The Group’s operations are based largely the sale of chemicals used as raw materials and intermediate products in a broad range of industries, including in particular in the automotive, packaging and construction industries. The demand for the products of the Group’s customers is impacted by general economic conditions and other factors, including the conditions in particular branches , labor and energy costs, exchange rate changes, interest rate fluctuations and other factors beyond the Group’s control.

As a result, the volume and profitability of the Group’s sales depends on the aforementioned conditions and on the economic situation in Poland, Czech Republic, France and the Netherlands and in the remaining part of Europe and globally. The Group may not guarantee that events that have adverse impact on the industries and markets in which it operates, in particular such as downtrend in the Polish, European or global economy, interest rate hikes, unfavorable exchange rate fluctuations and other factors, will not occur or will continue. Any significant downtrend in the industries of the Group’s customers or deterioration of the economic conditions in Poland, Europe or globally may have adverse impact on the Group’s business, results, financial standing and prospects.

The Group’s production costs may be directly influenced by the volatility of raw material and fuel costs, which depend on the global demand and supply, and other factors beyond the Group’s control. In the year ended 31 December 2016, the costs of the Group’s main raw materials (C4 fraction, butadiene, benzene, ethylene, ethylbenzene and styrene) totaled PLN 2.3 billion and accounted for 59.6% of all own costs of sales. Because these raw materials constitute a significant portion of the Group’s own costs of sales, the Group’s profit before tax and margins are subject to the unfavorable impact of changes in the costs of raw materials if the Group is not able to pass on higher prices to its customers. The probability of materialization of such risk may increase if recipients accumulate significant inventories and as a result temporarily limit their orders. Although in the longer run changes of raw material prices will be reflected in the products’ sales prices, in the short run the volatility of raw material prices is a challenge because the Group may not be able to pass the costs on to customers quickly by adjusting prices of its own products. The Group believes that sudden prices changes may also affect customers’ demand. In extraordinary cases, such as a force majeure reported by a key supplier, the Group may experience shortage of materials for manufacture of its products. Alternatively, in the case of limited availability of any key raw material, the Group may not be able to produce some of its products in the quantities required by its customers, which may have an adverse impact on the utilization of its production capacity and sale of products.

In addition, the Group’s production processes require significant amounts of energy and energy fuels. Above all, the Group utilizes hard coal, mine gas and natural gas to produce steam for various technological processes and heating energy used among others to heat the cities of Oświęcim and Kralupy. The electricity used in the Group’s technological processes is produced with the heat generated by firing energy fuels and its surplus is sold to the market. In the year ended 31 December 2016, the costs of hard coal, mine gas and natural gas used for heating accounted for 5% of the Group’s cost of sales of products and materials, compared to 7% in the year ended 31 December 2015 and 7% in the year ended 31 December 2014. The prices of hard coal and natural gas over the past year declined, which is a positive trend for the Group. Disruptions in the supply of hard coal and natural gas to the Group’s production facilities may have an adverse impact on the Group’s business, results, financial standing and prospects.

The Group’s operations are cyclical and, what is more important, the variation in the balance between supply and demand in the chemical industry and the Group’s future operating results may still be subject to such cycles and variation. Historically, the chemical industry as a whole has experienced interchanging periods of shortage of production capacity, leading to tight supply and higher prices and margins, followed by periods of significant increase of production capacities causing oversupply, diminished production capacity utilization and lower prices and margins. The factors that historically contributed to margin volatility in the chemical industry, in particular in the Group’s industry, most of which are beyond the Group’s control, include::

• exchange rate fluctuations in the case of manufacturers with global presence and distribution;
• oversupply in connection with increase of the production capacity by the existing and new competitors;
• short-term fluctuations in utilization of the production capacities in connection with scheduled changes and unscheduled stoppages;
• regulatory requirements causing technological and production changes; and
• political and economic conditions causing sudden price changes for the Group’s key raw materials, including C4 fraction, butadiene, benzene, ethylene or styrene.

