Keyuan Petrochemicals (KEYP) 10-Q 2011 Q3 Quarterly report

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q 

(Mark One)

o    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

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

For the transition period from _______________ to _______________

Commission File Number

Keyuan Petrochemicals, Inc.

(Exact name of registrant as specified in its charter)

Nevada	45-0538522
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

Qingshi Industrial Park

Ningbo Economic & Technological Development Zone

Ningbo, Zhejiang Province

P.R. China 315803

(86) 574-8623-2955

(Issuer's telephone number)

(Former address)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one)

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 Securities Exchange Act of 1934) Yes o  No x

As of November 18, 2011, the Registrant has 57,579,490 shares of common stock outstanding and 5,400,010 shares of Series B Preferred Stock outstanding.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION
Item 1.  Financial Statements	1
Condensed Consolidated Balance Sheets	1
Condensed Consolidated Statements of Operations and Comprehensive Income (loss)	2
Condensed Consolidated Statements of Cash Flows	3
Notes to Condensed Consolidated Financial Statements	4 – 22
Item 2.  Management’s Discussion and Analysis or Plan of Operation	22
Item 3.  Quantitative and Qualitative Disclosures About Market Risk	31
Item 4. Controls and Procedures	31
PART II – OTHER INFORMATION	34
Item 1.  Legal Proceedings	34
Item 1A. Risk Factors	34
Item 2.  Unregistered Sales of Equity Securities And Use Of Proceeds	34
Item 3.  Defaults Upon Senior Securities	34
Item 4.  (Removed and Reserved)	34
Item 5.  Other Information	34
Item 6.  Exhibits	35

INTRODUCTORY NOTE

Except as otherwise indicated by the context, references in this interim report on Form 10-Q (this “Form 10-Q”) to the “Company,” “Keyuan”, “we”, “us” or “our” are references to the combined business of Keyuan Petrochemicals, Inc. and its consolidated subsidiaries.  References to “Keyuan International” are references to our wholly-owned subsidiary, Keyuan International Group Limited”; references to “Keyuan HK” are references to our wholly-owned subsidiary, Keyuan Group Limited; references to “Ningbo Keyuan” are references to our wholly-owned subsidiary, Ningbo Keyuan Plastics Co.,Ltd.; references to “Ningbo Keyuan Petrochemicals” are to our wholly-owned subsidiary, Ningbo Keyuan Petrochemicals Co., Ltd. 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.

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-looking statements include, but are not limited to, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan” and similar expressions, as well as statements regarding new and existing products, technologies and opportunities, statements regarding market and industry segment growth and demand and acceptance of new and existing products, any projections of sales, earnings, revenue, margins or other financial items, any statements of the plans, strategies and objectives of management for future operations, any statements regarding future economic conditions or performance, uncertainties related to conducting business in China, any statements of belief or intention, and any statements or assumptions underlying any of the foregoing.  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: competition in the industry in which we operate and the impact of such competition on pricing, revenues and margins, volatility in the securities market due to the general economic downturn; 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.

KEYUAN PETROCHEMICALS, INC. AND SUBSIDIAIRES

CONDENSED CONSOLIDATED BALANCE SHEETS

			September 30,		December 31,
	Note		2011		2010
			(Unaudited)
ASSETS
Current assets:
Cash		3	$	3,743,446	$	29,336,241
Restricted bank deposits				158,847,306		98,053,146
Bills receivable				2,405,796		9,194,513
Inventories		4		47,517,210		86,831,556
Prepayments to suppliers		5		19,615,813		14,071,219
Consumption tax refund receivable		6		53,246,555		39,144,688
Amounts due from related parties		23		39,125		5,332,193
Other current assets		7		44,582,436		28,608,833
Income tax receivable		18		1,937,958		-
Deferred income tax assets				484,783		469,914
Total current assets				332,420,428		311,042,303
Property, plant and equipment, net		8		173,002,050		129,781,304
Intangible assets, net		9		999,318		1,045,466
Land use rights		10		11,116,868		11,099,875
Prepayments for property, plant and equipment		5		4,466,803		-
Total assets			$	522,005,467	$	452,968,948
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term bank borrowings		11	$	196,930,884	$	135,768,634
Bills payable				52,662,250		60,224,900
Current portion of long-term bank borrowings		12		14,241,500		17,445,500
Accounts payable				109,494,566		92,225,936
Advances from customers		13		18,679,760		10,479,217
Accrued expenses and other payables		14		36,475,059		18,205,110
Income taxes payable		18		-		10,699,778
Dividends payable				2,085,499		234,393
Amounts due to related parties		23		360,903		115,535
Total current liabilities				430,930,421		345,399,003
Long-term bank borrowings		12		6,103,500		15,170,000
Total liabilities				437,033,921		360,569,003
Series B convertible preferred stock:
Par value: $0.001; Authorized: 5,400,010 shares
6% cumulative dividend with liquidation preference
over common stock
Issued and outstanding: 5,400,010 shares
liquidation preference of $20,250,000				16,701,565		16,701,565
Commitments and contingencies		19		-		-
Stockholders’ equity:
Common stock:
Par value: $0.001; Authorized: 100,000,000 shares;
Issued and outstanding: 57,579,490 shares on September 30, 2011
and 57,577,840 shares on December 31, 2010				57,580		57,578
Additional paid-in capital				48,613,629		47,012,061
Statutory reserve				3,075,356		3,075,356
Accumulated other comprehensive income				5,984,800		3,310,416
Retained earnings				10,538,616		22,242,969
Total stockholders’ equity				68,269,981		75,698,380
Total liabilities and stockholders' equity			$	522,005,467	$	452,968,948

See accompanying notes to the condensed consolidated financial statements.

1

KEYUAN PETROCHEMICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

	Note	For the Three Months Ended						For the Nine Months Ended
		September 30,						September 30,
		2011			2010			2011			2010
Sales
Third parties		$	123,429,226		$	112,547,711		$	362,865,970		$	314,729,952
Related parties	23		41,225,747			38,796,255			99,443,224			85,983,117
Total Sales			164,654,973			151,343,966			462,309,194			400,713,069
Cost of sales
Third parties			126,185,505			84,197,313			351,055,636			271,636,985
Related parties	23		41,846,664			34,397,567			100,123,349			78,865,712
Total Cost of sales			168,032,169			118,594,880			451,178,985			350,502,697
Gross (loss) profit			(3,377,196)			32,749,086			11,130,209			50,210,372
Operating expenses
Selling expenses			91,607			97,871			846,287			441,284
General and administrative expenses			5,220,525			2,157,939			12,985,350			4,176,551
Total operating expenses			5,312,132			2,255,810			13,831,637			4,617,835
(Loss) income from operations			(8,689,328	)		30,493,276			(2,701,428)			45,592,537
Other income (expenses):
Interest income			1,497,644			104,115			3,186,530			166,470
Interest expense			(5,963,264	)		(3,954,826	)		(11,798,628	)		(6,680,644	)
Foreign exchange gain (loss), net			1,466,275			131,774			4,666,631			424,802
Liquidated damages expense	15		(1,424,609	)		-			(2,725,339	)		-
Non-operating income (expenses)	17		(159,370)			1,765,232			2,409,165			1,481,804
Total other income (expenses)			(4,583,324)			(1,953,705	)		(4,261,641)			(4,607,568	)
(Loss) income before income taxes			(13,272,652	)		28,539,571			(6,963,069)			40,984,969
Income tax (benefit) expense	18		(2,613,449)			7,383,399			304,529			10,574,976
Net income (loss) attributable to Keyuan
Petrochemicals Inc. stockholders			(10,659,203	)		21,156,172			(7,267,598)			30,409,993
Dividends to Series A convertible
Preferred stockholders			-			396,300						684,798
Dividends to Series B convertible
preferred stockholders	15		306,247			9,986			908,753			9,986
Net (loss) income attributable to Keyuan
Petrochemicals Inc. common stockholders		$	(10,965,450	)	$	20,749,886		$	(8,176,351)		$	29,715,209
Net (loss) income attributable to Keyuan
Petrochemicals Inc. stockholders		$	(10,659,203	)	$	21,156,172		$	(7,267,598)		$	30,409,993
Other comprehensive income
Foreign currency translation adjustment			942,212			2,202,386			2,674,383			2,396,334
Comprehensive (loss) income		$	(9,716,991	)	$	23,358,558		$	(4,593,215)		$	32,806,327
(Loss) Earnings  per share:
Attributable to common stock:
- Basic	20	$	(0.19	)	$	0.41		$	(0.14)		$	0.60
- Diluted	20	$	(0.19	)	$	0.37		$	(0.14)		$	0.57
Weighted average number of shares of  common stock used in calculation
Basic	20		57,579,490			50,839,504			57,579,096			49,525,972
Diluted	20		57,579,490			57,948,173			57,579,096			53,609,751

See accompanying notes to the condensed consolidated financial statements.

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KEYUAN PETROCHEMICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Nine Months Ended September 30,
	2011			2010
Cash flows from operating activities:
Net (loss) income	$	(7,267,598)		$	30,409,993
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Loss on disposal of property, plant and equipment		3,528			-
Depreciation		6,994,230			6,131,537
Amortization		78,033			74,470
Land use rights amortization		329,183			168,354
Deferred income tax expense		-			3,496,430
Share-based compensation expense		1,695,078			770,270
Changes in operating assets and liabilities:
Bills receivable		6,972,884			(2,833,738	)
Inventories		41,427,530			(43,112,327	)
Prepayments to suppliers		(9,138,576)			(10,420,393	)
Consumption tax refund receivable		(12,669,298)			(28,345,187	)
Other current assets		(9,613,538	)		(4,804,553	)
Accounts payable		14,233,205			53,154,501
Advances (to) from customers		7,750,302			6,154,441
Income taxes payable/receivable		(12,780,611	)		-
Accrued expenses and other payables		(7,281,521)			67,445
Net cash provided by operating activities		20,732,831			10,911,243
Cash flows from investing activities:
Proceeds from disposal of property, plant and equipment		10,582			-
Purchase of property, plant and equipment,		(23,631,456	)		(25,029,998	)
Purchase of land use rights		-			(5,900,639	)
Net cash used in investing activities		(23,620,874	)		(30,930,637	)
Cash flows from financing activities:
Pledged bank deposits used for bank borrowings		(56,821,639	)		(61,205,447)
Proceeds from short-term bank borrowings		189,192,525			135,343,173
Repayment of short-term bank borrowings		(130,501,038	)		(97,488,517)
Proceeds from bills payable		85,470,630			60,605,200
Repayment of bills payable		(94,796,100	)		(22,435,442)
Repayments of long-term bank borrowings		(13,101,900	)		(5,884,000	)
Short-term financing from related parties		13,232,658			14,415,800
Short-term financing to related parties		(13,118,390	)		(14,505,958)
Repayment to Ningbo Litong		-			(735,500	)
Repayments to unrelated parties		-			(956,150	)
Proceeds from warrant exercises		7,332			-
Proceeds from private placements		-			42,081,321
Dividends paid		(2,585,647	)		-
Net cash (used in) provided  by financing activities		(23,021,569	)		49,234,480
Effect of foreign currency exchange rate changes on cash		316,817			1,686,882
Net (decrease) increase  in cash		(25,592,795	)		30,901,968
Cash at beginning of the period		29,336,241			14,030,655
Cash at end of the period	$	3,743,446		$	44,932,623
Supplemental disclosure of cash flow information:
Income taxes paid	$	13,085,140		$	-
Interest paid, net of interest capitalized		11,798,628			6,680,643
Dividends accrued		4,436,753			694,784
Non-cash financing activities:
Payable for purchase of property, plant and equipment		14,668,112			(24,248,530	)

See accompanying notes to the condensed consolidated financial statements.

