Keyuan Petrochemicals (KEYP) 10-Q 2012 Q1 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 March 31, 2012

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 May 18, 2012, the Registrant has 57,646,160 shares of common stock outstanding and 5,333,340  shares of Series B Preferred Stock outstanding.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION
Item 1.  Financial Statements
Condensed Consolidated Balance Sheets	1
Condensed Consolidated Statements of Comprehensive Income	2
Condensed Consolidated Statements of Cash Flows	3
Notes to Condensed Consolidated Financial Statements	4 – 17
Item 2.  Management’s Discussion and Analysis of Financial Condition And Results of Operations	18
Item 3.  Quantitative and Qualitative Disclosures About Market Risk	24
Item 4. Controls and Procedures	24
PART II – OTHER INFORMATION	27
Item 1.  Legal Proceedings	27
Item 1A. Risk Factors	27
Item 2.  Unregistered Sales of Equity Securities And Use Of Proceeds	27
Item 3.  Defaults Upon Senior Securities	27
Item 4.  Mine Safety Disclosures	27
Item 5.  Other Information	27
Item 6.  Exhibits	28

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

			March 31,		December 31,
	Note		2012		2011
			（unaudited）
ASSETS
Current assets:
Cash		3	$	23,155,356	$	7,325,017
Pledged bank deposits				160,787,809		156,318,066
Bills receivable				266,701		1,574,000
Accounts receivable		13		-		2,226,288
Inventories		4		55,098,878		38,945,968
Prepayments to suppliers		5		52,411,212		15,781,294
Consumption tax refund receivable		6		76,219,573		55,809,560
Amounts due from related parties		22		39,600		39,350
Other current assets		7		55,837,854		45,978,428
Deferred income tax assets		17		37,585		37,348
Total current assets				423,854,568		324,035,319
Property, plant and equipment, net		8		197,107,187		190,867,621
Intangible assets, net		9		957,990		978,503
Land use rights		10		11,026,335		11,068,762
VAT recoverable		7		2,589,946		2,893,635
Total assets			$	635,536,026	$	529,843,840
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term bank borrowings		11	$	256,521,610	$	225,969,421
Bills payable				94,366,800		63,550,250
Current portion of long-term bank borrowings		12		15,840,000		15,740,000
Accounts payable				118,709,156		97,588,137
Advances from customers		13		32,249,204		7,821,623
Accrued expenses and other payables		14		25,537,857		30,287,946
Income taxes payable		17		1,530,600		186,326
Dividends payable				2,381,759		2,381,759
Amounts due to related parties		22		113,798		621,077
Total liabilities, all current				547,250,784		444,146,539
Series B convertible preferred stock:
Par value: $0.001; Authorized: 8,000,000 shares
6% cumulative dividend with liquidation preference
over common stock
Issued and outstanding: 5,333,340shares,
liquidation preference of $ 20,000,000		15		16,451,552		16,451,552
Commitments and contingencies		18		-		-
Stockholders’ equity:
Common stock:
Par value:$0.001; Authorized: 100,000,000 shares;
Issued and outstanding: 57,646,160 shares as at March 31, 2012 and
December 31, 2011		15		57,646		57,646
Additional paid-in capital				49,571,104		49,198,278
Statutory reserve				3,744,304		3,744,304
Accumulated other comprehensive income				7,123,222		6,545,811
Retained earnings				11,337,414		9,699,710
Total stockholders’ equity				71,833,690		69,245,749
Total liabilities and stockholders' equity			$	635,536,026	$	529,843,840

See accompanying notes to theunaudited condensed consolidated financial statements.

1

KEYUAN PETROCHEMICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

			Three Months Ended March 31,
	Note		2012			2011
			(unaudited)			(unaudited)
Sales
External parties			$	183,324,688		$	124,154,798
Related parties		22		-			22,609,819
Total Sales				183,324,688			146,764,617
Cost of sales
External parties				173,851,709			113,814,197
Related parties		22		-			20,299,359
Cost of sales				173,851,709			134,113,556
Gross profit				9,472,979			12,651,061
Selling expenses				252,906			539,132
General and administrative expenses				2,610,195			3,235,080
Total operating expenses				2,863,101			3,774,212
Income from operations				6,609,878			8,876,849
Other income(expense):
Interest income				939,234			906,944
Interest expense				(4,378,700	)		(3,196,629	)
Other income (expense), net				(186,228	)		879,130
Total other expense, net				(3,625,694	)		(1,410,555	)
Income before income taxes				2,984,184			7,466,294
Income tax expense		17		1,346,483			2,252,151
Net income attributable to Keyuan Petrochemicals Inc. stockholders				1,637,701			5,214,143
Dividends to Series B convertible
Preferred stockholders		15		-			296,260
Net income attributable to Keyuan
Petrochemicals Inc. common stockholders				1,637,701			4,917,883
Other comprehensive income:
Foreign currency translation adjustment				577,412			557, 297
Other comprehensive income				577,412			557,297
Comprehensive income			$	2,215,113		$	5,771,440
Earnings per share:
Attributable to common stock:
- Basic		19	$	0.03		$	0.09
- Diluted		19	$	0.03		$	0.08
Weighted average number of shares of common stock
used in calculation
Basic		19		57,646,160			57,578,300
Diluted		19		57,646,160			63,880,139

See accompanying notes to the unaudited condensed consolidated financial statements.

