Keyuan Petrochemicals, Inc. - FORM 10-Q

Attached files

file	filename
EX-10.1 - IMPORTS MORTGAGE APPLICATION - Keyuan Petrochemicals, Inc.	f10q0614ex10i_keyuan.htm
EX-31.1 - CERTIFICATION - Keyuan Petrochemicals, Inc.	f10q0614ex31i_keyuan.htm
EX-31.2 - CERTIFICATION - Keyuan Petrochemicals, Inc.	f10q0614ex31ii_keyuan.htm
EX-32.2 - CERTIFICATION - Keyuan Petrochemicals, Inc.	f10q0614ex32ii_keyuan.htm
EX-32.1 - CERTIFICATION - Keyuan Petrochemicals, Inc.	f10q0614ex32i_keyuan.htm
EXCEL - IDEA: XBRL DOCUMENT - Keyuan Petrochemicals, Inc.	Financial_Report.xls
EX-10.2 - TRANSLATION COPY OF CURRENT ASSETS LOAN CONTRACT - Keyuan Petrochemicals, Inc.	f10q0614ex10ii_keyuan.htm

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2014

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

For the transition period from _______________ to _______________

Commission File Number

Keyuan Petrochemicals, Inc.

(Exact name of registrant as specified in its charter)

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

Qingshi Industrial Park

Ningbo Economic & Technological Development Zone

Ningbo, Zhejiang Province

P.R. China 315803

(86) 574-8623-2955

(Issuer's telephone number)

(Former address)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934) Yes ☐ No ☒

As of August 19, 2014, the Registrant has 57,240,062 shares of common stock outstanding and 5,333,340 shares of Series B Preferred Stock outstanding.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements	4

	Condensed Consolidated Balance Sheets	4

	Condensed Consolidated Statements of Comprehensive Income (Loss)	5

	Condensed Consolidated Statements of Cash Flows	6

	Notes to Condensed Consolidated Financial Statements	7 – 17

Item 2.	Management’s Discussion and Analysis or Plan of Operation	18

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32

Item 4.	Controls and Procedures	32

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	33

Item 1A.	Risk Factors	34

Item 2.	Unregistered Sales of Equity Securities And Use Of Proceeds	34

Item 3.	Defaults Upon Senior Securities	34

Item 4.	Mine Safety Disclosures	34

Item 5.	Other Information	34

Item 6.	Exhibits	35

INTRODUCTORY NOTE

Except as otherwise indicated by the context, references in this Annual Report on Form 10-Q (this “Form 10-Q”) to the “Company,” “Keyuan” “we,” “us” or “our” are references to the combined business of Keyuan Petrochemicals, Inc. and its consolidated subsidiaries. References to “Sinotech Group” are references to our wholly-owned subsidiary, Sinotech Group Limited, previously known as Keyuan International Group Limited”; references to “Keyuan HK” are references to our wholly-owned subsidiary, Keyuan Group Limited; references to “Ningbo Keyuan” are references to our wholly-owned subsidiary, Ningbo Keyuan Plastics Co.,Ltd.; references to “Ningbo Keyuan Petrochemicals” are to our wholly-owned subsidiary, Ningbo Keyuan Petrochemicals Co., Ltd; references to “Keyuan Synthetic Rubbers” are references to our wholly-owned subsidiary, Ningbo Keyuan Synthetic Rubbers Co., Ltd.; references to ”Guangxi Keyuan” are references to our wholly-owned subsidiary, Guangxi Keyuan New Materials Co.,Ltd. References to “China” or “PRC” are references to the People’s Republic of China. References to “RMB” are to Renminbi, the legal currency of China, and all references to “$” and dollar are to the U.S. dollar, the legal currency of the United States.

Special Note Regarding Forward-Looking Statements

This report contains forward-looking statements and information that are based on the beliefs of our management as well as assumptions made by and information currently available to us. Such statements should not be unduly relied upon. When used in this report, forward-looking statements include, but are not limited to, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan” and similar expressions, as well as statements regarding new and existing products, technologies and opportunities, statements regarding market and industry segment growth and demand and acceptance of new and existing products, any projections of sales, earnings, revenue, margins or other financial items, any statements of the plans, strategies and objectives of management for future operations, any statements regarding future economic conditions or performance, uncertainties related to conducting business in China, any statements of belief or intention, and any statements or assumptions underlying any of the foregoing. These statements reflect our current view concerning future events and are subject to risks, uncertainties and assumptions. There are important factors that could cause actual results to vary materially from those described in this report as anticipated, estimated or expected, including, but not limited to: competition in the industry in which we operate and the impact of such competition on pricing, revenues and margins, volatility in the securities market due to the general economic downturn; Securities and Exchange Commission (the “SEC”) regulations which affect trading in the securities of “penny stocks,” and other risks and uncertainties. Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward- looking statements, even if new information becomes available in the future. Depending on the market for our stock and other conditional tests, a specific safe harbor under the Private Securities Litigation Reform Act of 1995 may be available. Notwithstanding the above, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) expressly state that the safe harbor for forward-looking statements does not apply to companies that issue penny stock. Because we may from time to time be considered to be an issuer of penny stock, the safe harbor for forward-looking statements may not apply to us at certain times.

PART I – FINANCIAL INFORMATION

KEYUAN PETROCHEMICALS, INC. AND SUBSIDIAIRES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data)

	Note		June 30, 2014			December 31, 2013
			(Unaudited)
ASSETS
Current assets:
Cash			$	8,880		$	12,309
Pledged bank deposits				488,964			336,363
Bills receivable				2,112			25
Accounts receivable				9,235			7,517
Inventories		3		69,550			69,914
Prepayments to suppliers				45,066			33,842
Consumption tax recoverable		4		16,202			46,072
Amounts due from related parties		13		41			43
Other current assets		5		71,978			65,189
Deferred income tax assets		8		3,219			2,641
Total current assets				715,247			573,915

Property, plant and equipment, net				307,985			285,506
Intangible assets, net				905			986
Land use rights				10,353			10,663
VAT recoverable				3,010			3,012

Total assets			$	1,037,500		$	874,082

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Short-term bank borrowings		6	$	601,601		$	424,436
Bills payable				241,270			261,524
Accounts payable				57,199			59,043
Amounts due to related parties				381			-
Advances from customers				16,794			10,820
Accrued expenses and other payables				31,001			23,767
Income tax payable		8		997			1,849
Dividends payable				2,382			2,382
Total liabilities, all current				951,625			783,821

Series B convertible preferred stock: Par value: $0.001; Authorized: 8,000,000 shares issued and outstanding: 5,333,340 shares, liquidation preference $20,250				16,868			16,868
Commitments and contingencies		7		-			-

Stockholders’ equity:
Common stock:
Par value: $0.001; Authorized: 100,000,000 shares Issued: 57,646,160 Shares as at June 30, 2014 and December 31, 2013; outstanding: 57,335,736 and 57,520,012 shares, as at June 30, 2014 and December 31, 2013, respectively				58			58
Additional paid-in capital				51,555			51,555
Statutory reserve				5,749			5,749
Accumulated other comprehensive income				9,785			10,245
Retained earnings				2,170			5,929
Treasury stock, at cost, 310,424 and 126,148 shares at June 30,2014 and December 31, 2013, respectively				(310	)		(143	)
Total stockholders’ equity				69,007			73,393

Total liabilities and stockholders’ equity			$	1,037,500		$	874,082

See accompanying notes to the consolidated financial statements.

