Keyuan Petrochemicals (KEYP) 10-K 2013 FY Annual report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-K

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2013

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER:

KEYUAN PETROCHEMICALS, INC.

 (Exact name of registrant as specified in its charter)

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

Qingshi Industrial Park

Ningbo Economic & Technological Development Zone

Ningbo, Zhejiang Province

P.R. China 315803

(86) 574-8623-2955

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

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

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

COMMON STOCK WITH $.001 PAR VALUE

(Title of Class)

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

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

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

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

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

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

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

The aggregate market value of the 9,871,301 shares of voting and non-voting common equity stock held by non-affiliates of the registrant was approximately $ 8,884,171as of June 28, 2013, the last business day of the registrant’s most recently completed second fiscal quarter, based on the last sale price of the registrant’s common stock on such date of $0.90 per share, as reported on the OTCBB. 

As of May 19, 2014, the Registrant has 57,520,012 shares of common stock outstanding and 5,333,340 shares of Series B Preferred Stock outstanding.

KEYUAN PETROCHEMICALS,, INC

TABLE OF CONTENTS

Annual Report on Form 10-K for the Year Ended December 31, 2013

	PART I	Page
Item 1	Business	1
Item 1A	Risk Factors	22
Item 1B	Unsolved Staff Comments	40
Item 2	Properties	40
Item 3	Legal Proceedings	41
Item 4	Mine Safety Disclosures	41
	PART II
Item 5	Market for Registrant’s Common Equity,  Related Stockholder Matters and Issuer Purchases of Equity Security	42
Item 6	Selected Financial Data	45
Item 7	Management’s Discussion and Analysis of Financial Conditions and Results of Operations	45
Item 7A	Quantitative and Qualitative Disclosure about Market Risk	54
Item 8	Financial Statements and Supplementary Data	F-1
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	55
Item 9A	Controls and Procedures	55
Item 9B	Other Information	57
	PART III
Item 10	Directors,  Executive Officers and Corporate Governance	58
Item 11	Executive Compensation	61
Item 12	Security Ownership of Certain Beneficial Owners and Management And Related Stockholder Matters	63
Item 13	Certain Relationships and Related Transactions and Director Independence	65
Item 14	Principal Accountant Fees and Services	67
	PART IV
Item 15	Exhibits and Financial Statements Schedules	68
	Signatures	69

INTRODUCTORY NOTE

Except as otherwise indicated by the context, references in this Annual Report on Form 10-K (this “Form 10-K”) to the “Company,” “Keyuan” “we,” “us” or “our” are references to the combined business of Keyuan Petrochemicals, Inc. and its consolidated subsidiaries.  References to “Sinotech Group” are references to our wholly-owned subsidiary, Sinotech Group Limited, previously known as 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 “Keyuan Synthetic Rubbers” are references to our wholly-owned subsidiary, Ningbo Keyuan Synthetic Rubbers Co., Ltd.; references to ”Guangxi Keyuan” are references to our wholly-owned subsidiary, Guangxi Keyuan New Materials 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.

PART I

ITEM 1.  BUSINESS

GENERAL OVERVIEW

(a)       Nature of business

We, through our PRC operating subsidiaries, Ningbo Keyuan Plastics Co., Ltd. (“Ningbo Keyuan”), Ningbo Keyuan Petrochemicals Co., Ltd (“Ningbo Keyuan Petrochmicals”), Keyuan Synthetic Rubbers Co., Ltd (“Keyuan Synthetic Rubbers”) and Guangxi Keyuan New Materials Co., Ltd (“Guangxi Keyuan”), are engaged in the manufacture and sale of petrochemical products in the PRC. Our operations include (i) a production facility with an annual petrochemical production capacity of 720,000 metric tons (MT) of a variety of petrochemical products, (ii) a Styrene-Butadience-Styrene (the “SBS”) production facility with a designed annual production capacity of 70,000 MT, (iii) facilities for the storage and loading of raw materials and finished goods and (iv) 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 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 (“Guangxi Project”). The investment amount for Guangxi Project is approximately USD $300 million. According to the cooperation agreement, the government of Fangchenggang City is responsible for providing land use rights for the facility.

On August 9, 2013, Guangxi Project was approved by the local government of Fangchengang City. On August 28, 2013, we commenced engineering and facility construction. The preliminary investigation for foundation piling was completed in late October 2013. We are currently in the process of land leveling which is expected to be completed by the end of June, 2014. We anticipate finishing construction of the facility and installation of pipe lines by the end of 2014. However, the timelines are subject to further adjustments, pending the status of project financing.

The Guangxi Project, as a part of our expansion plan, will improve our competitive position by extending and expanding our supply chain and manufacturing base. Once the facility is fully operational, it is expected to have an annual production capacity of 400,000 metric tons of Acrylonitrile Butadiene Styrene (“ABS”). We plan to fund the construction and operation of the Guangxi Project through outside financing. If such financing is not available on terms acceptable to us, the project will be delayed until appropriate financing is available. As a result, the timelines for the Guangxi Project mentioned herein above are subject to adjustment pending the status of project financing.

(b)      Organization

Keyuan Petrochemicals, Inc. (“Company” or “the Company”, formerly known as “Silver Pearl Enterprises, Inc.”, together with its subsidiaries, herein referred to as “we” “us” and “our”) was incorporated in the State of Texas on May 4, 2004.

On April 22, 2010, we 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”), our former principal stockholder. Pursuant to the terms of the Exchange Agreement, Delight Reward transferred to us all of its shares of Keyuan International in exchange for 47,658 shares of our Series M convertible preferred stock (the “Share Exchange”). On an “as converted” basis, the Series M convertible preferred stock represented approximately 95% of our outstanding common stock right after the Share Exchange.  The Series M convertible preferred stock voted with the common stock on an “as converted basis” and was converted into 47,658,000 shares of our common stock on December 28, 2010.

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

On May 12, 2010, we formed a corporation 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 our wholly-owned subsidiary (the “Merger Subsidiary”).

Effective as of May 17, 2010, the Merger Subsidiary was merged with and into us. As a result of the merger, our name was changed to “Keyuan 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.  We are the surviving corporation in the merger and; except for the name change, there was no change in our directors, officers, capital structure or business.

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

On April 4, 2012, Guangxi Keyuan was incorporated by Sinotech Group limited (75% ownership) and Ningbo Keyuan (25% ownership) in Guangxi province, PRC, as a joint venture subsidiary, for the purpose of developing the Guangxi Project.

On June 15, 2012, Keyuan Synthetic Rubbers was established as a wholly-owned PRC subsidiary of Ningbo Keyuan  to engage in the sales and marketing of various petrochemical products, specifically synthetic rubbers.

On October 15, 2012, Keyuan International changed its name to Sinotech Group Limited (“Sinotech Group”).

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The current shareholding structure of the Company is listed as follows:

(c)      Stock Repurchase Program

On September 17, 2012, our Board of Directors authorized the repurchase of $2 million of our stock for up to $1.50 per share.  On December 31, 2012, we engaged TriPoint Global Equities LLC (“TriPoint Global”) as our agent to design and execute the stock repurchase program that complies with the requirements of Rule 10b5-1(c)(1) and Rule 10b-18 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As of March 31, 2014, we had purchased 310,424 shares of common stock through the stock repurchase program. The stock repurchase program was temporarily suspended during the period from April 17, 2013 to October 21, 2013 in connection with the delay in filing our Annual Report on Form 10-K for the year ended December 31, 2012, and is currently suspended with an intention to resume with immediate effect once we file this report. 

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Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of  Publicly Announced Plans or Programs		Approximate Dollar Value of Shares that May Yet Be  Purchased Under the Plans or Programs
December 1 - December 31, 2012		0	$	0.00		0	$	2,000,000
January 1 - January 31, 2013		11,200	$	0.73		11,200	$	1,991,861
February 1 - February 28, 2013		15,850	$	0.77		15,850	$	1,979,668
March 1 - March 31, 2013		90,504	$	1.25		90,504	$	1,866,488
April 1-April 30 ,2013		3,300	$	1,44		3,300	$	1,861,740
October1- October 30, 2013		618	$	0.99		618	$	1,861,126
November 1-November 31,2013		1,486	$	0.80		1,486	$	1,859,933
December 1-December 31,2013		3,190	$	0.78		3,190	$	1,857,440
January 1-January 31, 2014		37,196	$	0.71		37,196	$	1,831,031
February 1-February 28, 2014		65,348	$	0.89		65,348	$	1,772,871
March 1-March 31, 2014		81,732	$	1.02		81,732	$	1,689,504
Total		310,424	$	0.94		310,424	$	N/A

(d)       Events during the Last Three Years

On September 24, 2013, we and Dragon State International Limited (“Dragon State”),  the sole holder of Series B Convertible Preferred Stock and the majority holder of Series C Warrant and Series D Warrant, agreed to amend certain terms in Certificate of Designations, Preferences and Rights of the Series B convertible preferred stock, Series C warrants and Series D warrants (the “Amendments”), which we issued in a September 2010 Private Placement ( defined herein below and  also known as Series B Financing).  Pursuant to the Amendments, both maturity date of Series B convertible preferred stock and expiration date of Series C and Series D warrants were extended from September 28, 2013 to September 28, 2014.

In addition to the Amendments, we and Dragon State entered into a tolling agreement on the same day (the “Tolling Agreement”). Pursuant to the Tolling Agreement, all periods of limitation, repose and laches which are or may be applicable to any or all claims and remedies at contract, tort and statute, including but not limited to all claims arising out of the securities purchase agreement dated September 28, 2010 and out of Dragon State’s purchase of our stock, whether described therein or not (collectively, “Tolled Claims”), that Dragon State has or may have against us and Mr. Chunfeng Tao, our Chairman of the Board and Chief Executive Officer, are tolled and suspended as of September 28, 2013 through and including September 28, 2014.

On July 2, 2013, the United District Court for the District of Columbia issued a final judgment approving a settlement reached between us and the Securities and Exchange Commission (“SEC”). The settlement was reached on February 28, 2013 in a case filed by the SEC in the United States District Count for the District of Columbia against us, alleging our violation of  Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934, and Rules 12b-20 and 13a-13 thereunder. Under the terms of the settlement, we, without admitting or denying the allegation of the complaint, paid a civil penalty of $1million and were permanently enjoined from violating certain securities law.

In connection with the preparation of our Annual Report on Form 10-K for the year ending December 31, 2010,  on or about March 24, 2011, KPMG, the Company’s former independent auditor, raised certain issues primarily  relating to unexplained issues regarding certain cash transactions and recorded sales and requested that the Audit Committee conduct an independent investigation. Based on the issues raised by KPMG, on March 31, 2011, our Audit Committee elected to commence an independent investigation of the issues raised and engaged the services of independent counsel, Pillsbury Winthrop Shaw Pittman LLP (“Pillsbury”), which in turn engaged Deloitte Financial Advisory Services LLP (“Deloitte”), as independent forensic accountants, and King & Wood, as Audit Committee counsel in the People’s Republic of China (Pillsbury, Deloitte and King & Wood are collectively referred herein as “Investigation Team”).

On September 28, 2011, the Investigation Team completed the investigation. On October 3, 2011, we provided the Nasdaq Hearings Panel with a copy of the final investigation report along with a comprehensive list of remedial actions we had taken and were committed to taking to remediate the accounting and internal control issues. On October 5, 2011, we were notified that the Nasdaq Hearings Panel exercised its discretionary authority pursuant to NASDAQ Listing Rule 5101 to delist our securities from the Nasdaq Stock Market. As a result, our shares resumed trading in the pink sheets under the ticker symbol KEYP.PK beginning October 7, 2011. Our common stock is currently traded on the Over-the-Counter Bulletin Board under the symbol KEYP.

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(e) Other Historical Events

In April and May, 2010, we entered into a securities purchase agreement with 122 accredited investors for the issuance and sale of 748,704 units  at a purchase price of $35 per unit, for aggregate gross proceeds of approximately $26,204,640   consisting of, in the aggregate, (a) 6,738,336 shares of Series A convertible preferred stock, par value $0.001 per share convertible into the same number of shares of common stock, (b) 748,704 shares of common stock, (c) three-year Series A warrants to purchase up to 748,704 shares of common stock, at an exercise price of $4.50 per, and (d) three-year Series B warrants to purchase up to 748,704 shares of common stock, at an exercise price of $5.25 per share (the “April-May 2010 Private Placement”, sometimes referred herein as “Series A Financing”). The units were issued in accordance with the exemption from the registration provisions of the Securities Act of 1933, as amended, provided by Section 4(2) of such Act for issuances not involving any public offering and Rule 506 of Regulation D promulgated thereunder.

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

OUR PRODUCTS

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

● 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.

● SBS: consisting of Styrene and butadiene, widely used for waterproofing building material, asphalt modification, furniture, shoe sole material, tubes, tape, auto parts and electrical applicances.

In order to improve our operational results and financial situation, we are adjusting our product portfolio to include Styrene-Ethylene-Butylene-Styrene (“SEBS”) which we believe will yield a higher gross margin than some of our current products.  SEBS is a product similar to SBS but with more durable product feature, and can be produced by our current SBS facility. In order to achieve a stable production value, we started trial production of monthly 200 MT per month from March, 2013 and will start bulk production when results of our lab analysis prove the condition of SEBS produced is suitable for sales.

4

Production Capacity and Expansion

Our annual designed manufacturing capacity is 720,000 MT of a variety of petrochemical products. Our SBS production facility is capable of producing up to 70,000 MT of SBS in full load condition without interruption (100% of utilization rate in ideal conditions). Additionally, 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.

Our SBS facility was completed in September 2011 as a part of our expansion plan. It currently has two production lines in commercial production. SBS has a higher product margin compared to other petrochemical products we are producing and a wide range of applications in the footwear, adhesive, polymer modification and modified asphalt industries. Our SBS facility achieved a 41% utilization rate in 2012, the first full year of production, and generated approximately $71 million in sales and $5.9 million in profits. We achieved, in accordance with our annual plan of 63,000 MT of SBS, a 63% utilization rate in 2013 3; and generated approximately $78 million in sales and $5.6 million in profits. 

As another component of our expansion plan, we intend to add 50,000 MT of new storage capacity in 2014, after which our total storage capacity will be 150,000 MT. We began the first phase of construction in August 2012. The construction of two new tanks with approximately 34,000 MT of new storage capacity was completed through June 2013 and the installation of pilings and pumps was completed in late October 2013. At the date of this Report, we are waiting for the local environmental department to conduct its inspection. Once we obtain the approval from the local environmental department, the two storage tanks can become operational. We expect that the operations will commence by the end of May, 2014.  For the remaining 16,000 MT of new storage capacity, we are planning to start construction in June, 2014 and expect to complete the work at the end of September 2015.

The following chart depicts our production capacity in 2013:

Breakdown of 2013 Capability of 568,939 (MT)

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Other than the utilization rate for SBS facility discussed above, the utilization rates for our other facilities during the 12 months ended December 31, 2013 are as follows:

·   styrene production: 77%;

·   propylene: 63%;

·   LPG: 80%;

·   BTX Aromatic: 93%; and

·   MTBE & others: 65%

Most of our facilities, except for the SBS facility, have been operating since 2009. Therefore, their current utilization rates for each product have been optimized to achieve stable output, less raw material cost and less equipment maintenance. While we are continuing working on existing equipment upgrades to achieve increased stabilized production, we realize that optimizing the utilization rates for our current facilities is not adequate to develop our business to meet increasing customer demands. More specifically, the increasing market demand in tire and auto parts has resulted in increasing market demand for styrene, ABS and Solution Polymerized Styrene Butadiene Rubber (“SSBR”); and higher requirements related to environmental protection imposed by the PRC government have led to higher demand for transformer oil and catalytic cracking oil. Based on these market trends, we have been focusing on the following improvements to our infrastructure to expand our manufacturing capacity:

a) an ABS production facility in Guangxi Province with an annual production capacity of 400,000 MT of ABS. We commenced facility construction in August 2013 and  expect to finish the first phase of construction by the end of 2014;

b) an oil catalytic cracking processing facility as an extension of our catalytic pyrolysis processing equipment, as well as the feed way of the main raw materials to produce synthetic rubber. This facility can reduce production costs and the market risk in the purchase of raw materials, and improve the stability and efficiency of project production to 200,000 MT of heavy oil per year;

c) an increased annual design capacity of our ethylene-styrene facility from 80,000 MT to 200,000 MT, of which 120,000 MT can be used for producing synthetic materials and 80,000 MT can be sold to downstream petrochemical companies. This facility can be considered the bridge between original products and high-value added products and will complete the integration of internal resources;

d)   a transformer oil facility using hydrogen from the ethylene-styrene facility to complete a double hydrogenation process on original products (BTX Aromatic) for refining transformer oil and producing high value transformer oil with a design capability of 100,000 MT per year.  Construction of the main facility column was completed at the end of October 2013. We are aiming  to finish the assembly and installation by the end of May 2014 and start trial operations at the end of June 2014  and

e) an SSBR production facility with a designed capacity of 150,000 MT per year, using synthetic rubber, styrene and butadiene to produce SSBR by applying our process technology. SSBR can be used as raw material for tires, instead of imported hexakis (methoxymethy) melamine (“HMMM”).

We acquired the approval for our catalytic oil processing facility and transformer oil plant from Ningbo local government on February 2013.  The foundation piling work was completed in July 2013. As of the date of this Report, we have completed 95% of the construction of the main body of the facility and infrastructure.  We expect to start trial operations at the end of May, 2014, at which time we will be able to produce medical use and edible products such as tubes and chewing gum. As of December 31, 2013, the capital invested in the catalytic oil processing facility was $15.9 million.

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The total estimated cost of our expansion plan is approximately $491.8 million, including $300 million for Guangxi Project, $19.8 million for the catalytic cracking processing equipment, $30 million for transformer oil facility and $99.5 million for the SSBR production facility, $40 million for the increased annual design capacity of ethylene- styrene, and $2.5 million for additional storage capacity.  Upon full completion of our expansion, our total production capacity will reach 1,723,000 MT per year including, but not limited to, our current petrochemical production of 720,000 MT, styrene of 200,000 MT, catalytic cracking oil of 200,000 MT, ABS of 400,000 MT, SSBR of 150,000 MT and transformer oil of 100,000 MT. The following chart depicts the breakdown of our planned production capacity of 1,723,000 MT.

Capacity Breakdown after expansion projects (1,723,000 MT)

Our current estimate of our expansion schedule is as follows. However, we are continuing our evaluation of timelines for our expansion projects based on our financial situation and market condition.

Expansion Project	Expected Completion Date
Oil Catalytic Processing Facility	End of Q4, 2014
Ethylene-Styrene Facility	End of Q2, 2015
Transformer Oil Facility	End of Q3, 2014
SSBR production facility	End of Q4, 2015
ABS Production Facility	End of Q4, 2016
New storage capacity of 50,000 MT	End of Q3, 2015

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Petrochemical Manufacturing Process

The following chart illustrates our petrochemical manufacturing process:

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The following chart illustrates the manufacturing process of SBS:

Petrochemical Market in China

Based on a report of China Petroleum and Chemical Federation, the petroleum and chemical industry will continue with a stable growth in 2014. The net profit in the petroleum and chemical industry in 2013 was RMB870 billion, an increase of 18% as compared to 2012. The output of crude oil in 2013 was 200 million MT, increased by 1.5% compared to 2012, and the output of chemical product in 2013 was 484 million MT, increased by 8% compared to 2012. (data source:http://www.askci.com/news/201301/21/219524756358.shtml)

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

● The demand for benzene in China continues to increase; the demand in 2013 was 9.7 million MT compared with 7 million MT in 2012, and it is expected that the demand for benzene will reach 10 million MT in 2015. (data source: http://finance.sina.com.cn/money/future/20131115/104417334698.shtml )

● China’s xylene demand reached 16.41 million MT in 2013, an increase of 18.5% compared to the demand in 2012 (data source: http://www.cnsb.cn/news/news_show.asp?info_id=987627 )

● The supply of propylene in China was 14.60 million MT in 2013 while the actual demand for propylene was17.10 million MT, leaving gap between demand and supply of approximately 2.5 million MT.(data source: http://kuaibao.dianlan.cn/cont-62001.html)

● Domestic demand for styrene is expected to continue to increase in the next few years. (data source: http://www.askci.com/news/201303/20/2011113329192.shtml)

● China’s demand for LPG grows steadily and is anticipated to increase from 23.97 million MT in 2012 to 26.02 million MT in 2015 (data source: http://www.askci.com/news/201211/12/17533_03.shtml)

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

● China imported 0.44 million MT of benzene in 2012 and 0.89 million MT of benzene in 2013 (data source: http://www.chyxx.com/data/jinchukou/201404/237554.html )

● China’s import of xylene grew from 16 million MT in 2012 to 30 million MT in 2013. (data source: http://dmb.100ppi.com/imex/)

● China’s import of propylene increased from 2.2 million MT in 2012 to 2.6 million MT in 2013 (data source: http://www.cs.com.cn/sylm/jsbd/201305/t20130508_3974989.html )

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

● China imported 3.33million MT of styrene through November 2013, an increase of 9.64% compared to styrene imports during the same period in 2012.(data source: http://info.pcrm.hc360.com/2014/02/140831328321.shtml )

Environmental Protection and Safety Measures

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

Environmental Protection

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

Safety Measures

Our safety control measures include:

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

Quality Control

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

Our Competitive Strengths

As an independent petrochemical manufacturer and supplier, our competitive strengths include:

Technology Advantage

We have proprietary manufacturing technologies that allow for better use of raw materials, higher yield rate and enhanced operational efficiency.

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The yield rate in 2012 for our entire line was 87.3% for finished products. The yield rate in 2013 for our entire line was 87.1% for finished products. Yield rate represents the percentage of finished product produced from input of raw material and net input of unfinished products and is calculated by dividing the sum of crude oil and net unfinished input into the individual net production of finished products. A yield rate of 87.1% means, for instance, 100 tons of heavy oil can generate approximately 87.1 tons of finished products.

Specifically, we possess the technology to use heavy oil, instead of naphtha, which is a commonly used feedstock in the petrochemical production industry. Heavy oil is approximately 15% cheaper per ton and more readily available than naphtha, which provides us with competitive advantage in the selection of raw materials.

In addition, we use enhanced technologies in our production process that allow for lower capital investment and higher operations efficiency. Our proprietary catalytic pyrolysis process uses a set of dual risers for one precipitator and one regenerator, while the commonly used fluidized catalytic cracking process uses one riser for one precipitator and one regenerator respectively. The set of dual riser, one precipitator and one regenerator are integrated into one complete process, which provides for ease of operation, higher operation efficiency and higher reaction temperature. It was estimated that the technology generates a 15% higher olefin yield rate than that of the fluidized catalytic cracking process, which allows us to produce more higher-margin olefin products such as styrene and propylene

Furthermore, a catalytic pyrolysis process with high temperatures can produce more olefin hydrocarbon based products compared with other equipment using low temperatures for the same product. In other words, our cost is reduced while producing the same amount of the product.

Our management considers our manufacturing technologies and manufacturing design critical to our business, and has taken steps to protect these technologies.

