ITEM 1A. RISK FACTORS.

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

Risks Related to Our Business

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

Due to our limited capital resources, our independent registered public accounting firm has issued a report that describes an uncertainty related to our ability to continue as a going concern. The auditors’ report discloses that we consumed cash in operating activities in 2015 and that we had a working capital deficiency at December 31, 2015. These conditions raise substantial doubt about our ability to continue as a going concern and may make it difficult for us to raise capital and make our securities an unattractive investment for potential investors. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. We may be unable to continue operations if we cannot generate revenues in excess of our expenses.

Our limited operating history

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 products, to expand our operations to include additional products and to control raw material costs, all of which are critical to our success. To date, we have been primarily focused on the stabilization and realignment of our production, and our original expansion plan has been delayed, extended and adjusted due to various reasons. This limited history also makes evaluating our business and future prospects difficult, and may increase the risk of your investment. We have limited experience as a consolidated operating entity, particularly with commercialization activities, and have not yet demonstrated an ability to successfully overcome many of the risks and uncertainties frequently encountered by a young company. An investor must consider our business and our prospects in light of the risks, uncertainties and difficulties common to early stage companies. We may encounter unanticipated problems, expenses and delays in carrying out our expansion plan. 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. 

Key employees are essential to growing our business.

Mr. Chunfeng Tao is essential to our ability to continue to grow our business. He has established relationships with customers and suppliers within the industries in which we operate. If he 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, we still face competition from other companies located in the same area for attracting skilled workers. If we fail to attract and retain qualified workers to meet our current and future needs, this could slow our business growth, which could result in a decrease in market share and affect our revenues and stock price.

We continue to be dependent on bank loans in order to fund our purchases of raw materials.

In order to operate our business efficiently, we rely on short-term bank loans to fund the purchase of raw materials. As of December 31, 2015, we had approximately $361 million of short-term debt and lines of credit from 11 banks. Typically, the term for a short term bank loan is one year. Bank loans are renewable at the banks’ option. In 2015, we repaid approximately $792 million and borrowed approximately $596 million  in the form of short-term bank loans. If one or more of these banks were to revoke its line of credit or we fail to renew bank loans when they become due, we would be unable to continue to purchase raw materials in the amounts necessary to continue production at our current capacity. Any such inability will cause us to lose potential revenues.

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

For the year ended December 31, 2015, our five largest customers accounted for 33% of our total sales. For the year ended December 31, 2014, our five largest customers accounted for 27% of our total sales. Sales to one major customer accounted for 9% and 6% of our total annual net revenue for the fiscal years 2015 and 2014, respectively. Though our customer base may change from year-to-year, during such years that the customer base is comparatively highly concentrated, the loss of, or reduction of our sales to, any of our major customers could have a material adverse effect on our business, operating results and financial condition.

We currently buy a majority of our heavy oil, an important component of our products, from three suppliers. Purchases (net of VAT) from the largest three suppliers for the years ended December 31, 2015 and 2014 were approximately $308.3 million and $609.7 million, respectively, in the aggregate. These purchases represented 49% and 79%, respectively of all of our purchases for the years ended December 31, 2015 and 2014. The Company’s largest supplier accounted for approximately $ 115.0 million and $525.8 million, or 18% and 68% of total purchases for the years ended December 2015 and 2014, respectively. There are a limited number of suppliers of the particular heavy oil we use in production. A change in suppliers, if we can find one, could cause a delay in manufacturing and a possible loss of sales, which would affect operating results adversely.

We need additional capital to carry out our expansion plan.

The total estimated cost of our expansion plan is approximately $372.5 million, including $300 million for Guangxi Project, $30 million for the transformer oil facility, $40 million for the increased annual design capacity of ethylene- styrene, and $2.5 million for additional storage capacity.

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

We cannot assure you that we will be successful in our expansion plan. If we are not successful, or the costs exceed our expectations, the expansion may not be accretive, and we may not recoup the costs spent. This can affect our stock price, revenues and profitability.

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

All of our revenues are attributable to petrochemical products and synthetic rubbers. 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 petrochemical and rubber products have experienced periods of tight supply, causing prices and margins to increase, followed by periods of capacity additions, resulting in oversupply and declining prices and margins. As tariffs and other import restrictions are reduced and the control of product pricing is relaxed in China, the markets for many of our products have become increasingly subject to the cyclicality of regional and global markets.