KEYUAN PETROCHEMICALS, INC. AND SUBSIDIARIES

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

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Sales	$	184,536		$	94,257		$	386,430		$	303,811
Cost of sales		174,845			91,628			369,596			292,360
Gross profit		9,691			2,629			16,834			11,451

Selling expenses		307			236			625			403
General and administration expenses		3,266			2,621			6,748			5,591
Total operating expenses		3,573			2,857			7,373			5,994

Income (loss) from operations		6,118			(228	)		9,461			5,457

Other income (expense):
Interest income		3,089			3,151			5,880			3,902
Interest expense		(6,620	)		(7,045	)		(11,588	)		(10,441	)
Foreign exchange (loss) gain, net		(1,694	)		4,652			(4,139	)		6,205
Other expense, net		(1,402	)		(715	)		(2,862	)		(1,095	)
Total other (expense) income, net		(6,627	)		43			(12,709	)		(1,429	)

(Loss) income before income taxes		(509	)		(185	)		(3,248	)		4,028
Income tax expense		511			312			511			1,607
Net (loss) income attributable to Keyuan Petrochemicals Inc. stockholders		(1,020	)		(497	)		(3,759	)		2,421
Dividends to Series B convertible preferred stockholders		-			-			-			-

Net (loss) income attributable to Keyuan Petrochemicals Inc. common stockholders	$	(1,020	)	$	(497	)	$	(3,759	)	$	2,421

Net (loss) income attributable to Keyuan Petrochemicals Inc. stockholders	$	(1,020	)	$	(497	)	$	(3,759	)	$	2,421

Other comprehensive income:
Foreign currency translation adjustment		381			1,101			(459	)		1,632
Comprehensive (loss) income	$	(639	)	$	604		$	(4,218	)	$	4,053

(Loss) earnings per share:
Attributable to common stock:
-Basic	$	(0.02	)	$	(0.01	)	$	(0.07	)	$	0.04
-Diluted	$	(0.02	)	$	(0.01	)	$	(0.07	)	$	0.04

Weighted average number of shares of common stock used in calculation:
-Basic		57,404,048			57,646,160			57,404,048			57,646,160
-Diluted		57,404,048			57,646,160			57,404,048			62.979,500

See accompanying notes to the consolidated financial statements.

KEYUAN PETROCHEMICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Amounts in thousands, except share data)

	Six months ended June 30,
	2014			2013
Cash flows from operating activities:
Net (loss) income	$	(3,759	)	$	2,421
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
Depreciation		6,514			6,047
Amortization		74			48
Land use rights amortization		233			234
Deferred income tax (benefit) expense		(598	)		1,086
Share-based compensation expense		-			764
Changes in operating assets and liabilities:
Bills receivable		(2,093	)		(8,116	)
Accounts receivable		(1,740	)		3,988
Inventories		(148	)		(6,339	)
Prepayments to suppliers		(11,519	)		(7,645	)
Consumption tax refund receivable		29,600			(40,834	)
Other current assets		(7,108	)		3,359
Accounts payable		(1,062	)		(19,970	)
Accounts payable – related parties		28			-
Advances from (to) customers		6,029			(18,593	)
Income taxes payable		(840	)		(2,595	)
Accrued expenses and other payables		1,416			(646	)
Net cash provided by (used in) operating activities		15,027			(86,791	)

Cash flows from investing activities:
Purchase of property, plant and equipment		(25,176	)		(28,318	)
Net cash used in investing activities		(25,176	)		(28,318	)

Cash flow from financing activities:
Pledged bank deposits used for bank borrowings		(155,429	)		(90,005	)
Proceeds from short-term bank borrowings		734,791			646,075
Repayment of short-term bank borrowings		(554,094	)		(504,884	)
Proceeds from bank notes		342,394			130,724
Repayments of bank notes		(360,773	)		(87,644	)
Repurchase of treasury stock		(168	)		-
Net cash provided by financing activities		6,721			94,266

Effect of foreign currency exchange rate changes on cash		(1	)		(225	)

Net decrease in cash		(3,429	)		(21,068	)

Cash at beginning of period		12,309			23,378
Cash at end of period	$	8,880		$	2,310

Supplemental disclosure of cash flow information:
Income tax paid	$	1,941		$	3,056
Interest paid, net of capitalized interest	$	-		$	10,441
Non cash investing and financing activities:
Payable for purchase of property, plant and equipment (net of VAT)	$	925		$	6,068

See accompanying notes to the consolidated financial statements.

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

(a) Organization and Nature of business

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

(b) Other Events

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

The consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company reported net loss and cash flows provided by operations of approximately $3.8 million and $16.8 million, respectively, for the six months ended June 30, 2014 and net income and cash flows used in operations of approximately $4.1 million and $53.1 million, respectively, for the year ended December 31, 2013. At June 30, 2014 and December 31, 2013, the Company had a working capital deficit of approximately $236 million and $162 million, respectively. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability or classification of assets, or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern.

The Company continues to finance its operations primarily through short-term bank borrowings. Short-term bank borrowings and bills payable amounted to approximately $843 million at June 30, 2014. Management expects that short-term bank financing will continue to be available through at least June 30, 2015.

The Company continues to benefit from favorable PRC tax policies related to consumption tax (Note 4) of which approximately $16.2 million was refundable at June 30, 2014. Approximately $7 million was refunded in July 2014, and management expects approximately $3.1 million of consumption tax to be refunded in September 2014, and that approximately $6 million will be deductible against future consumption tax obligations. In addition, management expects VAT of $30 million to be refunded in late 2014.

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

2 BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and include the financial statements of the Company and its subsidiaries. All intercompany balances and transactions are eliminated in consolidation. The financial statements have been prepared in accordance with U.S. GAAP applicable to interim financial information and the requirements of Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. These interim financial statements should be read in conjunction with the audited financial statements for the years ended December 31, 2013 and 2012, as not all disclosures required by generally accepted accounting principles for annual financial statements are presented. The interim financial statements follow the same accounting policies and methods of computation as the audited financial statements for the years ended December 31, 2013 and 2012. Interim results are not necessarily indicative of results for a full year. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the financial position and the results of operations and cash flows for the interim periods have been included.

3 INVENTORIES

Inventories consist of the following:

	June 30		December 31,
	2013		2013
	($’000)		($’000)
	(Unaudited)
Raw materials	$	35,116	$	37,747
Finished goods		33,733		30,823
Work-in-process		701		1,344
Total	$	69,550	$	69,914

4 CONSUMPTION TAX REFUND RECEIVABLE

The PRC government enacted a regulation pursuant to which domestically purchased heavy oil to be used for producing ethylene and aromatics products was exempted from consumption tax. In addition, the consumption tax paid for imported heavy oil is to be refunded if it is used for producing ethylene and aromatics products. Given all the Group’s purchased heavy oils are, or are to be, used for producing ethylene and aromatics products, the Group recognizes a consumption tax recoverable when a consumption tax for heavy oils has been paid and the relevant heavy oils have been used for production of ethylene and aromatics products. At June 30, 2014 and December 31, 2013, the Group recorded an estimated consumption tax recoverable amounting to approximately $16.2 million and $46.1 million, respectively.

In July 2014, a refund of approximately $7 million was received. In addition, management expects approximately $3.1 million of consumption tax to be refunded in September 2014, and that approximately $6 million will be deductible against future consumption tax obligations.

5 OTHER CURRENT ASSETS

Other current assets consist of the following:

	June 30		December 31,
	2014		2013
	($’000)		($’000)
	(Unaudited)
VAT recoverable	$	64,581	$	56,667
Customs deposits for imported inventories		2,390		3,680
Other		5,007		4,842
	$	71,978	$	65,189

Management estimates the deductible input VAT using vendor contracts, engineering and other estimates, as well as historical experience. Approximately $3.0 million was included in non-current assets as of June 30, 2014 and December 31, 2013, respectively.

Customs deposits for imported inventories represent amounts paid to the local customs office in connection with the import of raw materials inventories. Upon approval by the customs authorities, these amounts become refundable by the local tax authority and are reclassified as consumption tax refund receivable (Note 4).

6 SHORT-TERM BANK BORROWINGS

As of June 30, 2014, short−term bank borrowings outstanding carried a weighted average interest rate of 6.16% (2013: 6.25%) for bank loans in RMB; and a weighted average interest rate of 3.68% (2013: 2.52%) for bank loans in USD, and had maturity terms ranging from two to twelve months and interest rates ranging from 1.14% to 6.72% (2013: 1.0% to 7.2%).