In 2011, we received the approval for our patent application for Multiple Ethylene Propylene (“MEP”) technology  from the National Intellectual Property Bureau in China, #ZL-2010-2-0191523.6. MEP is an exclusive and leading technology used in our existing production process. Through the ingenuity of our CEO,  Mr.  Tao, we have developed this proprietary production process that improves the manufacturing efficiency and flexibility for a wide range of petrochemicals. The utility model patent applies to a processing technology used in the production of ethylene and propylene. This technology allows us to use lower grade feedstock (such as heavy oil) instead of a higher grade feedstock commonly used in other existing petrochemical production processes. It also allows us to improve the yield and utilization rate of the production line, resulting in a 15% cost savings.

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

In 2013, we were granted a patent for “the synthetic method for transparent segmented copolymer”( #ZL-2012-1-0005678.9). This method is to be used not only to expand our SBS products range, but also to increase the “K resin” content in styrene to further improve our product portfolio to diversify our market risk.

In addition to patent protection, we also entered into confidentiality and license agreements with certain employees, customers and others to protect the confidentiality of our technologies.

On December 20, 2013, Keyuan Synthetic Rubbers submitted an application to be recognized as a “National High-Tech Enterprise”. The certification of National High-Tech Enterprises was started in the early 1990s in order to establish China's high-tech industry and promote the rapid development of high tech enterprises. The State Council issued "Conditions and Measures of the High and New Technology Enterprises in National High Tech Industrial Development Zone (Guo Fa [1991] No. 12)" in 1991 and authorized the State Science and Technology Commission to organize High-Tech Enterprises of National High-Tech Industrial Development Zone. It set up a series of preferential policies in tax, finance and trade to support the development of High-Tech Enterprises. Once we are awarded as a “National High-Tech Enterprise”, we will benefit from a reduced income tax rate of 15% versus 25% for non High-tech status. Consequently, we will be able to make a greater investment in R&D and expansion toward the long-term growth of our company

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Elite Workforce

Our management team, composed of seasoned petrochemical experts with proven track records from China’s largest state-owned enterprises, provides us with specialized operating management and technical administration. In addition, we have allied with many industry-renowned technology experts and advisors assisting us to achieve consistent technological improvement.

Ideal Location

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

In the first three months of 2014, we applied to Ningbo local government to upgrade the classification of our own dock so that we can unload foreign cargo vessels under the 50,000 MT cargo capacity to our dock directly. We expect that the upgrading will be completed by the end of 2016 and we will be able to save additional logistics costs and storage fees once it is completed.

Our Guangxi Project is located in Fangchengang city,an important port for Guangxi province , and other than Beihai, the only major Chinese port on the Tonkin Gulf. It is very convenient for expansion into the South-East Asia market, with low storage and logistics costs.

Sales and Pricing

Sales

Most of our customers pay cash in advance to buy our products. To core customers with excellent credit history, we may grant credit sales, which is part of our strategy to maintain customer relationship.

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

In order to facilitate our future growth, Ningbo Keyuan Petrochemicals was incorporated in Ningbo, China with a registered capital of $3 million as a wholly-owned subsidiary of Keyuan HK  on August 27, 2010. Ningbo Keyuan Petrochemicals is responsible for our sales and marketing, raw materials sourcing and market analysis. Ningbo Keyuan Petrochemicals also serves as the “market thermometer” that monitors market conditions and obtains first hand market data through buying and selling activities. Management believes that consolidation of the sales and marketing and raw material procurement function into one business unit will help efficiently manage our future expansion.

Pricing

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

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Customers

Customers for Petrochemicals Products

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

In order to estimate the total orders for a year, we conduct surveys with our major customers to obtain their preliminary orders for the next one or two years and update the information annually. We enter into purchase contracts with customers on an order-to-order basis. In each order, price is determined based on market price and the quantity is specified based on (1) the customer demand for a particular order and (2) our capability to satisfy that particular order. Our five largest customers accounted for 27% and 36% of the sales for the years ended December 31, 2013 and 2012, respectively. We anticipate that our overall customer composition and the concentration of our top customers will be further changed as we expand our business and modify our product portfolio to include new products and higher-margin products; however, we can give no assurance that this will be the case.

Customers for SBS Products

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

We controlled approximately 15% of the domestic SBS market in 2012.  In 2013, our domestic market share increased to 18%. Our main SBS products, such as shoe sole material and asphalt modifier, were traded through agents in 2013. We engage agents as our main customers primarily because: (1) trading agents pay 30% in advance when placing their order and pay the rest before shipment, and (2) it decreases our overhead by allowing for a more streamlined sales force, as trading agents do not require regular client visits, entertaining or a highly specialized sales team to maintain the relationships.

To maintain and develop our relationship with SBS customers, we set up a customer relationship department to closely monitor and timely respond to customers’ requests and feedback, as well as a technical team in charge of improving product quality and adjusting product chemical features to meet different requirements from customers. In 2013, in order to more efficiently address customer satisfaction, we developed a new team of product managers specific to each product. They are given increased authority to work with the customer relationship department, the factory and the agent, to offer a first time solution to various needs.

We also have monthly meetings with our major SBS customers to obtain their preliminary orders. Because the price of SBS fluctuates frequently and we do not have a warehouse distribution system, the price of SBS usually includes shipment cost. Our five largest customers accounted for 26% and 23% of the sales of SBS for the year ended December 31, 2013 and 2012, respectively.

Intellectual Property

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

On January 25, 2011 we received a patent approval for MEP, #ZL-2010-2-0191523.6. MEP is our processing technology used in the production of ethylene and propylene. This technology allows us to use lower grade feedstock (such as heavy oil) instead of a higher grade feedstock commonly used in other existing petrochemical production processes. It also allows us to improve the yield and utilization rate of its production line, resulting in a 15% cost savings.

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

On August 4, 2013, we were granted a patent for “the synthetic method for transparent segmented copolymer”( #ZL-2012-1-0005678.9).  This method is to be used  not only  to expand our SBS products range, but to increase the “K resin” content in styrene on which will further improve our product portfolio to avoid market risk.

Going Concern and Management’s Plans

For the year ended December 31, 2013, we reported net income of approximately $4.6 million and cash flow used in operations of approximately $53 million. At December, 31, 2013, we had a working capital deficit of approximately $209.7 million.

The Report of the Independent Registered Public Accounting Firm on our consolidated financial statements as of and for the year ended December 31, 2013 includes a going concern explanatory paragraph which means that the accounting firm has expressed substantial  doubt about the Company’s ability to continue as a going concern.

Although the Company continues to finance its operations primarily through short-term bank borrowings, management’s realignment of product profiles, along with the general stabilization of the petrochemical industry in China resulted in a net income of $4.6 million in 2013 compared to a net loss of $5.8 million in 2012.

Short-term bank borrowings and bills payable amounted to approximately $686 million at December 31, 2013. Management expects that short-term bank financing will continue to be available through at least December 31, 2014.  Furthermore, as management expects that the petrochemical industry in China will continues to stabilize and that demand for downstream products (such as auto, home appliances and dyes) grow following several years of contraction, as such Management expects that the company’s overall profits will also grow.

As reported in our financial statements for the years ended December 31, 2013 and 2012, we continue to benefit from favorable PRC tax policies related to consumption tax. As of December 31, 2013, we had a consumption tax refund receivable of approximately $46.1 million. In April 2014, approximately $36.1 million was refunded and management expects that additional consumption tax deposits of approximately $0.4 million will be refunded in May 2014, and that approximately $9.6 million will be deductible against future consumption tax obligations. .

In order to improve our operational results and financial situation, we are adjusting our product portfolio to include SEBS which will yield a higher gross margin than some of our current products.  SEBS is a product similar to SBS but with more durable product feature, and can be produced by our current SBS facility. In order to achieve a stable production value, we started trial production of 200 MT per month from March 2013, and will start bulk production when the result of our lab analysis shows the condition of SEBS produced is suitable for sale. In addition, since late 2013, our industry has been steadily developing after a period of depression. We believe that the undertaking of our expansion plan ensures a sustainable and long-term growth. We are also exploring sources of additional financing, including short-term financing from our vendors and other parties. In addition, we are closely monitoring cash balances, cash needs and expense levels.

We are also exploring sources of additional financing, including short-term financing from our vendors and other parties. In addition, we are closely monitoring its cash balances, cash needs and expense levels.

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

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Government Regulation

In addition to U.S. securities laws, banking laws and laws applicable to all companies, such as The Foreign Corrupt Practices Act, as a China-based entity, we are subject to various Chinese regulations. This section sets forth a summary of the most significant China regulations or requirements that may affect our business activities operated in China or our shareholders’ right to receive dividends and other distributions of profits from the PRC subsidiary.

Foreign Investment in PRC Operating Companies

The Foreign Investment Industrial Catalogue jointly issued by China's Ministry of Commerce (MOFCOM) and NDRC in 2011 classified various industries/businesses into three different categories: (i) encouraged for foreign investment; (ii) restricted to foreign investment; and (iii) prohibited from foreign investment. For any industry/business not covered by any of these three categories, they will be deemed industries/businesses permitted for foreign investment. Except for those expressly provided with restrictions, encouraged and permitted industries/businesses are usually 100% open to foreign investment and ownership. With regard to those industries/businesses restricted to foreign investment, there is always a limitation on foreign investment and ownership. Foreign investment is prohibited in prohibited industries/business. The PRC subsidiary’s business does not fall under the industry categories that are restricted to, or prohibited from foreign investment and is not subject to limitation on foreign investment and ownership.

Regulation of Foreign Currency Exchange

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

Regulation of FIEs’ Dividend Distribution

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

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

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

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

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

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Regulation of a Foreign Currency’s Conversion into RMB and Investment by FIEs

On August 29, 2008, SAFE issued a Notice of the General Affairs Department of the State Administration of Foreign Exchange on the Relevant Operating Issues concerning the Improvement of the Administration of Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises or Notice 142, to further regulate the foreign exchange of FIEs. According to Notice 142, FIEs shall obtain a verification report from a local accounting firm before converting its registered capital in foreign currency into Renminbi, and the converted Renminbi shall be used for the business within its permitted business scope. Notice 142 explicitly prohibits FIEs from using RMB converted from foreign capital to make equity investments in the PRC, unless the domestic equity investment is within the approved business scope of the FIE and has been approved by SAFE in advance. In addition, SAFE strengthened its oversight over the flow and use of Renminbi funds converted from the foreign currency-dominated capital of a FIE. The use of such Renminbi may not be changed without approval from SAFE, and may not be used to repay Renminbi loans if the proceeds of such loans have not yet been used. Violations of Notice 142 may result in severe penalties, including substantial fines as set forth in the SAFE rules.

In addition, SAFE promulgated the Notice on Relevant Issues Concerning Strengthening the Administration of Foreign Exchange Businesses in November 2010, which requires the authenticity of settlement of the funds raised from offshore offerings to be closely examined and the settlement of funds should conform to their intended use as listed in the offering document. For the settlement of funds in excess of those intended by the offering document or for a purpose other than that listed in the offering document, a board resolution relating to the use of funds shall be submitted as a separate application document. SAFE further promulgated a circular in November 2011, which prohibits a foreign-invested enterprise from using Renminbi funds converted from its foreign currency registered capital to provide entrustment loans or repay loans borrowed from non-financial enterprises. These circulars may limit our ability to transfer the net proceeds from the offshore offering to our wholly foreign-owned subsidiaries in China, and we may not be able to convert the proceeds from the offshore offering into Renminbi to invest in or acquire any other PRC companies.

On November 19, 2012, SAFE promulgated the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment, or Circular 59, which became effective on December 17, 2012. Circular 59 substantially amends and simplifies the then current foreign exchange procedures. Under Circular 59, the opening of various special purpose foreign exchange accounts (e.g. pre-establishment expenses account, foreign exchange capital account, guarantee account) no longer requires the approval of SAFE. Reinvestment of Renminbi proceeds by foreign investors in the PRC no longer requires SAFE approval or verification.

On May 10, 2013, SAFE promulgated the Circular on Printing and Distributing the Provisions on Foreign Exchange Administration over Domestic Direct Investment by Foreign Investors and the Supporting Documents, which specifies that the administration by SAFE or its local branches over direct investment by foreign investors in the PRC shall be conducted by way of registration. Institutions and individuals shall register with SAFE and/or its local branches for their direct investment in the PRC. Banks shall process foreign exchange business relating to the direct investment in the PRC based on the registration information provided by SAFE and its branches.  

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Regulation of Foreign Exchange in Certain Onshore and Offshore Transactions

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

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

Regulations on Employee Stock Option Plans

In December 2006, the People’s Bank of China promulgated the Administrative Measures of Foreign Exchange Matters for Individuals, which set forth the respective requirements for foreign exchange transactions by individuals (both PRC or non-PRC citizens) under either the current account or the capital account. In January 2007, SAFE issued implementing rules for the Administrative Measures of Foreign Exchange Matters for Individuals, which, among other things, specified approval requirements for certain capital account transactions such as a PRC citizen’s participation in the employee stock ownership plans or stock option plans of an overseas publicly-listed company. In March 2007, SAFE promulgated the Application Procedures of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Ownership Plan or Stock Option Plan of Overseas-Listed Company, or the 2007 Stock Option Rules. In February 2012, SAFE promulgated the Notice on Issues Related to Foreign Exchange Administration on Domestic Individuals' Participation in Equity Incentive Plans of Overseas-Listed Company, which replaced the 2007 Stock Option Rules. Under current effective rules, if a PRC resident participates in any equity incentive plan of an overseas publicly-listed company, a qualified PRC domestic agent must, among other things, file on behalf of such participant an application with SAFE to conduct the SAFE registration with respect to such equity incentive plan and obtain approval for an annual allowance with respect to the purchase of foreign exchange in connection with the exercise or sale of stock options or stock such participant holds. Such participating PRC residents' foreign exchange income received from the sale of stock and dividends distributed by the overseas publicly-listed company must be fully remitted into a PRC collective foreign currency account opened and managed by the PRC agent before distribution to such participants.

Further, a notice concerning the individual income tax on earnings from employee share options jointly issued by Ministry of Finance, or the MOF, and the State Administration of Taxation, or the SAT, and its implementing rules, provide that domestic companies that implement employee share option programs shall (a) file the employee share option plans and other relevant documents to the local tax authorities having jurisdiction over them before implementing such employee share option plans; (b) file share option exercise notices and other relevant documents with the local tax authorities having jurisdiction over them before exercise by the employees of the share options, and clarify whether the shares issuable under the employee share options mentioned in the notice are the shares of publicly listed companies; and (c) withhold taxes from the PRC employees in connection with the PRC individual income tax.

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

Government Regulations Relating to Taxation

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

On December 26, 2007, the State Council issued a Notice on Implementing Transitional Measures for Enterprise Income Tax, or the Notice, providing that the enterprises that have been approved to enjoy a low tax rate prior to the promulgation of the EIT Law will be eligible for a five-year transition period beginning January 1, 2008, during which time the tax rate will be increased step by step to the 25% unified tax rate set out in the EIT Law. From January 1, 2008, for the enterprises whose applicable tax rate was 15% before the promulgation of the EIT Law, the tax rate will be increased to 18% for 2008, 20% for 2009, 22% for 2010, 24% for 2011, and 25% for 2012. For the enterprises whose applicable tax rate was 24%, the tax rate was changed to 25% from January 1, 2008.

The EIT Law and Implementation Rules of the EIT Law provide that an income tax rate of 10% may be applicable to dividends payable to non-PRC investors that are “non-resident enterprises”, which (i) do not have an establishment or place of business in the PRC, or (ii) have such establishment or place of business in the PRC but the relevant income is not effectively connected with the establishment or place of business, to the extent such dividends are derived from sources within the PRC. The income tax for non-resident enterprises shall be subject to withholding at the income source, with the payor acting as the obligatory withholder under the EIT Law, and therefore such income taxes generally called withholding tax in practice. Such income tax may be exempted or reduced by the State Council of the PRC or pursuant to a tax treaty between the PRC and the jurisdictions in which our non-PRC shareholders reside. For example, the 10% withholding tax is reduced to 5% pursuant to the Double Tax Avoidance Agreement Between Hong Kong and Mainland China if a Hong Kong resident enterprise owns more than 25% of the registered capital in a company in the PRC and is determined by the competent PRC tax authority to have satisfied the other conditions and requirements under such Double Tax Avoidance Agreement Between Hong Kong and Mainland China and other applicable laws. We are a U.S. holding company and substantially all of our income is derived from dividends we receive from our subsidiaries located in the PRC. Thus, if Keyuan HK are considered as a “non-resident enterprise” under the New EIT Law and the dividends paid to Keyuan HK by our subsidiaries in the PRC are considered income sourced within the PRC, such dividends may be subject to a withholding tax at a rate up to 10%.

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

The current EIT Law, which became effective on January 1, 2008, imposes a uniform enterprise income tax rate of 25% on all PRC resident enterprises, including foreign-invested enterprises and domestic enterprises, unless they qualify for certain exceptions.

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For the years ended December 31, 2013 and 2012, the Company was subject to the 25% tax rate. In order to support the growth of certain local enterprises, the local government granted certain credit back to Ningbo Keyuan. In the first two profitable years beginning from 2007, the local government credited  back to the Company the entire local portion of the income tax which equals to 40% of the whole enterprise income tax the Company paid applying the 25% tax rate.; in the subsequent three profitable years, the local government credited back 50% of the local income tax the Company paid under the 25% tax rate.  The Company recognized the subsidy related to income tax at the time the cash was received.

On December 20, 2013, Keyuan Synthetic Rubbers submitted an application to be recognized as a “National High-Tech Enterprise”. The certification of National High-Tech Enterprises was started in the early 1990s in order to establish China's high-tech industry and promote the rapid development of high tech enterprises. The State Council issued "Conditions and Measures of the High and New Technology Enterprises in National High Tech Industrial Development Zone (Guo Fa [1991] No. 12)" in 1991 and authorized the State Science and Technology Commission to organize High-Tech Enterprises of National High-Tech Industrial Development Zone. It set up a series of preferential policies in tax, financial and trade to support the development of High-Tech Enterprises. Once awarded as a “National High-Tech Enterprise”, Keyuan Synthetic Rubbers will benefit from a reduced income tax rate of 15% versus 25% for non High-tech status. Consequently, we will be able to make a greater investment in R&D and expansion toward the long-term growth of our company

Pursuant to the Administrative Measures on the Recognition of National High-Tech Enterprises, the provincial counterparts of the Ministry of Science and Technology, the Ministry of Finance and the State Administration of Taxation shall jointly determine whether an enterprise is qualified as a “National High-Tech Enterprise”. In making such determinations, these government agencies shall consider, among other factors, ownership of core technology, whether the products or services fall within the scope of high and new technology strongly supported by the state as specified in the measures, the ratios of technical personnel and research and development personnel to total personnel, the ratio of research and development expenditures to annual sales revenues, the ratio of revenues attributed to high and new technology products or services to total revenues, and other measures set forth in relevant guidance.  A “National High-Tech Enterprise” certificate is effective for a period of three years and could be renewed for another three years. After that, an entity needs to re-apply for the “High and New Technology Enterprise” status in order to be able to enjoy the preferential tax rate of 15%.

Regulations on Work Safety

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

The Regulations on the Safety Administration of Dangerous Chemicals (“RSADC”) was promulgated by the State Council on January 26, 2002, effective as of March 15, 2002. It sets forth general requirements for manufacturing and storage of dangerous chemicals in China. The RSADC requires that companies manufacturing dangerous chemicals establish and strengthen their internal regulations and rules on safety control and fulfill the national standards and other relevant provisions of the State. In addition, according to the RSADC, companies that manufacture, store, transport or use dangerous chemicals shall be required to obtain corresponding approvals or licenses with the State Administration of Work Safety and its local branches and other proper authorities. Companies that manufacture or store dangerous chemicals without approval or registration with the proper authorities can be shut down, ordered to stop manufacturing or ordered to destroy the dangerous chemicals. Such companies can also be subject to fines. If criminal law is violated, the persons chiefly liable, along with other personnel directly responsible for such impropriety, shall be subject to relevant criminal liability. The RSADC was further amended on March 2, 2011 and later on December 7, 2013. The amended regulation strengthens the administration of dangerous chemicals production. The State Administration of Work Safety further promulgated Implementing Measures on the Permit for Safe Use of Hazardous Chemicals on November 16, 2012, which sets forth the detailed procedures, conditions and documents required for application for safe use permit of dangerous chemicals.

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The Company has put work place safety as one of the top priorities for our operation. In order to comply with the aforementioned rules and regulations, as of December of 2013, we have made considerable investment in major equipment of approximately $1.9 million. We have installed a distribution control system (DCS), emergency shutdown system, electric explosion protection, automatic interlocking system, detecting & alarming system for inflammable and toxic gas, fire protection and fire detecting system, auto-sprinkling system, pressure release and control system. The Company’s operating subsidiary Ningbo Keyuan has obtained a work safety license effective from March 25, 2011 to March 24, 2014 for producing petrochemical products. The Company has successfully completed the work safety license renewal process and obtained the new license on April 2, 2014. The new license is effective from March 27, 2014 to March 26, 2017.

Regulations on Environmental Protection

The Environmental Protection Law (originally enacted in 1989) was amended on April 24, 2014, which set forth much stricter liabilities against polluters and greatly enhanced government authorities’ rights in enforcing the environmental protection law. For example, the environmental protection bureau may directly freeze assets of a polluters, the police may detain the responsible person; the administrative fines will accrue on daily basis without cap; and NGOs may initiate litigation against polluters in the public interest.

According to the Prevention and Control of Water Pollution Law, as adopted by the Standing Committee of the 10th National People’s Congress on February 28, 2008 and effective on June 1, 2008, China adopted a licensing system for pollutant discharge. Companies directly or indirectly responsible for discharge of industrial waste water or medical sewage to waters are required to obtain a pollutant discharge license. All companies are prohibited from discharging wastewater and sewage to waters without the license or in violation of the terms of the pollutant discharge license. As Ningbo city is currently working on setting up an inspection system of the pollutant discharge, there is no specific pollutant discharge license for our operating subsidiary Ningbo Keyuan. However, Ningbo Keyuan’s facilities have passed inspection with Ningbo city environmental protection authorities which includes an approval for the pollutant discharge.

The Regulations on the Administration of Construction Projects Environmental Protection (“RACPEP”), as adopted by the State Council on November 18, 1998 and effective on November 29, 1998, governs construction projects and the impact such projects will have on the environment. Pursuant to the RACPEP, the governing body is responsible for supervising the implementation of a three tiered system that includes (i) reviewing and approving a construction project, (ii) overseeing the construction project and (iii) inspecting the finished construction project and ensuring that all harmful pollutants are disposed of correctly. Manufacturing companies are required to apply for inspection with environmental protection authorities upon completion of a construction project. Our facilities have passed the inspection by the environmental protection authorities.

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

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Research and Development

We consider ourselves as a technology driven innovative Company. Our senior management combined has over one hundred years of industry experience. We continue to enhance our technology through internal and external research and development.

On January 25, 2011 we received approval for a patent related to the our proprietary production process, MEP, an exclusive and leading technology used in our existing production process. This technology allows us to use lower grade feedstock (such as heavy oil) instead of a higher grade feedstock commonly used in other existing petrochemical production processes. It also allows us to improve the yield and utilization rate of its production line.

