2018 Audited Financial Statements of Unconsolidated Affiliate of Hexion Inc

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 2018 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 2018, 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     1 March 2019

(All amounts in Renminbi (“RMB”) Yuan unless otherwise stated)

  

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

(All amounts in Renminbi (“RMB”) Yuan unless otherwise stated)

    

  

    

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

(All amounts in Renminbi (“RMB”) Yuan unless otherwise stated)

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

(All amounts in Renminbi (“RMB”) Yuan unless otherwise stated)

(All amounts in Renminbi (“RMB”) Yuan unless otherwise stated)

For year 2017

(All amounts in Renminbi (“RMB”) Yuan unless otherwise stated)

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. In 2016 Momentive Specialty UV Coatings (Shanghai) Limited was renamed Hexion UV Coatings (Shanghai) Limited.

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

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 2018 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 2018.

The top 5 major Creditors are as follows:

The top 3 major Creditors are as follows:

The major items include:

The major items include:

There were no material related party transactions in 2018.

On October 31, 2016 DSM filed a petition with the International Trade Commission (ITC) to commence an investigation against MUV and its customer OFS for allegedly importing UV curable coatings that infringe four DSM patents. In response, the ITC commenced an investigation. On February 6, 2017, the Federal District Court in the Southern District of Ohio stayed the infringement case pending the outcome of the ITC investigation. On February 15, 2018, the Administrative Law Judge in the ITC investigation issued an Initial Determination recommending that the ITC find many of the claims invalid but also that MUV infringed certain claims in two of DSM’s patents. As of May 8, 2018, the ITC had found all of the asserted claims of the four DSM patents-in-suit either invalid or not infringed.  On July 9, 2018, DSM filed a Notice of Appeal at the Court of Appeals for the Federal Circuit (“Federal Circuit”) for review of the Commission’s May 8, 2018 Opinion.  Both MUV and OFS moved to intervene.  These motions were granted by the Federal Circuit on July 25, 2018.  On September 27, 2018, DSM filed a motion to extend the time to file its opening brief.  The motion was granted.  On December 21, 2018, DSM filed its Principal Brief.  The responsive briefs of the ITC, MUV and OFS are all due on April 1, 2019.  No other dates have been set.  However, based on the present schedule, DSM’s reply brief would be due on April 15, 2019.  Oral argument should occur approximately ninety days later, (i.e., July 2019).  Unless there is an affirmance without an opinion, a decision should be issued approximately six months later.