S-1/A 1 fs1a2_keyuan.htm FORM S-1/A fs1a2_keyuan.htm
 


As filed with the Securities and Exchange Commission on         Registration No. 333-170324
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form S-1/A 2
 
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

KEYUAN PETROCHEMICALS, INC.
 (Exact name of Registrant as specified in its charter)
 
Nevada
 
1311
 
 45-0538522
(State or Other Jurisdiction of Incorporation or Organization)
 
(Primary Standard Industrial Classification Code Number)
 
(I.R.S. Employer Identification Number)

Qingshi Industrial Park
Ningbo Economic & Technological Development Zone
Ningbo, Zhejiang Province
P.R. China 315803
(86) 574-8623-2955
 (Address, including zip code, and telephone number,
including area code, of Registrant’s principal executive offices)

Copies to:
 
Louis E. Taubman, Esq.
Leser, Hunter, Taubman & Taubman
17 State Street, Suite 2000
New York, New York 10004
 
Approximate date of commencement of proposed sale to the public: From time to time after this Registration Statement becomes effective.
 
 
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  x   

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

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 definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer
o
Accelerated filer
o  
Non-accelerated filer
o
Smaller reporting company 
x
 
(Do not check if a smaller reporting company)
 
 
 
CALCULATION OF REGISTRATION FEE
 
Title of each class of securities to be registered  
Amount to be
Registered(1)
   
Proposed
maximum
offering price per
share(2)
   
Proposed
maximum
aggregate
offering price
   
Amount of
registration fee
 
Shares of Common Stock Underlying Preferred Stock
    5,400,010(3)     $ 5.13     $ 27,702,051.30     $ 1975.16  
Shares of Common Stock Underlying Warrants
    810,002(4)     $ 5.13     $ 4,155,310.26     $ 296.27  
Shares of Common Stock Underlying Warrants
    810,002(5)     $ 5.13     $ 4,155,310.26     $ 296.27  
Shares of Common Stock Underlying Placement Agent Warrants
    561,601(6)     $ 5.13     $ 2,881,013.13     $ 205.42  
Total
    7,581,615             $ 38,893,684.95     $ 2,773.12  
 
 
 
 

 
 
(1)
Pursuant to Rule 416 under the Securities Act of 1933, this registration statement includes an indeterminate number of additional shares as may be issuable as a result of stock splits or stock dividends which occur during this continuous offering.
   
(2)
Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(c) under the Securities Act of 1933, as amended based upon the average of the bid and asked price of the Registrant's common stock as quoted on the Nasdaq Stock Market of $5.19 on November 1, 2010. 
   
(3)
Represents shares of the Company’s Series B Convertible Preferred Stock, par value $0.001 per share, convertible into the same number of shares of the company’s common stock, par value $0.001 per share the Company issued pursuant to the financings that the Company consummated on September 28, 2010.
   
(4) 
Represents shares of common stock underlying Series C Warrants at an exercise price of $4.50 per share that the Company issued pursuant to the financings they consummated on September 28, 2010.
   
(5) 
Represents shares of common stock underlying Series D Warrants at an exercise price of $5.25 per share that the Company issued pursuant to the financings they consummated on September 28, 2010.
   
(6)
Represents shares of common stock underlying Placement Agent Warrants that the Company issued to the placement agent in connection with the financings they consummated on September 28, 2010, including 432,001 shares of common stock underlying Placement Agent Warrants at an exercise price of $3.75 per share; 64,800 shares of common stock underlying Placement Agent Warrants at an exercise price of $4.50 per share and 64,800 shares of common stock underlying Placement Agent Warrants at an exercise price of 5.25 per share.
 
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said section 8(a), may determine.
 
 
 
 
 
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE SELLING STOCKHOLDERS MAY NOT SELL THESE SECURITIES PUBLICLY UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
 
SUBJECT TO COMPLETION, DATED 
 
PROSPECTUS

 
KEYUAN PETROCHEMICALS, INC.
 
 
7,581,615Shares of Common Stock
 
 This prospectus relates to the resale of up to 7,581,615 shares of our common stock, $0.001 par value, including 5,400, 010  shares of our Common Stock (the “Conversion Shares”) issuable upon the conversion of our Series B Preferred Stock, and 2,181,605 shares of our Common Stock issuable upon exercise of warrants (the “Warrant Shares”). The Warrant Shares are comprised of (i) 810,002  shares of Common Stock issuable upon exercise of Series C Warrants to purchase our Common Stock, (ii) 810,002  shares of Common Stock issuable upon exercise of Series D Warrants to purchase our Common Stock and (iii) 561,601 shares of Common Stock issuable upon exercise of Placement Agent Warrants  to purchase our Common Stock issued to TriPoint Global Equities, LLC , as placement agent in connection with the Private Placement. The selling stockholders named herein may sell common stock from time to time in the principal market on which the stock is traded at the prevailing market price, at prices related to such prevailing market price, in negotiated transactions or a combination of such methods of sale. We will not receive any proceeds from the sales by the selling stockholders.

Our Common Stock is quoted on the Nasdaq Stock Market under the symbol “KEYP” and has very limited trading. The closing price for our Common Stock on the Nasdaq Stock Market on January 12, 2011 was $ 4.33 per share.
 
The selling stockholders, and any broker-dealer executing sell orders on behalf of the selling stockholders, may be deemed to be “underwriters” within the meaning of the Securities Act of 1933, as amended.  Commissions received by any broker-dealer may be deemed underwriting commissions under the Securities Act of 1933, as amended.
 
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE SHARES ONLY IF YOU CAN AFFORD A COMPLETE LOSS OF YOUR INVESTMENT. SEE “RISK FACTORS” BEGINNING ON PAGE 6 FOR A DISCUSSION OF RISKS APPLICABLE TO US AND AN INVESTMENT IN OUR COMMON STOCK.
 
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
 
The date of this prospectus is January 14, 2011 .
 
 

 

 
  1
 
     
  20
 
     
  20  
     
  20  
     
  20
 
     
  22
 
     
  24
 
     
  26
 
     
  26  
     
  110  
     
  110  
     
  110  
     
Part II
   
     
  111  
     
  111  
     
  111  
     
  113  
     
  115
 

We have not authorized any person to give you any supplemental information or to make any representations for us. You should not rely upon any information about us that is not contained in this prospectus or in one of our public reports filed with the Securities and Exchange Commission (“SEC”) and incorporated into this prospectus. Information contained in this prospectus or in our public reports may become stale. You should not assume that the information contained in this prospectus, any prospectus supplement or the documents incorporated by reference are accurate as of any date other than their respective dates, regardless of the time of delivery of this prospectus or of any sale of the shares. Our business, financial condition, results of operations and prospects may have changed since those dates. The selling stockholders are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted.
 
In this prospectus the “company,” “we,” “us,” and “our” refer to KEYUAN PETROCHEMICALS, INC., a Nevada corporation and its subsidiaries, after giving effect to the Share Exchange that the Company completed on April 22, 2010.
 
Until [  ], all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus.  This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters.

 
 
ITEM 3. SUMMARY INFORMATION, RISK FACTORS AND RATIO OF EARNINGS TO FIXED CHANGES
 
This summary highlights selected information appearing elsewhere in this prospectus. While this summary highlights what we consider to be the most important information about us, you should carefully read this prospectus and the registration statement of which this prospectus is a part in their entirety before investing in our common stock, especially the risks of investing in our common stock, which we discuss later in “Risk Factors,” and our financial statements and related notes beginning on page 6 and 51, respectively. Unless the context requires otherwise, the words “we,” “us” and “our” refer to Keyuan Petrochemicals, Inc.. and our subsidiaries, and the word “Keyuan Petrochemicals” refers only to Keyuan Petrochemicals, Inc.. All market and industry data provided in this prospectus represents information that is generally available to the public and was not prepared for us for a fee. We did not fund nor were we otherwise affiliated with these sources and we are not attempting to incorporate the information on external web sites into this prospectus. We are only providing textual reference of the information of market and industry data and the web addresses provided in this prospectus are not intended to be hyperlinks and we do not assure that those external web sites will remain active and current.
 
Our Company
 
Prior to the consummation of the share exchange transaction described below, we were a shell company with nominal operations and nominal assets. Currently, we are a holding company operating through our wholly-owned subsidiary, Keyuan Plastics, located in Ningbo, China. We are a manufacturer and supplier of various petrochemical products in China. Through Keyuan Plastics, our operations include (i) an annual petrochemical manufacturing capacity of 550,000 metric tons (MT) of a variety of petrochemical products, (ii) facilities for the storage and loading of raw materials and finished goods, (iii) a manufacturing technology that can support our manufacturing process with low raw material costs and high utilization and yields, (iv) a strong management team consisting of petrochemical experts with proven track records from some of China’s largest state-owned enterprises in the petrochemical industry.

Due to China’s growing demand for refined petrochemical products, which is mainly attributable to China’s significant economic growth and under-developed domestic supply capacity, our customer request orders for the year 2010 has exceeded our current annual production capacity. In order to increase our production capacity to meet the increasing market demands, our management team plans to expand our manufacturing capacity to include a raw material pre-treatment facility, additional storage capacity and an asphalt production facility.
 
In order to expand our facility, we need to acquire use rights of additional land. In China, the government is responsible for overall land planning and they will often select a target company to maximize the benefits of land use for a particular area. We have been in regular communications with the Ningbo Municipal Government about the land use rights for approximately 1.2 million square feet of land adjacent to our current production facility. We submitted our application to the local government for a land bidding process slated on July 13, 2010 which is a necessary legal proceeding to acquire the land use rights in China. We were the only bidder in this process because the land is well integrated with our existing site. The bidding process was completed on August 13, 2010 and we entered into land use right transfer agreements with the local government on August 18, 2010.
 
Share Exchange
 
On April 22, 2010, Silver Pearl entered into a Share Exchange Agreement, by and among Keyuan International Group Limited (“Keyuan International”), a company organized under the laws of the British Virgin Islands, Delight Reward Limited, the sole shareholder of Keyuan International and a company organized under the laws of the British Virgin Islands (the “Keyuan International Shareholder”), and Denise D. Smith, our former principal stockholder (“Smith”). Pursuant to the terms of the Exchange Agreement, the Keyuan International Shareholder transferred to us all of the issued and outstanding ordinary shares of Keyuan International (the “Keyuan International Shares”) in exchange for the issuance of 47,658 shares of our Series M preferred stock, par value $0.001 per share (the “Series M Preferred Stock”) (such transaction is sometimes referred to herein as the “Share Exchange”). The Series M shares vote with the common stock on an as converted basis and are convertible into 47,658,000 shares of common stock upon the Company’s shareholders approving an increase in authorized common stock to at least 100,000,000 shares. As a result of the Share Exchange, we are now the holding company of Keyuan Plastics Co., Ltd., the operating subsidiary of Keyuan International organized in the People’s Republic of China (“China” or the “PRC”) and engaged in manufacturing and supplying various petrochemical products in China.

Immediately prior to the Share Exchange, 3,264,000 shares of our common stock, par value $0.001 (the “Common Stock”) then outstanding were cancelled and retired.
 
 
April – May 2010 Private Financing
 
Following the Share Exchange, we entered into a securities purchase agreement with 122 accredited investors for the issuance and sale of 748,704 Units  at a purchase price of $35 per unit, 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, for aggregate gross proceeds of approximately $26,204,640  million.

In connection with the April-May 2010 private placement, we also entered into a registration rights agreement  with the investors, in which we agreed to file a registration statement  with the SEC to register for resale of the Common Stock, the Common Stock issuable upon conversion of the Series A Preferred Stock, the Series A Warrant Shares and the Series B Warrant Shares issued in the financing, within 30 calendar days of April 22, 2010 and to have such registration statement declared effective within 150 calendar days of April 22, 2010 or within 180 calendar days of April 22, 2010 in the event of a full review of the registration statement by the SEC. If we do not comply with the foregoing obligations under the Registration Rights Agreement, we will be required to pay cash liquidated damages to each investor, at the rate of 1% of the applicable subscription amount for each 30 day period in which we are not in compliance; provided, that such liquidated damages will be capped at 10% of the subscription amount of each investor and will not apply to any registrable securities that may be sold pursuant to Rule 144 under the Securities Act if all of the conditions in Rule 144(i)(2) are satisfied at the time of the proposed sale, or are subject to an SEC comment with respect to Rule 415 promulgated under the Securities Act. Accordingly, we filed a registration statement on Form S-1 in connection with the April-May 2010 private placement transaction, and the Amendment No. 4 to such Form S-1 which we filed on October 15, 2010 was declared effective on October 19, 2010. Therefore, we are not filing this prospectus to satisfy the provisions of the registration rights agreement we entered into in connection with the April-May 2010 private placement transaction.
 
A copy of the Exchange Agreement, the Purchase Agreement and the Registration Rights Agreement are incorporated herein by reference and are filed as Exhibit 2.1, Exhibits 10.1 and 10.2, respectively.