Short-term bank borrowings consist of the following:

	June 30,				December 31,
	2014				2013
	SHORT-TERM BANK BORROWINGS		PLEDGED BANK DEPOSITS		SHORT-TERM BANK BORROWINGS		PLEDGED BANK DEPOSITS
	($’000)		($’000)		($’000)		($’000)
	(Unaudited)		(Unaudited)
China Construction Bank	$	151,421	$	94,822	$	102,995	$	43,000
Shanghai Pudong Development Bank		33,632		23,523		32,529		9,000
Agricultural Bank of China		54,621		29,660		32,770		20,000
Pingan Bank		32,165		33,105		21,635		23,000
Bank of Ningbo		29,975		10,925		30,052		1,000
Bank of Communication		31,224		20,261		24,416		3,000
Bank of China		171,943		110,763		137,309		78,000
China Merchant Bank		53,619		24,859		33,249		23,000
Ningbo Commerce Bank		10,998		11,359		4,990		5,000
Bank of Hangzhou		4,693		733		-		-
Huaxia Bank		6,299		-		-		-
Export-Import Bank of China		21,011		7,069		-		-
China Guangfa Bank		-		-		4,491		5,000
Bank deposits pledged for bills payable		-		121,885		-		126,363

Total	$	601,601	$	488,964	$	424,436	$	336,363

Among the Group's short-term borrowings as of June 30, 2014, $191 million was guaranteed by related party and third-party entities and individuals, and $27 million was collateralized by the Group’s land, buildings and equipment with a carrying amount of $101 million.

7 COMMITMENTS AND CONTINGENCIES

(a) Operating commitments

The Group had outstanding Letters of Credit as of June 30, 2014 of approximately $130 million.

(b) Capital commitments

As of June 30, 2014, the Group had contractual capital commitments of approximately $9.2 million for purchases of equipment. The capital commitments relate primarily to manufacturing equipment enhancements.

The Company, with its PRC legal counsel, evaluated the matters identified in a 2010 Independent Investigation to determine the extent to which the Company may be exposed to fines and penalties in China. The Independent Investigation was conducted by the Audit Committee, and identified, among other matters, possible violations of PRC or U.S. laws. The Company has concluded that the extent to which it may be exposed to fines and penalties in the PRC is limited, and to date, has not received any PRC governmental or regulatory communication or inquiry related to these matters. However, management is currently unable to determine the final outcome of these matters and their possible effects on the consolidated financial statements.

8 INCOME TAXES

The provision for income taxes is recorded at the end of each interim period based on the Company’s best estimate of its effective income tax rate expected to be applicable for the full fiscal year. The Company’s expected effective tax rate for 2014 is approximately 25%. The lower effective rate for the six months ended June 30, 2014 is primarily due to losses in non-PRC jurisdictions, the benefit of which is not expected to be realized. The Company paid income taxes of approximately $0.4 million and $1.9 million, respectively during the three months and six months ended June 30, 2014.

9 EARNING (LOSS) PER SHARE

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

	Three months ended June 30						Six months ended June 30
	2014			2013			2014			2013
	($’000)			($’000)			($’000)			($’000)
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Basic earnings per share:
Net (loss) income attributable to Keyuan Petrochemicals, Inc. stockholders	$	(1,020	)	$	(497	)	$	(3,759	)	$	2,421
Fixed dividends to Series B convertible Preferred stockholders		-			-			-			-

Net (loss) income contributable to Keyuan Petrochemicals Inc. common stockholders	$	(1,020	)	$	(497	)	$	(3,759	)	$	2,421

Weighted average common share
(Denominator for basic income per share)		57,404,048			57,646,160			57,404,048			57,646,160

Effect of diluted securities:
-Series A convertible preferred stock		-			-			-			-
-Series B convertible preferred stock		-			-			-			5,333,340
-Series M convertible preferred stock		-			-			-			-
-Warrants		-			-			-			-
-Options		-			-			-			-
		57,404,048			57,646,160			57,404,048			62,979,500

Basic net loss per share:	$	(0.02	)	$	(0.01	)	$	(0.07	)	$	0.04
Diluted net loss per share:	$	(0.02	)	$	(0.01	)	$	(0.07	)	$	0.04

The following table represents the warrants and options excluded from the calculation of diluted earnings per share:

	June 30, 2014		June 30, 2013
Warrants		4,396,118		4,396,118
Options		3,490,000		3,490,000

10 STOCK REPURCHASE PROGRAM

On September 17, 2012, the Board of Directors authorized the repurchase of $2 million of the Company’s common stock for up to $1.50 per share. In the six months ended June 30, 2014, the Company had purchased 184,276 shares for approximately $168,000.

11 FAIR VALUE MEASUREMENTS

The Company did not have any assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2014 and 2013.

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

12 SIGNIFICANT CONCENTRATIONS AND RISKS

At June 30, 2014 and December 31, 2013, the Group held cash and pledged bank deposits in financial institutions of approximately $498 million and $349 million, respectively. They were primarily held in major financial institutions located in mainland China and the Hong Kong Special Administrative Region, which management believes have high credit ratings.

During the six months ended June 30, 2014, no sales to individual customers exceeded 10% of the Group’s total net revenue. During the three months ended June 30, 2014 and the three and six months ended June 30 2013, sales to major customers, which individually exceeded 10% of the Group’s total net revenue, were as follows:

Three months ended June 30, 2014						Three months ended June 30, 2013						Six months ended June 30, 2013
Largest Customers	Amount of Sales		% Total Sales			Largest Customers	Amount of Sales		% Total Sales			Largest Customers	Amount of Sales		% Total Sales
		($’000)						($’000)						($’000)
		(Unaudited)		(Unaudited)				(Unaudited)		(Unaudited)				(Unaudited)		(Unaudited)
Customer A	$	20,272		11	%	Customer A	$	11,738		13	%	Customer A		38,024		13	%
						Customer B	$	9,694		10	%	Customer B		29,168		10	%

The Group currently buys a majority of its heavy oil, an important component of its products, from one supplier. Although there are a limited number of suppliers of the particular heavy oil used in production, management believes that other suppliers could provide similar heavy oil on comparable terms. A change in suppliers, however, could cause a delay in manufacturing and a possible loss of sales, which would affect operating results adversely. The Company’s largest supplier accounted for approximately $120 million and $52 million, or 66% and 50% of total purchases for the three months ended June 30, 2014 and 2013, respectively. The Company’s largest supplier accounted for approximately $242 million and $187 million, or 67% and 61% of total purchases for the six months ended June 30, 2014 and 2013, respectively.

The Company commenced trading of heavy oil in April 2013, whereby the Company functions as an agent on behalf of a Hong-Kong based customer. For the three months ended June 30, 2014 and 2013, the trading of heavy oil consists of purchases of approximately $70.1 million and $130.0 million, respectively, and sales of approximately $69.8 million and $129.4 million, respectively, resulting in a loss of $0.3 million and $0.6 million, respectively, that has been included in cost of sales in the condensed consolidated statement of comprehensive income. For the six months ended June 30, 2014, the trading of heavy oil consists of purchases of approximately $170.1 million, and sales of approximately $169.0 million, resulting in a loss of $1.1 million, that has been included in cost of sales in the condensed consolidated statement of comprehensive income.