Considering the uncertainty of the global economic environment (which may cause decrease of demand) and the implications of volatility of the balance of supply and demand in the chemical industry, increase of supply may increase the pressure on the Group’s margins and may have a significant adverse impact on the Group’s business, results, financial standing and prospects.

The Group’s activity requires significant amounts of raw materials, including C4 fractions, butadiene, benzene, ethylene and styrene, which the Group obtains mainly from regional cracking installations, such as PKN Orlen (constituting a single group together with the Unipetrol Group), Sabic and OMV, that supply raw materials to the Group’s production facilities in the Czech Republic and Poland. The Group’s Czech production facilities are also connected by pipelines to selected suppliers, including a pipeline to the Unipetrol Group, through which the Group obtains C4 fraction, ethylene and benzene for the production facilities in the Czech Republic. In addition, the Group is the owner of 49% shares in a joint venture established together with the Unipetrol Group, normally satisfying approx. 50% of the Group’s demand for butadiene, which is the main raw material for production of synthetic rubber.

The uniqueness of the Group’s activity requires regular supplies of raw materials for its production facilities, which means that it may not always be able to avoid reliance on a single supplier. Any disruption or delay in deliveries of the raw materials from the given supplier or loss of the supplier in a situation where the Group is not able to find an appropriate alternative at the required time, may force it to reduce production. If any of the Group’s suppliers for any reason is not able to satisfy the supply requirements (for example in connection with insolvency, destruction of its production facilities or refusal to perform an agreement), the Group may not be able to acquire the raw material from other suppliers in sufficient quantities or at the same or lower price. Materialization of any of these risks may have an adverse impact on the Group’s business, results, financial standing and prospects.

The plants producing expandable polystyrene, located in Western Europe, are supplied with styrene by several recognized producers, with whom they are bound by long-term relationships. In order to reduce the risk, part of the supply is also made on the basis of cooperation with commercial companies supplying styrene also coming from other regions than Western Europe. However, this does not fully eliminate the risk in the event of a disruption of supplies by one of the permanent manufacturers, particularly in the event of a failure of the installation.

The Group derives a material part of its revenues from sales to certain key customers. In the year ended 31 December 2016, five of the Group’s biggest customers were responsible for 24.1% of its sales revenues, with four of them being producers of car tires. Consequently, maintaining close relations with the Group’s key customers is of critical importance. Deterioration or discontinuation of these relations may lead to a significant decline of sales, revenues, profitability and cash flows and have adverse impact on the Group’s activity and reputation.

In addition the Group is exposed to credit risk pertaining to default in payment or nonperformance of obligations by customers as regards trade and other receivables. Failure to perform the obligations by the customers or the possibility of termination of their contracts with the Group may prevent the Group from satisfying its demand for working capital. The risk is enhanced by financial difficulties experienced by customers, including bankruptcy, restructuring and liquidation or potential weakness of the industry. A customer’s failure to pay the amount due to the Group may have a significant adverse impact on the Group’s business, results, financial standing and prospects. Although the Group has introduced procedures and policies aimed at minimizing this risk, such as insurance of receivables, monitoring of credit exposures and granting of credit limits to customers, such procedures and policies may be insufficient and may not secure the Group against the risk of defaults in payment and/or non-performance of obligations by customers.

The Group’s ability to produce key specialist products depends on the holding of licenses to use patents, patent applications and other intellectual property. In July 2011 the Group launched production of polybutadiene rubber on a neodymium catalyst to produce enhanced performance tires based on Michelin’s license in the Group’s production facility in the Czech Republic. In 2015, in the facilities in Oświęcim, the Group launched an installation to producemodern SSBR butadiene and styrene rubbers based on a license from The Goodyear Tire  Rubber Company.

The Group may not guarantee that it will be able to maintain its licenses, including its licenses with Michelin and Goodyear. If the Group is not able to maintain or secure alternative licenses on acceptable terms or develop proprietary technologies that do not breach third party intellectual property rights, the Group may not be able to sell some of its products, which may have a significant impact on the Group’s business, results, financial standing and prospects.