Short Form Merger and Name Change

On May 12, 2010, we caused to be formed a corporation under the laws of the State of Nevada called Keyuan Petrochemicals, Inc. and on the same day, acquired one hundred (100) shares (95%) of this entity’s stock for cash. As such, this 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 corporate 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 provided for in the Agreement and Plan of Merger, there was no change in our directors, officers, capital structure or business.

A copy of the Agreement and Plan of Merger and a copy of the Articles of Merger are incorporated herein by reference and filed as Exhibits 2.2 and 3.2, respectively.
 
September 2010 Private Placement

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

 In connection with the September 2010 Private Placement, we also entered into the following agreements:

a.  
A Registration Rights Agreement with the investors, in which we agreed to file a registration statement  with the Commission to register for resale the Common Stock issuable upon conversion of the Series B Preferred Stock, the Series C Warrant Shares and the Series B Warrant Shares, within 30 calendar days of October 19, 2010 and to have the registration statement declared effective within 150 calendar days of October 19, 2010 or within 180 calendar days of October 19, 2010 in the event of a full review of the registration statement by the Commission. If we do not comply with the foregoing obligations under the Registration Rights Agreement, we will be required to pay cash liquidated damages to each Investor, at the rate of 1% of the applicable subscription amount for each 30 day period in which we are not in compliance; provided, that such liquidated damages will be capped at 10% of the subscription amount of each investor and will not apply to any registrable securities that may be sold pursuant to Rule 144 under the Securities Act, or are subject to an SEC comment with respect to Rule 415 promulgated under the Securities Act.

In addition, pursuant to the Registration Rights Agreement, the Investors acknowledged and agreed that the registration rights granted under the Registration Rights Agreement are subject in all respects to the full realization of the registration rights granted to the purchasers in the private placement closed on September 28, 2010.

b.  
A Securities Escrow Agreement with the investors and Delight Reward Limited, holder of all of our issued and outstanding Series M preferred stock, pursuant to which, Delight Reward agrees to deliver into an escrow account 3,400 shares of our Series M Preferred Stock convertible into 3,400,000 shares of Common Stock to be used as escrow shares after we amend our Articles of Incorporation to increase our authorized Common Stock to one hundred million (100,000,000) shares. With respect to the 2010 performance year, if we achieve less than 95% of the 2010 performance threshold, then the escrow shares for such year will be delivered to the Investors in the amount of 500,000 shares of Common Stock for each full percentage point by which such threshold was not achieved up to a maximum of 3,400,000 shares of Common Stock.
 
c.  
A  Lock-Up Agreement with each of Messers Chunfeng Tao, Jicun Wang, Peijun Chen and Xin Yue (collectively, the “Affiliates”), whereby the Affiliates are prohibited from selling our securities that they directly or indirectly own until the registration statement in connection with the September 2010 Private Placement  is declared effective by the Commission (the “Lock-Up Period”). In addition, the Affiliates further agree that during the twenty four (24) months immediately following the Lock-Up Period, the Affiliates shall not offer, sell, contract to sell, assign, transfer (the “Transfer”) more than twenty percent (20%) of the Lock-Up Shares in the aggregate, provided, that the Affiliates may Transfer not more than 0.83333% of the Lock-Up Shares during each calendar month following the Lock-Up Period, other than engaging in a Transfer in a private sale of the Lock-Up Shares if the transferee agrees in writing to be bound by and subject to the terms of the Lock-Up Agreement.

d.  
A Voting Agreement with Delight Reward and the investors,  pursuant to which the Stockholder agreed to (i) give its written consent in any action to approve the issuance of the Underlying Shares which will result in issuance of securities greater than 20% of the then outstanding shares of Common Stock at a price less that the applicable market, and (ii) to appoint a person designated by the investors holding a majority of the Preferred Shares as a member of the board of directors of the Company and the subsidiary of the Company organized under the laws of the People’s Republic of China.
 
A copy of  the Purchase Agreement and the Registration Rights Agreement are incorporated herein by reference and are filed as Exhibits 10.37 and 10.38, respectively. A copy of the Securities Escrow Agreement, the Lock-Up Agreement, the Voting Agreement the Form of Series C warrants, Form of Series D warrants and Series B Certificate of Designation, are filed incorporated herein by reference as Exhibits 10.39, 10.40, 10.41, 10.42, 10.43 and 4.3, respectively.
 
 
Our Organizational Structure

Below is a chart of our structure after the closing of the Share Exchange:

 
Principal Executive Office

Our principal executive offices are located at Ningbo Industrial Park, Ningbo Economic & Technological Development Zone, Ningbo, China 315803, Tel: (86) 574-8623-2955.
 
Risk Factors
 
The securities offered by this prospectus are speculative and involve a high degree of risks associated with our business.  For more discussion of these and other risk factors affecting us and our business, see the “Risk Factors” section beginning on page 6 of this prospectus.


 
The Offering
 
Common Stock being offered by Selling Stockholders
Up to 7,581,615  shares(1)
   
Common Stock outstanding
3,707,510 shares as of the date of this Prospectus
   
Common Stock outstanding after the Offering
11,289,125 (2)
   
Use of Proceeds
We will not receive any proceeds from the sale of shares by the Selling Stockholders, although we may receive additional proceeds of up to $10,149,323 if all of the Series C Warrants and Series D Warrants are exercised for cash. We will not receive any additional proceeds to the extent that the Warrants are exercised by cashless exercise.
   
Nasdaq Stock Market Symbol
KEYP
   
Risk Factors
The securities offered by this prospectus are speculative and involve a high degree of risk and investors purchasing securities should not purchase the securities unless they can afford the loss of their entire investment. See “Risk Factors” beginning on page 6.
                      
(1)
This prospectus relates to the resale by the Selling Stockholders of up to 7,581,615 shares of our Common Stock, including 5,400,010 shares of our Common Stock (the “Conversion Shares”) issuable upon the conversion of our Series B Preferred Stock, and  2,181,605 shares of our Common Stock issuable upon exercise of Warrants. The Warrant Shares are comprised of (i) 810,002  shares of Common Stock issuable upon exercise of Series C Warrants to purchase our Common Stock, (ii) 810,002  shares of Common Stock issuable upon exercise of Series D Warrants to purchase our Common Stock and (iii) 561,601 shares of Common Stock issuable upon exercise of placement agent Warrants to purchase our Common Stock issued to TriPoint Global Equities, LLC, as placement agent in connection with the Private Placement, and certain of its designees as set forth in this prospectus.
 
(2)
Assumes issuance of all Conversion Shares and Warrant Shares.

Summary Financial Information
 
The following summary financial data for the fiscal years ended December 31, 2009 and 2008, were derived from the consolidated financial statements of our recently acquired subsidiary, Keyuan International Group Ltd., and the interim financial data for the period ending June 30, 2010 for Keyuan International Group Ltd.. This information is only a summary and does not provide all of the information contained in our financial statements and related notes. You should read the “Management’s Discussion and Analysis or Plan of Operation” beginning on page 89 of this prospectus and our financial statements and related notes included elsewhere in this prospectus.
 
 
 
Statement of Operations Data:  
 
   
For the Years Ended 
December 31,
   
For the Quarter ended September 30,
   
For the Nine Months
Ended September 30,
 
   
2009
   
2008
   
2010
   
2010
 
                         
Sales
  $ 68,653,603     $ --     $ 151,343,966       400,713,069  
Cost of sales
    75,311,595       -       138,277,229       370,185,046  
Gross profit
    (6,657,992       -       13,066,737       30,528,023  
                                 
Operating expenses
                               
Selling expenses
    24,836       -       97,871       441,284  
General and administrative expenses
    2,714,093       1,839,253       1,645,321       3,539,109  
Total operating expenses
    2,738,929       1,839,253       1,734,192       3,980,393  
                                 
Gain (loss) from operations
    (9,396,921 )     (1,839,253 )     11,323,545       26,547,630  
                                 
Other income (expenses):
                               
      Interest expense, net
    (2,031,983 )     (64,584 )     (3,850,777 )     (6,514,240 )
Non-operating expenses
    (348,515 )     (39,885 )     1,897,007       1,906,606  
           Total other expenses
    (2,380,498 )     (104,469 )     (1,953,770 )     (4,607,634 )
                                 
Income (loss) before provision for income tax
    (11,777,419 )     (1,943,722 )     9,369,775       21,939,996  
Provision(benefit) for income tax
    (2,944,350 )     (441,794 )     1,477,677       3,392,623  
Income (net) loss
    (8,833,069 )     (1,501,928 )     7,892,098       18,547,373  
Other comprehensive income
                               
Foreign currency translation adjustment
    15,991       649,089       1,976,139       2,175,395  
                                 
Comprehensive income (loss)
  $ (8,817,078 )   $ (852,839 )   $ 9,868,237       20,722,768  
                                 
    Basic earnings (loss) per common share
  $ 0.00     $ 0.00     $ 2.26       9.56  
    Diluted earnings (loss) per common share
  $ 0.00     $ 0.00     $ 0.14       0.35  
                                 
  Weighted average number of common shares
                               
    Outstanding
                               
  Basic
    -       -       3,181,504       1,867,972  
  Diluted
    -       -       57,948,173       53,609,751  
 
 
PRO FORMA EPS (UNAUDITED)
   
Keyuan International
Group LTD.
   
Keyuan International
Group LTD.
   
Keyuan International
Group LTD.
 
    Six Months Ended    
Six Months Ended
   
Year Ended
 
    June 30,    
June 30,
   
December 31,
 
    2010    
2010
   
2009
 
    (unaudited)    
(unaudited)
   
(unaudited)
 
                     
Net income/(loss)
 
$
4,924,004
   
$
10,655,276
   
$
(8,833,069
)
                         
Other comprehensive income (loss)
                       
      Foreign currency translation gain
   
196,958
     
199,256
     
15,991
 
                         
Comprehensive income (loss)
 
$
5,120,962
   
$
10,854,532
   
$
(8,817,078
)
                         
Net income (loss) per Share
                       
      Basic
 
$
0.41
   
$
0.88
   
$
(0.73
)
      Diluted
 
$
0.08
   
$
0.16
   
$
(0.73
)
                         
Weighted average shares outstanding
                       
      Basic
   
12,136,003
     
12,136,003
     
12,136,003
 
      Diluted
   
65,194,013
     
65,194,013
     
12,136,003
 
 
-5-

 
Balance Sheet Data:   
 
   
As of December 31, 2009
   
As of December 31, 2008
   
As of
September 30,
2010
 
                   
Cash and cash equivalents
 
$
14,030,655
   
$
9,094,537
   
$
44,932,623
 
Restricted cash
   
6,012,690
     
-
     
68,422,905
 
Trade notes receivable
   
400,491
     
-
     
3,292,506
 
                         
Inventory
   
32,595,045
     
333,187
     
77,135,949
 
Advanced payments
   
7,417,202
     
17,849,208
     
18,173,457
 
Prepaid taxes     15,263,949        0       29,617,022  
Tax rebate receivable      0        0       8,171,637  
                         
Property and equipment, net
   
131,824,617
     
32,351,840
     
129,086,205
 
Intangible assets net      6,378,316        6,646,190       12,256,149  
Total assets 
   
219,060,334
     
67,154,129
     
391,573,599
 
Accounts payable – trade and accrued expenses
   
2,888,860
     
45,000
     
57,040,944
 
Trade notes payable
   
13,719,134
     
-
     
52,844,100
 
Short term bank loans
   
82,885,500
     
-
     
123,104,239
 
Total liabilities 
   
208,432,375
     
57,409,089
     
318,703,507
 
Shareholders’ equity
   
10,627,959
     
9,745,040
     
72,870,092
 
 
 
RISK FACTORS

An investment in our Common Stock is speculative and involves a high degree of risk and uncertainty. You should carefully consider the risks described below, together with the other information contained in this prospectus, including the consolidated financial statements and notes thereto, before deciding to invest in our Common Stock. If any of the following risks occur, our business, financial condition and results of operations and the value of our Common Stock could be materially and adversely affected.

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 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. 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.

As of December 31, 2009, we had not yet generated any net income from our operations.

We have incurred net operating losses since our inception. Our net loss was approximately $8,800,000 and $1,500,000 for the years ended December 31, 2009 and 2008, respectively. As of December 31, 2009, we had an accumulated net loss of $10,664,819. Although we anticipate that we will cease to incur operating losses commencing this year, there is no assurance that we will be able to generate net income in the near future or in such amount that meets our anticipation.
 
Key employees are essential to growing our business.
 
Chunfeng Tao, Jingtao Ma, Shifa Wang, Weifeng Xue and 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 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 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 estimated cost of our facility expansion and the addition of asphalt development is approximately $93.3 million including $5.8 million for purchasing land, $20 million for facility construction, $40 million for new equipment, $17.5 million for SBS project and $10 million for working capital for the whole business.  We received gross proceeds of $46.5 million from the April-May 2010 Private Placement and the September 2010 Private Placement. We had originally planned to use $20 million of the net proceeds for the purchase of the land. However, due to the decrease of the actual cost of land purchase versus our original estimates, we were able to allocate a greater percentage of the net proceeds received toward raw material purchases in the second quarter. We currently plan to use cash from operations and other sources to fund the purchase of the land use rights. However, we still need additional cash resources to expand our manufacturing facility to include an SBS production facility, additional storage capacity, a raw material pre-treatment facility and an asphalt production facility. We plan to be funded 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;
·
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 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.
 