3

1              ORGANIZATION, NATURE OF BUSINESS, AND RECENT EVENTS

(a)       Organization

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”.

On April 22, 2010, Silver Pearl Enterprises, Inc., a U.S. public shell company (now known as 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”). The Series M convertible preferred stock voted with the common stock on an “as converted basis“ and were converted into 47,658,000 shares of the Company’s common stock upon the Company’s stockholders approving an increase in authorized common stock to at least 100,000,000 shares. 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. On April 22, 2010, the Company repurchased and cancelled 3,264,000 shares of common stock from Smith for cash consideration of $400,000. The consideration paid in excess of par value of the repurchased shares amounting to $396,736 was charged to additional paid-in capital in the consolidated statement of stockholders’ equity and comprehensive income (loss). After giving effect to the repurchase and conversion of the Series M Preferred Stock, the former stockholders of Keyuan International hold 95.2% of the Company’s common stock.

The Share Exchange has been accounted for as a reverse acquisition and recapitalization whereby Keyuan International is deemed to be the accounting acquirer (and the legal acquiree). Accordingly, Keyuan International’s historical statements for the periods prior to the reverse acquisition became those of the Company retroactively restated for, and giving effect to, the number of shares received in the Share Exchange. The assets and liabilities, and revenues and expenses of the Company are included in the accompanying financial statements effective from April 22, 2010. The total net liabilities assumed by Keyuan International as of the date of the Share Exchange were not significant. The Company is deemed to be a continuation of the business of Keyuan International.

On May 12, 2010, the Company formed a business combination related shell company under the laws of the State of Nevada called Keyuan Petrochemicals, Inc. and on the same day, acquired 100% of the entity’s stock for cash. As such, the entity became the Company’s wholly-owned subsidiary (the “Merger Subsidiary”).

Effective as of May 17, 2010, the Merger Subsidiary was merged with and into the Company. As a result of the merger, the Company’s name was changed to “Keyuan Petrochemicals, Inc.”.  Prior to the merger, the Merger Subsidiary had no liabilities and nominal assets and, as a result of the merger, the separate existence of the merger subsidiary ceased.  The Company is the surviving corporation in the merger and, except for the name change, there was no change in the Company’s directors, officers, capital structure or business.

The Company, through its wholly-owned subsidiary, Keyuan International and its indirect subsidiaries Keyuan Group Limited (“Keyuan HK”) and Ningbo Keyuan Plastics Co., Ltd. (“Ningbo Keyuan”), is engaged in the manufacture and sale of petrochemical products.

On November 16, 2009, Keyuan HK acquired 100% of Ningbo Keyuan.  At the time of the acquisition, Keyuan HK and Ningo Keyuan were controlled by Mr. Tao Chunfeng, the Company’s Chief Executive Officer. Accordingly, the acquisition was accounted for as a common control transaction in a manner similar to a pooling of interests.

On August 8, 2010, Keyuan HK established a wholly owned subsidiary in the People’s Republic of China (“PRC”), Ningbo Keyuan Petrochemicals Co., Ltd (“Ningbo Keyuan Petrochemicals”), which is engaged in the sale of petrochemical products in the PRC.

4

(b)      Nature of business

The Company, through its PRC operating subsidiaries, Ningbo Keyuan and Ningbo Keyuan Petrochemicals, is engaged in the manufacture and sale of petrochemical products in the PRC.

(c)       Recent Events

The Company’s former auditor, KPMG, LLP (“KPMG”), brought certain issues to the Company’s Audit Committee’s attention through a March 28, 2011 memorandum and an April 18, 2011 letter (collectively, the “KPMG Memoranda”).  KPMG requested that the Company’s Audit Committee conduct an independent investigation (the “Investigation”) into those issues.  On March 31, 2011, the Audit Committee elected to commence such independent Investigation and engaged the services of independent counsel, Pillsbury Winthrop Shaw Pittman LLP (“Pillsbury”), which in turn engaged the services of Deloitte Financial Advisory Services LLP (“Deloitte”), as independent forensic accountants, and King & Wood, as Audit Committee counsel in the People’s Republic of China (“PRC”).  Pillsbury, Deloitte and King & Wood are collectively referred to herein as the “Investigation Team.”  On September 28, 2011 the Investigation was completed. The Investigation identified possible violations of PRC laws and U.S. Securities laws, including the maintenance of an off-balance sheet cash account that was used primarily to pay service providers and other Company related expenses. Total activity in the off-balance sheet cash account amounted to approximately $800,000 through December 31, 2010 with a net income statement effect of approximately $12,000, and $400,000 for the period from January 1, 2011 to March 31, 2011, with a net income statement effect of approximately $192,000, at which time the Company ceased its use.  The Investigation identified certain other issues that could result in potential violations of PRC or U.S. laws.  The Company is working with its legal counsel to evaluate the matters identified in the Investigation and to determine the extent to which the Company may be exposed to fines and penalties.  In addition, the Company has retained a Foreign Corrupt Practices Act (“FCPA”) expert to review potentially relevant transactions and to assist the Company with the design and implementation of a detailed FCPA program.  The Company has preliminarily concluded that the extent to which it may be exposed in the PRC is limited.  However, management is currently unable to determine the final outcome of these matters and their possible effects on the consolidated financial statements.

On October 7, 2011, trading of the Company’s common stock was delisted by NASDAQ, and is currently quoted on the OTCQB (symbol: KEYP).

The Company’ s management believes that the Company’s cash, working capital, and access to cash through its bank loans provide adequate capital resources to fund its operations and working capital needs for at least the next twelve months.

2              BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. general accepted accounting principles (U.S. GAAP) and include the financial statements of the Company and its subsidiaries (the “Group”). All intercompany balances and transactions are eliminated in consolidation. The financial statements have been prepared in accordance with GAAP applicable to interim financial information and the requirements of Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. These interim financial statements should be read in conjunction with the audited financial statements for the years ended December 31, 2010 and 2009, as not all disclosures required by generally accepted accounting principles for annual financial statements are presented. The interim financial statements follow the same accounting policies and methods of computation as the audited financial statements for the years ended December 31, 2010 and 2009. Interim results are not necessarily indicative of results for a full year. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the financial position and the results of operations and cash flows for the interim periods have been included.

5

3              CASH AND RESTRICTED BANK DEPOSIT

Cash consists of cash on hand and cash at banks. As of September 30, 2011 and December 31, 2010, cash of $3,680,801 and $26,857,729, respectively, was held in major financial institutions located in the PRC and the Hong Kong Special Administrative Region. Management performs periodic evaluations of the relative credit standings of those financial institutions, and believes that these major financial institutions have high credit ratings.

The restricted bank deposits of $158,847,306 as of September 30, 2011 consisted of $94,236,632 pledged for short-term bank loans borrowing, $28,662,624 pledged for letters of credits, and $28,123,550 pledged for bills payable.

4              INVENTORIES

Inventories consist of the following:

	September 30,		December 31,
	2011		2010
Raw materials	$	25,742,401	$	53,160,604
Finished goods		19,502,318		30,024,896
Work-in-process		2,272,491		3,646,056
Total	$	47,517,210	$	86,831,556

5              PREPAYMENTS TO SUPPLIERS

As of September 30, 2011 and December 31, 2010, prepayments to suppliers are made in connection with the purchase of raw materials and the construction of the Group’s facilities. Prepayments to suppliers are reclassified to inventories or construction-in-progress, when the Group applies the prepayments to related purchases of materials, after the related invoices are received, which is generally within six months.

6              CONSUMPTION TAX REFUND RECEIVABLE

The PRC government enacted a regulation that provides that domestically purchased heavy oil to be used for producing ethylene and aromatics products would be exempted from a consumption tax. In addition, the consumption tax paid for imported heavy oil would be refunded if it was used for producing ethylene and aromatics products. Given all the Group’s purchased heavy oils are, or are to be, used for the production of ethylene and aromatics products, the Group recognizes a consumption tax refund receivable when the consumption tax has been paid and the relevant heavy oils have been used in production.

In January 2011, a consumption tax refund of $24,919,354 was received, and in March 2011 the balance of $14,225,334 from 2010 was approved for payment by the PRC tax authorities.  Claims for consumption tax of $10,512,132 paid in the three months ended March 31, 2011, $10,007,158 paid in the three months ended June 30, 2011, and $18,839,915 paid in the three months ended September 30, 2011 are being submitted to the PRC tax authorities and are expected to be approved and refunded in the first quarter of 2012..

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7              OTHER CURRRENT ASSETS

Other current assets consist of the following:

	September 30,		December 31,
	2011		2010
VAT recoverable	$	14,215,201	$	21,953,590
Receivable from Ningbo Litong (Note 23)		-		2,217,854
Customs deposits for imported inventories		26,880,935		1,972,682
Others		3,486,300		2,464,707
	$	44,582,436	$	28,608,833

8              PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

	September 30,			December 31,
	2011			2010
Buildings	$	3,866,002		$	3,733,116
Machinery and equipment		145,368,601			130,513,767
Vehicles		623,914			560,440
Office equipment and furniture		134,158			130,043
Construction-in-progress		38,629,673			3,117,935
		188,622,348			138,055,301
Less: Accumulated depreciation		(15,620,298	)		(8,273,997	)
	$	173,002,050		$	129,781,304

Depreciation expense on property, plant and equipment is allocated to the following items:

	Three months ended  September 30,				Nine months ended  September 30,
	2011		2010		2011			2010
Cost of sales	$	2,280,341	$	2,025,649	$	6,870,200		$	6,046,386
Selling, general and administrative expenses		42,323		34,878		124,030			85,151
							��
	$	2,322,664	$	2,060,527	$	6,994,230		$	6,131,537

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9               INTANGIBLE ASSETS

Intangible assets consist of the following:

	Amortization		September 30,			December 31,
	Period		2011			2010
	Years
Licensing agreements		10-20	$	1,486,750		$	1,441,150
Less: Accumulated amortization				(487,432	)		(395,684	)
			$	999,318		$	1,045,466

For the nine months ended September 30, 2011 and 2010, amortization expense for intangible assets amounted to $78,033 and $74,470, respectively. For the three months ended September 30, 2011 and 2010, amortization expense for intangible assets amounted to $26,358 and $24,962, respectively. Estimated amortization expense for each of the next five years is estimated to be approximately $100,000.