2

KEYUAN PETROCHEMICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three Months Ended March 31,
	2012			2011
	(unaudited)			(unaudited)
Cash flows from operating activities:
Net income	$	1,637,701		$	5,214,143
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Loss on disposal of property and equipment		-			3,483
Depreciation		2,816,623			2,500,670
Amortization		26,798			25,680
Land use rights amortization		113,034			108,353
Share-based compensation expense		406,440			668,427
Changes in operating assets and liabilities:
Bills receivable		1,320,625			(137,963	)
Accounts receivable		2,246,090			-
Inventories		(15,945,642	)		32,506,267
Prepayments to suppliers		(33,856,552	)		(4,611,229	)
Consumption tax refund receivable		(20,106,087	)		14,385,368
Other current assets		(12,190,406	)		(5,762,117	)
Accounts payable		20,183,367			13,330,081
Advances from customers		24,439,449			(1,950,637	)
Income taxes payable		1,346,483			(3,190,044	)
Accrued expenses and other payables		(2,456,395	)		(442,096	)
Net cash (used in) provided by operating activities		(30,018,472	)		52,648,387
Cash flows from investing activities:
Proceeds from property disposal		-			10,448
Purchase of property, plant and equipment, including capitalized interest		(10,352,581	)		(46,014	)
Net cash used in investing activities		(10,352,581	)		(35,566	)
Cash flows from financing activities:
Pledged bank deposits used for bank borrowings		(3,485,396	)		(18,904,378	)
Proceeds from short-term bank borrowings		156,025,477			40,705,375
Repayment of short-term bank borrowings		(127,182,606	)		(30,283,820	)
Proceeds from bills payable		65,425,600			33,175,240
Prepayment of bills payable		(34,936,000	)		(43,066,940	)
Repayments of long-term bank borrowings		-			(12,935,300	)
Short-term financing from related parties					7,738,095
Short –term financing to related parties					(7,609,000	)
Proceeds from warrants exercised		-			4,865
Dividends paid		-			(219,976	)
Net cash provided by (used in) financing activities		55,847,075			(31,395,839	)
Effect of foreign currency exchange rate changes on cash		354,317			208,968
Net increase in cash		15,830,339			21,418,950
Cash at beginning of the period		7,325,017			29,336,241
Cash at end of the period	$	23,155,356		$	50,755,191
Supplemental disclosure of cash flow information:
Income taxes paid	$	-		$	5,442,195
Interest paid, net of capitalized interest	$	4,378,701		$	3,196,629
Dividends accrued	$	-		$	296,260
Non-cash investing and financing activities:
Payable for purchase of property, plant and equipment	$	2,516,115		$	12,736,521

See accompanying notes to the unaudited condensed consolidated financial statements.

3

1         ORGANIZATION AND DESCRIPTION OF BUSINESS

(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”.  The Company, through its wholly-owned subsidiary, Keyuan International Group Limited (“Keyuan International”) and its indirect subsidiaries, Keyuan Group Limited(“Keyuan HK”),Ningbo Keyuan Plastics Co., Ltd. (“Ningbo Keyuan”) and Ningbo Keyuan Petrochemicals Co., Ltd.(Ningbo Keyuan Petrochemicals), (the Company and its subsidiaries are collectively referred herein below as “the Group”) are engaged in the manufacture and sale of petrochemical products in the People’s Republic of China (“PRC”).

(b)       Other Events

In 2011, 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 “Independent 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 PRC. Pillsbury, Deloitte and King & Wood are collectively referred to herein as the “Investigation Team”. On September 28, 2011, the Independent Investigation was completed. The Independent 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 Independent Investigation identified certain other issues that could result in potential violations of PRC or U.S. laws. The Company continues to work 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. The Company has preliminarily concluded that the extent to which it may be exposed to fines and penalties in the PRC is limited, and to date, has not received any PRC governmental or regulatory communication or inquiry related to these matters. 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 Over-the-Counter Bulletin Board (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 unaudited 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 U.S. 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, 2011 and 2010, 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, 2011 and 2010. 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.

4

3         CASH

Cash consists of cash on hand and cash at banks. As of March 31, 2012 (unaudited) and December 31, 2011, cash of $23,020,926 and $7,101,505, respectively, was held in major financial institutions located in the PRC; and cash of $28,009 and $124,355, respectively was held in 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.

4         INVENTORIES

Inventories consist of the following:

	March 31,		December 31,
	2012		2011
	(unaudited)
Raw materials	$	32,970,911	$	26,226,388
Finished goods		19,550,298		10,891,825
Work-in-process		2,577,669		1,827,755
Total	$	55,098,878	$	38,945,968

5         PREPAYMENTS TO SUPPLIERS

As of March 31, 2012 and December 31, 2011, 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 of construction-in-progress, when the Group applies the prepayments to related purchases of materials after the related invoices are received.

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 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 for production. As of March 31, 2012 and December 31, 2011, the Group recorded an estimated consumption tax refund amounting to $76,219,573 and $55,809,569 respectively.

Claims for consumption tax of $55,809,560 for the year ended December 2011 are expected to be received by the end of May 2012. Consumption tax claims of $20,410,000 in the three months ended March 31, 2012 are in process, and are expected to be approved and refunded by the end of August 2012.