Our manufacturing processes could expose us to substantial production liability claims which will 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 will negatively impact our profitability.
 
In the past several years we have derived a significant portion of our revenues from a small group of customers and we have purchased raw material from a small group of suppliers. If we are to remain dependent upon only a few customers and a few raw material suppliers, such dependency could negatively impact our business, operating results and financial condition.
 
For the years ended December 31, 2009, our five largest customers accounted for 70% of our total revenue, and the single largest customer accounted for 26% of our total sales. For the nine months ended September 30, 2010, our five largest customers accounted for 42% of our total sales. As our customer base may change from year-to-year, during such years that the customer base is 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.
 

For the years ended December 31, 2009, our five largest suppliers  accounted for approximately 70% of our raw material purchases. For the nine months ended June 30, 2010, our five largest suppliers  accounted for 73.08% of our total raw material purchase. As our supplier base may change from year-to-year, during such years that the supplier base is highly concentrated, the loss of, or reduction of our raw material supply from, any of such major suppliers could have a material adverse effect on our business, operating results and financial condition.
 
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.
 
During the fiscal years ended December 31, 2009 and 2008, and subsequent interim period ended June 30, 2010 and through the date of dismissal, we did not experience any reportable events, except that in its letter to us in 2009 pursuant to “Statement on Auditing Standards (SAS) 112: Communicating Internal Control Related Matters,” Hall, our former auditor,  identified the following material weakness of our internal controls, which constitute a reportable event under Item 304(a)(1)(v) of Regulation S-K:
 
Reliance on financial reporting consultants for review of critical accounting areas and disclosures and material non-standard transactions;
Lack of sufficient accounting staff which results in a lack of segregation of duties necessary for a good system of internal control.
 
On April 22, 2010, Silver Pearl entered into a Share Exchange Agreement, by and among Keyuan International Group Limited (“Keyuan International”), a company organized under the laws of the British Virgin Islands, Delight Reward Limited, the sole shareholder of Keyuan International and a company organized under the laws of the British Virgin Islands (the “Keyuan International Shareholder”), and Denise D. Smith, our former principal stockholder (“Smith”). Pursuant to the terms of the Exchange Agreement, the Keyuan International Shareholder transferred to us all of the issued and outstanding ordinary shares of Keyuan International (the “Keyuan International Shares”) in exchange for the issuance of 47,658 shares of our Series M preferred stock, par value $0.001 per share (the “Series M Preferred Stock”) (such transaction is sometimes referred to herein as the “Share Exchange”). The Series M shares vote with the common stock on an as converted basis and are convertible into 47,658,000 shares of common stock upon the Company’s shareholders approving an increase in authorized common stock to at least 100,000,000 shares. As a result of the Share Exchange, we are now the holding company of Keyuan Plastics Co., Ltd., the operating subsidiary of Keyuan International organized in the People’s Republic of China (“China” or the “PRC”) and engaged in manufacturing and supplying various petrochemical products in China. The Share Exchange also caused  a change-in-control of Silver Pearl as the Company’s shareholders have acquired the majority ownership of the combined entity. As a result, the accounting staff of our operating entity in China became the primary accounting staff of our company.
 
As of September 30, 2010, considering the material weaknesses identified in our internal control, we performed an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures.  This evaluation was designed to evaluate if our disclosure control and procedures provide reasonable assurance that material information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and that the information is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.  Based on the evaluation, our management including our Chief Executive Officer and Chief Financial Officer, concluded that that the disclosure controls and procedures are effective as the date of September 30, 2010 in giving us reasonable assurance that the information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms and to ensure that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. This conclusion was based on the following factors as the date of September 30, 2010:
 
a)  
We had a much expanded accounting team and employee base in our operating entity in China that allows for segregation of duties necessary for a good system of internal control. For example, our accounting staff had one Chief Financial Officer, one Vice President of Accounting, two accounting managers, and nine accountants responsible for four different accounting functions: financial accounting, cost accounting, capital/fund management and data analysis. The expansion of our team not only allowed the proper segregation of duties, but also allowed implementation of proper review processes necessary for ensuring the accuracy of financial data used in preparing financial statements.
 
b)  
We had improved our accounting staff’s knowledge of U.S. accounting standards and requirements by hiring a CFO with significant U.S. accounting and finance experience and a bi-lingual accounting manager with significant financial reporting experience. As a result, we were able to prepare and review certain important accounting transactions and disclosures internally rather than relying on outside consultants.
 
c)  
Finally, we have recently appointed an audit committee comprised of independent members of our board of directors, including an audit committee chairman, whom we believe to meet the SEC’s definition of a “financial expert” in the Sarbanes-Oxley Act Section 406 and 407. We concluded that increased oversight and experience provided by the audit committee assisted us in the establishment and oversight of our controls and procedures.
 
 
 
-8-

 
In addition, our CFO and our accounting staff are currently working on documenting our internal controls and we expect such documentation to be complete in 2010 and we plan testing of internal controls thereafter. If our market capitalization exceeds $75 million in 2011, we will be required to be in compliance with the Sarbanes-Oxley Act Section 404 in the fiscal year of 2011. However our CFO and accounting staff have already taken actions to start our Sarbanes-Oxley Action 404 compliance project. We expect this compliance project will enhance the Company’s internal controls significantly. We are also looking to fill additional financial staff positions. Specifically, we believe that additional accounting staff trained in U.S. GAAP would improve our controls and procedures, specifically with regard to the preparation of our financial statements. Finally, we have recently appointed an audit committee comprised of independent members of our board of directors, including an audit committee chairman, whom we believe to meet the SEC’s definition of a “financial expert” in the Sarbanes-Oxley Act Section 406 and 407. We believe that the increased oversight and experience provided by the audit committee will assist us in the establishment and oversight of our controls and procedures. Although we believe that these corrective steps will remediate the material weaknesses discussed above when all of the additional financial staff positions are filled, we cannot assure you that this will be sufficient. We may be required to expend additional resources to identify, assess and correct any additional weaknesses in our internal control. We cannot make assurances that we will not identify additional material weaknesses in our internal control over financial reporting in the future.
 
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 environmental laws and regulations that require us to obtain environmental permits for our operations. If we fail to obtain all required environmental permits for our operations, or 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. 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, which have not been patented or registered as our property, are key components of our competitive advantage and our growth strategy. We 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.
  
If we are unable to establish appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations, result in the restatement of our financial statements, harm 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.

Effective internal controls are necessary for us to provide reliable financial reports and to effectively prevent fraud. We maintain a system of internal control 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.
 
 

 
As a public company, we will have significant additional requirements for enhanced financial reporting and internal controls. We are aware of that smaller reporting companies (market cap less than $75,000,000) are exempted from the requirements of the Sarbanes-Oxley Act Section 404 pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was adopted on July 21, 2010. However, with the current development pace of the Company, we anticipate that we may exceed the market cap of $75,000,000 soon. Therefore, we plan to continue our efforts to design and implement effective internal controls. The process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company.

We cannot assure you that we will not, in the future, identify areas requiring improvement in our internal control over financial reporting. We cannot assure you that the measures we will take to remediate any areas in need of improvement will be successful or that we will implement and maintain adequate controls over our financial processes and reporting in the future as we continue our growth. If we are unable to establish appropriate internal financial reporting controls and procedures before we exceed the market cap of $75,000,000, it could cause us to fail to meet our reporting obligations, result in the restatement of our financial statements, harm 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.
 
We will incur increased costs as a result of being a public company.
 
As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. 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 new rules and regulations to increase our legal, accounting and financial compliance costs and to make certain corporate activities more time-consuming and costly. In addition, we will incur additional costs associated with our public company reporting requirements. We are currently evaluating and monitoring developments with respect to these new 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.
 
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 equity interest in Keyuan Plastics, a wholly foreign owned enterprise under the PRC laws. These laws and regulations are relatively new and may be subject to change, and their official interpretation and enforcement may involve substantial uncertainty. 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 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.
 
 
Keyuan Plastics will be subject to restrictions on dividend payments.

Though currently we have not received any dividends from Keyuan Plastics, in the future, we may rely on dividends and other distributions from Keyuan Plastics to provide us with cash flow and to meet our other obligations. Current regulations in the PRC would permit the PRC subsidiary to pay dividends to us only out of its accumulated distributable profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, Keyuan Plastics will be required to set aside at least 10% (up to an aggregate amount equal to half of its registered capital) of its accumulated profits each year. Such cash reserve may not be distributed as cash dividends. In addition, if the PRC subsidiary incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments to us.

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.

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 PRC Enterprise Income Tax Law  (herein referred as the “New EIT Law”). The New EIT Law took effect on January 1, 2008. Under the New EIT Law, Foreign Investment Enterprises ( “FIEs”), and domestic companies are subject to a uniform tax rate of 25%. In addition, an enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise” which means that we may be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The New EIT Law provides a five-year transition period starting from its effective date for those enterprises which were established before the promulgation date of the New EIT Law and which were entitled to a preferential lower tax rate under the then-effective tax laws or regulations. However, since we were established after the promulgation date of the NEW EIT law, the five-year transition period will not be applicable to us if the PRC tax authorities determine that we are  a “resident enterprise” for PRC enterprise income purposes.

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 New EIT Law will be eligible for a five-year transition period since 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 New EIT Law. From January 1, 2008, for the enterprises whose applicable tax rate was 15% before the promulgation of the New EIT Law , the tax rate will be increased to 18% for year 2008, 20% for year 2009, 22% for year 2010, 24% for year 2011 and 25% for year 2012. For the enterprises whose applicable tax rate was 24%, the tax rate will be changed to 25% from January 1, 2008.

Under the New 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 New 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. Because the New EIT Law and its implementing rules are new, no official interpretation or application of this new “resident enterprise” classification is available. Therefore, it is unclear how tax authorities will determine tax residency based on the facts of each case.
 
If the PRC tax authorities determine that we are “resident enterprises” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this would mean that income such as interest on offering proceeds and non-China source income would be subject to PRC enterprise income tax at a rate of 25%. Second, although under the New EIT Law and its implementing rules, dividends paid to us from our PRC subsidiaries would qualify as “tax-exempt income,” we cannot guarantee that such dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes. 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 stockholders and with respect to gains derived by our non-PRC stockholders from transferring our shares. We are actively monitoring the possibility of “resident enterprise” treatment for the applicable tax years and are evaluating appropriate organizational changes to avoid this treatment, to the extent possible.
 
 
If we were treated as a “resident enterprise” by PRC tax authorities, we would be subject to taxation in both the U.S. and China, and our PRC tax may not be credited against our U.S. tax.

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

The New EIT Law and the Implementation Rules of the New 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 New EIT Law, and therefore such income taxes are generally called withholding tax in practice. It is currently unclear in what circumstances a source will be considered as located within the PRC. We are an offshore holding company. Thus, if we are considered as a “non-resident enterprise” under the New EIT Law and the dividends paid to us by our subsidiary in the PRC are considered income sourced within the PRC, such dividends may be subject to a 10% withholding tax. Currently, we have not received any dividends paid by our subsidiary in the PRC. Furthermore, since we intend to reinvest its earnings to further expand its businesses in mainland China, our subsidiary in the PRC does not intend to declare dividends to their immediate foreign holding companies in the foreseeable future.

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. Further, the Measures provides that in case of equity transfer between two non-resident enterprises which occurs outside China, the non-resident enterprise which receives the equity transfer payment shall, by itself or engage an agent to, file tax declaration with the PRC tax authority located at place of the PRC company whose equity has been transferred, and the PRC company whose equity has been transferred shall assist the tax authorities to collect taxes from the relevant non-resident enterprise. However, it is unclear whether the Measures refer to the equity transfer by a non-resident enterprise which is a direct or an indirect shareholder of the said PRC company. Given these Measures, there is a possibility that Keyuan Plastics may 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 its 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 tax declaration with the PRC tax authority located at place of the resident enterprise whose equity has been transferred, within seven days since the date of equity transfer provided under the contracts.

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

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

Keyuan Plastics is 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, Keyuan Plastics is obligated to withhold and pay individual income tax on behalf of our employees who are subject to PRC individual income tax. If the 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.

In addition, the SAT has issued several circulars concerning employee stock options. Under these circulars, our employees working in the PRC (which could include both PRC employees and expatriate employees subject to PRC individual income tax) who exercise stock options will be subject to PRC individual income tax. Our PRC subsidiary 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 change their policy, and we could be subject to sanctions.
 
Regulation of foreign currency’s conversion into RMB and investment by FIEs may adversely affect our PRC subsidiary’s direct investment in China

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 the Notice 142, FIEs shall obtain a verification report from a local accounting firm before converting its registered capital of foreign currency into Renminbi, and the converted Renminbi shall be used for the business within its permitted business scope. The 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.

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 the 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.
 