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

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

(A) Related Party Transactions

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

Name of parties		Relationship
Mr. Chunfeng Tao		Majority stockholder

Mr. Jicun Wang		Principal stockholder

Mr. Peijun Chen		Principal stockholder

Ms. Sumei Chen		Member of the Company’s Board of Supervisors and spouse of Mr. Wang

Ms. Yushui Huang		Vice President of Administration, Ningbo Keyuan

Ningbo Pacific Ocean Shipping Co., Ltd (Ningbo Pacific)		100% ownership by Mr. Wang

Ningbo Xinhe Logistic Co., Ltd (Ningbo Xinhe)		10% ownership by Ms. Huang

Related party transactions and amounts outstanding with the related parties as of and for the three and six months ended June 30, 2014 and 2013, are summarized as follows:

	Three months ended June 30				Six months ended June 30
	2014		2013		2014		2013
	($’000)		($’000)		($’000)		($’000)
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
Purchase of transportation services (a)	$	783	$	413	$	1,906	$	1,041
Loan guarantee fee (b)	$	-	$	19	$	-	$	42

	June 30, 2013		December 31, 2013
	($’000)		($’000)
	(Unaudited)
Amounts due to related parties (c)	$	381	$	369
Advance payments to these parties (d)	$	41	$	55

(a)

The Group purchased transportation services of approximately $0.7 million and $0.4 million from Ningbo Xinhe during each of the three months ended June 30, 2014 and 2013, respectively. The Group purchased transportation services of $1.9 million and $1.0 million from Ningbo Xinhe during the six months ended June 30, 2014 and 2013, respectively.

(b)

Guarantees for Bank Loans

Beginning in 2011, loan guarantee fees of 0.3% of the loan principal guaranteed are to be paid quarterly. During the three months ended June 30, 2014 and 2013, loan guarantee fees were approximately nil and $0.02 million for Ningbo Pacific, respectively. During the six months ended June 30, 2014 and 2013, loan guarantee fees were nil and $0.04 million for Ningbo Pacific, respectively.

(c)

Amounts due to related parties consist of the following.

	June 30, 2014		December 31, 2013
	($’000)		($’000)
	(Unaudited)
Ningbo Xinhe (Transportation expenses)	$	381	$	369

(d)

Advance payments to these parties consist of the following.

	June 30, 2014		December 31, 2013
	($’000)		($’000)
	(Unaudited)		(Unaudited)
Ningbo Xinhe	$	-	$	12
Mr. Tao		41		43
Total	$	41	$	55

(B) Relationships and transactions with certain other parties

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

Name of parties		Relationship
Ningbo Litong Petrochemical Co., Ltd (Ningbo Litong)		Former 12.75% nominee shareholder of Ningbo Keyuan

Ningbo Anqi Petrochemical Co., Ltd (Ningbo Anqi)		A related party through September 2011 when control transferred

Ningbo Lide Investment Co., Ltd. (Ningbo Lide)		A related party through September 2011 when control transferred

Ningbo Kunde Petrochemical Co, Ltd. (Ningbo Kunde)		A related party through September 2011 when control transferred

Transactions and amounts outstanding with these parties for the three and six months ended June 30, 2014 and 2013 are summarized as follows:

	Three months ended June 30				Six months ended June 30
	2014		2013		2014		2013
	($’000)		($’000)		($’000)		($’000)
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
Sales of products (e)	$	7,048	$	8,809	$	12,413	$	50,129
Purchase of raw materials (f)	$	25,255	$	7,987	$	35,996	$	34,703
Guarantee for bank borrowings (g)	$	108,253	$	94,405	$	108,253	$	94,405
Loan guarantee fees (g)	$	688	$	575	$	1,322	$	1,092

	June 30, 2013		December 31, 2013
	($’000)		($’000)
	(Unaudited)
Advance received from these parties (h)	$	72	$	-
Advance payments to these parties (i)	$	11,730	$	11,043
Account receivables from these parties (j)	$	5,090	$	218

(e)

The Group sold finished products of approximately $6.9 million and $1.8 million to Ningbo Litong during the three months ended June 30, 2014 and 2013, respectively. The Group sold finished products of approximately 0.2 million and nil to Ningbo Lide during the three months ended June 30, 2014 and 2013, respectively. The Group sold finished products of nil and approximately $7 million to Ningbo Kunde during the three months ended June 30, 2014 and 2013, respectively. The Group sold finished products of approximately $12.2 million and $12.1 million to Ningbo Litong, during the six months ended June 30, 2014 and 2013, respectively. The Group sold finished products of approximately 0.2 million and nil to Ningbo Lide during the six months ended June 30, 2014 and 2013, respectively. The Group sold finished products of nil and approximately $38 million to Kunde during the six months ended June 30, 2014 and 2013, respectively.

(f)

During the three months ended June 30, 2014, the Group purchased raw materials of approximately $16.9 million and $8.3 million from Litong and Lide, respectively. During the three months ended June 30, 2013, the Group purchased raw materials of nil and approximately $8.0 million from Kunde and Lide, respectively. During the six months ended June 30, 2014, the Group purchased raw materials of approximately $27.2 million and $8.8 million from Litong and Lide, respectively. During the six months ended June 30, 2013, the Group purchased raw materials of approximately $2.7 million and $32.0 million from Kunde and Lide, respectively.

(g)

Guarantees for Bank Loans

	Guarantee provided during the three months ended June 30,				Guarantee provided during the six months ended June 30,
	2014		2013		2014		2013
	($’000)		($’000)		($’000)		($’000)
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
Ningbo Litong	$	75,677	$	62,056	$	75,677	$	62,056
Ningbo Lide		32,576		32,056		32,576		32,056
Total	$	108,253	$	94,112	$	108,253	$	94,112

	Bank loans Guaranteed as of
	June 30, 2014		December 31, 2013
	($’000)		($’000)
	(Unaudited)
Ningbo Litong	$	142,970	$	109,618
Ningbo Lide		151,166		75,405
Total	$	294,136	$	185,023

Beginning in January 2011, loan guarantee fees of 0.3% of the loan principal guaranteed are to be paid quarterly. In the three months ended June 30, 2014, loan guarantee fees were $0.25 million and $0.43 million to Ningbo Litong and Ningbo Lide, respectively. In the six months ended June 30, 2014, loan guarantee fees were $0.5 million and $0.83 million for Ningbo Litong and Ningbo Lide, respectively.

(h)

At June 30, 2014, advance received from these parties consist of amounts due from Litong and Lide of $0.05 million and $0.02 million, respectively.

(i)

At June 30, 2014, advance payments to these parties consist of payments to Litong and Lide of $7.9 million and $3.8 million, respectively.

(j)

At June 30, 2014, accounts receivable from these parties consist of amounts receivable from Litong of $5.1 million.

14 Consolidated Segment Data

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

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

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

Segment information for the three and six months ended June 30, 2014 and 2013 are as follows:

	Three Months Ended June 30
	2014							2013
	Petrochemical		Rubber			Total		Petrochemical			Rubber		Total
	($'000)		($'000)			($'000)		($'000)			($'000)		($'000)
	(Unaudited)		(Unaudited)			(Unaudited)		(Unaudited)			(Unaudited)		(Unaudited)
Revenue	$	180,346	$	4,190		$	184,536	$	78,479		$	15,778	$	94,257
Income (loss) from operations	$	7,807	$	(1,689	)	$	6,118	$	(1,806	)	$	1,578	$	(228	)
Total assets	$	908,655	$	128,845		$	1,037,500	$	723,342		$	102,834	$	826,176

		Six Months Ended June 30
		2014							2013
		Petrochemical		Rubber			Total		Petrochemical			Rubber		Total
		($'000)		($'000)			($'000)		($'000)			($'000)		($'000)
		(Unaudited)		(Unaudited)			(Unaudited)		(Unaudited)			(Unaudited)		(Unaudited)
Revenue	$	376,049	$	10,381		$	386,430	$	260,073		$	43,738	$	303,811
Income (loss) from operations	$	11,981	$	(2,520	)	$	9,461	$	(2,143	)	$	7,600	$	5,457
Total assets	$	908,655	$	128,845		$	1,037,500	$	723,342		$	102,834	$	826,176

15 SUBSEQUENT EVENT

From July 1, 2014 through August 14, 2014, the Company purchased 95,674 shares of common stock through the stock repurchase program at an average purchase price of $1.15 per share.

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

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

The following discussion and analysis of financial condition and results of operations relates to the operations and financial condition reported in the financial statements of Keyuan for the three and six months ended June 30, 2014 and 2013 and should be read in conjunction with such financial statements and related notes included in this report and the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

Overview

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

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

Our organization chart is as follows:

Our Facility and Equipment

Facility

As of June 30, 2014, we have invested a total of approximately $97.1 million in the newly added construction and improvement of our production facility. Our current production facility encompasses approximately 1.3 million square feet, including 594,000 square feet for production and 19,500 square feet for laboratories and offices. We also acquired the land use right of an additional 1.2 million square feet of land in August 2010 for our expansion.