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

On August 4, 2013, we received the patent notice for “the synthetic method for transparent segmented copolymer” (#ZL-2012-1-0005678.9). This method is used to expand our SBS products range and increase the “K resin” content in styrene to  further enhance our product portfolio to diversify our market risk.

Description of Property

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

Address		Size	Leased/Owned/Granted	Function
1.	Qingshi Industrial Park, Beilun District, Ningbo, Zhejiang, China	231,084 Square meters	Granted use rights	Plant land
2.	No.8 Lianhe Road 239 Block, Qijiashan Neighborhood, Beilun District, Ningbo, Zhejiang, China	4,948 Square meters	Owned	Dormitory Building

Employees

As of December 31, 2013, we had 580 full-time employees including but not limited to 1 executive officer, 1 chief financial officer and 13 other senior management members, 30 engineers, 25 sales people, 20 researchers and developers, and 30 administrative staff. The remaining 460 full-time employees are production facility manufacturers. All of the employees have signed labor contracts with us and receive monthly salaries as well as other social benefits including pension insurance, unemployment insurance, accidental insurance, medical insurance and housing funds, etc. We do not have any other employees in addition to our full-time employees.

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

As required by PRC regulations, we participate in various employee benefit plans that are organized by municipal and provincial governments, including pension, work-related injury benefits, maternity insurance, and medical and unemployment benefit plans. We are required under PRC laws to make contributions to the employee benefit plans at specified percentages of the salaries, bonuses and certain allowances of our employees, up to a maximum amount specified by the local government from time to time. Members of the retirement plan are entitled to a pension equal to a fixed proportion of the salary prevailing at the member’s retirement date.

Executive Offices

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

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FOR ADDITIONAL INFORMATION

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

Copies of Company’s Annual Reports on Form 10K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are all available at our website (http://www.keyuanpetrochemicals.com/)  free of charge, within a week after we file same with the SEC or by sending a request for a paper copy to our outside securities counsel: Hunter Taubman Weiss LLP, c/o Keyuan Petrochemicals, Inc., 17 State Street, Suite 2000, New York, NY 10004.

ITEM 1A. RISK FACTORS

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

Risks Related to Our Business

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

Due to our limited capital resources our independent registered public accounting firm has issued a report that describes an uncertainty related to our ability to continue as a going concern. The auditors’ report discloses that we  consumed cash in operating activities in 2013 and that we had a working capital deficiency at December 31, 2013. These conditions raise substantial doubt about our ability to continue as a going concern and may make it difficult for us to raise capital. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Our limited operating history makes evaluation of our business difficult.

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

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Key employees are essential to growing our business.

Mr.Chunfeng Tao, Mr. Shifa Wang, and Mr. Mingliang Liu are essential to our ability to continue to grow our business. They have established relationships with customers and suppliers within the industries in which we operate.   If one or more of these key employees were to leave us, our relationships with our customers and suppliers may become strained, and our growth strategy might be hindered, which could limit our ability to increase revenue.

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

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

In order to operate our business efficiently, we rely on short term bank financing to fund the purchase of raw materials.  As of December 31, 2013, we had approximately $424 million of short term debt  and lines of credit from 13 banks. Typically, the term for a short term bank loan is one year.  Bank loans are renewable at the banks’ option. In 2013, we paid back approximately $1,112 million and borrowed approximately $1,199 million in the form of short terms loans. If one or more of these banks were revoke their line of credit or fail to renew such line of credit when it is due, we would be unable to continue to purchase raw materials in the amounts necessary to continue production at our current capacity.

We continue to have significant concentration with regard to our revenue and raw material purchases.

For the year ended December 31, 2013, our five largest customers accounted for 27% of our total sales. For the year ended December 31, 2012, our five largest customers accounted for 35% of our total sales. Sales to one major customer accounted for 6% and 13% of our total annual net revenue for the fiscal years 2013 and 2012, respectively. As our customer base may change from year-to-year, during such years that the customer base is comparatively highly concentrated, the loss of, or reduction of our sales to, any of such major customers could have a material adverse effect on our business, operating results and financial condition.

We currently buy a majority of our heavy oil, an important component of our products, from three suppliers. Although there are a limited number of suppliers of the particular heavy oil used in production, management believes that other suppliers could provide similar heavy oil on comparable terms. A change in suppliers, however, could cause a delay in manufacturing and a possible loss of sales, which would affect operating results adversely. Purchases (net of VAT) from the largest three suppliers for the years ended December 31, 2013 and 2012 were approximately $463 million and $549 million, respectively. These purchases represented 73% and 78%, respectively of all of the Group’s purchases for the years ended December 31, 2013 and 2012. The Company’s largest supplier accounted for approximately $355 million and $473 million, or 57% and 68% of total purchases for the years ended December 2013 and 2012, respectively.

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

The total estimated cost of our expansion plan is approximately $491.8 million, including $300 million for Guangxi Project, $19.8 million for the catalytic cracking processing equipment, $30 million for transformer oil facility and $99.5 million for the SSBR production facility, $40 million for the increased annual design capacity of ethylene- styrene, and $2.5 million for additional storage capacity.  

We plan to fund these expansions through short-term borrowings, cash from operations and potential equity financing. However, our ability to obtain additional capital on acceptable terms is subject to a variety of uncertainties, including, but not limited to:

● investors’ perception of, and demand for, securities of petrochemical manufacturing and supply companies;

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● conditions of the U.S. and other capital markets in which we may seek to raise funds;

● our future results of operations, financial condition and cash flow;

● PRC governmental regulation of foreign investment in petrochemical manufacturing companies in China;

● economic, political and other conditions in China; and

● PRC governmental policies relating to foreign currency borrowings

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

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

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

Our operating results depend largely on the uninterrupted operation of our business. Our facilities are located at Beilun, Ningbo, China, by the east coast. Severe weather conditions and natural disasters, such as hurricanes, storms, floods, and other severe weather events could disrupt our operations. Additionally, we are located in an industrial park where the infrastructure such as the electricity grid is in need of periodic upgrade. Disruptions to our operations due to natural conditions discussed above and/or mandatory power shutdowns due to the periodic electricity grid upgrades could significantly affect our ability to manufacture and/or sell products, which would result in a substantial loss of sales and revenues and substantial harm to our operating results.

Our manufacturing processes could expose us to substantial product liability claims, which may negatively impact our profitability.

We face an inherent business risk of exposure to product liability claims in the event that the use of our products is alleged to have resulted in adverse side effects. Side effects or marketing or manufacturing problems pertaining to any of our products could result in product liability claims or adverse publicity. These risks will exist for those products in clinical development and with respect to those products that have received regulatory approval for commercial sale. To date, we have not experienced any product liability claims. However, that does not mean that we will not have any such claims with respect to our products in the future which may negatively impact our profitability.

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

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

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

Notwithstanding the foregoing corrective actions, we cannot currently ensure that our controls and procedures will be effective at any time in the immediate future.  Moreover, in order to improve our controls and procedures we anticipate that we will continue to incur significant costs.  Failure to properly improve our controls and procedures could result in our failure to meet our reporting obligations, result in the restatement of our past financial statements, cause harm to our operating results, subject us to regulatory scrutiny and sanction, cause investors to lose confidence in our reported financial information and have a negative effect on the market price for shares of our common stock, all of which present significant risk to our investors.

Insurance coverage for some of our operations may be insufficient to cover losses.

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

Failure to comply with environmental laws and regulations may have a material adverse effect on our business and results of operations.

We are subject to various PRC environmental laws and regulations that require us to obtain environmental permits for our operations. We have obtained relevant environmental licenses or approvals to conduct the manufacturing of petrochemical products in our operating subsidiary Ningbo Keyuan. If we fail to obtain all required environmental permits for our operations, or fail to comply with the provisions of our permit, we could be subject to fines, criminal charges or other sanctions by regulators, including the suspension or termination of our operations. We are required to comply with extensive and complex environmental laws and regulations at various levels in the PRC relating to, among other things:

● the handling of petrochemical products;

● the operation of petrochemical product storage facilities;

● workplace safety;

● environmental damage; and

● hazardous waste disposal.

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

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

Our manufacturing technologies and process, some of which have not been patented or registered as our property, are key components of our competitive advantage and our growth strategy. We also rely on confidentiality and license agreements with certain of our employees, customers and others to protect the confidentiality of our technologies. If we are unable to adequately protect the confidentiality of these technologies, our business, results of operations, financial condition and prospects could be materially and adversely affected.

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

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

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

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

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We may face litigation and/or regulatory action as a result of certain events.

As a result of certain events, including but not limited to the delisting of our stock from the NASDAQ, our failure to file periodic reports as they were due for approximately six months and our failure to comply with certain registration requirements related to common shares underlying our preferred stock and warrants, we became subject to litigation from shareholders and other investors.  In November 2011, The Rosen Law Firm filed a class action law suit against us. We believe there is no basis to the law suit and intend to defend the law suit vigorously. In addition, in February 2014, The Brown Law Firm filed a derivative law suit against us and certain directors and officers. We believe there is no basis to the derivative law suit and intend to defend the law suit vigorously. Additionally, we may also become subject to regulatory enforcement actions in either the U.S. and/or China.  If we are forced to defend either a civil law suit brought by outside shareholders or investors and/or a regulatory action, we will be required to expend significant additional funds that could otherwise be utilized for business purposes.  Additionally, defense of such claims will result in management expending additional time and focus in connection with such defense that may materially impact its ability to effectively run our business.

Risks Relating to Regulation of Our Business

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

There are substantial uncertainties regarding the interpretation and application of the PRC laws and regulations, including, but not limited to, the laws and regulations governing our business and our ownership of the equity interests in our PRC subsidiaries, both of which are wholly foreign owned enterprise under the PRC laws. PRC laws and regulations are frequently subject to change due to rapid economic and social development and many of them were newly enacted within the last 10 years. The effectiveness of newly enacted laws, regulations or amendments may be delayed, resulting in detrimental reliance by foreign investors. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively.

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

Our PRC subsidiaries will be subject to restrictions on dividend payments.

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

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PRC regulations on loans and direct investments by overseas holding companies in PRC entities may delay or prevent us to make overseas loans or additional capital contributions to our PRC subsidiary.

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

Under the PRC Enterprise Income Tax Law, we may be classified as a “resident enterprise” of China, and such classification would likely result in unfavorable tax consequences to us and our non-PRC stockholders.

On March 16, 2007, the National People’s Congress (the “NPC”), approved and promulgated the new PRC Enterprise Income Tax Law (herein referred as the “EIT Law”). The EIT Law took effect on January 1, 2008. Under the EIT Law, Foreign Investment Enterprises (“FIEs”), and domestic companies are subject to a uniform tax rate of 25%.

In addition, under the EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the EIT Law define de facto management as “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise. On April 22, 2009, the State Administration of Taxation, or the SAT, issued a circular, or SAT Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China, which include all of the following conditions: (a) the location where senior management members responsible for an enterprise’s daily operations discharge their duties; (b) the location where financial and human resource decisions are made or approved by organizations or persons; (c) the location where the major assets and corporate documents are kept; and (d) the location where more than half (inclusive) of all directors with voting rights or senior management have their habitual residence. Further to SAT Circular 82, on August 3, 2011, the SAT issued the Administrative Measures of Enterprise Income Tax of Chinese-Controlled Offshore Incorporated Resident Enterprises (Trial), or SAT Bulletin 45, to provide more guidance on the implementation of SAT Circular 82; the bulletin became effective on September 1, 2011. SAT Bulletin 45 further clarifies certain issues in the areas of resident status determination, post-determination administration and competent tax authorities.It also specifies that when provided with a copy of Chinese tax resident determination certificate from a resident Chinese controlled offshore incorporated enterprise, the payer should not withhold 10% income tax when paying the Chinese-sourced dividends, interest, royalties, etc. to the Chinese controlled offshore incorporated enterprise. Although SAT Circular 82 and SAT Bulletin 45 only apply to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners, the determining criteria set forth in SAT Circular 82 and SAT Bulletin 45 may reflect the SAT’s general position on how the “de facto management body” text should be applied in determining the tax resident status of all offshore enterprises, regardless of whether they are controlled by PRC enterprises or individuals. Due to lack of applicable legal precedents, it remains unclear how the PRC tax authorities will determine the PRC tax resident treatment of a foreign company controlled by individuals like us.

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

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

If we receive any dividends from our PRC subsidiaries in the future, the dividends may be subject to PRC withholding tax.

The EIT Law and the Implementation Rules of the EIT Law provides that an income tax rate of 10% may be applicable to dividends payable to non-PRC investors that are “non-resident enterprises”, which (i) do not have an establishment or place of business in the PRC, or (ii) have such establishment or place of business in the PRC but the relevant income is not effectively connected with the establishment or place of business, to the extent such dividends are derived from sources within the PRC. The income tax for non-resident enterprises shall be subject to withholding at the income source, with the payer acting as the obligatory withholder under the EIT Law, and therefore such income taxes are generally called withholding tax in practice. We are an offshore holding company. Thus, if Keyuan HK is considered as a “non-resident enterprise” under the EIT Law and the dividends paid to us by our subsidiaries in the PRC are considered income sourced within the PRC, such dividends may be subject to a withholding tax at a rate of 10%, unless otherwise reduced or exempted according to arrangement or treaty between the PRC central government and governments of other regions or countries where the “non-resident enterprise”is incorporated orresident.

In January 2009, the State Administration of Taxation, or SAT, promulgated the Provisional Measures for the Administration of Withholding of Enterprise Income Tax for Non-resident Enterprises (“Measures”), pursuant to which, the entities which have the direct obligation to make the following payment to a non-resident enterprise shall be the relevant tax withholders for such non-resident enterprise, and such payment includes: incomes from equity investment (including dividends and other return on investment), interests, rents, royalties, and incomes from assignment of property as well as other incomes subject to enterprise income tax received by non-resident enterprises in China. Given these Measures, our PRC subsidiaries have an obligation to withhold income tax in respect of the dividends paid to non-resident enterprise investors.

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

We face uncertainty from China’s Circular on Strengthening the Administration of Enterprise Income Tax on Non-Resident Enterprises' Share Transfer (Circular 698 that was released in December 2009 with retroactive effect from January 1, 2008.)

The Chinese State Administration of Taxation released a circular (“Circular 698”) on December 10, 2009 that addresses the transfer of shares by nonresident companies. Circular 698, which is effective retroactively to January 1, 2008, may have a significant impact on many companies that use offshore holding companies to invest in China. Pursuant to Circular 698, where the withholding agent does not withhold in accordance with laws or can’t perform the withholding obligation, the non-resident enterprises shall file a tax declaration with the PRC tax authority located at the place of the resident enterprise whose equity has been transferred, within seven days after the date of the equity transfer provided under the contracts, or the date the transferor receives the income, whichever is earlier.

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

There is uncertainty as to the application of Circular 698. For example, it is possible that the relevant PRC tax authorities have jurisdiction regarding requests for information over a wide range of foreign entities having no direct contact with China. Moreover, the relevant authority has not yet promulgated any formal provisions or formally declared or stated how to calculate the effective tax in the country or jurisdiction and to what extent and the process of the disclosure to the tax authority in charge of that Chinese resident enterprise. In addition, there are no formal declarations with regard to how to decide abuse of form of organization and reasonable commercial purpose, which can be utilized by us to balance if our company complies with the Circular 698. As a result, we may become at risk of being taxed under Circular 698 and we may be required to expend valuable resources to comply with Circular 698 or to establish that we should not be taxed under Circular 698, which could have a material adverse effect on our financial condition and results of operations.

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

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

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

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

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

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

We believe that the M&A Rules and CSRC approval are not required in the context of the share exchange under our share exchange transaction because (i) such share exchange is a purely foreign related transaction governed by foreign laws, not subject to the jurisdiction of PRC laws and regulations; (ii) at the time of Share Exchange, we were not an SPV formed or controlled by PRC companies or PRC individuals; (iii) Ningbo Keyuan was established as a Sino-foreign joint venture by means of direct investment rather than by merger or acquisition of an existing PRC domestic company; (iv) at the time of Share Exchange, we were owned and  controlled by foreigners; and (v) there is no clear requirement in the New M&A Rule that would require an application to be submitted to the MOFCOM or CSRC for the approval of the listing and trading of our common stock on the U.S. security market. However, we cannot be certain that the relevant PRC government agencies, including CSRC, would reach the same conclusion, and we still cannot rule out the possibility that CSRC may deem that the transactions effected by the share exchange circumvented the M&A Rules, the PRC Securities Law and other rules and notices.

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

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

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

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

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

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

In December 2006, the People’s Bank of China promulgated the Administrative Measures of Foreign Exchange Matters for Individuals, which set forth the respective requirements for foreign exchange transactions by individuals (both PRC or non-PRC citizens) under either the current account or the capital account. In January 2007, SAFE issued implementing rules for the Administrative Measures of Foreign Exchange Matters for Individuals, which, among other things, specified approval requirements for certain capital account transactions such as a PRC citizen’s participation in the employee stock ownership plans or stock option plans of an overseas publicly-listed company. In March 2007, SAFE promulgated the Application Procedures of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Ownership Plan or Stock Option Plan of Overseas-Listed Company, or the 2007 Stock Option Rules. In February 2012, SAFE promulgated the Notice on Issues Related to Foreign Exchange Administration on Domestic Individuals' Participation in Equity Incentive Plans of Overseas-Listed Company, which replaced the 2007 Stock Option Rules. Under current effective rules, if a PRC resident participates in any equity incentive plan of an overseas publicly-listed company, a qualified PRC domestic agent must, among other things, file on behalf of such participant an application with SAFE to conduct the SAFE registration with respect to such equity incentive plan and obtain approval for an annual allowance with respect to the purchase of foreign exchange in connection with the exercise or sale of stock options or stock such participant holds. Such participating PRC residents' foreign exchange income received from the sale of stock and dividends distributed by the overseas publicly-listed company must be fully remitted into a PRC collective foreign currency account opened and managed by the PRC agent before distribution to such participants.

Further, a notice concerning the individual income tax on earnings from employee share options jointly issued by Ministry of Finance, or the MOF, and the State Administration of Taxation, or the SAT, and its implementing rules, provide that domestic companies that implement employee share option programs shall (a) file the employee share option plans and other relevant documents to the local tax authorities having jurisdiction over them before implementing such employee share option plans; (b) file share option exercise notices and other relevant documents with the local tax authorities having jurisdiction over them before exercise by the employees of the share options, and clarify whether the shares issuable under the employee share options mentioned in the notice are the shares of publicly listed companies; and (c) withhold taxes from the PRC employees in connection with the PRC individual income tax.

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

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Failure to comply with PRC laws and regulations relating to the environmental protection and safety in production requirements in China may result in severe penalties and liabilities.

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

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

Risks Associated With Doing Business in China

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

Our operations and assets in China are subject to significant political and economic uncertainties.

Changes in PRC laws and regulations, or their interpretation, or the imposition of confiscatory taxation, restrictions on currency conversion, imports and sources of supply, devaluations of currency or the nationalization or other expropriation of private enterprises could have a material adverse effect on our business, results of operations and financial condition. Under its current leadership, the Chinese government has been pursuing economic reform policies that encourage private economic activity and greater economic decentralization. There is no assurance, however, that the Chinese government will continue to pursue these policies, or that it will not significantly alter these policies from time to time without notice.

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We derive all of our sales from China.

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

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

Our reporting currency is the U.S. dollar and our operations in China use their local currency as their functional currencies. Substantially all of our revenue and expenses are in Chinese Renminbi. We are subject to the effects of exchange rate fluctuations with respect to any of these currencies. For example, the value of the Renminbi depends to a large extent on Chinese government policies and China’s domestic and international economic and political developments, as well as supply and demand in the local market. Since 1994, the official exchange rate for the conversion of Renminbi to the U.S. dollar had generally been stable and the Renminbi had appreciated slightly against the U.S. dollar. However, on July 21, 2005, the Chinese government changed its policy of pegging the value of Chinese Renminbi to the U.S. dollar. Under this policy, Chinese Renminbi may fluctuate within a narrow and managed band against a basket of certain foreign currencies. . As a result of this policy change, Chinese Renminbi depreciated approximately 0.06% against the U.S. dollar in 2009 and appreciated approximately 3.57% in 2010. Chinese Renminbi further appreciated approximately 4.86% in 2011.Chinese Renminbi further appreciated approximately 0.244% in 2012 and appreciated approximately 3.00% in 2013 It is possible that the Chinese government could adopt a more flexible currency policy, which could result in more significant fluctuation of Chinese Renminbi against the U.S. dollar. We can offer no assurance that Chinese Renminbi will be stable against the U.S. dollar or any other foreign currency.

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

Although Chinese governmental policies were introduced in 1996 to allow the convertibility of Chinese Renminbi into foreign currency for current account items, conversion of Chinese Renminbi into foreign exchange for capital items, such as foreign direct investment, loans or securities, requires the approval of SAFE which is under the authority of the People’s Bank of China. These approvals, however, do not guarantee the availability of foreign currency conversion. We cannot be sure that we will be able to obtain all required conversion approvals for our operations or that Chinese regulatory authorities will not impose greater restrictions on the convertibility of Chinese Renminbi in the future. Because a significant amount of our future revenue may be in the form of Chinese Renminbi, our inability to obtain the requisite approvals or any future restrictions on currency exchanges could limit our ability to utilize revenue generated in Chinese Renminbi to fund our business activities outside of China, or to repay foreign currency obligations, including our debt obligations, which would have a material adverse effect on our financial condition and results of operations.

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

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

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

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

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

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

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

● changes in taxation,

● changes in employment restrictions,

● import duties, and

● currency revaluation.

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

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Failure to comply with the U.S. foreign corrupt practices act and Chinese anti-corruption laws could subject us to penalties and other adverse consequences.

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

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

Changes in foreign exchange regulations in the PRC may affect our ability to pay dividends in foreign currency or conduct other foreign exchange business.

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

The Chinese government exerts substantial influence over the manner in which we must conduct our business activities.

China has only permitted provincial and local economic autonomy and private economic activities the last three decades, and, as a result, we are dependent on our relationship with the local government in the province in which we operate our business. Chinese government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, environmental regulations, land use rights, property and other matters. We believe that our operations in China are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of these jurisdictions may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations. Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof, and could require us to divest ourselves of any interest we then hold in Chinese properties.

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PRC employment contract law and increases in the labor costs in China may hurt our business and profitability.

A Chinese Employment Contract Law that became effective on January 1, 2008, imposes more stringent requirements on employers in relation to entry into fixed-term employment contracts, recruitment of temporary employees and dismissal of employees. In addition, under the Regulations on Paid Annual Leave for Employees, which also became effective on January 1, 2008, employees who have worked continuously for more than one year are entitled to a paid vacation ranging from 5 to 15 days, depending on the length of the employee’s service. Employees who waive such vacation entitlements at the request of the employer will be compensated for three times their normal daily salaries for each vacation day so waived. Pursuant to the PRC Employment Contract Law and its latest amendments effective on July 1, 2013, dispatched employees are intended to be a supplementary form of employment and shall only apply to provisional, auxiliary or substitutive positions, and the fundamental form should be direct employment by enterprises and organizations that require employees. It is expressly stated that the number of dispatched employees an employer uses may not exceed a "certain percentage" of its total labor force. The Interim Provisions on Labor Dispatch which came into force on March 1, 2014, further set such percentage at 10% and provide a two-year transitional period for compliance with such requirement. Failure to comply with these requirements may result in orders of rectification and imposition of fines. As a result of the new law and regulations, our labor costs may increase. There is no assurance that disputes, work stoppages or strikes will not arise in the future.