Raw material costs accounted for 48% and 61% of our cost of goods sold for fiscal years 2015 and 2014, respectively. The markets for these raw materials - namely, oil - have been volatile historically, may continue to be volatile in the future, and are beyond our control based on a number of potential factors. These factors include, but are not limited to, the following:

The long-term effect of these and other factors on the prices of oil is uncertain. Prolonged or further declines in these commodity prices may have the following negative effects on our business:

Our operation may be interrupted by weather conditions and power shutdowns

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

We may be exposed to risks relating to our disclosure controls and our internal controls.

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

During the process of preparing the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, in March, 2011, KPMG, the Company’s former independent auditor, raised certain issues primarily relating to certain cash transactions and recorded sales and requested that the Audit Committee conduct an independent investigation. Based on the issues raised by KPMG, our Audit Committee elected to commence an independent investigation of the issues raised. Following the investigation, our Audit Committee identified, among other issues, inadequate disclosure and issues regarding internal control and procedures. In order to improve corporate governance and enhance internal controls, management and our Board of Directors committed to adopting and implementing the recommendations of the Audit Committee, some of which we have not yet rectified. For more details of the corrective actions, please refer to Item 9A Controls and Procedures. 

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

We are required to comply with environmental laws and regulations.

We are subject to various PRC 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 fail to comply with the provisions of any 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:

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 will be subject to liabilities that could have a material adverse effect on our business, financial condition and results of operations. If we fail to comply with applicable environmental regulations, we will 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.

Accidents or injuries in or around our facility may adversely affect our reputation and subject us to liability.

As of the date of this report, we had three safety related accidents (as described in Item 1 Business above) in our facilities all of which happened in 2014 and caused a cost to us of approximately $8.5 million. There are inherent risks of accidents or injuries when working in or around our manufacturing facilities. Serious accidents or injuries could prevent us from renewing our safety licenses or result in suspension of our operation. One or more accidents or injuries at our facility could adversely affect our reputation among customers and potential customers and increase our costs if we are required to take additional measures to make our safety precautions more effective. We may not be adequately insured to cover the costs and liabilities associated with accidents.  

We must protect our technologies.

Our manufacturing technologies and process, some of which have not been patented or registered as our property, are key components of our competitive advantage and our growth strategy. We rely on confidentiality and license agreements with certain of our employees, customers and others to protect 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.

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

Though we are currently a smaller reporting company with a market cap less than $75 million, we have incurred and will incur significant legal, accounting and other expenses that we did not or otherwise would not incur as a private company. We may continue to incur costs for the various corrective actions we are taking and committed to taking to improve our internal controls and procedures, as well as corporate governance. Furthermore, if the Company’s market cap exceeds $75 million, we will be subject to the requirements of the Sarbanes-Oxley Act Section 404. In addition, the Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC, has required changes in corporate governance practices of public companies. We expect these rules and regulations, along with the corrective actions to improve our controls and procedures, to increase our legal, accounting and financial compliance costs and to make certain corporate activities more time-consuming and costly. We cannot predict or estimate the amount of additional costs we may incur or the timing of the occurrence of such costs.

We may lose our property and/or equipment if we fail to repay the short-term bank loans.

We enter into short-term bank loan agreements with our primary lenders to fund our operation. As of December 31, 2015 and 2014, we had an aggregate principal amount of approximately $361 million and $ 568 million outstanding under the loan agreements. Some of these loans are secured by a lien on our property and/or equipment. We may be unable to repay these loans if our cash and liquidity position changes or our operation is not successful, which may cause us to lose the possession of our property and/or equipment, and adversely impact our operation. If we lose our equipment we may be unable to produce our products until we replace the equipment, if we can, and which would cause us to lose business and we may not be able to continue operating. 

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

Our management and our Board of Directors have reviewed our past practices and have been advised that several of the following practices may result in possible violation of PRC laws or regulations. Specifically:

We cannot assure you that we may not be subject to penalties or fines from the Chinese regulators if they decide to proceed against us and we cannot assure you that there will be no other violation of any current PRC laws or regulations identified by the relevant government regulators.