We have a total of 100,000 MT of storage capacity, consisting of 50,000MT of storage capacity for raw materials and 50,000 MT for finished products. As a part of our expansion plan, we intend to add 50,000 MT of new storage capacity in 2014, after which our total storage capacity will be 150,000 MT. We completed construction of two new tanks with approximately 34,000 MT of storage capacity in June 2013 and the installation of pilings and pumps was completed in late October 2013. At the date of this Report, we have submitted the report and the related documents to the local environmental department for inspection and approval. Once we obtain the approval from the local environmental department, the two storage tanks will become operational. We expect that the operation will commence at the end of August 2014, if there are no adjustments required by the local environmental department. For the rest of approximately 16,000 MT of new storage capacity, we are planning to start the construction in October 2014 and expect to complete the work at the end of September 2015.

We have an on-site ocean shipping dock with 5,000 MT of shipping capacity and a 10-truck loading facility. Approximately 90% of our feedstock and finished products use this shipping dock. We also have adjacent access to another shipping dock with an additional 50,000 MT of shipping capacity. During the first three months of 2014, we started the application to the local government in Ningbo to upgrade the classification of our own dock so that we can unload foreign cargo vessels under the 50,000 MT cargo capacity to our dock directly. We expect that the upgrading will be completed by the end of 2016 and we will be able to save additional logistics costs and storage fees once it is completed.

Equipment

Our major processing equipment includes the following:

●

Heavy oil catalytic pyrolysis processing equipment- risers/generators/precipitators, fuel gas boilers, fractionating tower, absorbing, re-absorbing, and desorbing towers, heat exchangers, pumps, a stabilizing tower;

●

Gas fractionation processing equipment- de-propanizing tower, refining propylene tower, de-ethanizination tower, heat exchangers, pumps;

●

Ethylbenzene processing equipment- alkylation reactor, anti-alkylation reactor, dehydrogenation reactor, propylene absorbing tower, de-ethylene tower, ethylbenzene recovering tower, heating furnace for benzene, heating furnace for gas, steam overheating furnace, tail gas compressor, washing tower; and

●

Liquefied petroleum gas (LPG) and sulfur recovery process- LPG desulfurization extraction tower, dry gas desulfurization tower, regenerating tower, LPG de-mecaptan extraction tower.

Our Products

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

●

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

●

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

●

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

●

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

●

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

●

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

In order to improve our operational results and financial situation, we are adjusting our product portfolio to include Styrene-Ethylene-Butylene-Styrene (“SEBS”) which we believe will yield a higher gross margin than some of our current products. SEBS is a product similar to SBS but with more durable product features, and can be produced by our current SBS facility. In order to achieve a stable production value, we have started trial production of monthly approximately 200 -300 MT per month since March 2013. The lab analysis shows the trial production of SEBS has achieved a stable condition since April, 2014, However, The SBS/SEBS price has decreased significantly due to stagnant market conditions. In response, we decided to produce only per customers’ order, which is currently approximately 300MT per month. We will increase the production volume accordingly when the market recovers.

Production Capacity and Expansion

Our annual designed manufacturing capacity is 720,000 MT of a variety of petrochemical products. Our SBS production facility is capable of producing up to 70,000 MT of SBS in full load condition without interruption (100% of utilization rate in ideal conditions). Additionally, we have a total of 100,000 MT of storage capacity, consisting of 50,000 MT of storage capacity for raw materials and 50,000 MT for finished products.

Our SBS facility achieved a 41% utilization rate in 2012, the first full year of production, and generated approximately $71 million in sales and $5.9 million in profits. We achieved, in accordance with our annual plan of 63,000 MT of SBS, a 63% utilization rate in 2013; and generated approximately $78 million in sales and $5.6 million in profits. Although we planned to produce 63,000 MT of SBS for the fiscal year 2014, the production in the six months ended June 30, 2014 was 7,639 MT and resulted in revenue of $10.4 million and a loss of $2.5 million. The loss was mainly due to the sales price of SBS products decreased from the $1,915 per MT in December 2013 to $1,863 per MT in June 2014. As a result, we decided to reduce the production of SBS until the market improves.

The following chart depicts our production for the six months ended June 30, 2014:

Breakdown of the total capability of 348,347 (MT) for main products for the six months ended June 30, 2014

Other than the utilization rate for SBS facility discussed above, the utilization rates for our other facilities are as follows:

●	styrene production: 92%;
●	propylene: 80%;
●	LPG: 80%;
●	BTX Aromatic: 95%; and
●	MTBE & others: 90%

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

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

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

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

	d)	a transformer oil facility using hydrogen from the ethylene-styrene facility to complete a double hydrogenation process on original products (BTX Aromatic) for refining transformer oil and producing high value transformer oil with a design capability of 100,000 MT per year. We have completed the facility construction and are currently in the stage of preparing a report to the local environmental department for their inspection and approval; and

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

We acquired the approval for our catalytic oil processing facility and transformer oil plant from Ningbo local government in February 2013. The foundation piling work was completed in July 2013. As of the date of this Report, we have completed the construction of the main body of the facility and infrastructure. We are currently in the stage of preparing a report to be submitted to the local environmental department for inspection and approval. As of June 30, 2014, the capital invested in the catalytic oil processing facility was $21.9 million.

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

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

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

Expansion Project		Expected Completion Date
Oil Catalytic Processing Facility		End of Q4, 2014

Ethylene-Styrene Facility		End of Q2, 2015

Transformer Oil Facility		End of Q3, 2014

SSBR production facility		End of Q4, 2015

ABS Production Facility		End of Q4, 2016

New storage capacity of 50,000 MT		End of Q3, 2015

Manufacturing and Sales

Our total production of finished products was 160,645 MT for the three months ended June 30, 2014, and we generated $184 million in revenue based on the sale of 170,979 MT of petrochemical products.

Our total production of finished products was 348,347 MT for the six months end June 30, 2014, and we generated $386 million in revenue based on the sales of 356,517 MT of petrochemical products.

Results of Operations

The following table sets forth information from our statements of comprehensive income for the three and six months ended June 30, 2014 and 2013.

Comparison of the three and six months ended in June 30, 2013 and 2012 (in thousands)

	For the three months						Year to Year Comparison						For the six months						Year to Year Comparison
	Ended June 30,						Increase			Percentage			Ended June 30,						Increase			Percentage
	2014			2013			/(Decrease)			change			2014			2013			/(Decrease)			change

sales	$	184,536		$	94,257		$	90,279			96	%	$	386,430		$	303,811		$	82,619			27	%
Cost of sales		174,845			91,628			83,217			91	%		369,596			292,360			77,236			26	%

Gross profit		9,691			2,629			7,062			269	%		16,834			11,451			5,383			47	%

Operating expenses
Selling expenses		307			236			71			30	%		625			403			222			55	%
General and administrative expenses		3,266			2,621			645			25	%		6,748			5,591			1,157			21	%
Total operating expenses		3,573			2,857			716			25	%		7,373			5,994			1,379			23	%

Income (Loss) from operations		6,118			(228	)		6,346			2,783	%		9,461			5,457			4,004			73	%

Other income (expenses):
Interest income:		3,089			3,151			(62	)		(2	)%		5,880			3,902			1,978			51	%
Interest expense, net		(6,620	)		(7,045	)		425			(6	)%		(11,588	)		(10,441	)		(1,147	)		11	%
Foreign exchange gain (loss), net		(1,694	)		4,652			(6,346	)		(136	)%		(4,139	)		6,205			(10,344	)		(167	)%
Non-operating income (expenses)		(1,402	)		(715	)		(687	)		96	%		(2,862	)		(1,095	)		(1,767	)		161	%
Total other (expenses) Income		(6,627	)		43			(6,670	)		(15,512	)%		(12,709	)		(1,429	)		(11,280	)		(789	)%

