~to ~~under~~sanctions ~~the~~or ~~contracts~~penalties.

Where a foreign investor indirectly transfers equity interests in a Chinese resident enterprise by selling the shares in an offshore holding company, and the latter is located in a country or jurisdiction where the effective tax burden is less than 12.5% or where the offshore income of his, her, or its residents is not taxable, the foreign investor is required to provide the tax authority in charge of that Chinese resident enterprise with the relevant information within 30 days of the transfers. Moreover, where a foreign investor indirectly transfers equity interests in a Chinese resident enterprise through an abuse of form of organization and there are no reasonable commercial purposes such that the corporate income tax liability is avoided, the PRC tax authority will have the power to re-assess the nature of the equity transfer in accordance with PRC’s “substance-over-form” principle and deny the existence of the offshore holding company that is used for tax planning purposes.27

There is uncertainty as to the application of Circular 698. For example, while the term "indirectly transfer" is not 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 formally declared or stated how to calculate the effective tax in the country or jurisdiction and to what extent and the process of the disclosure to the tax authority in charge of that Chinese resident enterprise. In addition, there are no formal declarations with regard to how to decide abuse of form of organization and reasonable commercial purpose, which can be utilized by us to balance if our company complies with the Circular 698. As a result, we may become at risk of being taxed under Circular 698 and we may be required to expend valuable resources to comply with Circular 698 or to establish that we should not be taxed under Circular 698, which could have a material adverse effect on our financial condition and results of operations.

Our PRC subsidiaries are obligated to withhold and pay PRC individual income tax on behalf of our employees who are subject to PRC individual income tax. If we fail to withhold or pay such individual income tax in accordance with applicable PRC regulations, we may be subject to certain sanctions and other penalties and may become subject to liability under PRC laws.

Under PRC laws, Ningbo Keyuan and Ningbo Keyuan Petrochemicals are obligated to withhold and pay individual income tax on behalf of our employees who are subject to PRC individual income tax. If any PRC subsidiary fails to withhold and/or pay such individual income tax in accordance with PRC laws, it may be subject to certain sanctions and other penalties and may become subject to liability under PRC laws. We paid employees, senior management members and outside individual service providers cash compensation or awards totaling approximately RMB 4.8 million (approximately $709,000) in Year 2009, 2010 and first two months of 2011 without withholding individual income tax. Though we have stopped such practice and will follow any compensation recommendation from our compensation committee in the future, we may be subject to certain sanctions and other penalties and may become subject to liability under applicable tax laws in China.

In addition, the SAT has issued several circulars concerning employee stock options. Under these circulars, our employees working in the PRC (which could include both PRC employees and expatriate employees subject to PRC individual income tax) who exercise stock options will be subject to PRC individual income tax. Our PRC subsidiaries have obligations to file documents related to employee stock options with relevant tax authorities and withhold and pay individual income taxes for those employees who exercise their stock options. While tax authorities may advise us that our policy is compliant, they may change their policy, and we could be subject to sanctions

Regulations of Overseas Investments and Listings may increase the administrative burden we face and create regulatory uncertainties.

~~On August 8, 2006, six~~ Six PRC regulatory agencies, including the MOFCOM, the China Securities Regulatory Commission (the “CSRC”), the State Asset Supervision and Administration Commission ~~(the “SASAC”)~~, the ~~State Administration of Taxation (the “~~SAT”), the State Administration for Industry and Commerce ~~(the “SAIC”)~~ and the SAFE, amended and released the New M&A Rule, which took effect asin of September 8, 2006 (the “M&A Rule”). This regulation, among other things, includes provisions that ~~purport to~~ require that an ~~offshore company formed for purposes of overseas listing of equity interest in PRC companies and controlled directly or indirectly by PRC companies or individuals (an “~~SPV”) obtain the approval of the CSRC prior to the listing and trading of such SPV’s securities on an overseas stock exchange.

The application of the ~~New~~ M&A Rule with respect to overseas listings of SPVs remains unclear because to our knowledge in practice almost all overseas listings by Chinese companies in recent years, similar to ours, have not secured approval from the CSRC.

It is not clear whether the provisions in the new regulation regarding the offshore listing and trading of the securities of a SPV apply to an offshore company such as us which owns equity interests in Ningbo Keyuan and Ningbo Keyuan Petrochemicals. We believe that the M&A Rules and the CSRC’s approval ~~are~~were not required in the context of the share exchange under our Share ~~transaction~~Exchange in 2010 because (i1) ~~such~~the share exchange iswas a purely foreign related transaction governed by foreign laws, not subject to the jurisdiction of PRC laws and regulations; (ii2) at the time of Share Exchange, we were not an SPV formed or controlled by PRC companies or PRC individuals; (~~iii~~3) Ningbo Keyuan was established as a ~~Sino~~sino-foreign joint venture by means of direct investment rather than by merger or acquisition of an existing PRC domestic company; (iv4) at the time of Share Exchange, we were owned and controlled by foreigners; and (v5) there is no clear requirement in the ~~New~~ M&A Rule that would require an application to be submitted to the MOFCOM or the CSRC for the approval of the listing and trading of our ~~common~~Common ~~stock~~Stock on ~~the~~a U.S. ~~security~~ securities market. However, we cannot be certain that the relevant PRC government agencies, including the CSRC, would reach the same conclusion, and we still cannot rule out the possibility that the CSRC may deem that the transactions effected by the share exchange circumvented the M&A Rules, the PRC ~~Securities~~securities ~~Law~~law and other ~~rules~~regulations and ~~notices~~rules.

~~However, through the Slow Walk Options, we~~ We are indirectly owned or substantially controlled by a PRC ~~individuals~~individual, Mr. Chunfeng Tao~~, Mr~~. ~~Jicun Wang and Mr. Peijun Chen.~~ If the CSRC or another PRC regulatory agency subsequently determines that CSRC’s approval iswas required for the ~~transaction~~Share Exchange, we may face sanctions by ~~CSRC~~the CSRC or another PRC regulatory agency. If this happens, these regulatory agencies may impose fines and penalties on our operations in the PRC, limit our operating privileges in the PRC, delay or restrict the repatriation of the proceeds from financings into the PRC, restrict or prohibit payment or remittance of dividends to us or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our shares. The CSRC or other PRC regulatory agencies may also take actions requiring us, or making it advisable for us, to ~~delay or cancel~~ unwind the transaction.

The M&A Rules, along with foreign exchange regulations discussed ~~in the~~ above ~~subsection~~, will be interpreted or implemented by the relevant government authorities in connection with our future offshore financings or acquisitions, and we cannot predict how they will affect our business development strategy.

There are PRC regulations relating to the establishment of offshore holding companies by PRC residents may subject our PRC resident beneficial owners or our PRC subsidiaries to liability or penalties, limit our ability to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us.

~~In October 2005, SAFE issued the~~ Notice 75 ~~on Issues Relating to the Administration of Foreign Exchange in Fund-raising~~ and ~~Return~~its ~~Investment~~implementation ~~Activities~~rules ~~of Domestic Residents Conducted via Offshore Special Purpose Companies, or SAFE Notice 75, which became effective as of November 1, 2005. SAFE has also~~ issued ~~implemented~~by ~~rules~~the to SAFE ~~Notice 75. SAFE Notice 75 and its implementation rules~~ require PRC residents (including both corporate entities and natural persons) to register with SAFE or its competent local branch in connection with their direct or indirect shareholding in any company outside of China referred to as an “offshore special purpose company” established for the purpose of raising funds from overseas to acquire assets of, or equity interests in, PRC companies. Under SAFE Notice 75, a “special purpose vehicle”, or SPV, refers to an offshore entity established or controlled, directly or indirectly, by PRC residents for the purpose of seeking offshore equity financing using assets or interests owned by such PRC residents in onshore companies. In addition, any PRC resident that is the ~~shareholder~~stockholder of an offshore ~~special~~SPV ~~purpose company~~ is required to amend his or her SAFE registration with the SAFE or its competent local branch, with respect to that offshore ~~special~~SPV ~~purpose company~~ in connection with any of its increase or decrease of capital, transfer of shares, merger, division, equity investment or creation of any security interest over any assets located in China. The SAFE regulations require retroactive approval and registration of direct or indirect investments previously made by PRC residents in offshore ~~special purpose companies~~SPVs. PRC subsidiaries of an offshore ~~special~~SPV ~~purpose company~~ are required to coordinate and supervise the filing of SAFE registrations by the offshore holding company’s ~~shareholders~~stockholders who are PRC residents in a timely manner. In the event that a PRC resident ~~shareholder~~ stockholder with a direct or indirect investment in an offshore parent company fails to obtain the required SAFE approval and make the required registration, the PRC subsidiaries of such offshore parent company may be prohibited from making distributions of profits to the offshore parent and from paying the offshore parent proceeds from any reduction in capital, share transfer or liquidation in respect of the PRC subsidiaries. Further, failure to comply with the various SAFE approval and registration requirements described above, ~~as currently drafted,~~ could result in liability under PRC law for foreign exchange evasion.

3328

There still remain uncertainties as to how certain procedures and requirements under the aforesaid SAFE regulations will be enforced, and it remains unclear how these existing regulations, and any future legislation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant government authorities. Although we have requested PRC residents who, to our knowledge, hold direct or indirect interests in our company to make the necessary applications, filings and amendments as required under the ~~SAFE~~ Notice 75 and other related rules, we do not believe that all of our PRC resident beneficial holders have ~~not~~ completed such approvals and registrations required by the SAFE regulations. We cannot assure you that such PRC residents will ~~be able to~~ complete the necessary approval and registration procedures required by the SAFE regulations. We will attempt to comply, and attempt to ensure that all of our ~~shareholders~~stockholders subject to these rules comply with the relevant requirements. We cannot, however, assure the compliance of all of our China-resident ~~shareholders~~stockholders. Any current or future failure to comply with the relevant requirements could subject us to fines or sanctions imposed by the Chinese government, including restrictions on certain of our subsidiaries’ ability to pay dividends or hinder our investment in those subsidiaries or affect our ownership structure, which could materially and adversely affect our business and prospects.

~~Failure~~We must to comply with PRC regulations regarding the registration requirements for employee ~~stock~~equity ~~ownership~~incentive plans or share option plans ~~may subject the PRC plan participants or us to fines and other legal or administrative sanctions~~.

~~In December 2006,~~ Under the ~~People’s~~current ~~Bank of China promulgated the Administrative Measures of Foreign Exchange Matters for Individuals, which set forth the respective requirements for foreign exchange transactions by individuals (both~~ PRC ~~or non-PRC citizens) under either the current account or the capital account. In January 2007, SAFE issued implementing~~ rules ~~for the Administrative Measures of Foreign Exchange Matters for Individuals~~, ~~which,~~if ~~among other things, specified approval requirements for certain capital account transactions such as~~ a PRC ~~citizen’s~~resident ~~participation~~participates in ~~the~~any ~~employee~~equity ~~stock~~incentive ~~ownership~~plan ~~plans or stock option plans~~ of an overseas publicly-listed company~~. In March 2007~~, ~~SAFE~~a ~~promulgated~~qualified PRC ~~the~~domestic ~~Application~~agent ~~Procedures of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Ownership Plan or Stock Option Plan of Overseas-Listed Company~~must, oramong ~~the~~other ~~Stock Option Rules. Under these rules~~things, ~~PRC~~file ~~citizens~~on ~~who~~behalf ~~participate~~of insuch anparticipant ~~employee stock ownership plan or a stock option plan in~~ an ~~overseas~~application ~~publicly-listed company are required to register~~ with ~~SAFE or its local branch and complete certain other procedures. For participants of an employee stock ownership plan, an overseas custodian bank should be retained by~~ the ~~PRC~~SAFE ~~agent,~~to ~~which~~conduct ~~could be~~ the ~~PRC~~SAFE registration ~~subsidiary~~with ofrespect ~~such overseas publicly-listed company,~~ to ~~hold on trusteeship all overseas assets held by~~ such ~~participants~~equity ~~under~~incentive ~~the employee share ownership~~ plan. Inand ~~the~~obtain ~~case~~approval offor aan ~~stock~~annual ~~option~~allowance ~~plan,~~with ~~the~~respect ~~PRC agent is required~~ to ~~retain a financial institution with stock brokerage qualification at~~ the ~~place~~purchase of ~~where~~foreign ~~the~~currency ~~overseas publicly-listed company is listed or a qualified institution designated by the overseas publicly-listed company to handle matters~~ in connection with the exercise or sale of stock options ~~for~~or ~~the~~ stock ~~option~~such ~~plan~~participant ~~participants~~holds. ~~For~~Such ~~participants~~participating PRC ~~who~~residents' ~~had~~foreign ~~already~~exchange ~~participated~~income inreceived anfrom ~~employee~~the ~~stock~~sale ~~ownership~~of ~~plan or~~ stock ~~option~~and ~~plan~~dividends ~~before~~distributed ~~the~~by ~~date of~~ the ~~Stock~~overseas ~~Option~~publicly-listed company ~~Rules,~~must ~~the~~be ~~Stock~~fully ~~Option~~remitted ~~Rules~~into ~~require~~a ~~their~~ PRC ~~employers~~collective orforeign ~~PRC~~currency ~~agents~~account toopened ~~complete~~and ~~the~~managed ~~relevant~~by ~~formalities~~the ~~within~~PRC ~~three~~agent ~~months~~before ofdistribution to ~~the~~such ~~date of this rule~~participants.

34Further, domestic companies that implement employee share option programs shall file the employee share option plans and other relevant documents with the local tax authorities and withhold taxes from the PRC employees in connection with the PRC individual income tax.

~~Further,~~We and aour ~~notice~~PRC ~~concerning~~citizen ~~the~~employees ~~individual~~who ~~income~~participate ~~tax~~in onour ~~earnings from~~ employee ~~share~~stock ~~options~~incentive ~~jointly~~plan, ~~issued~~which bywe ~~Ministry~~adopted ofin ~~Finance~~2010, orare ~~the~~subject ~~MOF,~~to ~~and~~these regulations. ~~the~~We ~~State Administration of Taxation, or the SAT,~~ and ~~its~~our ~~implementing~~PRC ~~rules, provide that domestic companies that implement employee share~~ option ~~programs~~grantees ~~shall~~have ~~(a)~~not ~~file~~completed the ~~employee~~registrations ~~share~~under ~~option~~these ~~plans~~regulations. Though ~~and~~the ~~other~~options ~~relevant~~issued ~~documents~~under to the ~~local~~incentive ~~tax~~plan ~~authorities~~have ~~having~~been ~~jurisdiction~~forfeited ~~over~~or ~~them~~expired ~~before~~and ~~implementing~~none ~~such~~of ~~employee~~them ~~share~~has ~~option~~been ~~plans;~~exercised, we ~~(b)~~cannot ~~file~~assure ~~share~~you ~~option~~that ~~exercise~~we ~~notices~~ and ~~other~~our ~~relevant~~PRC ~~documents~~option ~~with~~grantees ~~the~~will ~~local~~be ~~tax~~able ~~authorities~~to ~~having~~complete ~~jurisdiction over them before exercise by~~ the ~~employees~~required ofregistrations. ~~the~~Any ~~share~~current ~~options,~~or ~~and~~future failure ~~clarify~~to ~~whether~~comply ~~the~~with ~~shares issuable under~~ the ~~employee~~relevant ~~share~~requirements ~~options~~could ~~mentioned~~subject inus ~~the~~to ~~notice~~fines ~~are~~or ~~the~~sanctions ~~shares~~imposed ofby ~~publicly listed companies; and (c) withhold taxes from~~ the ~~PRC~~Chinese ~~employees~~government, inwhich could ~~connection~~adversely ~~with~~affect ~~the~~our ~~PRC~~business ~~individual~~and ~~income tax~~prospects.

We must ~~and~~comply ~~our~~with PRC ~~citizen~~laws ~~employees who participate in the employee stock incentive plan, which we adopted in 2010, will be subject to these regulations. We~~ and ~~our PRC option grantees have not completed the registrations under these~~ regulations. Werelating ~~cannot assure you that we and our PRC option grantees will be able~~ to ~~complete~~ the ~~required~~environmental ~~registrations.~~protection ~~Any current or future failure to comply with the relevant requirements could subject us to fines or sanctions imposed by the Chinese government, which could adversely affect our business~~ and ~~prospects~~safety.

~~Failure~~The Chinese togovernment ~~comply~~has ~~with~~been ~~PRC~~adopting ~~laws~~increasingly ~~and~~stringent regulations relating to the safety and environmental protection, and our business depends upon compliance with these regulations and requirements. Our current manufacturing facilities have passed an as-build acceptance inspection and we obtained relevant safety inproduction permits and approvals from a variety of government authorities upon completion of such inspection. The as-build inspection is an inspection conducted by the local government to make sure that a company meets all the conditions for normal production. ~~requirements~~However, inthere ~~China~~is ~~may~~no ~~result~~assurance inthat ~~severe~~we ~~penalties~~will be able to obtain or renew all such permits or approvals, which are subject to our fulfillment of the standards and ~~liabilities~~requirements set out by the regulatory authorities.

The Chinese government has been adopting increasingly stringent regulations relating to the safety and environmental protection, and our business depends upon compliance with the aforesaid regulations and requirements. We completed an as-build acceptance inspection and we obtained relevant safety production permits and approvals from a variety of government authorities upon completion of the aforesaid inspection. The as-build inspection was conducted by the local government to make sure that a company meets all the conditions for normal production. We obtained all the necessary permits and approvals including environmental protection, firefighting and safety production before our trial production and submitted the application for as-build acceptance inspection at the end of 2009. The as-build acceptance inspection needs to be conducted within 12 months after the submission of application and we received the complete set of permits and approvals from relevant government authorities on December 16, 2010. However, there is no assurance that we will obtain or renew all such permits or approvals, which are subject to our fulfillment of the standards and requirements set out by the regulatory authorities. If we fail to pass the as-build acceptance inspection or obtain required licenses, we may be subject to fines, penalties or legal proceedings. Our operations at our production facilities are subject to periodic checks by the relevant authorities in the PRC and they have the power to take action against us, impose fines, withdraw or suspend our relevant licenses or activities or impose other penalties if we fail to comply with relevant regulations, in the event of which our business operations may be adversely affected. In addition, any change in the scope or application of these laws and regulations may limit our production capacity or increase our cost of operation and could therefore have an adverse effect on our business operations, financial condition and operating results. Our failure to comply with these laws and regulations could result in fines, penalties or legal proceedings. There can be no assurance that the Chinese government will not impose additional or stricter laws or regulations, compliance with which may cause us to incur significant capital expenditures, which it may not be able to pass on to our customers.

In September 2011, we completed construction of an SBS production facility which we started in September 2010. The SBS facility was built on part of 1.2 million square feet of land for which we obtained the use right in August 2010. To ensure compliance with national environmental regulation and working safety protection regulations, we underwent an environmental assessment which was conducted by the government environmental bureau. The preliminary environmental assessment permit was obtained in 2009 to enable us to start construction. We constructed our facility based on a design system in compliance with environmental protection, including gas discharge and waste water treatment and recycling. As a result, we passed the environmental assessment in August 2012. However, there can be no assurance that the Chinese government will not impose additional or stricter laws or regulations, compliance with which may cause us to incur significant capital expenditures, which we may not be able to pass on to our customers. Our operations at our production facilities are subject to periodic checks by the relevant authorities in the PRC and they have the power to take action against us, impose fines, withdraw or suspend our relevant licenses or activities or impose other penalties if we fail to comply with relevant regulations, in the event of which our business operations may be adversely affected.29

Risks Associated With Doing Business in China

~~There~~In addition to the risks related to the regulation of our business, there are substantial risks generally associated with doing business in China, as set forth in the following risk factors.

Our operations and assets in China are subject to significant political, economic, legal, regulatory and ~~economic~~tax structural uncertainties.

~~Changes~~Our current inoperation ~~PRC~~is ~~laws~~located ~~and~~in ~~regulations~~Ningbo, orChina ~~their~~and ~~interpretation,~~virtually orall ~~the imposition~~ of ~~confiscatory~~our ~~taxation,~~assets ~~restrictions~~are onlocated ~~currency~~in ~~conversion,~~China. ~~imports~~We ~~and~~generate ~~sources~~our ofsales ~~supply,~~revenue substantially ~~devaluations~~from ofcustomers ~~currency~~located orin ~~the~~China. ~~nationalization~~Our orresults ~~other expropriation~~ of ~~private enterprises could have a material adverse effect on our business~~operations, ~~results~~financial state of ~~operations~~affairs and ~~financial~~future ~~condition.~~growth ~~Under~~are, ~~its~~to a ~~current~~significant ~~leadership~~degree, ~~the~~subject ~~Chinese~~to ~~government~~China’s ~~has been pursuing~~ economic, ~~reform~~political ~~policies~~and ~~that~~legal ~~encourage~~development ~~private economic activity~~ and ~~greater~~related ~~economic decentralization~~uncertainties. ~~There~~Our isoperations and noresults ~~assurance,~~could ~~however,~~be ~~that~~materially ~~the~~affected ~~Chinese~~by ~~government~~a ~~will~~number ~~continue~~of tofactors, ~~pursue these policies~~including, orbut ~~that it will~~ not ~~significantly~~limited ~~alter these policies from time~~ to ~~time without notice.~~:

We● ~~derive~~Changes ~~all~~in policies by the Chinese government resulting in changes in laws or regulations or the interpretation of ~~our~~laws ~~sales~~or ~~from~~regulations; ~~China~~● Changes in taxation; ● Changes in employment restrictions; ● Import duties; and ● Currency revaluation.

Substantially all of our sales are generated from China. We anticipate that sales of our products in China will continue to represent a substantial proportion of our total sales in the near future. Any significant decline in the condition of the PRC economy could adversely affect consumer demand of our products, among other things, which in turn would have a material adverse effect on our business and financial condition.

Currency fluctuations and restrictions on currency exchange may adversely affect our business, including limiting our ability to convert Chinese Renminbi into foreign currencies and, if Chinese Renminbi were to decline in value, reducing our revenue in U.S. dollar terms.

Our reporting currency is the U.S. dollar and our operations in China use their local currency as their functional currencies. Substantially all of our revenue and expenses are in Chinese Renminbi. We are subject to the effects of exchange rate fluctuations with respect to any of these currencies. For example, the value of the Renminbi 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. Since 1994, the official exchange rate for the conversion of Renminbi to the U.S. dollar had generally been stable and the Renminbi had appreciated slightly against the U.S. dollar. However, on July 21, 2005, the Chinese government changed its policy of pegging the value of Chinese Renminbi to the U.S. dollar. Under the new policy, Chinese Renminbi may fluctuate within a narrow and managed band against a basket of certain foreign currencies. As a result of this policy change, Chinese Renminbi depreciated approximately 0.06% against the U.S. dollar in 2009 and appreciated approximately 3.57% in 2010. Chinese Renminbi further appreciated approximately 4.86% in 2011. It is possible that the Chinese government could adopt a more flexible currency policy, which could result in more significant fluctuation of Chinese Renminbi against the U.S. dollar. We can offer no assurance that Chinese Renminbi will be stable against the U.S. dollar or any other foreign currency.

The statements of our 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 could result in reduced revenue, operating expenses and net income for our international operations. Similarly, to the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign currency denominated transactions could result in increased revenue, operating expenses and net income for our international operations. We are also exposed to foreign exchange rate fluctuations as we convert the financial statements of our foreign subsidiaries into U.S. dollars in consolidation. If there is a change in foreign currency exchange rates, the conversion of the foreign subsidiaries’ financial statements into U.S. dollars will lead to a translation gain or loss which is recorded as a component of other comprehensive income. In addition, we have certain assets and liabilities that are denominated in currencies other than the relevant entity’s functional currency. Changes in the functional currency value of these assets and liabilities create fluctuations that will lead to a transaction gain or loss. 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 Chinese Renminbi into foreign currency for current account items, conversion of Chinese Renminbi into foreign exchange for capital items, such as foreign direct investment, loans or securities, requires the approval of SAFE which is under the authority of the People’s Bank of China. These approvals, however, do not guarantee the availability of foreign currency conversion. 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 Chinese Renminbi in the future. Because a significant amount of our future revenue may be in the form of Chinese Renminbi, our inability to obtain the requisite approvals or any future restrictions on currency exchanges could limit our ability to utilize revenue generated in Chinese Renminbi to fund our business activities outside of China, or to repay foreign currency obligations, including our debt obligations, which would have a material adverse effect on our financial condition and results of operations.