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

Future inflation in China may inhibit our ability to conduct business in China.

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

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

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

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

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

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

The Chinese legal system is similar to a civil law system based on written statutes. Unlike common law systems, it is a system in which decided legal cases have little precedential value. Although legislation in the PRC over the past 35 years has significantly improved the protection afforded to various forms of foreign investment and contractual arrangements in the PRC, these laws, regulations and legal requirements are relatively new. Due to the limited volume of published judicial decisions, their non-binding nature, the short history since their enactments, the discrete understanding of the judges or government agencies of the same legal provision, inconsistent professional abilities of the judicators, and the inclination to protect local interest in the court room, interpretation and enforcement of PRC laws and regulations involve uncertainties, which could limit the legal protection available to us, and foreign investors, including you. The inability to enforce or obtain a remedy under any of our future agreements could result in a significant loss of business, business opportunities or capital and could have a material adverse impact on our business, prospects, financial condition, and results of operations. In addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until some time after the violation. In addition, any litigation in the PRC, regardless of outcome, may be protracted and result in substantial costs and diversion of resources and management attention.

Risks Related to our Securities

Insiders have substantial control over us, and they could delay or prevent a change in our corporate control even if our other stockholders wanted it to occur.

Mr. Chunfeng Tao, our Chairman, Chief Executive Officer and President, owns 45.6132% of the equity of Delight Reward Limited. Delight Reward Limited holds 47,558,000 shares of our common stock, representing approximately 82.68% of our common stock. Accordingly, Mr. Tao (indirectly controls approximately 56.94% of our common stock)  is able to control all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This could delay or prevent an outside party from acquiring or merging with us even if our other stockholders wanted it to occur.

There may not be sufficient liquidity in the market for our securities in order for investors to sell their securities and the market price of our common stock may be volatile.

There is currently only a limited public market for our common stock and there can be no assurance that a trading market will develop further or be maintained in the future. The market price of our common stock has been and will likely continue to be highly volatile, as is the stock market in general. Some of the factors that may materially affect the market price of our Common Stock are beyond our control, such as changes in financial estimates by industry and securities analysts, conditions or trends in the industry in which we operate or sales of our common stock. Additionally, on April 1, 2011 trading in our common stock was halted by Nasdaq and on October 5, 2011, our common stock was delisted from Nasdaq.  On October 7, 2011, our stock began trading on the Pink Sheets and is currently trading on the OTC Bulletin Board.  It is likely that our stock will experience significant pressure for some time as a result of the lack of liquidity during the period in which it was halted.

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

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

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

Because our common stock is quoted on the OTC Markets and is subject to the “Penny Stock” rules, investors may have trouble reselling their shares.

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

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

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

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ITEM 1B. UNSOLVED STAFF COMMENTS

Not applicable.

ITEM 2. DESCRIPTION OF PROPERTY

All land in China is owned by the State.  Individuals and companies are permitted to acquire rights to use land or land use rights for specific purposes.  In the case of land used for industrial purposes, the land use rights are granted for a certain period no more than 50 years.  This period may be renewed at the expiration of the initial and any subsequent terms.  Granted land use rights are transferable and may be used as security for borrowings and other obligations. We currently own land use rights to approximately 2.5 million square feet of land, including land for our existing production facility and land for future expansions, and approximately 53,000 square feet of buildings consisting of an employee dormitory in Ningbo, China.  

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

Address		Size	Leased/Owned/Granted	Function
1	Qingshi Industrial Park, Beilun District, Ningbo, Zhejiang, China	231,084 Square Meters (approximately 2,487,000 square feet)	Granted use rights	Plant land
2	No.8 Lianhe Road 239 Block, Qijiashan,Neighborhood,Beilun District, Ningbo, Zhejiang, China	4,948 Square Meters (approximately 53,000 square feet)	Owned	Dormitory Building

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

ITEM 3. LEGAL PROCEEDINGS

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

On November 15, 2011, the Rosen Law Firm filed a class action suit, alleging we had violated federal securities laws by issuing materially false and misleading statements and omitting material facts with regard to disclosure of related party transactions and effectiveness of internal controls in past public filings.  The case is currently at the discovery stage and we believe there is no basis to the suit filed by the Rosen Law Firm and intend to contest the case vigorously.

On February 13, 2014, the Brown Law Firm filed a derivative action suit on behalf of the Company, alleging certain and former current officers and directors of the Company had violated their fiduciary duties between at least April 22, 2010 to October 20, 2011. All proceedings and discovery in the derivative action is currently stayed by the United States District Court for the Southern District of New York until July 7, 2014, at which time the Company and certain individuals need to file their respective answers. Management intends to contest the case vigorously or alternatively to settle the matter in an appropriate manner.

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

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

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PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITY

Our common stock is traded on the Over-the-Counter Bulletin Board under the symbol “KEYP”; our cusip number is 493722102. 

The following table sets forth the quarterly high and low bid prices for the common stock since the quarter ended March 31, 2012.  The prices set forth below represent inter-dealer quotations, without retail markup, markdown or commission and may not be reflective of actual transactions.

	High		Low
The quarter ended March 31, 2012		1.40		0.30
The quarter ended June 30, 2012		1.77		1.35
The quarter ended September 30, 2012		1.53		0.50
The quarter ended December 31, 2012		1.1		0.56
The quarter ended March 31, 2013		1.3		0.30
The quarter ended April 30, 2013		1.40		0.58
The quarter ended June 30, 2013		1.40		0.85
The quarter ended September 30, 2013		1.05		0.60
The quarter ended December 31, 2013		0.97		0.49
The quarter ended March 31, 2014		1.15		0.58

On May 19, 2014, the closing bid price of the common stock was $0.86 and we had approximately 99 record holders of our commons stock and one (1) record holder of our Series B Preferred Stock. This number excludes any estimate by us of the number of beneficial owners of shares held in street name, the accuracy of which cannot be guaranteed.

As of  May 19, 2014 , there are (i) three-year Series C Warrants to purchase up to 810,001 shares of Common Stock, at an exercise price of $4.50 per share, expiring on September 28, 2014; and (ii) three-year Series D Warrants to purchase up to 810,001 shares of Common Stock, at an exercise price of $5.25 per share expiring on September 28, 2014. In connection with the September 2010 Private Placement, we granted placement agent warrants to purchase up to 561,601 shares of Common Stock to Tripoint Global Equities, Inc expiring on September 28, 2014.  

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

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Dividend Policy

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

Description of Equity Compensation Plans

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

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights			Weighted-average  exercise  price of outstanding options, warrants and rights		Number of securities remaining available for further  issuance  under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders		2,890,000	(1)(2)	$	4.2		2,820,000
Equity compensation plans not approved by security holders		100,000	(3)	$	4.5
Total		3,030,000					2,820,000

(1)   On June 30, 2010, we granted stock options to certain senior management employees to purchase in the aggregate 3,000,000 shares of common stock at an exercise price of $4.20 per share and the grant-date fair value of these stock options amounted to $3,347,298. However, options to purchase in the aggregate 150,000 shares of common stock were later forfeited in 2010 because two optionees left the Company. The remaining 2,850,000 options all vested as of December 31, 2013.

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(2)   On July 1, 2010, we granted stock options to two independent directors with contractual terms of 5 years. The exercise price of these stock options is $4.20 per share and the grant-date fair value of these stock options amounted to $91,349. A total of 40,000 options vested and became exercisable one year after the grant date.  The remaining 40,000 options were later forfeited on June 29, 2012 because two independent directors resigned from the board.

(3)   On August 4, 2010, we granted five-year options to 79 managers and employees to purchase in the aggregate 700,000 shares of the Company’s common stock at an exercise price of $4.50 per share, in consideration of their services to the Company.  The shares were issued in accordance with the exemption from the registration provisions of the Securities Act of 1933, as amended, provided by Section 4(2) of such Act for issuances not involving any public offering and Regulation S promulgated under the Securities Act of 1933, as amended. We made this determination based upon the representations of the respective Optionees that none of them were “U.S. person[s]” as that term is defined in Rule 902(k) of Regulation S under the Securities Act. Based on feedback received from the employees after the option award which indicated that most of those employees would prefer tangible cash rewards, management proposed canceling  600,000 of these stock options that had been granted to 77 of the 79 employees. On December 29 2010, the Board of Directors approved the proposal to cancel such stock options. The reset of 100,000 stock options vested as of December 31, 2013

Recent Sales of Unregistered Securities

None.

Repurchases of Equity Securities

On September 17, 2012, our Board of Directors authorized the repurchase of $2 million of the Company’s stock for up to $1.50 per share.  On December 31, 2012, the Company engaged TriPoint Global Equities LLC (“TriPoint Global”) as its agent to design and execute the stock repurchase program, that complies with the requirements of Rule 10b5-1(c)(1) and Rule 10b-18 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As of March 31, 2014, the Company had purchased 310,424 shares of common stock through the stock repurchase program. On April 1, 2014, in connection with the delay in filing our Annual Report on Form 10-K for the year ended December 31, 2013, we decided to temporarily suspend the stock repurchase program with an intention to resume once we file this report.

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of  Publicly Announced Plans or Programs		Approximate Dollar Value of Shares that May Yet Be  Purchased Under the Plans or Programs
December 1 - December 31, 2012		0	$	0.00		0	$	2,000,000
January 1 - January 31, 2013		11,200	$	0.73		11,200	$	1,991,861
February 1 - February 28, 2013		15,850	$	0.77		15,850	$	1,979,668
March 1 - March 31, 2013		90,504	$	1.25		90,504	$	1,866,488
April 1-April 30 ,2013		3,300	$	1.44		3,300	$	1,861,740
October1- October 30, 2013		618	$	0.99		618	$	1,861,126
November 1-November 31,2013		1,486	$	0.80		1,486	$	1,859,933
December 1-December 31,2013		3,190	$	0.78		3,190	$	1,857,440
January 1-January 31, 2014		37,196	$	0.71		37,196	$	1,831,031
February 1-February 28, 2014		65,348	$	0.89		65,348	$	1,772,871
March 1-March 31, 2014		81,732	$	1.02		81,732	$	1,689,504
Total		310,424	$	0.94		310,424	$	N/A

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ITEM 6. SELECTED FINANCIAL DATA

Not applicable.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

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

Overview

Operating through our wholly-owned subsidiaries, Ningbo Keyuan, Ningbo Keyuan Petrochemicals, Keyuan Keyuan Synthetic Rubbers and Guangxi Keyuan, 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) a Styrene-Butadience-Styrene (the “SBS”) production facility with a designed annual production capacity of 70,000 MT, (iii) facilities for the storage and loading of raw materials and finished goods and (iv) 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 January 2012, we signed a cooperation agreement with Fangchenggang City to build a new petrochemicals production facility for Guangxi Project. According to the cooperation agreement, the government of Fangchenggang City is responsible for providing the land use rights for the facility. This new production facility, as a part of our expansion plan, will improve our competitive position by extending and expanding our supply chain and manufacturing base. Once the facility is fully operational, it is expected to have an annual production capacity of 400,000 metric tons of ABS. In August, 2013, we commenced engineering and facility construction. We are currently in the process of land leveling which is expected to be completed in the second quarter of 2014. According to the current schedule, construction of facilities and installation of pipe lines will be complete by the end of 2014. However, our schedule is subject to further adjustment pending the status of financing. The total investment amount to construct this new production facility is approximately USD $300 million.  We plan to fund the construction and operation of the new production facility through outside financing. If such financing is not available on terms acceptable to us, construction of this facility will be delayed until appropriate financing is available.

Our Facility and Equipment

Facility

As of December 31, 2013, we have invested a total of approximately $62.6 million in the construction and improvement of our production facility. Our current production facility encompasses approximately 1.3 million square feet, including 594,000 square feet for production and 19,500 square feet for laboratories and offices. We also acquired the land use right of an additional 1.2 million square feet of land in August 2010 for our expansion.

We have a total of 100,000 MT of storage capacity, consisting of 50,000MT of storage capacity for raw materials and 50,000 MT for finished products. As a part of our expansion plan, we intend to add 50,000 MT of new storage capacity in 2014, after which our total storage capacity will be 150,000 MT. We completed construction of two new  tanks with approximately 34,000 MT of storage capacity in June 2013 and the installation of pilings and pumps  was completed at the end of October 2013. At the date of this Report, we are waiting for the local environmental department to conduct its inspection. Once we obtain the approval from the local environmental department, the two storage tanks can become operational. We expect that the operation will commence by the end of May, 2014.  For the rest of approximately 16,000 MT of new storage capacity, we are planning to start the construction in June, 2014 and expect to complete the work at the end of September, 2015.

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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. During the first three months of 2014, we started the application to the local government in Ningbo to upgrade the classification of our own dock so that we can unload foreign cargo vessels under the 50,000 MT cargo capacity to our dock directly. We expect that the upgrading will be completed by the end of 2016 and we will be able to save additional logistics costs and storage fees once it is completed.

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.

Expansion Plan

As a part of our expansion plan, we intend to add 50,000 MT of new storage capacity in 2014, after which our total storage capacity will be 150,000 MT. We finished construction of two new tanks in the second quarter of 2013 and installation of piling and pumps in the fourth quarter of 2013. We are currently waiting for the local environmental department to conduct inspection and we expect to obtain its approval for operation in late May, 2014. For the rest of approximately 16,000 MT of new storage capacity, we are planning to start the construction in June, 2014 and expect to complete the work at the end of September, 2015.

Our SBS facility was completed in September 2011 as a part of our expansion plan. It currently has two production lines in commercial production. SBS has a higher product margin compared to other petrochemical products we are producing and a wide range of applications in the footwear, adhesive, polymer modification and modified asphalt industries. Our SBS facility achieved a 41% utilization rate in 2012, the first full year of production, and generated approximately $71 million in sales and $5.9 million in profits. We achieved a 63% utilization rate in 2013 annual production plan of 63,000 MT of; and generated approximately $78 million in sales and $5.6 million in profits. 

We expect to generate net profit margins of 10% from our production of SBS once the facility reaches normal production levels, which means the actual production volume exceeds 80% of the design capacity. However, market conditions, the volatility of feedstock and SBS product prices can significantly impact the estimated profitability and we cannot guarantee that our SBS production will achieve 80% or more of the designed capacity in the future.

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We acquired the approval to start our catalytic oil processing facility and transformer oil plant with the Ningbo local government in February 2013.  The foundation piling work was completed in July 2013 and as of the date of this filing we have completed 95% of the construction of the main body of the facility and infrastructure.  We expect to start trial operation in late May, 2014, at which time we will be able to produce medical use and edible products such as tubes and chewing gum. As of December 31, 2013, the amounts invested for the catalytic oil processing facility was $15.9 million USD.

In order to develop our business to meet the increasing customer demands, we have been working to expand our manufacturing capacity by focusing on the following improvements to our infrastructure. In anticipation of the market demand for the production of finished goods, environmental protection requirements, we adjusted our original expansion project and are currently working to refining our manufacturing capacity to include:

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

Expansion Project	Expected Completion Date
Oil Catalytic Processing Facility	End of Q4, 2014
Ethylene-Styrene Facility	End of Q2, 2015
Transformer Oil Facility	End of Q3, 2014
SSBR production facility	End of Q4, 2015
ABS Production Facility	End of Q4, 2016
New storage capacity of 50,000 MT	End of Q3, 2015

The total estimated cost of our expansion plan is approximately $491.8 million, including $300 million for Guangxi Project, $19.8 million for the catalytic cracking processing equipment, $30 million for transformer oil facility and $99.5 million for the SSBR production facility, $40 million for the increased annual design capacity of ethylene- styrene, and $2.5 million for additional storage capacity.  Upon full completion of our expansion, our total production capacity will reach 1,723,000 MT per year including, but not limited to, our current petrochemical production of 720,000 MT, styrene of 200,000 MT, catalytic cracking oil of 200,000 MT, ABS of 400,000 MT, SSBR of 150,000 MT and transformer oil of 100,000 MT. The following chart depicts the breakdown of our planned production capacity of 1,723,000 MT.

Going concern and management’s plans

For the year ended December 31, 2013, we reported net income of approximately $4.6 million and cash flow used in operations of approximately $53 million. At December, 31, 2013, we had a working capital deficit of approximately $209.7 million.

The Report of the Independent Registered Public Accounting Firm on our consolidated financial statements as of and for the year ended December 31, 2013 includes a going concern explanatory paragraph which means that the accounting firm has expressed substantial  doubt about the Company’s ability to continue as a going concern.

Although the Company continues to finance its operations primarily through short-term bank borrowings, management’s realignment of product profiles, along with the general stabilization of the petrochemical industry in China resulted in a net income of $ 4.6 million in 2013 compared to a net loss of $5.8 million in 2012.

Short-term bank borrowings and bills payable amounted to approximately $686 million at December 31, 2013. Management expects that short-term bank financing will continue to be available through at least December 31, 2014.  Furthermore, as management expects that the petrochemical industry in China will continues to stabilize and that demand for downstream products (such as auto, home appliances and dyes) grow following several years of contraction, as such Management expects that the company’s overall profits will also grow.

As reported in our financial statements for the years ended December 31, 2013 and 2012, we continue to benefit from favorable PRC tax policies related to consumption tax. As of December 31, 2013, we had a consumption tax refund receivable of approximately $46.1 million. In April 2014, approximately $36.1 million was refunded and management expects that additional consumption tax deposits of approximately $0.4 million will be refunded in May 2014, and that approximately $9.6 million will be deductible against future consumption tax obligations.

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In order to improve our operational results and financial situation, we are adjusting our product portfolio to include SEBS which will yield a higher gross margin than some of our current products.  SEBS is a product similar to SBS but with more durable product feature, and can be produced by our current SBS facility. In order to achieve a stable production value, we started trial production of 200 MT per month from March 2013, and will start bulk production when the result of our lab analysis shows the condition of SEBS produced is suitable for sale. In addition, since late 2013, our industry has been steadily developing after a period of depression. We believe that the undertaking of our expansion plan ensures a sustainable and long-term growth. We are also exploring sources of additional financing, including short-term financing from our vendors and other parties. In addition, we are closely monitoring cash balances, cash needs and expense levels.

We are also exploring sources of additional financing, including short-term financing from our vendors and other parties. In addition, we are closely monitoring its cash balances, cash needs and expense levels.

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

Manufacturing and Sales

Our total production of finished products during the 12 months ended December 31, 2013 was 568,939 MT and revenue totaled $647 million, based on the sale of 566,916 MT of petrochemical products including 36,959 MT of SBS products. Our total production of finished products for fiscal year 2012 was 688,821 MT and revenue totaled $751 million from the sale of 675,484 MT of petrochemical products. The decrease in total production of finished products and revenues in 2013 was mainly due to 41 days of production suspension

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

Critical Accounting Policies and Estimates

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

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

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

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

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

Buildings	45 years
Machinery and equipment	5 to 20 years
Vehicles	5 years
Office equipment and furniture	3 to 10 years

During January 2013, management performed an assessment of the useful lives of certain machinery and equipment. In evaluating the useful lives, management considered the historical life of the assets, operational strategy, and related functionality. Management concluded that machinery and equipment would remain in service longer than the depreciable life assigned. Effective February 1, 2013, the Group changed the time period over which it depreciates machinery and equipment to 20 years from 15 years. Management believes that this change more clearly and appropriately reflects the state of the machinery and equipment and thus, more reasonably and accurately reports the value of the machinery and equipment on the balance sheet. This change is being accounted for as a change in estimate. This change in estimate resulted in a reduction of depreciation expense of approximately $3.1 million or approximately $0.05 per share for the year ended December, 2013.

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

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

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

Bills Receivable. In connection with the Company’s financing transactions, the Group may also obtain bills receivable in exchange for cash or payables.  These bills, which are sold at a discount prior to maturity, include provisions whereby the Group agrees to reimburse the accepting bank in the event that the related party counterparty fails to honor its liability to the accepting bank.

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Bills Payable. Bills payable represent bills issued by an accepting bank in favor of the Group’s suppliers. The Group’s suppliers receive payments from the accepting bank directly upon maturity of the bills, and the Group is obliged to repay the face value of the bills to the accepting bank. Bills that are not remitted directly by the Group to its suppliers may be sold by the Group to other accepting banks for cash prior to their maturity. Discounts paid are recorded as a component of interest expense.

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

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

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

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

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

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

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

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Results of Operations

The following table and analysis sets forth information from our statements of operations for the years ended December 31, 2013 and 2012 (amounts in thousands, except production and per metric ton amounts):

	For the Year Ended December 31						Year to Year Comparison
	2013			2012			Increase/ (decrease)			Percentage Change
Sales
Third Parties	$	646,549		$	750,628		$	(104,079	)		(13.9	%)
Related Parties		-
Total Sales		646,549			750,628			(104,079	)		(13.9	%)
Cost of Sale
Third Parties		620,040			721,519			(101,479	)		(14.1	%)
Related Parties		-
Cost of Sales		620,040			721,519			(101,479	)		(14.1	%)
Gross Profit		26,509			29,109			(2,600	)		(8.9	%)
Operating Expenses
Selling Expenses		1,563			1,132			431			38.1	%
General and administrative Expenses		14,736			12,510			2,226			17.8	%
Total Operating Expenses		16,299			13,642			2,657			19.5	%
Income from Operations		10,210			15,467			(5,257	)		(34	%)
Other Income(Expense)
Interest Income		8,422			5,940			2,482			41.8	%
Interest Expense		(18,809	)		(25,065	)		6,256			(25	%)
Foreign Exchange gain, net		10,118			(1,319	)		11,437			867.1	%
Liquidated damages expenses		-
Other income (expense), net		(1,833	)		(79	)		(1,754	)		2220.3	%
Total other expenses		(2,102	)		(20,523	)		18,421			(89.8	%)
Loss before provision for income taxes		8,108			(5,056	)		13,164			260.4	%
Income tax expense		3,476			794			2,682			337.8	%
Net Income		4,632			(5,850	)		10,482			179.2	%
Other comprehensive income
Foreign currency translation adjustment		2,754			945			1,809			191.4	%
Comprehensive Income/(loss)	$	7,386		$	(4,905	)		12,291			250.6	%

Sales: Our sales for the year ended December 31, 2013 were $ 646,549 compared to sales of $750,628 for the year ended December 31, 2012, a decrease of $104,078, or 13.9%. The substantial decrease in our sales is a result of 41 days production suspension for a routine maintenance of our production facilities.

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In 2013, we sold 529,957 MT of chemical products at an average price of $1.167 per MT, as compared to sales of 646,753 MT of chemical products at the average price of $1.051 per MT in 2012. This represents a reduction of 116,796 MT, or a decrease of approximately 18.1% in sold products. Compared with 15 days of production suspension for inspection in 2012, we lost 41 days of production for system maintenance during 2013.