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

As a result of certain events, including but not limited to the delisting of our Common Stock from the Nasdaq Stock Market, our failure to file periodic reports as they were due and our failure to comply with certain registration requirements related to common shares underlying our preferred stock and warrants, we became subject to litigation from stockholders and other investors. In November 2013, The Rosen Law Firm filed a class action law suit against us. In February 2014, The Brown Law Firm filed a derivative law suit against us and certain directors and officers. In addition, in October 2014, Dragon State filed the Complaint against us. As of today, these three litigations have been settled. Additionally, we may also become subject to regulatory enforcement actions in either the U.S. and/or China. If we are forced to defend either a civil law suit brought by outside stockholders or investors and/or a regulatory action, we will be required to expend significant additional funds that could otherwise be utilized for business purposes. Defense of such claims would also require management to expend additional time and focus in connection with such defense which may materially impact its ability to effectively run our business, regardless of whether we are ultimately successful.

We have accepted continuing obligations related to our corporate governance.

In February 2014, a derivative action was filed alleging breach of fiduciary duties arising primarily out of transactions which occurred in 2009 and 2010 between us and certain related parties or other parties. Because the derivative litigation would be expensive and distracting, we settled the lawsuit in July 2015 without admitting to any wrongdoing. We agreed, among other matters, to make certain modifications to our corporate governance including expanding our nomination and corporate governance committee and adopting a related-party transaction policy. The settlement agreement is filed as Exhibit 10.4 to this report. We continue to implement the modifications we agreed to under the settlement agreement. If we do not fully comply with the terms of the settlement agreement, we could be sued for breach of the settlement agreement. Any lawsuit could be costly for us, reduce our share price, and deviate our management’s time away from running our business.

We may be subject to penalties or fines from the U.S. tax authorities as a result of possible violations of federal and state tax laws or regulations

Keyuan Petrochemicals Inc., as a U.S. public company and Nevada corporation, is subject to various U.S. and Nevada laws and regulations. U.S. federal tax law generally requires U.S. corporations to file U.S. tax returns every year. Keyuan Petrochemicals, Inc. may be subject to penalties for failure to file U.S. federal tax returns. In addition, we may be required to file certain foreign tax disclosures on forms 5471 and 5472 on an annual basis. In general, penalties for failure to file forms 5471 and 5472 are $10,000 per failure, per year.

We may be subject to penalties or fines from the Hong Kong tax authorities as a result of possible violations of Hong Kong tax laws or regulations

Keyuan HK, as a HK company, is subject to various Hong Kong laws and regulations. Hong Kong tax law generally requires Hong Kong companies to file Hong Kong tax returns. Keyuan HK may be subject to penalties for failure to file Hong Kong tax returns.

Risks Relating to Regulation of Our Business

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

There are substantial uncertainties regarding the interpretation and application of the PRC laws and regulations, including, but not limited to, the laws and regulations governing our business and our ownership of the equity interests in our PRC subsidiaries which are classified as wholly owned foreign entities (the “ WOFEs ”) under the PRC laws. PRC laws and regulations are frequently modified due to rapid economic and social developments and many of them have been newly enacted within the last twenty years. Certain 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 subsidiaries by relevant governmental bodies may be revoked at a later time by higher regulatory bodies. We cannot predict the effect of the interpretation of existing or new PRC laws or regulations on our businesses. We cannot assure you that our current ownership and operating structure would not be found to be in violation of any current or future PRC laws or regulations. As a result, we may be subject to sanctions, including fines, and could be required to restructure our operations or cease to operate. In addition, any litigation in relation thereto in China may be protracted and result in substantial costs and diversion of resources and management attention. Any of these or similar actions could significantly disrupt our business operations or restrict us from conducting a substantial portion of our business operations, which could materially and adversely affect our business, financial condition and results of operations.

Our PRC subsidiaries are subject to restrictions on dividend payments.