We may have limited legal recourse under PRC laws if disputes arise under our contracts with third parties.

The Chinese government has enacted laws and regulations dealing with matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, their experience in implementing, interpreting and enforcing these laws and regulations is limited, and our ability to enforce commercial claims or to resolve commercial disputes is unpredictable. If our new business ventures are unsuccessful, or other adverse circumstances arise from these transactions, we face the risk that the parties to these ventures may seek ways to terminate the transactions, or, may hinder or prevent us from accessing important information regarding the financial and business operations of these acquired companies. The resolution of these matters may be subject to the exercise of considerable discretion by agencies of the Chinese government, and forces unrelated to the legal merits of a particular matter or dispute may influence their determination. Any rights we may have to specific performance, or to seek an injunction under PRC law, in either of these cases, are severely limited, and without a means of recourse by virtue of the Chinese legal system, we may be unable to prevent these situations from occurring. The occurrence of any such events could have a material adverse effect on our business, financial condition and results of operations.

Because our funds are held in banks in uninsured PRC bank accounts, the failure of any bank in which we deposit our funds could affect our ability to continue our business.

Funds on deposit at banks and other financial institutions in the PRC are often uninsured. A significant portion of our assets are in the form of cash deposited with banks in the PRC, and in the event of a bank failure, we may not have access to our funds on deposit. Depending upon the amount of money we maintain in a bank that fails, our inability to have access to our cash could impair our operations, and, if we are not able to access funds to pay our suppliers, employees and other creditors, we may be unable to continue in business.

Our business could be severely harmed if the Chinese government changes its policies, laws, regulations, tax structure or its current interpretations of its laws, rules and regulations, relating to our operations in China.

Our business is located in Ningbo, China and virtually all of our assets are located in China. We generate our sales revenue only from customers located in China. Our results of operations, financial state of affairs and future growth are, to a significant degree, subject to China’s economic, political and legal development and related uncertainties. Our operations and results could be materially affected by a number of factors, including, but not limited to:

● Changes in policies by the Chinese government resulting in changes in laws or regulations or the interpretation of laws or regulations, ● changes in taxation,

● changes in employment restrictions, ● import duties, and ● currency revaluation.

Over the past several years, the Chinese government has pursued economic reform policies including the encouragement of private economic activities and greater economic decentralization. If the Chinese government does not continue to pursue its present policies that encourage foreign investment and operations in China, or if these policies are either not successful or are significantly altered, then our business could be harmed. Following the Chinese government’s policy of privatizing many state-owned enterprises, the Chinese government has attempted to augment its revenues through increased tax collection. It also exercises significant control over China’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Continued efforts to increase tax revenues could result in increased taxation expenses being incurred by us. Economic development may be limited as well by the imposition of austerity measures intended to reduce inflation, the inadequate development of infrastructure and the potential unavailability of adequate power and water supplies, transportation and communications. In addition, the Chinese government continues to play a significant role in regulating industry by imposing industrial policies.

~~Failure~~We derive tosubstantially ~~comply~~all ~~with~~of ~~the~~our ~~U.S.~~sales ~~foreign~~from ~~corrupt practices act and Chinese anti-corruption laws could subject us to penalties and other adverse consequences~~China.

~~Our~~Substantially all ~~executive~~of ~~officers,~~our ~~employees~~sales ~~and other agents~~ are ~~subject~~generated tofrom ~~anti-corruption and anti-bribery laws including~~ China’s. ~~anti-corruption~~We ~~laws~~anticipate ~~and~~that ~~the~~sales ~~U.S.~~of ~~Foreign~~our ~~Corrupt~~products ~~Practices~~in ~~Act,~~China orwill ~~the~~continue ~~FCPA,~~to ~~which~~represent ~~generally~~a ~~prohibits~~substantial proportion ~~United~~of ~~States~~our ~~companies~~total ~~from~~sales ~~engaging~~ in ~~bribery~~the ornear ~~other~~future. ~~prohibited~~Any ~~payments~~significant todecline ~~foreign~~in ~~officials for~~ the ~~purpose~~condition of ~~obtaining~~the orPRC ~~retaining~~economy ~~business.~~could, Inamong ~~addition~~other things, weadversely ~~are~~affect ~~required~~consumer todemand ~~maintain~~of ~~records that accurately and fairly represent~~ our ~~transactions and have an adequate system of internal accounting controls. Foreign companies~~products, ~~including~~among ~~some~~other ~~that may compete with us~~things, ~~are~~which ~~not~~in ~~subject~~turn towould ~~these prohibitions, and therefore may~~ have a ~~competitive~~material ~~advantage~~adverse ~~over~~effect on ~~us.~~our ~~The~~business ~~PRC also strictly prohibits bribery of government officials. However, corruption, extortion, bribery, pay-offs, theft~~ and ~~other~~financial ~~fraudulent practices occur from time-to-time in the PRC~~condition.

While we intend to implement measures to ensure compliance with the FCPA and China’s anti-corruption laws by all individuals involved with our company, our employees or other agents may engage in such conduct for which we might be held responsible. Since we became a U.S. public company, we have implemented strict requirements to preclude payments to government officials and limits on the amount employees can spend on gifts and entertaining clients. Although prior to our becoming a U.S public company we had given culturally traditional gifts to government officials during Spring Festival and other Chinese traditional holidays, we believe the amounts of such gifts We are ~~below~~subject ~~the amounts that generally trigger criminal liability under PRC law. The gifts were not made with the intent~~ to ~~bribe~~currency orfluctuations ~~wrongfully influence any such officials. However, if our employees or other agents are found to have engaged in practices that violate either U.S or PRC laws, we could suffer severe penalties~~ and ~~other~~restrictions ~~consequences that may have a material adverse effect~~ on ~~our~~currency ~~business, financial condition and results of operations~~exchange. In addition, our brand and reputation, our sales activities or our stock price could be adversely affected if we become the target of any negative publicity as a result of actions taken by our employees or other agents.

~~Changes~~Our reporting currency is the U.S. dollar and our operations in ~~foreign~~China ~~exchange~~use ~~regulations~~China’s local currency as its functional currency. Substantially all of our revenue and expenses are in RMB. We are subject to the ~~PRC~~effects ~~may~~of ~~affect~~exchange ~~our~~rate ~~ability~~fluctuations with respect to ~~pay~~this ~~dividends~~currency. For example, the value of 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 ~~foreign~~the ~~currency~~local ormarket. ~~conduct~~From ~~other~~1994 ~~foreign~~to mid-2005, the official exchange ~~business~~rate for the conversion of RMB to the U.S. dollar had generally been stable and RMB had appreciated slightly against the U.S. dollar. In July 2005, the Chinese government changed its policy of pegging the value of RMB to the U.S. dollar. Under this policy, RMB may fluctuate within a narrow and managed band against a basket of certain foreign currencies. As a result of this policy change, RMB appreciated approximately 4.86% in 2011. RMB further appreciated approximately 0.244% in 2012, appreciated approximately 3.00% in 2013, depreciated approximately 0.33% in 2014, depreciated approximately 6.02% in 2015, and appreciated approximately 0.65% in the first quarter of 2016.

The Renminbi is not a freely convertible currency currently, and the restrictions on currency exchanges may limit our ability to use revenues generated in Renminbi to fund our business activities outside the PRC or to make dividends or other payments in United States dollars. The PRC government strictly regulates conversion of Renminbi into foreign currencies. Over the years, foreign exchange regulations in the PRC have significantly reduced the government’s control over routine foreign exchange transactions under current accounts. In the PRC, SAFE regulates the conversion of the Renminbi into foreign currencies. Pursuant to applicable PRC laws and regulations, foreign invested enterprises incorporated in the PRC are required to apply for “Foreign Exchange Registration Certificates.” Currently, conversion within the scope of the “current account” (e.g. remittance of foreign currencies for payment of dividends, etc.) can be effected without requiring the approval of SAFE. However, conversion of currency in the “capital account” (e.g. for capital items such as direct investments, loans, securities, etc.) still requires the approval of SAFE.30

38It is possible that the Chinese government could adopt a more flexible currency policy, which could result in more significant fluctuations of RMB against the U.S. dollar. We can offer no assurance that RMB will be stable against the U.S. dollar or any other foreign currency.

The statements ~~Chinese~~of ~~government~~our ~~exerts~~operations ~~substantial~~are ~~influence~~translated ~~over~~into U.S. dollars at the ~~manner~~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 could result in reduced revenue, operating expenses and net income for our operations. Similarly, to the extent U.S. dollar weakens against foreign currencies, the translation of these foreign currency denominated transactions could result in increased revenue, operating expenses and net income for our operations. We are also exposed to foreign exchange rate fluctuations as we convert the financial statements of our foreign subsidiaries into U.S. dollars in consolidation. If there is a change in foreign currency exchange rates, the conversion of the foreign subsidiaries’ financial statements into U.S. dollars will lead to a translation gain or loss, which is recorded as a component of other comprehensive income. In addition, we ~~must~~have ~~conduct~~certain assets and liabilities that are denominated in currencies other than the relevant entity’s functional currency. Changes in the functional currency value of these assets and liabilities create fluctuations that will lead to a transaction gain or loss. We have not entered into agreements or purchased instruments to hedge our ~~business~~exchange ~~activities~~rate risks.

~~China~~Although Chinese ~~has~~governmental ~~only~~policies ~~recently~~were ~~permitted~~introduced ~~provincial~~in ~~and~~1996 ~~local~~to ~~economic~~allow ~~autonomy~~the ~~and~~convertibility ~~private~~of ~~economic~~RMB ~~activities,~~into ~~and,~~foreign ascurrency afor ~~result~~current account items, weconversion ~~are~~of ~~dependent~~RMB oninto ~~our~~foreign ~~relationship~~exchange ~~with~~for ~~the~~capital ~~local~~items, ~~government~~such inas ~~the~~foreign ~~province~~direct ininvestment, ~~which~~loans weor ~~operate~~securities, ~~our~~requires the ~~business.~~approval ~~Chinese~~of ~~government~~SAFE, ~~has~~which ~~exercised~~is ~~and~~under ~~continues~~the toauthority ~~exercise substantial control over virtually every sector~~ of the ~~Chinese~~People’s ~~economy~~Bank ~~through~~of ~~regulation and state ownership~~China. ~~Our~~These ~~ability~~approvals, tohowever, ~~operate~~do innot ~~China~~guarantee the ~~may~~availability beof ~~harmed~~foreign bycurrency ~~changes~~conversion. inWe ~~its~~have ~~laws~~not and ~~regulations,~~cannot ~~including~~be ~~those~~sure ~~relating~~that towe ~~taxation,~~will ~~environmental~~be ~~regulations,~~able ~~land~~to ~~use~~obtain ~~rights,~~all ~~property~~required ~~and~~conversion approvals ~~other~~for ~~matters. We believe that~~ our operations inor ~~China~~that ~~are~~Chinese inregulatory ~~material~~authorities ~~compliance~~will ~~with~~not ~~all~~impose ~~applicable~~greater ~~legal~~restrictions ~~and~~on ~~regulatory requirements. However,~~ the ~~central or local governments~~ convertibility of ~~these~~RMB ~~jurisdictions~~in ~~may~~the ~~impose~~future. ~~new,~~Because ~~stricter~~a ~~regulations~~significant oramount ~~interpretations~~ of ~~existing~~our ~~regulations~~future ~~that~~revenue ~~would~~may ~~require~~be ~~additional~~in ~~expenditures~~the ~~and~~form ~~efforts~~of onRMB, our ~~part~~inability to ~~ensure~~obtain ~~our~~the requisite ~~compliance~~approvals ~~with such regulations~~ or ~~interpretations.~~any ~~Accordingly,~~future ~~government~~restrictions ~~actions~~on incurrency ~~the~~exchanges ~~future,~~could ~~including~~limit ~~any~~our ~~decision~~ability ~~not~~ to ~~continue~~utilize torevenue ~~support~~generated ~~recent~~in ~~economic reforms and~~ RMB to ~~return~~fund toour abusiness ~~more~~activities ~~centrally~~outside ~~planned~~of ~~economy~~China, or ~~regional~~to orrepay ~~local~~foreign ~~variations~~currency inobligations, ~~the~~including ~~implementation~~our ofdebt ~~economic policies~~obligations, ~~could~~which would have a ~~significant~~material adverse effect on ~~economic~~our ~~conditions~~financial incondition ~~China or particular regions thereof,~~ and ~~could~~results ~~require us to divest ourselves~~ of ~~any interest we then hold in Chinese properties~~operations.

~~PRC~~We may ~~employment~~have ~~contract~~limited ~~law~~legal ~~and~~recourse ~~increases~~under inPRC ~~the~~laws ~~labor~~if ~~costs~~disputes inarise ~~China~~under ~~may hurt~~ our ~~business~~contracts ~~and~~with ~~profitability~~third parties.

A The Chinese ~~employment~~government ~~contract~~has ~~law~~enacted ~~that~~laws ~~became~~and ~~effective~~regulations ondealing ~~January~~with 1matters such as corporate organization and governance, ~~2008~~foreign investment, ~~imposes~~commerce, ~~more~~taxation ~~stringent~~and ~~requirements~~trade. onHowever, ~~employers~~their experience in ~~relation~~implementing, tointerpreting ~~entry~~and ~~into~~enforcing ~~fixed-term~~these ~~employment~~laws ~~contracts~~and regulations is limited, ~~recruitment~~and ofour ~~temporary~~ability ~~employees~~to ~~and~~enforce ~~dismissal~~commercial ofclaims ~~employees.~~or Into ~~addition,~~resolve ~~under~~commercial ~~the~~disputes ~~Regulations~~is onunpredictable. ~~Paid~~If ~~Annual~~our business ~~Leave~~ventures ~~for~~are ~~Employees~~unsuccessful, ~~which~~or ~~also~~other ~~became~~adverse ~~effective~~circumstances onarise ~~January~~from 1,these ~~2008~~transactions, ~~employees~~we ~~who~~face ~~have~~the ~~worked~~risk ~~continuously~~that ~~for~~the ~~more~~parties to ~~than~~these ~~one~~ventures ~~year~~may ~~are~~seek ~~entitled~~ways to aterminate ~~paid~~the ~~vacation~~transactions, ~~ranging~~or, ~~from~~may 5hinder toor 15prevent ~~days,~~us ~~depending~~from onaccessing important information regarding the ~~length~~financial ofand ~~the~~business ~~employee’s~~operations ~~service~~of these companies. ~~Employees~~The ~~who~~resolution ~~waive~~of ~~such~~these ~~vacation~~matters ~~entitlements~~may atbe subject to the ~~request~~exercise of considerable discretion by agencies of the ~~employer~~Chinese ~~will~~government, beand ~~compensated~~forces ~~for~~unrelated ~~three~~to ~~times~~the ~~their~~legal ~~normal~~merits ~~daily~~of ~~salaries~~a ~~for~~particular ~~each~~matter or ~~vacation~~dispute ~~day~~may soinfluence ~~waived~~their determination. AsAny arights ~~result~~we ofmay ~~the~~have ~~new~~to specific performance, or to seek an injunction under PRC law, ~~and~~in ~~regulations~~either of these cases, ~~our~~are ~~labor~~severely ~~costs~~limited, and without a means of recourse by virtue of the Chinese legal system, we may ~~increase~~be unable to prevent these situations from occurring. ~~There~~The isoccurrence noof ~~assurance~~any ~~that~~such ~~disputes,~~events ~~work~~could ~~stoppages~~have ora ~~strikes~~material ~~will~~adverse ~~not~~effect on ~~arise~~our inbusiness, ~~the~~financial ~~future~~condition and results of operations.

Increases in the labor costs or future disputes with our employees could damage our business, financial condition or operating results. According to PRC labor laws, the employer shall be responsible to deal with and pay social insurances and housing Our funds ~~for all of its employees based on the actual salary of the employees. In addition, as required by PRC regulations, we participate in various employee benefit plans that~~ are ~~organized~~held by municipal and provincial governments, including pension, work-related injury benefits, maternity insurance, medical and unemployment benefit plans. We are required under PRC laws to make contributions to the employee benefit plans at specified percentages of the salaries, bonuses and certain allowances of our employees, up to a maximum amount specified by the local government from time to time. Members of the retirement plan are entitled to a pension equal to a fixed proportion of the salary prevailing at the member’s retirement date. There is no guarantee that we and our subsidiaries will be able to comply with the relevant requirements. Failure to comply with the various PRC Labor Laws and regulation requirements described above could result in ~~liability~~uninsured ~~under~~ PRC ~~law.~~bank accounts

~~Future~~Funds on ~~inflation~~deposit at banks and other financial institutions in ~~China~~the ~~may~~PRC ~~inhibit~~are often uninsured. A significant portion of our ~~ability~~assets are in the form of cash deposited with banks in the PRC, and in the event of a bank failure, we may not have access to ~~conduct~~our ~~business~~funds on deposit. Depending upon the amount of money we maintain in ~~China~~a bank that fails, our inability to have access to our cash could impair our operations, and, if we are not able to access funds to pay our suppliers, employees and other creditors, we may be unable to continue our business.

We may fail to comply with the U.S. Foreign Corrupt Practices Act and Chinese anti-corruption laws.

Our executive officers, employees and other agents are subject to anti-corruption and anti-bribery laws including China’s anti-corruption laws and the U.S. Foreign Corrupt Practices Act (“FCPA”), which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. In addition, we are required to maintain records that accurately and fairly represent our transactions and have an adequate system of internal accounting controls. Foreign companies, including some that may compete with us, are not subject to these prohibitions, and therefore may have a competitive advantage over us. The PRC also strictly prohibits bribery of government officials. However, corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in the PRC.

While we intend to implement measures to ensure compliance with the FCPA and China’s anti-corruption laws by all individuals involved with our Company, our employees or other agents may engage in such conduct for which we might be held responsible. Since we became a U.S. public company, we have implemented strict requirements to preclude payments to government officials and limits on the amount employees can spend on gifts and entertaining clients. Although prior to our becoming a U.S. public company we had given culturally traditional gifts to government officials during Spring Festival and other Chinese traditional holidays, we believe the amounts of such gifts are below the amounts that generally trigger criminal liability under PRC law. The gifts were not made with the intent to bribe or wrongfully influence any such officials. However, if our employees or other agents are found to have engaged in practices that violate either U.S. or PRC laws, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations. In addition, our brand and reputation, our sales activities or our stock price could be adversely affected if we become the target of any negative publicity as a result of actions taken by our employees or other agents.

Foreign exchange regulations in the PRC may change.

RMB is not a freely convertible currency, and the restrictions on currency exchanges may limit our ability to use revenues generated in RMB to fund our business activities outside the PRC or to make dividends or other payments in United States dollars. The PRC government strictly regulates conversion of RMB into foreign currencies. Over the years, foreign exchange regulations in the PRC have significantly reduced the government’s control over routine foreign exchange transactions under current accounts. In the PRC, SAFE regulates the conversion of RMB into foreign currencies. Pursuant to applicable PRC laws and regulations, FIEs incorporated in the PRC are required to apply for “Foreign Exchange Registration Certificates.” Currently, conversion within the scope of the “current account” (e.g. remittance of foreign currencies for payment of dividends) can be effected without requiring the approval of the SAFE. However, conversion of currency in the “capital account” (e.g. for capital items such as direct investments, loans and securities) still requires the approval of the SAFE. If we don’t comply with these requirements, it could negatively affect our business, and we can be subject to fines or sanctions imposed by the Chinese government.

We are subject to PRC employment contract law and increases in the labor costs in China.

Under current PRC employment law, temporary employment cannot exceed more than 10% of the employment of a company. In addition, employees who have worked continuously for more than one year are entitled to a paid vacation ranging from 5 to 15 days, depending on the length of the employee’s service. Employees who waive such vacation entitlements at the request of the employer will be compensated for three times their normal daily salaries for each vacation day so waived. As a result, our labor costs increased and may continue to increase.

Increases in the labor costs or future disputes with our employees could damage our business, financial condition or operating results. According to PRC labor laws, the employer is responsible to deal with and pay social insurances and housing funds for all of its employees based on the actual salary of the employees. In addition, as required by PRC regulations, we participate in various employee benefit plans that are organized by municipal and provincial governments, including pension, work-related injury benefits, maternity insurance, medical and unemployment benefit plans. We are required under PRC laws to make contributions to the employee benefit plans at specified percentages of the salaries, bonuses and certain allowances of our employees, up to a maximum amount specified by the local government from time to time. Members of the retirement plan are entitled to a pension equal to a fixed proportion of the salary prevailing at the member’s retirement date. There is no guarantee that we and our subsidiaries will be able to comply with the relevant requirements. Failure to comply with the various PRC labor laws and regulation requirements described above can result in liability under PRC law.

There may be future inflation in China.

In recent years, the Chinese economy has experienced periods of rapid expansion and high rates of inflation. These factors have led to the adoption by the Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit, or regulate growth and contain inflation. High inflation may in the future cause the Chinese government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China, and thereby harm the market for our products.

We may have difficulty establishing adequate management, legal and financial controls in the PRC.

We may have difficulty in hiring and retaining a sufficient number of qualified employees to work in the PRC. As a result, or for other reasons, we may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet ~~Western~~ western standards. ~~We may have difficulty establishing adequate management, legal and financial controls in the PRC.~~ Please refer to Item 9A. Controls and Procedures ~~on page 58~~ for additional information on this matter.

You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China based on United States or other foreign laws, against us and our management.

We conduct substantially all of our operations in China and substantially all of our assets are located in China. In addition, ~~some of~~ our directors and executive officers reside within China. As a result, it may not be possible to effect service of process within the United States or elsewhere outside China upon ~~some of~~ our directors and senior executive officers, including with respect to matters arising under U.S. federal securities laws or applicable state securities laws. It would also be difficult for investors to bring an original lawsuit against us or our directors or executive officers before a Chinese court based on U.S. federal securities laws or otherwise. Moreover, China does not have treaties with the United States or many other countries providing for the reciprocal recognition and enforcement of judgment of courts.

~~Because~~ Chinese law ~~laws~~governs ~~govern~~ almost all of our business’ material agreements~~, we may not be able to enforce our rights within the PRC or elsewhere, which could result in a significant loss of business, business opportunities or capital~~.

The Chinese legal system is similar to a civil law system based on written statutes. Unlike common law systems, it is a system in which decided legal cases have little precedential value. Although legislation in the PRC over the ~~past 26~~ years has significantly improved the protection ~~afforded~~ to various forms of foreign investment and contractual arrangements in the PRC, these laws, regulations and legal requirements are relatively new. Due to the limited volume of published judicial decisions, their non-binding nature, the short history since their enactments, the discrete understanding of the judges or government agencies of the same legal provision, inconsistent professional abilities of the judicators, and the inclination to protect local interest in the court room, interpretation and enforcement of PRC laws and regulations involve uncertainties, which ~~could~~can limit the legal protection available to us, and foreign investors, including ~~you~~our stockholders. The inability to enforce or obtain a remedy under any of our future agreements ~~could~~can result in a significant loss of business, business opportunities or capital and ~~could~~can have a material adverse impact on our business, prospects, financial condition, and results of operations. In addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until ~~some~~sometime ~~time~~ after the violation. In addition, any litigation in the PRC, regardless of outcome, may be protracted and result in substantial costs and diversion of resources and management attention regardless of whether we are successful.

Investors’ attitudes towards Chinese companies will affect us irrespective of our actions.

The market prices for shares of companies with operations in China have experienced volatility that often has been unrelated to the operating performance of those companies or the broader stock market. The securities of some China-based companies that have listed their securities in the United States have experienced significant volatility in recent years, including, in some cases, substantial declines in the trading prices. The trading performances of these companies’ securities after their offerings may affect the attitudes of investors towards Chinese companies listed in the United States in general, which consequently may impact the trading performance of our securities, regardless of our actual operating performance. In addition, any negative news or perceptions about inadequate corporate governance practices or fraudulent accounting, corporate structure or other matters of other Chinese companies may also negatively affect the attitudes of investors towards Chinese companies in general, including us, regardless of whether we have engaged in any inappropriate activities.