In 2013, SBS production was 36,959 MT of finished products at an average sale price of $ 2.110 per MT generating sales of $77,984 In 2012, the SBS facility produced 28,730 MT of finished products at the average sale price of $ 2.471 per MT generating total sales of $70,992. Our sales for SBS products increased $ 6,992 or 9.8%. The main reason for the increase is that we became more experienced in stabilizing the facility operating conditions and reducing interruptions, as well as increasing the output after the first year’s trial operation.

We did not incur any sales to related parties for the years ended December 31, 2013 and 2012. For additional information on related party transactions, please refer to Footnote 22 of the financial statements. 

The breakdown of the 566,916 MT products produced is listed below.

Product	(Metric Tons)
BTX  Aromatics		275,923
LPG		93,377
MTBE and Others		29,337
Styrene		76,246
Propylene		55,074
SBS products		36,959
Total Metric Tons Sold		566,916

Cost of Sales: Cost of sales was $620,040 for the year ended December 31, 2013, or 96% of sales, compared to cost of sales of $721,519, or 96% of sales for the year ended December 31, 2012, a decrease of $101,479 or 14.06%. Our cost of sales are primarily composed of the costs of direct raw materials (mainly heavy oil, benzene and carbinol), labor cost, depreciation and amortization of manufacturing equipment and facilities, and other overhead.

The decrease in cost of sales in 2013 is mainly due to the 41 days of production suspension for system maintenance which is conducted every two years.

In addition to primary components of cost of sales, our cost of sales includes energy costs.Energy required for production of our products consists of water, electricity and steam, the costs of which are attributed to cost of sales rather than operating expense. The supply prices of these energy sources in China have been very stable historically as a result of PRC government policy. Accordingly, the potential impact of changing energy costs to our production is minimal. The following are the costs for water, electricity and stream for the year ended December 31, 2013 and 2012 (amounts in thousands):

	For the Year Ended December 31
	2013 (Unaudited)		2012 (Unaudited)
Water		1,367		1,338
Electricity		12,627		11,282
Steam		2,298		1,498

Total energy cost was approximately $16,262 for the year ended December 31, 2013, which constitutes approximately 2.52 % of sales. Total energy cost was approximately $14,118 for the year ended December 31, 2012, which constitutes approximately 1.88 % of sales.

Gross Profit: Gross profit for the year ended December 31, 2013 was $26,509, compared to $29,109 for the year ended December 31, 2012. The decrease of $2,600 in gross profit in 2013 is due to the decreased sales of products which subsequently causes the fixed cost and maintenance cost relatively higher compared to fiscal year 2012. In addition, we also have a gross loss of $ 1,637 in the trading activities of heavy oil with our suppliers in 2013, which is contributable to the decrease of gross profit.

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Operating Expenses: Operating expenses, including selling expenses, and general and administrative expenses, were $16,299, or 2.5 % of sales for the year ended December 31, 2013 as compared to $13,642, or 1.8% of sales for the fiscal year 2012, an increase of $2,657.  The increase is due to that we outsourced our SBS products packing service, which caused $0.4 million attributable to selling expense. We also took out the research and development expense (approximately $ 1.6 million), which had been included in our cost of production in 2012, and  rearranged it into the our operating expense in 2013, per the requirement of application for the qualification of “a “High and New Technology Enterprise”

Interest Income/Expense: For the year ended December 31, 2013, the interest income and expense was approximately $8,422 and $18,809, respectively; as compared to interest income and expense of approximately $5,940 and $25,065 for the year ended December 31, 2012, respectively. The increased interest income is mainly from the increased pledge bank deposit for the bank borrowing.  The decrease in interest expense is mainly due to the decreased rate of the discounted bills in addition to that  the weighted average interest rate for the short term borrowing also decreased from 6.21 % in 2012 to 5.63% in 2013.

Net Income: Net Income for the year ended December 31, 2013 was approximately $4,632, as compared to a net loss of approximately $5,850 for the year ended December 31, 2012, an increase of $10,482 or 179.2 %. The increase in net income was mainly due to the exchange gain of $10,712 from the appreciation of RMB. For instance,  the exchange rate for USD to RMB is 6.11 to 1 on December 31,2012 as compared to  6.3  to 1 on December 31, 2013.

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 gain of $2,754 for the year ended December 31, 2013 and gain of $945 for the year ended December 31, 2012, respectively. The balance sheet amounts at December 31, 2013 and 2012, with the exception of equity, were translated at RMB 6.1087 and RMB 6.3012 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 year ended December 31, 2013 and 2012 were RMB 6.1881 and RMB 6.3032, respectively, to 1.00 U.S. dollar.

Liquidity and Capital Resources

The Report of our Independent Registration Public Accounting Firm on the Company's financial statements as of and for the year ended December 31, 2013 includes a going concern explanatory paragraph which means that the auditors stated that conditions exist that raise substantial doubt about the Company's ability to continue as a going concern.

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

	For the Year Ended December 31 (in thousands)
	2013			2012
Net cash provided by (used in) operating activities	$	(52,961	)	$	(7,095	)
Net cash used in investing activities	$	(73,341	)	$	(54,417	)
Net cash provided by financing activities	$	115,231		$	77,488

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Net cash used in operating activities was $52,961 for the year ended December 31, 2013, as compared to $7,095 used in operating activities for the same period in 2012.  The increase in cash used in operating activities is primarily due to the increase in accounts payable, the prepaid VAT, inventories and prepayment to suppliers. We obtained less advances from customer in 2013 which was attributable to the increase in net cash used in operating activities in 2013. 

Net cash used in investing activities was approximately $73,341 and $54,417 for the years ended December 31, 2013 and 2012, respectively. The increase in net cash used in investing activities is primarily due to our increasing investments for the construction of infrastructures and facilities in accordance with our expansion plan.

Net cash provided by financing activities amounted to $115,231 for 2013 and $77,488 for 2012. The increase of $37,743 in net cash provided by financing activities in 2013 is primarily due to the increase in short-term bank borrowings for our operation and expansion plan.

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 December 31, 2013, we had an aggregate principal amount of approximately $424 million outstanding under the loan agreements, with maturity dates from February 2013 to  December 2013  and interest rates from 1.0%  to 7.2%  per annum. As of  the 19th of May 2014, we had an aggregate principal amount of approximately $553 million outstanding under the loan agreements, with maturity date throughMay, 2015, and interest rates from 1.00% to 6.72% per annum. The loan agreements contain customary affirmative and negative covenants and were mainly guaranteed by third parties and individual persons or secured by a lien on our property and equipment. Beginning in January 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. We paid approximately $2.6 million of compensation in respect of these guarantees for the year ended December 31, 2013. 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 December 31, 2013, 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 for our current operations. However, we are working to refining our manufacturing capacity to include an ABS facility, an oil catalytic cracking processing facility, an increased annual design capacity of ethylene-styrene facility to 200,000 MT, a transformer oil facility and a SSBR production facility. The total cost of additioal processing equipment for products refinement and SSBR production facility is approximately $149.3 million, including $49.8 million for additional processing equipment and $99.5 million for our SSBR production facility. We are currently going through the governmental approval and design phase of the ABS production facility and estimating the related costs. We plan to fund this proposed expansion through debt financing, cash from operations, proceeds from prior financings, warrant exercises, and potential equity financing. However, we may not be able to obtain additional financing at acceptable terms, or at all, and, as a result, our ability to increase our production capacity and to expand our business could be adversely affected.

ITEM 7A   QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Not Applicable

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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

Keyuan Petrochemicals, Inc.

We have audited the accompanying consolidated balance sheets of Keyuan Petrochemicals, Inc. and subsidiaries (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of comprehensive income (loss), stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2013.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Keyuan Petrochemicals, Inc. and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1(c) to the consolidated financial statements, the Company has experienced recurring net cash flows used in operations, and has a working capital deficiency at December 31, 2013 that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1(c). The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ GHP HORWATH, P.C.

Denver, Colorado

May 21, 2014

F-1

KEYUAN PETROCHEMICALS, INC. AND SUBSIDIAIRES

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data)
 

	Note	As of December 31
		2013			2012
ASSETS
Current assets:
Cash	2(d)	$	12,309		$	23,378
Pledged bank deposits	2(e)		336,363			201,252
Bills receivable	2(k)		25			3,968
Accounts receivable	2(g)		7,517			14,248
Inventories	3		69,914			48,634
Prepayments to suppliers	5		33,842			23,476
Consumption tax recoverable	6		46,072			51,334
Amounts due from related parties	22		43			40
Other current assets	7		65,189			56,320
Deferred income tax assets	18		2,641			2,801
Total current assets			573,915			425,451
Property, plant and equipment, net	8		285,506			227,603
Intangible assets, net	9		986			880
Land use rights	10		10,663			10,708
VAT recoverable			3,012			2,232
Total assets		$	874,082		$	666,874
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Short-term bank borrowings	11	$	424,436		$	295,146
Bills payable	2(k)		261,524			102,650
Accounts payable			59,043			130,387
Advances from customers	4		10,820			24,405
Accrued expenses and other payables	12		23,767			26,833
Income tax payable	19		1,849			2,344
Dividends payable			2,382			2,382
Amounts due to related parties	22		-			479
Total liabilities, all current			783,821			584,626
Series B convertible preferred stock:
Par value:$0.001; Authorized: 8000,000 shares issued and outstanding: 5,333,340 shares, liquidation preference $20,250	13		16,868			16,452
Commitments and contingencies	18		-			-
Stockholders’ equity:
Common stock:
Par value: $0.001; Authorized: 100,000,000 shares Issued and outstanding: 57,646,160 and 57,520,012 shares, respectively, as at December 31, 2013 and 2012			58			58
Additional paid-in capital			51,555			50,653
Statutory reserve	16		5,749			4,071
Accumulated other comprehensive income			10,245			7,491
Retained earnings			5,929			3,523
Treasury stock, at cost, 126,148 shares at December 31, 2013			(143	)		-
Total stockholders’ equity			73,393			65,796
Total liabilities and stockholders’ equity		$	874,082		$	666,874

See accompanying notes to the consolidated financial statements.

F-2

KEYUAN PETROCHEMICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

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

	Note	Year Ended December 31,
		2013			2012
Sales		$	646,549		$	750,628
Cost of sales			620,040			721,519
Gross profit			26,509			29,109
Selling expenses			1,563			1,132
General and administration expenses			14,736			12,510
Total operating expenses			16,299			13,642
Income from operations			10,210			15,467
Other income (expense):
Interest income			8,422			5,940
Interest expense			(18,809	)		(25,065	)
Foreign exchange gain (loss) , net			10,118			(1,319	)
Other (expense) income, net			(1,833	)		(79	)
Total other expense, net			(2,102	)		(20,523	)
Income (loss) before income taxes			8,108			(5,056	)
Income tax expense	19		3,476			794
Net Income (loss) attributable to Keyuan Petrochemicals Inc. stockholders			4,632			(5,850	)
Dividends to Series B convertible preferred stockholders			548			-
Net Income (loss) attributable to Keyuan Petrochemicals Inc. common stockholders			4,084			(5,850	)
Other comprehensive income (loss):
Foreign currency translation adjustment			2,754			945
Comprehensive income (loss)		$	7,386		$	(4,905	)
Earnings (loss) per share:
Attributable to common stock:
-Basic		$	0.07		$	(0.10	)
-Diluted		$	0.07		$	(0.10	)
Weighted average number of shares of common stock used in calculation:
-Basic			57,551,991			57,646,160
-Diluted			57,551,991			57,646,160

See accompanying notes to the consolidated financial statements.

F-3

KEYUAN PETROCHEMICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

YEARS ENDED DECEMBER 31, 2013 AND 2012

(Amounts in thousands, except share data)

	Common stock					Additional				Accumulated other								Total
	Number of shares					paid-in capital		Statutory reserve		comprehensive income		Retained earnings			Treasury Stock			stockholders’ equity
Balance as of January 1, 2012		57,646,160		$	58	$	49,198	$	3,744	$	6,546	$	9,700		$	-		$	69,246
Share-based compensation		-			-		1,455		-		-		-						1,455
Net income		-			-		-		-		-		(5,850	)					(5,850	)
Statutory reserve		-			-		-		327		-		(327	)					-
Other comprehensive income - Foreign currency translation loss		-			-		-		-		945		-						945
Balance as of December 31, 2012		57,646,160			58		50,653		4,071		7,491		3,523			-			65,796
Fixed dividends for series B Convertible preferred stockholders		-			-		-		-		-		(548	)					(548	)
Share-based compensation		-			-		770		-		-		-						770
Change in fair value of the Series C and Series D warrants		-			-		132		-		-		-						132
Net income		-			-		-		-		-		4,632						4,632
Treasury Stock		(126,148	)													(143	)		(143	)
Statutory reserve		-			-		-		1,678		-		(1,678	)					-
Other comprehensive income - Foreign currency translation loss		-			-		-		-		2,754		-						2,754
Balance as of December 31, 2013		57,520,012		$	58	$	51,555	$	5,749	$	10,245	$	5,929		$	(143	)	$	73,393

See accompanying notes to the consolidated financial statements.

F-4

KEYUAN PETROCHEMICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands, except share data)

	Year Ended
	December 31, 2013			December 31, 2012
Cash flows from operating activities:
Net income (loss)	$	4,632		$	(5,850	)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation		11,232			11,927
Amortization		121			107
Land use rights amortization		461			452
Deferred income tax expense (benefit)		245			(2,763	)
Share-based compensation expense		770			1,590
Changes in operating assets and liabilities:
Bills receivable		2,283			(2,379	)
Accounts receivable		7,303			(12,249	)
Inventories		(19,488	)		(9,363	)
Prepayments to suppliers		(10,199	)		(6,877	)
Consumption tax recoverable		6,790			4,934
Other current assets		(7,330	)		(9,958	)
Accounts payable		(43,268	)		281
Advances from (to) customers		(14,128	)		16,993
Income taxes payable		(562	)		2,155
Accrued expenses and other payables		8,045			3,905
Net cash used in operating activities		(53,093	)		(7,095	)
Cash flows from investing activities:
Purchase of property, plant and equipment		(73,341	)		(54,417	)
Net cash used in investing activities		(73,341	)		(54,417	)
Cash flow from financing activities:
Pledged bank deposits used for bank borrowings		(127,080	)		(43,629	)
Proceeds from short-term bank borrowings		1,199,005			827,950
Repayment of short-term bank borrowings		(1,111,878	)		(729,531	)
Proceeds from bank notes		373,265			198,125
Repayments of bank notes		(217,938	)		(159,562	)
Repayment of long term bank borrowings		-			(15,865	)
Repurchase of treasury stock		(143	)		-
Net cash provided by financing activities		115,231			77,488
Effect of foreign currency exchange rate changes on cash		134			77
Net increase (decrease) in cash		(11,069	)		16,053
Cash at beginning of period		23,378			7,325
Cash at end of period	$	12,309		$	23,378
Supplemental disclosure of cash flow information:
Income tax paid	$	3,867		$	1,914
Interest paid, net of capitalized interest	$	-		$	843
Non cash investing and financing activities:
Payable for purchase of property, plant and equipment (net of VAT)	$	13,845		$	18,653
Dividends on Series B convertible preferred stock	$	(548	)	$

See accompanying notes to the consolidated financial statements.

F-5

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

(a) Organization and Nature of business

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

Sinotech is an investment holding company and was incorporated in the British Virgin Islands in 2009.

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

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

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

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

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

(b) Other Events

The Company, with its PRC legal counsel, evaluated the matters identified in a 2010 Independent Investigation to determine the extent to which the Company may be exposed to fines and penalties in China. The Independent Investigation was conducted by the Audit Committee, and identified, among other matters, possible violations of PRC or U.S. laws. The Company has 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 July 2, 2013, the United District Court for the District of Columbia issued a final judgment approving a settlement reached between the Company and the Securities and Exchange Commission (“SEC”). The settlement was reached on February 28, 2013 in a case filed by the SEC in the United States District Count for the District of Columbia against the Company, alleging it violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934, and Rules 12b-20 and 13a-13 thereunder. Under the terms of the settlement, the Company, without admitting or denying the allegation of the complaint, paid a civil penalty of $1million and was permanently enjoined from violating certain securities law.

(c) Going concern and management’s plans

For the year ended December 31, 2013, the Company reported net income of approximately $4.6 million and cash flow used in operations of approximately $53.8 million. At December, 31, 2013, the Company had a working capital deficit of approximately $209.7 million.

F-6

Although the Company continues to finance its operations primarily through short-term bank borrowings, management’s realignment of product profiles, along with the general stabilization of the petrochemical industry in China, resulted in net income of $ 4.6 million in 2013 compared to a net loss of $5.9 million in 2012.

Short-term bank borrowings and bills payable amounted to approximately $688 million at December 31, 2013. Management expects that short-term bank financing will continue to be available through at least December 31, 2014.  Furthermore, management expects that the petrochemical industry in China will continue to stabilize, and that demand for downstream products (such as auto, home appliances and dyes) will grow following several years of contraction, As such, management expects that the Company’s overall profits will also grow.

As further described in Note 6 (below), the Company continues to benefit from favorable PRC tax policies related to consumption tax. As of December 31, 2013, the Company had consumption tax recoverable of approximately $46.1 million. In April 2014, approximately $36.1 million was refunded and management expects that additional consumption tax deposits of approximately $0.4 million will be refunded in May 2014, and that approximately $9.6 million will be deductible against future consumption tax obligations.

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 through at least the end of 2014.

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

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

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a)Principles of consolidation and basis of presentation

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

All significant intercompany transactions and balances are eliminated on consolidation.

(b)Use of estimates

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

F-7

(c)Foreign currency transactions and translation

The functional currency of the Company, Sinotech and Keyuan HK is the U.S. dollar. The functional currency of the PRC operating subsidiaries is the Renminbi (“RMB”). Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency using the applicable exchange rates at each balance sheet date, and non-monetary items are translated at historical rates. The resulting exchange differences on these transactions are recorded in foreign exchange gain (loss), net in the consolidated statements of comprehensive income.

The Group’s reporting currency is the U.S. dollar. Assets and liabilities of the PRC operating subsidiaries are translated into the U.S. dollar using the exchange rates at each balance sheet date. Revenue and expenses of the PRC operating subsidiaries are translated at average rates prevailing during the reporting period. Shareholders’ equity is translated at historical rates. Adjustments resulting from translating the financial statements of the PRC operating subsidiaries into the U.S. dollar are recorded as a separate component of accumulated other comprehensive income in stockholders’ equity.

(d)Cash

Cash consists of cash on hand and cash at banks. As of December 31, 2013 and 2012, cash of $12.3 million and $23.3 million, respectively, was held in major financial institutions located in the PRC. Management performs periodic evaluations of the relative credit standings of those financial institutions, and believes that they have high credit ratings.

(e)Pledged bank deposits

Pledged bank deposits represent amounts held by financial institutions, which are not available for the Group’s use, as security for issuances of bills payable to the Group’s suppliers, or as security for short-term bank borrowings. Upon maturity of the bills, which generally occurs within three to six months after the issuance of the bills, or upon the repayment of short-term bank borrowings, the deposits are released by the financial institutions and become available for use by the Group.  Pledged bank deposits related to the purchase of inventories are reported within cash flows from operating activities and pledged bank deposits related to short-term bank borrowings are reported within cash flows from financing activities in the consolidated statements of cash flows.

(f)Inventories

Inventory is stated at the lower of cost or market. Cost is determined using the weighted-average cost method. Provisions are made for excess, slow moving and obsolete inventory as well as inventory whose carrying value is in excess of net realizable value. Management continually evaluates the recoverability based on assumptions about customer demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory reserves or write-downs may be required. The Group did not record any provision for slow-moving and obsolete inventory as of December 31, 2013 and 2012.

(g)Accounts receivable

With the approval of the Company’s general manager, the Company occasionally extends unsecured credit to its long-term customers with a good credit rating. An allowance for doubtful accounts is established and recorded based on management’s assessment of its analysis of trade receivables, customers’ credit-worthiness, past collection history, and changes in customers’ payment records. The Company writes-off accounts receivable when accounts are deemed uncollectible. At December 31, 2013 and 2012, the Group considers all of its accounts receivable to be collectible and no provision for doubtful accounts has been made in the consolidated financial statements.

F-8

(h)Property, plant and equipment

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

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

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

During January 2013, management performed an assessment of the useful lives of certain machinery and equipment. In evaluating the useful lives, management considered the historical life of the assets, operational strategy, and related functionality. Management concluded that machinery and equipment would remain in service longer than the depreciable life assigned. Effective February 1, 2013, the Group changed the time period over which it depreciates machinery and equipment to 20 years from 15 years. Management believes that this change more clearly and appropriately reflects the state of the machinery and equipment and thus, more reasonably and accurately reports the value of the machinery and equipment on the balance sheet. This change is being accounted for as a change in estimate. This change in estimate resulted in a reduction of depreciation expense of approximately $3.1 million, or approximately $0.05 per share, for the year ended December, 2013.

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

(i) Long-Lived Assets

In accordance with Financial Accounting Standard Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 360-10, the Group reviews the recoverability of its long-lived assets on a periodic basis in order to identify business conditions, which may indicate a possible impairment. The assessment for potential impairment is based primarily on the Group’s ability to recover the carrying value of its long-lived assets from expected future undiscounted cash flows. If the total of the expected future undiscounted cash flows is less than the total carrying value of the assets, a loss is recognized for the difference between the fair value (computed based upon the expected future discounted cash flows) and the carrying value of the assets. No impairment is believed to exist at December 31, 2013.

(j) Land use rights

Land use rights represent the exclusive right to occupy and use a piece of land in the PRC for a specified contractual term. Land use rights are recorded at cost and amortized on a straight-line basis over the terms of the land use rights of 15 to 50 years.

(k) Bills receivable and bills payable

The Group utilizes banker’s acceptances in the form of bills receivable and bills payable.

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

F-9

In connection with the Company’s financing transactions, the Group may also obtain bills receivable in exchange for cash or payables.  These bills, which are sold at a discount prior to maturity, include provisions whereby the Group agrees to reimburse the accepting bank in the event that the counterparty fails to honor its liability to the accepting bank.  At December 31, 2013 and 2012, discounted bills receivable subject to reimbursement amounted to approximately $1.8 and $4.0 million, respectively.  Historically, the Group has not suffered any losses under these reimbursement agreements.

Bills payable represent bills issued by an accepting bank in favor of the Group’s suppliers. The Group’s suppliers receive payments from the accepting bank directly upon maturity of the bills, and the Group is obliged to repay the face value of the bills to the accepting bank. Bills that are not remitted directly by the Group to its suppliers may be sold by the Group to other accepting banks for cash prior to their maturity. Discounts paid are recorded as a component of interest expense.

(l) Revenue recognition

The Group derives its revenue primarily from the sale of petrochemical products. In accordance with the provisions of the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 104, codified in FASB ASC Topic 480, revenue should not be recognized until it is realized or realizable and earned. Revenues are considered to have been earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues. The Group recognizes revenue when the products are delivered and the customer takes ownership and assumes risks of losses, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable. Written sales agreements, which specify price, product, and quantity, are generally used as evidence of an arrangement. Customer acceptance is generally evidenced by a carrier signed shipment notification form.