We conduct all of our business through our consolidated subsidiaries incorporated in the PRC. We rely on dividends paid by these consolidated subsidiaries for our cash needs, including the funds necessary to pay any dividends and other cash distributions to our stockholders, to service any debt we may incur and to pay our operating expenses. The payment of dividends by entities established in the PRC is subject to limitations. Current regulations in the PRC permit PRC subsidiaries to pay dividends to us only out of their accumulated distributable profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, our PRC subsidiaries are required to set aside a reserve of at least 10% (up to an aggregate amount equal to half of its registered capital) of each subsidiary’s accumulated profits each year. Such cash reserve may not be distributed as cash dividends. In addition, if any PRC subsidiary incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments to us.

Additionally, under Financial Accounting Standard Board (“ FASB ”) Accounting Standard Codification (“ ASC ”) Topic 740-30, no deferred tax expense is required to be recorded on the earnings of foreign subsidiaries when the parent company establishes that the earnings will be permanently reinvested outside the U.S. If dividend payments are made by our subsidiaries to the Company, additional U.S. tax could become due in future years. At the time of the repatriation or investment in U.S. property, the U.S. will tax the foreign earnings as a dividend and will allow a foreign tax credit for any foreign taxes previously paid on the earnings. To the extent that dividend payments are made by our PRC subsidiaries to the Company, additional tax may be due.

PRC regulates loans and direct investments by overseas holding companies in PRC entities.

Under 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 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 SAFE, or its local branch in advance. These registration or approval procedures may delay or prevent us from making overseas loans or additional capital contributions to our PRC subsidiaries.

Under the PRC Enterprise Income Tax Law, we may be classified as a “resident enterprise” of China.

Under the EIT Law, FIEs and domestic companies are subject to a uniform tax rate of 25%.

In addition, under the EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the EIT Law define de facto management as “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise. The specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China, includes all of the following factors: (a) the location where senior management members responsible for an enterprise’s daily operations discharge their duties; (b) the location where financial and human resource decisions are made or approved by organizations or persons; (c) the location where the major assets and corporate documents are kept; and (d) the location where more than half (inclusive) of all directors with voting rights or senior management have their habitual residence. Although the above only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners, the determining criteria may reflect the SAT’s general position on how the “de facto management body” text should be applied in determining the tax resident status of all offshore enterprises, regardless of whether they are controlled by PRC enterprises or individuals. Due to lack of applicable legal precedents, it remains unclear how the PRC tax authorities will determine the PRC tax resident treatment of a foreign company controlled by individuals like us.

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

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.

We face uncertainty from China’s Circular on Strengthening the Administration of Enterprise Income Tax on Non-Resident Enterprises' Share Transfer.

The SAT released a circular (“ Circular 698 ”) in December 2009 that addresses the transfer of shares by nonresident companies. Circular 698, which is effective retroactively to January 1, 2008, has had 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 must file a tax declaration with the PRC tax authority located at the place of the resident enterprise whose equity has been transferred, within seven days after the date of the equity transfer provided under the contracts, or the date the transferor receives the income, whichever is earlier.

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

If Circular 698 were to apply to us, it would negatively affect us, as it would subject us to additional taxes, and we would be liable for not complying with Circular 698 earlier.

Our PRC subsidiaries are obligated to withhold and pay PRC individual income tax on behalf of our employees who are subject to PRC individual income tax.

Under PRC laws, Ningbo Keyuan, Ningbo Keyuan Petrochemicals, Zhongkexuneng, Keyuan Synthetic Rubbers and Guangxi Keyuan are obligated to withhold and pay individual income tax on behalf of our employees who are subject to PRC individual income tax. If any PRC subsidiary fails to withhold and/or pay such individual income tax in accordance with PRC laws, it may be subject to certain sanctions and other penalties and may become subject to liability under PRC laws. We withheld individual income tax on all amount paid to employees, senior management members and outside individual service providers in 2014 and 2015. If we fail to follow these regulations in the future, we may be subject to certain sanctions and other penalties and may become subject to liability under applicable tax laws in China.

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

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

Six PRC regulatory agencies, including the MOFCOM, the China Securities Regulatory Commission (the “ CSRC ”), the State Asset Supervision and Administration Commission, the SAT, the State Administration for Industry and Commerce and the SAFE, amended and released the New M&A Rule, which took effect in September, 2006 (the “ M&A Rule ”). This regulation, among other things, includes provisions that require that an SPV obtain the approval of the CSRC prior to the listing and trading of such SPV’s securities on an overseas stock exchange.