On September 21, 2006, CSRC published on its official website procedures regarding its approval of overseas listings by SPVs. CSRC approval procedures require the filing of a number of documents with CSRC and it would take several months to complete the approval process.
 
The application of the New M&A Rule with respect to overseas listings of SPVs remains unclear with no consensus currently existing among the leading PRC law firms regarding the scope of the applicability of CSRC approval requirement.
 
 
It is not clear whether the provisions in the new regulation regarding the offshore listing and trading of the securities of a SPV apply to an offshore company such as us which owns equity interest in Keyuan Plastics. We believe that the M&A Rules and CSRC approval are not required in the context of the share exchange under our 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) we are not a SPV formed or controlled by PRC companies or PRC individuals; (iii) Keyuan Plastics was established as a foreign investment enterprise by means of direct investment rather than by merger or acquisition of an existing PRC domestic company and it is not owned or controlled by PRC individuals or entities; (iv) we are owned or substantively 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.

If CSRC or another PRC regulatory agency subsequently determines that CSRC’s approval is required for the 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 this Offering 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.
 
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 the aforesaid regulations and requirements. We are in the process of conducting as-build acceptance inspection and we must obtain relevant safety production permits and approvals from a variety of government authorities upon completion of aforesaid inspection.  The as-build inspection is conducted by the local government to make sure that a company meets all the conditions for normal production. We have already obtained all the necessary permits and approvals including environmental protection, fire fighting and safety production before our trial production and submitted the application for as-build acceptance inspection at the end of 2009. The as-build acceptance inspection needs to be conduced within 12 months after the submission of application and we received the complete set of permits and approvals from relevant government authorities on December 16, 2010. However, there is no assurance that we will obtain or renew all such permits or approvals, which are subject to our fulfillment of the standards and requirements set out by the regulatory authorities. If we fail to pass the as-build acceptance inspection, 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.
 
Risks Associated With Doing Business in China

There are substantial risks 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.
 
 
 
We derive a substantial portion of ours 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 the new policy, Chinese Renminbi may fluctuate within a narrow and managed band against a basket of certain foreign currencies. As a result of this policy change, Chinese Renminbi appreciated approximately 0.09% against the U.S. dollar in 2009 and 3.35% in 2008. 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 income statements of our operations are translated into U.S. dollars at the average exchange rates in each applicable period. To the extent the U.S. dollar strengthens against foreign currencies, the translation of these foreign currency denominated transactions could result in reduced revenue, operating expenses and net income for our international operations. Similarly, to the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign currency denominated transactions could result in increased revenue, operating expenses and net income for our international operations. We are also exposed to foreign exchange rate fluctuations as we convert the financial statements of our foreign subsidiaries into U.S. dollars in consolidation. If there is a change in foreign currency exchange rates, the conversion of the foreign subsidiaries’ financial statements into U.S. dollars will lead to a translation gain or loss which is recorded as a component of other comprehensive income. In addition, we have certain assets and liabilities that are denominated in currencies other than the relevant entity’s functional currency. Changes in the functional currency value of these assets and liabilities create fluctuations that will lead to a transaction gain or loss. We have not entered into agreements or purchased instruments to hedge our exchange rate risks, although we may do so in the future. The availability and effectiveness of any hedging transaction may be limited and we may not be able to successfully hedge our exchange rate risks.

Although Chinese governmental policies were introduced in 1996 to allow the convertibility of Chinese Renminbi into foreign currency for current account items, conversion of Chinese Renminbi into foreign exchange for capital items, such as foreign direct investment, loans or securities, requires the approval of SAFE which is under the authority of the People’s Bank of China. These approvals, however, do not guarantee the availability of foreign currency conversion. We cannot be sure that we will be able to obtain all required conversion approvals for our operations or that Chinese regulatory authorities will not impose greater restrictions on the convertibility of Chinese Renminbi in the future. Because a significant amount of our future revenue may be in the form of Chinese Renminbi, our inability to obtain the requisite approvals or any future restrictions on currency exchanges could limit our ability to utilize revenue generated in Chinese Renminbi to fund our business activities outside of China, or to repay foreign currency obligations, including our debt obligations, which would have a material adverse effect on our financial condition and results of operations
 
We may have limited legal recourse under PRC laws if disputes arise under our contracts with third parties.
 
The Chinese government has enacted laws and regulations dealing with matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, their experience in implementing, interpreting and enforcing these laws and regulations is limited, and our ability to enforce commercial claims or to resolve commercial disputes is unpredictable. If our new business ventures are unsuccessful, or other adverse circumstances arise from these transactions, we face the risk that the parties to these ventures may seek ways to terminate the transactions, or, may hinder or prevent us from accessing important information regarding the financial and business operations of these acquired companies. The resolution of these matters may be subject to the exercise of considerable discretion by agencies of the Chinese government, and forces unrelated to the legal merits of a particular matter or dispute may influence their determination. Any rights we may have to specific performance, or to seek an injunction under PRC law, in either of these cases, are severely limited, and without a means of recourse by virtue of the Chinese legal system, we may be unable to prevent these situations from occurring. The occurrence of any such events could have a material adverse effect on our business, financial condition and results of operations.
 
 
 
Because our funds are held in banks in uninsured PRC bank accounts, the failure of any bank in which we deposit our funds could affect our ability to continue our business.

Funds on deposit at banks and other financial institutions in the PRC are often uninsured. A significant portion of our assets are in the form of cash deposited with banks in the PRC, and in the event of a bank failure, we may not have access to our funds on deposit. Depending upon the amount of money we maintain in a bank that fails, our inability to have access to our cash could impair our operations, and, if we are not able to access funds to pay our suppliers, employees and other creditors, we may be unable to continue in business.
 
Our business could be severely harmed if the Chinese government changes its policies, laws, regulations, tax structure or its current interpretations of its laws, rules and regulations, relating to our operations in China.

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

Changes in policies by the Chinese government resulting in changes in laws or regulations or the interpretation of laws or regulations,
changes in taxation,
changes in employment restrictions,
import duties, and
currency revaluation.

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

Failure 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 may violate applicable law in connection with the marketing or sale of our products, 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. If our employees or other agents are found to have engaged in such practices, 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 only recently has permitted provincial and local economic autonomy and private economic activities, 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.

The implementation of the new PRC employment contract law and increase in the labor costs in China may hurt our business and profitability.

A new employment contract law became effective on January 1, 2008 in China. It 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 newly promulgated 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. 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 fund 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 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 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.
 
 
 
You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China based on United States or other foreign laws against us and our management.

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

Because Chinese laws will 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 25 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 rooms, 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.

Pursuant to a share transfer agreement, Mr. Chunfeng Tao, our Chairman, Chief Executive Officer and President has an option, subject to certain performance targets, to purchase from Mr. Brian Pak-Lun Mok, the current sole shareholder of Apex Smart Limited (the current owner of 45.6132% of the share capital of Delight Reward Limited), up to 100% of Apex Smart Limited’s equity, which, upon exercise, would entitle Mr. Tao to own 45.6132% of the equity of Delight Reward Limited. Delight Reward Limited holds 47,658,000 shares of our common stock, representing approximately 82.77% of our common stock. Accordingly, Mr. Tao 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.

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 may be volatile.

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. These factors 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.
 

 
Because we are becoming 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.

When this registration statement becomes effective, there will be a significant number of shares of Common Stock eligible for sale, which could depress the market price of such stock.

Once this registration statement is effective, a large number of shares of Common Stock will become available for sale in the public market, which could harm the market price of the stock. Further, shares may be offered from time to time in the open market pursuant to Rule 144 if all of the conditions in Rule 144(i)(2) are satisfied at the time of the proposed sale, and these sales may have a depressive effect as well. In general, a non-affiliate who has held restricted securities for a period of six (6) months may sell such securities into the market and an “affiliate” who has held restricted shares for a period of six (6) months may, upon filing a notification with the SEC on Form 144, sell Common Stock into the market in an amount equal to one percent (1%) of the outstanding shares.
 
 

We have not paid dividends in the past and do not expect to pay dividends in the future, and any return on investment may be limited to the value of our stock.

We have never paid any cash dividends on our Common Stock and do not anticipate paying any cash dividends on our Common Stock in the foreseeable future and any return on investment may be limited to the value of our Common Stock. We plan to retain any future earning to finance growth.
 
ITEM 4.  USE OF PROCEEDS
 
We will not receive any of the proceeds from the sale of the Shares being offered by the Selling Stockholders, although we may receive additional proceeds of up to approximately $10,149,323 if all of the Series C Warrants and Series D Warrants are exercised for cash. We will not receive any additional proceeds to the extent that the Warrants are exercised by cashless exercise. We expect to use the proceeds received from the exercise of the Warrants, if any, for general working capital purposes. We cannot assure you however that any of the Warrants will ever be exercised.
 
ITEM 5.  DETERMINATION OF OFFERING PRICE
 
Not applicable.
 
ITEM 6.  DILUTION
 
Not applicable.
 
ITEM 7.  SELLING STOCKHOLDERS

We are registering for resale shares of our Common Stock that are issued and outstanding, and shares of Common Stock underlying our Series B Preferred Stock and Series C and Series D Warrants held by the Selling Stockholders identified below. 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 as promulgated under the Securities Act of 1933. We are registering the shares to permit the Selling Stockholders and their pledgees, donees, transferees and other successors-in-interest that receive their shares from a Selling Stockholder as a gift, partnership distribution or other non-sale related transfer after the date of this prospectus to resell the shares when and as they deem appropriate in the manner described in the “Plan of Distribution.”  As of the date of this prospectus there are 57,577,840 shares of Common Stock issued and outstanding.
 
 
 
The following table sets forth:
 
 
·
the name of the Selling Stockholders,
 
 
·
the number of shares of our Common Stock that the Selling Stockholders beneficially owned prior to the offering for resale of the shares under this prospectus,
 
 
·
the maximum number of shares of our Common Stock that may be offered for resale for the account of the Selling Stockholders under this prospectus, and
 
 
·
the number and percentage of shares of our Common Stock beneficially owned by the Selling Stockholders after the offering of the shares (assuming all of the offered shares are sold by the Selling Stockholders).
 
We entered into a placement agent agreement with TriPoint Global on March 18, 2009 whereby we paid a cash fee to TriPoint Global equal to 6% of the gross proceeds received by us in connection with the Private Placement and we issued to TriPoint Global and its designees warrants to purchase up to 561,601 shares of Common Stock.
 
Except for TriPoint Global, none of the Selling Stockholders is a broker dealer. In addition, none of the Selling Stockholders is an affiliate of a broker dealer. The Selling Stockholders confirmed to us that it or he bought the securities in the ordinary course of business and at the time of purchase, it or he had no agreements or understandings, directly or indirectly, with any person to distribute the securities. None of the Selling Stockholders has any agreement or understanding to distribute any of the Shares being registered.
 
Each Selling Stockholder may offer for sale all or part of the Shares from time to time. The table below assumes that the Selling Stockholders will sell all of the Shares offered for sale. A Selling Stockholder is under no obligation, however, to sell any Shares pursuant to this prospectus.
 
 

 
Name of Selling Stockholder
 
Shares of
Common Stock
Beneficially
Owned Prior
to Offering (1)
   
Maximum
Number of Shares 
of Common Stock 
to be Sold (2)
   
Number of
Shares of Common
Stock Owned After
Offering (3)
   
Percentage
Ownership
After Offering (4)
 
Dragon State International Limited (5)
    6,933,342       6,933,342       0       *  
Excalibur Special Opportunities LP (6)
    86,672       86,672       0       *  
TriPoint Global Equities, LLC (7)
    561,601       561,601       0       *  
 
* Represents beneficial ownership of less than one percent of our outstanding shares.
 
1)  
Unless otherwise noted, the Selling Stockholder became one of our shareholders pursuant to the Private Placement.  Accordingly, prior to the Offering, the Selling Stockholder only owned shares of common stock underlying the Notes and Warrants received in the September 2010  Private Placement (the “Securities”); however, based upon the terms of the both the preferred stock and the Warrants, holders may not convert the preferred stock and/or exercise the warrants, if on any date, such holder would be deemed the beneficial owner of more than 9.99%, depending upon their agreement, of the then outstanding shares of our common stock; however, a holder may elect to waive the cap upon 61 days notice to us, except that during the 61 day period prior to the expiration date of their warrants, they can waive the cap at any time, but a waiver during such period will not be effective until the expiration date of the warrant. Therefore, unless otherwise noted, this number represents the number of Securities the Selling Stockholder received in the Private Placement that he/she can own based upon the ownership cap, assuming the ownership cap is not waived. Additionally, the shares of preferred stock are subject to certain anti-dilution provisions, which would be triggered if we were to sell securities at a price below the price at which we sold the Notes. See “Prospectus Summary – Recent Developments - Financing” and “Description of Securities.”
 
2) 
This number represents all of the Securities that the Selling Stockholder received in the September 2010 Private Placement, which we agreed to register in this Registration Statement pursuant to the Registration Rights Agreement we entered into in connection with the September 2010 Private Placement.
 