5

7         OTHER CURRRENT ASSETS

Other current assets consist of the following:

	March 31,		December 31,
	2012		2011
	(unaudited)
VAT recoverable	$	10,467,629	$	9,991,877
Receivable from a third party		-		2,740,970
Customs deposits for imported inventories		39,479,616		29,102,193
Others		5,890,609		4,143,388
	$	55,837,854	$	45,978,428

The estimate of deductible input VAT on the purchase of property, plant and equipment is determined using vendor contracts, engineering and other estimates, as well as historical experience, and is included in VAT recoverable. Approximately $2.6 million and $2.9 million is included in non-current assets as of March 31, 2012 and December 31, 2011 respectively.

Customs deposits for imported inventories represent amounts paid to the local customs office in connection with the importing of raw materials inventories. Upon approval by the customs authorities, these amounts become refundable by the local tax authority and are reclassified as consumption tax refund receivable (Note 6).

8         PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

	March 31,			December 31,
	2012			2011
	(unaudited)
Buildings	$	3,912,938		$	3,888,234
Machinery and equipment		177,969,015			175,736,470
Vehicles		755,808			663,985
Office equipment and furniture		136,984			134,929
Construction-in-progress		34,255,856			27,449,846
		217,030,601			207,873,464
Less: Accumulated depreciation		(19,923,414	)		(17,005,843	)
	$	197,107,187		$	190,867,621

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

	Three months ended March 31,
	2012		2011
	(unaudited)		(unaudited)
Cost of sales	$	2,767,487	$	2,459,436
Selling, general and administrative expenses		49,136		41,234
	$	2,816,623	$	2,500,670

For the three months ended March 31, 2012 and the year ended December 31,2011, interest capitalized amounted to nil and $1,246,179 respectively.

6

9         INTANGIBLE ASSETS, NET

Intangible assets consist of the following:

	Amortization	March 31,			December 31,
	Period	2012			2011
	Years	(unaudited)
Licensing agreements	10-20	$	1,504,800		$	1,495,300
Less: Accumulated amortization			(546,810	)		(516,797	)
		$	957,990		$	978,503

For the three months ended March 31, 2012 and 2011, amortization expense for intangible assets  amounted to $26,798 and $25,680, respectively. Amortization expense for each of the next five years is estimated to be approximately $100,000.

10       LAND USE RIGHTS

	March 31,			December 31,
	2012			2011
	(unaudited)
Land use rights	$	12,259,495		$	12,182,100
Less: Accumulated amortization		(1,233,160	)		(1,113,338	)
	$	11,026,335		$	11,068,762

For the three months ended March 31, 2012 and 2011, amortization expense related to land use rights  was $113,034 and $108,353, respectively.

11       SHORT-TERM BANK BORROWINGS

	March 31,		December 31,
	2012		2011
	(unaudited)
Bank borrowings-secured/guaranteed	$	256,521,610	$	225,969,421

Short−term bank borrowings outstanding as of March 31, 2012 carry a weighted average interest rate of 5.3% (2011: 5.45%) for bank loans in RMB; a weighted average interest rate of 4.35% (2011: 3.78%) for bank loans in USD, and have maturity terms ranging from one to twelve months and interest rates ranging from 3.1% to 7.93% (2011: 2.97% to 7.93%).

At March 31, 2012, approximately $1,584,000 included in short-term bank borrowings is payable to Shanghai Pudong Development Bank, which is secured by a one-year fixed term deposit with a carrying amount of $12,355,200. In addition, $36,295,934 payable to Bank of China is secured by Ningbo Keyuan's one year fixed term deposit and pledged deposits with a carrying amount of $35,701,461 as of March 31, 2012; $11,000,000 payable to China CITIC Bank is secured by Ningbo Keyuan’s one-year fixed term deposit with a carrying amount of $11,246,400 as of March 31, 2012; and $10,068,264 payable to China Construction bank is secured by pledged deposits with a carrying amount of $12,672,000 as of March 31, 2012. Among the rest of the Group's short-term borrowings, $197,573,412 is guaranteed by related party and third-party entities and individuals, including $1,899,216 which is guaranteed by the Group’s Chief Executive Officer and $11,000,000 that is secured by the Group’s land, buildings and equipment with a carrying amount of $90,651,672 as of March 31, 2012.

12       LONG-TERM BANK BORROWINGS

	March 31,			December 31,
	2012			2011
	(unaudited)
Loan from China Construction Bank	$	15,840,00		$	15,740,000
Less: current portion		(15,840,00	)		(15,740,000	)
	$	-		$	-

As of March 31, 2012 (unaudited) and December 31, 2011,  the Group's long-term bank loans are secured/ guaranteed by related-party entities and Mr. Tao (Note 22), bearing interest from 5.4% to 8.13% (2011:7.29% to 7.74%) and are due on various dates through October 2012.There were no additional bank borrowings in the three months ended March 31, 2012.

7

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 sheet, until the products are delivered and the customer takes ownership and assumes the risk of loss. With the approval of the Company’s general manager, the Company occasionally extends credit to its long-term customers with a good credit rating. As of March 31, 2012 (unaudited) and December 31, 2011, the balance of accounts receivable was nil and $2,226,288 respectively, The $2,226,288 of accounts receivable as of December 31, 2011 was received on January 6, 2012.