The Group’s activity requires different certificates, consents and authorizations in different jurisdictions. The Group may not guarantee that it will be able to extend all the required certificates, permits and authorizations upon their expiry. The eligibility criteria for such certificates, permits and authorizations may change and may be more restrictive. In addition, new requirements pertaining to certificates, permits and authorizations may be enacted in the future. Introduction of new or more restrictive provisions of law, regulations, certification requirements, permits and authorizations applicable to the Group’s activity may significantly increase the costs of compliance and maintenance, prevent the Group from continuation of its existing activity, or limit or prevent expansion of activity. Each such event may have adverse impact on the Group’s activity, financial results and future prospects.

The industry in which the Group operates is highly competitive and exposed to strong competition from big international producers and from smaller regional competitors. The Group’s biggest competitors in the synthetic rubber market include Arlanxeo, Trinseo, Versalis and Sibur. The Group’s major competitors on the styrene plastics market are BASF, Ravago and Sunpor (EPS) and Styrolution, Total, Trinseo and Versalis (PS).

The competition is based on a number of factors, such as product quality, service and price. The Group’s competitors may improve their competitive position in the Group’s core end markets through successful launch of new products, improvement of their production processes or expansion of their production capacity or extension of their facilities. In addition, if the Group is forced to raise the prices of its synthetic rubbers, latex raw materials, polystyrenes or butadiene, other manufacturers who offer similar products made of cheaper raw materials, for example as a result of using a different chemical composition, may be able to improve their market position and force the Group to cut its prices to compete with its competitors. The competition between chemical products based on styrenes and other products on end markets on which we compete is fierce. The supply (production capacity) exceeds the potential demand in this market and the Group may be forced to adjust its process to match competitive offers. In addition, increase of competition on the part of the existing and new products may reduce the demand for the Group’s products in the future and its customers may decide to use alternative sources to satisfy their needs.

Also, it is hard to determine the long-term impact of competition on these products. Some of the Group’s competitors may be able to reduce their product prices if they have lower operating expenses. Alternatively, some competitors may have higher financial, technological or other resources, increasing their resistance to changes of costs and demand in the market. These competitors may be in a better position to withstand the changes of market conditions than the Group. Competitors may also be able to respond quicker than the Group to new and emerging technologies or changes of customer requirements. If the Group is not able to keep up with the product and production process innovations of its competitors it may not maintain its existing market position.

In addition consolidation of the Group’s competitors or customers may cause a reduction of the demand for its products and hinder its competition with other entities. If the Group is not able to effectively compete with other chemical producers based on styrene or if other products can effectively substitute the Group‘s products, its sales may decline.

The market segments on which the Group’s customers compete experience periodic technological changes, continuous product improvement, product replacement and changes of customer requirements. More pronounced competition from existing or newly developed products offered by the Group’s competitors or companies whose products offer similar functionalities may exert an adverse impact on the demand for the Group’s products.

For example, in the EPS industry, competition between producers leads to constant launch of improved product classes with lower heat conduction which requires adaptation of the Group’s products to satisfy customer requirements and maintain the demand for its products.

The Group tries to identify, develop and offer innovative products, satisfying the changing customer requirements and facing competitive challenges. Nonetheless, if the Group is not able to maintain or further develop its product portfolio, customers may decide to acquire comparable products from competitors, which may have an adverse impact on the Group’s business, results, financial standing and prospects.

The Group may not be able to develop products which satisfy customers’ needs sufficiently. In addition, quick commercialization of the products that the Group will develop may be disrupted or delayed by production difficulties or other technical difficulties, lack of acceptance by the industry or insufficient size of the industry required to support new products, new competitive products, and difficulties with moving from the experimental phase to the production phase, which is typical of the product development process, particularly in moving from the laboratory phase to the semi-technical phase. Such disruptions or delays may have an adverse impact on the Group’s business, results, financial standing and prospects.