3) 
Since we do not have the ability to control how many, if any, of their shares each of the selling shareholders listed above will sell, we have assumed that the selling shareholders will sell all of the shares offered herein for purposes of determining how many shares they will own after the Offering and their percentage of ownership following the offering.
 
4)
All Percentages have been rounded up to the nearest one hundredth of one percent.
 
5) 
Consists of 5,333,340  shares of Common Stock underlying Series B Preferred Stock, 800,001  shares of Common Stock underlying Series C Warrants and 800,001  shares of Common Stock  underlying Series D Warrants.  The person having voting, dispositive or investment powers over Dragon State International Limited are its general partners: Jose Luis Artiga, Fernando Vila, Jie-ping Yao and Lei Xu.  The address for Dragon State International Limited is Room 4607-11 The Centre, 99 Queen’s Road Central, Central Hong Kong.
 
6)
Consists of 66,670 shares of Common Stock  underlying Series B Preferred Stock, 10,001  shares of Common Stock underlying Series C Warrants and 10,001  shares of Common Stock underlying Series D Warrants. The person having voting, dispositive or investment powers over Excalibur Special Opportunities LP is William Hechter. The address for Excalibur Special Opportunities LP is 150 Bloor Street West, Suite 14, Toronto ON M552X9, Canada.
 
7)
Consists of  561,601 shares of Common Stock underlying placement agent Warrant to purchase same, subject to a 9.99% limitation on beneficial ownership of our Common Stock as more fully described in note 1 above. Mark Elenowitz and Michael Boswell share voting and dispositive power over the securities held by TriPoint Global Equities, LLC. The address for TriPoint Global Equities, LLC is 17 State Street, 20th Floor, New York, NY 10004.
 
ITEM 8.  PLAN OF DISTRIBUTION
 
The Selling Stockholders and any of their pledgees, donees, transferees, assignees and successors-in-interest may, from time to time, sell any or all of their Shares on any stock exchange, market or trading facility on which the Shares are traded or quoted or in private transactions. These sales may be at fixed prices, at prevailing market prices at the time of sale, at prices related to the prevailing market price, at varying prices determined at the time of sale, or at negotiated prices. The Selling Stockholders may use any one or more of the following methods when selling Shares:
 
 
·
ordinary brokerage transactions and transactions in which the broker-dealer solicits Investors;
 
 
·
block trades in which the broker-dealer will attempt to sell the Shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;
 
 
·
purchases by a broker-dealer as principal and resale by the broker-dealer for its account;
 
 
·
an exchange distribution in accordance with the rules of the applicable exchange;
 
 
 
·
privately negotiated transactions;
 
 
·
to cover short sales made after the date that this registration statement is declared effective by the SEC;
 
 
·
broker-dealers may agree with the Selling Stockholders to sell a specified number of such Shares at a stipulated price per share;
 
 
·
through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;
 
 
·
a combination of any such methods of sale; and
 
 
·
any other method permitted pursuant to applicable law.
 
The Selling Stockholders may also sell Shares under Rule 144 under the Securities Act, if  all of the conditions in Rule 144(i)(2) are satisfied at the time of the proposed sale, rather than under this prospectus.
 
In connection with the sale of the Common Stock or interests therein, the Selling Stockholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the Common Stock in the course of hedging the positions they assume. The Selling Stockholders may also sell shares of the Common Stock short and deliver these securities to close out their short positions, or loan or pledge the Common Stock to broker-dealers that in turn may sell these securities. The Selling Stockholders may also enter into option or other transactions with broker-dealers or other financial institutions or the creation of one or more derivative securities which require the delivery to such broker-dealer or other financial institution of Shares offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).
 
Broker-dealers engaged by the Selling Stockholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the Selling Stockholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated. The Selling Stockholders do not expect these commissions and discounts to exceed what is customary in the types of transactions involved.
 
The Selling Stockholders may from time to time pledge or grant a security interest in some or all of the Shares owned by them and, if they default in the performance of their secured obligations, the amendment or supplement to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act of 1933 will be filed amending the list of Selling Stockholders to include the pledgee, transferee or other successors in interest as Selling Stockholders under this prospectus and the pledgees or secured parties may offer and sell shares of Common Stock from time to time under the supplement or  amendment to this prospectus.
 
The Selling Stockholders also may transfer the shares of Common Stock in other circumstances, in which case the transferees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus.
 
The Selling Stockholders and any broker-dealers or agents that are involved in selling the Shares may be deemed to be “underwriters” within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the Shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. Discounts, concessions, commissions and similar selling expenses, if any, that can be attributed to the sale of Shares will be paid by the Selling Stockholder and/or the purchasers. Each Selling Stockholder has represented and warranted to the Company that it acquired the securities subject to this registration statement in the ordinary course of such Selling Stockholder’s business and, at the time of its purchase of such securities such Selling Stockholder had no agreements or understandings, directly or indirectly, with any person to distribute any such securities.
 
 
TriPoint Global Equities, LLC (“TriPoint Global”) is a registered broker dealer and FINRA member firm and listed as a Selling Stockholder in this prospectus. TriPoint Global served as placement agent for our September 2010 Private Placement, which was completed on September 28, 2010.  
 
We entered into a placement agent agreement with TriPoint Global on March 18, 2009 whereby we paid a cash fee to TriPoint Global equal to 6% of the gross proceeds received by us in connection with the Private Placement and we issued to TriPoint Global and its designees Warrants to purchase 561,601  shares of Common Stock. The registration statement of which this prospectus forms a part includes the shares of Common Stock underlying Warrants granted to TriPoint Global and its designees. The shares of Common Stock issuable upon exercise of placement agent Warrants received by TriPoint Global are transferable within TriPoint Global or to its assigns or designees, at the discretion of TriPoint Global, and in accordance with the Securities Act of 1933, as amended.
 
TriPoint Global does not have an underwriting agreement with us and/or the Selling Stockholders and no Selling Stockholders are required to execute transactions through TriPoint Global. Further, other than any existing brokerage relationship as customers with TriPoint Global, no Selling Stockholders has any pre-arranged agreement, written or otherwise, with TriPoint Global to sell their securities through TriPoint Global.
 
FINRA Rule 5110 requires FINRA member firms (unless an exemption applies) to satisfy the filing requirements of Rule 5110 in connection with the resale, on behalf of Selling Stockholders, of the securities on a principal or agency basis. NASD Notice to Members 88-101 states that in the event a Selling Stockholder intends to sell any of the shares registered for resale in this prospectus through a member of FINRA participating in a distribution of our securities, such member is responsible for insuring that a timely filing, if required, is first made with the Corporate Finance Department of FINRA and disclosing to FINRA the following:
 
 
·
it intends to take possession of the registered securities or to facilitate the transfer of such certificates;
 
 
·
the complete details of how the selling shareholders’ shares are and will be held, including location of the particular accounts;
 
 
·
whether the member firm or any direct or indirect affiliates thereof have entered into, will facilitate or otherwise participate in any type of payment transaction with the selling shareholders, including details regarding any such transactions; and
 
 
·
in the event any of the securities offered by the selling shareholders are sold, transferred, assigned or hypothecated by any selling shareholder in a transaction that directly or indirectly involves a member firm of FINRA or any affiliates thereof, that prior to or at the time of said transaction the member firm will timely file all relevant documents with respect to such transaction(s) with the Corporate Finance Department of FINRA for review.
 
No FINRA member firm may receive compensation in excess of that allowable under FINRA rules, including Rule 2710, in connection with the resale of the securities by the selling shareholders, which total compensation may not exceed 8%.
 
We have advised each Selling Stockholder that it may not use Shares registered on this registration statement to cover short sales of Common Stock made prior to the date on which this registration statement shall have been declared effective by the Commission. If a Selling Stockholder uses this prospectus for any sale of the Common Stock, it will be subject to the prospectus delivery requirements of the Securities Act. The Selling Stockholders will be responsible to comply with the applicable provisions of the Securities Act and Exchange Act, and the rules and regulations thereunder promulgated, including, without limitation, Regulation M, as applicable to such Selling Stockholders in connection with resales of their respective Shares under this registration statement.
 
We are required to pay all fees and expenses incident to the registration of the Shares, but the Company will not receive any proceeds from the sale of the Common Stock. The Company has agreed to indemnify the Selling Stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act.
 
ITEM 9.  DESCRIPTION OF SECURITIES TO BE REGISTERED

Authorized Capital Stock

We have 70,000,000 shares of authorized capital stock, consisting of 50,000,000 shares of Common Stock, par value $0.001, and 20,000,000 shares of the Company’s Preferred Stock, par value $0.001, 11,000,000 of which are designated as Series A Convertible Preferred Stock, 8,000,000 shares of Series B Convertible Preferred Stock and 47,658 shares are designated as Series M Convertible Preferred Stock.
 
Common Stock

As of the date hereof, 57,577,840 shares of our Common Stock are issued and outstanding. Holders of Common Stock are entitled to cast one vote for each share on all matters submitted to a vote of shareholders, including the election of directors. The holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared by the Board out of funds legally available therefore. See “Dividend Policy.” Such holders do not have any preemptive or other rights to subscribe for additional shares. All holders of Common Stock are entitled to share ratably in any assets for distribution to shareholders upon the liquidation, dissolution or winding up of the Company. There are no conversion, redemption or sinking fund provisions applicable to the Common Stock. All outstanding shares of Common Stock are fully paid and nonassessable.
 
 
Preferred Stock

The Board is authorized, without further action by the shareholders, to issue, from time to time, up to 20,000,000 shares of preferred stock in one or more classes or series. Similarly, the Board will be authorized to fix or alter the designations, powers, preferences, and the number of shares which constitute each such class or series of preferred stock. Such designations, powers or preferences may include, without limitation, dividend rights (and whether dividends are cumulative), conversion rights, if any, voting rights (including the number of votes, if any, per share), redemption rights (including sinking fund provisions, if any), and liquidation preferences of any unissued shares or wholly unissued series of preferred stock. As of the date hereof, the Board has designated three classes of Preferred Stock, consisting of Series M Preferred Stock and Series A Preferred Stock and Series B Preferred Stock; and does not have any current intention to designate any other class of preferred stock.
 
Series B Preferred Stock
 
As of the date hereof, we have 5,400,010 shares of Series B Preferred Stock issued and outstanding. The Series B Preferred Shares by its principal terms:
 
(a)
pay a cumulative dividend at an annual rate of 6% during the first year immediately from and after the issuance date, payable quarterly, at our option, in cash or in shares of Common Stock;
(b)
shall rank junior to our Series A preferred stock but have a preference over the Common Stock and Series M Preferred Stock and to all other classes and series of our equity securities on dividend rights and rights on liquidation, dissolution or winding up of the Company equal to the original purchase price per Series A Preferred Share;
(c)
are convertible in whole or in part, at the option of the holders, at one-to-one ratio,  into shares of our common stock at $3.75 per share prior to the Maturity, and all outstanding shares of the Series B Preferred Stock shall automatically convert to shares of common stock upon Maturity, provided, however, at no time may holders convert shares of Series B Preferred Stock if (i) we have not obtained the Shareholder Approval; or (ii) the number of shares of common stock to be issued pursuant to such conversion would cause the number of shares of common stock beneficially owned by such holder and its affiliates in excess of 9.99% of the then issued and outstanding shares of common stock outstanding at such time, unless the holder provides us with a waiver notice in such form and with such content specified in the Series B Certificate of Designation.
 (e)
the conversion price and the number of common shares underlying the Series B Preferred Stock are subject to customary adjustments, including weighted average broad-based anti-dilution protection, at any time or from time to time after the issuance date; and
(f)
requires that we, prior to taking certain corporate actions (including certain issuances or redemptions of its securities or changes in its organizational documents), obtain the approval of more than 50% of the Series B Preferred Shares then issued and outstanding, voting as a group.
 
THE SERIES C WARRANTS

As of the date hereof, there are 874,802 Series C Warrants issued and outstanding, including 64,800 warrants issued to the placement agent in the Private Placement. The Series C Warrants will, by its principal terms,
 
(a)
entitle the holder to purchase one (1) share of Common Stock;
(b)
be exercisable at any time after the consummation of the Private Placement and shall expire on the date that is three (3) years following the original issuance date of the Series C Warrants, subject to that the Company has obtained the shareholder approval;
(c) 
be exercisable, in whole or in part, at an exercise price of $4.50 per share;
(d) 
be exercised only for cash (except that there will be a cashless exercise option at any time during which a registration statement covering such shares is not effective); and
(e) 
Non-callable
 
THE SERIES D WARRANTS

As of the date hereof, there are 874,802  Series D Warrants issued and outstanding, including 64,800 warrants issued to the placement agent in the Private Placement. The Series D Warrants will, by its principal terms,
 
(a)
entitle the holder to purchase one (1) share of Common Stock;
(b)
be exercisable at any time after consummation of the Private Placement and shall expire on the date that is three (3) years following the original issuance date of the Series D Warrants; subject to that the Company has obtained shareholder approval;
(c)
be exercisable, in whole or in part, at an exercise price of $5.25 per share;
(d)
be exercised only for cash (except that there will be a cashless exercise option at any time during which registration statement covering such shares is not effective); and
(e)
Non-callable.
 