14       ACCRUED EXPENSES AND OTHER PAYABLES

Accrued expenses and other payables as of March 31, 2012 (unaudited) and December 31, 2011 consist of:

	March 31,		December 31,
	2012		2011
	(unaudited)
Purchase of property, plant and equipment	$	20,587,868	$	24,590,217
Accrued payroll and welfare		330,770		1,061,508
Liquidated damages		2,493,326		2,493,326
Other accruals and payables		2,125,893		2,142,895
	$	25,537,857	$	30,287,946

15       STOCKHOLDERS’ EQUITY AND RELATED FINANCING AGREEMENTS

Dividends

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

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

On January 17, 2011, the Company’s Board of Directors approved the distribution of 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. In January 2011, certain stockholders of the Company 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 dividend 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. In October 2011, the Company’s Board of Directors suspended the payment of quarterly cash dividends on the Company’s common stock while it pursues strategic alternatives including, but not limited to, taking the Company private, a merger or other transaction.

During the year ended December 31, 2011, 66,670 shares of the Series B convertible preferred stock were converted into 66,670 shares of the Company’s common stock. In addition,1,150 Series A warrants and  500 Series B warrants were exercised, and the Company issued 1,150 shares and 500 shares of the Company’s common stock, receiving proceeds of $4,863 and $2,468, respectively. There were no dividends to be paid and accrued for the three months ended March 31, 2012.

8

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 of 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 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.

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 of 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 of 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 Group does not comply with the foregoing obligations under the registration rights agreement, the Group 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 Group are 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.

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 (NASDAQ) for more than three days.

 On April 1, 2011, trading of the Company’s common stock was suspended and on October 7,2011 was delisted by NASDAQ. Management determined that the registration statements were no longer effective commencing on April 7, 2011 and registerable securities in connection with the Series A and B private placements were not able to be sold pursuant to Rule 144 under the Securities Act until November 1, 2011. Accordingly, in the year ended December 31, 2011, an estimated contingent liability for $2,493,326 was accrued with a corresponding charge to earnings. There were no liquidated damages during the three months ended March 31, 2012 and 2011.

9

16       SHARE-BASED PAYMENTS

Effective June 30, 2010, the Board of Directors approved the Company’s 2010 Equity Incentive Plan ( the “Plan”). The maximum numbers 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 a plan 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 the grant date, 40% shall vest and become exercisable two years after the grant date, and 30% shall vest and become exercisable three years after the grant date. For the remaining 190,000 stock options: 40% shall vest and become exercisable one year after the grant date and 60% shall vest and become exercisable two years after the grant date.

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.

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 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. Included in accrued expenses and other payables is approximately $223,613 representing the liability related to the committed cash payment as of March 31, 2012.

No options were granted during the three months ended March 31, 2012.

For the three months ended March 31, 2012 and 2011, 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 $310,973, respectively.

As of March 31, 2012, there were unrecognized compensation costs related to employee stock options of approximately $1,966,406. These costs are expected to be recognized on a straight-line basis, over the remaining weighted average service period of 1.19 years.

10

17       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.

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 three months ended March 31, 2012 and 2011 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  before income tax expense arose in the following jurisdictions:

	Three months ended March 31,
	2012			2011
	(unaudited)			(unaudited)
PRC	$	4,556,035		$	8,629,792
U.S.		(798,123	)		(938,337	)
Hong Kong and BVI		(773,728	)		(225,161	)
Total income  before income taxes	$	2,984,184		$	7,466,294

The Group’s income tax expense consists of current tax expense for the three months ended March 31, 2012 and 2011 and there was no deferred income tax expense.

11

17       INCOME TAXES (CONTINUED)

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

	Three months ended March 31,
	2012				2011
	(unaudited)				(unaudited)
Income (loss) before income taxes	$	2,984,184			$	7,466,294
Computed expected income tax expense		746,046	25.00	%		1,866,573	25.00	%
NOLs from overseas subsidiaries
not recognized		407,008	13.60	%		365,569	4.90	%
Others		193,429	6.50	%		20,009	0.30	%
Actual income tax expense	$	1,346,483	45.20	%	$	2,252,151	30.20	%

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 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 $34.5 million and $31 million as of March 31, 2012 and December 31, 2011, respectively.

The Group  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 subsidiary are open to examination by the PRC state and local tax authorities for the tax years beginning in 2008.

18       CONTINGENCY

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

In connection with the shipping of finished products, inaccurate product information has been provided to the PRC Port authority. In addition, through March 31, 2011, Ningbo Keyuan failed to withhold income tax of approximately $50,000 from payments to certain external service providers and employees. 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.In addition, the Group had outstanding Letter’s of Credit as of March 31, 2012 of $61,945,056.

12

19       EARNINGS  PER SHARE

The following table sets forth the computation of basic net income  per share:

	Three months ended March 31,
	2012		2011
	(unaudited)		(unaudited)
Basic earnings  per share:
Net income  attributable to Keyuan
Petrochemicals, Inc. stockholders	$	1,637,701	$	5,214,143
Fixed dividends to Series B convertible
preferred stockholders		-		296,260
Net income attributable to Keyuan
Petrochemicals Inc. common stockholders	$	1,637,701	$	4,917,883
Weighted average common shares
(Denominator for basic income per share)		57,646,160		57,578,300
Effect of diluted securities:
- Series A convertible preferred stock		-		-
- Series B convertible preferred stock		-		5,400,010
- Series M convertible preferred stock		-		-
- Warrants		-		409,676
- Options		-		492,153
		57,646,160		63,880,139
Basic net income per share:	$	0.03	$	0.09
Diluted net income per share:	$	0.03	$	0.08

20       FAIR VALUE MEASUREMENTS

The Company did not have any assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2012 and 2011.

