Audit Report SAAF (2017) AR.NO.071

We have audited the accompanying financial statements of Momentive UV Coatings (Shanghai) Co., Ltd. (hereinafter referred to as “the Company”),including the balance sheet as of 31 December 2016 and the income statement, cash flow statement for the year then ended as well as notes to the financial statements.

Management is responsible for the preparation of these financial statements. This responsibility includes: (1) these financial statements are prepared in accordance with Accounting Standards for Business Enterprises and the Accounting System for Business Enterprises, and present fairly. (2) designing, implementing and maintaining internal control relevant to the preparation of the financial statements that are free from material misstatement, whether due to fraud or error.

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in United States of America. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider the internal control relevant to the preparation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

In our opinion, the financial statements of Momentive UV Coatings (Shanghai) Co., Ltd. have been prepared in accordance with U.S. Generally accepted accounting principles, and present fairly, in all material respects, the financial position of the Company as of 31 December 2016, and the results of its operations and cash flows for the year then ended.

/s/ Shanghai Asahi Accounting Firm Chinese CPA : Li Can

Chinese CPA : Zhu Jun

Shanghai P. R. China     February 10, 2017

(All amounts in Rmb Yuan unless otherwise stated)

  

The accompanying notes form an integral part of these financial statements.

(All amounts in Rmb Yuan unless otherwise stated)

    

  

    

The accompanying notes form an integral part of these financial statements.

(All amounts in Rmb Yuan unless otherwise stated)

The accompanying notes form an integral part of these financial statements.

(All amounts in Rmb Yuan unless otherwise stated)

(Amounts expressed in Renminbi (“RMB”) unless otherwise stated)

Momentive UV Coatings (Shanghai) Co., Ltd., formally known as Borden UV (Shanghai) Co., Ltd.༈¨”the Company”༉©is a Sino-foreign equity joint venture enterprise between Borden UV Coatings Holdings (Shanghai) Limited and Prime Union Limited. The Company was established on 18 March 2004 with the approval of the Shanghai Municipal Government in Shangwaihuhuiduzizi[2004]0768 and the business license number is 913101157595925826 with the operation period of 30 years. The Company’s registered capital is USD$500,000.00.

The approved Company’s business operation scope includes manufacture and sale of various kinds of UV coatings and provision of related technical consulting services (Comment: extracted from Articles of Associations of the Company.)

In 2007, the Company’s prior shareholder Borden UV Coating Holding (Shanghai) Limited was renamed Hexion Specialty UV Coating (Shanghai) Limited and transferred 0.01% of its shares to Prime Union Limited, and the Company was renamed Hexion UV Coatings (Shanghai) Co., Ltd.. In 2013, based on the approvals of the Company’s Board of Directors and the Pudong District of Shanghai Municipal government, the Company was renamed Momentive UV Coatings (Shanghai) Co., Ltd., and one of the Company’s investors, Hexion Specialty UV Coatings (Shanghai) Ltd., was renamed Momentive Specialty UV Coatings (Shanghai) Limited (subsequently renamed again to Hexion UV Coatings (Shanghai) Limited in 2015).

2.1 Accounting standards

The Company adopts accounting principles generally accepted in the United States of America.

2.2 Accounting period

The Company’s accounting year starts on 1 January and ends on 31 December.

2.3 Basis of accounting and measurement bases

The Company follows the accrual method of accounting. Assets are initially recorded at their actual costs and are subsequently adjusted for impairment, if any, as events and circumstances warrant.

2.4 Reporting currency

The recording currency of the Company is RMB Yuan.

2.5 Foreign currency translation

Except for the accounting treatment for paid-in capital, foreign currency transactions are translated into RMB at the exchange rates stipulated by the People’s Bank of China on the first day of the month in which the transactions took place. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated into RMB at the stipulated exchange rates by the People’s Bank of China at the balance sheet date. Exchange differences arising from these translations are expensed, except for those which occurred in the pre-operation period, which are recorded as long-term deferred expenses, and those attributable to foreign currency borrowings that have been taken out specifically for the construction of fixed assets, which are capitalized as part of the fixed asset costs.

2.6 Provision for Bad Debt

Full provisions are applied to receivables where events or changes in circumstances indicate that the balances cannot be collected (the debtor is deregistered, bankrupt and the Company can not take back the accounts receivable according to the bankruptcy procedure in law; the debtor is dead, has no heritage to pay or has no haeres; has solid evidence that the accounts receivable aged over three years and can not be taken back). When the bad debt occurs, it is written off through the bad debt provision with the approvals according to the authorized level.

2.7 Inventories

2.7.1 Inventories include materials in transit, raw materials, work in progress, finished goods, low cost consumables and packaging materials.

2.7.2 Inventories are stated at the lower of cost or market.

2.7.3 The inventory issuance cost was determined using the weighted average method.

2.7.4 Low cost consumables are fully amortized when issued for use.

2.8 Fixed assets and depreciation

2.8.1 Fixed assets include buildings, machinery and equipment used in production or rendering of services, or held for management purposes, which have useful lives of more than one year.

2.8.2 Fixed assets purchased or constructed by the Company are recorded at actual cost.

2.8.3 Fixed assets are depreciated using the straight-line method to write off the cost of the assets to their residual values of 0% which represents their estimated salvage value over their estimated useful lives. Their estimated useful lives are as follows:

2.9 Long-term prepaid expenses

Long-term prepaid expenses was recorded in actual cost and are amortized on the straight-line basis over the expected beneficial periods and are presented at cost net of accumulated amortization.

2.10 Sales of goods

Revenue from the sale of goods is recognized when significant risks and rewards of ownership of the goods are transferred to the buyer, the Company retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold, and it is probable that the economic benefit associated with the transaction will flow to the Company and the relevant revenue and costs can be measured reliably.

2.11 Enterprise income tax (“EIT”)

EIT is recognized under the liability method (balance sheet approach).

The Company’s applicable major taxations and rate are as follows:

The actual EIT rate applicable for 2016 was 25%.

The top major debtors are as follows:

The top 5 major debtors are as follows:

There was no receivable from related parties as of 31 December 2016.

The top 5 major Creditors are as follows:

The top 3 major Creditors are as follows:

The major 2016 items include:

The major 2016 items include:

There were no material related party transactions in 2016.

January 8, 2015 - Momentive UV Coatings (Shanghai) Co., Ltd. sued by DSM Desotech, Inc. for patent infringement in Southern District of Ohio.

The case is currently pending, and the Company is unable to assess the potential outcome and any resulting financial impact at this time.