 
 
 
The Placement Agent Warrants

The warrants issued to the placement agent contain the same terms and conditions as those issued to the Investors.  However, the Placement Agent received warrants to purchase up to 561,601  shares of the Company’s Common Stock, including warrants to purchase up to 432,001 shares of Common Stock at an exercise price of $3.75 per share; warrants to purchase up to 64,800 shares of Common Stock at an exercise price of $4.5 per share and warrants to purchase up to 64,800 shares of Common Stock at an exercise price of $5.25 per share.
 
Registration Rights

Pursuant to the Registration Rights Agreement we entered into with the investors of the September 2010 Private Placement, we agreed to register all of the shares of common stock and the shares underlying the Series B Preferred Stock and the Warrants, as well as any shares we believe may be issued pursuant to the final conversion price or exercise price of the Series B Preferred Stock or Warrants, respectively, and pursuant to an adjustment in such price as per the terms of the Series B Preferred Stock and Warrants.

Transfer Agent

The transfer agent for our common stock and preferred stock is Signature Stock Transfer, Inc., 2632 Coachlight Court, Plano, Texas 75093. Tel: (972) 612-4120
 
Item 10.  Interest of Named Experts and Counsel
 
Legal Matters
 
Certain legal matters with respect to the shares of common stock offered hereby will be passed upon for us by Leser, Hunter, Taubman & Taubman, New York, New York 10004.

Experts
 
The financial statements for the fiscal years ended December 31, 2009 and 2008 included in this prospectus have been audited by Patrizio & Zhao, LLC, independent auditors, as stated in its report appearing in this prospectus and elsewhere in the registration statement of which this prospectus forms a part, and have been so included in reliance upon the reports of such firm given upon its authority as experts in accounting and auditing.
 
Item 11.  Information with Respect to the Registrant
 
Our Products

We manufacture and supply a variety of petrochemical products, including BTX aromatics, propylene, styrene, liquid petroleum gas (LPG), MTBE and other petrochemicals, each of which is described below:

·
BTX Aromatics: consists of benzene, toluene, xylene and other chemical components used for further processing into oil resin, gasoline and solvent materials widely used in paint, ink, construction coating and pesticide;
·
Propylene: a chemical intermediate which is one of the building blocks for an array of chemical and plastic products that are commonly used to produce polypropylene, acrylonitrile, oxo chemicals, propylene oxide, cumene, isopropyl alcohol, acrylic acid and other chemicals for paints, household detergents, automotive brake fluids, indoor/outdoor carpeting, textile, insulating materials, auto parts and electrical appliances;
·
Styrene: a precursor to polystyrene and several copolymers widely used for packaging materials, construction materials, electronic parts, home appliances, household goods, home furnishings, toys, sporting goods and other products;
·
LPG: a mixture of hydrocarbon gases used as fuel in heating appliances and vehicles. A replacement for chlorofluorocarbons as an aerosol propellant and a refrigerant which reduces damage to the ozone layer; and
·
MTBE & Other Chemicals: MTBE, oil slurry, sulphur and others which are used for a variety of applications including fuel components, refrigeration systems, fertilizers, insecticides and fungicides.
 
 
 
 
Production Capacity and Expansion

The following chart depicts our current production capacity:

                   
Current Capacity Breakdown (MT)
 
In order to develop our business to meet the increasing customer purchase orders, our management team plans to expand our manufacturing capacity to include :

a)  
an SBS production facility which will have a designed capacity of 70,000 MT per year;

b)  
additional storage capacity which will allow us to take better advantage of price variations to our raw materials costs as well as our finished products sales;

c)  
a raw material pre-treatment facility which will allow us to handle lower grade raw materials thereby helping us to further decrease raw material costs, improve efficiency in current production process and provide necessary feedstock for asphalt production;
 
d)  
an asphalt production facility, which will add with 300,000 MT annual capacities to our current facility.
 
We are currently working on building a new facility for producing Styrene-Butadience-Styrene (the “SBS”), one of the Styreneic Block Copolymers.  SBS is a product with high product margin with major application for footwear, adhesive, polymer modification and modified asphalt industries. The SBS facility will be built on the 1.2 million square feet of land for which we recently received written confirmation for reservation from local government on August 13, 2010. The construction started in September, 2010 and will take approximately 10 to 12 months to complete. The designed capacity of the SBS facility would allow for production of up to 70,000 metric tons per year. China’s current domestic production capacity of SBS is approximately 600,000 tons a year with an estimated domestic demand of 750,000 tons (data source: http://www.cpi360.com/docpage/c419/200906/0603_419_546403.aspx which is set up by Eastern-China International P&C Net). The total investment of the SBS facility is estimated to be $17.5 million.  We expect to start the trial run in the forth quarter of 2011 and commence the production in late 2011.  We expect to generate net profit margins of 10% for our production of SBS once the facility reaches normal production levels. The SBS facility is anticipated to achieve 80% utilization rate in 2012, the first full year of production, and generate approximately $107 million in sales and $10million to $11million in profit in 2012. The basis for the sales for the SBS facility is as follows: 56000 metric tons a year (80% capacity utilization * 70,000 tons capacity) * $1915 (the expected sale price per ton) =$107 million.
 
In anticipation of the increasing needs of raw materials and the production of finished goods along with our development of raw material facility, the asphalt facility and SBS facility, we are currently working on building additional storage capacity for raw material and for finished goods to increase our current 100,000 MT of storage capacity to 200,000 MT. The additional storage capacity will allow us to take better advantage of price variations to our raw materials costs as well as our finished products sales.
 
The addition of a raw material pre-treatment facility will greatly enhance our capability to handle tougher raw materials and reduce raw material cost. The pre-treatment equipment will be utilized prior to the catalytic pyrolysis processing. After pre-treatment, the “better” raw materials will go to the catalytic pyrolysis process and the “poorer” raw materials will go to the asphalt production facility. To be more specific, the raw materials coming from storage tanks will go through heat exchanging process and will be mixed with solvent in the mixer before going to the two level extractors for separating process. Through different levels of separation, the higher quality raw material will go to catalytic pyrolysis process and the lower quality raw material will be generated into asphalt products through the modifying process. Raw material pre-treatment facility will allow us to introduce a even lower grade heavy oil which ultimately lowers raw material costs.
 
We believe developing asphalt production capability fits into our overall business: first, there is a huge market demand in China due to China’s focus on building infrastructure to support further economic growth and the under-developed domestic supply; second, asphalt production can provide a better use of our production residuals and the lower quality materials. Currently, our production residuals are sold as scrap, however, with our expanded asphalt production, we can use those residuals to produce asphalt which can be sold at a much higher price. We expect the increased revenue and net profit from asphalt production will contribute significantly to our overall success; third, our management teamhas in-depth knowledge and expertise in designing, building and managing an asphalt production facility. Our CEO, Mr. Chunfeng Tao had successfully built and managed Ningbo Daxie Liwan Petrochemical Co.(later purchased by China National Offshore Oil company) to an annual production of 500,000 metric tons of high grade asphalt.  We plan to produce high-grade pavement asphalt which is the building material for highways and various grades of roads including urban fast roads and trunk roads with heavy traffic flow. High-grade pavement asphalt can also be used as raw materials for emulsified asphalt, diluted asphalt and modified asphalt.  We expect the asphalt facility will be completed by end of June, 2012.
 
 
The estimated cost of storage capacity expansion, raw material pre-treatment facility and asphalt facility is  approximately $75.8 million including $5.8 million for purchasing land, $20 million for facility construction, $40 million for new equipments,  and $10 million for working capital.
 
Our current annual designed manufacturing capacity is 550,000 metric tons of a variety of petrochemical products. However, we plan to spend approximately $3.8 million to upgrade the catalytic pyrolysis processing equipment used in our existing production facilities. We have started the design work and installation is scheduled to begin in March 2011. Once the installation and annual maintenance is completed by the end of the second quarter of 2011, our design capacity will increase to 720,000 MT per year. With the additions of SBS (70,000 MT) and asphalt capacity (300,000 MT), our total production capacity will reach 920,000 MT a year. The following chart depicts the breakdown of our total 920,000 MT production capacity after the completion of SBS and asphalt facilities:
 
Capacity Breakdown with Asphalt Facility &SBS (920,000 MT in total)
 
Our estimated completion timeline for our expansion projects  is as follows:
 
Expansion Project
Expected Completion Date
SBS Production Facility
End of Q3, 2011
Storage Facility
End of Q4, 2011
Raw Materials Pre-treatment Facility
End of Q1, 2012
Asphalt Production Facility
End of Q2, 2012
 
In order to expand our facilities, we need to acquire use rights of additional land. In China, the government is responsible for overall land planning and they will often select a target company to maximize the benefits of land use for a particular area. We have been in regular communications with the Ningbo Municipal Government about the land use rights for approximately 1.2 million square feet of land adjacent to our current production facility. We submitted our application to the local government for a land bidding process slated on July 13, 2010 which is a necessary legal proceeding to acquire the land use rights in China. We were the only bidder in this process because the land is well integrated with our existing site. The bidding process was completed on August 13, 2010 and we entered into land use right transfer agreements with the local government on August 18, 2010.
 
 
 
Petrochemical Manufacturing Process

The following chart illustrates our petrochemical manufacturing process:
 

 
Petrochemical Market in China

China has the world’s second largest petrochemical market after the U.S. in terms of production and consumption. China’s petrochemical output value grew from RMB 1,240 billion in 2000 to 6,584 billion in 2008, representing a Compound Annual Growth Rate (CAGR) of 23.2%. China Petrol and Chemical Industry Association (CPCIA) expects that the total profits in petrochemical industry will increase between 8% and 10% in 2010. (Source: http://english.people daily.com.cn)
 
 
 

 
 
China’s Petrochemical Market Size from 2000-2008 (RMB billions)
 
 
China’s Monthly Imports of Petrochemicals in 2009 (Thousand tons)
 
 Note: Does not include crude oil.
Source: customs.gov.cn

China’s increasing domestic demand for petrochemical products has exceeded the domestic supply in the past several years:
 
·
China’s benzene supply grew from 2.13 million MT in 2002 to 4.06 million MT in 2007 representing a CAGR of 13.8%. China’s benzene demand increased from 2.08 million MT in 2002 to 4.25 million MT in 2007, representing a CAGR of 15.4%. ( data source: www.stats.gov.cn ) (China Petrochemical Industry Association)
 
·
China’s toluene supply grew from 697,000 MT in 2002 to 1.52 million MT in 2007, representing a CAGR of 16.9%. China’s toluene demand increased from 1.56 million MT in 2002 to 1.96 million MT in 2007, representing a CAGR of 4.7%.(data source: www.stats.gov.cn ) (www.chem99.com)

·
China’s xylene supply grew from 820,000 MT in 2002 to 1.62 million MT in 2007, representing a CAGR of 14.6%. China’s xylene demand increased from 1.1 million MT in 2002 to 1.99 million MT in 2007, representing a CAGR of 12.6%.(data source: www.stats.gov.cn ) (www.chem99.com)

·
China’s propylene supply has grown from 3.78 million MT in 2000 to 9.35 million MT in 2006, representing a CAGR of 16.3%. China’s propylene demand has risen from 4.39 million MT in 2000 to 14.43 million MT in 2006, representing a CAGR of 21.9%.(data source: www.stats.gov.cn) (www.baiinfo.com)
 
 

 
·
China’s styrene supply has grown from 0.89 million MT in 2002 to 2.25 million MT in 2006, representing a CAGR of 26.1%. China’s Styrene demand has increased from 2.69 million MT in 2002 to 4.58 million MT in 2006, representing a CAGR of 14.2%.(data source:www.stats.gov.cn) (www.baiinfo.com)

·
China’s LPG supply has grown from 12.56 million MT in 2003 to 17.8 million MT in 2007, representing a CAGR of 9.1%. China’s LPG demand has increased from 18.77 million MT in 2003 to 22 million MT in 2007, representing a CAGR of 4.05%.(data source: www.stats.gov.cn ) ( www.chinaccm.com)
 
As a result, China has imported petrochemical products to meet the domestic demand, which is expected to continue for a number of years (source: Publication by Business Monitor International Ltd.: China Petrochemicals Report, Includes 5 Year Forecast to 2014; Q2 2010):
 
·
China imported 480,000 MT of benzene between 2003 and 2007 averaging 96,000 MT a year; (data source: www.stats.gov.cn )(China Petrochemical Industry Association)

·
China imported 863,000 MT of toluene in 2002 and 445,000 MT in 2007, averaging 746,000 MT per year; (data source: www.stats.gov.cn ) (www.chem99.com)

·
China imported 271,000 MT of xylene in 2002 and 420,000 MT in 2007, averaging 430,000 MT a  year; (data source: www.stats.gov.cn ) (www.chem99.com)

·
China’s import of propylene has increased from 210,000 MT in 2004 to 920,000 MT in 2008; ( data source:www.stats.gov.cn) (www.baiinfo.com)

·
China’s import of styrene has risen from 1.79 million MT in 2002 to 2.81 million MT in 2008, averaging 2.63 million MT a year; ( data source:www.stats.gov.cn) (www.baiinfo.com)

·
China’s import of LPG was 6.21 million MT in 2003 and 4.2 million MT in 2007, averaging 5.63 million MT of LPG imported per year. (data source: www.stats.gov.cn ) (www.chem99.com)  ( www.chinaccm.com)

Asphalt Market in China and Pretreatment & Asphalt Process

In addition to its use as raw materials for emulsified, diluted and modified asphalt-based products, asphalt is widely used for highways, roads and airport pavements. Currently the length of China’s highways has reached 75,000 km (46,603 miles) in the aggregate, which made China rank the second in the world in terms of the length of its highway system. According to the PRC government plan, the length of China's highways will reach 100,000 km (62,137 miles) by 2020. In November 2008, Ministry of Communication issued RMB 5 trillion investment plan and according to this plan, the average annual investment for construction of highways in the next five years will be RMB 980 billion, among which 60% will be used for construction of expressways, 20% for provincial highways and 20% for highways in the countryside.