Income(loss) before income taxes		(509	)		(185	)		(324	)		175	%		(3,248	)		4,028			(7,276	)		(181	)%
Income tax expense		511			312			199			64	%		511			1,607			(1,096	)		(68	)%
(Loss) Net Income		(1,020	)		(497	)		(523	)		105	%		(3,759	)		2,421			(6,180	)		(255	)%
Other comprehensive income
Foreign currency translation adjustment		381			1,101			(720	)		(65	)%		(459	)		1,623			(2,082	)		(128	)%
Comprehensive income (loss)	$	(639	)	$	604		$	(1,243	)		(206	)%	$	(4,218	)	$	4,053		$	(8,271	)		(204	)%

Sales: Our sales for the three months ended June 30, 2014 were approximately $185 million, compared to $94 million for the three months ended June 30, 2013, an increase of $90 million, or 96%. The increase was mainly due to the increase in sales and production volume in the second quarter of 2014, compared with the 40 days of production interruptions in the second quarter of 2014, which resulted in 98,000 metric tons of lost production. During the three months ended June 30, 2014, we sold 170,979 metric tons of petrochemical products at an average price of $1,079 per metric ton, compared to85,999 metric tons of petrochemical products at an average price of $1,096 per metric ton in the three months ended June 30, 2013. The average sales price per MT in the second quarter of 2014 dropped 1.5% compared with the same period of 2013, mainly due to the stagnant condition of the overall SBS market.

Sales for the six months ended June 30, 2014 were approximately $386 million, compared to $304 million for the six months ended June 30, 2013, an increase of $82 million, or 27%. The increase in our sales was due to the increase in sales and production volume in the second quarter of 2014, compared with the 40 days of production interruptions in the second quarter of 2013. Compared with the average sales price for the six months ended June,30,2013, the average sales price in the same period of 2014 decreased 3.5% from $1,123 to $1,084 per MT. The decrease was mainly due to the decrease in the price of SBS products of 18% from $2,173 per MT to $ 1,782 per MT.

Cost of Sales: Our cost of sales was approximately $175 million for the three months ended June 30, 2014, or 95% of sales, as compared to approximately $92 million, or 97 % of sales for the three months ended June 30, 2013. Our cost of sales are primarily composed of the costs of direct raw materials (mainly heavy oil, benzene, butadiene and carbinol), labor, depreciation and amortization of manufacturing equipment and facilities, and other overhead. The decrease in the percentage of cost of sales was mainly due to the average unit cost of raw material dropped from $1,065 for three months ended June 30 2013 to $ 1,021 for the comparable period of 2014.

Our cost of sales was approximately $370 million for the six months ended June 30, 2014, or 95.64% of sales, as compared to approximately $292 million, or 96.44% of sales for the six months ended June 30, 2013. In the six months ended June 30, 2013, our average cost of finished product was $1,034 per metric ton, as compared to $ 1,080 per metric ton in the six months ended June 30, 2013, a decrease of 4.3%.

For the six months ended June 30, 2014, the trading of heavy oil consists of purchases of approximately $170.1 million, and sales of approximately $169.0 million, resulting in a loss of $1.1 million, that has been included in cost of sales in the condensed consolidated statement of comprehensive income.

Energy required for production of our products consists of water, electricity and steam, the costs of which are attributed to cost of sales rather than operating expense. The supply prices of these energy sources in China have historically been very stable as a result of PRC government policy. Accordingly, the potential impact of changing energy costs to our production is minimal. Following are the costs for water, electricity and stream for the six months ended June 30, 2014 and 2013 (amounts in thousands):

	For the Six Months Ended June 30,
	2014		2013
	(Unaudited)		(Unaudited)
Water		667		685
Electricity		5,015		5,763
Steam		1,606

Total energy cost was approximately $7,288 for the six months ended June 30, 2014, which constitutes approximately 1.9 % of sales. Total energy cost was approximately $6,448 for the three months ended June 30, 2013, which constitutes approximately 2.1% of sales.

Gross Profit: Gross profit for the three months ended June 30, 2014 was approximately $9.7 million as compared to $2.6 million for the comparable period in 2013, an increase of approximately $7.1 million or 269 %. The increase was mainly due to the increased sales and production volume during the period compared with the production suspension in the comparable period in 2013.

Gross profit for the six months ended June 30, 2014 was approximately $17 million as compared to $11 million for the comparable period in 2013. Our gross margin increased from 3.6 % for the six months ended June 30, 2013 to 4.4 % for the six months ended June 30, 2014. The main reason for the increase in the gross margin is mainly due to the increased production and lower unit costs.

Operating Expenses: Operating expenses, including selling expenses, and general and administrative expenses, were approximately $3.6 million, or 1.9% of sales for the three months ended June 30, 2014, as compared to $2.9 million, or 3% of sales for the comparable period in 2013, an increase of approximately $0.7 million or 25%. The increase was mainly due to due to increases in loan guarantee fees of $0.1million and increased R&D expenses of $0.4 million related to Ningbo Keyuan Synthetic Rubbers’ application as a national high-tech enterprise.

Operating expenses, including selling expenses and general and administrative expenses, were approximately $7.4 million, or 1.9 % of sales for the six months ended June 30, 2014, as compared to $6 million, or 2% of sales for the comparable period in 2013, an increase of approximately $1.4 million. The increase in the expenses was due to general increases in R&D expense, welfare fees and taxes.

Interest Income/Expense (net): For the three months ended June 30, 2014, interest income and interest expense were approximately $3.1 million and $6.6 million, respectively; as compared to interest income and interest expense of approximately $3.1 million and $7.0 million, respectively, for the comparable period in 2013. The increase in interest income / expense was mainly due to higher borrowings and deposits in the period.

For the six months ended June 30, 2013, interest income and interest expense were approximately $5.9 million and $11.6 million, respectively, as compared to interest income and interest expense of approximately $3.9 million and $10.4 million, respectively, for the comparable period in 2013. The increase in interest income / expense was mainly due to higher borrowings and deposits.

Net loss: Net Loss was approximately $1 million for the three months ended June 30, 2014, as compared to net loss of approximately $0.5 million in the same period in 2013, an increase of $0.5 million, or 105%. This increase in loss was mainly due to the foreign exchange loss of $1.7 million from the depreciation of RMB, compared to an exchange gain of $4.7 million in the same period of 2013.

Net loss was approximately $3.8 million for the six months ended June 30, 2014, as compared to net income of approximately $2.4 million in the same period in 2013, a decrease of $ 6.2 million, or 255 %. This decrease was mainly due to the foreign exchange loss of $4.1 million, compared to a foreign exchange gain of $6.2 million in the same period of 2013. The exchange rate for USD to RMB appreciated from 6.31 to 1 on January 1, 2013, to 6.17 to 1 on June 30, 2013, however, the exchange rate for USD to RMB depreciated from 6.11 to 1 on January 1, 2014, to 6.16 to 1 on June 30, 2014.

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

Currency translation adjustments resulting from this process are included in accumulated other comprehensive income and amounted to $0.4 million for the three months ended June 30, 2014. The balance sheet amounts at June 30, 2014 and 2013, with the exception of equity, were translated at RMB 6.1538 and RMB 6.1728 to 1.00 U.S. dollar respectively. The equity accounts were translated at their historical rates. The average translation rates applied to income statement accounts for the three months ended June 30, 2014 and 2013 were RMB 6.1633 and RMB 6.2023, respectively, to 1.00 U.S. dollar.

Liquidity and Capital Resources

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

	For the Six Months Ended June 30,
	2014			2013
	(Unaudited)			(Unaudited)
Net cash provided by (used in) operating activities		15,027			(86,791	)
Net cash used in investing activities		(25,176	)		(28,318	)
Net cash provided by financing activities		6,721			94,266

Net cash provided by operating activities was approximately $15 million for the six months ended June 30, 2014, as compared approximately $86.8 million used in operations for the same period in 2013. The primary reason for the increase is the consumption tax refund which was received in a more timely manner in 2014 compared to 2013

Net cash used in investing activities was approximately $25.7 million and $28.3 million for the six months ended June 30, 2014 and 2013, respectively. The net cash used in investing activities is primarily due to our increasing investments in the construction of our infrastructures and facilities in accordance with our expansion plan.