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

We believe that the M&A Rules and the CSRC’s approval were not required in the context of the share exchange under our Share Exchange in 2010 because (1) the share exchange was a purely foreign related transaction governed by foreign laws, not subject to the jurisdiction of PRC laws and regulations; (2) at the time of Share Exchange, we were not an SPV formed or controlled by PRC companies or PRC individuals; (3) Ningbo Keyuan was established as a sino-foreign joint venture by means of direct investment rather than by merger or acquisition of an existing PRC domestic company ; (4) at the time of Share Exchange, we were owned and controlled by foreigners; and (5) there is no clear requirement in the M&A Rule that would require an application to be submitted to the MOFCOM or the CSRC for the approval of the listing and trading of our Common Stock on a U.S. securities market. However, we cannot be certain that the relevant PRC government agencies, including the CSRC, would reach the same conclusion, and we still cannot rule out the possibility that the CSRC may deem that the transactions effected by the share exchange circumvented the M&A Rules, the PRC securities law and other regulations and rules.

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

The M&A Rules, along with foreign exchange regulations discussed above, 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.

There are PRC regulations relating to the establishment of offshore holding companies by PRC residents

Notice 75 and its implementation rules issued by the SAFE require PRC residents (including both corporate entities and natural persons) to register with SAFE or its competent local branch in connection with their direct or indirect shareholding in any SPV. In addition, any PRC resident that is the stockholder of an offshore SPV is required to amend his or her SAFE registration with the SAFE or its competent local branch, with respect to that offshore SPV 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 SPVs. PRC subsidiaries of an offshore SPV are required to coordinate and supervise the filing of SAFE registrations by the offshore holding company’s stockholders who are PRC residents in a timely manner. In the event that a PRC resident stockholder with a direct or indirect investment in an offshore parent company fails to obtain the required SAFE approval and make the required registration, the PRC subsidiaries of such offshore parent company may be prohibited from making distributions of profits to the offshore parent and from paying the offshore parent proceeds from any reduction in capital, share transfer or liquidation in respect of the PRC subsidiaries. Further, failure to comply with the various SAFE approval and registration requirements described above, could result in liability under PRC law for foreign exchange evasion.

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

We must comply with PRC regulations regarding the registration requirements for employee equity incentive plans or share option plans.

Under the current PRC rules, if a PRC resident participates in any equity incentive plan of an overseas publicly-listed company, a qualified PRC domestic agent must, among other things, file on behalf of such participant an application with the SAFE to conduct the SAFE registration with respect to such equity incentive plan and obtain approval for an annual allowance with respect to the purchase of foreign currency in connection with the exercise or sale of stock options or stock such participant holds. Such participating PRC residents' foreign exchange income received from the sale of stock and dividends distributed by the overseas publicly-listed company must be fully remitted into a PRC collective foreign currency account opened and managed by the PRC agent before distribution to such participants.

Further, domestic companies that implement employee share option programs shall file the employee share option plans and other relevant documents with the local tax authorities and withhold taxes from the PRC employees in connection with the PRC individual income tax.

We and our PRC citizen employees who participate in our employee stock incentive plan, which we adopted in 2010, are subject to these regulations. We and our PRC option grantees have not completed the registrations under these regulation s. Though the options issued under the incentive plan have been forfeited or expired and none of them has been exercised, we cannot assure you that we and our PRC option grantees will be able to complete the required registrations. Any current or future failure to comply with the relevant requirements could subject us to fines or sanctions imposed by the Chinese government, which could adversely affect our business and prospects.

We must comply with PRC laws and regulations relating to the environmental protection and safety.

The Chinese government has been adopting increasingly stringent regulations relating to the safety and environmental protection, and our business depends upon compliance with these regulations and requirements. Our current manufacturing facilities have passed an as-build acceptance inspection and we obtained relevant safety production permits and approvals from a variety of government authorities upon completion of such inspection. The as-build inspection is an inspection conducted by the local government to make sure that a company meets all the conditions for normal production. However, there is no assurance that we will be able to obtain or renew all such permits or approvals, which are subject to our fulfillment of the standards and requirements set out by the regulatory authorities.

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

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

Our operations and assets in China are subject to significant political, economic, legal, regulatory and tax structural uncertainties.