In the PRC, value added tax (“VAT”) of 17% on invoiced amounts, and consumption tax of $133 per ton on certain sales, are collected on behalf of tax authorities. Revenue is recorded net of VAT and consumption tax. VAT and consumption tax paid for purchases, net of VAT and consumption tax collected from customers, is recorded in other current assets and consumption tax recoverable, respectively, in the consolidated balance sheets as of December 31, 2013 and 2012.

(m) Share-based compensation

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

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

(n) Employee benefit plans

Pursuant to relevant PRC regulations, Ningbo Keyuan, Ningbo Keyuan Petrochemicals, Ningbo Keyuan Synthetic Rubbers and Guangxi Keyuan are required to make contributions to various defined contribution plans organized by municipal and provincial PRC governments. The contributions are made for each PRC employee at rates ranging from 26.7% to 28.7% on a standard salary base as determined by the local social security bureau.

Contributions to the defined contribution plans are charged to the consolidated statements of comprehensive income (loss) when the related service is provided. For each of the years ended December 31, 2013 and 2012, contributions to the defined contribution plans were approximately $0.5 million.

The Group has no other obligation for the payment of employee benefits associated with these plans beyond the contributions described above.

F-10

(o) Income taxes

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

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

(p) Fair value measurements

The Group utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Group determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:

·   Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Group has the ability to access at the measurement date.

·   Level 2 inputs are inputs other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.

·   Level 3 inputs are unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.

The level in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

(q) Earnings (loss) per share

Basic earnings (loss) per share is computed by dividing net income (loss) attributable to the Company’s common stockholders by the weighted average number of common stock outstanding during the year.

Diluted earnings (loss) per share is calculated by dividing net income (loss) attributable to the Company’s stockholders as adjusted for the effect of dilutive common stock equivalents, if any, by the weighted average number of common stock and dilutive common stock equivalents outstanding during the year. Common stock equivalents consist of the common stock issuable upon the conversion of the Group’s Series B convertible preferred stock (using the if–converted method) and common stock issuable upon the exercise of outstanding stock options and stock purchase warrants (using the treasury stock method). Potential dilutive securities are not included in the calculation of dilutive earnings (loss) per share if the effect is anti-dilutive. A total of 4,014,605 and 7,190,766 warrants and options were excluded from diluted earnings per share for the years ended December 31, 2013, and 2012, respectively, as their effect was anti-dilutive.

F-11

(r) Segment reporting

The Group’s chief operating decision maker has been identified as its Chief Executive Officer (CEO).

The Group has two operating segments; the manufacture and sale of petrochemical products (petrochemical segment) and the manufacture and sale of rubber products (rubber segment), established in 2012. Substantially all of the Company’s operations and customers are located in the PRC. Consequently, no geographic information is presented.
 

(s) Contingencies

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

(t) Recent accounting pronouncements

Effective January 1, 2013, the Company adopted Accounting Standards Update (“ASU”) No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” The adoption of ASU 2013-02 concerns presentation and disclosure only and did not have an impact on the Company’s consolidated financial position or results of operations.

In July 2013, the FASB, issued Accounting Standards Update (ASU) No. 2013-11 “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” Under ASU 2013-11, an entity is required to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. If a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. ASU 2013-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of this guidance affects presentation only and, therefore, it is not expected to have a material impact on the Company's financial condition, results of operations or cash flows.

3         INVENTORIES

Inventories consist of the following:

	December 31,		December 31,
	2013		2012
	($’000)		($’000)
Raw materials	$	37,747	$	26,433
Finished goods		30,823		21,701
Work-in-process		1,344		500
Total	$	69,914	$	48,634

F-12

4         ADVANCES FROM CUSTOMERS
 

The Group generally requires a prepayment of 100% of the sales contract price from its customers shortly before products are delivered. Such prepayments are recorded as “advances from customers” in the Group’s consolidated balance sheet, until products are delivered and customers take ownership and assume the risk of loss. Approved by the Company’s general manager, the Company occasionally extends credit to its long-term customers with good credit ratings. As of December 31, 2013 and December 31, 2012, the balance of accounts receivable was approximately $7.5 million and $14.2 million, respectively.

5         PREPAYMENTS TO SUPPLIERS

The Group makes prepayments to suppliers in connection with purchases of raw materials. Prepayments to suppliers are reclassified to inventories or expense and applied to related purchases of materials after invoices of such purchases are received.

6         CONSUMPTION TAX RECOVERABLE

The PRC government enacted a regulation pursuant to which domestically purchased heavy oil to be used for producing ethylene and aromatics products was exempted from consumption tax. In addition, the consumption tax paid for imported heavy oil is to be refunded if it is used for producing ethylene and aromatics products. Given all the Group’s purchased heavy oils are, or are to be, used for producing ethylene and aromatics products, the Group recognizes a consumption tax recoverable when a consumption tax for heavy oils has been paid and the relevant heavy oils have been used for production of ethylene and aromatics products. As of December 31, 2013 and 2012, the Group recorded an estimated consumption tax recoverable amounting to approximately $46.1 million and $51.3 million, respectively.

Approximately $36.1 million of consumption tax was refunded in April 2014. In addition, management expects approximately $0.4 million of consumption tax to be refunded in May 2014, and that approximately $9.6 million will be deductible against future consumption tax obligations.

7       OTHER CURRENT ASSETS

Other current assets consist of the following:

	As of December 31,
	2013		2012
	($’000)		($’000)
VAT recoverable	$	56,667	$	31,751
Customs deposits for imported inventories		3,680		21,648
Other		4,842		2,921
	$	65,189	$	56,320

Management estimates the deductible input VAT using vendor contracts, engineering and other estimates, as well as historical experience. Approximately $3.0 million and $2.2 million was included in non-current assets as of December 31, 2013 and 2012, respectively.

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

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8        PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

	As of December 31,
	2013			2012
	($’000)			($’000)
Buildings	$	6,303		$	3,920
Plant, machinery and equipment		253,728			239,222
Vehicles		1,274			950
Office equipment and furniture		309			296
Construction-in-progress		65,267			12,292
		326,881			256,680
Less: accumulated depreciation		(41,375	)		(29,077	)
	$	285,506		$	227,603

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

	Year ended December 31,
	2013		2012
	($’000)		($’000)
Cost of sales	$	10,370	$	13,254
Selling, general and administrative expenses		862		189
	$	11,232	$	13,443

For the years ended December 31, 2013 and 2012, interest capitalized amounted to approximately nil and $0.8 million, respectively.

9         INTANGIBLE ASSETS

Intangible assets consist of the following:

	Amortization	As of December 31,
	Period	2013			2012
	Years	($’000)			($’000)
Licensing agreements	10-20	$	1,758		$	1,508
Less: Accumulated amortization			(772	)		(628	)
		$	986		$	880

Licensing agreements consist of technology utilization rights for petrochemical production. For each of the years ended December 31, 2013 and 2012, amortization expense for intangible assets amounted to approximately $0.1 million. Amortization expense for each of the next five years is estimated to be approximately $0.1 million.

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10       LAND USE RIGHTS

Land use rights consist of the following:

	As of December 31,
	2013			2012
	($’000)			($’000)
Land use rights	$	12,754		$	12,282
Less: Accumulated amortization		(2,091	)		(1,574	)
	$	10,663		$	10,708

For the years ended December 31, 2013 and 2012, amortization expense related to land use rights was approximately $0.5 million and $0.4 million, respectively.

11      SHORT-TERM BANK BORROWINGS

Short-term bank borrowings consist of the following:

	As of December 31,
	2013		2012
	($’000)		($’000)
Bank borrowings-secured/guaranteed	$	424,436	$	295,146

As of December 31, 2013, short−term bank borrowings carried a weighted average interest rate of5.63% (2012: 6.21%) for bank loans in RMB; and a weighted average interest rate of 2.72% (2012: 3.97%) for bank loans in USD, and had maturity terms ranging from two to twelve months and interest rates ranging from 1.0% to 7.2% (2012: 1.27% to 7.93%).

As of December 31, 2013, approximately $33 million included in short term bank borrowings was payable to Shanghai Pudong Development Bank, and was secured by a one-year fixed term deposit and pledged deposits with a carrying amount of $9 million. In addition, as of December 31, 2013, $137 million payable to Bank of China was secured by a one-year fixed term deposit with a carrying amount of $78 million; $103 million payable to China Construction Bank was secured by a one-year fixed term deposit with a carrying amount of $43 million; $33 million payable to Agricultural Bank of China was secured by a one-year fixed term deposit with a carrying amount of $20 million; $5 million payable to Ningbo Commerce Bank was secured by a one-year fixed term deposit with a carrying amount of $5 million; $24 million payable to Bank of Communication was secured by a one-year fixed term deposit with a carrying amount of $3 million; and $4 million payable to Guangdong Development Bank was secured by a one-year fixed term deposit with a carrying amount of $5 million. Furthermore, $30 million payable to the Bank of Ningbo was secured by a one-year fixed term deposit with a carrying amount of $1 million; $33 million payable to China Merchant Bank was secured by a one-year fixed term deposit with a carrying amount of $23 million; $22 million payable to Shenzhen Development Bank was secured by a one-year fixed term deposit with a carrying amount of $23 million. Among the rest of the Group's short-term borrowing, as of December 31, 2013, $95 million was guaranteed by related party and third-party entities and individuals, and $24 million was secured by the Group’s land, buildings and equipment with a carrying amount of $91 million.

F-15

12      ACCRUED EXPENSES AND OTHER PAYABLES

Accrued expenses and other payables consist of the following:

	As of December 31,
	2013		2012
	($’000)		($’000)
Purchase of property, plant and equipment	$	15,266	$	19,261
Accrued payroll and welfare		1,075		1,156
Liquidated damages		2,493		2,493
Other accruals and payables		4,933		3,923
	$	23,767	$	26,833

13       SERIES B CONVERTIBLE PREFFERED STOCK AND RELATED FINANCING AGREEMENTS

The significant terms of the Series B convertible preferred stock are as follows:

Conversion:

At any time on or after the issuance date, at the election of the holders, each share of the Series B convertible preferred stock may be converted into shares of the Company’s common stock, at a conversion price of $3.75 per share, subject to certain ownership limitations.

The conversion price is subject to certain anti-dilutive adjustments, including adjustments for stock splits, dividends and distributions, and reorganization, merger or consolidation. In addition, the conversion price may be adjusted down.

The Series B convertible preferred stock shall be automatically converted into common stock (for the same conversion price as described above) upon the third year anniversary of the issuance date of the Series B convertible preferred stock on September 28, 2013. In the event the Company shall issue or sell any additional shares of common stock at a price per share less than the then-applicable conversion price or without consideration, then the conversion price upon each such issuance shall be reduced to that price (the “Round Down Provision”). On September 24, 2013, the Company and the sole holder of Series B convertible preferred stock agreed to extend the automatic conversion date of Series B preferred stock from September 28, 2013 to September 28, 2014.

Management evaluated the terms and conditions of the embedded conversion features and determined that there was no beneficial conversion features for the Series B convertible preferred stocks because the effective conversion price is equal to or higher than the fair value at the date of issuance.

Redemption:
 

As a result of the Round Down Provision, and in accordance with ASR 268 “Presentation in Financial Statement of Redeemable Preferred Stock”, the Series B convertible preferred stock has been classified as temporary equity as the Company does not control the events necessary to issue the maximum number of shares that could be required should the redemption feature be triggered. In the event the Company has insufficient authorized registered shares of common stock to effect a conversion request from the Series B investors, the Company, at its sole discretion, may elect to satisfy such conversion request by either redeeming the preferred stock at its liquidation preference of $3.75 per share, or by issuing restricted shares of the Company’s common stock.

The Series B convertible preferred stock is redeemable at the option of their holders simultaneously with the occurrence of the following events:

(i) Merger or consolidation where the holders of the Company’s outstanding voting securities prior to such merger or consolidation do not own over 50% of the outstanding voting securities of the merged or consolidated entity immediately after such merger or consolidation; or (ii) the sale of all or substantially all of the Company’s properties or assets (collectively, an “Organic Change”).

F-16

Management considers the occurrence of the Organic Change is solely within the control of the Company.

Voting Rights:

The Series B convertible preferred stock has no voting rights with the common stock or other equity securities of the Company other than certain class voting rights, as outlined in the related agreement.

Fixed dividends were accrued and cumulative for one year from the date of the initial issuance of the Series B convertible preferred stock, and are payable on a quarterly basis. Annual dividends were determined as 6% of $3.75 for each share of the Series B convertible preferred stock. Fixed dividends are no longer payable on the series B convertible preferred stock.
 

Tolling agreement :

The Company and Dragon State Limited (“Dragon State”), the sole holder of series B convertible preferred stock and the majority holder of Series C warrants and Series D warrants, entered into a tolling agreement, dated September 24, 2013 (the “Tolling Agreement”). Pursuant to the Tolling Agreement, all periods of limitation, repose and laches which are or may be applicable to any or all claims and remedies at contract, tort and statute, including but not limited to all claims arising out of the securities purchase agreement dated September 28, 2010 and out of Dragon State’s purchase of the securities of the Company, whether described therein or not (collectively, “Tolled Claims”), that Dragon State has or may have against the Company and its Chairman of the Board and Chief Executive Officer, Mr. Tao, are tolled and suspended as of September 8, 2013 through and including September 28, 2014.

Together with the Tolling Agreement, the Company and Dragon State agreed to amend certain terms in the certificate of designations, preferences and rights of Series B convertible preferred stock, Series C warrants and Series D warrants issued in Series B financing in September 2010 (the “Amendments”).

Pursuant to the Amendments, i) the date of maturity (a.k.a. the date of mandatory conversion) of series B convertible preferred stock was extended from September 28, 2013 to September 28, 2014; ii) the term of Series C warrant was extended from three years to four years and expire on September 28, 2014; and iii) the term of Series D warrant was extended from three years to four years and expire on September 28, 2014.

The Company considered the fair value of series B convertible preferred stock, Series C warrants and Series D warrants immediately before and after the Amendments and determined that the Amendments constitute modification of the Series B convertible preferred stock, Series C warrants and Series D warrants, resulting in the transfer of value from the Company’s common shareholders to Series B preferred stockholders. The estimated fair value of the value transferred is approximately $548,000 and is reflected as a deemed dividend in the statement of comprehensive income for the the year ended December 31, 2013.

The fair value was estimated as of September 24, 2013 (date of modification) using the Black Scholes option-pricing model utilizing the following assumptions: stock price of $0.70 per share; no dividends; a risk free rate of 0.1%, which equals the one -year yield on Treasury bonds at constant (or fixed); and volatility of 126.36%.

Escrow shares agreement :

In connection with the Series B financing, the Company entered into an escrow share agreement with the representatives of the Series B investors, Delight Reward (the majority owner of the Company), and Anslow&Jaclin, LLP (the “Escrow Agreement”), pursuant to which 3,400,000 shares of the Company’s common stock (the “Escrow Shares”) held by Delight Reward  were delivered to the Escrow Agent. The Escrow Shares were to be released back to Delight Reward upon the Company’s achievement of no less than 95% of a net income of $33 million for the year ended December 31, 2010 (the “Performance Threshold”). The Performance Threshold was achieved and the 3,400,000 shares were released on November 6, 2013.

F-17

14         COMMON STOCK PURCHASE WARRANTS

In conjunction with the Company’s Series A and Series B financings, the Company previously issued the following warrants to purchase the Company’s common stock:

		Maximum number
		of shares of		Exercise
	Issuance dates	common stock		prices
Series A Warrants	April 22 and May 18, 2010		748,704	$	4.50
Series B Warrants	April 22 and May 18, 2010		748,704	$	5.25
Series C Warrants	September 28, 2010		810,002	$	4.50
Series D Warrants	September 28, 2010		810,002	$	5.25
Placement agent warrants
-Series A Private Placement	April 22 and May 18, 2010		718,755	$	3.50~$5.25
-Series B Private Placement	September 28, 2010		561,601	$	3.75~$5.25

Series A warrants and Series B warrants, including placement agent warrants issued in the Series A financing, expired in 2013.

On September 24, 2013, the Company and Dragon State, the majority holder of Series C warrants and Series D warrants agreed to extend the term of Series C and Series D warrants from three years to four years expiring on September 28, 2014.

Series C and Series D warrants entitle the holders to purchase shares of the Company’s common stock at any time after their respective issuance dates and shall expire on September 28, 2014. The Series C and Series D warrants are not callable.

15        SHARE-BASED PAYMENTS

(a)   Employee stock option grants

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 a Plan Committee (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 of options to purchase shares of the Company’s common stock granted under the Plan shall be determined by the Board or the Committee, provided, however that the exercise price of any incentive stock option shall not be less than 100% of the fair market value of a share on the date of grant. 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 approximately $3.3 million. A total of 2,810,000 stock options vest over three years as follows: 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 grant date and 60% shall vest and become exercisable two years after grant date.

F-18

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 approximately $0.1 million. A total of 40,000 options shall vest and become exercisable one year after the grant date and the remaining 40,000 options shall vest and become exercisable two years after the grant date, provided that the independent directors are re-elected for successive one year terms one year after the stock options issuance date.

On August 4, 2010, the Company granted a total of 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 approximately $1.3 million. These stock options were to 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 of these stock options 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 at the date of commitment was approximately $0.4 million and no incremental compensation cost resulted from the cancellation of these stock options.

There is no unrecognized compensation cost related to employee stock options as of December 31, 2013.

There were no share options granted during the years ended December 31, 2013 and 2012. A summary of the share options activity during the year ended December 31, 2013 is as follows:

	Number of options			Weighted average exercise price		Weighted average remaining contractual term	Aggregate intrinsic value
Balance as of January 1, 2013		2,333,000			4.2
Forfeited		(540,000	)		4.2
Balance as of December 31, 2013		1,793,000		$	4.2	0.5	$	0
Exercisable as of December 31, 2013		1,793,000		$	4.2	0.5	$	0

The total fair value of stock options that vested during the year ended December 31, 2013 was approximately $0.7 million.

(b)   Non-employee stock option grants

A summary of stock options granted to non-employees as of December 31, 2013 is as follows:

	Number of options		Weighted average exercise price		Weighted average remaining contractual term	Aggregate intrinsic value
Outstanding as of December 31, 2013		40,000	$	4.20	0.5 years	$	-
Exercisable as of December 31, 2013		40,000	$	4.20	0.5 years	$	-

F-19

16         STATUTORY RESERVES

Ningbo Keyuan, Ningbo Keyuan Petrochemicals, Ningbo Keyuan Synthetic Rubbers and Guangxi Keyuan are required to allocate at least 10% of their after tax profits as determined under generally accepted accounting principles in the PRC to a statutory surplus reserve until the reserve balances reach 50% of their respective registered capitals. As of December 31, 2013 and 2012, Ningbo Keyuan, Ningbo Keyuan Petrochemicals, Ningbo Keyuan Synthetic Rubbers and Guangxi Keyuan had made appropriations to this statutory reserve of approximately $5.7 millionand $4.1 million, respectively.

17         STOCK REPURCHASE PROGRAM

On September 17, 2012, our Board of Directors authorized the repurchase of $2 million of the Company’s common  stock for up to $1.50 per share.  Through December 31, 2013 the Company had purchased 126,148 shares for approximately $143,000.

Shares of common stock repurchased by the Company are recorded at cost as treasury stock and result in a reduction of shareholders' equity in the consolidated balance sheets. Treasury shares may be reissued as part of the Company’s stock-based compensation programs. There were no reissuances during the year ended December 31, 2013.

18       COMMITMENTS AND CONTINGENCIES

(a) Operating commitments

The Group had outstanding Letter’s of Credit as of December 31, 2013 of approximately $174 million.

(b) Capital commitments

As of December 31, 2013, the Group had contractual capital commitments of approximately $15.3 million for purchases of equipment. The capital commitments relate primarily to manufacturing equipment updates.

(c) Litigation

On November 15, 2011, the Company and several of its officers were named in a securities class action, alleging violation of federal securities laws by issuing materially false and misleading statements and omitting material facts with regard to disclosure of related party transactions and effectiveness of internal controls in past public filings.  The case is currently at the discovery stage and management believes that there is no basis to the suit and intends to contest the case vigorously.

On February 13, 2014, the Brown Law Firm filed a derivative action suit on behalf of the Company, alleging certain and former current officers and directors of the Company had violated their fiduciary duties between at least April 22, 2010 to October 20, 2011. The case is currently at the discovery stage and management believes that there is no basis to the suit and intends to contest the case vigorously

The Group, from time to time, is involved in various legal actions arising in the ordinary course of business. Management does not currently believe that there are any pending legal actions where the outcome of such legal actions would have a material adverse effect on the Group’s consolidated financial statements.

19        INCOME TAXES

The Company and its subsidiaries file separate income tax returns.

F-20

The United States of America

The Company is incorporated in the State of Nevada in the U.S., and is subject to 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

Sinotech is incorporated in the British Virgin Islands (“BVI”). Under the current laws of the BVI, Sinotech is not subject to tax on income or capital gains. In addition, upon payments of dividends by Sinotech, 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 years ended December 31, 2013 and 2012, 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, Ningbo Keyuan Petrochemicals, Ningbo Keyuan Synthetic Rubbers and Guanxi Keyuan are all incorporated in the PRC and the applicable PRC statutory income tax rate for these companies is 25%.

Components of loss before income tax expense (benefit) consist of the following jurisdictions:

	Year ended December 31,
	2013			2012
	($’000)			($’000)
PRC	$	12,344		$	1,303
U.S.		(1,671	)		(3,512	)
Hong Kong and BVI		(2,565	)		(2,847	)
Income (loss) before income taxes	$	8,108		$	(5,056	)

The Group’s income tax expense (benefit) in the consolidated statements of comprehensive income (loss) consists of the following:

	Year ended December 31,
	2013		2012
	($’000)		($’000)
Current income tax expense	$	3,224	$	3,595
Deferred income tax (benefit) expense		252		(2,801	)
Total income tax expense	$	3,476	$	794

F-21

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

	Year ended December 31,
	2013					2012
	($’000)					($’000)
Loss before income taxes	$	8,108				$	(5,056	)
Computed expected
Income tax expense (benefit)		2,027		25.0	%		(1,264	)	25.0	%
Tax loss not recognized		1,110		13.7	%		1,485		(29.4	%)
Effect of different tax rates		(51	)	(0.6	%)		105		(2.1	%)
Other		30		0.4	%		126		(2.5	%)
Permanent differences		360		4.4	%		342		(6.8	%)
Actual income tax expense	$	3,476		42.9	%	$	794		(15.7	%)

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.