10            LAND USE RIGHTS

	September 30,			December 31,
	2011			2010
Land use rights	$	12,112,443		$	11,740,943
Less: Accumulated amortization		(995,575	)		(641,068	)
	$	11,116,868		$	11,099,875

For the nine months ended September 30, 2011 and 2010, amortization expense related to land use rights was $329,183 and $168,354, respectively. For the three months ended September 30, 2011 and 2010, amortization expense related to land use rights was $111,184 and $84,118, respectively.

11            SHORT-TERM BANK BORROWINGS

	September 30,		December 31,
	2011		2010
Bank borrowings-secured/guaranteed	$	196,930,884	$	135,768,634

The short−term bank borrowings outstanding as of September 30, 2011 carry a weighted average interest rate of 5.23% (2010: 5.18%) regarding bank loans in RMB; a weighted average interest rate of 3.47% (2010: 3.46%) regarding bank loans in USD, and have maturity terms ranging from one to twelve months and interest rates ranging from 2.97% to 4.92% (2010: 2.97% to 5.56%).

Included in short-term bank borrowings at September 30, 2011 are $3,912,500 and $22,000,000 payable to Shanghai Pudong Development Bank, which are secured by Ningbo Keyuan's rights to use sea areas and a one-year fixed term deposit with a carrying amount of $24,085,350, respectively; in addition, $57,466,553 payable to Bank of China is secured by Ningbo Keyuan's one-year fixed term deposit and pledged deposits with carrying amounts of $59,039,782 and as of September 30, 2011; $11,000,000 payable to China CITIC Bank is secured by Ningbo Keyuan's one-year fixed term deposit with a carrying amount of $11,111,500. Among the rest of the Group's short term borrowings, $84,181,443 is guaranteed by related-party, third-party entities and individuals, including $18,780,000 which is  guaranteed by the Group’s Chief Executive Officer, and $18,780,000 that is secured by the Group’s land, buildings and equipment with a carrying amount of $90,891,179 as of September 30, 2011.

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12            LONG-TERM BANK BORROWINGS

	September 30,			December 31,
	2011			2010
Loan from China Construction Bank	$	15,650,000		$	15,170,000
Loan from Industrial and Commercial Bank of China		4,695,000			4,551,000
Loan from Bank of China		-			12,894,500
		20,345,000			32,615,500
Less: current portion		(14,241,500	)		(17,445,500	)
	$	6,103,500		$	15,170,000

As of September 30, 2011 and December 31, 2010, all of the Group's long-term bank loans are guaranteed by related-party entities, bearing interest from 7.29% to 8.13% and are due on various dates from December 2011 to October 2012. There were no additional bank borrowings in the nine months ended September 30, 2011.

Future principal repayments on the long-term bank borrowing are as follows:

2011	$	4,695,000
2012		15,650,000
	$	20,345,000

13            ADVANCES FROM CUSTOMERS

The Group requires a prepayment of 100% of the sales contract price from its customers shortly before products are delivered. Such prepayment is recorded as “advances from customers” in the Group’s consolidated balance sheets, until the products are delivered and the customer takes ownership and assumes the risk of loss.

 14           ACCRUED EXPENSES AND OTHER PAYABLES

Accrued expenses and other payables as of September 30, 2011 and December 31, 2010 consist of:

	September 30,		December 31,
	2011		2010
Purchase of property, plant and equipment	$	32,655,460	$	17,217,958
Accrued payroll and welfare		388,413		690,831
Liquidated damages		2,725,339		-
Other accruals and payables		705,847		296,321
	$	36,475,059	$	18,205,110

9

15            STOCKHOLDERS’ EQUITY AND RELATED FINANCING AGREEMENTS

Dividends

Fixed dividends are accrued and cumulative for one year from the date of the initial issuance of the Series A and Series B convertible preferred stocks, and are payable on a quarterly basis.

Annual dividends are determined as 6% of $3.50 for each share of the Series A convertible preferred stock, and 6% of $3.75 for each share of the Series B convertible preferred stock.

As of December 31, 2010, all of the Series A convertible preferred stock had been converted into the Company’s common stock. No shares of Series B convertible preferred stock have been converted into the Company’s common stock.

On January 27, 2011, the Company’s Board of Directors approved the distribution of an annual cash dividend of $0.36 per share for 2010 to be paid quarterly to its common stock stockholders at the assigned dates of record. The first quarter dividend of $0.09 per share is declared to be paid to stockholders of record as of March 1, 2011, with the actual distribution occurring on April 15, 2011. Certain stockholders of the Company have announced the waiver of their rights to receive such cash dividends. In addition, Dragon State International Limited, the primary Series B convertible stockholder agreed to waive their rights to receive cash dividends for 2010 should they choose to convert their preferred stock before the record date. The estimated dividends to be distributed and the dividends waived are approximately $3.5 million and $17.2 million respectively. Approximately $0.9 million has been distributed to the common stockholders as dividends of the second quarter.  In October 2011, the Company's Board of Directors suspended the payment of quarterly cash dividends on the Company’s common stock while it pursued strategic alternatives including, but not limited to, taking the Company private, a merger or other transaction.

Registration rights agreement

In connection with the Series A private placement, the Company entered into a registration rights agreement  with the Series A investors, in which the Company agreed to file a registration statement  with the Securities and Exchange Commission (“SEC”) to register for resale the issued common stock, the common stock issuable upon conversion of the Series A convertible preferred stock, and the common stock underlying the Series A and Series B Warrants, and the common stock underlying the placement agent warrants within 30 calendar days of April 22, 2010 and to have this registration statement declared effective within 150 calendar days of April 22, 2010 or within 180 calendar days of April 22, 2010 in the event of a full review of the registration statement by the SEC. If the Company doesn’t comply with the foregoing obligations under the registration rights agreement, the Company will be required to pay liquidated damages in cash to each 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. At December 31, 2010, all of the Series A convertible preferred stock has been converted into the Company’s common stock. The Company did not incur any liquidated damages in 2010.

In connection with the Series B private placement, the Company entered into a registration rights agreement  with the Series B Investors, in which the Company agreed to file a registration statement with the SEC to register for resale the common stock issuable upon the conversion of the Series B convertible preferred stock, common stock underlying the Series C and Series D warrants, and common stock underlying the placement agent warrants, within 30 calendar days following the later of (i) the closing date of the offering or (ii) the effective date of the prior registration statement for resale the Issued Common Stock and common stock issuable upon the conversion of the Series A preferred stock, Series A and Series B warrants, and placement agent warrants issued in the Series A private placement (the “Prior Registration Statement”), and to have the registration statement declared effective within 150 calendar days ( or 180 calendar days of the Closing Date in the event of a full review of the registration statement by the SEC)  following the later to occur of (i) the closing date of the Series B private placement or (ii) the effective date of the Prior Registration Statement.  If the Company does not comply with the foregoing obligations under the registration rights agreement, the Company 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.

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Liquidated damages are also payable in the event that the registration statement is not maintained continuously effective for approximately 180 days, or if trading of the Company’s common stock is suspended or if the Company’s common stock is delisted from the principal exchange on which it is traded  for more than three days.

As the required Registration Statements were declared effective in the specified time frame, management determined that a liability for liquidated damages had not been incurred as of December 31, 2010.  On April 1, 2011, trading of the Company’s common stock was suspended. In addition, management determined that, as of April 15, 2011, the Registration Statements were no longer effective.   Accordingly, in the three months ended June 30, 2011, the period in which it became probable that the Company will be required to remit liquidated damages to the Investors, an estimated contingent liability for liquidated damage was accrued with a corresponding charge to earnings, as per the guidance in ASC 825-20, “Registration Payment Arrangements”.  Accrued liquidated damages are $2,725,339 as of September 30, 2011.

16            SHARE-BASED PAYMENTS

(a)   Employee stock option grants

Effective June 30, 2010, the Board of Directors approved the Company’s 2010 Equity Incentive Plan (the “Plan”). The maximum number of shares of common stock of the Company issuable pursuant to the Plan is 6,000,000 shares.  The Plan shall be administered by the Board; provided however, that the Board may delegate such administration to the Committee.

Subject to the provisions of the Plan, the Board and/or the Committee shall have authority to determine the type or types of awards to be granted to each participant under the Plan. The exercise price per share of each option shall be determined by the Board or the Committee; provided, however, that such exercise price per share under any incentive stock option shall not be less than 100% of the fair market value of a share on the date of grant of such incentive stock option. The term of each option shall be fixed by the Board or the Committee, provided that no incentive stock option shall have a term greater than 10 years.

On June 30, 2010, the Company granted a total of 3,000,000 stock options to certain senior management employees with a contractual term 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 $3,347,298. A total of 2,810,000 stocks options vest over three years as follow: 30% shall vest and become exercisable one year after grant date, 40% shall vest and become exercisable two years after grant date, and 30% shall vest and become exercisable three years after 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.  The related expense was $286,986 for the three months ended September 30, 2011.

On July 1, 2010, the Company granted a total of 80,000 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 of the options shall vest and become exercisable one year after the grant date and the remaining 40,000 of the stock 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.  The related expense was $7,592 for the three months ended September 30, 2011.

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On August 4, 2010, the Company granted 700,000 stock options to employees with a contractual term of 5 years. The exercise price of these stock options was $4.50 per share and the grant-date fair value of these stock options amounted to $1,338,761. These stock 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.

On December 29, 2010, 600,000 stock options granted to certain employees on August 4, 2010, were cancelled. As compensation for such cancellation, the Company committed to pay these employees incremental cash payments during the period through August 2013. The fair value of the committed cash payment on December 29, 2010 was approximately $400,000 and no incremental compensation costs resulted from the cancellation of these stock options.  The related expense for the remaining outstanding options as well as cancellation was $111,520 for the three months ended September 30, 2011.

No options were granted during the three and nine months ended September 30, 2011.

For the three months ended September 30, 2011 and 2010, share-based compensation expenses related to employee stock options charged to general and administrative expenses in the consolidated statements of operations were $406,098 and $371,251, respectively. For the nine months ended September 30, 2011 and 2010, share-based compensation expenses related to employee stock options charged to general and administrative expenses in the consolidated statements of operations were $1,222,626 and $371,251, respectively.