The fair values of cash, pledged bank deposits, bills receivable, consumption tax refund receivable, short-term bank borrowings, bills payable, and accounts payable approximate their respective carrying amounts due to their short-term nature. Amounts from 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.

21       SIGNIFICANT CONCENTRATIONS AND RISKS

As of March 31, 2012 and December 31, 2011, the Group held cash and pledged bank deposits in financial institutions of approximately $183,890,170 and $163,591,879, respectively. They were primarily held in major financial institutions located in  mainland China and the Hong Kong Special Administrative Region. Management believes that these financial institutions have high credit ratings.

13

Sales to the major customers, which individually exceeded 6% of the Group’s total annual net revenue, are as follows:

For three months ended March 31, 2012 (unaudited)						For three months ended March 31, 2011 (unaudited)
Largest	Amount of		% Total			Largest	Amount of		% Total
Customers	Sales		Sales			Customers	Sales		Sales
Customer A	$	17,710,329		10	%	Customer C	$	28,767,142		20	%
Customer B		13,879,025		8	%	Customer E		22,543,658		16	%
Customer C		12,159,536		7	%	Customer D		13,889,494		10	%
Customer D		11,868,747		6	%	Customer F		10,298,926		7	%
Customer E		11,046,399		6	%	Customer H		8,129,979		6	%
Total	$	66,664,036		37	%	Total	$	83,629,199		58	%

The Group currently buys a majority of its heavy oil, an important component of its products, from three suppliers. Although there are a limited number of suppliers of the particular heavy oil used in production, management believes that other suppliers could provide similar heavy oil on comparable terms. A change in suppliers, however, could cause a delay in manufacturing and a possible loss of sales, which would affect operating results adversely. Purchases (net of VAT) from the largest three suppliers for three months ended March 31, 2012 and 2011 were $104,650,648 and $81,947,818 respectively. These purchases represented 79% and 75% respectively of all of the Company’s purchases for three months end March 31, 2012 and 2011.The Company’s largest supplier accounted for  approximately $89.1 million and  $65.4 million or 67.1% and 61% of total purchases for the three months ended March 31, 2012 and 2011, respectively.

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.

22       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 the 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	10% ownership by Ms. Huang
(Ningbo Xinhe)
Ningbo Kunde Petrochemical Co, Ltd.	Mr. Tao’s mother was a 65% nominee shareholder for Mr. Hu, a third party through September 2011
(Ningbo Kunde)
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)

14

Related party transactions and amounts outstanding with the related parties as of and for the three months ended March 31, 2012 and 2011 are summarized as follows:

	Three months ended March 31,
	2012		2011
	(unaudited)		(unaudited)
Sales of products (a)	$	-	$	22,609,819
Purchase of raw material (b)	$	-	$	7,023,135
Purchase of transportation services (c)	$	561,115	$	611,373
Credit line of guarantee provision for bank borrowings (d)	$	-	$	-
Loan guarantee fees (d)	$	-	$	337,254
Short-term financing from related parties (e)	$	-	$	7,738,095
Short-term financing to related parties (e)	$	-	$	7,609,000
Amount due from related parties (f)	$	-	$	5,382,675
Amount due to related parties (g)	$	113,798	$	133,170

(a) The Group sold finished products of nil and $22,543,658 to Ningbo Kunde for the three months ended March 31, 2012 and 2011, respectively. The prices were based on market prices at the time of transactions. There were outstanding amounts of nil and $65,798 received in advance from Kunde as of March 31, 2012 and 2011, respectively. Sales to Zhenhai Jinchi for the three months ended March 31, 2012 and 2011 were nil and $66,161 with no outstanding balance.

(b) The Group purchased raw materials of nil and $7,023,135 from Ningbo Kunde during the three month ended March 31, 2012 and 2011, respectively. The outstanding payment in advance to Ningbo Kunde as of March 31, 2011 in respect of these purchase transactions was $5,344,500.

(c) The Group purchased transportation services of $561,115 and $611,373 from Ningbo Xinhe during the three months ended March 31, 2012 and 2011, respectively, and amounts owed to Ningbo Xinhe as of March 31, 2012 and 2011 in respect of these purchase transactions was $107,757 and $51,045, respectively

(d) Guarantees for Bank Loans

	Guarantee provided during				Bank Loans guaranteed as of
	the three months ended March 31				March 31,		December 31,
	2012		2011		2012		2011
	(unaudited)		(unaudited)		(unaudited)
Mr. Tao	$	-	$	-	$	15,840,000	$	34,628,000
Jicun Wang and Chen	$	-	$	-	$	1,899,216	$	1,983,523
Ningbo Kewei	$	-	$	-	$	-	$	29,700,067
Ningbo Pacific	$	-	$	-	$	23,975,791	$	27,918,200
Ningbo Hengfa	$	-	$	-	$	-	$	14,795,600
Shandong Tengda	$	-	$	-	$	-	$	944,400
Total	$	-	$	-	$	41,715,007	$	109,969,790

Beginning in 2011 loan guarantee fees of 0.3% the loan principal guaranteed are to be paid annually. During the three months ended March 31, 2012, loan guarantee fees were $32,767 and $58,132 for Ningbo Hengfa and Ningbo pacific , respectively. During the three months ended March 31, 2011, loan guarantee fees were $76,472, $122,879 and $137,903 for Ningbo Hengfa, Ningbo Pacific and Ningbo Kewei, respectively.