Net cash provided by financing activities amounted to approximately $6.7 million for the six months ended June 30, 2014, compared with approximately $94.3 million for the same period in 2013, as more funds were available from operations in 2014 resulting in reduced need for short term borrowings.

The Company commenced trading of heavy oil in April 2013, whereby the Company functions as an agent on behalf of a Hong-Kong based customer. For the six months ended June 30, 2014, the trading of heavy oil consists of purchases of approximately $170.1 million, and sales of approximately $169.0 million, resulting in a loss of $1.1 million, that has been included in cost of sales in the condensed consolidated statement of comprehensive income.

Consumption Tax Refund

At June 30, 2014 and December 31, 2013, the Group recorded an estimated consumption tax recoverable amounting to approximately $16.2 million and $46.1 million, respectively.In July 2014, a refund of approximately $7 million was received. In addition, management expects approximately $3.1 million of consumption tax to be refunded in September 2014, and that approximately $6 million will be deductible against future consumption tax obligations.

Bank Loans

We have entered into loan agreements with our primary lenders, Bank of China, China Construction Bank, Agricultural Bank of China, etc. under which we have term loans. As of August14, 2014, we had an aggregate principal amount of approximately $583 million in bank loans outstanding under the loan agreements, with maturity dates from July 2014 to June 2015 and interest rates from 1.1% to 7.2% per annum.

Before we enter into loan agreements with a lender, the lender will approve a comprehensive credit line which is the maximum amount of the loans we can obtain from the lender within a certain time period. The comprehensive credit line is usually secured by one or more third party guaranties or liens on our property and equipment, or a security deposit. Once the comprehensive credit line is approved, we will enter into an individual loan agreement with the lender each time we obtain a loan from the lender under the credit line. Therefore, we typically have multiple loan agreements under one comprehensive credit line with one lender as long as the credit limit has not been reached. Though different lenders have different forms for loan agreements, loan agreements usually contain similar material terms such as the amount of a loan, the term of a loan, interest rate, etc. In addition, some loan agreements specify the purposes of loans, and lenders are permitted to monitor the use of loans and our business. The loan agreements generally do not require us to maintain specific ratios or working capital requirements. In the event that lenders observe abnormal use of a loan or a substantial loss in our business or other event that could potentially have a substantial negative impact on our ability to repay the loans on time, they can either amend or terminate the loan agreements, or request additional financial covenants to secure the loans. If we fail to repay loans in a timely manner, or fail to obtain written consent from the lenders regarding extension/renewal applications, we may be subject to default interest or the loans may be canceled. Historically, we have no record of default on any of our loans and, as a result, we do not anticipate that our loans will not be renewed when their terms expire. However, we cannot guarantee that one or more of our loans will not be renewed or extended at the end of their terms, which could have a material negative impact upon our liquidity which could impact our ability to purchase raw materials, make upgrades and improvements to our infrastructure or otherwise negatively impact our business and operations.

As of June 30, 2014, 32% of our bank loans (approximately USD $191 million) were guaranteed by our related parties. Usually, a guaranty agreement is executed among a third party, a lender and us pursuant to a credit line approved by the lender. Though different lenders use different forms for loan guaranty agreements, loan guaranty agreements usually contain substantially similar terms. According to a loan guaranty agreement, the guarantor is jointly liable for all our debts to the lender under the corresponding loan agreements and the lender can bring legal action against the guarantor for damages in the event there is a default or breach of any loan agreement under the credit line. The guaranty is independent of any loan agreement under the credit line and irrevocable. In addition, if the credit line is extended or renewed, a written consent from the guarantor is required. Otherwise, the guarantor is only liable for loans under loan agreements that were executed during the original term of the credit line. Beginning in January 2011, certain individual loan guarantors, some of whom are related parties, were paid a monthly fee of approximately 0.3% of the outstanding loan balances as compensation for their guarantees. Through December 31, 2010, no compensation was paid in respect of these guarantees. During the three and six months ended June 30, 2014 and 2013, expenses related to loan guarantee fees of approximately $0.7 million and $0.6 million, and $1.3 million and $1.1 million, respectively. As of June 30, 2014, there was $1.9 million of accrued and unpaid guarantee fees. Historically, all debts have been repaid by the Company in a timely manner. All short-term bank loans are revolving loans whose terms (at the due date of payment) are generally extended by the lender. As of June 30, 2014, we were in compliance with the terms of our loan agreements. As such, management expects most unpaid loan balances will be extended at their due dates. Depending on our capital needs, the Company evaluates whether to apply for additional long-term bank loans. The Company currently has sufficient lines of credit with its banks for both short-term and long-term borrowings.

Related Party Transactions

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

Name of parties		Relationship
Mr. Chunfeng Tao		Majority stockholder

Mr. Jicun Wang		Principal stockholder

Mr. Peijun Chen		Principal stockholder

Ms. Sumei Chen		Member of the Company’s Board of Supervisors and spouse of Mr. Wang

Ms. Yushui Huang		Vice President of Administration, Ningbo Keyuan

Ningbo Pacific Ocean Shipping Co., Ltd (Ningbo Pacific)		100% ownership by Mr. Wang

Ningbo Xinhe Logistic Co., Ltd (Ningbo Xinhe)		10% ownership by Ms. Huang

Related party transactions and amounts outstanding with the related parties as of and for the three and six months ended June 30, 2014 and 2013, are summarized as follows:

	Three months ended June 30				Six months ended June 30
	2014		2013		2014		2013
	($’000)		($’000)		($’000)		($’000)
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
Purchase of transportation services (a)	$	783	$	413	$	1,906	$	1,041
Loan guarantee fee (b)	$	-	$	19	$	-	$	42

	June 30, 2013		December 31, 2013
	($’000)		($’000)
	(Unaudited)
Amounts due to related parties (c)	$	381	$	369
Advance payments to these parties (d)	$	41	$	55

(a)

(b)

Guarantees for Bank Loans

	June 30, 2014		December 31, 2013
	($’000)		($’000)
	(Unaudited)
Ningbo Xinhe (Transportation expenses)	$	381	$	369

(d)

Advance payments to these parties consist of the following.

	June 30, 2014		December 31, 2013
	($’000)		($’000)
	(Unaudited)		(Unaudited)
Ningbo Xinhe	$	-	$	12
Mr. Tao		41		43
Total	$	41	$	55

Relationships and transactions with certain other parties

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

Name of parties		Relationship
Ningbo Litong Petrochemical Co., Ltd (Ningbo Litong)		Former 12.75% nominee shareholder of Ningbo Keyuan
Ningbo Anqi Petrochemical Co., Ltd (Ningbo Anqi)		A related party through September 2011 when control transferred
Ningbo Lide Investment Co., Ltd. (Ningbo Lide)		A related party through September 2011 when control transferred
Ningbo Kunde Petrochemical Co, Ltd. (Ningbo Kunde)		A related party through September 2011 when control transferred

Transactions and amounts outstanding with these parties for the three and six months ended June 30, 2014 and 2013 are summarized as follows:

	Three months ended June 30				Six months ended June 30
	2014		2013		2014		2013
	($’000)		($’000)		($’000)		($’000)
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
Sales of products (e)	$	7,048	$	8,809	$	12,413	$	50,129
Purchase of raw materials (f)	$	25,255	$	7,987	$	35,996	$	34,703
Guarantee for bank borrowings (g)	$	108,253	$	94,405	$	108,253	$	94,405
Loan guarantee fees (g)	$	688	$	575	$	1,322	$	1,092

	June 30, 2013		December 31, 2013
	($’000)		($’000)
	(Unaudited)
Advance received from these parties (h)	$	72	$	-
Advance payments to these parties (i)	$	11,730	$	11,043
Account receivables from these parties (j)	$	5,090	$	218

(e)

(f)

(g)

Guarantees for Bank Loans

	Guarantee provided during the three months ended June 30,				Guarantee provided during the six months ended June 30,
	2014		2013		2014		2013
	($’000)		($’000)		($’000)		($’000)
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
Ningbo Litong	$	75,677	$	62,056	$	75,677	$	62,056
Ningbo Lide		32,576		32,056		32,576		32,056
Total	$	108,253	$	94,112	$	108,253	$	94,112

	Bank loans Guaranteed as of
	June 30, 2014		December 31, 2013
	($’000)		($’000)
	(Unaudited)
Ningbo Litong	$	142,970	$	109,618
Ningbo Lide		151,166		75,405
Total	$	294,136	$	185,023

(h)

At June 30, 2014, advance received from these parties consist of amounts due from Litong and Lide of $0.05 million and $0.02 million, respectively.