As of September 30, 2011, unrecognized compensation cost related to employee stock options was approximately $2,777,682. These costs are expected to be recognized on a straight-line basis over the remaining weighted average service period of 1.69 years.

(b)   Non-employee stock option grants

On July 1, 2010, the Company granted 40,000 stock options to an external HR consultant with a contractual term of 5 years in exchange for its services completed prior to the grant date. The exercise price of these stock options is $4.20 per share and the grant-date fair value is $45,675. These stock options vested and became exercisable immediately on the grant date.

On July 27, 2010, the Company granted 420,000 stock options to a consultant. The options expire on April 21, 2013. The exercise price of these stock options is $4.20 per share. A total of 70,000 of the stock options vested and became exercisable immediately on the grant date, 31,818 vested monthly from September 1, 2010 through April 1, 2011, and the remaining balance of 95,456 vested on May 1, 2011. Management considers that the vesting dates are concurrent with the respective service completion dates. The grant date fair value of the options was $520,441.

For the three months ended September 30, 2011, share-based compensation expenses related to non-employee stock options recorded in general and administrative expenses in the consolidated statements of operations were $3,796. For the nine months ended September 30, 2011, share-based compensation expenses related to non-employee stocks and stock options recorded in general and administrative expenses in the consolidated statements of operations were $170,775 and $301,678, respectively. For the three months ended September 30, 2010, share-based compensation expenses related to non-employee stocks and stock options were $142,465 and $131,730, respectively. For the nine months ended September 30, 2010, share-based compensation expenses related to non-employee stocks and stock options were $267,290 and $131,730, respectively.

As of September 30, 2011, unrecognized compensation costs related to service provider stock options were approximately $30,492. The remaining costs related to stock options are expected to be recognized over a remaining service period of 1.75 years.

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17            SUBSIDY INCOME

In April and June 2011, a total of approximately $3.1 million of subsidy income was received from the local government.  Subsidy income is recognized when it is received.  The local government has agreed to pay a subsidy equal to 40% of income tax paid in 2010 and 2011, and 20% of income tax to be paid in 2012, 2013 and 2014 as subsidy income.  Subsidy income is subject to income tax.

18            INCOME TAXES

The Company and its subsidiaries file separate income tax returns.

The United States of America

The Company is incorporated in the State of Nevada in the U.S., and is subject to the U.S. federal corporate income tax at progressive rates ranging from 15% to 35%. The state of Nevada does not impose any state corporate income tax. The Company was also liable to state taxes in North Carolina due to the existence of its U.S. office in North Carolina. The office was closed in October 2011.

British Virgin Islands

Keyuan International is incorporated in the British Virgin Islands (“BVI”). Under the current laws of British Virgin Islands, Keyuan International is not subject to tax on income or capital gains. In addition, upon payments of dividends by Keyuan International, no BVI withholding tax is imposed.

Hong Kong

Keyuan HK is incorporated in Hong Kong. Keyuan HK did not earn any income that was derived in Hong Kong for the nine months ended September 30, 2011 and 2010 and therefore was not subject to Hong Kong Profits Tax. The payments of dividends by Hong Kong companies are not subject to any Hong Kong withholding tax.

PRC

Ningbo Keyuan and Ningbo Keyuan Petrochemicals are both incorporated in the PRC and the applicable PRC statutory income tax rate for both companies is 25%.

Components of income (loss) before income tax expense arose in the following jurisdictions:

	Three months ended  September 30,						Nine months ended September 30,
	2011			2010			2011			2010
PRC	$	(9,087,464)		$	29,510,325		$	2,852,121		$	42,276,633
U.S.		(3,610,942	)		(911,056	)		(8,315,021	)		(1,122,863	)
Hong Kong and BVI		(574,246	)		(59,698	)		(1,500,169	)		(168,801	)
(Loss) income before income taxes	$	(13,272,652	)	$	28,539,571		$	(6,963,069)		$	40,984,969

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The Group’s income tax expense in the consolidated statements of operations consists of the following:

PRC:	Three months ended  September 30,				Nine months ended September 30,
	2011		2010		2011		2010
Current income tax expense	$	-	$	7,105,546	$	304,529	$	7,105,546
Deferred income tax (benefit) expense		(2,613,449)		277,853		-		3,469,430
Total income tax (benefit) expense	$	(2,613,449)	$	7,383,399	$	304,529	$	10,574,976

Reconciliation between income tax expense (benefit) and the amounts computed by applying the PRC statutory income tax rate of 25% to income (loss) before income taxes is as follows:

	Three months ended September 30,									Nine months ended September 30,
	2011					2010				2011					2010
(Loss) income before income taxes	$	(13,272,652	)			$	28,539,571			$	(6,963,069)				$	40,984,969
Computed income tax (benefit) expense		(3,318,163	)	25.0	%		7,134,893	25.0	%		(1,740,767)		25.0	%		10,246,242	25.0	%
NOLs from overseas subsidiaries not recognized		1,356,212		(10.2	%)		318,884	1.1	%		3,155,416		(45.4	%)		393,022	1.0	%
Others		(651,498	)	4.9	%		(70,378)	(0.2	%)		(1,110,120	)	16.0	%		(64,288)	(0.2	%)
Actual income tax expense (benefit)	$	(2,613,449)		19.7	%	$	7,383,399	25.9	%	$	304,529		(4.4	%)	$	10,574,976	25.8	%

The PRC income tax rate has been used because the majority of the Group’s consolidated income (loss) before income taxes arises in the PRC.

According to the prevailing PRC income tax law and its relevant regulations, non-PRC-resident enterprises are levied withholding tax at 10%, unless reduced by tax treaties or similar arrangements, on dividends from their PRC-resident investees for earnings accumulated beginning on January 1, 2008, and undistributed earnings generated prior to January 1, 2008 are exempt from such withholding tax. Further, the Company’s distributions from its PRC subsidiaries are subject to the U.S. federal income tax at 35%, less any applicable qualified foreign tax credits. Due to the Company’s policy of permanently reinvesting substantially all of its earnings in its PRC business, the Company has not provided for deferred income tax liabilities for U.S. federal income tax purposes on its PRC subsidiaries’ undistributed earnings of $28.5 million and $26.3 million as of September 30, 2011 and December 31, 2010, respectively.

The Group mainly files income tax returns in the United States and the PRC. The Company is subject to U.S. federal income tax examination by tax authorities for tax years beginning in 2004.  According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of taxes is due to computational errors made by the taxpayer or the withholding agent. The statute of limitations is extended to five years under special circumstances where the underpayment of taxes is more than RMB100,000 ($15,000). In the case of transfer pricing issues, the statute of limitation is ten years. There is no statute of limitation in the case of tax evasion. The PRC tax returns for the Company’s PRC subsidiaries are open to examination by the PRC state and local tax authorities for the tax years beginning in 2008.

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19            CONTINGINCIES

In connection with the shipping of finished products, inaccurate product information was provided to the PRC Port authority.  In consultation with PRC legal counsel, management has evaluated the contingencies associated with the provision of inaccurate information and expects that the penalty, if any, will not be significant and will not have a material impact on the consolidated financial statements.

Ningbo Keyuan failed to withhold income tax of approximately $50,000 from payments to certain external service providers and employees. Ningbo Keyuan has asked these external service providers and employees to pay the related income tax to the tax bureau. However at this time it is uncertain if such payments will be made. If such payments are not made, in accordance with PRC income tax law, Ningbo Keyuan may be subject to fines ranging from 50% to three times of the amount of tax that Ningbo Keyuan failed to withhold.  Management expects that the resolution of this matter will not have a material impact on the Group’s consolidated financial statements.

On November 15, 2011, The Rosen Law Firm, P.A. filed a class action suit, 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 the effectiveness of internal controls in past public filings. The Company believes there is no basis to the suit filed by The Rosen Law Firm and intends to defend the law suit vigorously.

20            EARNINGS (LOSS) PER SHARE

Earnings per share for the period of the Share Exchange have been restated to reflect the recapitalization under the Share Exchange. The following table sets forth the computation of basic net income (loss) per share:

	For the three months ended					For the nine months ended
	September 30			September 30		September 30		September 30
	2011			2010		2011		2010
Net (loss) income attribute to Keyuan
Petrochemicals, Inc. stockholders	$	(10,659,203	)	$	21,156,172	$	(7,267,598)	$	30,409,993
Less: Dividend attributable to preferred
Stockholders		306,247			406,286		908,753		694,784
Net (loss) income attributable to Keyuan Petrochemical Inc. common shareholders	$	(10,965,450	)	$	20,749,886	$	(8,176,351)	$	29,715,209
Weighted average common shares
(Denominator for basic income per share)		57,579,490			50,839,504		57,579,096		49,525,972
Effect of diluted securities:
- Series A convertible preferred stock		-			6,738,336		-		3,899,197
- Series B convertible preferred stock		-			117,391		-		39,561
-   - Warrants		-			252,942		-		145,021
Weighted average common shares
(denominator for diluted income per share)		57,579,490			57,948,173		57,579,096		53,609,751
Basic net (loss) income per share	$	(0.19	)	$	0.41	$	(0.14)	$	0.60
Diluted net (loss) income per share	$	(0.19	)	$	0.37	$	(0.14)	$	0.57

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21            FAIR VALUE MEASUREMENTS

The Company did not have any assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2011 and 2010.

The fair values of cash, pledged bank deposits, bills receivable, consumption tax refund receivable, short-term bank borrowings, bills payable, current portion of long-term borrowings, and accounts payable approximate their respective carrying amounts due to their short-term nature. Amounts due to related parties are not practicable to estimate due to the related party nature of the underlying transactions. The Group’s long-term debt, secured by various assets, bears interest at rates commensurate with market rates and therefore management believes carrying values approximate fair values.

22            SIGNIFICANT CONCENTRATIONS AND RISKS

As of September 30, 2011 and December 31, 2010, the Group held cash and pledged bank deposits in financial institutions of approximately $162,528,107 and $127,260,081, respectively. They were primarily held in major financial institutions located in mainland China and the Hong Kong Special Administrative Region, which management believes have high credit ratings.