The tax effects of the temporary differences that give rise to significant portions of deferred income tax assets are presented below:

	As of December 31,
	2013			2012
	($’000)			($’000)
Net operating loss carry forwards	$	7,415		$	6,356
Depreciation		1,199			963
Interest income receivable on pledged bank deposits		-			-
Prepaid expenses and other current assets		1,461			1,439
Accrued bonus		4			183
Other		(23	)		216
Total deferred income tax assets		10,056			9,157
Valuation allowance		(7,415	)		(6,356	)
Net deferred tax assets	$	2,641		$	2,801

Deferred tax assets arising from net operating loss carry forwards (“NOL’S”) from the Group’s operations outside of the PRC were approximately $7.4 and $6.4 million as of December 31, 2013 and 2012, respectively. Management has determined that it is more likely than not that they will not generate sufficient taxable income in those jurisdictions to realize the deferred tax asset. Accordingly, a valuation allowance for the full amount was provided. As of December 31, 2013, NOL’S and their expiration dates arose in the following jurisdictions:

				Expiration date
US	$	(17,054	)	December 31, 2013
Hong Kong		(9,095	)	Not applicable
BVI		(211	)	Not applicable
	$	(26,360	)

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 exempted from such withholding tax. Further, the Group’s distributions from its PRC subsidiaries are subject to U.S. federal income tax at 34%, less any applicable qualified foreign tax credits. Due to the Group’s policy of reinvesting permanently its earnings in its PRC business, the Group has not provided for deferred income tax liabilities of $11.1 million and $9.4 million for U.S. federal income tax purposes on its PRC subsidiaries’ undistributed earnings of $44.5 million and $37.7 million as of December 31, 2013 and 2012, respectively.

For each of the years ended December 31, 2013 and 2012, the Group did not have unrecognized tax benefits, and therefore no interest or penalties related to unrecognized tax benefits were accrued. Management does not expect that the amount of unrecognized tax benefits will change significantly within the next twelve months.

F-22

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 2010.  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 limitations is ten years. There is no statute of limitations 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.

20          FAIR VALUE MEASUREMENTS

The Company did not have any assets and liabilities that were measured at fair value on a recurring basis as of December 31, 2013 and 2012.

The fair values of cash, pledged bank deposits, bills receivable, accounts receivable, short-term bank borrowings, bills payable, and accounts payable approximate their respective carrying amounts due to their short-term nature. Amounts due to/from related parties are not practicable to estimate due to the related party nature of the underlying transactions.

21          SIGNIFICANT CONCENTRATIONS AND RISKS

As of December 31, 2013 and December 31, 2012, the Group held cash and pledged bank deposits in financial institutions of approximately $349 million and $225 million, 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.

During the year ended December 31, 2013, no sales to individual customers exceeded 10% of the Group’s total net revenues. Sales to one individual customer comprised approximately 13 % of the Group's total net revenue for the year ended December 31, 2012. At December 31, 2013, two customers accounted for 25% and 47% of accounts receivable. At December 31, 2012, two customers accounted for 100% of accounts receivable.

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 a particular heavy oil used in production, management believes that other suppliers could provide similar heavy oil on comparable terms. A change in suppliers, however, could cause a delay in manufacturing and a possible loss of sales, which would affect operating results adversely. Purchases (net of VAT) from the largest three suppliers for the years ended December 31, 2013 and 2012 were approximately $459 million and $549 million, respectively. These purchases represented 80% and 78%, respectively of all of the Group’s purchases for the years ended December 31, 2013 and 2012. The Company’s largest supplier accounted for approximately $358 million and $474 million, or 57% and 68% of total purchases for the years ended December 2013 and 2012, respectively. In addition, the supplier provided short-term financing to the Company of approximately $29 million during 2012, of which $20 million was included in accounts payable at December 31, 2012 and was repaid in January 21, 2013. Interest paid for this financing amounted to approximately $0.43 million. In addition, on December 27, 2012, the supplier provided a non-interest bearing advance of approximately $10 million to the Company, that was repaid in full on January 8, 2013.

The Company commenced trading of heavy oil in April 2013，whereby the Company functions as an agent on behalf of a Hong Kong-based customer. For the year ended December 31, 2013, the trading of heavy oil consists of purchases of approximately $416.1 million, and sales of approximately $414.5 million, resulting in a loss of $1.6 million, that has been included in cost of sales in the statement of comprehensive income.

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 remittances abroad, and rates and methods of taxation, among other things.

F-23

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

(A) 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
Ningbo Pacific Ocean Shipping Co., Ltd (Ningbo Pacific)	100% ownership by Mr. Wang
Ningbo Hengfa Metal Product Co., Ltd (Ningbo Hengfa, former name “Ningbo Tenglong”)	100% ownership by Mr. Chen

Related party transactions and amounts outstanding with the related parties as of and for the years ended December 31, 2013 and 2012, are summarized as follows:

	Year ended December 31
	2013		2012
	($’000)		($’000)
Guarantee for bank borrowings (a)	$	-	$	34,399
Loan guarantee fee (a)	$	103	$	307
Advance payments to related parties (b)	$	43	$	40

(a)   Guarantees for Bank Loans

Guarantees for bank loans provided by related parties during the year ended December 31, 2013 and 2012 are as follows:

	Guarantee provided during year ended December 31,
	2013		2012
	($’000)		($’000)
Mr. Tao	$	-	$	16,645
Jicun Wang and Sumei Chen		-		17,754
Total	$	-	$	34,399

	Bank loans Guaranteed as of
	December 31, 2013		December 31, 2012
	($’000)		($’000)
Jicun Wang and Sumei Chen	$	-	$	13,054
Ningbo Pacific		-		25,426
Total	$	-	$	38,480

(a) Beginning in 2011, loan guarantee fees of 0.3% of the loan principal guaranteed are to be paid quarterly. In the year ended December 31, 2013, loan guarantee fees were approximately $0.1 million for Ningbo Pacific. In 2012, loan guarantee fees were approximately $0.1 million and $0.2 million for Ningbo Hengfa and Ningbo Pacific, respectively.

F-24

(b) Advance payments to related parties consist of Mr. Tao for advances made for business purposes. These amounts are unsecured interest free and due on demand.

(B) Relationships and transactions with certain other parties

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

Name of parties	Relationship
Ningbo Xinhe Logistic Co., Ltd (Ningbo Xinhe)	10% ownership by Ms. Huang
Ningbo Litong Petrochemical Co., Ltd (Ningbo Litong)	Former 12.75% nominee shareholder of Ningbo Keyuan
Ningbo Anqi Petrochemical Co., Ltd (Ningbo Anqi)	A related party through September 2011 when control transferred
Ningbo Lide Investment Co., Ltd. (Ningbo Lide) (formerly Ningbo Kewei)	A related party through September 2011 when control transferred
Ningbo Kunde Petrochemical Co, Ltd. (Ningbo Kunde)	A related party through September 2011 when control transferred

Transactions and amounts outstanding with these parties for the years ended December 31, 2013 and 2012 are summarized as follows:

	Year ended December 31
	2013		2012
	($’000)		($’000)
Sales of products (c)	$	69,476	$	146,716
Purchase of raw materials (d)	$	65,713	$	41,312
Purchase of transportation services (e)	$	3,613	$	2,813
Guarantee for bank borrowings (f)	$	280,332	$	365,184
Loan guarantee fees (f)	$	2,474	$	1,411
Amounts due to these parties(g)	$	369	$	-
Advance payments to these parties (h)	$	11,055	$	-
Advance Received from these parties (i)	$	218	$	-

(c) The Group sold finished products of approximately $30.7 million and $45.4 million to Ningbo Litong for the years ended December 31, 2013 and 2012, respectively. The Group sold finished products of approximately $38.0 million and $98.2 million to Ningbo Kunde for the years ended December 31, 2013 and 2012, respectively. The Group sold finished products of approximately $0.8 million and $3.1 million to Ningbo Lide for the years ended December 31, 2013 and 2012, respectively.

F-25

(d) The Group purchased raw materials of approximately $15.8 million and $26.0 from Ningbo Litong for the years ended December 31, 2013 and 2012, respectively. The Group purchased raw materials of approximately $2.7 million and $11.6 from Ningbo Kunde for the years ended December 31, 2013 and 2012, respectively. The Group purchased raw materials of approximately $47.2 million and $3.7 from Ningbo Lide for the years ended December 31, 2013 and 2012, respectively.

(e) The Group purchased transportation services of $3.6 millionand approximately $2.8 million from Ningbo Xinhe during the years ended December 31, 2013 and 2012, respectively.

(f) Guarantees for Bank Loans

	Guarantee provided during the year ended December 31,				Bank loans Guaranteed as of December 31,
	2013		2012		2013		2012
	($’000)		($’000)		($’000)		($’000)
Ningbo Litong	$	148,507	$	103,805	$	150,483	$	30,710
Ningbo Lide		131,825		261,379		133,579		122,651
Total	$	280,332	$	365,184	$	284,062	$	153,361

Beginning in January 2011, loan guarantee fees was approximately 0.3% of the loan principal guaranteed. Guarantee fees payable to Litong and Lide were approximately $1.1 million and $1.4 million, respectively, for the year ended December 31, 2013. Guarantee fees payable to Litong and Lide were approximately $0.7 million each for the year ended December 31, 2012.

(g) At December 31, 2013, approximately $0.4 million was due to Xinhe.

(h) At December 31, 2013, advance payments to these parties consist of payments to Litong, Lide and Xinhe of $3.8 million, $7.2 million, and $0.01 million, respectively.

(i) At December 31, 2013, advances received from these parties consist of amounts received from Litong of $0.2 million.

23        CONSOLIDATED SEGMENT DATA

Segment information is consistent with how management reviews the business, makes investing and resource allocation decisions and assesses operating performance. The segment data presented reflects this segment structure. The Company reports financial and operating information in the following two segments:

(a) Petrochemicals Segment: Manufacturing and sales of mixed light aromatics, mixed heavy aromatics, fine propylene, propane, butane, liquefied petroleum gas (LPG), methyl tert-butyl ether, styrene, etc.

(b) Rubber Segment: Manufacturing and sales of various rubber products.

F-26

Segment information for the years ended December 31, 2013 and 2012 is as follows:

	Year end December 31, 2013						Year end December 31, 2012
	Petrochemical		Rubber		Total		Petrochemical			Rubber		Total
	($’000)		($’000)		($’000)		($’000)			($’000)		($’000)
Revenue	$	568,562	$	77,987	$	646,549	$	679,636		$	70,992	$	750,628
Income from operations	$	4,609	$	5,601	$	10,210	$	9,501		$	5,962	$	15,467
Interest income	$	8,342	$	80	$	8,422	$	5,938		$	2	$	5,940
Interest expense	$	18,809	$	-	$	18,809	$	25,065		$	-	$	25,065
Depreciation	$	7,784	$	3,448	$	11,232	$	9,307		$	2,620	$	11,927
Amortization	$	582	$	-	$	582	$	559		$	-	$	559
Income tax expense	$	1,976	$	1,500	$	3,476	$	(295	)	$	1,089	$	794
Deferred tax assets	$	2,461	$	180	$	2,641	$	2,758		$	43	$	2,801
Total assets	$	756,446	$	117,636	$	874,082	$	577,202		$	89,672	$	666,874

24         Keyuan Petrochemicals, Inc. (Parent Company)

Relevant PRC statutory laws and regulation permit payments of dividends by the Company’s subsidiaries in the PRC only out of their retained earnings, if any, as determined in accordance with the PRC accounting standards and regulations.

Under the Law of the PRC on Enterprises with Wholly Owned Foreign Investment, the Company’s subsidiaries in the PRC are required to allocate at least 10% of their after tax profits, after making good their accumulated losses as reported in their PRC statutory financial statements, to the general reserve fund and have the right to discontinue allocations to the general reserve fund if the balance of such reserve has reached 50% of their registered capital. These statutory reserves are not available for distribution to the shareholders (except in liquidation) and may not be transferred in the form of loans, advances, or cash dividends.

As of December 31, 2013, approximately $5.7 million (2012:$4.1 million) was appropriated from retained earnings and set aside for the statutory reserve by the Company’s subsidiaries in the PRC.

As a result of these PRC laws and regulations, the Company’s subsidiaries in the PRC are restricted in their ability to transfer a portion of their net assets, either in the form of dividends, loans or advances, and consisting of paid-in capital and statutory reserves amounting to approximately $135.0 million as of December 31, 2013 (2012: $60.1 million).

The following presents condensed unconsolidated financial information of the Parent Company only:

Condensed Balance Sheets:

	As of December 31,
	2013		2012
	($’000)		($’000)
Cash	$	5	$	5
Other current assets		328		21
Investment in subsidiaries		41,774		41,774
Total assets		42,107		41,800
Accounts payable		272		272
Accrued expenses and other payables		2,925		3,814
Inter-company liabilities		12,112		9,872
Dividends payable		2,382		2,382
Series B convertible preferred stock		16,868		16,452
Total stockholders' equity		7,548		9,008
Total liabilities and stockholders' equity	$	42,107	$	41,800

F-27

Consolidated Statements Of operations:

	Year ended December 31,
	2013		2012
	($’000)		($’000)
General and administrative expenses	$	1,671	$	3,512
Interest expense		-		-
Net loss	$	1,671	$	3,512

Condensed Statements of Cash Flows:

	Year ended December 31,
	2013			2012
	($’000)			($’000)
Cash flows from operating activities
Net Loss	$	(1,671	)	$	(3,512	)
Adjustments to reconcile net loss to net cash used in operating activities:
Share-based compensation expense		770			1,590
Decrease in other assets		(889	)		372
Decrease in accounts payable, accrued expenses and other payables		-			608
		(1,790	)		(942	)
Net cash used in operating activities
Cash flows from financing activities
Advance from inter-group company		1,790			942
Net cash provided by financing activities		1,790			942
Net decrease in cash		-			-
Cash at beginning of year		5			5
Cash at end of year	$	5		$	5

25         SUBSEQUENT EVENTS

From January 1, 2014 through March 31, 2014, the Company  purchased 184,276 shares of common stock through the stock repurchase program at an averge purchase price of $0.94 per share.

F-28

ITEM 9      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

None 

ITEM 9A.  CONTROLS AND PROCEDURES

(a)         Evaluation of disclosure controls and procedures

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 PRC.  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.

55

As a result of the findings of the Audit Committee and its review of our controls and procedures, management concluded that the Company had 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.

In connection with the preparation of our financial statements for the fiscal year ended December 31, 2013, management has determined that our internal control environment is still not properly designed and did not operate effectively to ensure that the Company’s financial statements (and related financial statement disclosures) were prepared in accordance with US generally accepted accounting principles (US GAAP).  As a result we continue to have material weaknesses in our controls and procedures.

Some specific weaknesses in our control environment included:

1)           Lack of sufficient knowledge of and ability to uniformly apply U.S. GAAP reporting by our existing key accounting staff;

2)           Lack of sufficient accounting staff which results in a limited of segregation of duties necessary for an effective internal control system,  and to ensure the timely preparation and review of the financial statements

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

4)           Despite the Company’s efforts certain individuals  responsible for certain key control activities lack an  internal control consciousness and awareness;

5)           Inadequate training and training programs;

6)           Lack of necessary senior management oversight and monitoring of the accounting functions of the organization throughout 2013;

7)           Lack of policies and procedures to analyze, document, monitor and report on non-routine and complex transactions as well as a lack of sufficient documentation of our existing financial processes, risk assessment and internal controls; and

8)           Lack of regular communication between operations and the accounting/finance departments and inadequate sharing of financial information within the Company

In the past fiscal year, we have experienced a large amount of turnover in our accounting department and our current staff is relatively new and inexperienced, and thus unfamiliar with the Company, as well as U.S. GAAP reporting.  In order to meet the rigorous demands of being a U.S. listed company and remediate the weaknesses that have been identified, we are working on taking or plan to implement the following additional measures:

a)           Implement regular training programs with regard to internal controls, compliance requirements and corporate governance;

b)           Identify outside directors with greater U.S. public company experience and increase board oversight;

c)           Hire additional accounting personal, including but not limited to an experienced controller;

d)          Hire additional senior manager or consultant with the appropriate skills and experience, and background in US GAAP and SEC reporting;

e)          Implement policies and procedures to provide for the rigorous monitoring and oversight of the control environment; monitoring of the organizational structure, implement a robust internal audit program;

f)           Further review and evaluate the duties and responsibilities of senior management;

56

g)          Implement procedures for the identification, documentation, Board approval and appropriate disclosure of related party transactions;

h)          Implement policies and procedures to ensure that all non-routine transactions are identified in a timely manner, such that all such transactions are approved by the Board and that systems and processes are developed to accumulate appropriate documentation supporting the transactions and to accumulate all information required for disclosure in our financial statements;

i)           Develop and enhance policies to ensure that all identified contingencies are evaluated completely and in a timely manner; to provide for a continuous and robust risk assessment process, including evaluation of legal and regulatory considerations related to business activities;

j)           Further strengthen policies and procedures related to construction-in-process, including formalized budget monitoring, timely and accelerated receipt of invoices from vendors to reduce both the risks inherent in the estimation of deductible input VAT and the risks associated with the estimation of accounts payable, approval of contract change orders and updating of contract schedules for contract cancellations, and more robust documentation of goods and services received;

k)          Implement policies and procedures to ensure that consolidated financial statements are properly reviewed by accounting personnel and that all supporting schedules are similarly reconciled and reviewed timely;

l)  Implement policies and procedures to ensure adequate communication and sharing of financial information within the Company.

If we are able to successfully undertake the remediation measures outlined above, and  if such measures are effectively implemented and maintained, we believe that we will be able to remediate the material weaknesses discussed above.  However, due to the limited cash flow we are currently experiencing and the current lack of experience in public company governance by key personnel, we cannot assure when or if we will be able to successfully implement these remedial measures.

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

Item 9b. Other Information.

None.

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PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following table and text set forth the names and ages of all directors and executive officers as of December 31, 2013. The Board of Directors is comprised of only one class. All of the directors will serve until the next annual meeting of shareholders and until their successors are elected and qualified, or until their earlier death, retirement, resignation or removal.  There are no family relationships among our directors and executive officers. Also provided herein are brief descriptions of the business experience of each director, executive officer and advisor during the past five years and an indication of directorships held by each director in other companies subject to the reporting requirements under the Federal securities laws.

Name	Age	Position
Chunfeng Tao	46	Chairman, President, Chief Executive Officer and Secretary
Baojun Zheng	39	Chief Financial Officer
Yuxin Xiang	41	Independent Director
Dishen Shen	75	Independent Director
Xin Yue	49	Director

Mr. Chunfeng Tao, Chairman, President and Chief Executive Officer.    Mr. Chunfeng Tao has been a member of our Board of Directors and the CEO of the Company since April 22, 2010. Mr. Tao has over 20 years’ extensive experience in the petrochemical industry. Between 2008 to 2010,  he served as President of Ningbo Plastics. Between 2005 and 2008, he served as President of Ningbo Hebang Chemical Co., a company with annual revenue of RMB 10 billion which he managed and built to an annual production capacity of 250,000 MT for aromatic and heavy oil cracking products. Between 2002 and 2005, Mr. Tao served as Executive Vice President of Ningbo Daxie Liwan Petrochemicals Co., a company with annual revenue of RMB 6 billion. Under his management, the company’s annual production was increased to 500,000 MT of high grade asphalt. Between 1989 and 2002, Mr. Tao served in various senior management and technical positions at Sinopec Zhenhai Refining & Chemical Co., the largest base for crude oil processing and sour crude oil processing in China, and won over 30 technological innovations, management awards and distinction during his service period. Due to Mr. Tao’s extensive experience in the petrochemical industry, his capacity of strong leadership demonstrated over the years in different companies, and his familiarity with the Company’s daily operation, Mr. Tao’s contribution to the Board as a director and the Chairman is crucial to the functioning of the Board.

Mr. Baojun Zheng, Chief Financial Officer.  On January 3, 2014, Mr. Baojun Zheng was appointed as Vice President of Accounting and Chief Financial Officer by the Board of the Directors to replace Mr. Fan Zhang , effective as of January 3, 2014. Before joining Keyuan, Mr. Zhen has 18 years experience in financial management. From 2011 to 2013, Mr. Zheng was a finance director of Ninbo AIERNI Group Co., Ltd. From 2002 to 2011, Mr. Zheng served as a finance director at Ningbo YunShen Corp., Ltd. Mr. Zheng holds a bachelor degree of accounting and financial management from Zhejiang Financial and Science University.

Mr.Yuxin Xiang, Director. Mr. Yuxin Xiang has been a member of our Board of Directors since September 6, 2012. Mr. Xiang serves as the President of CNX Consulting Inc. which provides financial reporting, asset management and capital transactions services to North American companies, as well as a director and Audit Committee member of five companies listed on the Toronto Stock Exchange (TSX) and TSX Venture Exchange (TSXV). Prior to joining CNX Consulting, Mr. Xiang served as the Chief Financial Officer of IND DairyTech Limited and GobiMin Inc, both listed on TSXV. Mr. Xiang also worked in corporate finance management for several TSX listed companies, including COM DEV International Ltd., ATS Automation Tooling Systems Inc. and CFM Corporation. He holds a Bachelor of Arts Degree from Huazhong University of Science & Technology in China, and a Masters of Business Administration from York University in Canada. Mr. Xiang is a Certified Management Accountant (Ontario) and a Certified Public Accountant (Delaware).

Mr. Dish Shen, Director.  Mr. Dishen Shen has been a member of our Board of Directors since July 1, 2010. Mr. Shen is a senior petrochemical engineer with nearly 40 years of oil refining and petrochemical industry expertise and management experience and has served in a variety of progressive leadership roles in planning and economic development in Zhejiang Province, focusing primarily on development of the petrochemical industry, and serves today as a member of the People's Committee of Zhejiang Province. Since 2005, he has been serving as a senior counsel for Zhejiang Provincial Association Of Engineering Consultants, the institute providing consulting and administration service. He graduated from Beijing Petroleum Institute with a major in oil refining systems.

Mr. Xin Yue, Director . Mr. Xin Yue has been a member of our Board of Directors since July 1, 2010. Mr. Yue currently is co-founder and chief executive officer of Cmark Capital Co., Ltd since 2005. Previously he also co-founded Golden Spider Co., Ltd., and New Shengtong Technology Co., Ltd. Mr. Yue has served as an advisor to several U.S. public companies, such as Tianyin Pharmaceutical Co., Inc. and Jpak Group Inc. and president at a Shanghai subsidiary of Jiubai Group Co., Ltd. He received his Bachelor of Science in Economics and Management at Capital Economic and Trade University and his MBA in Finance from Baruch College at The City University of New York. Mr. Yue’s broad experience as an advisor to U.S. public companies adds to our Board relevant expertise and knowledge about the U.S. capital market, and rules and regulations of U.S. securities laws.

58

Significant Employees

The following are employees who are not executive officers, but who are expected to make significant contributions to our business:

Mr. Shifa Wang, Vice President & Chief Engineer.  With 30 years’ management experience in petrochemical technology and manufacturing, and specialty in oil refining and catalytic cracking, Mr. Wang has been responsible for technology, and research and development of the Company since 2009. In December, 2012, Mr. Wang was appointed as the new General Manager of Ningbo Keyuan replacing Dr. Ma, responsible for daily operation and management and efficiency improvement of Ningbo Keyuan. Between 2007 and 2009, Mr. Wang served as General Manager at Guangdong Yingchang Heavy Road Asphalt Co., Ltd, responsible for managing and overseeing the overall business operations of the company. Between 1981 and 2002, he served as the Chief Engineer at Sinopec Anqing Refinery Co., Ltd., responsible for technology development and research and development. Between 2003 and 2006, he was the Head of Operations for Phase II production line expansion, including construction of 500,000 MT heavy oil catalytic cracking facility, 150,000 MT gas fractionation facility, 10,000 MT sulphur recovery facility and 30,000 MT polypropylene facility, at Guangdong Tianyi Group Co., Ltd.  Mr. Wang received his Bachelor of Science from Chemical Engineering Department of China Petroleum University and Master of Art in Enterprise Management from Qinghua University.