We are not insured against all of the operating risks to which our business is exposed, and our coverage where we have it, may be insufficient to cover losses.

The insurance industry in China is still at an early stage of its development. Insurance companies in China offer limited business insurance products or offer them at a high price.

Our business is subject to all of the operating risks normally associated with the manufacture of petrochemical products such as oil spills, pipeline ruptures, and releases of chemicals or other hazardous substances, any of which could result in damage to, or destruction of production facilities and other property; pollution or other environmental damage; and injury to persons. We do not maintain insurance coverage for various risks, including environmental claims. A significant uninsured claim against us would have a material adverse effect on our financial position and results of operations.

Our insurance coverage, where we have it, may not be sufficient to cover us against 100% of potential losses arising as a result of the foregoing and for certain risks, such as political risk, business interruption, war, terrorism, and piracy, for which we have limited or no coverage. In addition, we are not insured against all risks in all aspects of our business such as weather. The occurrence of a significant event against which we are not fully insured could have a material adverse effect on our financial condition, results of operations, or cash flows.

Risks Related to our Securities

~~Insiders~~Restrictions on ~~have~~the ~~substantial~~reliance ~~control~~of ~~over~~rule ~~us,~~144 ~~and~~by ~~they~~shell ~~could~~companies ~~delay~~ or ~~prevent~~former ashell ~~change in our corporate control even if our other stockholders wanted it to occur~~companies.

Pursuant to aRule ~~share~~144 ~~transfer~~of ~~agreement,~~the ~~Mr.~~Securities ~~Chunfeng~~Act ~~Tao,~~(the ~~our~~“Rule ~~Chairman~~144”), ~~Chief~~a ~~Executive~~“shell ~~Officer~~company” ~~and~~is ~~President~~defined ~~has~~as ~~exercised an~~a ~~option~~company ~~after certain~~that has ~~performance~~no ~~targets~~or ~~were~~nominal ~~met to~~operations, ~~purchase~~and, ~~from~~either ~~Mr.~~no ~~Brian~~or ~~Pak-Lun~~nominal ~~Mok,~~assets; ~~the~~assets ~~sole~~consisting ~~shareholder~~solely of ~~Apex~~cash ~~Smart~~and ~~Limited~~cash ~~(the~~equivalents; ~~owner~~or ofassets consisting ~~45.6132%~~ of ~~the~~any ~~share~~amount ~~capital~~ of ~~Delight~~cash ~~Reward~~and ~~Limited),~~cash ~~100%~~equivalents ofand ~~Apex~~nominal ~~Smart~~other ~~Limited’s~~assets. ~~equity~~As such, ~~which~~we ~~entitled~~were ~~Mr.~~a ~~Tao~~“shell company” pursuant to ~~own~~Rule ~~45.6132%~~144 ofprior to the ~~equity~~Share ofExchange. ~~Delight~~The ~~Reward~~SEC ~~Limited.~~staff ~~Delight~~has ~~Reward~~taken ~~Limited~~the ~~holds~~position ~~47,658,000~~that ~~shares~~Rule of144 ~~our~~is ~~common~~not ~~stock,~~available ~~representing~~for ~~approximately~~the resale ~~82.60%~~ of ~~our~~securities ~~common~~initially ~~stock.~~issued ~~Accordingly,~~by ~~Mr.~~any ~~Tao~~shell companies (~~indirectly~~other ~~controls~~than ~~approximately~~business-combination ~~56.81%~~related ofshell ~~our common stock~~companies) ~~and~~ ~~other~~or ~~insiders~~any issuer ~~are~~that ~~able~~has tobeen ~~control~~at ~~all~~any ~~matters~~time ~~requiring~~previously ~~stockholder~~a ~~approval,~~shell ~~including the election of directors and approval of significant corporate transactions~~company. ~~This~~The ~~could~~SEC ~~delay~~has orprovided ~~prevent~~ an ~~outside~~important ~~party~~exception ~~from~~to ~~acquiring~~this orprohibition, however, ~~merging with us even~~ if ~~our~~the ~~other~~following ~~stockholders~~conditions ~~wanted~~are ~~it to occur.~~met:

~~There~~● ~~may~~The ~~not~~issuer of the securities that was formerly a shell company has ceased to be ~~sufficient~~a ~~liquidity~~shell incompany; ● The issuer of the ~~market~~securities ~~for~~is ~~our~~subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act; ● The issuer of the securities inhas ~~order~~filed ~~for~~all ~~investors~~reports and materials required to ~~sell~~be ~~their~~filed ~~securities~~under Section 13 or 15(d) of the Exchange Act, as applicable, during the preceding 12 months (or such shorter period that the issuer was required to file such reports and materials), other than current reports on Form 8-K; and ● At least one year has elapsed from the time that the issuer filed current comprehensive disclosure with the SEC reflecting its status as an entity that is not a shell company.

~~There~~As such, issales ~~currently~~of ~~only~~our securities pursuant to Rule 144 are not able to be made until a ~~limited~~period ~~public~~of ~~market~~at ~~for~~least ~~our~~twelve ~~common~~months ~~stock~~has elapsed from the date we have filed all reports and ~~there~~materials ~~can~~required to be filed under the Section 13 or 15(d) of the Exchange Act, as applicable, during for 12 months. Therefore, any restricted securities we sell in the future or issue to consultants or employees, in consideration for services rendered or for any other purpose will have no ~~assurance~~liquidity ~~that~~until and unless such securities are registered with the SEC and/or we have filed all reports and material required to be filed, as applicable, during for 12 months and we have otherwise complied with the other requirements of Rule 144. As a ~~trading~~result, ~~market~~it may be harder for us to fund our operations and pay our consultants with our securities instead of cash. Furthermore, it will ~~develop~~be ~~further~~harder for us to raise funding through the sale of debt or beequity ~~maintained~~securities unless we agree to register such securities with the SEC, which could cause us to expend additional resources in the future. Lastly, any shares held by affiliates, including shares received in any registered offering, will be subject to the resale restrictions of Rule 144(i).

4034

~~The~~Insiders have ~~market~~substantial ~~price~~control ofover us, and they could delay or prevent a change in our ~~common~~corporate ~~stock~~control ~~may~~even beif ~~volatile~~our other stockholders want it to occur.

~~The~~Mr. Chunfeng ~~market~~Tao, ~~price of~~ our ~~common~~Chairman ~~stock has been~~ and ~~will likely continue to be highly volatile~~President, asowns is100% ~~the stock market in general. Some~~ of the ~~factors~~equity ~~that~~of ~~may~~Delight ~~materially~~Reward ~~affect~~Limited. ~~the~~Delight ~~market~~Reward ~~price~~Limited holds 84% of our Common Stock. ~~are beyond our control~~Accordingly, ~~such~~Mr. asTao ~~changes~~(who inindirectly ~~financial~~controls ~~estimates~~approximately by84% ~~industry and securities analysts, conditions or trends in the industry in which we operate or sales~~ of our ~~common~~Common ~~stock.~~Stock) ~~Additionally,~~is onable ~~April~~to 1,control ~~2011~~all matters ~~trading~~requiring instockholder ~~our~~approval, ~~common~~including ~~stock~~the ~~was~~election ~~halted~~of bydirectors ~~Nasdaq~~ and onapproval ~~October~~of 5,significant ~~2011~~corporate ~~our common stock was delisted from Nasdaq~~transactions. On This ~~October~~could 7,delay ~~2011,~~or ~~our~~prevent ~~stock~~an ~~began~~outside ~~trading~~party onfrom ~~the~~acquiring ~~Pink~~or ~~Sheets~~merging ~~and~~with isus ~~currently~~even ~~trading~~if ~~on the OTC Bulletin Board. It is likely that~~ our ~~stock~~other ~~will~~stockholders ~~experience~~wanted ~~significant pressure for some time as a result of the lack of liquidity during the period in which~~ it ~~was~~to ~~halted~~occur.

~~These~~There may ~~factors~~not ~~and~~be ~~the~~sufficient ~~event~~liquidity ~~listed~~in ~~above may materially adversely affect~~ the market ~~price~~for of our common stock, regardless of our performance. In addition, the public stock markets have experienced extreme price and trading volume volatility. This volatility has significantly affected the market prices of securities ofin ~~many~~order ~~companies~~ for ~~reasons~~investors ~~frequently unrelated~~ to ~~the~~sell ~~operating~~their ~~performance~~securities ofand the ~~specific companies. These broad~~ market ~~fluctuations may adversely affect the market~~ price of our ~~common~~Common ~~stock~~Stock may be volatile.

There is currently only a limited public market for our Common Stock and there can be no assurance that a trading market will develop further or be maintained in the future. The market price of our Common Stock has been and will likely continue to be highly volatile, as is the stock market in general. Some of the factors that may materially affect the market price of our Common Stock are beyond our control, such as changes in financial estimates by industry and securities analysts, conditions or trends in the industry in which we operate or sales of our Common Stock. Additionally, on April 1, 2013 trading in our Common Stock was halted by Nasdaq Stock Market and on October 5, 2013, our Common Stock was delisted from Nasdaq Stock Market. As a result, our stock is currently trading on the OTC Pink. Our stock experienced significant pressure after these events.

These factors and the events listed above may materially adversely affect the market price of our Common Stock, regardless of our performance. In addition, the public stock markets have experienced extreme price and trading volume volatility. This volatility has significantly affected the market prices of securities of many companies for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of our Common Stock.

Financial Industry Regulatory Authority sales practice requirements may limit a stockholder’s ability to buy and sell our stock.

Financial Industry Regulatory Authority (the “FINRA”) has adopted rules that require that a broker-dealer when recommending an investment to a customer, must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our Common Stock, which may have the effect of reducing the level of trading activity and liquidity of our Common Stock. Further, many brokers charge higher transactional fees for penny stock transactions. As a result, fewer broker-dealers may be willing to make a market in our Common Stock, which may limit a stockholder’s ability to buy and sell our stock.

Our Common Stock is quoted on the OTC Markets and is subject to the “Penny Stock” rules.

Broker-dealer practices in connection with transactions in “penny stocks” are regulated by penny stock rules adopted by the SEC. Penny stocks generally are equity securities with a price per share of less than $5.00 (other than securities registered on some national securities exchanges or quoted on the over-the-counter markets). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and, if the broker-dealer is the sole market maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market, and monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, broker-dealers who sell these securities to persons other than established customers and “accredited investors” must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. Should a broker-dealer be required to provide the above disclosures or fail to deliver such disclosures on the execution of any transaction involving a penny stock in violation of federal or state securities laws, an investor may be able to cancel his or her purchase and get the money back. In addition, if the stocks are sold in a fraudulent manner, the purchaser may be able to sue the persons and firms that caused the fraud for damages. If an investor has signed an arbitration agreement, however, the investor may have to pursue the claim through arbitration. Consequently, these requirements may have the effect of reducing the level of trading activity, if any, in the secondary market for a security subject to the penny stock rules, and investors in our Common Stock may find it difficult to sell their shares.

Because we became public by means of a reverse merger, we may not be able to attract the attention of major brokerage firms.

Since we became public through a “reverse merger,” ~~the~~our ~~newly-issued~~Common ~~common~~Stock ~~shares~~ issued in connection with the “reverse merger” and the private placement are restricted shares. As a result, our ~~common~~Common ~~stock~~Stock will continue to be very thinly traded after the reverse merger, until a considerable number of such shares are registered in an effective registration statement or become sellable under Rule 144 if all of the conditions in Rule 144(i)(2) are satisfied at the time of the proposed sale. Therefore, securities analysts of major brokerage firms may not provide coverage of our Company since there is little incentive to brokerage firms to recommend the purchase of our ~~common~~Common ~~stock~~Stock. No assurance can be given that brokerage firms will want to conduct any secondary offerings on behalf of the Company in the future.

~~ITEM~~In addition, ~~1B.~~with ~~UNSOLVED~~one ~~STAFF~~stockholder ~~COMMENTS~~that owns approximately 84% of our Common Stock, it significantly reduces the amount of shares to be traded if that stockholder does not sell.

ITEM 1B. UNSOLVED STAFF COMMENTS.

Not applicable.

ITEM 2. ~~DESCRIPTION OF PROPERTY~~PROPERTIES.

All land in China is owned by the State. Individuals and companies are permitted to acquire rights to use land or land use rights for specific purposes. In the case of land used for industrial purposes, the land use rights are granted for a certain period no more than 50 years. This period may be renewed at the expiration of the initial and any subsequent terms. Granted land use rights are transferable and may be used as security for borrowings and other obligations. We currently own land use rights to approximately 27.52 million square feet of land, including land for our existing production facility and land for future expansions, and approximately 53,000 square feet of buildings consisting of an employee dormitory in Ningbo, China.

We have acquired the state-granted use rights to land set forth in the table below.

	Address		Size		Leased/Owned/Granted		Function
Location		Size		Leased/Owned/Granted		Function
1	Qingshi Industrial Park, Beilun District, Ningbo, Zhejiang, China		231,084 Square Meters (approximately 2,487,000 square feet)		Granted use rights		Plant land
Qingshi Industrial Park, Beilun District, Ningbo, Zhejiang, China		231,749 square meters (approximately 2,494,525 square feet)		Granted use rights (20 years use rights for approximately 1.3 million square feet granted in 2008 and 40 years use rights for approximately 1.2 million square feet granted in 2012)		Plant land
2	No.8 Lianhe Road 239 Block, Qijiashan,Neighborhood,Beilun District, Ningbo, Zhejiang, China		4,948 Square Meters (approximately 53,000 square feet)		Owned		Dormitory Building
Qingshi Industrial Park, Gangkou District, Fangchengang, Guangxi, China		433,712 square meters (approximately 4,668,437 square feet)		Granted use rights (40 years use right granted in 2014)		Plant land

41The dormitory building, shipping dock and facilities we own are listed below:

Location	Size	Function	Product
Ningbo, Zhejiang, China	Approximately 53,260 square feet	Dormitory building	N/A

Ningbo, Zhejiang, China	N/A	Production facility	Petrochemical products, SBS, SEBS

Fangchengang, Guangxi, China	N/A	Production facility	ABS

Ningbo, Zhejiang, China	N/A	Shipping dock	N/A

We intend to expand our manufacturing facility over the next few years and believe that we currently have enough land to satisfy such expansion.

ITEM 3. LEGAL PROCEEDINGS.

We may from time to time become a party to various legal or administrative proceedings arising in the ordinary course of our business.

OnIn 2014, ~~November~~Jiujiang ~~15,~~Jianan ~~2011,~~Petrochemicals ~~the~~Engineering ~~Rosen~~Co., ~~Law~~Ltd. ~~Firm~~(“Jiujiang Jianan”) filed a ~~class~~suit ~~action~~against Ningbo ~~suit,~~Keyuan ~~alleging~~in wethe ~~had~~Beilun ~~violated~~District ~~federal~~People’s ~~securities~~Court. ~~laws~~Jiujiang byJianan ~~issuing~~and ~~materially~~Ningbo ~~false~~Keyuan ~~and~~are ~~misleading~~parties ~~statements~~to ~~and~~certain ~~omitting~~service contract ~~material~~pursuant ~~facts~~to ~~with~~which ~~regard~~Jiujiang Jianan performed maintenance to ~~disclosure~~Ningbo ofKeyuan’s ~~related~~production ~~party~~equipment. ~~transactions~~Jiujiang Jianan claimed it had provided additional services and ~~effectiveness~~thus ofwas ~~internal~~entitled ~~controls~~to inadditional ~~past~~service ~~public~~fee ~~filings. The~~from ~~case~~Ningbo isKeyuan. ~~currently~~On atJuly 27, 2016, the ~~discovery~~Beilun ~~stage~~District ~~and~~People’s weCourt ~~believe~~issued ~~there~~a isjudgment nothat ~~basis~~Ningbo toKeyuan ~~the~~should ~~suit~~pay ~~filed~~construction byfee ~~the~~of ~~Rosen~~RMB 9.0 ~~Law~~million ~~Firm~~(approximately ~~and~~$1.4 ~~intend~~million) plus an interest of RMB 0.8 million (approximately $0.1 million) to ~~contest~~Jiujiang Jianan. Ningbo Keyuan appealed to the Ningbo City Intermediate People’s Court on August 8, 2016. The case ~~vigorously~~is currently under the review by the Ningbo Intermediate People’s Court.

On January 9, 2012, Ningbo Keyuan filed a law suit in Ningbo Beilun District People’s Court against Zhenjiang Kaiyuan Installation Group (now known as Zhenjiang Industry Equipment Installation Group Co., Ltd) in breach of a project construction contract and alleged damages of RMB 98,000. Zhenjiang Industry Equipment filed a counter claim requiring us to pay RMB 9,825,615 of project cost and RMB 1,350,000 of interest. The two parties have settled the case and Ningbo Keyuan agreed to pay Zhenjiang Industry Equipment a total amount of RMB 7,220,000 (approximately $1,144,738).36

In ~~June~~May ~~2012~~2015, Taihua Plastic (Ningbo) ~~Keyuan~~Co., Ltd (“Taihua”) filed a ~~law~~complaint ~~suit~~against in Ningbo ~~Beilun~~Keyuan ~~District~~and ~~People’s~~Zhongkexuneng ~~Court~~in ~~against~~the Ningbo ~~Lianneng~~Intermediate ~~Thermo Co~~People’s Court., ~~Ltd~~Pursuant ~~(“Ningbo~~to ~~Lianneng”)~~a insale aagreement ~~dispute~~between ~~over~~Taihua aand ~~power~~Zhongkexuneng, ~~supply~~Taihua ~~contract~~made ~~alleging~~a ~~damages~~payment of approximately RMB ~~10,964,366~~29.7 million (approximately $~~1,740,300)~~4. In8 ~~August~~million) ~~2012,~~to ~~Ningbo~~Zhongkexuneng ~~Lianneng~~for ~~filed~~styrene. aTaihua ~~counter~~claimed ~~claim~~damages in ~~Ningbo~~the ~~Intermediate~~amount ~~People’s~~of ~~Court~~RMB 29.7 million, along with interest of RMB 0.8 million (~~the~~approximately ~~“Intermediate~~$0.1 ~~Court”~~million) ~~against~~and ~~Ningbo~~deductible ~~Keyuan~~VAT ~~for~~(as ~~the~~defined ~~same~~herein ~~dispute~~below) ~~for~~of RMB ~~15,444,539~~4.7 million (approximately US$0.7 ~~2,451,500~~million). A ~~civil~~On ~~trial~~June ~~for~~24, 2016, the ~~counter~~Ningbo ~~claim~~Intermediate ~~was~~People’s ~~held~~Court atruled ~~the~~that ~~Intermediate~~Zhongkexuneng ~~Court~~should onreturn ~~August~~the ~~30,~~payment of ~~2012,~~RMB ~~but~~29.7 nomillion ~~decision~~(approximately ~~was made~~$4.8 Inmillion) ~~addition~~to Taihua, ~~Ningbo~~plus ~~Keyuan~~the ~~filed~~interest; ~~the~~and ~~same~~Ningbo ~~law~~Keyuan ~~suit~~should inbe ~~the~~jointly ~~Intermediate~~liable ~~Court~~to insuch payment ~~late~~as ~~August~~a ~~2012,~~shareholder ~~and~~of aTaihua. ~~civil~~Ningbo ~~trial~~Keyuan ~~for~~appealed ~~this~~to ~~claim~~the ~~was~~Zhejiang ~~held~~Higher People’s Court on ~~October~~July 1811, ~~2012.~~2016 Noclaiming of ~~decision~~its ~~has~~limited ~~been~~liability ~~made~~ as a shareholder of ~~the~~a ~~date~~corporation. ofThe ~~this~~case ~~filing~~is currently under the trial.

On ~~February~~March 2825, ~~2013~~2016, the ~~Company~~Sixth ~~reached~~Chemical aEngineering Construction ~~settlement~~Co., inLtd a(“the ~~case~~Sixth”) ~~filed~~brought bya ~~the~~suit ~~Securities~~against ~~and~~Ningbo ~~Exchange~~Keyuan ~~Commission (“SEC”)~~ in the ~~United~~Beilun ~~States~~ District ~~Count~~People’s Court. ~~for~~The ~~the~~Sixth ~~District~~was ofa ~~Columbia~~contractor ~~against~~who ~~the~~was ~~Company,~~supposed ~~alleging~~to ~~the~~build ~~Company~~one ~~violated~~of ~~Sections~~Ningbo ~~17(a)(2)~~Keyuan ~~and~~facilities. ~~17(a)(3)~~Completion of the ~~Securities~~construction ~~Act~~was delayed offor ~~1933,~~several ~~Sections~~months ~~13(a),~~by ~~13(b)(2)(A)~~the ~~and~~Sixth ~~13(b)(2)(B)~~resulting ofin ~~the~~our ~~Securities~~loss ~~Exchange Act~~ of ~~1934,~~approximately ~~and~~RMB ~~Rules~~30.4 ~~12b-20~~million ~~and~~(approximately ~~13a-13~~$4.7 ~~thereunder~~million). ~~Under~~The Sixth ~~the~~claimed ~~terms~~that ~~agreed~~Ningo toKeyuan byowed ~~the~~a ~~Company~~remaining ~~and~~contractual ~~the~~payment ~~SEC,~~of ~~the~~RMB ~~Company,~~24.8 ~~without~~million ~~admitting~~(approximately or$3.8 ~~denying~~million) plus the penalties ~~allegation~~of breach of the ~~complaint~~contract. In July 2016, ~~will~~Ningbo ~~pay~~Keyuan filed a ~~civil~~counter ~~penalty~~claim ofalleging ~~$1million~~that ~~and~~the ~~will~~Sixth behad ~~permanently~~breached ~~enjoined~~the contract ~~from~~by ~~violating~~delaying ~~certain~~the ~~securities~~completion ~~law.~~of ~~The~~the ~~settlement~~construction ~~remains~~and ~~subject~~requesting toa ~~approval~~total bycompensation ~~the~~of ~~United~~RMB ~~District~~30.4 ~~Court~~million ~~for~~(approximately $4.7 ~~the~~million) ~~District~~from ofthe ~~Columbia,~~Sixth. ~~which~~A ~~must~~hearing ~~approve~~is ~~its~~to ~~terms~~be ~~and~~scheduled ~~enter~~by the ~~final~~Beilun ~~judgment~~District People’s Court.

In July 2016, Mr. Zongdong Hu filed a labor dispute in Beilun District Ningbo City Labor Arbitration Department claiming a compensation of RMB 0.5 million (approximately $0.08 million). Mr. Hu was a former vice general engineer at Ningbo Keyuan. Ningbo Keyuan decided not to grant Mr. Hu certain amount of cash reward based on the evaluation of his performance in accordance with his employment agreement. Mr. Hu disagrees with our decision. The arbitration is currently pending.

Other than as set forth herein, we are currently not a party to any material legal or administrative proceedings and are not aware of any pending or threatened legal or administrative proceedings against us.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

4237

PART II

ITEM 5. ~~MARKET~~ ~~FOR~~Market ~~COMMON~~for ~~EQUITY~~Registrant’s ~~AND~~Common ~~RELATED~~Equity, ~~STOCKHOLDER~~Related ~~MATTERS~~Stockholder ~~AND~~Matters ~~ISSUER~~and ~~PURCHASES~~Issuer Purchases OFof ~~EQUITY~~Equity ~~SECURITY~~Security.

~~The~~Our Common ~~Company’s~~Stock ~~common stock~~ is traded on the ~~Over-the-Counter~~OTC ~~Bulletin~~Pink ~~Board~~ under the symbol “KEYP”; our ~~cusip~~CUSIP number is 493722102. We first began trading on April 22, 2010 on the Over the Counter Bulletin Board. Beginning on September 15, 2010, we began trading on the Nasdaq Capital Market under the symbol “KEYP”. On January 18, 2011, our common stock commenced trading on the Nasdaq Global Market. On April 1, 2011 trading in our stock was halted by Nasdaq and delisted on October 5, 2011 resulting our shares trading on the Pink Sheets commencing on October 7, 2011.