Sales to major customers, which individually exceeded 4% of the Group’s total net revenues, are as follows:

Three months ended September 30, 2011						Three months ended September 30, 2010
Largest	Amount of		% Total			Largest	Amount of		% Total
Customers	Sales		Sales			Customers	Sales		Sales
Customer A	$	41,225,299		25	%	Customer A	$	35,844,229		22	%
Customer B		13,170,091		8	%	Customer I		14,966,412		9	%
Customer C		11,137,634		7	%	Customer F		10,844,446		7	%
Customer D		12,173,190		7	%	Customer  J		10,192,676		6	%
Customer E		6,372,752		4	%	Customer  K		9,676,952		6	%
Total	$	84,068,966		51	%	Total	$	81,524,715		50	%

Nine months ended September 30, 2011						Nine months ended September 30, 2010
Largest	Amount of		% Total			Largest	Amount of		% Total
Customers	Sales		Sales			Customers	Sales		Sales
Customer A	$	99,376,211		21	%	Customer A	$	79,072,843		20	%
Customer F		42,569,008		9	%	Customer L		31,564,935		8	%
Customer C		41,406,576		9	%	Customer I		21,453,441		5	%
Customer G		19,465,251		4	%	Customer J		20,563,582		5	%
Customer H		18,257,022		4	%	Customer L		20,331,348		5	%
Total	$	221,074,068		48	%	Total	$	172,986,149		43	%

16

The Group currently buys a majority of its fuel oil, an important component of its products, from three suppliers. 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 three months ended September 30, 2011 and 2010 were $85,220,085 and $80,227,040, respectively. These purchases represented 77% and 59% respectively of all of the Company’s purchases for three months end September 30, 2011 and 2010. Purchases (net of VAT) from the largest three suppliers for the nine months ended September 30, 2011 and 2010 were $317,299,110 and $216,723,384 respectively. These purchases represented 79% and 59%, respectively, of all of the Group’s purchases for the nine months end September 30, 2011 and 2010. The Company’s largest supplier accounted for approximately $62 million and $51.0 million, or 56% and 38% of total purchases for the three months ended September 2011 and 2010, and $252.2 million and $120.2 million, or 62% and 33% of total purchases for the nine months ended September 2011 and 2010.

The Group’s operations are carried out in the PRC. Accordingly, the Group’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC as well as by the general state of the PRC’s economy. The business may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

23            RELATED PARTY TRANSACTIONS AND RELATIONSHIPS AND TRANSACTIONS WITH CERTAIN OTHER PARTIES

(1)  Related Party Transactions

The Company considers all transactions with the following parties to be related party transactions.

Name of parties	Relationship
Mr. Chunfeng Tao	Majority stockholder
Mr. Jicun Wang	Principal stockholder
Mr. Peijun Chen	Principal stockholder
Ms. Sumei Chen	Member of the Company’s Board of Supervisors and spouse of Mr. Wang
Ms. Yushui Huang	Vice President of Administration, Ningbo Keyuan
Mr. Weifeng Xue	Vice President of Accounting, Ningbo Keyuan through August 2011
Mr. Hengfeng Shou	Vice President of Sales, Ningbo Keyuan
	Petrochemical
Ningbo Kewei Investment Co., Ltd.	A company controlled by Mr. Tao through October 2011
(Ningbo Kewei)
Ningbo Pacific Ocean Shipping Co., Ltd	100% ownership by Mr. Wang
(Ningbo Pacific)
Ningbo Hengfa Metal Product Co., Ltd	100% ownership by Mr. Chen
(Ningbo Hengfa, former name "Ningbo Tenglong")
Shandong Tengda Stainless Steel Co., Ltd	100% ownership by Mr. Chen
(Shandong Tengda)
Ningbo Xinhe Logistic Co., Ltd
(Ningbo Xinhe)	10% ownership by Ms. Huang
Ningbo Kunde Petrochemical Co, Ltd.	Mr. Tao’s mother was a 65% nominee shareholder
(Ningbo Kunde)	for Mr. Hu, a third party through September 2011
Ningbo Jiangdong Jihe Construction Materials	Controlled by Mr. Xue’s Brother-in-law
Store (Jiangdong Jihe)
Ningbo Wanze Chemical Co., Ltd	Mr. Tao’s sister-in-law is the legal representative
(Ningbo Wanze)
Ningbo Zhenhai Jinchi Petroleum Chemical	Controlled by Mr. Shou
Co., Ltd (Zhenhai Jinchi)

17

Related party transactions and amounts outstanding with related parties as of and for the three and nine months ended September 30, 2011 and 2010 are summarized as follows:

	Three Months ended September 30,				Nine Months ended September 30,
	2011		2010		2011		2010
Sales of products (a)	$	41,225,747	$	38,796,256	$	99,443,224	$	85,983,117
Purchase of raw material (b)	$	-	$	14,103,440	$	7,113,589	$	19,850,135
Purchase of transportation services (c)	$	1,230,893	$	332,419	$	2,158,772	$	3,376,808
Credit line of guarantee provision for bank borrowings (d)	$	-	$	33,097,500	$	-	$	158,132,500
Loan guarantee fees (d)	$	402,447	$	-	$	1,159,365	$	-
Short-term financing from related parties (e)	$	-	$	12,479,262	$	13,232,658	$	14,415,800
Short-term financing to related parties (e)	$	-	$	12,839,420	$	13,118,390	$	14,505,958

	September 30,		December 31,
	2011		2010
Amounts due from related parties (f)	$	39,125	$	5,332,193
Amounts due to related parties (g)	$	360,903	$	115,535

(a) During the three months ended September 30, 2011 and 2010, the Group sold finished products of $41,225,747 and $35,844,229 to Ningbo Kunde, and nil and $2,952,027 to Zhenhai Jinchi, respectively. During the nine months ended September 30, 2011 and 2010, the Group sold finished products of $99,376,211 and $79,072,843 to Ningbo Kunde, and $67,013 and $6,910,274 to Zhenhai Jinchi, respectively. Amounts received in advance from Kunde as of September 30, 2011 were $218,660.

(b) The Group purchased raw materials of nil and $14,103,440 from Ningbo Kunde during the three months ended September 30, 2011 and 2010, respectively. The Group purchased raw materials of nil and $4,440,207 from Ningbo Kewei during the nine months ended September 30, 2011 and 2010 with no outstanding amount payable to Ningbo Kewei at September 30, 2011 in respect of these purchase transactions. The Group purchased raw materials of $7,113,589 and $15,409,928 from Ningbo Kunde during the nine months ended September 30, 2011 and 2010, respectively.

(c) The Group purchased transportation services of $1,230,893 and $332,419 from Ningbo Xinhe during the three months ended September 30, 2011 and 2010, respectively. The Group purchased transportation services of $2,158,772 and $3,376,808 from Ningbo Xinhe during the nine months ended September 30, 2011 and 2010, respectively, and amounts owed to Ningbo Xinhe as of September 30, 2011 in respect of these purchase transactions were $142,243.

18

(d) Guarantees for Bank Loans

	Guarantee provided during				Guarantee provided during
	the three months ended September 30,				the nine months ended September 30,
	2011		2010		2011		2010
Mr. Tao	$	-	$	-	$	-	$	79,434,000
Ningbo Kewei		-		33,097,500		-		74,285,500
Ningbo Pacific		-		-		-		4,413,000

	Guaranteed Bank Loans
	as of September 30,
	2011
Mr. Tao	$	34,430,000
Jicun Wang and Chen	$	14,743,698
Ningbo Kewei	$	29,530,245
Ningbo Pacific	$	19,438,698
Ningbo Hengfa	$	20,188,500
Shangdong Tengda	$	939,000

Beginning in 2011, loan guarantee fees of 0.3% of the loan principal guaranteed are to be paid quarterly. In the three months ended September 30, 2011, loan guarantee fees were $75,616, $241,921 and $84,910 for Ningbo Hengfa, Ningbo Pacific and Ningbo Kewei, respectively. In the nine months ended September 30. 2011, loan guarantee fees were $225,732, $543,167 and $390,466 for Ningbo Hengfa, Ningbo Pacific and Ningbo Kewei, respectively.

(e)   Short-term financing transactions with related parties

	Three Months Ended September 30,
	2011						2010
	From(i)		To(i)		Balance(ii)		From(i)		To(i)			Balance(ii)
Ningbo Kewei	$	-	$	-	$	-	$	4,100	$	(4,100	)	$	-
Ningbo Kunde		-		-		-		6,774,800		(6,774,800	)		-
Jiangdong Jihe		-		-		-		3,236,200		(3,326,358	)		(91,571)
	$	-	$	-	$	-	$	10,015,100	$	(10,015,258	)	$	(91,571)

	Nine Months Ended September 30,
	2011							2010
	From(i)		To(i)			Balance(ii)		From(i)		To(i)			Balance(ii)
Ningbo Kewei	$	5,394,900	$	(5,394,900	)	$	-	$	1,471,000	$	(1,471,000	)	$	-
Ningbo Kunde		5,394,900		(5,394,900	)		-		9,708,600		(9,708,600	)		-
Jiangdong Jihe		2,442,858		(2,328,590	)		-		3,236,200		(3,326,358	)		(91,571)
	$	13,232,658	$	(13,118,390	)	$	-	$	14,415,800	$	(14,505,958	)	$	(91,571)

(i) Transactions during the year are translated at average exchange rates.

(ii) Balances at year end are translated at the balance sheet exchange rate.

19

(f) Amounts due from related parties consist of the following:

	September 30,		December 31,
Related Party	2011		2010
Ningbo Kunde	$	-	$	5,181,809
Jiangdong Jihe		-		112,459
Mr. Tao		39,125		37,925
	$	39,125	$	5,332,193

Amounts due from Mr. Tao represent advances made for business expenses which are unsecured, interest free and due on demand.

(g) Amounts due to related parties consist of the following:

	September 30,		December 31,
Related Party	2011		2010
Ningbo Kunde	$	218,660	$	-
Ningbo Jinchi		-		115,416
Ninbo Xinhe		142,243		119
	$	360,903	$	115,535

Amounts due to related parties represent balances due for raw materials purchases and freight.

(2)  Relationships and transactions with certain other parties

The Group has the following relationships and transactions with certain other parties:

Name of parties	Relationship
Ningbo Litong Petrochemical Co., Ltd	Former 12.75% nominee shareholder of Ningbo
(Ningbo Litong)	Keyuan
Ningbo Jiangdong Haikai Construction	Controlled by cousin of Mr. Weifeng Xue, Vice
Materials Store (Jiangdong Haikai)	President of Accounting through August 2011
Ningbo Jiangdong Deze Chemical Co., Ltd	Controlled by cousin of Mr. Weifeng Xue, Vice
(Jiangdong Deze)	President of Accounting through August 2011
Ningbo Anqi Petrochemical Co., Ltd	Controlled by cousin of Mr. Weifeng Xue, Vice
(Ningbo Anqi)	President of Accounting through August 2011

20

Transactions and amounts outstanding with these parties for the three and nine months ended September 30, 2011and 2010, are summarized as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Sales of products (h)	$	-	$	14,966,412	$	777,960	$	21,453,441
Purchase of raw material (i)	$	5,302,905	$	2,576,040	$	14,839,187	$	14,665,472
Credit line of guarantee for bank borrowings (j)	$	-	$	-	$	-	$	-
Loan guarantee fees (j)	$	256,020	$	-	$	761,676	$	-
Short-term financing from theses parties (k)	$	3,949,020	$	20,495,052	$	51,835,741	$	37,722,324
Short-term financing to these parties (k)	$	3,949,020	$	17,968,222	$	49,582,214	$	35,195,494

	September 30,		December 31,
	2011		2010
Amounts due from these parties	$	-	$	2,217,854
Amounts due to these parties	$	64,201	$	110,134

(h) The Group sold finished products to Ningbo Litong for $14,966,412 in the three months ended September 30, 2010. The Group sold finished products of $777,960 and $21,453,441 to Ningbo Litong in the nine months ended September 30, 2011 and 2010, with no outstanding balance.