Our current operation is located in Ningbo, China and virtually all of our assets are located in China. We generate our sales revenue substantially 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:

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.

We derive substantially all of our sales from China.

Substantially all of our sales are generated from China. We anticipate that sales of our products in China will continue to represent a substantial proportion of our total sales in the near future. Any significant decline in the condition of the PRC economy could, among other things, 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.

We are subject to currency fluctuations and restrictions on currency exchange.

Our reporting currency is the U.S. dollar and our operations in China use China’s local currency as its functional currency. Substantially all of our revenue and expenses are in RMB. We are subject to the effects of exchange rate fluctuations with respect to this currency. For example, the value of RMB 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. From 1994 to mid-2005, the official exchange rate for the conversion of RMB to the U.S. dollar had generally been stable and RMB had appreciated slightly against the U.S. dollar. In July 2005, the Chinese government changed its policy of pegging the value of RMB to the U.S. dollar. Under this policy, RMB may fluctuate within a narrow and managed band against a basket of certain foreign currencies. As a result of this policy change, RMB appreciated approximately 4.86% in 2011. RMB further appreciated approximately 0.244% in 2012, appreciated approximately 3.00% in 2013, depreciated approximately 0.33% in 2014, depreciated approximately 6.02% in 2015, and appreciated approximately 0.65% in the first quarter of 2016.

It is possible that the Chinese government could adopt a more flexible currency policy, which could result in more significant fluctuations of RMB against the U.S. dollar. We can offer no assurance that RMB will be stable against the U.S. dollar or any other foreign currency.

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

Although Chinese governmental policies were introduced in 1996 to allow the convertibility of RMB into foreign currency for current account items, conversion of RMB 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 have not and 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 RMB in the future. Because a significant amount of our future revenue may be in the form of RMB, our inability to obtain the requisite approvals or any future restrictions on currency exchanges could limit our ability to utilize revenue generated in RMB 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 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 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.

Our funds are held in uninsured PRC bank accounts

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 our business.

We may fail to comply with the U.S. Foreign Corrupt Practices Act and Chinese anti-corruption laws.

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

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

Foreign exchange regulations in the PRC may change.

RMB is not a freely convertible currency, and the restrictions on currency exchanges may limit our ability to use revenues generated in RMB 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 RMB 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 RMB into foreign currencies. Pursuant to applicable PRC laws and regulations, FIEs 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) can be effected without requiring the approval of the SAFE. However, conversion of currency in the “capital account” (e.g. for capital items such as direct investments, loans and securities) still requires the approval of the SAFE. If we don’t comply with these requirements, it could negatively affect our business, and we can be subject to fines or sanctions imposed by the Chinese government.

We are subject to PRC employment contract law and increases in the labor costs in China.

Under current PRC employment law, temporary employment cannot exceed more than 10% of the employment of a company. In addition, 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, our labor costs increased and may continue to increase.

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

There may be future inflation in China.

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

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

We may have difficulty in hiring and retaining a sufficient number of qualified employees to work in the PRC. As a result, or for other reasons, 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. Please refer to Item 9A. Controls and Procedures for additional information on this matter.

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

We conduct substantially all of our operations in China and substantially all of our assets are located in China. In addition, 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 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.

Chinese law governs almost all of our business’ material agreements.

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 years has significantly improved the protection to various forms of foreign investment and contractual arrangements in the PRC, these laws, regulations and legal requirements are relatively new. Due to the limited volume of published judicial decisions, their non-binding nature, the short history since their enactments, the discrete understanding of the judges or government agencies of the same legal provision, inconsistent professional abilities of the judicators, and the inclination to protect local interest in the court room, interpretation and enforcement of PRC laws and regulations involve uncertainties, which can limit the legal protection available to us, and foreign investors, including our stockholders. The inability to enforce or obtain a remedy under any of our future agreements can result in a significant loss of business, business opportunities or capital and can 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 sometime 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 regardless of whether we are successful.

Investors’ attitudes towards Chinese companies will affect us irrespective of our actions.