The following table sets forth the quarterly high and low bid prices for the ~~common~~Common ~~stock~~Stock since the quarter ended ~~June~~March 3031, ~~2010~~2014. The prices set forth below represent inter-dealer quotations, without retail markup, markdown or commission and may not be reflective of actual transactions.

	High			Low
The quarter ended June 30, 2010		5.20			0.25
The quarter ended March 31, 2014		1.15			0.58
The quarter ended September 30,2010		5.55			3.15
The quarter ended June 30, 2014		1.25			0.85
The quarter ended December 31,2010		5.75			3.67
The quarter ended September 30, 2014		1.24			0.80
The quarter ended March 31, 2011		5.56			4.12
The quarter ended December 31, 2014		1.00			0.0001
The quarter ended June 30, 2011		5.56	*		4.12	*
The quarter ended March 31, 2015		0.1599			0.0001
The quarter ended September 30, 2011		5.56	*		4.12	*
The quarter ended June 30, 2015		0.04			0.015
The quarter ended December 31, 2011		4.88	*		1.02	*
The quarter ended September 30, 2015		0.04			0.0199
The quarter ended March 31, 2012		2.20			0.62
The quarter ended December 31, 2015		0.022			0.01
The quarter ended June 30, 2012		1.77			1.35
The quarter ended March 31, 2016		0.03			0.012
The quarter ended September 30, 2012		1.53			0.50
The quarter ended June 30, 2016		0.021			0.007
The quarter ended December 31, 2012		1.10			0.56
The quarter ended September 30, 2016		0.009			0.002
The quarter ended March 31, 2012		1.40			0.30
The quarter ended June 30, 2012		1.77			1.35
The quarter ended September 30, 2012		1.53			0.50
The quarter ended December 31, 2012		1.10			0.56
The quarter ended March 31, 2013		1.40			0.30

*On ~~For~~ October 10, 2016, the ~~period~~closing ~~from April~~bid 1,price ~~2011~~of toour Common Stock was $0.002 per share and on October 613, ~~2011~~2016, ~~trading~~ inwe had approximately 79 record holders of our ~~stock~~Common ~~was~~Stock. ~~halted~~This number excludes any estimate by ~~Nasdaq~~us of the number of beneficial owners of shares held in street name, the accuracy of which cannot be guaranteed.

AtIn September ~~June 3~~2014, ~~2013,~~ the ~~closing~~Series ~~bid~~C ~~price~~warrants ofand ~~the~~Series ~~common~~D ~~stock~~warrants ~~was~~along ~~$0.90~~with ~~and~~the weplacement ~~had~~agent ~~approximately 106 record~~warrants ~~holders~~issued ofin ~~our~~the ~~commons~~September ~~stock~~2014 Private ~~and~~Placement ~~one~~expired ~~record~~pursuant ~~holder~~to oftheir ~~our~~respective terms. The outstanding Series B ~~Preferred~~preferred ~~Stock.~~shares ~~This~~were ~~number~~converted ~~excludes~~on ~~any~~August 11, ~~estimate~~2016. byThe usSeptember of2010 ~~the~~Private ~~number~~Placement, ofthe ~~beneficial~~Series ~~owners~~B ofpreferred shares, ~~held~~Series C warrants and Series D warrants are described in ~~street~~more ~~name,~~detail ~~the~~in ~~accuracy~~Item of1 ~~which~~Business ~~cannot~~of bethis ~~guaranteed~~Report.

43Effective August 11, 1993, the SEC adopted Rule 15g-9, which established the definition of a "penny stock," for purposes relevant to the Company, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require: (1) that a broker or dealer approve a person's account for transactions in penny stocks; and (2) that the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased. In order to approve a person's account for transactions in penny stocks, the broker or dealer must (1) obtain financial information and investment experience and objectives of the person; and (2) make a reasonable determination that the transactions in penny stocks are suitable for that person and that person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks. The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prepared by the Commission relating to the penny stock market, which, in highlight form, (1) sets forth the basis on which the broker or dealer made the suitability determination; and (2) states that the broker or dealer received a signed, written agreement from the investor prior to the transaction. Disclosure also has to be made about the risks of investing in penny stock in both public offerings and in secondary trading, and about commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.

As of June 3, 2013 , there are (i) three-year Series A Warrants to purchase up to 807,450 shares of Common Stock, at an exercise price of $4.50 per share; (ii) three-year Series B Warrants to purchase up to 808,600 shares of Common Stock, at an exercise price of $5.25 per share. (iii) three-year Series C Warrants to purchase up to 874,802 shares of Common Stock, at an exercise price of $4.50 per share; and (iv) three-year Series D Warrants to purchase up to 874,802 shares of Common Stock, at an exercise price of $5.25 per share. We also granted warrants to purchase 718,755 shares of Common Stock to TriPoint Global Equities, LLC, the placement agent in the April-May 2010 Financing. In connection with the September 2010 financing, we granted placement agent warrants to purchase up to 561,601 shares of Common Stock to Tripoint Global Equities, Inc. 38

Effective August 11, 1993, the SEC adopted Rule 15g-9, which established the definition of a "penny stock," for purposes relevant to the Company, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require: (i) that a broker or dealer approve a person's account for transactions in penny stocks; and (ii) that the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased. In order to approve a person's account for transactions in penny stocks, the broker or dealer must (i) obtain financial information and investment experience and objectives of the person; and (ii) make a reasonable determination that the transactions in penny stocks are suitable for that person and that person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks. The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prepared by the Commission relating to the penny stock market, which, in highlight form, (i) sets forth the basis on which the broker or dealer made the suitability determination; and (ii) states that the broker or dealer received a signed, written agreement from the investor prior to the transaction. Disclosure also has to be made about the risks of investing in penny stock in both public offerings and in secondary trading, and about commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks

Dividend Policy

On January 27, 2011, ~~Keyuan's~~our Board of Directors approved the distribution of an annual cash dividend of $0.36 per share for 2011 to be paid quarterly to its ~~common~~Common ~~stock~~Stock ~~shareholders~~stockholders at the assigned dates of record. Management agreed to waive their rights to receive cash dividends with regards to ~~common~~Common ~~stock~~Stock indirectly owned by them. In addition, ~~PRAX~~Dragon ~~Capital~~State agreed to waive their rights to receive cash dividends should they choose to convert their Series B preferred stock before the record date. The first quarterly dividend of $0.09 per share was ~~paid~~made to ~~shareholders~~stockholders of record as of March 1, 2011;, ~~distribution~~and ~~occurred~~it was paid on April 15, 2011. The second quarterly dividend of $0.09 per share was ~~paid~~made to ~~shareholders~~stockholders of record as of June 1, 2011;, ~~distribution~~and ~~occurred~~it was paid on July 15, 2011. In October 2011, ~~the~~our ~~Company’s~~ Board of ~~directors~~Directors suspended the payment of quarterly cash dividends on ~~the~~our ~~Company’s~~ Common Stock while itwe ~~pursues~~ pursue strategic alternatives including, but not limited to, taking the Company private, a merger or other transaction, which we continue to pursue.

Description of Equity Compensation Plans

On June 29, 2010, the Board of Directors approved ~~the~~our ~~Company’s~~ 2010 Equity Incentive Plan (the “Plan”) to authorize issuance of up to 6,000,000 shares ~~for~~as ~~issuance under~~ equity incentive awards, ~~effective~~under ~~June 30, 2010. On December 6, 2010, we filed Definitive Schedule 14C information statement with~~ the ~~Commission proposing to adopt the~~ Plan~~. The information statement was mailed to shareholders on December 6~~, ~~2010~~which ~~and it~~ became effective on December 21, 2010.

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights			Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for further issuance under equity compensation plans (excluding securities reflected in column (a))
Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights			Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for further issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders		~~2,930,000~~0	(1)(2)	$	~~4.2~~-		26,~~820~~000,000
		100,000	(3)	$	4.5
Equity compensation plans not approved by security holders		0	(3)	$	-
Equity compensation plans not approved by security holders
Total		0			-		6,000,000
Total		3,030,000					2,820,000

(1) On June 30, 2010, the Company granted stock options to certain senior management employees to purchase in the aggregate 3,000,000 shares of the Company’s common stock at an exercise price of $4.20 per share and the grant-date fair value of these stock options amounted to $3,347,298. However, options to purchase in the aggregate 150,000 shares of the Company’s common stock were later forfeited in 2010 because two optionees left the Company. A total of 2,810,000 stocks options vest over three years as follows: 30% shall vest and become exercisable one year after the grant date, 40% shall vest and become exercisable two years after the grant date, and 30% shall vest and become exercisable three years after the grant date. For the remaining 190,000 stock options: 40% shall vest and become exercisable one year after the grant date and 60% shall vest and become exercisable two years after the grant date.

(1)	On June 30, 2010, we granted stock options to certain senior management employees to purchase in the aggregate 3,000,000 shares of Common Stock at an exercise price of $4.20 per share and the grant-date fair value of these stock options amounted to $3,347,298. However, options to purchase in the aggregate 150,000 shares of Common Stock were later forfeited in 2010 because two optionees left the Company. The remaining 2,850,000 options were all vested as of December 31, 2013 and expired on June 29, 2015. No option was exercised prior to the expiration.

(2)	On July 1, 2010, we granted 40,000 stock options to two independent directors with contractual terms of 5 years. The exercise price of these stock options is $4.20 per share and the grant-date fair value of these stock options amounted to $91,349. A total of 40,000 options were vested and became exercisable one year after the grant date. The 40,000 options were later forfeited on June 29, 2012 because two independent directors resigned from the board. No option was exercised prior to the forfeiture.

(3)	On August 4, 2010, we granted five-year options to 79 managers and employees to purchase in the aggregate 700,000 shares of the Company’s Common Stock at an exercise price of $4.50 per share, in consideration of their services to the Company. Among them, 600,000 options were later cancelled by us and the reset of 100,000 stock options were vested as of December 31, 2013 and expired on August 3, 2015. No option was exercised prior to the expiration.

(2) On July 1, 2010, the Company granted stock options to two independent directors with contractual terms of 5 years. The exercise price of these stock options is $4.20 per share and the grant-date fair value of these stock options amounted to $91,349. A total of 40,000 options shall vest and become exercisable one year after the grant date and the remaining 40,000 options shall vest and become exercisable two years after the grant date, provided that the independent directors are re-elected for successive one year terms one year after the stock options issuance date.39

(3) On August 4, 2010, we granted five-year options to 79 managers and employees to purchase in the aggregate 700,000 shares of the Company’s common stock at an exercise price of $4.50 per share, in consideration of their services to the Company. Of these options, 30% of the Options shall vest immediately one year after the issuance, 40% of the options shall vest two years after the issuance and 30% of the options shall vest three years after the issuance. The shares were issued in accordance with the exemption from the registration provisions of the Securities Act of 1933, as amended, provided by Section 4(2) of such Act for issuances not involving any public offering and Regulation S promulgated under the Securities Act of 1933, as amended. We made this determination based upon the representations of the respective Optionees that none of them were “U.S. person[s]” as that term is defined in Rule 902(k) of Regulation S under the Securities Act. Based on feedback received from the employees after the option award which indicated that most of those employees would prefer tangible cash rewards, management proposed canceling 600,000 of these stock options that had been granted to 77 of the 79 employees. On December 29 2010, the Board of Directors approved the proposal to cancel such stock options.

Recent Sales of Unregistered Securities

~~During~~As reported ~~the~~in ~~past~~our ~~three~~current ~~years,~~report weon ~~effected~~Form ~~the~~8-K ~~following~~filed ~~transactions~~on inAugust ~~reliance~~8, ~~upon~~2016, ~~exemptions~~we ~~from~~entered ~~registration~~into ~~under~~a ~~the~~side ~~Securities~~agreement ~~Act~~with asDelight ~~amended.~~Reward ~~Unless~~on ~~stated~~August 4, ~~otherwise:~~2016, ~~(i)~~pursuant ~~each~~to ofwhich, ~~the~~Delight ~~persons~~Reward ~~who~~agreed ~~received~~to ~~these~~pay ~~unregistered~~us ~~securities~~for ~~had~~each ~~knowledge~~convertible ~~and~~share ~~experience~~of inCommon ~~financial~~Stock ~~and~~underlying ~~business~~5,333,340 ~~matters~~Series B ~~which~~preferred ~~allowed~~shares ~~them to evaluate~~ the ~~merits~~highest ~~and~~sale ~~risk~~price of the ~~receipt~~Company’s ofCommon ~~these~~Stock ~~securities,~~per ~~and~~share ~~they~~as ~~were~~reported ~~knowledgeable~~on ~~about~~the ~~our~~OTC ~~operations~~Pink ~~and~~during ~~financial~~a ~~condition;~~period commencing ~~(ii)~~on ~~no underwriter participated in, nor did we pay any commissions or fees to any underwriter in connection with~~ the ~~transactions;~~date ~~(iii)~~of the ~~transactions~~Settlement ~~did~~Agreement, ~~not~~which ~~involve~~was a$0.005 ~~public~~per ~~offerings;~~share ~~and~~of ~~(iv)~~Common ~~each~~Stock, ~~certificate issued~~ for ~~these~~an ~~unregistered~~aggregate ~~securities~~purchase ~~contained~~price of a$27,465.01. ~~legend~~We ~~stating~~intend ~~that~~to ~~the~~use ~~securities have not been registered under~~ the ~~Act~~proceeds ~~and~~as ~~setting~~general ~~forth~~capital ~~the~~for ~~restrictions on~~ the ~~transferability and the sale of the securities~~Company.

45Repurchases of Equity Securities

InOn September ~~connection~~17, ~~with the Exchange Agreement~~2012, onour ~~April~~Board ~~22,~~of ~~2010,~~Directors weauthorized ~~issued~~the anrepurchase ~~aggregate~~ of ~~47,568~~$2 ~~shares~~million of our ~~Series~~shares Mof ~~Preferred~~Common Stock tofor ~~the~~up ~~Keyuan~~to ~~International~~$1.50 per ~~Shareholder~~share. WeOn ~~received~~December in31, ~~exchange~~2012, ~~from~~we ~~the~~engaged ~~Keyuan~~Tripoint ~~International~~Global ~~Shareholder~~as ~~50,000~~our ~~shares~~agent ofto ~~Keyuan~~design ~~International,~~and ~~representing~~execute ~~100% of~~ the ~~issued~~stock ~~and~~repurchase ~~outstanding~~program ~~shares~~in compliance ofwith ~~Keyuan~~the ~~International,~~requirements ~~which~~of ~~exchange~~Rule ~~resulted~~10b5-1(c)(1) inand ~~Keyuan~~Rule ~~International~~10b-18 ~~becoming~~under ~~our~~the ~~wholly-owned~~Exchange ~~subsidiary~~Act. ~~The~~In ~~issuance~~July of2014, ~~such~~we ~~securities~~terminated ~~was~~the stock ~~exempt~~repurchase ~~from~~program ~~registration~~after ~~pursuant~~we topurchased ~~Section~~an ~~4(2)~~aggregate of 425,110 ~~and~~shares ~~Regulation~~of DCommon ~~and/or~~Stock. The ~~Regulation~~following Sis ~~promulgated~~a ~~under~~chart ~~the~~that provides ~~Securities~~details ~~Act~~ of ~~1933,~~the asrepurchases ~~amended~~that ~~(the~~we ~~“Securities Act”)~~made.

As more fully described in Item 1.01 above, on April 22, 2010, immediately following the Share Exchange, we consummated the Private Placement for the issuance and sale of Units, consisting of an aggregate of (a) 5,954,058 shares of Series A Preferred Stock, (b) 661,562 Shares of common stock, (c) three-year Series A Warrants to purchase up to 661,562 Series A Warrant Shares, and (d) three-year Series B Warrants to purchase up to 661,562 Series B Warrant Shares, for aggregate gross proceeds of approximately $23.2 million. In connection with the final closing on May 17, 2010, we issued 784,278 shares of Series A Preferred Stock, 87,142 shares of Common Stock, 87,142 Series A Warrants and 87,142 Series B Warrants to the Investors. The issuance of the Units, the Series A Preferred Stock, the Shares, the Series A Warrants, the Series B Warrants and the placement agent warrants pursuant to the Private Placement were exempt from registration pursuant to Section 4(2) of, and Regulation D and/or Regulation S promulgated under the Securities Act.

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares that Remained Available for Purchase Under the Plans or Programs
December 1 - December 31, 2012		0	$	0.00		0	$	2,000,000
January 1 - January 31, 2013		11,200	$	0.73		11,200	$	1,991,861
February 1 - February 28, 2013		15,850	$	0.77		15,850	$	1,979,668
March 1 - March 31, 2013		90,504	$	1.25		90,504	$	1,866,488
April 1 - April 30, 2013		3,300	$	1.44		3,300	$	1,861,740
October 1 - October 31, 2013		618	$	0.99		618	$	1,861,126
November 1 - November 30, 2013		1,486	$	0.80		1,486	$	1,859,933
December 1 - December 31, 2013		3,190	$	0.78		3,190	$	1,857,440
January 1 - January 31, 2014		38,390	$	0.69		38,390	$	1,831,775
February 1 - February 28, 2014		55,366	$	0.95		55,366	$	1,779,177
March 1 - March 31, 2014		109,032	$	1.07		109,032	$	1,662,513
April 1 - April 30, 2014		500	$	1.08		500	$	1,661,975
July 1 - July 31, 2014		95,674	$	1.15		95,674	$	1,551,950

~~On April 19, 2010, we issued 88,000 shares of common stock to Hayden Communications International, for the investor related services they will provide to us from April 19, 2010 to April 18, 2011~~ITEM 6. ~~The~~ SELECTED ~~shares~~FINANCIAL were issued in accordance with the exemption from the registration provisions of the Securities Act of 1933, as amended, provided by Section 4(2) of such Act for issuances not involving any public offering and Rule 506 of Regulation D promulgated thereunderDATA.

On April 19, 2010, we issued 48,000 shares of common stock to Chesapeake Group, Inc, for the investor related services they will provide to us in a period of 12 months. The shares were issued in accordance with the exemption from the registration provisions of the Securities Act of 1933, as amended, provided by Section 4(2) of such Act for issuances not involving any public offering and Rule 506 of Regulation D promulgated thereunder.

On April 19, 2010, we issued 50,000 shares of common stock to Hampton Growth Resources, LLC, for the investor related services they will provide to us for a 12 months period. The shares were issued in accordance with the exemption from the registration provisions of the Securities Act of 1933, as amended, provided by Section 4(2) of such Act for issuances not involving any public offering and Rule 506 of Regulation D promulgated thereunder.

On July 1, 2010, we granted 80,000 five-year options to two outside directors to purchase up to 80,000 shares of the Company’s common stock at an exercise price of US$4.20 per share, in consideration of their services to the Company. Of these options, 40,000 of the options shall vest after one year of the issuance and the remaining 40,000 of the options shall vest after two years of the issuance, provided that the optionee is re-elected for successive one year terms at the end of 12 months of the issuance. The shares were issued in accordance with the exemption from the registration provisions of the Securities Act of 1933, as amended, provided by Section 4(2) of such Act for issuances not involving any public offering.

On July 1, 2010, we granted 40,000 five-year options to a consultant to purchase an aggregate of 40,000 shares of the Company’s common stock at an exercise price of US$4.20 per share, in consideration of their services to the Company. Of these options, all 40,000 of the options shall vest immediately. The shares were issued in accordance with the exemption from the registration provisions of the Securities Act of 1933, as amended, provided by Section 4(2) of such Act for issuances not involving any public offering.

On July 27, 2010, we granted 420,000 three-year options to a consultant to purchase an aggregate of 420,000 shares of the Company’s common stock at an exercise price of US$4.20 per share, in consideration of their services to the Company. Of these options, 70,000 of the options vested immediately, 31,818 vest monthly beginning on September 1, 2010 and the remaining balance of 95,456 vested on May 1, 2011. The shares were issued in accordance with the exemption from the registration provisions of the Securities Act of 1933, as amended, provided by Section 4(2) of such Act for issuances not involving any public offering and Rule 506 of Regulation D promulgated thereunder.

On August 4, 2010, we granted five-year options to 79 managers and employees to purchase in the aggregate 700,000 shares of the Company’s common stock at an exercise price of US$4.50 per share, in consideration of their services to the Company. Of these options, 30% of the Options shall vest immediately one year after the issuance, 40% of the options shall vest two years after the issuance and 30% of the options shall vest three years after the issuance. The shares were issued in accordance with the exemption from the registration provisions of the Securities Act of 1933, as amended, provided by Section 4(2) of such Act for issuances not involving any public offering and Regulation S promulgated under the Securities Act of 1933, as amended. We made this determination based upon the representations of the respective Optionees that none of them were “U.S. person[s]” as that term is defined in Rule 902(k) of Regulation S under the Securities Act. Based on feedback received from the employees after the option award which indicated that most of those employees would prefer tangible cash rewards , management proposed canceling 600,000 of these stock options that had been granted to 77 of the 79 employees. On December 29 2010, the Board of Directors approved this proposal to cancel such options.

On September 28, 2010 , we closed a private placement of $20,250,000 from offering a total of 540,001 units at a purchase price of $37.5 per unit, consisting of an aggregate of (a) 5,400,010 shares of Series B convertible preferred stock of the Company, (b) three year Series C warrants to purchase up to 810,002 share of Common Stock, at an exercise price of $4.50 per share, and (c) three year Series D warrants to purchase up to 810,002 share of Common Stock, at an exercise price of $5.25 per share. In addition, we issued placement agent warrants to purchase up to 561,601 shares of Common Stock to Tripoint Global Equities, Inc. The issuance of the Units, the Series B Preferred Stock, the Series C Warrants, the Series D Warrants and the Placement Agent Warrants pursuant to the private placement were issued pursuant to the exemption from the registration provisions of the Securities Act of 1933, as amended, provided by Section 4(2) of such Act for issuances not involving any public offering and Regulation S promulgated under the Securities Act of 1933, as amended. We made this determination based upon the representations of the respective Investors that they were not a “U.S. person[s]” as that term is defined in Rule 902(k) of Regulation S under the Securities Act.

On February 24, 2011, two investors in the April-May 2010 Private Placement exercised Series A warrants and purchased 650 shares of common stock and 500 shares of common stock respectively nt at an exercise price of $4.50 per share. As a result, 650 shares of common stock were issued on March 1, 2011 and 500 shares of common stock were issued on April 1, 2011.

On April 1, 2011, one investor in the April-May 2011 Private Placement exercised Series B warrants and purchased 500 shares of common stock at an exercise price of $5.25 per share. As a result, 500 shares of common stock were issued on April 4, 2011.

On November 29, 2011, one investor in the September 2010 Private Placement chose to convert 66,670 shares of Series B preferred stock into common stock. As a result, 66,670 shares of common stock were issued on December 7, 2011.

ITEM 6. SELECTED FINANCIAL DATA

Not applicable.

4740

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OROF ~~PLAN~~FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS.

The following discussion and analysis of our financial condition and result of operations should be read in conjunction with our audited consolidated financial statements and the notes to those financial statements appearing elsewhere in this Form 10-K. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in the "Risk Factors" section of this report and the other reports we file with the Securities and Exchange Commission. Our actual results may differ materially from those contained in any forward-looking statements.

Overview

Operating through our wholly-owned subsidiaries, Ningbo Keyuan, Ningbo Keyuan Petrochemicals, Keyuan ~~Keyuan~~ Synthetic Rubbers, ~~and~~Zhongkexuneng and Guangxi Keyuan, our operations include (i1) a production facility with an annual petrochemical production capacity of 720,000 ~~metric~~MT of ~~tons~~a variety of petrochemical products, (MT2) a SBS production facility with a designed annual production capacity of 70,000 MT, (3) a ~~variety~~SEBS production facility with a designed annual production capacity of ~~petrochemical~~10,000 ~~products~~MT, (ii4) facilities for the storage and loading of raw materials and finished goods and (~~iii~~5) a manufacturing ~~technology~~technologies that can support our manufacturing process with relatively low raw material costs and high utilization and yields~~, all of which are led by a management team consisting of petrochemical experts with proven track records from some of China’s largest state-owned enterprises in the petrochemical industry~~.