The Group may not be certain that the investments it makes in its technology department and research and development department will accrue proportionately higher net sales or profits. The Group’s teams dealing with research and development work and application technology closely cooperate with the customers on development of the high quality innovative products and applications, which are custom-made to their specific needs.

In addition, alternative materials, products or technologies may be developed and the existing ones may be improved or replace the ones currently offered by the Group. For example, substitute products may impact the demand for the Group’s products in particular emulsion rubber and polystyrenes. Progress in production, including increase of demand for substitute end products which use other materials and improvement of quality of competitive substitute products used for production of the existing end products, and fluctuations of product and raw material prices, may increase the relative advantage of the substitute products and reduce the demand for the Group’s products due to the customers switching to substitutes. For example, regulations pertaining to tire labelling in the EU drove up demand for types with upgraded performance parameters (SSBR and NdBR rubbers) for passenger cars, with better properties than emulsion rubber, which is the main product in the Group’s offering. Also polystyrene faces the risk of substitution. Packaging applications may also use competitive materials such as polymers, in particular polypropylene, polylactide and paper. The cost of switching to one of these alternative materials is relatively low, because modern production lines can generally switch between polymers. Additional investments may be required in the area of polyethylene terephthalate (“PET”) processing, and in some cases also polypropylene. If such newly developed or improved products or alternative products are offered at lower prices and have preferred properties or other advantages, especially from a regulatory perspective, and the Group is not able to offer similar, new or improved products, it may lose many customers, which may have an adverse impact on the Group’s business, results, financial standing and prospects.

The Group has experience in executing acquisitions. The Group implements and intends to continue acquisitions of companies or assets used to conduct similar or complementary activity, provided that appropriate acquisition opportunities are identified. To finance future acquisitions the Group may need to borrow money which will increase its burden following from debt and may impact the Group’s capability to make payments resulting from its debt instruments. It may happen that the Group will not be able to raise financing for the planned acquisitions on favorable terms or at all. To manage all successful acquisitions the Group has to extend and continue to improve its operating, financial and management information systems, nonetheless the increased impact of the leverage may impair the Group’s capabilities in this respect. The Group may have limited free cash resources and consequently may not be able to make appropriate investments in the target to enable it to achieve the desired synergy effect. The Group has already executed and may continue to execute strategic acquisitions thanks to which it may expand its current product offering or ensure additional geographical or product diversification of its operating segments. However these acquisitions can be exposed to different types of risk, including:

• problems with effective integration of operating activities;
• inability to maintain business relations established before the acquisitions;
• increase of operating costs;
• the costs associated with ensuring and maintaining compliance with prevailing provisions of law, rules and regulations, including in particular in terms of expansion in new markets, if any;
• loss of key employees of the target;
• possibility of unexpected liabilities;
• problems with achieving the forecast effect of increase of efficiency, synergies and cost savings.

The Group may not guarantee that any of its acquisitions will ultimately bring about the originally expected benefits (the abovementioned risk also applies to the EPS segment recently acquired from INEOS). In addition, the Group may not be able to identify attractive acquisition candidates or not be able to raise funding or not be able to execute potential acquisitions on attractive terms.

The Group conducts its activity in many countries. The Group’s results are reported in appropriate foreign currencies and then translated into PLN at the prevailing exchange rate to be taken into account in the consolidated financial statements. The main currencies whose exchange rate fluctuations constitute one of the Group’s risk factors are: EUR, PLN, USD and CZK. The value of these currencies vs. Polish zloty has fluctuated significantly in recent years. This situation may recur in the future. The possible depreciation of these currencies vs. Polish zloty will reduce the PLN equivalent of these amounts, which present the operating performance in the consolidated financial statements. The possible appreciation of these currencies will cause these amounts to rise accordingly. Because the revenues on sales of the Group’s products in EUR and USD exceed the costs of raw materials incurred in these currencies, the appreciation of the PLN versus EUR or USD may exert an adverse impact on the generated margins and operating results. In addition, because the ratio of sales revenues in EUR to USD exceeds the corresponding ratio on the side of the costs in these currencies, depreciation of EUR vs. USD may exert an adverse impact on the margins and operating results. In addition, with regard to products sold for foreign currencies, any appreciation of PLN in relation to these currencies will have negative impact on the Group’s operating results. Exchange rate fluctuations may also interfere with the comparability of operating results in individual financial periods.