15

(e) Short-term financing transactions with related parties

	Three Months Ended March 31(unaudited)
	2012						2011
	From		To		Balance		From		To			Balance
Ningbo Kewei		-		-		-		-		-			-
Ningbo Kunde		-		-		-		5,326,300		(5,326,300	)		-
Jiangdong Jihe		-		-		-		2,411,795		(2,282,700	)		(16,336	)
		-		-		-		7,738,095		(7,609,000	)		(16,336	)

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

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

(f) Amounts due from related parties of $39,600 at March 31, 2012 consist of amounts due from  Mr. Tao for advances made for business expenses, which advances are unsecured, interest free and due on demand.

(g) Amount due to related parties consists of the following:

	March 31,		December,31
Related Party	2012		2011
	(unaudited)
Ningbo Xinhe	$	113,798	$	621,077
	$	113,798	$	621,077

Amount due to related parties represent balances due for raw materials purchase and freight charges.

(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 12.5% nominee shareholder of Ningbo
(Ningbo Litong)	Keyuan
Ningbo Jiangdong Haikai Construction	Controlled by cousin of Mr. Weifeng Xue, former
Materials Store (Jiangdong Haikai)	Vice President of Accounting through August 2011
Ningbo Jiangdong Deze Chemical Co., Ltd	Controlled by cousin of Mr. Weifeng Xue,
(Jiangdong Deze)	Vice President of Accounting through August 2011
Ningbo Anqi Petrochemical Co., Ltd	Controlled by cousin of Mr. Weifeng Xue,
(Ningbo Anqi)	Vice President of Accounting through August 2011
Ningbo Kewei Investment Co., Ltd	A related party through September 2011when control transferred
(Ningbo Kewei)
Ningbo Kunde Petrochemical Co., Ltd	A related party through September 2011 when control transferred
(Ningbo Kunde)

16

Transactions and amounts outstanding with these  parties for the three months ended March 31, 2012 and 2011 are summarized as follows:

	2012		2011
	(unaudited)		(unaudited)
Sales of products (h)	$	22,287,086	$	768,068
Purchase of raw material (i)	$	445,871	$	-
Credit line of guarantee provision for bank borrowings (j)	$	164,186,000	$	-
Loan guarantee fees (j)	$	-	$	202,952
Short-term financing from theses parties (k)	$	-	$	34,692,475
Short-term financing to these parties (k)	$	-	$	38,174,353
Amounts due from these parties	$	-	$	5,726,250
Amounts due to these parties	$	4,019,111	$	-

(h) The Group sold finished products of $10,127,548 and $768,068 to Ningbo Litong for the three months ended March 31, 2012 and 2011 (unaudited), respectively. Amounts received in advance from Litong were $2,751,911 and $17,620 as of March 31, 2012 and 2011 (unaudited), respectively. The Group sold finished products of  $12,159,538 to Ningbo Kunde for the three months ended March 31, 2012 (unaudited). There were outstanding amounts of $1,267,200 received in advance from Kunde as of March 31, 2012 (unaudited).

(i) The Group purchased raw materials of $445,871 and $10,418,407 from Ningbo Litong during thethree months ended March 31, 2012 and 2011 (unaudited), respectively.

(j)   Guarantees for Bank Loans

	Guarantee provided during the three months ended				Bank loans guaranteed as of
	March 31				March 31,		December 31,
	2012		2011		2012		2011
	(unaudited)		(unaudited)		(unaudited)
Ningbo Litong	$	25,344,000	$	-	$	54,136,302	$	61,632,077
Ningbo Kewei	$	-	$	-	$	12,807,492	$	-

Beginning in 2011 loan guarantee fees of 0.3% the loan principal guaranteed after January 1, 2011 are to be paid quarterly. In the three months ended March 31, 2012, loan guarantee fees were $194,564 and $165,621 for Ningbo Litong and Ningbo Kewei, respectively. In the three months ended March 31, 2011, loan guarantee fees were $202,952 for Ningbo Litong.

(k)   Short-term financing transactions

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

	Three Months Ended March 31 (unaudited)
	2012						2011
	From		To		Balance		From		To			Balance
Ningbo Litong		-		-		-		25,280,142		(28,762,020	)		5,726,250
Jiangdong Deze		-		-		-		2,587,060		(2,587,060	)		-
Ningbo Anqi		-		-		-		6,825,273		(6,825,273	)		-
		-		-		-		34,692,475		(38,174,353	)		5,726,250

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

(ii)   Balances at period end are translated at the balance sheet exchange rate,

17

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 three months ended March 31, 2012 and 2011 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, 2011.

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 720,000 metric tons (MT) of a variety of petrochemical products, (ii) facilities for the storage and loading of raw materials and finished goods and (iii) a manufacturing technology that can support our manufacturing process with relatively low raw material costs and high utilization and yields, all of which are led by a management team consisting of petrochemical experts with proven track records from some of China’s largest state-owned enterprises in the petrochemical industry.