The market prices for shares of companies with operations in China have experienced volatility that often has been unrelated to the operating performance of those companies or the broader stock market. The securities of some China-based companies that have listed their securities in the United States have experienced significant volatility in recent years, including, in some cases, substantial declines in the trading prices. The trading performances of these companies’ securities after their offerings may affect the attitudes of investors towards Chinese companies listed in the United States in general, which consequently may impact the trading performance of our securities, regardless of our actual operating performance. In addition, any negative news or perceptions about inadequate corporate governance practices or fraudulent accounting, corporate structure or other matters of other Chinese companies may also negatively affect the attitudes of investors towards Chinese companies in general, including us, regardless of whether we have engaged in any inappropriate activities.

We are not insured against all of the operating risks to which our business is exposed, and our coverage where we have it, 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.

Our business is subject to all of the operating risks normally associated with the manufacture of petrochemical products such as oil spills, pipeline ruptures, and releases of chemicals or other hazardous substances, any of which could result in damage to, or destruction of production facilities and other property; pollution or other environmental damage; and injury to persons. 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.

Our insurance coverage, where we have it, may not be sufficient to cover us against 100% of potential losses arising as a result of the foregoing and for certain risks, such as political risk, business interruption, war, terrorism, and piracy, for which we have limited or no coverage. In addition, we are not insured against all risks in all aspects of our business such as weather. The occurrence of a significant event against which we are not fully insured could have a material adverse effect on our financial condition, results of operations, or cash flows.

Risks Related to our Securities

Restrictions on the reliance of rule 144 by shell companies or former shell companies.

Pursuant to Rule 144 of the Securities Act (the “ Rule 144 ”), a “shell company” is defined as a company that has no or nominal operations, and, either no or nominal assets; assets consisting solely of cash and cash equivalents; or assets consisting of any amount of cash and cash equivalents and nominal other assets. As such, we were a “shell company” pursuant to Rule 144 prior to the Share Exchange. The SEC staff has taken the position that Rule 144 is not available for the resale of securities initially issued by any shell companies (other than business-combination related shell companies) or any issuer that has been at any time previously a shell company. The SEC has provided an important exception to this prohibition, however, if the following conditions are met:

As such, sales of our securities pursuant to Rule 144 are not able to be made until a period of at least twelve months has elapsed from the date we have filed all reports and materials required to be filed under the Section 13 or 15(d) of the Exchange Act, as applicable, during for 12 months. Therefore, any restricted securities we sell in the future or issue to consultants or employees, in consideration for services rendered or for any other purpose will have no liquidity until and unless such securities are registered with the SEC and/or we have filed all reports and material required to be filed, as applicable, during for 12 months and we have otherwise complied with the other requirements of Rule 144. As a result, it may be harder for us to fund our operations and pay our consultants with our securities instead of cash. Furthermore, it will be harder for us to raise funding through the sale of debt or equity securities unless we agree to register such securities with the SEC, which could cause us to expend additional resources in the future. Lastly, any shares held by affiliates, including shares received in any registered offering, will be subject to the resale restrictions of Rule 144(i).

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

Mr. Chunfeng Tao, our Chairman and President, owns 100% of the equity of Delight Reward Limited. Delight Reward Limited holds 84% of our Common Stock. Accordingly, Mr. Tao (who indirectly controls approximately 84% of our Common Stock) is able to control all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This could delay or prevent an outside party from acquiring or merging with us even if our other stockholders wanted it to occur.

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

There is currently only a limited public market for our Common Stock and there can be no assurance that a trading market will develop further or be maintained in the future. The market price of our Common Stock has been and will likely continue to be highly volatile, as is the stock market in general. Some of the factors that may materially affect the market price of our Common Stock are beyond our control, such as changes in financial estimates by industry and securities analysts, conditions or trends in the industry in which we operate or sales of our Common Stock. Additionally, on April 1, 2013 trading in our Common Stock was halted by Nasdaq Stock Market and on October 5, 2013, our Common Stock was delisted from Nasdaq Stock Market. As a result, our stock is currently trading on the OTC Pink. Our stock experienced significant pressure after these events.

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

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

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

Our Common Stock is quoted on the OTC Markets and is subject to the “Penny Stock” rules.

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

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

Since we became public through a “reverse merger,” our Common Stock 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.

In addition, with one stockholder that owns approximately 84% of our Common Stock, it significantly reduces the amount of shares to be traded if that stockholder does not sell.