In ~~April 2011~~ addition, we ~~expanded~~are ~~our~~working ~~annual~~on ~~production~~an ~~capacity~~expansion ~~from~~including ~~550,000~~the MTGuangxi toProject ~~720,000~~(as ~~MT.~~described Wein ~~also~~Item ~~completed~~1 ~~the~~Business ~~construction~~above), of a ~~Styrene-Butadience-Styrene~~transformer oil ~~(the “SBS”) production~~ facility, ~~with~~ an increased annual ~~production~~design capacity of 70ethylene-styrene,~~000~~ ~~MT in September 2011~~ and weadditional ~~began~~storage ~~initial~~capacity. ~~trial~~Upon ~~production~~full incompletion ~~October~~of our ~~and~~expansion, our ~~November~~total ~~2011.~~production ~~One~~capacity ~~SBS~~will ~~production~~reach ~~line~~1,270,000 ~~began~~MT ~~commercial~~per ~~production~~year incomprised ~~December~~of ~~2011~~our ~~and~~current ~~second~~petrochemical production of ~~line~~720,000 ~~began~~MT, ~~commercial~~a ~~production~~SBS inof ~~August~~70,00 ~~2012.~~MT, Wea ~~plan~~SEBS toof ~~construct~~10,000 ~~new~~MT, ~~devices~~additional tostyrene ~~refine~~of ~~our~~120,000 ~~original~~MT, ~~products~~catalytic tocracking ~~produce~~oil ~~other~~of ~~high-value~~200,000 ~~added~~MT, ABS ~~products.~~of ~~Currently these~~50,000 ~~projects~~MT, ~~are~~and intransformer ~~the~~oil ~~pre-construction~~of ~~government~~100,000 ~~approval phase~~MT.

In January 2012, we signed a cooperation agreement with Fangchenggang City to build a new petrochemicals production facility in Guangxi Keyuan New Materials Industrial Park, in Guangxi Province. The total investment amount to construct this new production facility is RMB 12.8 billion (approximately USD $2.02 billion). We commenced pre-construction activities in February 2012 and intend to finish the initial stage of construction and begin operations by the end of 2013. However, the timeline is subject to revision pending the status of project financing. This new production facility, as a part of our expansion plan, will improve our competitive position by extending and expanding our supply chain and manufacturing base. Once the facility is fully operational, it is expected to have an annual production capacity of 400,000 metric tons of ABS. We plan to fund the construction and operation of the new production facility through outside financing. If such financing is not available on terms acceptable to us, construction of this facility will be delayed until appropriate financing is available. According to the cooperation agreement, the government of Fangchenggang City will provide the land use right for the facility.

Our Facility and Equipment

Facility

As of December 31, ~~2012~~2015 and December 31, 2014, we have invested a total of approximately $263.4 million and $33.7 million in the construction and improvement of our production facility. Our current production facility encompasses roughly 1.3 million square feet, including 594,000 square feet for production and 19,500 square feet for laboratories and offices. We also acquired 1.2 million square feet of additional land in August 2010 for our future expansion.

We were ~~have~~granted anland ~~on-site~~use ~~ocean~~rights ~~shipping~~for ~~dock with~~ 2.5~~,000~~ MTmillion ofsquare ~~shipping~~feet ~~capacity~~land ~~and~~in aNingbo, ~~10-truck~~China ~~loading~~where ~~facility. Approximately 90% of~~ our ~~feedstock~~current ~~and~~production ~~finished~~facilities ~~products use this shipping dock~~locate. We ~~also~~were ~~have~~granted ~~adjacent~~land ~~access~~use torights ~~another~~for ~~shipping~~4.7 ~~dock~~million ~~with~~square anfeet ~~additional~~land 50in Guangxi,~~000~~ MTChina offor ~~shipping~~the ~~capacity~~Guangxi Project.

48Our production facilities are set forth in the table below.

Facilities for Petrochemical Products

Product	Amount of Production Lines	Location of Facility	Designed Manufacturing Capacity (MT)				Actual Production (MT)				Utilization Rate
			2014		2015		2014		2015		2014			2015
BTX Aromatics	1	Ningbo, Zhejiang		300,000		300,000		209,385		235,347		75	%		78	%
Propylene	1	Ningbo, Zhejiang		50,000		50,000		28,986		21,713		58	%		43	%
Styrene	1	Ningbo, Zhejiang		80,000		80,000		80,815		65,695		101	%(1)		82	%
LPG	1	Ningbo, Zhejiang		100,000		100,000		63,196		61,366		63	%		61	%
MTBE and other chemicals	1	Ningbo, Zhejiang		190,000		190,000		201,213		118,293		106	%(1)		62	%
Total	5	N/A		720,000		720,000		586,775		502,414		N/A			N/A

(1)	We use industrial standard designed manufacturing capacity based on equipment and facility. In the case that a facility is operated efficiently, the actual production can exceed the standard calculation of designed manufacturing capacity.

Facilities for Rubber Products

Product	Amount of Production Line	Location of Facility	Designed Manufacturing Capacity (MT)				Actual Production (MT)				Utilization Rate
			2014		2015		2014		2015		2014			2015
SBS (1)	2	Ningbo, Zhejiang		70,000		70,000		16,976		29,828		24	%		43	%
SEBS (2)	1	Ningbo, Zhejiang		10,000		10,000		1,746		2,355		17	%		24	%
Total	3	N/A		80,000		80,000		18,713		32,183		N/A			N/A

(1)

Our SBS facility was completed in September 2011. It currently has two production lines in commercial production. SBS generally has a higher product margin compared to petrochemical products we are producing and a wide range of applications in the footwear, adhesive, polymer modification and modified asphalt industries.

(2)	Our SEBS facility started full production in fiscal year 2014.

We have a total of 134,000 MT of storage capacity, consisting of 84,000 MT of storage capacity for raw materials and 50,000 MT for finished products. As a part of our expansion plan, we intend to add additional 16,000 MT of new storage capacity which is now under construction and expected to be completed in the fourth quarter of 2016.

We own an on-site ocean shipping dock with 50,000 MT of shipping capacity and a 10-truck loading capacity next to our production facility in Ningbo, China. Approximately 90% of our feedstock and finished products use this shipping dock. We are currently upgrading the classification of our own dock so that we can unload foreign cargo vessels under the 50,000 MT cargo capacity to our dock directly. We expect that the upgrade will be completed by the end of 2017 and we will be able to unload certain cargoes directly rather paying a third party to do so.

Our Guangxi Project is located in Fangchengang city, an important port for Guangxi province, and other than Beihai, the only major Chinese port on the Tonkin Gulf. The storage and logistics costs are generally lower in Fanchengang city compared to other ports in China.

Equipment

Our major processing equipment includes the following:

● Heavy oil catalytic pyrolysis processing equipment-: risers/generators/precipitators, fuel gas boilers, fractionating tower, absorbing, re-absorbing , and desorbing towers, heat exchangers, pumps, and a stabilizing tower; ● Gas fractionation processing equipment- de-propanizing tower, refining propylene tower, de-ethanizination tower, heat exchangers, and pumps; ● Ethylbenzene processing equipment- alkylation reactor, anti-alkylation reactor, dehydrogenation reactor, propylene absorbing tower, de-ethylene tower, ethylbenzene recovering tower, heating furnace for benzene, heating furnace for gas, steam overheating furnace, tail gas compressor, and washing tower; and ● Liquefied petroleum gas (LPG) and sulfur recovery processing equipment: LPG desulfurization extraction tower, dry gas desulfurization tower, regenerating tower, and LPG de-mecaptan extraction tower.

● Ethylbenzene processing equipment- alkylation reactor, anti-alkylation reactor, dehydrogenation reactor, propylene absorbing tower, de-ethylene tower, ethylbenzene recovering tower, heating furnace for benzene, heating furnace for gas, steam overheating furnace, tail gas compressor, washing tower; and ● Liquefied petroleum gas (LPG) and sulfur recovery process- LPG desulfurization extraction tower, dry gas desulfurization tower, regenerating tower, LPG de-mecaptan extraction tower.42

Our Products

We manufacture and supply a variety of petrochemical products, including BTX aromatics, propylene, styrene, LPG, MTBE and other petrochemicals.

● BTX Aromatics: Consisting of benzene, toluene, xylene and other chemical components for further processing into oil resin, gasoline and solvents materials widely used in paint, ink, construction coating and pesticide.

● Propylene: A chemical intermediate as one of the building blocks for an array of chemical and plastic products that are commonly used to produce polypropylene, acrylonitrile, oxo chemicals, propylene oxide, cumene, isopropyl alcohol, acrylic acid and other chemicals for paints, household detergents, automotive brake fluids, indoor/outdoor carpeting, textile, insulating materials, auto parts and electrical appliances.

● Styrene: A precursor to polystyrene and several copolymers widely used for packaging materials, construction materials, electronic parts, home appliances, household goods, home furnishings, toys, sporting goods and others.

● LPG: A mixture of hydrocarbon gases used as fuel in heating appliances and vehicles. A replacement for chlorofluorocarbons as an aerosol propellant and a refrigerant which reduces damage to the ozone layer.

● MTBE & Other Chemicals: MTBE, oil slurry, sulphur and others are used for a variety of applications including fuel components, refrigeration systems, fertilizers, insecticides and fungicides, etc.

● Styrene butadiene styrene (SBS): a thermoplastic elastomer with features similar to rubber, widely used in the manufacture of resin, shoes, tape, tubes and asphalt.

Expansion Plan

~~Our~~The total ~~annual~~estimated ~~designed~~cost ~~manufacturing capacity was 550,000 MT~~ of aour ~~variety~~expansion ofplan ~~petrochemical~~is ~~products~~approximately ~~at the end of 2010~~$372.5 Inmillion, ~~order~~including to$300 ~~meet~~million for the ~~increasing~~Guangxi ~~market demands~~Project, we$30 million ~~upgraded~~for the ~~catalytic~~transformer ~~pyrolysis~~oil ~~processing~~facility, ~~equipment~~$40 ~~used~~million infor ~~our~~the ~~production~~increased ~~facilities~~annual todesign ~~expand the~~ capacity ~~from~~of ~~550~~ethylene-styrene,~~000~~ MTand ~~to 720,000 MT~~$2.5 ~~This~~million for ~~capacity~~additional ~~expansion~~storage ~~project started in March 2011 and was completed in April 2011~~capacity.

InOur current ~~September~~estimate ~~2011, we completed building a new facility designed for the production~~ of ~~SBS,~~our ~~one~~expansion ofschedule ~~the~~is ~~Styreneic~~as ~~Block Copolymers~~follows. ~~SBS~~ ~~is a product with higher product margin with major applications for the footwear~~However, ~~adhesive,~~we ~~polymer~~are ~~modification~~continuing ~~and~~our ~~modified~~evaluation ~~asphalt industries. The SBS facility was built on part~~ of the ~~1.2~~timeline ~~million square feet of land~~ for ~~which we obtained~~ the ~~land use right in August 2010~~ ~~The~~expansion projects ~~construction~~based ~~started~~on in September, 2010 and was completed (as planned) in September 2011. We started trial production in October and November, 2011, and one SBS production line began commercial production in December 2011. The design capacity of the SBS facility allows for production of up to 70,000 MT per year. We expect to generate net profit margins of 10% from our ~~production~~financial ofsituation ~~SBS once the facility reaches normal production levels. In 2012, the facility achieved a 41% utilization~~ and ~~generated~~market ~~approximiately $ 71~~conditions.~~0 million in sales and approximiately $ 5.97 million of income from operations.~~

Expansion Project		Expected Completion Date
Ethylene-Styrene Facility		End of Q1, 2017
Transformer Oil Facility		End of Q1, 2017
ABS Production Facility		End of Q1, 2017⁽¹⁾
New storage capacity of 16,000 MT		End of Q4, 2016

In(1) ~~order~~The toConstruction ~~develop~~of ~~our~~the ~~business~~ABS tofacility ~~meet~~and ~~the~~installation ~~increasing~~of ~~customer~~main ~~demands,~~equipment weand ~~have~~pipelines ~~been~~is ~~working~~expected to ~~expand~~be ~~our~~completed ~~manufacturing capacity~~ by ~~focusing on~~ the ~~following~~end ~~improvements to our infrastructure. In anticipation~~ of ~~the~~2017 ~~market~~and ~~demand for the~~ production ofis ~~finished~~expected ~~goods, environmental protection requirements, we adjusted our original expansion project and are currently working~~ to ~~refining~~be ~~our~~started ~~manufacturing~~by ~~capacity~~the toend ~~include:~~of 2018.

a) an ABS production facility in Guangxi Province, which will have an annual production capacity of 400,000 MT of ABS. The Company began pre-construction activities in February 2012, and the first phase is expected to be completed by the forth quarter of 2014. b) an oil catalytic cracking processing facility as an extension of our catalytic pyrolysis processing equipment, as well as the feed way of the main raw materials to produce synthetic rubber. This facility can reduce production costs and the market risk in completely repurchase of raw materials, and improve the stability and efficiency of project production to 200,000 MT of heavy oil per year. c) an increased annual design capacity of our ethylene-styrene facility from 80,000 MT to 200,000 MT, among which 120,000 MT can be used for producing synthetic and 80,000 MT can be sold to downstream petrochemical companies. Ethylene-styrene is the main raw material (eg. Bezene) from the catalytic cracking oil processing facility to produce styrene. This facility can be considered the bridge between original products and high-value added products and will complete the integration of our internal resources. d) a transformer oil facility using hydrogen from the ethylene-styrene facility to complete a double hydrogenation process on original products (BTX Aromatic) for refining transformer oil, and producing high value transformer oil with a design capability of 100,000 MT per year. e) an SSBR (Solution Polymerized Styrene Butadiene Rubber )production facility with a design capability of 150,000 MT per year, that will use its own production process technology in synthetic rubber, combining styrene and butadiene, to produce SSBR. This product can be used as raw materials for tires, instead of imported hexakis (methoxymethy) melamine (“HMMM”).

We are currently evaluating the timeline for the expansion projects. Our current estimate is as follows:

Expansion Project		Expected Completion Date
Oil Catalytic Cracking Processing Facility		End of Q4, 2013
Ethylene-Styrene Facility		End of Q4, 2014
Transformer Oil Facility		End of Q4, 2014
SSBR production facility		End of Q4, 2015
ABS Production Facility		End of Q4, 2014

The total cost of additioal processing equipment for products refinement and the SSBR production facility is approximately $149.3 million, including $49.8 million for additional processing equipment and $99.5 million for our SSBR production facility. We are currently going through the governmental approval and design phase of the ABS production facility and estimating the related costs.

We plan to fund this proposed expansion through debt financing, cash from operations, proceeds from prior financings, warrant exercises, and potential equity financing. However, we may not be able to obtain additional financing at acceptable terms, or at all, and, as a result, our ability to increase our production capacity and to expand our business could be adversely affected.

Going concern and management’s plans

~~Our audited financial statements for~~ For the ~~years~~year ended December 31, ~~2012~~2015, ~~and 2011 have been prepared assuming~~ we ~~will continue as a going concern. We~~ reported a net loss of approximately $560.855 million. inFor ~~2012~~the ~~and~~year ~~cash~~ended ~~flows~~December 31, 2015, net cash used in ~~operations~~operating ofactivities ~~approximately~~was $7112.15 million ~~for the year ended December 31, 2012~~. At December 31, ~~2012~~2015, we ~~had~~ a had working capital ~~deficit~~deficits of approximately $~~159~~284.6 million. The Report of the Independent Registered Public Accounting Firm on our consolidated financial statements as of and for the year ended December 31, 2012 includes a going concern explanatory paragraph which means that the accounting firm has express substantial doubt about the Company’s ability to continue as a going concern.

WeAlthough we continue to finance our operations primarily through short-term bank borrowings~~. Short-term~~ ~~bank~~and ~~borrowings~~management’s ~~and~~realignment ~~bills~~of ~~payable~~product ~~amounted~~profiles, toalong ~~approximately~~with ~~$397.8~~the ~~million~~general atstabilization of ~~December~~the ~~31,~~petrochemical ~~2012,~~industry ~~and~~in ~~have~~China, ~~increased~~our tooperations ~~approximately~~resulted ~~$414~~in ~~million~~a atnet ~~May~~loss ~~28,~~of ~~2013~~$60. ~~Management~~5 ~~expects~~million ~~that~~in ~~short-term~~2015 ~~bank~~compared ~~financing~~to ~~will~~a ~~continue~~net toloss beof $47.1 ~~available~~million ~~through~~in at2014 ~~least~~and ~~the~~a ~~end~~net profit of $4.6 million in 2013.

WeShort-term bank ~~continue~~borrowings toand ~~benefit~~notes ~~from~~payable ~~favorable~~amounted ~~PRC tax policies related~~ to ~~consumption tax,~~ approximately $~~51.3~~695 million ~~of which was refundable~~ at December 31, ~~2012~~2015. Management believes that this amount will be refunded by June 30, 2013 and that additional consumption tax deposits of approximately $84.1 million through May 28, 2013 will be refunded more promptly in the second half of 2013.

WeThese ~~are~~matters ~~expanding~~raise ~~our~~substantial ~~production~~doubt ~~line~~about tothe ~~include~~company’s ~~Styrene-Ethylene-Butylene-Styrene~~ability ~~(“SEBS”). Management expects production and sale of SEBS~~ to ~~commence~~continue inas ~~the second half of 2013, and that SEBS will yield~~ a ~~higher~~going ~~gross margin than some of the Company’s current products~~concern.

WeManagement ~~are~~expects ~~also~~that ~~exploring~~short-term ~~sources~~bank borrowings will continue to be available through the following 12 months from the date of ~~additional~~this ~~financing,~~report. ~~including~~Since we have not defaulted on previous short-term bank ~~financing~~borrowings, ~~from~~we ~~vendors~~believe ~~and~~the ~~other~~good ~~parties~~credit history will allow us to renew our short-term bank borrowing when they mature. In ~~addition~~Furthermore, management expects that the ~~Company~~petrochemical isindustry ~~closely~~in ~~monitoring~~China ~~its~~will ~~cash~~continue ~~balances~~to stabilize, ~~cash~~and ~~needs~~that demand for downstream products (such as auto, home appliances and ~~expense~~dyes) ~~levels~~will grow after several years of contraction. As such, management expects that the Company will resume profitability in the next few years.

~~The~~As ~~ability~~reported ofin ~~the~~our ~~Company~~financial tostatements for ~~continue~~the asyears aended ~~going~~December ~~concern~~31, is2015 ~~dependent~~and ~~upon~~2014, ~~management’s~~we ~~ability~~continue to ~~implement~~benefit ~~its~~from ~~strategic~~favorable ~~plan,~~PRC ~~obtain~~tax ~~additional~~policies ~~capital~~related ~~and~~to ~~generate net income and positive cash flows from operations~~consumption tax. ~~There~~ ~~can~~As beof noDecember ~~assurance~~31, ~~that~~2015, ~~these~~we ~~plans~~had consumption ~~will~~tax berecoverable ~~sufficient~~of orapproximately ~~that~~$44.4 ~~additional~~million. As ~~financing~~of ~~will~~July be31, ~~available~~2016, inall ~~amounts~~outstanding tax orrecoverable ~~terms~~as ~~acceptable~~of toDecember ~~the Company~~31, if2015 atwas ~~all~~refunded.

50We believe that the Company’s cash, working capital and access to cash through its bank loans, assuming they will remain available to us through the following 12 months from the date of this report, provide adequate capital resources to fund its operations and working capital needs through at least 12 months from the date of this report.

We are also exploring sources of additional financing, including short-term financing from our vendors and other parties and potential equity financing if the terms are acceptable to us. In addition, we are closely monitoring our cash balance, cash needs and expense levels.

Our ability to continue as a going concern is dependent upon management’s ability to implement our expansion plan, obtain additional capital and generate net income and positive cash flows from operations. There can be no assurance that these plans will be sufficient or that additional financing will be available in amounts or terms acceptable to us, if at all.

Manufacturing and Sales

Our total production of finished products ~~for~~during the ~~2012~~12 ~~was~~months ~~688~~ended December 31,~~821~~ MT2015 and ~~revenue~~2014 ~~totaled~~was ~~$750 million~~534,597 ~~based~~MT onand ~~the sale of 675~~605,~~484~~488 MT, ofrespectively. ~~petrochemical~~Our ~~products included~~revenue ~~the~~totaled ~~sale~~$474 ofmillion ~~SBS~~and $653 ~~products~~million ~~which~~for ~~was~~the ~~28,730MT. Our~~fiscal ~~total~~years ~~production~~ended ofDecember ~~finished products for 2011 was 535~~31,~~208~~ MT2015 and ~~revenue~~2014, ~~totaled $626.7 million~~ based on the sale of ~~588~~569,~~976~~748 MT and 882,571 MT of petrochemical products. ~~Therefore,~~and wesynthetic ~~experienced~~rubbers, anrespectively. ~~increase~~The decrease in total production of finished products ~~with an~~and ~~increase~~revenues in ~~revenue~~fiscal ~~and~~year 2015 ~~sales.~~was ~~The~~mainly ~~lower~~due ~~overall~~to an 85-day production insuspension. ~~2011~~We ~~was~~did ~~mainly~~not ~~due~~have toany ~~the~~production 44suspension ~~days~~during ofthe ~~production~~fiscal ~~interruptions.~~year 2014.

InDuring the first and second quarter of ~~2011~~2015, operation weof ~~experienced~~Ningbo ~~production~~Keyuan ~~interruptions,~~and ~~mainly~~Keyuan asSynthetic aRubbers ~~result~~was ofsuspended ~~the~~for ~~expansion~~85 ofdays ~~our~~in ~~production~~connection ~~capacity.~~with Incontinuing ~~April~~depressed ~~2011,~~oil weprice in ~~lost~~international amarkets ~~combined~~occurring 25in ~~days~~June of2014 ~~production,~~which ~~equating~~materially tonegatively ~~approximately~~impacted ~~54,000~~us ~~tons~~and ofour ~~production~~downstream distributors. As a result, we ~~and~~did ~~approximately~~not ~~$45~~have ~~million~~enough ofcapital ~~revenues.~~to In satisfy the ~~third~~unsustainable ~~quarter~~cash ofdemand ~~2011,~~to wemaintain ~~incurred~~operations. ~~production~~We ~~interruptions,~~resumed ~~mainly~~operations asin aApril 2015 ~~result~~when ofwe observed the ~~upgrade~~recovery ofand ~~the~~stabilization ~~local~~of ~~power~~oil ~~grid~~market. WeDuring ~~lost~~the asuspension, ~~combined~~we 19conducted ~~days~~routine maintenance of facility ~~production,~~which ~~equating~~is torequired ~~approximately~~every ~~41,000~~two ~~tons~~years ~~of production,~~ and ~~approximately~~requires ~~$40~~a ~~million~~temporary suspension of ~~revenues~~production. As a result, inof ~~2011~~the wesuspension, ~~experienced~~our total production ~~interruptions~~of ~~totaling~~finished aproducts ~~combined~~for 44the ~~days. These~~fiscal ~~lost~~year ~~days~~2015 ofwas ~~production~~decreased ~~equated~~by to approximately 9571,000 ~~tons~~MT ofand ~~production~~revenue ~~and~~for the fiscal year 2015 was decreased by approximately $85179 million compared to the total production of ~~revenues~~finished products and revenue for the fiscal year 2014, respectively.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include the financial statements of the Company and its subsidiaries (the “Group”). The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the useful lives of fixed assets; the fair value determination of financial and equity instruments; the ~~realizability~~ability ofto realize inventories; ~~and~~ the recoverability of ~~property,~~long-lived ~~plant~~assets; the collectability of receivables and ~~equipment~~the realization of deferred tax assets. These estimates are often based on complex judgments and assumptions that management believes to be reasonable but ~~are~~ inherently uncertain and unpredictable.

We believe the following critical accounting policies, among others, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:

Inventories. Inventories are stated at the lower of cost or market. Cost is determined using the weighted-average cost method. ~~Provisions~~ Written-downs are made for excess, slow moving and obsolete inventory as well as inventory whose carrying value is in excess of net realizable value. Management continually evaluates the recoverability based on assumptions about customer demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory ~~reserves or~~ write-downs may be required. The Group ~~did~~recorded ~~not~~$4.4 ~~record~~million ~~any~~and ~~provision~~$1.2 million for slow-moving and obsolete inventory as of December 31, ~~2012~~2014 and ~~2011~~2013, respectively. The Group did not record any written-down for slow-moving and obsolete inventory for fiscal year 2015 in this report.