(i) The Group purchased raw materials of $5,302,905 and $2,576,040 from Ningbo Litong during the three months ended September 30, 2011 and 2010. During the nine months ended September 30, 2011 and 2010, the Group purchased raw materials of $14,839,187 and $14,665,472 from Ningbo Litong. Amounts payable to Litong were $64,201 as of September 30, 2011, and were included in accounts payable on the consolidated balance sheet.

(j) Guarantees for Bank Loans

	Guaranteed Bank Loans
	as of September 30,
	2011
Ningbo Litong	$	39,907,500

No new guarantees were obtained from these parties during the three and nine months ended September 30, 2011.  Guarantee fees paid to Litong were $256,020 and $761,646 for the three and nine months ended September 30, 2011, respectively.

(k) Short-term financing transactions

Historically the Group and these parties have provided each other with short-term financing, typically, in the form of cash, bills receivable and bills payable.

21

In connection with the Group’s financing transactions, the Group has obtained bills receivable in exchange for cash or other payables. These bills are sold for cash at a discount prior to maturity. At maturity, the counter parties honor their obligations under the bills by paying the bill amount to the accepting bank, at which time, or shortly thereafter, the Group repays the counter parties. Short-term financing obtained and repayments made under these agreements were as follows for the three and nine months ended September 30, 2011 and 2010.

	Three Months Ended September 30,
	2011							2010
	From(i)		To(i)			Balance(ii)		From(i)		To(i)			Balance(ii)
Ningbo Litong	$	-	$	-		$	-	$	20,495,052	$	(15,026,222	)	$	(5,583,810)
Jiangdong Deze		-		-			-		-		-			-
Ningbo Anqi		3,949,020		(3,949,020	)		-		-		(2,942,000)			2,994,000
	$	3,949,020	$	(3,949,020	)	$	-	$	20,495,052	$	(17,968,222	)	$	(2,589,810)

	Nine Months Ended September 30,
	2011							2010
	From(i)		To(i)			Balance(ii)		From(i)		To(i)			Balance(ii)
Ningbo Litong	$	38,399,357	$	(36,145,830	)	$	-	$	37,722,324	$	(32,253,494	)	$	(5,583,810)
Jiangdong Deze		2,620,380		(2,620,380	)		-		-		-			-
Ningbo Anqi		10,816,004		(10,816,004	)		-		-		(2,942,000)			2,994,000
	$	51,835,741	$	(49,582,214	)	$	-	$	37,722,324	$	(35,195,494	)	$	(2,589,810)

(i) Transactions during the year are translated at average exchange rates.

(ii) Balances at year end are translated at the balance sheet exchange rate.

ITEM 2.       MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and result of operations contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in the "Risk Factors" section of the other reports we file with the Securities and Exchange Commission. Actual results may differ materially from those contained in any forward-looking statements.

The following discussion and analysis of financial condition and results of operations relates to the operations and financial condition reported in the financial statements of Keyuan  for the nine months ended September 30, 2011 and 2010 and should be read in conjunction with such financial statements and related notes included in this report and the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

22

Overview

Operating through our wholly-owned subsidiaries, Ningbo Keyuan and Ningbo Keyuan Petrochemicals, our operations include (i) a production facility with an annual petrochemical production capacity of 550,000 metric tons (MT) of a variety of petrochemical products (such capacity was expanded to 720,000 MT in April 2011), (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.

In April 2011, 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 we began initial trial production in October and November 2011. In addition, we plan to complete an additional storage capacity, a raw material pre-treatment facility and an asphalt production facility by the end of 2012.

Our Facility and Equipment

Facility

As of September 30, 2011, we have invested a total of approximately $173 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 additional 1.2 million square feet of land in August 2010 for our future expansion.

We have a total of 100,000 MT of storage capacity, consisting of 50,000 MT of storage capacity for raw materials and 50,000 MT for finished products. As part of our expansion plan, we intend to add 180,000 MT of new storage capacity in 2012, after which our total storage capacity will be 280,000 MT.

We have an on-site ocean shipping dock with 5,000 MT of shipping capacity and a 10-truck loading facility. Approximately 90% of our feedstock and finished products use this shipping dock. We also have adjacent access to another shipping dock with an additional 50,000 MT of shipping capacity.

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, a stabilizing tower;

● Gas fractionation processing equipment- de-propanizing tower, refining propylene tower, de-ethanizination tower, heat exchangers, 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, 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.

23

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 plastics, 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 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 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.

Expansion Plan

Our annual designed manufacturing capacity was 550,000 metric tons of a variety of petrochemical products at the end of 2010. In order to meet the increasing market demands, 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 2011 and was completed in April 2011. We also completed building an SBS production facility which is capable of producing up to70,000 MT in September 2011. We are planning to expand our facility to include additional storage capacity, a raw material pre-treatment facility and an asphalt production facility by the end of 2012.

SBS Facility

In September 2011, we completed building a new facility designed for producing SBS, one of the Styreneic Block Copolymers.  SBS is a product with higher product margin with major application for 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 use of right in August 2010 The construction started in September, 2010 and was completed (as planned) in September 2011. We started trial production in October and November, 2011. The designed capacity of the SBS facility would allow for production of up to 70,000 metric tons per year.  We expect to generate net profit margins of 10% from our production of SBS once the facility reaches normal production levels. The SBS facility is anticipated to achieve an 80% utilization rate in 2012, the first full year of production, and to generate approximately $107 million in sales and $10 million to $11 million in profit in 2012.

24

Other Expansion Projects

In addition to the SBS production facility, we plan to increase our current 100,000 MT storage capacity to 280,000 MT. Management believes that the increased storage capacity will allow the Company to take better advantage of sales price variations of raw materials and our products, as well supporting the storage needs resulting from our various expansion projects and our corresponding increased overall production capacity. .  We also plan to build a pretreatment facility and an asphalt facility on the land that was acquired in August 2010. The pretreatment facility will allow us to handle lower grade raw materials thereby allowingus to further decrease overall raw material costs. In addition, this facility will improve efficiency in current production process andprovide the necessary feedstock for our planned asphalt production. The new asphalt facility will be capable of producing as much as 300,000 MT annually once it is completed. Once completed and fully operational, we estimate that the new asphalt facility will generate approximately $298 million in sales and approximately $30 million of additional profits a year.

The actual and estimated schedule of our expansion plan is as follows:

Completed SBS facility in September 2011

Complete Trial Production and begin SBS production and sales in the fourth quarter of 2011

Complete storage capacity expansion, pretreatment facility and asphalt by December 31, 2012

On August 18, 2010, we acquired four parcels of land adjacent to the Company's current facilities totaling approximately 1.2 million square feet. The total cost of the land was approximately $5.8 million. Aside from the cost of the land acquisition, the estimated cost of the storage expansion and construction of the  pretreatment and asphalt facilities is approximately $70 million, including $20 million for facility construction, $40 million for new equipment and $10 million for working capital.

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.

Manufacturing and Sales

Our total production of finished products was 123,379 MT for the three months ended September 30, 2011 and we generated $165 million in revenue based on the sale of 161,003 MT of petrochemical products, including 12,022 MT of products produced by third parties. For the first nine months of 2011, our total production was 399,220 MT and revenue generated from sales was $462 million, which represented a 15% increase from the same period of 2010.

In the second quarter of 2011, we incurred production interruptions, mainly as a result of the expansion of our production capacity. In April 2011, we lost a combined 25 days of production, equating to approximately 54,000 tons of production, and approximately $45 million of revenues. In the third quarter of 2011, we incurred production interruptions, mainly as a result of the upgrade of the local power grid. We lost a combined 19 days of production, equating to approximately 41,000 tons of production, and approximately $40 million of revenues. 

As a result, during the nine months ended September 30, 2011 we incurred production interruptions totaling a combined 44 days.   These lost days of production equated to approximately 95,000 tons of productions and roughly $85 million of revenues.

25

Results of Operations

The following table shows the results of operations of our business.

Comparison of the three and nine months ended September 30, 2011 and 2010

	For the three months				Year to Year Comparison			For the nine months				Year to Year Comparison
	Ended September 30,				Increase		Percentage	Ended September 30,				Increase		Percentage
	2011		2010		/(Decrease)		change	2011		2010		/(Decrease)		Change
Sales
Third parties		123,429,226		112,547,711		10,881,515	10%		362,865,970		314,729,952		48,136,018		15%
Related Parties		41,225,747		38,796,255		2,429,492	6%		99,443,224		85,983,117		13,460,107		16%
Total sales	$	164,654,973	$	151,343,966	$	13,311,007	9%	$	462,309,194	$	400,713,069	$	61,596,125		15%
Cost of sales
Third parties		126,185,505		84,197,313		41,988,192	50%		351,055,636		271,636,985		79,418,651		29%
Related Parties		41,846,664		34,397,567		7,449,097	22%		100,123,349		78,865,712		21,257,637		27%
Total cost of sales		168,032,169		118,594,880		49,437,289	42%		451,178,985		350,502,697		100,676,288		29%
Gross profit		(3,377,196)		32,749,086		(36,126,282)	(110%)		11,130,209		50,210,372		(39,080,163)		(78%)
Operating expenses
Selling expenses		91,607		97,871		(6,264)	(6%)		846,287		441,284		405,003		92%
General and administrative expenses		5,220,525		2,157,939		3,062,586	142%		12,985,350		4,176,551		8,808,799		211%
Total operating expenses		5,312,132		2,255,810		3,056,322	135%		13,831,637		4,617,835		9,213,802		200%
(Loss) Gain from operations		(8,689,328)		30,493,276		(39,182,694)	(128%)		(2,701,428)		45,592,537		(48,293,965)		(106%)
Other income (expenses):
Interest expense, net		(4,465,620)		(3,850,711)		(614,909)	16%		(8,612,098)		(6,514,174)		(2,097,924)		32%
Foreign exchange gain (loss), net		1,466,275		131,774		1,334,501	1013%		4,666,631		424,802		4,241,829		999%
Liquidated damage expenses		(1,424,609)		-		(1,424,609)	n/a		(2,725,339)		-		(2,725,339)		n/a
Non-operating income (expenses)		(159,370)		1,765,232		(1,924,602)	(109%)		2,409,165		1,481,804		927,361		63%
Total other Income(expenses)		(4,583,324)		(1,953,705)		2,629,619	(135%)		(4,261,641)		(4,607,568)		345,927		(8%)
(Loss) Income before provision for income tax		(13,272,652)		28,539,571		(41,812,223)	(147%)		(6,963,069)		40,984,969		(47,948,038)		(117%)
Provision for income tax		(2,613,449)		7,383,399		(9,996,848)	(135%)		304,529		10,574,976		(10,270,447)		(97%)
Net (Loss) Income		(10,659,203)		21,156,172		(31,815,375)	(150%)		(7,267,598)		30,409,993		(37,677,591)		(124%)
Other comprehensive income
Foreign currency translation adjustment		942,212		2,202,386		(1,260,174)	(57%)		2,674,383		2,396,334		278,049		12%
Comprehensive (loss) income	$	(9,716,991)	$	23,358,558	$	(33,075,549)	(142%)	$	(4,593,215)	$	32,806,327	$	(37,399,542)		(114%)