To ensure the high-quality condition of roads and highways, the PRC government requires regular pavement maintenance every five years. In the past five years, the domestic demand for asphalt in China has exceeded supply with total imports of approximately 3.3 million MT in 2009.
 
 
Source: www.chem99.com
 
The following chart depicts the pretreatment and asphalt process:

 
Environmental Protection and Safety Measures

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

We have taken various measures to meet national standards and ensure our environmental compliance. For example, we recycle the water for cooling in our production process and large amounts of water can be saved through recycling. Sulfureted hydrogen generated in production will be sent to the facility for sulfur recovery. The waste water and waste gas will be treated by our sewage water treatment station and emission control facility to meet the national standards before discharge. The industrial residue and garbage will be sent to qualified companies for safe treatment.
 
 
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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 national standards of petrochemical products set by the General Administration of Quality Supervision, the Inspection and Quarantine of the PRC, and National Standardization Committee.

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.
 
Specifically, we possess the technology to use heavy oil, instead of naphtha which is a commonly used component in the petrochemical production industry. Heavy oil is approximately RMB 1,000 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 proprietary catalytic pyrolysis with higher reaction temperature, which results in 15% higher yield rate than conventional fluidized cracking processes. Finally, we use enhanced technologies in our production process that allow for lower capital investment and enhanced operations efficiency.
 
Also, our yield rate for our entire production line indicates a yield rate of 91.15% for the finished products. Yield rate represents the percent 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 91.15% means, for instance, 100 tons of heavy oil can generate approximately 91 tons of finished products.
 
In addition, we use enhanced technologies in our production process that allow for lower capital investment and enhanced 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 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 ultimately generates a 15% higher yield rate than that of the fluidized catalytic cracking process.
 
Finally, catalytic pyrolysis process with high temperature can produce more olefin hydrocarbon based products compared with other equipment using low temperature for the same product. In other words, the cost has been reduced while producing the same amount of the product and it is estimated that RMB 1,000 (about USD $146.5) can be saved per one metric ton of raw material.
 
Though our manufacturing technologies and process have not been patented or registered as our property, we rely on confidentiality and license agreements with certain of our employees, customers and others to protect the confidentiality of our technologies. Our management considers our manufacturing technologies and manufacturing design critical to our business, and has taken steps to protect these technologies. On May 17, 2010, we have filed two patent applications with the National Intellectual Property Bureau in China, which is located at  No. 6 Xitucheng Road, Jimenqiao, Haidian District, Beijing City, China.

Research & Development Advantage

Armed with a team of experienced engineers and technicians with state-of-the-art research and laboratory facilities, we are confident in our strong research and development capacities. To further enhance our research capacities, we have building our research team under the lead of Mr. Chunfeng Tao.

 
 
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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 excellent 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 in close proximity to raw material suppliers and downstream manufacturers which provides us with readily available access to raw materials. In addition, being located in Qingshi Chemical Park in Ningbo provides us with access to skilled labor and industry resources.

Sales and Pricing

Sales

In selling our products, approximately 90% of our customers pay cash payment in advance. With respect to core customers with excellent credit history, we may make an exception by conducting credit sales as part of our strategy to maintain core customer loyalty.

In order to meet customers’ demand, we have improved our manufacturing technologies and streamlined our transactional process to achieve a 30 days’ raw material-to-sales cycle.

Currently, our customer request orders for our products have exceeded our production capacity. The following chart sets forth the comparison between our annual production capacity and the size of customer requests for the listed products below:
 
Product Line
Annual Capacity
(MT)
Customer Requests
(MT)
Requests/Capacity
BTX Aromatics
345,000
480,000
1.39x
Propylene
51,500
90,000
1.75x
Styrene
36,000
48,000
1.33x
LPG
77,500
93,000
1.20x

Note: The actual quantities sold are based on Keyuan’s capacity to satisfy the order as well as customer demand. On an order-to-order basis, Keyuan and customers agree to a minimum and maximum quantity amount, of which Keyuan commits to fulfill the minimum order
 
In order to facilitate our future growth, Ningbo Keyuan Petrochemicals, Ltd was incorporated in Ningbo, P.R. China with a registered capital of $3 million as a wholly owned subsidiary of Keyuan Group (the BVI entity) on August 27, 2010. Ningbo Keyuan Petrochemicals is responsible for the sales and marketing, raw materials sourcing and market analysis for the Company. Dr. Jingtao Ma was appointed as the General Manager of the new entity. Dr. Ma was the head of the former sales and marketing division of Keyuan. This new entity will also serve as the “market thermometer” that can better monitor market conditions and obtain first hand market data through buying and selling activities. Management believes that the consolidation of the sales and marketing and raw material procurement function under one business unit will help efficiently manage the future expansion of the Company.
 
Pricing

China’s 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.

Major Customers

Our target customers are component manufacturers located in the Yangtze River Delta and Pearl River Delta. 80% 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 fule products and other chemical products. And the remaining 20% of our sales are via distributors. In order to estimate the total orders for a year, we conduct investigations with our major customers to obtain their preliminary orders for the next one or two years and update the information annually. We enter into purchase contracts with customers on an order-to-order basis. In each contract, price is determined based on market price and the quantity is specified based on (1) the customer demand for a particular order and (2) our capability to satisfy that particular order. For the year ended December 31, 2009, our five largest customers accounted for 70% of our total revenue, and the single largest customer accounted for 26% of our total sales. For the nine months ended September 30, 2010, our five largest customers amounted to $167.68 million and accounted for approximately 42% of the Company's total sales. As our customer base may change from year-to-year, during such years that the customer base is 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.
  
Intellectual Property

We have a pending trademark application for the company logo of Keyuan Plastics with the State Administration for Industry and Commerce, Trademark Office. Our management considers our manufacturing technologies and manufacturing design critical to our business, and intends to take steps to protect these technologies.

Government Regulation

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 the China's Ministry of Commerce (MOFCOM) and the NDRC in 2007 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 or prohibited from foreign investment, there is always a limitation on foreign investment and ownership. 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, subject to a cap approved by SAFE, 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.
 
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 verification report from a local accounting firm before converting its registered capital of foreign currency into Renminbi, and the converted Renminbi shall be used for the business within its permitted business scope. The 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.

 
 
 
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 Notice 75 requires PRC residents (including both corporate entities and natural persons) to register with SAFE or its competent local branch before establishing or controlling any company outside of China referred to as an “offshore special purpose company” 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. To further clarify the implementation of SAFE Notice 75, SAFE issued Circular 106 in May, 2007. Under Circular 106, 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 remains 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. 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 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.

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 New EIT Law. The New EIT Law took effect on January 1, 2008. Under the New EIT Law, FIEs and domestic companies are subject to a uniform tax rate of 25%. The New EIT Law provides a five-year transition period starting from its effective date for those enterprises which were established before the promulgation date of the New EIT Law and which were entitled to a preferential lower tax rate under the then-effective tax laws or regulations.
 
 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 New EIT Law will be eligible for a five-year transition period since 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 New EIT Law. From January 1, 2008, for the enterprises whose applicable tax rate was 15% before the promulgation of the New EIT Law , the tax rate will be increased to 18% for year 2008, 20% for year 2009, 22% for year 2010, 24% for year 2011, 25% for year 2012. For the enterprises whose applicable tax rate was 24%, the tax rate will be changed to 25% from January 1, 2008.

The New EIT Law and Implementation Rules of the New 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 New EIT Law, and therefor such income taxes generally called withholding tax in practice. It is currently unclear in what circumstances a source will be considered as located within the PRC. 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 we are considered as a “non-resident enterprise” under the New EIT Law and the dividends paid to us by our subsidiary in the PRC are considered income sourced within the PRC, such dividends may be subject to a 10% withholding tax.

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 the beneficial owner in Hong Kong owns more than 25% of the registered capital in a company in the PRC.

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 its financial conditions and results of operations.
 
 
 
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For the year ended 2009, the Company incurred a loss and was subject to the 25% tax rate. In order to support the growth of certain local enterprises, the local government granted Keyuan Plastics Co., a preferential tax treatment. In the first two profitable years, the local government will credit back to the Company the entire local portion of the income tax which equals to 40% of the whole Enterprise Income Tax the Company paid applying the 25% tax rate, resulting in an effective tax rate of 15%; in the subsequent three profitable years, the local government will credit back 50% of the local income tax the Company paid under the 25% tax rate resulting in an effective tax rate of 20%.
 
Regulations of Overseas Investments and Listings
 
On August 8, 2006, six PRC regulatory agencies, including MOFCOM, the China Securities Regulatory Commission or the CSRC, the State Asset Supervision and Administration Commission or the SASAC, the State Administration of Taxation or the SAT, the State Administration for Industry and Commerce or the SAIC and SAFE, jointly amended and released the M&A Rules, which became effective on September 8, 2006. This regulation, among other things, includes provisions that purport to require that an offshore SPV formed for purposes of overseas listing of equity interest in PRC companies and controlled directly or indirectly by PRC companies or individuals obtain the approval of CSRC prior to the listing and trading of such SPV’s securities on an overseas stock exchange.
 
On September 21, 2006, CSRC published on its official website procedures regarding its approval of overseas listings by SPVs. CSRC approval procedures require the filing of a number of documents with CSRC and it would take several months to complete the approval process. The application of the M&A Rules with respect to overseas listings of SPVs remains unclear with no consensus currently existing among the leading PRC law firms regarding the scope of the applicability of CSRC approval requirement.

Regulations on Work Safety

On June 29, 2002, the Work Safety Law (“WSL”) of the PRC was adopted by the 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 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 Company has put work place safety as one of the top priorities for our work. In order to comply with the aforementioned rules and regulations, we have made considerable investment for major equipment with a total estimated amount of RMB 23 million (about USD 3.37 million). We have installed distribution control system (DCS), emergency shutdown system, electric explosion protection, automatic interlocking system, detecting & alarming system for inflammable & toxic gas, fire fighting & fire detecting system, auto-sprinkling system, pressure release and control system.
 
Regulations on Environmental Protection

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.

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) to inspect the finished construction project and ensure 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.
 
In order to meet the above mentioned requirements of environmental protection, we have invested about RMB 28 million (about USD 4.1 million) and built some of the major facilities including a sewage treatment facitility, sulphur recovery facility, sea water desulphurization facility, flue gas treatment facility and 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.
 
 

 
Research and Development

Research and development costs are expensed as incurred. Research and development costs for the year ended December 31, 2009 were about RMB 3 million (approximately USD$ 0.44 million) for procurement of testing and analyzing instruments for our lab. There was no expense incurred for the year ended December 31, 2008 since we mainly focused on the construction of our facility.
 
Description of Property
 
We have acquired the state-granted use rights to land set forth in the table below. Currently, we are not leasing any property from third parties.

Item
Address
Size
Leased/Owned/Granted
Function
1.
Qingshi Industrial Park, Beilun District, Ningbo, Zhejiang, China
119,093.50
Square meters
Granted use rights
Plant land
2.
No.8 Lianhe Road 239 Block, Qijiashan Neighborhood, Beilun District, Ningbo, Zhejiang, China
4,948.17 Square meters
Owned
Dormitory Building
 
Employees

Currently, we have 355 full-time employees, including 1 executive officer and 10 other senior management, 21 engineers, 9 sales people, 6 researchers and developers and 37 administrative staff. The remaining 271 full-time employees are production facility manufacturers. All of the employees have signed labor contracts with the Company and have received monthly salaries as well as other social benefits including pension insurance, jobless 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, 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.

On May 1, 2007, Keyuan Plastics entered into a non-fixed term employment agreement with Mr. Chunfeng Tao, pursuant to which, Keyuan Plastics 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 Keyuan Plastics.

On May 1, 2007, Keyuan Plastics also entered into a confidentiality and non-compete agreement with Mr. Tao, pursuant to which, Mr. Tao agrees, among others, (i) that he will keep in confidence all Keyuan Plastics confidential information obtained in connection with such employment; (ii) that Keyuan Plastics has the sole ownership right to all Keyuan Plastics 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 Keyuan Plastics confidential information that he obtained during his last five (5) years of employment (or such less term) with Keyuan Plastics.
 