One of the consequences of the currency structure of the Group’s purchases of raw materials, sale of products, incurring of loans and borrowings and holding of cash in foreign currencies is that the Group has been and will be exposed to FX rate fluctuations, which may materially influence the its operating results, assets and liabilities and cash flows expressed in Polish zlotys. In 2016, 76% of the Group’s revenues and 90% of its costs were associated with transactions settled in foreign currencies (mainly EUR and USD). Exchange rate fluctuations affect the amount of sales revenues and the cost of raw material purchases. Appreciation of the local currency has negative impact on profitability of exports and sales in the domestic market, nonetheless changes in revenues on exports or domestic sales measured on the basis of quoted exchange rates and caused by their fluctuations, are balanced by changes of the cost of import of raw materials (or measured on the basis of FX exchange rate quotations), thus largely neutralizing our exposure to the FX risk.

The Group incurs transaction FX risk each time it effects purchase or sale transactions settled in a currency other than the local currency of the entity which entered into the transaction. Due to FX volatility, the Group may not guarantee that it will be able to manage its FX transaction risk effectively or that exchange rate fluctuations will not have an adverse impact on the Group’s business, results, financial standing and prospects.

WAs producers adapt their operations to the demand generated by the market, the import of cheap ethylene or polyethylene from the United States or Middle East may impact the profitability of European cracking installations and, as a consequence, lead to closure of the installations which turn out less competitive. In addition, migration of European cracking installations towards light hydrocarbons (ethane) may also impact the butadiene market. According to IHS Chemical’s data, in the period from 2008 to 2012 in Western Europe, cracking lines with the total production capacity of approx. 0.5 million tons per annum, i.e. 2.3%, were decommissioned. This trend was continued in the next years – in 2013 Versalis closed down one of its two lines in Priolo, Italy, with the total production capacity of 300 thousand tons of ethylene p.a., and in October 2015 Total shut down another cracker in Carling in eastern France with the production capacity of 320 thousand tons of ethylene per annum. Due to low margins in the period of high oil prices, managers of petrochemical plants made a decision to adapt part of the crackers to be able to process light raw material feedstock instead of benzene fractions; INEOS in Grnagemouth (United Kingdom) and Rafnes (Norway), Borealis in Stenungsund (Sweden), SABIC in Wilton (United Kingdom), which will reduce the production of butadiene. On the other hand, investment projects were started to extract butadiene from C4 fraction, so far hydrogenated in Europe, to increase the supply of butadiene (BASF and Evonik in Antwerp, LyondellBasell in Vesseling, OMV in Burghausen, TVK in Tiszaujvaros). Decommissioning of European crackers and switching to light feedstock may lead to limited availability of butadiene and increased costs of transport of these products from non-European countries. Currently, due to lower oil prices, this trend has slowed down and production is based on heavier feedstock to the extent possible. However one cannot avoid the risk that in the future, when oil prices will go back up, the costs of raw materials produced in Europe will increase and the purchase of raw materials from cracking installations outside Europe may turn out unprofitable. The Group’s production costs may exert an adverse impact on the Group’s business, results, financial standing and prospects.