Property, Plant and Equipment. Property, plant and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, taking into consideration the assets’ estimated residual value. When items are retired or otherwise disposed of, income is charged or credited for the difference between the net book value and proceeds received thereon. Ordinary maintenance and repairs are charged to expense as incurred.

The estimated useful lives of property, plant and equipment are listed as follows:

Buildings	45 years
Machinery and equipment	5 to 15 years
Plant, machinery and equipment	5 to 20 years
Vehicles	5 years
Office equipment and furniture	3 to 10 years

5144

Construction-in-progress is stated at cost. Cost comprises of nonrefundable prepayments and direct costs of construction as well as interest costs capitalized during the period of the construction of the plant or installation of equipment. Costs included in construction in progress are transferred to their respective categories of property, plant and equipment when the assets are ready for their intended use, at which time depreciation commences.

Long-Lived Assets. The Group reviews the recoverability of its long-lived assets on a periodic basis in order to identify business conditions, that ~~which~~ may indicate a possible impairment. The assessment for potential impairment is based primarily on the Group’s ability to recover the carrying value of its long-lived assets from expected future discounted cash flows. If the total of the expected future discounted cash flows is less than the total carrying value of the assets, a loss is recognized for the difference between the fair value (computed based upon the expected future discounted cash flows) and the carrying value of the assets.

Notes Receivable. For certain major customers, the Group accepts their payment for the Group’s products by ~~bills~~notes receivable. Notes ~~Bills~~ receivable represent short-term notes receivable issued either by the customer or by the customer and an accepting bank that entitles the Group to receive the full face amount from the customer or the accepting bank at maturity, which is generally six months from the date of issuance. ~~Bills~~Notes receivable are typically sold at a discount prior to maturity, and the discount is included in interest expense. Historically, the Group has experienced no ~~losses~~loss on ~~bills~~notes receivable from the default of counterparties.

~~Bill Receivable~~Notes Payable. InNotes ~~connection~~payable ~~with~~represent bills issued by accepting banks in favor of the ~~Company~~Group’s ~~financing~~suppliers. ~~transactions,~~The ~~the~~ Group’s suppliers ~~may~~receive ~~also~~payments ~~obtain~~from ~~bills~~the ~~receivable~~accepting inbanks ~~exchange~~directly ~~for~~upon ~~cash~~maturity orof ~~payables. These~~the bills, ~~which~~and ~~are~~the ~~sold~~Group atis aobliged ~~discount~~to ~~prior~~repay the face value of the bills to ~~maturity,~~the ~~include~~accepting ~~provisions~~banks. ~~whereby~~Bills that are not remitted directly by the Group ~~agrees~~ to ~~reimburse~~its ~~the~~suppliers ~~accepting~~may ~~bank~~be insold by the ~~event~~Group ~~that~~to ~~the~~other ~~related~~accepting ~~party~~banks ~~counterparty~~for ~~fails~~cash prior to ~~honor~~their ~~its~~maturity. ~~liability~~Discounts topaid ~~the~~are ~~accepting~~recorded ~~bank~~as a component of interest expense.

~~Bills Payable~~Revenue Recognition. The ~~Bills~~Group ~~payable~~derives ~~represent~~its ~~bills~~revenue ~~issued~~primarily byfrom anthe ~~accepting~~sale ~~bank~~of inpetrochemical ~~favor~~and ofrubber products. In accordance with the ~~Group’s~~provisions ~~suppliers.~~of ~~The~~the ~~Group’s~~FASB ~~suppliers~~ASC ~~receive~~Topic ~~payments~~605, ~~from~~revenue ~~the~~is ~~accepting~~recognized ~~bank~~only ~~directly~~when ~~upon~~it ~~maturity~~is ofrealized ~~the~~or ~~bills,~~realizable and ~~the~~earned. ~~Group~~Revenues are isconsidered ~~obliged~~ to ~~repay~~have been earned when the ~~face~~entity ~~value~~has ofsubstantially ~~the~~accomplished ~~bills~~what it must do to be entitled to the ~~accepting~~benefits represented ~~bank~~by the revenues. ~~Bills~~The ~~that~~Group recognizes revenue when the products are ~~not~~delivered ~~remitted~~and ~~directly~~customers bytake ownership and assume risks of losses, collection of the ~~Group~~relevant toreceivable ~~its~~is ~~suppliers~~probable, ~~may~~persuasive beevidence ~~sold~~of byan arrangement exists and the ~~Group~~sales price tois ~~other~~fixed ~~accepting~~or ~~banks~~determinable. ~~for~~Written ~~cash~~sales ~~prior~~agreements, towhich ~~their~~specify ~~maturity.~~price, ~~Discounts~~product, ~~paid~~and quantity, are ~~recorded~~generally used as evidence of arrangements. Customer acceptance is generally evidenced by a ~~component~~carrier ofsigned ~~interest~~shipment ~~expense~~notification form.

Revenue Recognition. The Group derives its revenue primarily from the sale of petrochemical products. In accordance with the provisions of the SEC Staff Accounting Bulletin No. 104, codified in FASB ASC Topic 480, revenue is recognized only when it is realized or realizable and earned. Revenues are considered to have been earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues. The Group recognizes revenue when the products are delivered and the customer takes ownership and assumes risks of losses, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable. Written sales agreements, which specify price, product, and quantity, are generally used as evidence of an arrangement. Customer acceptance is generally evidenced by a carrier signed shipment notification form.

In the PRC, value added tax (“VAT”) of 17% on invoiced amounts is collected on behalf of the tax authorities. Revenue is recorded net of VAT. VAT paid for purchases, net of VAT collected from customers, is recorded in “other current assets” in the consolidated balance sheets.

Share-Based Compensation. The Group accounts for share-based payments under the provisions of FASB ASC Topic 718, “Compensation-Stock Compensation”~~, or ASC Topic 718~~. Under FASB ASC Topic 718, the Group measures the costs of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award and recognizes the costs over the period the employee is required to provide service in exchange for the award, which generally is the vesting period.

The Group accounts for equity instruments issued to non-employee vendors in accordance with the provisions of FASB ASC Subtopic 505-50, “Equity-Based Payments to Non-Employees”. All transactions in which goods or services are received in exchange for equity instruments are accounted for based on the fair value of the equity instrument issued. The measurement date for the fair value of the equity instruments issued is the date on which the counterparty’s performance is completed.

Income Taxes. Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss carryforwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided to reduce the carrying amount of deferred income tax assets if it is considered more likely than not that some portion, or all, of the deferred income tax assets will not be realized.

The Group recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Group has elected to classify interest and penalties related to unrecognized tax benefits as part of income tax expense in the consolidated statements of operations.45

The Group recognizes the effect of income tax positions only if those positions are more likely than not will be sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% possibility of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Group has elected to classify interest and penalties related to unrecognized tax benefits as part of income tax expense in the consolidated statement of operations. There were no unrecognized tax benefits as of December 31, 2015 and 2014, respectively. Management does not anticipate any potential future adjustments in the next twelve months that would result in a material change to its tax positions. For periods presented, the Group did not incur any interest and penalties.

Contingencies. In the normal course of business, the Group is subject to loss contingencies, such as legal proceedings and claims arising out of its business. An accrual for a loss contingency is recognized when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated.

Results of Operations

The following table ~~and analysis~~ sets forth information from our statements of operations for the years ended December 31, ~~2012~~2015 and ~~2011~~2014 (amounts in thousands, except production and per metric ton amounts):

	For the Year Ended December 31						Year to Year Comparison
	2012			2011			Increase/ (decrease)			Percentage Change
	2015			2014			Increase/ (decrease)			Percentage Change
Sales	$	474,360		$	653,497		$	(179,137	)		(27.41	%)
Third Parties	$	750,628		$	533,913		$	216,715			40.59	%
Cost of Sales		446,442			659,353			(212,911	)		(32.29	%)
Related Parties		-			92,772			(92,772	)		(100	%)
Gross profit (loss)		27,918			(5,856	)		33,774			576.74	%
Total Sales		750,628			626,685			123,943			19.78	%
Operating expenses
Cost of Sale
Selling expenses		2,165			1,477			688			46.58	%
Third Parties		721,519			504,872			216,647			42.91	%
General and administrative expenses		35,554			11,742			23,812			202.79	%
Related Parties		-			99,798			(99,798	)		(100	%)
Total operating expenses		37,719			13,219			24,500			185.34	%
Cost of Sales		721,519			604,670			116,849			19.32	%
Loss from operations		(9,801	)		(19,075	)		9,274			48.62	%
Gross Profit		29,109			22,015			7,094			32.22	%
Other income/(expense)
Operating Expenses
Interest income		12,231			10,109			2,122			20.99	%
Selling Expenses		1,132			1,240			(108	)		(8.71	%)
Interest expense		(37,983	)		(26,077	)		(11,906	)		(45.66	%)
General and administrative Expenses		12,510			17,859			(5,349	)		(29.95	%)
Foreign exchange loss, net		(13,165	)		(2,666	)		(10,499	)		(393.81	%)
Total Operating Expenses		13,642			19.099			(5,457	)		(28.57	%)
Other income (expense), net		(10,562	)		(6,369	)		(4,193	)		(65.83	%)
Income from Operations		15,467			2,916			12,551			430.42	%
Total other expenses		(49,479	)		(25,003	)		(24,476	)		(97.89	%)
Other Income(Expense)
Loss before provision for income taxes		(59,280	)		(44,078	)		(15,202	)		(34.49	%)
Interest Income		5,940			4,320			1,620			37.50	%
Income tax expense		1,222			3,047			(1,825	)		(59.89	%)
Interest Expense		(25,065	)		(15,797	)		9,268			58.67	%
Net loss		(60,502	)		(47,125	)		(13,377	)		(28.39	%)
Foreign Exchange gain, net		(1,319	)		3,662			(4,981	)		(136	%)
Other comprehensive loss
Liquidated damages expenses		-			(2,493	)		(2,493	)		100	%
Foreign currency translation adjustment		(2,603	)		(543	)		(2,060	)		(379.37	%)
Other income (expense), net		(79	)		3,103			(3,182	)		(97.45	%)
Comprehensive loss	$	(63,105	)	$	(47,668	)		(15,437	)		(32.38	%)
Total other expenses		(20,523	)		(7,205	)		13,318			184.84	%
Loss before provision for income taxes		(5,056	)		(4,289	)		767			17.88	%
Income tax expense		794			2,852			(2,058	)		(72.16	%)
Net loss		(5,850	)		(7,141	)		(1,291	)		(18.08	%)
Other comprehensive income
Foreign currency translation adjustment		945			3,235			(2,290	)		(70.79	%)
Comprehensive loss	$	(4,905	)	$	(3,906	)		999			25.58	%

5346

~~Sales:~~The following ~~Our~~table ~~sales~~sets ~~for~~forth ~~the~~information ~~year~~from ~~ended~~our ~~December~~statements ~~31, 2012 were $750,628 compared to sales~~ of ~~$533,913~~operations for the ~~year~~years ended December 31, ~~2011,~~2014 anand ~~increase~~2013 of(amounts in ~~$216~~thousands,~~715,~~ orexcept ~~40.59%. The substantial increase in our sales was due to higher~~ production ~~volume of our products, more working days~~ and ~~the operation of our of SBS facility for the 12 months ended December 31, 2012. In 2012, we sold 675,484 metric tons of chemical products at an average price of $1.11~~ per metric ton, as compared to sales of 588,976 metric tons of chemical products at an average price of $1.07 per metric ton in 2011. This represents an increase of approximately 15% in sold products. Compared with 44 days production suspension in 2011, we lost 15 days of production for inspections during 2012. With the commencement of production in 2012, the SBS facility achieved 41% of its designed capacity (full capacity should be 70,000tons/ yearamounts) ~~in its first year which brought an additional 28,730 MT of finished products and sales of $70,992.~~:

We did not incur any sales to related parties for the year ended December 31, 2012 as compared to $92,772 of sales to related parties for the year ended December 31, 2011. Pricing for sales to related parties adopts the same principles as that to non-related parties. For additional information on related party sales, please refer to Footnote 23 of the financial statements.

	For the Year Ended December 31						Year to Year Comparison
	2014			2013			Increase/ (decrease)			Percentage Change

Sales	$	653,497		$	646,549		$	6,948			1.07	%
Cost of sales		659,353			620,040			39,313			6.34	%

Gross (loss) profit		(5,856	)		26,509			(32,365	)		(122.09	%)

Operating expenses
Selling expenses		1,477			1,563			(86	)		(5.50	%)
General and administrative expenses		11,742			14,736			(2,994	)		(20.32	%)
Total operating expenses		13,219			16,299			(3,080	)		(18.90	%)

(Loss) Income from operations		(19,075	)		10,210			(29,285	)		(286.83	%)

Other income(expense)
Interest income		10,109			8,422			1,687			20.03	%
Interest expense		(26,077	)		(18,809	)		(7,268	)		(38.64	%)
Foreign exchange (loss)gain, net		(2,666	)		10,118			(12,784	)		(126.35	%)
Other income (expense), net		(6,369	)		(1,833	)		(4,536	)		(247.46	%)
Total other expenses		(25,003	)		(2,102	)		(22,901	)		(1089.49	%)

(Loss) profit before provision for income taxes		(44,078	)		8,108			(52,186	)		(643.64	%)
Income tax expense		3,047			3,476			(429	)		(12.34	%)
Net (loss) income		(47,125	)		4,632			(51,757	)		(1117.38	%)

Other comprehensive (loss) income
Foreign currency translation adjustment		(543	)		2,754			(3,297	)		(119.72	%)

Comprehensive (loss) income	$	(47,668	)	$	7,386			(55,054	)		(745.38	%)

The following ~~breakdown~~analysis set forth information from our statements of operations for the ~~675~~years ended December 31,~~484~~ ~~metric~~2015, ~~tons~~2014 ~~products~~and 2013 ~~produced~~(unless isotherwise ~~listed~~stated, ~~below.~~amounts in thousands, except production and per MT amounts):

Product	(Metric Tons)
BTX Light Aromatics		287,887
BTX Heavy Aromatics		135,694
LPG		71,017
MTBE and Others		50,661
Styrene		56,152
Propylene		45,343
SBS products		28,730
Total Metric Tons Sold		675,484

Sales: Our sales for the year ended December 31, 2015 were $474,360 compared to sales of $653,497 for the year ended December 31, 2014, a decrease of $179,137 or 27.4%. The decrease in our sales is a result of an 85-day production suspension in connection with the continuingly depressed oil price in international markets occurring in June 2014, which had materially negatively impacted us and our downstream distributors. As a result, we then did not have enough capital to satisfy the unsustainable cash demand to maintain operation. The sales for the year ended December 31, 2014 compared to sales of $646,549 for the year ended December 31, 2013 increased by $6,948 or 1.1%, which was not significant.

Cost of Sales: Cost of sales was $721,519 for the year ended December 31, 2012, or 96% of sales, compared to cost of sales of $504,872, or 95% of sales for the year ended December 31, 2011, an increase of $216,647. Our cost of sales are primarily composed of the costs of direct raw materials (mainly heavy oil, benzene and carbinol), labor, depreciation and amortization of manufacturing equipment and facilities, and other overhead. In 2012, our average cost of finished product was $1.07 per metric ton, as compared to an average cost of $1.03 per metric ton in 2011, an increase of 3%. The increase of the cost of sales is mainly attributable to the SBS facility. Our SBS facility resulted in an additional 28,730 MT of products in 2012 and an additional $63,365 of cost of sales. Moreover, the increasing Chinese labor costs also caused an increase in cost of sales.47

54During the year ended December 31, 2015, we sold 596,748 MT of petrochemical products at an average price of $0.83 per MT compared to sales of 882,571 MT of petrochemical products at the average price of $0.74 per MT in the fiscal year 2014. This represents a reduction of 312,823 MT, or a decrease of approximately 35.4% in sold products. The decrease was mainly due to the production suspension for 85 days in 2015 and the decreased market demands for our products despite that the average sales price in 2015 increased as a result of the stabilization of global oil price in 2015. We did not suspend our operation during the fiscal year 2014. The increase in the average sales price in 2015 was mainly due to the stabilization of global oil price in 2015 compared to the continuingly depressed international oil price in second half year of 2014.

~~Gross~~During ~~Profit: Gross profit for~~ the year ended December 31, ~~2012~~2014, ~~was~~we sold ~~$29~~882,~~109,~~571 ~~compared~~MT toof petrochemical products at an average price of $~~22,015 for~~0.74 ~~the~~per ~~year~~MT ~~ended~~compared ~~December~~to 31529,957 ~~2011. Our~~MT ~~gross~~of ~~profit~~petrochemical ~~margin~~products sold ~~has~~at ~~increased~~the ~~from~~average 3price of $1.~~51%~~17 ~~for~~per MT in the fiscal year ~~ended~~2013. ~~December~~This 31represents an increase of 116,796 ~~2011~~MT, toor 3an increase of approximately 40.90% ~~for~~in sold products. The increase was mainly due to the ~~year~~completion ~~ended~~of ~~December~~our 31oil catalytic cracking processing facility in late 2014 which can improve the stability and efficiency of projection production of heavy oil to 200,000 ~~2012. The~~MT ~~main~~of ~~reason~~heavy ~~for~~oil per year and the ~~increase~~increased indemands for our products due to the ~~gross~~market ~~margin~~change isdespite that the ~~increase~~average sales price decreased in ~~sales~~2014. The ~~volume~~significant ~~and~~decrease in the ~~new~~average ~~SBS~~sales ~~products~~price ~~which~~was ~~yield~~mainly ain ~~higher~~connection ~~gross~~with ~~profit~~the ~~margin~~continuingly ofdepressed 10oil price in international markets occurring in June 2014.~~74%.~~

~~Operating~~During ~~Expenses:~~the ~~Operating~~year ~~expenses~~ended December 31, ~~including~~2015, we ~~selling~~produced ~~expenses~~31,707 ~~and~~MT ~~general~~of ~~and~~finished ~~administrative~~SBS ~~expenses,~~products ~~were~~at ~~$13,642,~~an oraverage sale price of $1.886 %per ofMT generating sales ~~for~~of ~~the~~$58,975. During the year ended December 31, ~~2012~~2014, aswe ~~compared~~produced to13,821 MT of finished SBS products at the average sale price of $~~19,100,~~1.59 orper 3%MT generating total sales of $21,943. Our sales for SBS products for the fiscal year ~~2011,~~2015 aincreased ~~decrease~~by of $ 537,~~457. The~~032 ~~decrease~~or ~~was~~168.8% ~~due~~compared to ~~expense~~the sales of ~~$5.8~~SBS ~~million~~products infor ~~connection~~the ~~with~~fiscal ~~the~~year ~~Independent~~2014. ~~Investigation~~The reason for the ~~year~~increase ~~ended~~in ~~December~~finished ~~31,~~SBS ~~2011.~~products ~~There~~ is that we became more experienced in SBS production and were ~~no such~~able ~~expenses~~to ~~for~~further stabilize the ~~year~~facility ~~ended~~operating ~~December 31~~conditions, ~~2012~~reduce interruptions and increase the output during the fiscal year 2015.

~~Interest~~During ~~Expense: For~~ the year ended December 31, ~~2012~~2014, we ~~interest~~produced ~~expense~~13,821 ~~was~~MT ~~approximately~~of ~~$25,065~~finished asSBS ~~compared~~products toat ~~interest~~an ~~expense~~average sale price of ~~approximately~~$1.59 per MT generating sales of $1521,~~797~~943. ~~for~~During the year ended December 31, ~~2011.~~2013, ~~The~~we ~~increase~~produced in36,959 ~~interest~~MT ~~expense~~of isfinished ~~mainly~~SBS ~~due~~products toat the ~~increased~~average ~~interest~~sale ~~cost~~price ~~associated~~of ~~with~~$2.11 ~~discounting~~per MT generating total sales of ~~bank~~$77,984. ~~acceptance~~Our ~~notes~~sales ~~and~~for ~~higher~~SBS ~~interest~~products ~~rates~~for the fiscal year 2014 decreased by $56,041 ~~together~~or ~~with~~71.9% compared to sales of SBS products for the ~~increased~~fiscal ~~bank~~year ~~borrowings~~2013. The main reason for the decrease is due to the change in market conditions and decreased demands of SBS products.

~~Liquidated~~We ~~damages~~started ~~expense:~~full ~~For~~production of SEBS in 2014. During the year ended December 31, ~~2012~~2015, we ~~did~~sold ~~not~~2,207 ~~accrue~~MT ~~any~~of ~~liquidated~~finished ~~damages~~SEBS ~~expenses~~products ~~compared~~at toan ~~accrued~~average ~~liquidated~~sale ~~damages~~price ~~expense~~ of $2.3 per MT,~~493~~ ~~for~~generating sales of $5,098. During the year ended December 31, ~~2011.~~2014, Onwe ~~April~~sold 1,445 ~~2011,~~MT ~~trading~~ of ~~the~~SEBS ~~Company’s~~products ~~common~~at ~~stock~~an ~~was~~average ~~suspended.~~price Inof ~~addition,~~$2.7 ~~management~~per ~~determined~~MT generating ~~that,~~sales ~~our~~of ~~Registration Statements were no longer effective since April 15~~$3,919. ~~2011~~The ~~and~~increase ~~the~~of ~~registrable~~SEBS ~~securities~~products inwe ~~connection with Series A and B Private Placements were not be able to be~~ sold ~~pursuant to Rule 144 under the Securities Act~~ during the ~~period~~fiscal ~~between~~year ~~April~~2015 ~~2011~~was ~~and~~mainly ~~November~~because 1,we ~~2011.~~started ~~Accordingly,~~producing SEBS in ~~the~~fiscal year ~~ended~~2014 ~~December~~and 31thus, ~~2011,~~did itnot ~~became~~full ~~probable~~capacity ~~that~~in ~~the~~2014. ~~Company~~The ~~will~~change beof ~~required~~the toaverage ~~remit~~sale ~~liquidated~~price ~~damages~~was tocaused ~~investors.~~by ~~Estimated~~the ~~contingent~~change in ~~liabilities~~market ofprice ~~$2.5~~and ~~million~~the ~~were~~decrease ~~accrued with a corresponding charge to earnings~~ in ~~the~~raw ~~year~~material ~~ended~~prices ~~December~~for ~~31,~~producing ~~2011~~SEBS.

~~Net~~The ~~loss:~~breakdown ~~Net loss for the year ended December 31, 2012 was approximately $5,850 , as compared to a net loss~~ of ~~approximately~~products ~~$7,141~~produced for the ~~year~~ years ended December 31, ~~2011~~2015, a2014 ~~decrease of $1,291 or 18.08 %. The decrease in net loss was mainly due to a higher yield rate~~ and ~~decreased~~2013 ~~legal,~~is ~~consulting~~listed ~~and investigation expenses~~below.

Foreign Currency Translation Adjustment: Our reporting currency is the U.S. dollar. Our local currency, Renminbi (RMB), is our functional currency. Results of operations and cash flow are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rate as quoted by the People’s Bank of China at the end of the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of shareholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

Products	For the Year Ended December 31,
	2015 (MT)		2014 (MT)		2013 (MT)
BTX Aromatics		243,261		140,313		275,923
LPG		58,571		54,404		93,377
MTBE and Others		151,762		635,357		29,337
Styrene		90,106		27,464		76,246
Propylene		21,342		11,212		55,074
SBS		31,707		13,821		36,959
SEBS		2,207		1,445		-
Total Products Sold		598,956		884,016		566,916

Currency translation adjustments resulting from this process are included in accumulated other comprehensive income in the consolidated statement of shareholders' equity and amounted to gain $945 for the year ended December 31, 2012 and $3,235 for the year ended December 31, 2011, respectively. The equity accounts were translated at historical rates. The average translation rates applied to income statement accounts for the years ended December 31, 2012 and 2011 were RMB 6.30318 and RMB6.45328 to 1.00 U.S. dollar.48

Cost of Sales: Our cost of sales are primarily composed of the costs of direct raw materials (mainly heavy oil, benzene and carbinol), labor cost, depreciation and amortization of manufacturing equipment and facilities, and other overhead.