In order to facilitate the Company’s future growth, Ningbo Keyuan Petrochemicals, Ltd. was incorporated in Ningbo, China with a registered capital of $3 million as a wholly-owned subsidiary of Keyuan Group Limitd (the Hong Kong entity) on August 27, 2010. Ningbo Keyuan Petrochemicals is responsible for the sales and marketing, raw materials sourcing and market analysis for the Company. Dr. Jingtao Ma was appointed as the General Manager of the new entity. Dr. Ma was the head of the former sales and marketing division at Keyuan. This new entity will also serve as the “market thermometer” that can better monitor market conditions and obtain first hand market data through buying and selling activities. Management believes that the consolidation of the sales and marketing and raw material procurement function under one business unit will help efficiently manage the future expansion of the Company. In addition, on December 2, 2011, Mr. Jingtao Ma was appointed as the new General Manager of Ningbo Keyuan, replacing Mr. Chunfeng Tao so that Mr. Tao can focus on the overall development and strategy of the Company.

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.  One SBS production line began commercial production in December 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. However, management is currently evaluating the effectiveness and feasibility of the entire manufacturing capacity expansion strategy considering the long-term development and the industry environment and the timetable may be adjusted based on the evaluation results.

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

Our Facility and Equipment

Facility

As of March 31, 2012, we have invested a total of approximately $212 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 an 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.

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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 , an asphalt production  and ABS production facility.

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.

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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 allowing us 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.  We also entered into a cooperation agreement with Fanchenggang City to build a ABS production facility with an estimated annual production of 400,000 MT ABS upon completion.

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

Completed SBS facility in September 2011

Completed Trial Production and began SBS production and sales in the fourth quarter of 2011

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

Complete first phase construction of an ABS facility by the end of 2013

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 are currently estimating the cost of the ABS production facility.

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.

Currently,  management is evaluating the effectiveness and feasibility of the whole manufacturing capacity expansion strategy based upon the longterm development and the industry environment  and, therefore ,the company may make adjustments to one or more of the projects according to the evaluation results.

Manufacturing and Sales

Our total production of finished products was 160,613  MT for the three months ended March 31, 2012 and we generated $183.3 million in revenue based on the sale of 157,854 MT of petrochemical products, which  represented a 25% increase  from the same period of 2011.

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Results of Operations

The following table sets forth information from our statements of comprehensive income for the three months ended March 31, 2012 and 2011.

Comparison of the three months ended March 31, 2012 and 2011.

	For the three months Ended March 31					Period to Period Comparison
	2012			2011		Increase/ (decrease)			Percentage Change
Sales
Third Parties	$	183,324,688		$	124,154,798	$	59,169,890			48	%
Related Parties		-			22,609,819		(22,609,819	)		(100	%)
Total Sales		183,324,688			146,764,617		36,560,071			25	%
Cost of Sales
Third Parties		173,851,709			113,814,197		60,037,512			53	%
Related Parties		-			20,299,359		(20,299,359	)		(100	%)
Cost of Sales		173,851,709			134,113,556		39,738,153			30	%
Gross Profit		9,472,979			12,651,061		(3,178,082	)		(25	%)
Operating Expenses
Selling Expenses		252,906			539,132		(286,226)			(53	%)
General and administrative Expenses		2,610,195			3,235,080		(624,885)			(19	%)
Total Operating Expenses		2,863,101			3,774,212		(911,111)			(24	%)
Income from Operations		6,609,878			8,876,849		(2,266,971	)		(26	%)
Other Income(Expense)
Interest Income		939,234			906,944		32,290			3.6	%
Interest Expense		(4,378,700	)		(3,196,629)		(1,182,071	)		37	%
Other income (expense),net		(186,228)			879,130		(1,065,358	)		(121	%)
Total other Expenses:		(3,625,694	)		(1,410,555)		(2,215,139	)		157	%
(Loss) income  before provision for income taxes		2,984,184			7,466,294		(4,482,110	)		(60	%)
Income tax expense		1,346,483			2,252,151		(905,668)			(40	%)
Net (Loss) Income		1,637,701			5,214,143		(3,576,442)			(69	%)
Other comprehensive income
Foreign currency translation adjustment		577,412			557, 297		20,115			3.6	%
Comprehensive (loss)  Income	$	2,215,113		$	5,771,440		(3,556,327	)		(62	%)

Sales: Our sales for the three months ended March 31, 2012 were approximately $183.3 million, compared to sales of $146.8 million for the three months ended March 31, 2011, an increase of $36.6 million, or 25.0%. The substantial increase in our sales was due to the higher capacity utilization coupled with higher average sales price for our products compared to the comparable period in 2011. In the three months ended March 31, 2012 we sold 157,853 metric tons of chemical products at an average price of $1,161 per metric ton, as compared to the sale of 148,768 metric tons of chemical products at an average price of $834 per metric ton in the three months ended March 31, 2011. This represents a 39% increase in average sales price and 6% increase in overall metric tons sold.

Cost of Sales: Our overall cost of sales was approximately $173.9 million for the three months ended March 31, 2012, or 94.9% of sales, as compared to cost of sales of approximately $134.1 million, or 91.4% of sales for the three months ended March 31, 2011. 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. The increase in the percentage of cost of sales was due to the higher price of raw materials compared to the corresponding period in 2011.

Gross Profit: As a result of the increase in sales and the percentage of cost of sales, gross profit for the three months ended March 31, 2012 was approximately $9.5 million as compared to $12.6 million for the comparable period in 2011. Our gross margin decreased from 8.6 % for the three months ended March 31, 2011 to 5.2% for the three months ended March 31, 2012.