China is one of the most rapidly developing synthetic rubber markets in the world; it wields significant influence on the global synthetic rubber market. In the recent years the general level of production on the Chinese synthetic rubber market has improved significantly thanks to increase of concentration in the industry, which has led to quick increase of production capacity. The production capacity of China’s synthetic rubber industry significantly exceeded the market demand, as a result of which the market could not absorb the full production volume generated by this industry. For this reason China may take actions to export their products to the EU at competitive prices, which would increase the amount of synthetic rubber offered in Europe. This may undercut demand for the Group’s products and, as a consequence, exert an adverse impact on the Group’s business, results, financial standing and prospects.

Many of the Group’s supplier contracts contain provisions which make it possible for the suppliers to limit the quantity of the raw materials delivered to the Group below the contracted volumes in a force majeure situation. In a situation in which the Group would be forced to look for alternative sources of raw materials, or a supplier does not want to perform, or cannot perform, its obligations under the raw material supply agreement, or if a supplier terminates its agreement with the Group, the Group could potentially be unable to acquire such raw materials from alternative suppliers at the right time on comparable or more attractive terms, which could have an adverse impact on the Group’s business, results, financial standing and prospects.

Mr. Michał Sołowow directly and indirectly holds 62.46% of the Company’s shares and as at 31 December 2016 controls its activity. Mr. Sołowow may exert significant impact on appointment of the Company’s supervisory board and management board members and may take actions beneficial to the interests of the Company’s shareholders at the cost of the interests of its creditors, including as regards decisions pertaining to dividend payout.

The interim dividend payout ratio on Synthos SA’s shares was 243% of the Group’s consolidated net profit in 2016 and 78% of the Group’s statutory consolidated net profit in 2015. The Group may continue to pay dividends in accordance with the rules it has adopted and the limitations following from the Group’s agreements. Dividends paid out from the Group’s retained profits which may be much higher than the net profits generated by the Group in future periods, may weaken the Group’s capital strength, reduce its cash flows and impact the ability to repay its debt. In connection with the Bond issue, the group is also subject to standard high-yield covenants which may impair its ability to finance future activity and capital needs and to take advantage of business opportunities and conduct current operations.

In addition, if Mr. Sołowow makes a decision to sell all or some of his shares, each new controlling shareholder will have the possibility of implementing a strategy different from the Group’s operating strategy as at the date of this report. Each impact on or instability in the Group’s corporate governance may have a significant impact on the Group’s business, results, financial standing and prospects.

The Group received approval of grants from the EU and the state budget for investments and research and development activity which as at 31 December 2016 amounted to approx. PLN 418 million and which have been partly distributed or will be distributed over the next few years. Up to yearend 2016 the Group received PLN 264 million from the Ministry of the Economy, the Polish Agency for Entrepreneurial Development, the National Environmental Protection and Water Management Fund and the National Center for Research and Development. In 2016, the Group signed grant agreements totaling PLN 70 million, in 2015 for PLN 59.2 million, in 2014 for PLN 19.4 million, in 2013 for PLN 45 million and in 2012 for PLN 207.9 million, including PLN 43.3 million under the “Innovative Economy” Operational Program to finance the Group’s Research and Development Center in Oświęcim and PLN 146.8 million for the project entitled “Implementation of an innovative technology for manufacture of SSBR X3 rubber in Synthos Dwory 7”, under which the Group started to build a new production line for advanced SSBR and Li-BR rubbers with a capacity of 90 thousand tons per annum, as part of expanding the Group’s portfolio by introducing new and innovative products. The Group also obtained grants from the National Environment Protection and Water Management Fund (NFOŚiGW). To maintain the received grants the Group is obligated to fulfil strict regulatory undertakings such as project promotion, maintaining project integrity for the period of five years from the completion and attaining the headcount level specified in the application. If the Group fails to fulfill the obligations, it will have to return the received grants together with statutory interest. Failure to comply with the above regulations may have an adverse impact on the Group’s business, results, financial standing and prospects.