Cost of sales was $446,442 for the year ended December 31, 2015, or 94% of sales, compared to cost of sales of $659,353, or 101% of sales for the year ended December 31, 2014, a decrease of $212,911 or 32.29%. The decrease in cost of sales in 2015 is mainly due to the 85-day production suspension in connection with the continuingly depressed oil price in international markets occurring in June 2014, which materially negatively impacted us and our downstream distributors. As a result, we then did not have enough capital to satisfy the unsustainable cash demand to maintain operation.

Cost of sales for the year ended December 31, 2014 was $659,353 compared to cost of sales of $620,040, or 96% of sales for the year ended December 31, 2013, an increase of $39,313 or 6.34%. The increase in cost of sales in 2014 is mainly due to 41 days of production suspension in 2013.

In addition to primary components of cost of sales listed above, our cost of sales includes energy costs. Energy required for our production consists of water, electricity and steam, the costs of which are attributed to cost of sales rather than operating expense. Historically prices of these energy sources in China have been very stable as a result of PRC governmental policy. Accordingly, the potential impact of changes in energy costs to cost of sales is minimal. The following are the costs for water, electricity and stream for the years ended December 31, 2015, 2014 and 2013 (amounts in thousands except production and per metric ton amounts):

	For the Year Ended December 31
	2015		2014		2013

Water	$	1,237	$	1,335	$	1,367
Electricity		12,454		8,962		12,627
Steam		6,784		2,730		2,298
Total		20,475		13,027		16,292

Total energy cost was approximately $20,475 for the year ended December 31, 2015, which constitutes approximately 4.3% of sales. Total energy cost was approximately $13,027 for the year ended December 31, 2014 which constitutes approximately 2.0% of sales. Total energy cost was approximately $16,292 for the year ended December 31, 2013, which constitutes approximately 2.52 % of sales.

Gross Profit (loss): Gross profit for the year ended December 31, 2015 was $27,918 compared to gross loss of $5,856 for the year ended December 31, 2014. The increase of $33,774 in gross profit in fiscal year 2015 is due to the stabilization of international oil price in 2015 compared to 2014. The increase in average sales price in 2015 has resulted in a better gross profit compared to 2014.

Gross loss for the year ended December 31, 2014 was $5,856 compared to gross profit of $26,509 for the year ended December 31, 2013. The decrease of $32,365 in gross profit in 2014 is due to the overall petrochemical market deterioration in 2014, which caused a continuing decrease in prices of both finished products and raw material.

Operating Expenses: Operating expenses include selling expenses, and general and administrative expenses. Operating expenses were $37,719, or 8.0 % of sales for the year ended December 31, 2015 compared to $13,219, or 2.0% of sales for the fiscal year ended December 31, 2014, an increase of $24,500. The increase is mainly due to the increase in bad debt provision provided for in our accounts receivables and our prepayment to suppliers of $22,151 in 2015. The bad debt provision was mainly due to canceled orders caused by change in market conditions which led to decrease in product demand.

Operating expenses were $13,219, or 2.0% of sales for the year ended December 31, 2014 compared to $16,299, or 2.5% of sales for the fiscal year 2013, a decrease of $3,080. The decrease is mainly due to a decrease of $973 in research and development expenses and a decrease of $577 in consulting fee paid to an external financial consultant in fiscal year 2014 compared to the fiscal year 2013.

Interest Income and Expense: For the year ended December 31, 2015, the interest income and expense was approximately $12,231 and $37,983, respectively; compared to interest income and expense of approximately $10,109 and $26,077 for the year ended December 31, 2014, respectively. The increased interest income during the fiscal year 2015 is mainly from the increased pledge bank deposit for the bank borrowing during the fiscal year 2015. The increase in interest expense is mainly due to the increase in average borrowing interest rate from 3.7% to 4.4% for the fiscal year 2015 comparing to the fiscal year 2014.

For the year ended December 31, 2014, the interest income and expense was approximately $10,109 and $26,077, respectively; compared to interest income and expense of approximately $8,422 and $18,809 for the year ended December 31, 2013, respectively. The increased interest income during the fiscal year 2014 is mainly from the increased pledge bank deposit for the bank borrowing during the fiscal year 2014. The increase in interest expense is mainly due to the increase in short term loan of $567,525 as of December 31, 2014 compared to short-term bank loan of $424,436 as of December 31, 2013.

Net Income/loss: Net loss for the year ended December 31, 2015 was approximately $60,502 compared to a net loss of approximately $47,125 for the year ended December 31, 2014, which was an increase of $13,377 or 28.39%. The increase in net loss for the fiscal year 2015 was mainly due to the exchange loss of $13,165 from the depreciation of RMB, which caused by the Company’s frequent overseas transactions on the purchase and sales of crude oil as raw materials that were denominated in USD. For instance, the exchange rate for USD to RMB was 6.12 to 1 on December 31, 2014 compared to 6.49 to 1 on December 31, 2015. Also the decrease in sales in 2015 due to production suspension contributed to the increase in the net loss for the fiscal year 2015.

Net loss for the year ended December 31, 2014 was approximately $47,125 compared to a net profit of approximately $4,632 for the year ended December 31, 2013, a decrease of $51,757 or 1117.38%. The decrease in net income was mainly due to the decrease in gross profit as stated herein above and the exchange loss of $12,784 from the depreciation of RMB, which caused by the Company’s frequent overseas transactions that denominated in USD.

Foreign Currency Translation Adjustment: Our reporting currency is the U.S. dollar. Our local currency, RMB, is our functional currency for Chinese operating entities. Results of operations and cash flow are translated at an average exchange rate during the corresponding reporting period, and assets and liabilities are translated at unified exchange rate as quoted by the People’s Bank of China at the end of such period. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of stockholder equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than RMB are included in the results of operations as incurred.

Currency translation adjustments resulting from this process are included in accumulated other comprehensive income in the consolidated statement of equity, and amounted to a loss of $2,603 for the year ended December 31, 2015, a loss of $543 for the year ended December 31, 2014 and a gain of $2,754 for the year ended December 31, 2013, respectively. The amounts in our balance sheets as of December 31, 2015, 2014 and 2013, with the exception of equity, were translated at RMB 6.4936, RMB 6.1190 and RMB 6.1087 to 1.00 U.S. dollar, respectively. The equity accounts were translated at their historical rates. The average translation rates applied to income statement accounts for the years ended December 31, 2015, 2014 and 2013 were RMB6.2264, RMB 6.1426 and RMB 6.1900, respectively, to 1.00 U.S. dollar.

Liquidity and Capital Resources

The Company's financial statements for the years ended December 31, 2012 and 2011 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Report of our Independent Registration Public Accounting Firm on the Company's financial statements as of and for the year ended December 31, 2012 includes a going concern explanatory paragraph which means that the auditors stated that conditions exist that raise substantial doubt about the Company's ability to continue as a going concern.

The following table sets forth a summary of our approximate cash flows for the periods indicated:

	For the Year Ended December 31 (in thousands)
	2012			2011
	2015			2014			2013
Net cash provided by (used in) operating activities	$	(7,095	)	$	1,731
Net cash (used in) provided by operating activities	$	(112,456	)	$	41,460		$	(53,093	)
Net cash used in investing activities	$	(543,~~417~~396	)	$	(4233,~~313~~668	)	$	(73,341	)
Net cash provided by financing activities	$	77,488		$	16,934
Net cash provided by (used in) financing activities	$	141,100		$	(14,760	)	$	115,231

55Net cash used in operating activities was $112,456 for the year ended December 31, 2015, compared to $41,460 provided by operating activities for the same period in 2014. The cash used in operating activities is primarily caused by $60,502 in net loss, an increase of $34,967 in consumption tax refund receivable, increase of $67,762 in prepayment to suppliers and the increase of $71,763 in pledged deposits for operating activities.

Net cash ~~used~~provided inby operating activities was $741,~~095~~460 for the year ended December 31, ~~2012~~2014 as compared to $ 153,~~731~~093 ~~provided~~used byin operating activities for the same period in ~~2011~~2013. The ~~decrease in~~ cash provided by ~~operations~~operating ~~was~~activities is primarily due to ~~increases~~a decrease of $34,349 in ~~accounts~~consumption tax receivable, and ~~inventories~~a decrease of $5,200 ~~prepayments~~in prepayment to suppliers. ~~and~~We ~~other~~obtained ~~current~~more ~~assets~~advances from customer in 2014, ~~offset~~which byled anto ~~increase~~the increase in ~~advances~~net ~~from~~cash ~~customers~~provided by operating activities in 2014.

Net cash used in investing activities was approximately $543,~~417~~396 and $4233,~~313~~668 for the years ended December 31, ~~2012~~2015 and ~~2011~~2014, respectively. ~~Net~~The net cash used in investing activities ~~was~~for the fiscal year 2015 is primarily ~~comprised~~due ofto ~~payments~~our decreased investments for ~~our infrastructure~~the construction of infrastructures and facilities as a result of the ~~expansion~~slow down of the economy and a decrease in market demands. We are constantly adjusting our ~~facilities~~expansion plan and operations in accordance with changes in market conditions.

Net cash ~~provided~~used byin ~~financing~~investing activities was ~~amounted~~approximately to$33,668 and $7773,~~488~~341 for ~~2012~~the ~~and~~years ~~$16~~ended December 31,~~934~~ ~~for~~2014 ~~2011.~~and ~~Cash~~2013, ~~provided~~respectively. byThe ~~financing~~net ~~activities~~cash used in ~~2012~~investing activities ~~was~~is primarily due to ~~the~~our ~~increase~~decreased ininvestments ~~short-term~~for ~~bank~~the ~~loans,~~construction ~~offset~~of byinfrastructures ~~cash~~and ~~used~~facilities inconsidering the slowdown ~~settlement~~ of ~~bills~~economy ~~payable,~~and ~~the~~decrease ~~repayment~~in ofmarket ~~bank~~demands. ~~loans~~We ~~and~~made ~~the~~adjustments ~~increase~~to inour ~~pledged~~expansion ~~deposits~~plan ataccording ~~banks~~to such changes.

WeNet ~~have~~cash ~~entered~~provided ~~into~~by ~~loan~~financing activities ~~agreements~~amounted ~~with~~to ~~our primary lenders~~$141,100 ~~Bank~~for offiscal ~~China,~~year ~~China Construction Bank~~2015, ~~Agricultural~~as ~~Bank~~compared of China, etc., under which we have term loans. As of December 31, 2012, we had an aggregate principal amount of approximately $295 million outstanding under the loan agreements, with maturity dates from January 2013 to ~~December~~ ~~2013 and interest rates from 1.27% to 6.72% per annum. As of March 31, 2013, we had an aggregate principal amount of approximately~~ $~~284.6 million outstanding under the loan agreements~~14,760 ~~with~~used maturity date through March, 2014, and interest rates from 1.13% to 6.72% per annum. The loan agreements contain customary affirmative and negative covenants and were mainly guaranteed by third parties and individual persons or secured by a lien on our property and equipment. Beginning in ~~January~~financing ~~2011,~~activities ~~certain individual loan guarantors, some of whom are related parties, were paid a monthly fee of approximately 0.1% of the outstanding loan balances as compensation~~ for ~~their~~fiscal ~~guarantees~~year 2014. WeThe ~~paid~~increase ~~approximately $1.8 million~~ of ~~compensation in respect of these guarantees for the year ended December 31~~$126,340 ~~2012.~~net ~~Historically,~~cash ~~all~~provided ~~debts due have been paid back~~ by ~~the~~financing ~~Company~~activities in afiscal ~~timely~~year ~~manner.~~2015 ~~All~~is ~~short-term~~primarily ~~bank loans are revolving loans whose terms (at~~ due ~~date~~to ~~of payment) are generally extended by~~ the ~~lender. As~~ decrease of ~~December 31~~$195,301 ~~2012, we were~~ in compliance with the terms of our loan agreements. As such, management expects most unpaid loan balances will be extended at their due dates. Depending on our capital needs, the Company evaluates whether to apply for additional longshort-term bank ~~loans when they are paid back. The Company currently has sufficient lines of credit with the banks for both short-term and long-term~~ borrowings ~~for~~in ~~our~~fiscal ~~current~~year ~~operations~~2015. However, we are working to refining our manufacturing capacity to include an ABS facility, a oil catalytic cracking processing facility, an increased annual design capacity of ethylene-styrene facility to 200,000 MT, a transformer oil facility and a SSBR production facility. The total cost of additioal processing equipment for products refinement and SSBR production facility is approximately $149.3 million, including $49.8 million for additional processing equipment and $99.5 million for our SSBR production facility. We are currently going through the governmental approval and design phase of the ABS production facility and estimating the related costs. We plan to fund this proposed expansion through debt financing, cash from operations, proceeds from prior financings, warrant exercises, and potential equity financing. However, we may not be able to obtain additional financing at acceptable terms, or at all, and, as a result, our ability to increase our production capacity and to expand our business could be adversely affected.

~~ITEM~~Net ~~7A QUANTITATIVE~~cash ~~AND~~used ~~QUALITATIVE~~in financing ~~DISCLOSURE~~activities ~~ABOUT~~amounted ~~MARKET~~to ~~RISK~~$14,760 for 2014, as compared to $115,231 provided by financing activities for 2013. The decrease of net cash used in financing activities in 2014 is primarily due to the increase in repayment of short-term bank borrowing and bank notes in year 2014.

~~Not~~We ~~Applicable~~have entered into short-term loan agreements with our primary lenders such as Bank of China, China Construction Bank and Agricultural Bank of China. As of December 31, 2015, we had an aggregate principal amount of approximately $360,720 outstanding under the loan agreements with maturity dates from January 2016 to December 2016 and the annual interest rates from 1.9% to 6.9%. As of December 31, 2014, we had an aggregate principal amount of approximately $567,525 outstanding under the loan agreements with maturity dates from January 2015 to December 2015 and the annual interest rates from 1.0% to 7.5%. As of December 31, 2013, we had an aggregate principal amount of approximately $424,436 outstanding under the loan agreements with maturity dates from January 2014 to December 2014 and the annual interest rates from 1.0% to 7.2%. The loan agreements were mainly guaranteed by third parties and individual persons or secured by a lien on our property and equipment. Historically, all debts due have been paid back by the Company in a timely manner. All short-term bank loans are revolving loans, and the lenders generally agree to extend the loans upon maturity if we request. As the date of this report, we have timely repaid or renewed all short-term bank loans. As of December 31, 2015, December 31, 2014 and December 31, 2013, we were in compliance with the terms of our loan agreements. As such, management expects outstanding bank loans will be extended if not paid back upon maturity. Depending on our capital needs, we evaluate whether to apply for additional long-term bank loans. We currently have sufficient lines of credit with our primary lenders for both short-term and long-term borrowings for our operations. However, we estimate the total cost of the expansion (as described in Item 1 Business above) will be $372,500. We plan to fund the expansion through debt financing, cash from operations, and potential equity financing. However, we may not be able to obtain additional financing at acceptable terms, or at all, and, as a result, our ability to increase our production capacity and to expand our business could be adversely affected.

56ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

~~ITEM 8~~Not Applicable. ~~FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA~~

~~REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM~~51

~~Board~~ITEM 8. ofFINANCIAL ~~Directors~~STATEMENTS ~~and~~AND ~~Shareholders~~SUPPLEMENTARY DATA.

~~Keyuan Petrochemicals, Inc.~~Index

We have audited the accompanying consolidated balance sheets of Keyuan Petrochemicals, Inc. and subsidiaries (the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of comprehensive loss, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2012. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

Report of Independent Registered Public Accounting Firm – Marcum Bernstein & Pinchuk LLP	F-2

Consolidated Balance Sheets	F-3

Consolidated Statements of Operations and Comprehensive Loss	F-4

Consolidated Statements of Changes in Equity (Deficit)	F-5

Consolidated Statements of Cash Flows	F-6

Notes to Consolidated Financial Statements	F-7

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Keyuan Petrochemicals, Inc. and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1(c) to the consolidated financial statements, the Company has suffered net losses and cash flows used in operations, and has a working capital deficiency at December 31, 2012 that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1(c). The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Unusually important events occurred in 2011. These events, management’s evaluation, and their potential effects are described in Note 1(b) to the consolidated financial statements.

The Company has significant transactions and relationships with related parties and certain other parties which are described in Note 23 to the consolidated financial statements. It is possible that the terms of these transactions may not be the same as those that would result from transactions among unrelated parties.

/s/ GHP HORWATH, P.C.

Denver, Colorado

June 4, 2013

F-1

~~KEYUAN~~REPORT OF ~~PETROCHEMICALS,~~INDEPENDENT ~~INC.~~REGISTERED ~~AND~~PUBLIC ~~SUBSIDIAIRES~~ACCOUNTING FIRM

To the Audit Committee of the Board of Directors and Shareholders

of Keyuan Petrochemicals, Inc.

We have audited the accompanying consolidated balance sheets of Keyuan Petrochemicals, Inc. (the “Company”) as of December 31, 2014 and 2015, and the related consolidated statements of operations and comprehensive loss, changes in equity (deficit) and cash flows for the years ended December 31, 2014 and 2015. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Keyuan Petrochemicals, Inc., as of December 31, 2014 and 2015, and the consolidated results of its operations and its cash flows for the years ended December 31, 2014 and 2015 in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1(c) to the consolidated financial statements, the Company has experienced recurring negative net cash flows used in operations, and has a working capital deficiency at December 31, 2015. These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1(c). The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Marcum Bernstein & Pinchuk LLP

New York, New York

October 17, 2016

NEW YORK OFFICE • 7 Penn Plaza • Suite 830 • New York, New York 10001 • Phone 646.442.4845 • Fax 646.349.5200 • marcumbp.com

F-2

KEYUAN PETROCHEMICALS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data)

		As of December 31
	Note	As of December 31
	Note	2012			2011
		2015			2014
ASSETS
Current assets:
Cash	2(d)	$	234,~~378~~764		$	~~7,325~~870
Pledged bank deposits	2(e)		~~201~~282,~~252~~968			~~156~~347,~~318~~632
Bills receivable	2(k)		3,968			1,574
Notes receivable	2(k)		735			-
Accounts receivable	2(g)		14,248			2,226
Accounts receivable, net	2(g)		23,398			27,514
Inventories	3		4855,~~634~~730			3888,~~946~~783
Prepayments to suppliers	5		23,476			15,781
Prepayments to suppliers, net	5		80,077			26,564
Consumption tax refund receivable	6		51,334			55,810
Consumption tax recoverable	6		44,377			11,513
Amounts due from related parties	23		4092			3953
Other current assets	7		56,320			45,979
Amounts due from non-controlling interests	26		19,376			-
Deferred income tax assets	20		2,801			37
Other current assets	7		19,049			88,869
Total current assets			~~425~~530,~~451~~566			~~324~~591,~~035~~798
Property, plant and equipment, net	8		~~227~~273,~~603~~146			~~190~~290,~~868~~163
Intangible assets, net	9		~~880~~1,021			~~978~~838
Land use rights	10		1023,~~708~~757			1125,~~069~~865
VAT recoverable			21,~~232~~205			2,~~894~~001
Total assets		$	~~666~~829,~~874~~695		$	~~529~~910,~~844~~665
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES AND (DEFICIT) EQUITY
Current liabilities:
Current Liabilities:
Short-term bank borrowings	11	$	~~295~~360,~~146~~720		$	~~225~~567,~~969~~525
Bills payable	2(k)		102,650			63,550
Notes payable	2(k)		334,139			190,051
Current portion of long-term bank borrowings	12		-			15,740
Accounts payable			52,820			48,624
Accounts payable			130,387			97,588
Advances from customers	4		15,563			19,606
Advances from customers	4		24,405			7,822
Amounts due to related parties	23		5,330			839
Accrued expenses and other payables	1312		2642,~~833~~654			3041,~~288~~101
Income taxes payable	20		2,344			186
Income tax payable	19		1,596			46
Dividends payable			2,382			2,382
Amounts due to related parties	23		479			621
Total current liabilities			815,204			870,174
Total liabilities, all current			584,626			444,146
Long-term debt	11		15,400			-
Series B convertible preferred stock:
Total liabilities			830,604			870,174
Par value: $0.001; Authorized: 8,000,000 shares
Stockholders’ (deficit) equity:
Issued and outstanding:
5,333,340 shares, liquidation preference
$20,250	14		16,452			16,452
Commitments and contingencies	19		-			-
Stockholders’ equity:
Common stock:
Par value:$0.001; Authorized: 100,000,000 shares;
Par value: $0.001; Authorized: 100,000,000 shares Issued: 57,646,160 shares, shares outstanding: 57,221,050 as at December 31, 2015 and 2014			58			58
Issued and outstanding: 57,646,160 shares in 2012 and 2011	15		58			58
Additional paid-in capital			70,917			66,628
Additional paid-in capital			50,653			49,198
Statutory reserve	16		6,109			5,773
Statutory reserve	18		4,071			3,744
Accumulated other comprehensive income			7,098			9,701
Accumulated other comprehensive income			7,491			6,546
Accumulated deficit			(101,594	)		(41,220	)
Retained earnings			3,523			9,700
Consideration receivable			(9,417	)		-
Total stockholders’ equity			65,796			69,246
Treasury stock, at cost, 425,110 shares at December 31, 2015 and 2014			(449	)		(449	)
Total liabilities and stockholders' equity		$	666,874		$	529,844
Total stockholders’ (deficit) equity			(27,278	)		40,491
Non-controlling interests			26,369			-
Total (deficit) equity			(909	)		40,491
Total liabilities and (deficit) equity		$	829,695		$	910,665

See accompanying notes to the consolidated financial statements.

F-23

KEYUAN PETROCHEMICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Amounts in thousands, except share and per share data)

			Year Ended
	Note			Year Ended December 31,
			December 31, 2012				December 31, 2011
				2015				2014
	Note
Sales				$	474,360			$	653,497
Sales
Cost of sales					446,442				659,353
External parties			$	750,628			$	533,913
Gross profit (loss)					27,918				(5,856	)
Related parties	23			-				92,772
Selling expenses					2,165				1,477
Total Sales				750,628				626,685
General and administration expenses					35,554				11,742
Cost of sales
Total operating expenses					37,719				13,219
External parties				721,519				504,872
Loss from operations					(9,801	)			(19,075	)
Related parties	23			-				99,798
Other expense:
Cost of sales				721,519				604,670
Interest income					12,231				10,109
Gross profit				29,109				22,015
Interest expense					(37,983	)			(26,077	)
Selling expenses				1,132				1,240
Foreign exchange loss, net					(13,165	)			(2,666	)
General and administrative expenses				12,510				17,859
Other expense, net					(10,562	)			(6,369	)
Total operating expenses				13,642				19,099
Total other expense, net					(49,479	)			(25,003	)
Income from operations				15,467				2,916
Loss before income taxes					(59,280	)			(44,078	)
Other income (expense):
Income tax expense		19			1,222				3,047
Interest income				5,940				4,320
Net loss					(60,502	)			(47,125	)
Interest expense				(25,065	)			(15,797	)
Net loss attributable to non-controlling interests					(464	)			–
Liquidated damages expense				-				(2,493	)
Net loss attributable to Keyuan Petrochemicals Inc. common stockholders					(60,038	)			(47,125	)
Foreign exchange (loss) gain, net				(1,319	)			3,662
Other comprehensive loss:
Other income (expense), net				(79	)			3,103
Foreign currency translation adjustment					(2,603	)			(543	)
Total other expense, net				(20,523	)			(7,205	)
Comprehensive loss				$	(63,105	)		$	(47,668	)
Loss before income taxes				(5,056	)			(4,289	)
Comprehensive loss attributable to non-controlling interests					(464	)			–
Income tax expense	20			794				2,852
Comprehensive loss attributable to Keyuan Petrochemicals Inc. common stockholders					(62,641	)			(47,668	)
Net loss attributable to Keyuan
Loss per common stock:
Petrochemicals Inc. stockholders				(5,850	)			(7,141	)
-Basic		20		$	(1.05	)		$	(0.82	)
Dividends to Series B convertible
-Diluted		20		$	(1.05	)		$	(0.82	)
preferred stockholders	14			-				1,205
Weighted average number of shares of common stock used in calculation:
Net loss attributable to Keyuan
-Basic					57,221,050				57,304,255
Petrochemicals Inc. common stockholders			$	(5,850	)		$	(8,346	)
-Diluted					57,221,050				57,304,255
Net loss attributable to Keyuan
Petrochemicals Inc. stockholders			$	(5,850	)		$	(7,141	)
Other comprehensive (loss) income
Foreign currency translation adjustment				945				3,235
Comprehensive loss			$	(4,905	)		$	(3,906	)
Loss per share:
Attributable to common stock:
- Basic			$	(0.10	)		$	(0.14	)
- Diluted			$	(0.10	)		$	(0.14	)
Weighted average number of shares of common stock used in calculation
Basic				57,646,160				57,585,040
Diluted				57,646,160				57,585,040

See accompanying notes to the consolidated financial statements.