Mr. Mingliang Liu, Vice President of Manufacturing. Mr. Liu has been responsible for overseeing the manufacturing by the Company since 2009. Mr. Liu has over 30 years of experience in petrochemical manufacturing and production management and specializes in oil refining, heavy oil cracking and crude oil processing. Between 1975 and 2009, he served in various supervisory and managerial positions at Sinopec Zhenhai Refining & Chemical Co. Mr. Liu majored in Economics & Management at Zhejiang CCP Institute.

Corporate Governance

Corporate governance is the system that allocates duties and authority among a company’s stockholders, Board of Directors and management. The stockholders elect the Board of Directors and vote on extraordinary matters; the Board of Directors is a company’s governing body, responsible for hiring, overseeing, and evaluating management, particularly the chief executive officer; and management runs a company’s day-to-day operations. Our Board of Directors currently consists of five seats.

Board Leadership Structure.   

The Board of Directors maintains a structure with the Chief Executive Officer of the Company holding the position as Chairman of the Board of Directors.

The Board of Directors utilizes a leadership structure that has the Chief Executive Officer (who is the Corporation’s principal executive officer and a director) who also acts in the capacity as Board Chairman, without a designated independent lead director. This structure creates efficiency in the preparation of the meeting agendas and related Board materials as the Company’s Chief Executive Officer works more directly with those preparing the necessary Board materials and is more connected to the overall daily operations of the Company. Agendas are also prepared with the permitted input of the full Board of Directors allowing for any concerns or risks of any individual director to be discussed as deemed appropriate.  Given the Company’s relatively small size (both in terms of number of employees and in scope of operational activities directly conducted by the Company), its corporate strategy and its focus on research and development, this structure is deemed to be appropriate and allows for efficient oversight. However, in order to improve corporate governance, the Board has authorized the establishment of  a sub-committee composed of the independent directors,  the Company’s SOX 404 compliance consultant and a U.S. securities counsel to the Company to examine the responsibilities and duties of the Chief Executive Officer and Chairman of the Board, and further evaluate this structure.

Compliance with Section 16(a) of the Exchange Act

Section 16(a) of the Exchange Act requires our officers, directors and persons who own more than 10% of any class of our securities registered under Section 12(g) of the Exchange Act to file reports of ownership and changes in ownership with the SEC. Officers, directors and greater than 10% stockholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file.

59

Based on our review of copies of such reports, we believe that there was compliance with all filing requirements of Section 16(a) applicable to our officers, directors and 10% stockholders during fiscal 2010.

Code of ethics

The Company has always encouraged its employees, including officers and directors to conduct business in an honest and ethical manner.  Additionally, it has always been our policy to comply with all applicable laws and provide accurate and timely disclosure.

Due to our lack of operations and small employee base prior to the Share Exchange, we did not maintain a formal written code of ethics.  However, as a result of the Share Exchange, we decided to adopt formal written codes of ethics for our executive officers, our directors and our employees.

Our codes of ethics are designed to deter wrongdoing and promote honest and ethical conduct and compliance with applicable laws and regulations.  These codes also incorporate our expectations of our executives that enable us to provide accurate and timely disclosure in our filings with the Securities and Exchange Commission and other public communications.  Our codes of ethics are attached as exhibits to the Current Report on Form 8-K that we filed with the SEC on July 7, 2010 and are available on our website, http://ir.stockpr.com/keyuanpetrochemicals/governance-documents. Any future changes or amendments to our code of ethics, and any waiver of our codes of ethics will also be posted on our website when applicable.

Board Independence and Committees

Since our stock start started trading on Nasdaq in September 2010, we were required to comply with the director independence requirements of the Nasdaq rules.  Since that time, in determining whether our directors are independent, we have complied and plan to continue to comply with the Nasdaq rules although our common stock is currently trading on Pink Sheets.  The Board of Directors will also consult with counsel to ensure that the Boards of Director’s determinations are consistent with those rules and all relevant securities and other laws and regulations regarding the independence of directors, including those adopted under the Sarbanes-Oxley Act of 2002 with respect to the independence of Audit Committee members.  The Nasdaq  listing standards define an “independent director” generally as a person, other than an officer of a company, who does not have a relationship with the company that would interfere with the director’s exercise of independent judgment.  Our two directors, Mr. Shen and Mr. Xiang are “independent” as that term is defined by Nasdaq Rule 4200(a)(15). We are planning to add additional one or two bilingual Chinese-speaking independent directors to facilitate the Board oversight and augment the efforts of the current independent directors.

Audit Committee and Financial Expert

Our Audit Committee consists of Mr. Yuxin Xiang and Mr. Dishen Shen, each of whom is independent. The Audit Committee assists the Board of Directors oversight of (i) the integrity of the our financial statements, (ii) our compliance with legal and regulatory requirements, (iii) the independent auditor’s qualifications and independence, and (iv) the performance of our internal audit function and independent auditor, and prepares the report that the Securities and Exchange Commission requires to be included in our annual proxy statement. The Audit Committee operates under a written charter. Mr. Xiang is the Chairman of our Audit Committee.

The Board of Directors determined that Mr. Xiang possesses accounting or related financial management experience that qualifies him as financially sophisticated within the meaning of Rule 4350(d)(2)(A) of the Nasdaq Marketplace Rules and that he is an “audit committee financial expert” as defined by the rules and regulations of the SEC.

Compensation Committee

The Compensation Committee is responsible for overseeing and, as appropriate, making recommendations to the Board of Directors regarding the annual salaries and other compensation of our executive officers and general employees and other policies, and for providing assistance and recommendations with respect to our compensation policies and practices. Each of Mr. Yuxin Xiang and Mr. Dishen Shen are members of the Compensation Committee. The Compensation Committee operates under a written charter. Mr. Xiang is the Chairman of Compensation Committee.

60

Nominating Committee and Corporate Governance Committee

The purpose of the Nominating and Corporate Governance Committee is to assist the Board of Directors in identifying qualified individuals to become members of our Board of Directors, in determining the composition of the Board of Directors and in monitoring the process to assess Board effectiveness. Each of Mr. Yuxin Xiang and Mr. Dishen Shen are members of the Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee operates under a written charter.

ITEM 11.      EXECUTIVE COMPENSATION

Executive Compensation

Summary Compensation Table of Named Executive Officers

The following table sets forth all cash compensation paid by us, as well as certain other compensation paid or accrued, in 2013, 2012 and 2011 to each of the following named executive officers. The total amount was$133,263 in 2013, $133,755 in 2012, and $361,519 in 2011, respectively.

Name and Principal Position	Fiscal Year	Salary ($)	Bonus ($)	Option Awards ($)	Non-Equity  Incentive Plan Compensation ($)	Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)	All Other Compensation ($)	Total ($)
Chunfeng Tao	2013	59,103						59,103
(President, Chief Executive)	2012	57,132						57,132
	2011	28,116	90,772					118,888
Aichun Li(2)	2013							Nil
(Former Chief Financial Officer)	2012							Nil
	2011	125,000						125,000
	2013	29,861	5,005					34,866
Fan Zhang (3)	2012	28,566	4,414					32,980
(Acting Chief Financial Officer)	2011	14,079	13,822					27,902
Jingtao Ma (1)	2013	39.294						39,294
(Vice President)	2012	28,566	15,077					43,643
	2011	25,435	48,555					73,990
Weifeng Xue(1)	2013							Nil
(Former VP of Accounting)	2012							Nil
	2011	15,739						15,739

(1) Although they are not executive officers, based on upon the compensation received, Mr. Ma and Mr. Xue qualify as named executive officers for purposes of this table.  Mr. Xue no longer has any further responsibility or authority with regard to the accounting or finance of the Company since August 20, 2011. Mr. Xue remained available to assist the Company with the transition for a period of up to two months.On January 3, 2014, Mr. Jintao Ma resigned from his position of the Chief General Manager of Ningbo Keyuan Petrochemicals due to personal reasons.

(2)	On October 12, 2011, Ms. Li resigned her position as Chief Financial Officer of the Company. Ms. Li was a consultant retained by the Company until December 12, 2011.
(3)	On January 3, 2014, the Board of Directors of the Company approved the appointment of Mr. Baoyun Zhen, as the Chief Financial Officer of the Company, effective immediately, replacing Mr. Fan Zhang, who the Company intends to appoint as the Chief General Manager of Zhejiang Zhongke Xunen Import and Export Ltd, a to be formed new Company which is the process of incorporation.

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Pension Benefits

We do not sponsor any qualified or non-qualified defined benefit plans.

Nonqualified Deferred Compensation

We do not maintain any non-qualified defined contribution or deferred compensation plans.

Retirement/Resignation Plans

We do not have any plans or arrangements in place regarding the payment to any of our executive officers following such person’s retirement, resignation, constructive termination or change in control transaction.

Employment Agreements

We have entered into employment agreements with each of the PRC subsidiary’s employees, officers and directors.

On May 1, 2007, Ningbo Keyuan entered into a non-fixed term employment agreement with Mr. Chunfeng Tao, pursuant to which, Ningbo Keyuan hired Mr. Tao as its general manager effective May 1, 2007. The compensation in connection with this employment shall be commensurate with Mr. Tao’s duties and responsibility as the general manager and is subject to mutual agreement between Mr. Tao and Ningbo Keyuan.   On February 2, 2009, Keyaun Plastics entered into another similar agreement with Mr. Mingliang Liu to hire him as vice general manager. On October 21, 2009, Mr. Shifa Wang was hired by Ningbo Keyuan as a vice technical general manager and chief engineer and a similar employment agreement was signed between Ningbo Keyuan and Mr. Wang. On January 3, 2014, Mr Baojun Zheng was hired by the Company as the Chief Financial Officer and Vice President of Accounting, and a similar employment agreement was signed between Keyuan petrochemicals Inc and Mr Zheng.

On May 1, 2007, Ningbo Keyuan also entered into a confidentiality and non-compete agreement with Mr. Tao, pursuant to which, Mr. Tao agreed, among other things, (i) that he will keep in confidence all Ningbo Keyuan confidential information obtained in connection with such employment; (ii) that Ningbo Keyuan has the sole ownership right to all Ningbo Keyuan intellectual properties, either developed by Mr. Tao individually or collectively with other parties during his employment term or within one (1) year following the termination of his employment; and (iii) that within two (2) years following the termination of his employment, he will not, directly or indirectly, engage in any business or other activities related to Ningbo Keyuan confidential information that he obtained during his last five (5) years of employment (or such less term) with Ningbo Keyuan.   In addition, using the same form of the agreement, we entered into confidentiality and non-compete agreements with Mr. Mingliang Liu, Mr. Shifa Wang and Mr. Baojun Zheng on February 2, 2009, October 21, 2009 and January 3, 2014, respectively.

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Compensation of Directors

Our directors are reimbursed for expenses incurred by them in connection with attending Board of Directors’ meetings.. The following table sets forth all cash compensation paid by us, as well as certain other compensation paid or accrued, in 2013, to each of the following named directors.

Name	Fees earned or paid in cash ($)	Stock awards ($)	Option awards ($)	Non-equity incentive plan compensation ($)	Nonqualified deferred compensation earnings  ($)	All other compensation ($)	Total ($)
Yuxin Xiang	90,000	0	0	0	0	0	90,000
Dishen Shen	21,180	0	0	0	0	0	21,180
Xin Yue	0	0	0	0	0	0	0

ITEM 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The following table sets forth certain information regarding beneficial ownership of our Common Stock as of May 19, 2014 by (i) each person (or group of affiliated persons) who is known by us to own more than five percent (5%) of the outstanding shares of our Common Stock, (ii) each director, executive officer and director nominee, and (iii) all of our directors, executive officers and director nominees as a group. As of May 19, 2014, we had 57,520,012 shares of Common Stock issued and outstanding, and 5,333,340  shares of Series B Preferred Stock issued and outstanding.

Beneficial ownership is determined in accordance with SEC rules and generally includes voting or investment power with respect to securities. For purposes of this table, a person or group of persons is deemed to have “beneficial ownership” of any shares of common stock that such person has the right to acquire within 60 days of May 19, 2014. For purposes of computing the percentage of outstanding shares of our common stock held by each person or group of persons named above, any shares that such person or persons has the right to acquire within 60 days of May 19, 2014 is deemed to be outstanding for such person, but is not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. The inclusion herein of any shares listed as beneficially owned does not constitute an admission of beneficial ownership.

We calculate beneficial ownership for purposes of this table as follows:

A  +  B

X  +  B

Where:

A = individual’s current holders of common stock

B = number of shares of common stock individual may own within 60 days

X= number of common stock currently outstanding

Unless otherwise noted, the principal address of each of the stockholders, directors and officers listed below is Qingshi Industrial Park, Ningbo Economic & Technological Development Zone, Ningbo, Zhejiang Province, P. R. China 31580.

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Name of Beneficial Owner	Amount (Number of Shares)		Percentage of Outstanding Shares of Common  Stock (5)(6)
Delight Reward Limited(1)		47,558,000		82.68	%
Chunfeng Tao(2)		32,750,341		56.94	%
Dragon State International Limited (3)		5,333,340		9.27	%
Peijun Chen(4)		9,802,965		17.04	%

(1)   Delight Reward Limited is owned by Apex Smart Limited (68.864%),  Chance Brilliant Holdings Limited (20.5694%), Harvest Point Limited (5.3896%) and Strategic Synergy Limited (5.1755%). Mr. Chunfeng Tao is the controlling person of Apex Smart Limited.   Mr. Peijun Chen is the controlling person of Chance Brilliant Holdings Limited .Ms. Muxin Duan is the controlling person of Harvest Point Limited. Mr. Brian Pak Lun Mok is the controlling person of Strategic Synergy Limited (subject to the Slow Walk Agreement described in the discussion below).

(2)   Mr. Chunfeng Tao, through his 100% ownership of Apex Smart Limited, owns and controls 32,750,341 shares of our common stock.

(3)   In connection with the September 2010 Private Placement, Dragon State owns 5,333,340 shares of Series B Preferred Stock.  However, pursuant to the relative rights and preferences of the Series B preferred stock, the numbers of common stock to be issued upon conversion of the Series B preferred stock cannot  exceed 9.99% of the then issued and outstanding shares of common stock outstanding at such time.

(4)   Mr. Wang indirectly (through his 20.5694% ownership of Delight Reward Limited) owns and controls 9,802,965 shares of our Common Stock.

Changes in Control

During the twelve months ended December 31, 2013, there was no arrangements, known to us, the operation of which may at a subsequent date result in a change in control of the Company.

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ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

We have not entered into any transaction during the last two fiscal years with any director, executive officer, director nominee, 5% or more shareholder, nor have we entered into transaction with any member of the immediate families of the foregoing person (including spouse, parents, children, siblings, and in-laws) or is any such transaction proposed, except as follows:

(A) 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
Ningbo Pacific Ocean Shipping Co., Ltd  (Ningbo Pacific)	100% ownership by Mr. Wang
Ningbo Hengfa Metal Product Co., Ltd (Ningbo Hengfa, former name “Ningbo Tenglong”)	100% ownership by Mr. Chen

Related party transactions and amounts outstanding with the related parties as of and for the years ended December 31, 2013 and 2012, are summarized as follows:

	Year ended December 31
	2013		2012
	($’000)		($’000)
Guarantee for bank borrowings (a)	$	-	$	34,399
Loan guarantee fee (a)	$	103	$	307
Advance payments to related parties (b)	$	43	$	40

(a)   Guarantees for Bank Loans

Guarantees for bank loans provided by related parties during the year ended December 31, 2013 and 2012 are as follows:

	Guarantee provided during year ended December 31,
	2013		2012
	($’000)		($’000)
Mr. Tao	$	-	$	16,645
Jicun Wang and Sumei Chen		-		17,754
Total	$	-	$	34,399

	Bank loans Guaranteed as of
	December 31, 2013		December 31, 2012
	($’000)		($’000)
Jicun Wang and Sumei Chen	$	-	$	13,054
Ningbo Pacific		-		25,426
Total	$	-	$	38,480

(a) Beginning in 2011, loan guarantee fees of 0.3% of the loan principal guaranteed are to be paid quarterly. In the year ended December 31, 2013, loan guarantee fees were approximately $0.1 million for Ningbo Pacific. In 2012, loan guarantee fees were approximately $0.1 million and $0.3 million for Ningbo Hengfa and Ningbo Pacific, respectively.

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(b) Advance payments to related parties consist of Mr. Tao for advances made for business purposes. These amounts are unsecured interest free and due on demand.

(B) Relationships and transactions with certain other parties

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

Name of parties	Relationship
Ningbo Xinhe Logistic Co., Ltd (Ningbo Xinhe)	10% ownership by Ms. Huang
Ningbo Litong Petrochemical Co., Ltd (Ningbo Litong)	Former 12.75% nominee shareholder of Ningbo Keyuan
Ningbo Anqi Petrochemical Co., Ltd (Ningbo Anqi)	A related party through September 2011 when control transferred
Ningbo Lide Investment Co., Ltd. (Ningbo Lide) (Formerly Ningbo Kewei)	A related party through September 2011 when control transferred
Ningbo Kunde Petrochemical Co, Ltd. (Ningbo Kunde)	A related party through September 2011 when control transferred

Transactions and amounts outstanding with these parties for the years ended December 31, 2013 and 2012 are summarized as follows:

	Year ended December 31
	2013		2012
	($’000)		($’000)
Sales of products (c)	$	69,476	$	146,716
Purchase of raw materials (d)	$	65,713	$	41,312
Purchase of transportation services (e)	$	3,613	$	2,813
Guarantee for bank borrowings (f)	$	280,332	$	365,184
Loan guarantee fees (f)	$	2,474	$	1,411
Amounts due to these parties(g)	$	369	$	-
Advance payments to these parties (h)	$	11,055	$	-
Advance Received from these parties (i)	$	218	$	-

(c) The Group sold finished products of approximately $30.7 million and $45.4 million to Ningbo Litong for the years ended December 31, 2013 and 2012, respectively. The Group sold finished products of approximately $38.0 million and $98.2 million to Ningbo Kunde for the years ended December 31, 2013 and 2012, respectively. The Group sold finished products of approximately $0.8 million and $3.1 million to Ningbo Lide for the years ended December 31, 2013 and 2012, respectively.

(d) The Group purchased raw materials of approximately $15.8 million and $26.0 from Ningbo Litong for the years ended December 31, 2013 and 2012, respectively. The Group purchased raw materials of approximately $2.7 million and $11.6 from Ningbo Kunde for the years ended December 31, 2013 and 2012, respectively. The Group purchased raw materials of approximately $47.2 million and $3.7 from Ningbo Lide for the years ended December 31, 2013 and 2012, respectively.

(e) The Group purchased transportation services of $3.6 millionand approximately $2.8 million from Ningbo Xinhe during the years ended December 31, 2013 and 2012, respectively.

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(f) Guarantees for Bank Loans

	Guarantee provided during the year ended December 31,				Bank loans Guaranteed as of December 31,
	2013		2012		2013		2012
	($’000)		($’000)		($’000)		($’000)
Ningbo Litong	$	148,507	$	103,805	$	150,483	$	30,710
Ningbo Lide		131,825		261,379		133,579		122,651
Total	$	280,332	$	365,184	$	284,062	$	153,361

Beginning in January 2011, loan guarantee fees was approximately 0.3% of the loan principal guaranteed. Guarantee fees payable to Litong and Lide were approximately $1.1 million and $1.4 million, respectively, for the year ended December 31, 2013. Guarantee fees payable to Litong and Lide were approximately $0.7 million each for the year ended December 31, 2012.

(g) At December 31, 2013, approximately $0.4 million was due to Xinhe.

(h) At December 31, 2013, advance payments to these parties consist of payments to Litong, Lide and Xinhe of $3.8 million, $7.2 million, and $0.01 million, respectively.

(i) At December 31, 2013, advances received from these parties consist of amounts received from Litong of $0.2 million.

ITEM 14.      PRINCIPAL ACCOUNTANT FEES AND SERVICES

Aggregate fees for professional services rendered to the Company by GHP Horwath P.C for the years ended December 31, 2013 and 2012 were as follows:

Services Provided	2013		2012
Audit Fees	$	345,000		$	362,000
Audit Related Fees	Nil				63,000
Tax Fees	19,000				19,000
All Other Fees	Nil			Nil
Total	$	364,000		$	444,000

Audit Fees.  The aggregate fees billed for the years ended December 31, 2013 and 2012 were for the audits of our financial statements and reviews of our interim financial statements included in our annual and quarterly reports.

Audit Related Fees.  The aggregate fees billed for the years ended December 31, 2013 and 2012 were for the audit or review of our financial statements that are not reported under Audit Fees.

Tax Fees.  The aggregate fees billed for the years ended December 31, 2013 and 2012 were for professional services related to tax compliance, tax advice and tax planning.

All Other Fees.  The aggregate fees billed for the years ended December 31, 2013and 2012 were for services other than the services described above.

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(5) AUDIT COMMITTEE POLICIES AND PROCEDURES

The policy of our Audit Committee is to pre-approve all audit and permissible non-audit services to be performed by the Company’s independent auditors during the fiscal year.  Under these procedures, the Audit Committee pre-approves both the type of services to be provided by our auditor and the estimated fees related to these services.

ITEM 15.      EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS

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 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)
4.2	Amendment to Certificate of Designation of Rights and Preference of Series B Preferred Stock (incorporated by reference to Exhibit 99.1 of the Registrant’s Form 8-K filed on September 25, 2013).
10.1	Amendment to Series C Warrant and Series D  Warrant, dated September 24, 2013 (incorporated by reference to Exhibit 99.2 of the Registrant’s Form 8-K filed on September 25, 2013).
31.1	Certifications of Chief Executive Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.  (Filed herewith.)
31.2	Certifications of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.  (Filed herewith.)
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.  (Filed herewith.)
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.  (Filed herewith.)

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Keyuan Petrochemicals, Inc.
By:	/s/ Chunfeng Tao
	Chunfeng Tao Chairman and Chief Executive Officer
By:	/s/ Baojun Zheng
	Baojun Zheng
	Vice President of Accounting / Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934 this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/ Chunfeng Tao	Chairman, President, Chief Executive Officer and Director	May 21, 2014
Chunfeng Tao
/s/ Baojun  Zheng	Vice President of Accounting/ Chief Financial Officer	May 21, 2014
Baojun Zheng
/s/ Yuxin Xiang	Director, Audit Committee Chairman and Compensation Committee Chairman	May 21, 2014
Yuxin Xiang
/s/ Dishen Shen	Director	May 21, 2014
Dishen Shen
/s/ Xin Yue	Director	May 21, 2014
Xin Yue

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