Operating Expenses: Operating expenses, including selling expenses, and general and administrative expenses, were approximately $2.9 million, or 1.6% of sales for the three months ended March 31, 2012 as compared to $3.8 million, or 2.6% of sales for the comparable period in 2011, a decrease of approximately $0.9 million, or an additional 1.0% of overall sales. The decrease in these expenses was due to the Company’s implementation of comprehensive budget management beginning in  January 2012.

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Interest Expense (net): For the three months ended March 31, 2012, interest expense (net) was approximately $3.4 million as compared to interest expense (net) of approximately $2.3 million, for the comparable period in 2011. The increase in interest expense is mainly due to the increased interest cost associated with the discounting of bank acceptance notes and higher interest rates, together with  increased bank borrowings.

Net Income/loss: Net income attributable to common stockholders for the three months ended March 31, 2012 was approximately $1.6 million, or 0.8% of sales as compared to net income attributable to common stockholders of approximately $5.2  million, or 3.5% of sales in the same period in 2011.This decrease was mainly due to higher cost of sales in 2012,compared the same period of 2011.

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 $0.58 million for the three months ended March 31, 2012. The balance sheet amounts, at March 31, 2012, with the exception of equity were translated at RMB6.3131 to 1.00 U.S. dollar. The equity accounts were translated at their historical rates. The average translation rates applied to income statement accounts for the three months ended March 31, 2012 and 2011were RMB6.2972 and RMB6.57117, respectively, to 1.00 U.S. dollar.

Liquidity and Capital Resources

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

	For the Three Months Ended March 31,
	2012			2011
Net cash (used in)provided by operating activities		(30,018,472	)		52,648,387
Net cash used in investing activities		(10,352,581	)		35,566
Net cash (used in) provided by financing activities		55,847,075			(31,395,839	)

Net cash used in operating activities was approximately $30 million for the three months ended March 31, 2012 as compared to net cash provided by operations of approximately $52.6 million for the same period in 2011. For the three months ended March 31, 2012, the increase net cash used in operations was primarily caused by the increase in inventory, increase in prepayments to suppliers and the increase in consumption tax refund receivable.

Net cash used in investing activities was approximately $10.4 million and $0.03 million for the three months ended March 31, 2012 and 2011, 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 be consistent throughout 2012.

Net cash provided by financing activities amounted to approximately $55.8 million for the three months ended March 31, 2012. Net cash used in financing activities amounted to approximately $31.4 million for the same period in 2011. For the three months ended March 31, 2012, the net cash provided by financing activities was through an increase in bank borrowings and bills payable.

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 March 31, 2012, we had an aggregate principal amount of approximately $256.5 million outstanding under the loan agreements, with maturity dates from April 2012 to March 2013 and interest rates from 3.10% to 7.93% per annum. The loan agreements contain customary affirmative and negative covenants and were mainly guaranteed by third parties and individual persons or secured by a lien on our property and equipment. Historically, all debts due have been paid back by the Company in a timely manner. All short-term bank loans are revolving loans whose terms (at due date of payment) are generally extended by the lender. As of March 31, 2012, we were in compliance with the terms of our loan agreements. As such, management expects most unpaid loan balances will be extended at their due dates. Depending on our capital needs, the Company evaluates whether to apply for additional long-term bank loans when they are paid back. The Company currently has sufficient lines of credit with the banks for both short-term and long-term borrowings.

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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 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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Since the commencement of investigation, the Company has been focused on improving its internal controls and procedures. Because of  the material weaknesses described in Item 9A. “Controls and Procedures” in our annual report on Form 10-K for the year ended December 31, 2011, that the Company is still in the process of remediating to strengthen its internal control,  management concluded that,  as of March 31, 2012, our disclosure controls and procedures were not effective. Investors are directed to Item 9A of annual report on Form 10-K for the year ended December 31, 2011 for the description of these weaknesses.

As of March 31, 2012, 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 previous accounting department into Planning Finance Department and Funds Department, and streamlining the department’s roles to ensure clear responsibilities, work efficiency and adequate oversight of the CFO; 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; and the appointment of Mr. Jiangtao Ma as General Manger of Ningbo Keyuan in December 2011 to replace Mr. Tao, so that Mr. Tao can focus on the Company’s overall development and strategy;

c)   Implementation of a comprehensive budget management procedure based upon the evaluation of the management and proposals from 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 to ensure the accuracy of the Financial statement; 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 as well as development of new policies and procedures to strengthen effective management and day-to-day operation of funds;

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

6) Development and implementation of Customer Access System and Database Management System to review business licenses and other related documents, as well as conducting site visits to current and potential customers to ensure their good standing and improve the Company’s recording of transactions;

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

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

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

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

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

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

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

14) Development and implementation of procedures to set up an effective incentive system and commitment system to retain  personnel and prevent talent losses; and

15) 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.

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 case is currently at the discovery stage.  We believe there is no basis to the suit filed by the Rosen Law Firm and intend to contest the case vigorously.

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

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.  Mine Safety Disclosures

Not applicable

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(incorporated by reference to Exhibit 10.21 of the Registrant’s Form S-1 filed on November 3, 2010).
10.2	Independent Director Agreement of Michael Rosenberg, dated August 1, 2011(incorporated by reference to Exhibit 10.22 of the Registrant’s Form S-1 filed on November 3, 2010).
10.3	Amendment to Independent Director Agreement of Dishen Shen, dated September 30, 2011 (incorporated by reference to Exhibit 10.23 of the Registrant’s Form S-1 filed on November 3, 2010).
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:   May 21,  2012	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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