F-34

KEYUAN PETROCHEMICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF ~~STOCKHOLDERS’~~CHANGES IN EQUITY (DEFICIT)

YEARS ENDED DECEMBER 31, 2012 AND 2011

(Amounts in thousands, except share data)

		Common stock	~~Common stock~~					Additional	~~Additional paid-in~~			~~Statutory~~		Accumulated Other	~~Accumulated other comprehensive~~			~~Retained~~				~~Total stockholders’~~						Non-
	Note		Number of shares						capital			reserve			income			earnings				equity
		Number of shares						paid-in capital			Statutory reserve			comprehensive income			Retained earnings				Consideration receivable				Treasury Stock			controlling interest		Total equity (deficit)
Balance as of January 1, 2011				57,577,840		$	58		$	47,012		$	3,075		$	3,311		$	22,243			$	75,699
Balance as of January 1, 2014			57,646,160		$	58		$	51,555		$	5,749		$	10,244		$	5,929			$	-			$	(143	)	$	-	$	73,392
Dividends declared for common stockholders				-			-			-			-			-			(3,528	)			(3,528	)
Additional paid in capital									15,073																						15,073
Fixed dividends for series B Convertible preferred stockholders				-			-			-			-			-			(1,205	)			(1,205	)
Net loss			-			-			-			-			-			(47,125	)			-				-			-		(47,125	)
Exercise of series A warrants				1,150			-			5			-			-			-				5
Treasury Stock			-			-			-			-			-			-				-				(306	)		-		(306	)
Exercise of series B warrants				500			-			2			-			-			-				2
Statutory reserve			-			-			-			24			-			(24	)			-				-			-		-
Series B conversion				66,670			-			250			-			-			-				250
Other comprehensive income – Foreign currency translation loss			-			-			-			-			(543	)		-				-				-			-		(543	)
Share-based compensation				-			-			1,929			-			-			-				1,929
Balance as of December 31, 2014			57,646,160			58			66,628			5,773			9,701			(41,220	)			-				(449	)		-		40,491
Net loss				-			-			-			-			-			(7,141	)			(7,141	)
Additional paid in capital			-			-			4,289			-			-			-				-				-			4,289		-
Statutory Reserve				-			-			-			669			-			(669	)			-
Net loss			-			-			-			-			-			(60,038	)			-				-			464		(60,502	)
Other comprehensive income- Foreign currency translation gain				-			-			-			-			3,235			-				3,235
Non-controlling shareholder investment			-			-			-			-			-			-				-				-			21,705		21,705
Balance as of December 31, 2011				57,646,160			58			49,198			3,744			6,546			9,700				69,246
Statutory reserve			-			-			-			336			-			(336	)			-				-			-		-
Share-based compensation				-			-			1,455			-			-			-				1,455
Consideration receivable			-			-			-			-			-			-				(9,417	)			-			9,417		-
Net income				-			-			-			-			-			(5,850	)			(5,850	)
Other comprehensive income – Foreign currency translation loss			-			-			-			-			(2,603	)		-				-				-			-		(2,603	)
Statutory Reserve				-			-			-			327			-			(327	)			-
Balance as of December 31, 2015			57,646,160			58			70,917			6,109			7,098			(101,594	)			(9,417	)			(449	)		26,369		(909	)
Other comprehensive income - Foreign currency translation loss				-			-			-			-			945			-				945
Balance as of December 31, 2012				57,646,160		$	58		$	50,653		$	4,071		$	7,491		$	3,523			$	65,796

See accompanying notes to the consolidated financial statements.

F-45

KEYUAN PETROCHEMICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands, except share data)

	Year Ended
	Year Ended December 31,
	December 31, 2012			December 31, 2011
	2015			2014
Cash flows from operating activities:
Net loss	$	(560,~~850~~502	)	$	(747,~~141~~125	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Liquidated damages		-			2,493
Depreciation		15,265			13,665
Loss on disposal of property, plant and equipment		-			3
Amortization of intangible assets		243			148
Depreciation		11,927			8,290
Inventory impairment		-			4,434
Amortization		107			105
Bad debt expenses		22,151			285
Land use rights amortization		~~452~~771			~~441~~518
Deferred income tax (benefit) expense		(2,763	)		443
Deferred income tax benefit		-			2,627
Share-based compensation expense		1,590			2,063
Changes in operating assets and liabilities:
Bills receivable		(2,379	)		7,843
Notes receivable		(766	)		25
Accounts receivable		(127,~~249~~141	)		(219,~~192~~895	)
Inventories		(929,~~363~~130	)		50(23,~~355~~347	)
Prepayments to suppliers		(667,~~877~~762	)		15,~~432~~200
Consumption tax refund receivable		4,934			(14,959	)
Consumption tax recoverable		(34,967	)		34,349
Other current assets		(976,~~958~~637	)		(1833,~~500~~769	)
Accounts payable		~~281~~5,334			4(6,~~199~~758	)
Advances (to) from customers		16,993			(3,122	)
Amounts due from/to related parties		2,225			825
Income taxes payable		2,155			(10,746	)
Advances from customers		(3,097	)		8,716
Accrued expenses and other payables		3,905			(19,276	)
Taxes payable		2,184			(2,365	)
Net cash (used in) provided by operating activities		(7,095	)		1,731
Accrued expenses and other payables		(20,398	)		29,635
Pledged deposit for operating activities		(71,763	)		74,292
Net cash (used in) provided by operating activities		(112,456	)		41,460
Cash flows from investing activities:
Purchase of property, plant and equipment,		(54,417	)		(42,323	)
Purchase of property, plant and equipment		(3,396	)		(33,668	)
Proceeds from property disposal		-			10
Payment in relation to constructions		-			-
Net cash used in investing activities		(543,~~417~~396	)		(4233,~~313~~668	)
Cash flows from financing activities:
Cash flow from financing activities:
Pledged bank deposits used for bank borrowings		~~(43~~136,~~629~~427	)		(5385,~~735~~561	)
Proceeds from short-term bank borrowings		~~827~~596,~~950~~350			~~258~~1,~~412~~331,565
Repayment of short-term bank borrowings		(~~729~~791,~~531~~651	)		(~~170~~1,~~771~~188,258	)
Proceeds from bank notes		~~198~~742,~~125~~620			~~114~~627,~~399~~630
Repayment of bank notes		(159,562	)		(113,353	)
Repayments of bank notes		(580,916	)		(700,136	)
Repayments of long-term bank borrowings		(15,865	)		(17,820	)
Proceeds from long term debt		16,061			-
Short-term financing from related parties		-			13,303
Capital injection from non-controlling shareholder		22,209			-
Short-term financing to related parties		-			(13,188	)
Net cash provided by (used in) financing activities		141,100			(14,760	)
Short-term financing to/from Litong (Note23)		-			2,266
Effect of foreign currency exchange rate changes on cash		(21,354	)		(4,471	)
Proceeds from warrant exercises		-			7
Net increase/(decrease) in cash		3,894			(11,439	)
Dividends paid		-			(2,586	)
Cash at beginning of period		870			12,309
Net cash provided by financing activities		77,488			16,934
Cash at end of period	$	4,764		$	870
Effect of foreign currency exchange rate changes on cash		77			1,637
Net increase (decrease) in cash		16,053			(22,011	)
Cash at beginning of year		7,325			29,336
Cash at end of year	$	23,378		$	7,325
Supplemental disclosure of cash flow information:
Income taxes paid	$	1,914		$	13,155
Income tax paid	$	273		$	2,795
Interest paid, net of capitalized interest	$	843		$	15,797
Interest paid	$	23,832		$	22,471
Non cash investing and financing activities:
Payable for purchase of property, plant and equipment (net of VAT)	$	18,653		$	21,308
Amount not yet paid for purchase of property, plant and equipment (net of VAT)	$	(2,555	)	$	681

See accompanying notes to the consolidated financial statements.

F-56

1 ORGANIZATION AND NATURE OF BUSINESS, RECENT EVENTS, AND GOING CONCERN AND MANAGEMENT’S PLANS

(a) Organization and Nature of business

Keyuan Petrochemicals, Inc. (the “Company”) was incorporated in the State of Texas on May 4, 2004 in the former name of Silver Pearl Enterprises, Inc. The Company, through its wholly-owned subsidiary, Sinotech Group Limited, ~~formerly Keyuan International Group Limited~~ (“~~Keyuan~~Sinotech ~~International~~Group”) and its indirect subsidiaries, Keyuan Group Limited (“Keyuan HK”), Ningbo Keyuan Plastics Co., Ltd. (“Ningbo Keyuan”), Ningbo Keyuan Petrochemicals Co., Ltd. (“Ningbo Keyuan Petrochemicals”), Ningbo Keyuan Synthetic Rubbers Co., Ltd. (“~~Ningbo~~ Keyuan Synthetic Rubbers”), Zhejiang ZhongkeXuneng Trading Co. (“Zhongkexuneng”) and Guangxi Keyuan New Materials Co., Ltd. (“Guangxi Keyuan”) (collectively referred herein below as “the Group” ) are engaged in the manufacture and sale of petrochemical and rubber products in the People’s Republic of China (“PRC”).

~~Keyuan~~Sinotech Group ~~International~~ is an investment holding company and was incorporated in the British ~~virgin~~Virgin Islands in 2009.

Keyuan HK was established in Hong Kong in 2009, and is a holding company with no significant assets ~~or operations~~.

Ningbo Keyuan was established in April 2007 as a wholly foreign-owned enterprise in Ningbo, PRC.

On August 8, 2010, Keyuan HK established Ningbo Keyuan Petrochemicals, a wholly-owned subsidiary in the PRC.

On March 7, 2012, Keyuan HK and Ningbo Keyuan established Guangxi Keyuan, a wholly-owned subsidiary in the PRC. Commencing from April 15, 2013, Guangxi Keyuan is owned by Sinotech Group which owns 75% and Ningbo Keyuan which owns 25%.

On June 15, 2012, Ningbo Keyuan established ~~Ningbo~~ Keyuan ~~Synthetic~~synthetic Rubbers, a wholly-owned subsidiary in the PRC.

On May 13, 2014, Sinotech Group (75%) and Ningbo Keyuan (25%) established Zhongkexuneng, a wholly-owned subsidiary in the PRC.

On September 16, 2015, Sinotech Group, Ningbo Hengyun Energy Technology Co Ltd. (“Hengyun”) and Ningbo Keyuan entered into a shareholder investment agreement regarding the capital investment of Guangxi Keyuan. Hengyun invested $30.5 million to Guangxi Keyuan with shareholding percentage of 32.88%. As of December 31, 2015, Hengyun invested $21.7 million to Guangxi Keyuan, the remaining part will be paid before December 31, 2016 as agreed in the contract.

(b) Other Events

InOn ~~2011,~~February ~~Company’s former auditor~~13, ~~KPMG~~2014, ~~LLP~~The ~~(“KPMG”),~~Brown ~~brought~~Law ~~certain~~Firm ~~issues~~filed a toderivative ~~the~~action ~~Company’s~~suit ~~Audit~~on ~~Committee’s~~behalf ~~attention~~of ~~through~~the aCompany ~~March~~alleging ~~28,~~certain ~~2011 memorandum~~ and anformer ~~April~~current ~~18,~~officers ~~2011~~and ~~letter~~directors ~~(collectively,~~of the ~~“KPMG Memoranda”). KPMG requested that the~~ Company’s ~~Audit~~had violated ~~Committee~~their ~~conduct~~fiduciary anduties ~~independent~~during ~~investigation (~~the ~~“Independent~~period ~~Investigation”)~~from ~~into~~at ~~those~~least ~~issues.~~April ~~On March 31~~22, ~~2011,~~2010 ~~the Audit Committee elected~~ to ~~commence~~October ~~such Independent Investigation and engaged the services of independent counsel~~20, ~~Pillsbury~~2011 ~~Winthrop Shaw Pittman LLP~~ (~~“Pillsbury”), which in turn engaged~~ the ~~services of Deloitte Financial Advisory Services LLP (~~“~~Deloitte~~Derivative Action”),. The asCompany ~~independent forensic accountants,~~ and ~~King~~the &plaintiff ~~Wood,~~entered ascertain ~~Audit~~settlement ~~Committee~~of ~~counsel in~~ the ~~PRC.~~Derivative ~~Pillsbury,~~Action ~~Deloitte~~pursuant ~~and King & Wood are collectively referred~~ to ~~herein as~~ the ~~“Investigation~~terms ~~Team”.~~of Ona ~~September~~stipulation ~~28,~~of ~~2011,~~settlement whereby the ~~Independent~~Company ~~Investigation~~agreed ~~was~~to ~~completed.~~certain ~~The~~corporate ~~Independent~~governance ~~Investigation~~reforms ~~identified~~including ~~possible~~expanding ~~violations~~its ofNomination ~~PRC laws~~ and ~~U.S.~~Corporate ~~Securities~~Governance Committee ~~laws,~~and ~~including~~adopting ~~the~~a ~~maintenance~~related ofparty antransaction ~~off-balance~~policy ~~sheet cash account that was used primarily to pay service providers~~ and ~~other~~an ~~Company-related~~payment ~~expenses.~~of ~~Total activity in the off-balance sheet cash account amounted to approximately~~ $~~800~~190,000 ~~through~~to ~~December~~plaintiff’s ~~31,~~counsel. ~~2010,~~On ~~with~~October ~~a net income statement effect of approximately $12~~5,~~000~~ 2015, ~~and $400,000 of activity in~~ the ~~off-balance~~United ~~sheet~~States ~~cash~~District ~~account~~Court ~~for~~Southern ~~the~~District ~~period~~of ~~from~~New ~~January~~York 1,entered ~~2011~~an toorder ~~March~~granting ~~31,~~final ~~2011,~~approval ~~with a net income statement effect~~ of ~~approximately $192,000, at which time~~ the ~~Company ceased its use~~settlement. The ~~Independent~~case ~~Investigation~~was ~~identified certain other issues that could result in potential violations of PRC or U~~dismissed.~~S. laws.~~

On November ~~October 7~~15, 2011, ~~trading~~The Rosen Law Firm filed a class action suit on behalf of certain stockholders, alleging the Company’s ~~common~~had ~~stock~~violated federal ~~was~~securities ~~delisted~~laws by ~~NASDAQ,~~issuing materially false and ismisleading ~~currently~~statements ~~quoted~~and onomitting material facts with regard to disclosure of related party transactions and effectiveness of internal controls in past public filings. After litigating the ~~Over-~~case for several years, the~~-Counter~~ ~~Bulletin~~parties ~~Board~~entered ~~(symbol:~~a ~~KEYP)~~stipulation of settlement in the aggregate amount of $2,650,000 in cash, plus interests, the terms of which United States District Court Southern District of New York entered an order granting final approval of on October 9, 2015. The case was dismissed.

On March 1, 2013, the Company reached a settlement in a case filed by the United States Securities and Exchange Commission on February 28, 2013 in the United States District Court for the District of Columbia against the Company, alleging the Company violated Section 17(a)(2) and 17(a)(3) of the Securities Act of 1933, Section 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934, and Rules 12bF-20 and 13a-13 thereunder. Under the settlement terms and without admitting or denying the allegation of the complaint, the Company will pay a $1 million civil penalty and will be permanently enjoined from violating certain securities law. The settlement remains subject to approval by the United District Court for the District of Columbia, which must approve its terms and enter the final judgment.7

~~F-6~~On October 28, 2014, Dragon State Limited (“Dragon State”), an investor in the Company’s September 2010 Private Placement, filed a complaint against, among others, the Company and Mr. Chunfeng Tao, seeking rescission of the securities purchase agreement in the September 2010 Private Placement and the return of $20 million, and in the alternative, seeking monetary damages to be determined at a trial but not less than $20 million (the “Complaint”). At the closing of the September 2010 Private Placement, Dragon State purchased from the Company for an aggregate price of $20 million, 5,333,340 shares of the Company’s Series B preferred stock, 800,001 series C warrants to purchase 800,001 common shares, at a price of $4.50 per share (subject to adjustments), and 800,001 series D warrants to purchase 800,001 common shares at a price of $5.25 per share (subject to adjustments).

~~The~~On ~~Company~~July 11, ~~with~~2016, ~~its~~the ~~PRC~~Company ~~legal~~entered ~~counsel,~~into ~~evaluated~~a share ~~the~~purchase ~~matters~~and ~~identified~~settlement inagreement (the ~~Independent~~“Settlement ~~Investigation~~Agreement”) towith ~~determine~~Dragon ~~the~~State, ~~extent~~Delight toReward ~~which~~Limited (“Delight Reward”), Keyuan HK, Ningbo Keyuan Petrochemicals, Ningbo Keyuan, and Keyuan Synthetic Rubbers (the Company, ~~may~~Keyuan beHK, ~~exposed~~Ningbo Keyuan toPetrochemicals, ~~fines~~Ningbo Keyuan and ~~penalties~~Keyuan inSynthetic ~~China~~Rubbers are collectively referred as the “Keyuan Group”), Tao, and Prax Capital Equity Management Co., ~~The~~Ltd., ~~Company~~an ~~has~~affiliated ~~preliminarily~~party ~~concluded~~to ~~that~~Dragon ~~the~~State. ~~extent~~Pursuant to ~~which~~the itSettlement ~~may~~Agreement, beDragon State ~~exposed~~agreed to ~~fines~~transfer ~~and~~the ~~penalties~~securities purchased in the ~~PRC~~September is2010 ~~limited~~Private Placement to Delight Reward for a consideration of RMB 12,000,000 or the equivalent amount of US dollars. In addition, Delight Reward and Keyuan Group agreed to ~~date~~pay, ~~has~~and ~~not~~Dragon State ~~received~~agreed ~~any~~to ~~PRC~~accept, ~~governmental~~a orsettlement ~~regulatory~~of ~~communication~~RMB 6,000,000 or ~~inquiry~~equivalent ~~related~~amount of US dollars to ~~these~~waive ~~matters.~~all ~~However~~claims and liabilities that Dragon State or its affiliated companies or individuals had brought or would bring against Delight Reward, ~~management~~Keyuan isGroup, ~~currently~~Tao ~~unable~~and their toaffiliates ~~determine~~including the ~~final~~Complaint. ~~outcome~~These amounts were paid on July 15, 2016. On July 19, 2016, the United States District Court Southern District of ~~these~~New ~~matters~~York ~~and~~entered ~~their~~an ~~possible~~order ~~effects~~granting onfinal approval of the ~~consolidated~~settlement. ~~financial~~The ~~statements~~Complaint was dismissed.

On August 4, 2016, Delight Reward entered into a side agreement with the Company (cthe “Side Agreement”) ~~Going~~. ~~concern~~Under the Side Agreement, Delight Reward agreed not to claim, that the warrants transferred pursuant to the Settlement Agreement were exercisable, and ~~management~~agreed pay to the Company for each convertible share underlying the Series B preferred stock transferred pursuant to the Settlement Agreement, the highest sale price of the Company’s Common ~~plans~~Stock per share as reported on the OTC Pink during a period commencing on the date of the Settlement Agreement and ending on August 4, 2016, which was $0.005 per share of Common Stock. The aggregate purchase price for the shares of Common Stock underlying the series B preferred stock was, therefore $27,465.01. On August 8, 2016, these funds were paid in cash on hand by Delight Reward. On August 10, 2016, the shares of Series B preferred stock were converted into 5,493,001 shares of Common Stock pursuant to the terms of the certificate of designations of series B preferred stock and the Side Agreement.

~~The~~(c) Financial consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company reported a net loss of approximately $5.85 million in 2012 and cash flows used in operations of approximately $7.1 million. At December 31condition, ~~2012~~liquidity, ~~the~~and ~~Company had a working~~ capital deficit of approximately $159 million. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability or classification of assets, or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern.resources

~~The~~For ~~Company~~the ~~continues~~year ended toDecember ~~finance~~31, ~~its~~2015, ~~operations~~the ~~primarily~~Company ~~through~~reported ~~short-term~~net ~~bank~~loss ~~borrowings. Short-term~~of ~~bank borrowings and bills payable amounted to~~ approximately $~~397~~60.85 million atand ~~December~~cash ~~31,~~flow ~~2012,~~used ~~and~~in ~~have~~operations ~~increased~~of to approximately $~~414~~112.5 million. atAt ~~May~~December 2831, ~~2013. Management~~2015, ~~expects~~the ~~that~~Company ~~short-term~~had ~~bank~~working ~~financing~~capital ~~will~~deficit ~~continue~~of toapproximately be$284.6 ~~available through at least the end of 2013~~million.

~~The~~Although the Company continues to ~~benefit~~finance and ~~from~~support ~~favorable~~its ~~PRC~~operations ~~tax~~primarily ~~policies~~through ~~related~~short-term tobank ~~consumption~~borrowings, ~~tax~~management’s ~~(Note~~realignment 6)of product profiles, ~~approximately~~along with ~~$51.3~~the ~~million~~general stabilization of ~~which~~the ~~was~~petrochemical ~~refundable~~industry atin ~~December 31~~China, ~~2012. Management~~the ~~believes~~operations ~~that~~resulted ~~this~~in ~~amount~~net ~~will~~loss beof ~~refunded~~$60.5 bymillion ~~June~~in 2015 ~~30,~~compared ~~2013~~to ~~and~~a ~~that~~net ~~additional~~loss ~~consumption tax deposits~~ of ~~approximately~~ $8447.1 million ~~through~~in ~~May~~2014 ~~28,~~and ~~2013~~a ~~will~~net beprofit ~~refunded~~of ~~more~~$4.6 ~~promptly~~million in ~~the second half of~~ 2013.

~~The Company is expanding its production line to include Styrene~~F-Ethylene-Butylene-Styrene (“SEBS”). Management expects production and sale of SEBS to commence in the second half of 2013, and that SEBS will yield a higher gross margin than some of the Company’s current products.8

~~The Company is also exploring sources of additional financing, including short~~Short-term ~~financing~~bank ~~from~~borrowings ~~its vendors~~ and ~~other~~notes ~~parties. In~~payable amounted ~~addition,~~to ~~the~~approximately ~~Company~~$695 ismillion ~~closely~~at ~~monitoring~~December ~~its cash balances~~31, ~~cash needs and expense levels~~2015.

These matters raise substantial doubt about the company’s ability to continue as a going concern.

The Company is exploring sources of additional financing, including short-term financing from its vendors, banks, and other parties and equity financing. In addition, the Company is closely monitoring its cash balances, cash needs and expense levels.

The ability of the Company to continue as a going concern is dependent upon management’s ability to implement its strategic plan, obtain additional capital and generate net income and positive cash flows from operations. There can be no assurance that these plans will be sufficient or that additional financing will be available in amounts or terms acceptable to the Company, if at all.

2 . SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Principles of consolidation and basis of presentation

The accompanying consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and include the financial statements of the ~~Group~~Company.

All significant intercompany transactions and balances are eliminated on consolidation.

(b) Use of estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the useful lives of property, plant and equipment; the fair value determination of financial and equity instruments; the realizability of inventories; and the recoverability of long-lived ~~property~~assets, ~~plant~~realization ~~and~~of ~~equipment~~deferred tax assets and ~~accounts~~collectability ~~receivable~~of receivables. These estimates are often based on complex judgments and assumptions that management believes to be reasonable but are inherently uncertain and unpredictable.

The functional currency of the Company, Sinotech ~~Keyuan~~

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