The Group is subject to different regulations, including regulations on customs and international trade, provisions of law on export/import control, and the related regulations. The above provisions of law and regulations impose limitations on the countries in which the Group may conduct activity, persons or entities with which it may cooperate, products which it may acquire or sell and conditions on which it may conduct activity, including exposure antidumping limitations and proceedings. In addition the Group is subject to antimonopoly regulations, zoning and occupancy regulations applicable to production facilities in general, and regulating imports, promotion and sale of the Group’s products, activity of production facilities and warehousing facilities, and its relations with customers, suppliers and competitors. In the event of amending these provisions of law or regulations or their breach by the management board, employees, suppliers, procurement agents or trading companies, the costs of certain goods may rise, the Group may experience delays in shipments of goods, be subject to penalties, or suffer damage to its reputation; all these factors may reduce the demand for the Group’s products and cause damage to its activity and have an adverse impact on the results of its operations. For example, the Group is exposed to the risk of dumping prices of products from China or India – if the prices charged are below the level of the prices charged in China or India or below the production cost, which may harm the Group’s competitive position. In addition, in some areas the Group uses certain forms of trade protection, including antidumping protection and the EU Authorized Economic Operator program, which ensures expedited customs service for materials crossing international borders. In the case of loss of such protection, the Group’s operating results may suffer.

In addition, changes of regulations on statutory minimum wages or other regulations pertaining to employee benefits may cause the Group to incur additional salary and benefit costs, which may have an adverse impact on its profitability.

In calculation of the global provision for income taxes and other tax liabilities the Group adopts certain judgments and believes that its tax estimations are rational. Nonetheless the level of accuracy of such tax estimations may be lower because the Group submits tax returns in multiple jurisdictions where it does not have in-depth knowledge of the tax regulations. The Group may be exposed in the future to inspections of tax authorities and the tax authorities may not agree with its tax interpretation of certain material items, including past and future mergers and/or disposals, and demand as a result recalculation and potential increase of its tax liability. In addition changes to the existing regulations may also increase the Group’s effective tax rate. The Group may also be subject to new tax regulations that may affect its tax structure. A significant increase of the Group’s tax burden may have a significant adverse impact on the Group’s business, results, financial standing and prospects.

Legal requirements are subject to frequent changes and depend on the interpretation and the Group is not able to predict the ultimate cost of compliance with such requirements or their effects on the conducted activity. The Group may be obligated to incur significant expenditures or change its business practices to ensure compliance with the existing or future provisions of law or regulations, which may increase the costs or significantly reduce the possibility of conduct of its activity.

SYNTHOS PBR s.r.o., the Group’s Czech company, benefits from state tax incentive programs in the form of tax relief granted by the Czech government for 2011-2016, when the company is exempted from corporate income tax. The tax relief in question applies only if SYNTHOS PBR s.r.o. satisfies the requirements imposed by Czech and EU law and the Czech government; otherwise, the Group may lose the unused relief and be obligated to refund the part already used, together with applicable penalties, which could affect the Group’s business, results, financial standing and prospects.

A large number of the Group’s existing, former or abandoned production buildings and facilities have a long industrial history, which comprises, among others, chemical processing, hazardous substances and storage of waste and related activities, e.g. related to landfills. As a result, soil or groundwater pollution may occur in the future in connection with discharge of substances, which has occurred in some facilities in past, and it is possible that further pollution may be detected in these or other locations in the future.

Some provisions, regulations and court rulings regarding environmental protection impose on current or former owners, operators or users of such facilities and locations liability for the pollutions occurring in or originating from such facilities or locations, regardless of the causes or omissions or knowledge of the pollutions. The Group may be at any time held liable for examination and removal of the pollution coming from the Group’s facilities or caused by the activity conducted in the Group’s facilities, which may be the source of significant, unexpected costs. Occurrence of a leakage of hazardous materials in the future, detection of a previously unknown pollution or imposition of new obligations regarding examination or removal of pollution in the Group’s facilities may be the source of significant, unexpected costs. The Group may also be obligated to pay fines or fees if the emissions and/or other impacts exceed regulatory limits; the Group has paid such fines and/or fees in the past.