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Sales: Sales for the three months ended September 30, 2011 were approximately $164.6 million compared to sales of $151.3 million for the three months ended September 30, 2010, an increase of $13.3 million, or 8.8%. The increase in our sales was due to higher average sales price of our products. In the three months ended September 30, 2011 we sold 162,552 metric tons of chemical products at an average price of $1,013 per metric ton, as compared to sales of 181,282 metric tons of chemical products at an average price of $835 per metric ton in the three months ended September 30, 2010. This represents an increase of approximately 21.3% in average sales price and a decrease of approximately 10.3% in overall products sold.  The decrease in overall products sold was mainly due to the 19 days production suspension caused by the upgrade of the local power grid.

Our overall sales for the three months ended September 30, 2011 included approximately $41.2 million of sales to related parties as compared to approximately $38.8 million in the same period in 2010.  Pricing for sales to related parties was determined on the same basis as sales to non-related parties.  For additional informational on related party sales, please refer to Footnote 23 of the financial statements.

Sales for the nine months ended September 30, 2011 were approximately $462.3 million compared to sales of $400.7 million for the nine months ended September 30, 2010, an increase of $61.6 million, or 15.4%. The substantial increase in our sales was due to the higher capacity utilization coupled with higher average sales price of our products. In the nine months ended September 30, 2011 we sold 447,147 metric tons of chemical products at an average price of $1,034 per metric ton, as compared to sales of 481,983 metric tons of chemical products at an average price of $831 per metric ton in the nine months ended September 30, 2010. This represents an increase of approximately 24.4% in average sales price and a decrease of approximately 7.2% in overall chemical products sold. The decrease in overall products sold was mainly due to the 25 day production suspension caused by the capacity expansion in the second quarter and the 19 day production suspension caused by the upgrade of the local power grid in the third quarter.

Our overall sales for the first nine months of 2011 included approximately $99.4 million of sales to related parties as compared to approximately $85.9 million in same period in 2010.  Pricing for sales to related parties adopts the same principles as that to non-related parties.  For additional informational on related party sales, please refer to Footnote 23 of the financial statements.

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Cost of Sales: Overall cost of sales was approximately $168.0 million for the three months ended September 30, 2011, or 102% of sales, as compared to cost of sales of approximately $118.6 million, or 78.4% of sales for the three months ended September 30, 2010.  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 the three months ended September 30, 2011 our average cost of finished product was $1,034 per metric ton, as compared to an average cost of $654 per metric ton in the three months ended September 30, 2010, an increase of 58.1%.  The main reason for the higher percentage of cost of sales is the timing of our procurement of raw materials.  In the third quarter of 2011, the price fluctuation of raw material was significant and we obtained a large portion of raw materials at a higher price point. Our raw material price was $676 per metric ton, as compared to the average market price of $656 per metric ton. We estimate that the timing of our purchases had an impact of approximately $2.5 million on the cost of sales. In September 2011, production was suspended for 19 days due to unexpected power shutdown during which we still incurred estimated expenses of $1 million including depreciation, labor cost and various other manufacturing overhead. In addition, as a result of the power shutdown, we were forced to hold onto raw materials that we had already purchased during the period of production suspension during which time the sale price of our products decreased as a result of decreased raw material prices following the shutdown. The lower percentage for cost of sales for the three months ended September 30 2010 was due to the inclusion of the consumption tax refund in the first three quarters.

Our overall cost of sales was approximately $451.2 million for the nine months ended September 30, 2011, or 97.6% of sales, as compared to cost of sales of approximately $350.5 million, or 87.5% of sales for the nine months ended September 30, 2010.  In the nine months ended September 30, 2011 our average cost of finished product was $1,009 per metric ton, as compared to an average cost of $727 per metric ton in the nine months ended September 30, 2010, an increase of 38.8%.  In second and third quarters of 2011, production was suspended for 44 days during which we still incurred estimated expenses of $2.2 million, including depreciation, labor cost and various other manufacturing overhead.

Gross Profit/(Loss): Gross loss for the three months ended September 30, 2011 was approximately $3.4 million as compared to gross profit of $32.7 million for the comparable period in 2010. Our gross margin has decreased from 21.6% for the three months ended September 30, 2010 to (2%) for the three months ended September 30, 2011.  The main reason for the decrease in the gross margin is the increase in our raw material prices including the timing of procurement, and the manufacturing overhead incurred during the suspension of production.  The Company uses fuel oil as raw material for production, which is a product of heavy crude oil. For crude oil, the average Brent oil price in the three months ended September 30, 2011 was $112 per barrel, as compared to $77 in the same period of 2010, an increase of 46%.

Gross profit for the nine months ended September 30, 2011 was approximately $11.1 million as compared to $50.2 million for the comparable period in 2010. Our gross margin has decreased from 12.5% for the nine months ended September 30, 2010 to 2.4% for the nine months ended September 30, 2011.  The main reason for the decrease in the gross margin is the increase in our raw material prices.   Additionally, the suspension of production had a negative impact of approximately 0.5% on the gross margin for the nine months ended September 30, 2011.  

Going forward, management believes that major fluctuations in prices of raw materials will continue to have a major impact on our gross margins, although management continues to improve efficiencies in our manufacturing processes.

Operating Expenses: Operating expenses, including selling expenses, and general and administrative expenses, were approximately $5.3 million, or 3.2% of sales for the three months ended September 30, 2011 as compared to $2.3 million, or 1.5% of sales for the three months ended September 30, 2010, an increase of approximately $3.0 million. The increase was due to various public company expenses including various legal and consulting services. In the three months ended September 30, 2011, we also incurred expenses of approximately $1.8 million in connection with the independent investigation.

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Operating expenses, including selling expenses and general and administrative expenses, were approximately $13.8 million, or 3.0% of sales for the nine months ended September 30, 2011 as compared to $4.6 million, or 1.2% of sales for the comparable period in 2010, an increase of approximately $9.2 million. The increase was due to various public company expenses including share-based compensation, and various legal and consulting services. The share-based compensation for the nine months ended September 30, 2011 was $1.7 million, as compared to share-based compensation of $0.8 million for the nine months ended September 30, 2010.  In the nine months ended September 30, 2011, we also incurred expenses of US$3.5 million in connection with the independent investigation.  The remaining increase was mainly a result of various legal and consulting services associated with being a public company, as well as increased cost due to our growth and expansion.

General and administrative expenses will likely substantially increase in 2011 as a result of various legal, consulting and internal expenses related to the Company’s independent investigation and efforts to address NASDAQ’s delisting decision, which we are appealing.   Aside from the legal fees and consulting expenses related to the investigation, management also expects increased expenses as a result of the implementation of subsequent corrective policies related to various aspects of internal controls and accounting policies.

Interest Expense: For the three months ended September 30, 2011, interest expense was approximately $4.5 million, as compared to interest expense of approximately $3.9 million for the comparable period in 2010. For the nine months ended September 30, 2011, interest expense was approximately $8.6 million, as compared to interest expense of approximately $6.5 million for the comparable period in 2010.  The increase in interest expense is mainly due to the increased interest cost associated with discounting of bank acceptance notes and higher interest rates, together with the increased bank borrowings

Liquidated damages expense: For the nine months ended September 30, 2011, we accrued liquidated damages expense of $2.7 million. On April 1, 2011, trading of the Company’s common stock was suspended. In addition, management determined that, as of April 15, 2011, our Registration Statements were no longer effective. Accordingly, in the quarter ended June 30, 2011, it became probable that the Company will be required to remit liquidated damages to investors. Estimated contingent liabilities of $1.4 million and $2.7 million were accrued with a corresponding charge to earnings in the three and nine months ended September 30, 2011, respectively.

Net Income/(loss): We incurred a loss of approximately $10.7 million for the three months ended September 30, 2011, as compared to net income of approximately $21.1 million in the same period in 2010. The loss was mainly due to the higher cost of sales and the increase in legal, consulting and investigation expenses. We also believe that the investigation was an important reason accounting for our loss in the third quarter, because it drew the attention of our management away from the daily operations. Nevertheless, it is difficult to quantify any impact beyond the direct costs incurred.

Net loss for the nine months ended September 30, 2011 was approximately $7.3 million, as compared to net income of $30.4 million for the same period in 2010, a substantial reduction of $37.7 million. The decrease is mainly due to the loss in the second quarter, which was due to the increase in raw material prices, the increase in legal, consulting and investigation expenses and the suspension of production.

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.

Currency translation adjustments resulting from this process are included in accumulated other comprehensive income in the consolidated statement of shareholders' equity and amounted to $0.9 million for the three months ended September 30, 2011. The balance sheet amounts, at September 30, 2011 and 2010, with the exception of equity, were translated at RMB6.3898 and RMB6.6800 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 nine months ended September 30, 2011 and 2010 were RMB6.4876 and RMB6.7981, respectively, to 1.00 U.S. dollar.

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Liquidity and Capital Resources

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

	For the Nine Months Ended September 30,
	2011			2010
Net cash provided by operating activities		20,732,831			10,911,243
Net cash used in investing activities		(23,620,874	)		(30,930,637	)
Net cash (used in) provided by financing activities		(23,021,569	)		49,234,480

Net cash provided by operating activities was approximately $20.7 million for the nine months ended September 30, 2011 as compared to net cash provided by operations of approximately $10.9 million for the same period in 2010. The increase in cash provided by operations was primarily due to the decrease in our inventory balance and the increase in accounts payable and advances from customers, which was offset by the reduction in prepaid tariffs for the nine months ended in September 30, 2011. For the nine months ended in September 30, 2010, the net cash provided by operations was primarily due to net income and the increase in accounts payable and increase in advances from customers..