(i)

At June 30, 2014, advance payments to these parties consist of payments to Litong and Lide of $7.9 million and $3.8 million, respectively.

(j)

At June 30, 2014, accounts receivable from these parties consist of amounts receivable from Litong of $5.1 million.

Going concern and management’s plans

The consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company reported a net loss and cash flows provided by operations of approximately $3.8 million and $15 million, respectively, for the six months ended June 30, 2014 and net income and cash flows used in operations of approximately $4.1 million and $53.1 million, respectively, for the year ended December 31, 2013. At June 30, 2014 and December 31, 2013, the Company had a working capital deficit of approximately $236 million and $210 million, respectively. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments relating to the recoverability or classification of assets, or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern.

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

The Company continues to benefit from favorable PRC tax policies related to consumption tax (Note 4) of which approximately $16.2 million was refundable at June 30, 2014. Approximately $7 million was refunded in July 2014 and management expects approximately $3.1 million of consumption tax to be refunded in September 2014, and that approximately $6 million will be deductible against future consumption tax obligations. In addition, management expects that VAT of $30 million is expected to be refunded in late 2014.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable to smaller reporting companies.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

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

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

(b) Changes in Internal Control over Financial Reporting

In connection with the preparation of our financial statements for the fiscal year ended December 31, 2013, the management determined that our internal control environment is not properly designed due to the existence of certain material weaknesses and that it did not operate effectively to ensure that the Company’s financial statements (and related financial statement disclosures) were prepared in accordance with US generally accepted accounting principles (US GAAP). We have established a number of remediation measures, which we believe will remediate the material weaknesses identified, if such measures are effectively implemented and maintained. As of the end of the period covered by the report, we continue the process of implementing and maintaining the remediation measures, but we cannot assure when or if we will be able to successfully implement these remedial measures. For more information regarding our controls and procedures, please refer to Item 9A. Controls and Procedures in our Annual Report on Form 10-K for fiscal year ended December 31, 2013, filed with the SEC on May 22, 2014.

There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter covered by this report that has materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. Legal Proceedings

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

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

On February 13, 2014, the Brown Law Firm filed a derivative action suit on behalf of the Company, alleging certain and former current officers and directors of the Company had violated their fiduciary duties between at least April 22, 2010 to October 20, 2011. All proceedings and discovery in the derivative action is currently stayed by the United States District Court for the Southern District of New York until September 19, 2014, on which date the Court will hold a conference. Management intends to contest the case vigorously or alternatively to settle the matter in an appropriate manner.

On April 8, 2014, YiNuo Co.ltd filed a law suit in Ningbo Beilun District People’s Court against Ningbo Keyuan Synthetic Rubbers Co., Ltd in a dispute related to product quality, and allegd a claim for damages of RMB 10 million. The hearing is scheduled to be held on August 18, 2014. We have filed a counter claim and plan to contest the suit vigorously.

On May 7, 2014, Eastwell International Co.Ltd filed a law suit in Nanjin Intermediate People’s Court against Ningbo Keyuan Synthetic Rubbers Co., Ltd for a breach of contract and disputing product quality and alleged a claim for damages of RMB 21.05 million. We filed a counter claim and plan to contest the suit vigorously. The first hearing at the Court was held on June 18, 2014 and the second hearing was held on July 4, 2014. In the second hearing, Eastwell International Co.Ltd proposed to reduce the claim amount to RMB 14.05 million. We declined the proposal and asked for the third hearing to be held. The date of third hearing has been set to August 19, 2014.

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

Item 1A. Risk Factors

Not applicable to smaller reporting companies.

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

(a) Not Applicable.

(b) Not Applicable.

ITEM 3. Defaults upon Senior Securities

(a) Not Applicable.

(b) Not Applicable.

ITEM 4. Mine Safety Disclosures

Not applicable.

ITEM 5. OTHER INFORMATION

(a) Not applicable.

(b) Not applicable.

ITEM 6. EXHIBITS

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

2.1		Share Exchange Agreement dated April 22, 2010 (incorporated by reference to Exhibit 2.1 of the Registrant’s Form 8-K filed on April 28, 2010)
2.2		Agreement and Plan of Merger (incorporated by reference to Exhibit 2.1 of the Registrant’s Form 8-K filed on May 19, 2010)
3.1		Amended Articles of Incorporation of Keyuan Petrochemicals, Inc. (f/k/a Silver Pearls, Inc.), filed with the Secretary of State of Nevada (incorporated by reference to Exhibit 3.1 of the Registrant’s Form S-1 filed on December 29, 2010).
3.2		Articles of Merger (incorporated by reference to Exhibit 3.1 of the Registrant’s Form 8-K filed on May 19, 2010)
3.3		Amended Bylaws of Keyuan Petrochemicals, Inc. dated June 29, 2010 (incorporated by reference to Exhibit 3.1 of the Registrant’s Form 8-K filed on July 7, 2010)
4.1		Certificate of Designation of Rights and Preferences of Series A Preferred Stock (incorporated by reference to Exhibit 4.1 of the Registrant’s Form 8-K filed on April 28, 2010)
4.2		Certificate of Designation of Rights and Preferences of Series M Preferred Stock (incorporated by reference to Exhibit 4.2 of the Registrant’s Form 8-K filed on April 28, 2010)
4.3		Certificate of Designation of Rights and Preference of Series B Preferred Stock (incorporated by reference to Exhibit 3.1 of the Registrant’s Form 8-K filed on September 30, 2010)
4.4		Amendment to Certificate of Designations, Rights and Preference of Series B Preferred Stock (Incorporated by reference to Exhibit 99.1 of the Registration’s Form 8-K filed on September 25, 2013)
4.5		Amendment to Series C Warrant and Series D Warrant (Incorporated by reference to Exhibit 99.2 of the Registration’s Form 8-K filed on September 25, 2013)
10.1 *		Translation copy of Imports mortgage application by and between Ningbo Keyuan Plastics Co., Ltd and Merchants Bank., Beilun Branch dated June 18, 2014
10.2 *		Translation copy of Current assets loan Contract by and between Ningbo Keyuan Plastics Co., Ltd and Agricultural Bank of China Inc., Beilun Branch dated June 13, 2014
31.1 *		Certification of Chief Executive Officer required by Rule 13a-14/15d-14(a) under the Exchange Act
31.2 *		Certification of Chief Financial Officer required by Rule 13a-14/15d-14(a) under the Exchange Act
32.1 *		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 *		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS*		XBRL Instance Document
101.SCH*		XBRL Taxonomy Extension Schema Document
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*		XBRL Taxonomy Extension Labels Linkbase Document
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document

* Filed herewith.

SIGNATURES

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

Date: August 19, 2014	Keyuan Petrochemicals, Inc.

	By:	/s/ Chunfeng Tao
		Chunfeng Tao
		Chief Executive Officer & President

	By:	/s/ Zhen Bao Jun
		Zhen Bao Jun Chief Financial Officer Vice President of Accounting

Keyuan Petrochemicals, Inc. - FORM 10-Q - August 19, 2014

Attached files

Keyuan Petrochemicals, Inc. Reports