Copies of the employment agreements and confidentiality and non-compete agreements are included herein as Exhibit 10.12 and 10.19.
 
Executive Offices
 
Our offices are located at Qingshi Industrial Park, Ningbo Economic & Technological Development Zone, Ningbo, Zhejiang Province, P.R. China 315803.
 
Legal Proceedings

We are currently not a party to any material legal or administrative proceedings and are not aware of any pending legal or administrative proceedings against us. We may from time to time become a party to various legal or administrative proceedings arising in the ordinary course of our business.
 
 

 
MARKET FOR OUR COMMON STOCK, DIVIDENDS AND
RELATED STOCKHOLDER INFORMATION
 
Our Common Stock is quoted on the Nasdaq Stock Market under the symbol “KEYP” and has very limited trading.
 
Set forth in the following table are the high and low closing prices for the years ended December 31, 200 9 and 20 10 , and for the quarter ended September 30, 2010 for our common stock.
 
 
Quarter Ended
 
High
   
Low
 
                 
March 31, 2009
 
$
0.25
   
$
0.25
 
June 30, 2009
 
$
0.25
   
$
0.25
 
September 30, 2009
 
$
0.25
   
$
0.25
 
December 31, 2009
 
$
0.25
   
$
0.25
 
March 31, 2010
 
$
0.25
   
$
0.25
 
June 30, 2010   $
5.20
    $ 0.25  
September 30, 2010   $  5.00     $  4.04  
December 31, 2010   $  5.75     $  3.67  
 
As of January 12, 2011 , the closing bid price of the common stock was $ 4.33 and we had approximately  146   record holders of our common stock,  2 record holders of our Series B Preferred Stock and 1 record holders of our Series M 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  January 12, 2011 , there are (i) three-year Series A Warrants to purchase up to 808,600 shares of Common Stock, at an exercise price of $4.50 per share; (ii) three-year Series B Warrants to purchase up to 808,600 shares of Common Stock, at an exercise price of $5.25 per share. (iii) three-year Series C Warrants to purchase up to 874,802 shares of Common Stock, at an exercise price of $4.50 per share; and (iv) three-year Series D Warrants to purchase up to 874,802 shares of Common Stock, at an exercise price of $5.25 per share.
 
Effective August 11, 1993, the SEC adopted Rule 15g-9, which established the definition of a "penny stock," for purposes relevant to the Company, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require: (i) that a broker or dealer approve a person's account for transactions in penny stocks; and (ii) that the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased. In order to approve a person's account for transactions in penny stocks, the broker or dealer must (i) obtain financial information and investment experience and objectives of the person; and (ii) make a reasonable determination that the transactions in penny stocks are suitable for that person and that person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks. The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prepared by the Commission relating to the penny stock market, which, in highlight form, (i) sets forth the basis on which the broker or dealer made the suitability determination; and (ii) states that the broker or dealer received a signed, written agreement from the investor prior to the transaction. Disclosure also has to be made about the risks of investing in penny stock in both public offerings and in secondary trading, and about commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
 
 

Dividend Policy

We have not paid cash dividends on any class of common equity since formation and we do not anticipate paying any dividends on our outstanding Common Stock in the foreseeable future. We plan to retain any earnings to finance the development of the business and for general corporate purposes.
 
Future cash dividends, if any, will be at the discretion of our board of directors and will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors as our board of directors may deem relevant. We can pay dividends only out of our profits or other distributable reserves and dividends or distribution will only be paid or made if we are able to pay our debts as they fall due in the ordinary course of business.
 
Description of Equity Compensation Plans Approved By Shareholders

On June 29, 2010, the Board of Directors approved the Company’s 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.
 
Financial Statements
 
 
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 
To the Board of Directors and Stockholders
Keyuan Petrochemicals, Inc.
 
We have reviewed the accompanying consolidated balance sheet of Keyuan Petrochemicals, Inc. (the “Company”) as of September 30, 2010, and the related consolidated statements of operations and comprehensive income (loss) for the three months and nine months ended September 30, 2010 and 2009, consolidated statements of stockholders’ equity for the nine months ended September 30, 2010, and the consolidated statements of cash flows for the nine months ended June 30, 2010 and 2009. These consolidated financial statements are the responsibility of the Company’s management.
 
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
 
Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.
 
 
/s/ PATRIZIO & ZHAO, LLC
Parsippany, New Jersey
November 15, 2010
 
 
KEYUAN PETROCHEMICALS, INC.
 
Consolidated Balance Sheets
 
   
September 30,
   
December 31,
 
   
2010
   
2009
 
Assets
 
(Unaudited)
       
Current assets:
           
Cash and cash equivalents
 
$
44,932,623
   
$
14,030,655
 
Restricted cash
   
68,422,905
     
6,012,690
 
Trade notes receivable
   
3,292,506
     
400,491
 
Inventories
   
77,135,949
     
32,595,045
 
Advance payments
   
18,173,457
     
7,417,202
 
Prepaid taxes
   
29,617,022
     
15,263,949
 
Tax rebate receivable
   
8,171,637
     
-
 
Due from unrelated parties
   
-
     
1,068,741
 
Deferred tax assets
   
105,631
     
3,486,922
 
Other current assets
   
379,515
     
581,706
 
Total current assets
   
250,231,245
     
80,857,401
 
                 
Property, plant and equipment, net
   
129,086,205
     
131,824,617
 
                 
Intangibles, net
   
12,256,149
     
6,378,316
 
                 
Total assets
 
$
391,573,599
   
$
219,060,334
 
                 
Liabilities and stockholders’ equity
               
Current liabilities:
               
Accounts payable – trade and accrued expenses
 
$
57,040,944
   
$
2,888,860
 
Accounts payable – construction related
   
21,625,440
     
45,374,656
 
Short-term bank loans
   
123,104,239
     
82,885,500
 
Notes payable
   
52,844,100
     
13,719,134
 
Current portion of long-term bank loans
   
20,508,900
     
7,628,400
 
Advances from customers
   
23,151,303
     
16,549,644
 
Dividend payable
   
694,784
     
-
 
Due to former shareholder
   
-
     
733,500
 
Due to unrelated parties
   
-
     
953,550
 
Other current liabilities
   
272,797
     
290,631
 
Total current liabilities
   
299,242,507
     
171,023,875
 
                 
 Long-term bank loans
   
19,461,000
     
37,408,500
 
                 
Total liabilities
   
318,703,507
     
208,432,375
 
                 
Stockholders’ equity:
               
Series A preferred stock, $0.001 par value, 20,000,000 shares
               
  authorized, 6,738,336 shares issued and outstanding at
               
  September 30, 2010
   
6,738
     
-
 
     Series B preferred stock, $0.001 par value, 20,000,000 shares
               
        authorized, 5,400,010 shares issued and outstanding at
               
        September 30, 2010
   
5,400
     
-
 
Series M preferred stock, $0.001 par value, 47,658 shares
               
  authorized, issued and outstanding at September 30, 2010
   
48
     
48
 
Common stock, $0.001 par value, 50,000,000 shares authorized,
               
  3,181,504 issued and outstanding at September 30,2010
   
3,182
     
-
 
Additional paid-in capital
   
62,428,778
     
20,229,949
 
Retained earnings (deficit)
   
7,187,770
     
(10,664,819
)
Accumulated other comprehensive income
   
3,238,176
     
1,062,781
 
Total stockholders’ equity
   
72,870,092
     
10,627,959
 
                 
Total liabilities and stockholders' equity
 
$
391,573,599
   
$
219,060,334
 
 
 
 
42

 
 
KEYUAN PETROCHEMICALS, INC.
 
Consolidated Statements of Operations and Comprehensive Income (loss)
(Unaudited)
 
   
For the Three Months
   
For the Nine Months
 
   
Ended September 30,
   
Ended September 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Sales
 
$
151,343,966
   
$
7,362,101
   
$
400,713,069
   
$
7,362,101
 
                                 
Cost of sales
   
138,277,229
     
6,091,133
     
370,185,046
     
6,091,133
 
                                 
Gross profit
   
13,066,737
     
1,270,968
     
30,528,023
     
1,270,968
 
                                 
Operating expenses
                               
         Selling expenses
   
97,871
     
3,404
     
441,284
     
3,404
 
         General and administrative expenses
   
1,645,321
     
839,699
     
3,539,109
     
2,076,292
 
                 Total operating expenses
   
1,743,192
     
843,103
     
3,980,393
     
2,079,696
 
                                 
Income (loss) from operations
   
11,323,545
     
427,865
     
26,547,630
     
(808,728
)
                                 
Other income (expenses):
                               
         Interest expense, net
   
(3,850,777
)
   
(568,242
)
   
(6,514,240
)
   
(821,422
)
         Non-operating income (expense)
   
1,897,007
     
(86,426
)
   
1,906,606
     
(227,332
)
                 Total other expenses
   
(1,953,770
)
   
(654,668
)
   
(4,607,634
)
   
(1,048,754
)
                                 
Income (loss) before provision for income Taxes
   
9,369,775
     
(226,803
)
   
21,939,996
     
(1,857,482
)
  
                               
Provision (benefit) for income taxes
                               
         Current tax provision
   
1,477,677
     
-
     
3,392,623
         
         Deferred tax benefit
           
(56,700
)
   
-
     
(464,370
)
                 Total
   
1,477,677
     
(56,700
)
   
3,392,623
     
(464,370
)
                                 
Net Income (loss)
   
7,892,098
     
(170,103
)
   
18,547,373
     
(1,393,112
)
                                 
Other comprehensive income
                               
         Foreign currency translation adjustment
   
1,976,139
     
24,841
     
 2,175,395
     
20,363
 
                                 
Comprehensive Income (loss)
 
$
9,868,237
   
$
(145,262
)
 
$
20,722,768
   
$
(1,372,749
)
                                 
         Basic earnings per common share
 
$
2.26
   
$
0.00
   
$
9.56
   
$
0.00
 
         Diluted earnings per common share
 
$
0.14
   
$
0.00
   
$
0.35
   
$
0.00
 
                                 
         Weighted average number of common shares outstanding
                               
                Basic
   
3,181,504
     
-
     
1,867,972
     
-
 
                Diluted
   
57,948,173
             
53,609,751
     
-
 

 
 
43

 
 
Consolidated Statements of Cash Flows
(Unaudited)
 
   
For the Nine Months Ended September 30,
 
   
2010
   
2009
 
             
Cash flows from operating activities:
           
Net income (loss)
 
$
18,547,373
   
$
(1,393,112
)
Adjustments to reconcile net income (loss) to net cash
               
provided by (used in) operating activities:
               
Share-based payments
   
132,828
     
-
 
Depreciation and amortization
   
6,374,361
     
270,183
 
Deferred tax assets
   
3,392,689
     
(464,370
)
Changes in current assets and current liabilities:
               
Notes receivable
   
(2,833,738
)
   
-
 
Inventories
   
(43,112,327
)
   
(29,215,139
)
Advance payments for raw materials
   
(10,420,393
)
   
-
 
Prepaid taxes
   
(13,655,138
)
   
(11,200,246
)
Tax refund receivable
   
(8,171,637
)
   
-
 
Other current assets
   
209,357
     
(349,133
)
Accounts payable – trade and accrued expenses
   
53,154,501
     
(44,994
)
Advances from customers
   
6,154,441
     
3,026,569
 
Dividends payable
   
694,784
     
-
 
Other current liabilities
   
(22,713
)
   
4,839,897
 
Total adjustments
   
(8,102,985
)
   
(33,137,233
)
                 
Net cash provided by (used in) operating activities
   
10,444,388
     
(34,530,345
)
                 
Cash flows from investing activities:
               
Advance payments for construction in progress
   
-
     
(9,982,433
)
Due from unrelated parties
   
1,071,478
     
-
 
Additions to property and equipment
   
(781,468
)
   
(53,220,371
)
Additions to intangible assets
   
(5,900,639
)
   
(51,307
)
Accounts payable – construction related
   
(24,248,530
)
   
15,816,422
 
                 
Net cash used in investing activities
   
(29,859,159
)
   
(47,437,689
)
                 
Cash flows from financing activities:
               
Restricted cash
   
(61,205,447
)
   
(2,661,048
)
Proceeds from short-term bank loans
   
37,854,656
     
66,698,450
 
Proceeds from bank notes
   
38,169,758
     
7,329,500
 
Due to former shareholder
   
(735,500
)
   
5,703,007
 
Due to unrelated parties
   
(956,150
)
   
-
 
Repayment of long-term bank loans
   
(5,884,000
)
   
-
 
Capital contribution in cash
   
-
     
9,650,000
 
Proceeds from issuance of preferred stock and warrants
   
42,081,321
     
-
 
Preferred stock dividends declared
   
(694,784
)
   
-
 
                 
Net cash provided by financing activities
   
48,629,854
     
86,719,909
 
                 
Effect of foreign currency translation on cash
   
1,686,885