Net cash used in investing activities was approximately $23.6 million and $30.9 million for the nine months ended September 30, 2011 and 2010, respectively. Net cash used in investing activities was primarily focused on payments for the infrastructure construction and the expansion of our facility. As we move forward with our expansion, it is expected that net cash used in investing activities will increase for the rest of our 2011 fiscal year.

Net cash used in financing activities amounted to approximately $23.0 million for the nine months ended September 30, 2011. Net cash provided by financing activities amounted to approximately $49.2 million for the same period in 2010. Financing cash used in 2011 was mainly the result of the settlement of bills payable, the repayment of bank loans and the increase in pledged deposits at banks. Financing cash provided in 2011 was primarily due to the increase in short-term bank loans. In 2010, the net cash provided in financing activities was primarily the result of increase in bank loans and bills payable, in addition to the private placement proceeds in September 2010.

We have entered into loan agreements with our primary lenders, Bank of China, China Construction Bank, Agricultural Bank of China, etc. under which we have term loans. As of September 30, 2011, we had an aggregate principal amount of approximately $217 million bank loans outstanding under the loan agreements, with maturity dates from December 2011 to October 2012 and interest rates from 2.97% to 8.13% per annum. $197 million is classified as short-term bank loans, $14.2 million as current portion of long-term bank loans and $6.1 million as long-term bank loans. The loan agreements contain customary affirmative and negative covenants and were guaranteed by related parties, third parties and individual persons, and/or secured by a lien on our property and equipment. Beginning in January 2011, 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 guarantees. Through December 31, 2010, no compensation was paid in respect of these guarantees. Historically, all debts have been repaid by the Company in a timely manner. All are revolving loans whose terms (at due date of payment) are extended by the lender. As of September 30, 2011, we were in compliance with the terms of our loan agreements. Management expects all unpaid loan balances will be extended at their due date. Depending on capital needs, the Company evaluates whether to apply for additional long-term bank loans. The Company currently has sufficient lines of credit with the banks for both short-term and long-term borrowings.

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable to smaller reporting companies.

ITEM 4. CONTROLS AND PROCEDURES

(a)      Evaluation of disclosure controls and procedures

Our management maintains disclosure controls and procedures designed to provide reasonable assurance that material information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that the information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. We performed an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were ineffective in ensuring that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission, and were ineffective in providing reasonable assurance that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

We do not expect that our disclosure controls and procedures will prevent all errors and all instances of fraud. Disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits must be considered relative to their costs. Because of the inherent limitations in all disclosure controls and procedures, no evaluation of disclosure controls and procedures can provide absolute assurance that we have detected all our control deficiencies and instances of fraud, if any. The design of disclosure controls and procedures also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

(b)      Changes in internal control over financial reporting

In our Form 10-Q for the period ended September 30, 2010, we disclosed that we had the following material weaknesses with regard to our internal controls and procedures over financial reporting:

1) Reliance on financial reporting consultants for review of critical accounting areas and disclosures, and material non-standard transactions; and

2) Lack of sufficient accounting staff, which results in a lack of segregation of duties necessary for a good system of internal control.

In connection with the preparation of our Form 10-K for the period ended December 31, 2010, our former auditors, KPMG, raised certain issues, which were primarily related to issues regarding certain cash transactions and recorded sales.  As a result, our Audit Committee elected to commence an independent investigation and engaged the services of independent counsel, Pillsbury Winthrop Shaw Pittman LLP, which in turn engaged the services of Deloitte Financial Advisory Services LLP, as independent forensic accountants, and King & Wood, as Audit Committee counsel in China.  As a result of the investigation, the Audit Committee identified a number of issues that may have a material impact on our internal controls and procedures over financial reporting.

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As a result of the findings of the Audit Committee and its review of our controls and procedures, management has concluded that the Company continues to have material weaknesses. A material   weakness is a control  deficiency,  or  combination  of control deficiencies,  that  results  in more than a remote  likelihood  that a material misstatement  of the  financial  statements  will not be  prevented or detected. Management identified the following material weaknesses during its assessment of our internal control over financial reporting:

1) Lack of sufficient knowledge of U.S. GAAP reporting by our existing accounting staff;

2) Lack of sufficient accounting staff which results in a lack of segregation of duties necessary for an efficient internal control system;

3) Lack of a sufficient number of personnel appropriately qualified to perform control monitoring activities;

4) Lack of internal control consciousness and awareness by individuals responsible for certain key control activities, including:

a) Lack of sufficient documentation of  our existing financial processes, risk assessment and internal controls;

b)  Inadequate procedures for identifying and disclosing related party transactions;

c) Inadequate controls with regard to certain banking and loan transactions; and

d) Inadequate disclosure and accounting for certain off balance sheet transactions.

5) Inadequate training and training programs;

6) A Chief Financial Officer (CFO) for Chinese operations that did not report to the Company’s CFO;

7) Lack of Audit Committee oversight prior to its formation in July 2010; and

7) Lack of necessary senior management oversight and monitoring of the accounting functions of the organization, and because the company completed a reverse merger in April 2010, senior management lacked the background, skills and experience to meet the reporting requirements of a US listed company.  

As a result, the Company has taken and has begun to take the following measures to remediate the material weaknesses:

1) A review of the responsibilities of senior management and a restructuring of our organization chart in order to provide for proper segregation of duties, including but not limited to:

a)   Restructuring of our accounting department, and streamlining the department’s roles to ensure that the CFO maintains adequate oversight; and

b)   Termination of Mr. Xue in August 2011, our former Vice President of Accounting/ PRC  CFO and hiring of Mr. Fan Zhang as Vice President of Accounting/PRC CFO.

2) Continued and careful evaluation of control processes and systems by the Audit Committee, the Board of Directors and Management, including but not limited to:

a)   Engagement of a compliance officer to monitor the Company’s corporate governance and compliance, reporting directly to the Audit Committee;

b)   Evaluation of the duties and responsibilities of the CEO and his role in day-to-day operations of the Company and the control environment;

c)   Engagement of an outside consultant to assist with SOX 404 compliance; and

d)   The addition of one or one or more additional independent, bilingual Chinese-speaking directors to facilitate the Board oversight and assist and augment the efforts of the current independent directors.

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3) Implementation of additional controls and procedures to ensure the preparation and review of complete and transparent US GAAP financial statements in a timely and efficient manner, including but not limited to:

a)   Additional training in U.S. GAAP for our accounting staff; and

b)   Hiring of additional qualified accounting personnel, including an experienced controller.

4) Cessation of the use of an off-balance sheet cash account and the adoption of policies and procedures to prevent the future use of off balance sheet accounts;

5) Implementation of new procedures for the identification and approval of and appropriate disclosure of potential  related party transactions;

6) Implementation of new policies and procedures to ensure that all transactions are supported by sufficient documentation;

7) Development and implementation of policies and procedures that provide continuous risk assessment of legal and regulatory considerations related to business activities;

8) Development of policies to ensure that all identified contingencies are evaluated completely and in a timely manner;

9) Development and implementation of policies and procedures to ensure that revenues are properly recorded and all invoices are appropriately reviewed by accounting personnel;

10) Implementation of policies and procedures to ensure inventory purchases are properly recorded;

11) Implementation of policies and procedures to ensure that all liabilities are recorded on the proper period;

12) Development and implementation of policies and procedures to ensure that financial information is appropriately shared during inter-departmental meetings; and

13) Planned adoption of a Corporate Best Practices Manual;

We believe that the remediation measures we are taking, if effectively implemented and maintained, will remediate the material weaknesses discussed above.  

Except as described above, there have been no changes in our internal controls over financial reporting that occurred during the fiscal period to which this Quarterly Report on Form 10-Q relates that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1.   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.

On November 15, 2011, The Rosen Law Firm, P.A. filed a class action suit, 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 the effectiveness of internal controls in past public filings. The Company believes there is no basis to the suit filed by The Rosen Law Firm and intends to defend the law suit vigorously.

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 1A. Risk Factors

Not applicable to smaller reporting companies.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a)             Not Applicable.

(b)             Not Applicable.

(c )            Not Applicable

ITEM 3. Defaults upon Senior Securities

(a)             Not Applicable.

(b)             Not Applicable.

ITEM 4.  (Removed and Reserved)

ITEM 5. OTHER INFORMATION

(a)             Not applicable.

(b)             Not applicable.

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ITEM 6.  EXHIBITS

(a) The following exhibits are filed as part of this report.

2.1	Share Exchange Agreement dated April 22, 2010 (incorporated by reference to Exhibit 2.1 of the Registrant’s Form 8-K filed on April 28, 2010)
2.2	Agreement and Plan of Merger (incorporated by reference to Exhibit 2.1 of the Registrant’s Form 8-K filed on May 19, 2010)
3.1	Amended Articles of Incorporation of Keyuan Petrochemicals, Inc. (f/k/a Silver Pearls, Inc.), filed with the Secretary of State of Nevada (incorporated by reference to Exhibit 3.1 of the Registrant’s Form S-1 filed on December 29, 2010).
3.2	Articles of Merger (incorporated by reference to Exhibit 3.1 of the Registrant’s Form 8-K filed on May 19, 2010)
3.3	Amended Bylaws of Keyuan Petrochemicals, Inc. dated June 29, 2010 (incorporated by reference to Exhibit 3.1 of the Registrant’s Form 8-K filed on July 7, 2010)
4.1	Certificate of Designation of Rights and Preferences of Series A Preferred Stock (incorporated by reference to Exhibit 4.1 of the Registrant’s Form 8-K filed on April 28, 2010)
4.2	Certificate of Designation of Rights and Preferences of Series M Preferred Stock (incorporated by reference to Exhibit 4.2 of the Registrant’s Form 8-K filed on April 28, 2010)
4.3	Certificate of Designation of Rights and Preference of Series B Preferred Stock (incorporated by reference to Exhibit 3.1 of the Registrant’s Form 8-K filed on September 30, 2010)
10.1	Independent Director Agreement of Gerry Goldberg, dated August 1, 2011
10.2	Independent Director Agreement of Michael Rosenberg, dated August 1, 2011
10.3	Amendment to Independent Director Agreement of Dishen Shen, dated September 30, 2011.
31.1	Certification  of  Chief  Executive  Officer  required  by Rule 13a-14/15d-14(a) under the Exchange Act
31.2	Certification of  Chief Financial Officer required by Rule 13a-14/15d-14(a) under the Exchange Act
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date:   November 21,  2011	Keyuan Petrochemicals, Inc.
	By: /s/ Chunfeng Tao
	Chunfeng Tao
	Chief Executive Officer & President
	By:  /s/ Fan Zhang
	Fan Zhang Acting Chief Financial Officer/Vice President of Accounting

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