The emergence of environmental liability for which the Group does not have the appropriate security may have an adverse impact on its financial results. The Group is of the opinion that the securities provided by the sellers from whom it has purchased the assets or entities will help to limit the costs associated with environmental liability from before their acquisition, this situation may still have adverse impact on the Group’s financial results to the extent to which: (i) the sellers do not fulfill their obligations regarding their security, and/or (ii) the Group breaches of obligations to refrain from certain activities which may deteriorate the existing status quo or limit the related losses.

Additionally the Group may be obligated to recognize or significantly increase the financial provisions for the obligations and liabilities associated with the costs of removal of such pollutions. If the Group does not manage to precisely anticipate the amounts or timing of such costs, the impact of such a situation on the Group’s business, results or financial standing in each period in which such costs will have to be incurred may be material. Additionally in some jurisdictions the authorities have the power to establish pledges on real estate and to seize the accounts of the entity using the property to cover the costs of removal of the pollutions.

The Group carries out regular review of all types of environmental risk and provisions created for such risks. Provisions are recognized when the Group has a current liability resulting from past events, the amount of the liability can be reliably estimated and it is probable that settlement of such liability will require the use of resources that have economic value. Provisions are calculated on the basis of among others: known events, type and scope of pollutions, land reclamation techniques, prevailing provisions of law and regulations, and estimated risks, as at each balance sheet date, and adjusted as needed on the next balance sheet dates. Since such calculations are based on a number of factors, many of which may change, and depend on unpredictable circumstances, the Group may not guarantee that such provisions will be sufficient. For instance, from time to time the Group may incur the costs of reclamation in the existing Group facilities and in newly purchased facilities. If it turns out that environmental damage has occurred as a result of the Group’s current or historical activity (to which the Group is a successor), the Group may incur significant costs of removal of the pollutions and pay significant fines. If the provisions recognized for environmental liabilities are lower than the anticipated costs of compliance with the environmental regulations, the Group may be obligated to make additional payments which may have a significant adverse impact on the Group’s business, financial standing and results.

In its production activity the Group uses large quantities of hazardous substances, produces hazardous waste, generates sewage and emits air pollutants. Consequently, the Group’s activity is subject to extensive environmental and occupational health and safety provisions of law and regulations at both national and local level in multiple jurisdictions. Many of these provisions and regulations have been made more restrictive over time, and the costs of compliance with such requirements may continue to increase, including the costs associated with capital expenditures for pollution protection facilities. Additionally the Group’s production facilities require operation permits, renewed periodically, which may be revoked in the event of non-compliance. The required permits may not be issued or may not be kept valid, and the permits issued may contain more restrictive requirements, limiting the activity or requiring further investments to satisfy the conditions of the permit issued. For instance, in connection with the EU Regulation on registration, evaluation, authorization and restriction of chemicals (“REACH Regulation”) or the new EU Regulation on classification, labelling and packaging (“CLP Regulation”), each key raw material, chemical material or substance, including the Group’s products, may be classified as having toxicological or health impact on the environment, users of the Group’s products or the Group’s employees.

The REACH Regulation imposed significant obligations on the entire chemical industry in respect to testing, evaluation and registration of key chemicals and semi-finished chemical products. Each delay in full registration of the substance in accordance with the requirements may result in imposition of penalties for breach of these provisions or regulations or impossibility to sell the Group’s products containing them. The procedures associated with the REACH Regulation are costly and time-consuming and lead to increase of production costs and lower margins on chemical products.

In Poland the following have been introduced: the new Polish Environmental Protection Act (“Environmental Protection Act”), Directive of the European Parliament on industrial emissions (“IED Directive”) and additional regulations on land, soil and underground water pollution. The Environmental Protection Act introduces new, lower emission standards for the power sector and new obligations for owners of land as regards examination and reclamation of polluted land. The Group has implemented a modernization and new equipment investment program making it possible to adapt the combined heat and power plant operating in Synthos Dwory 7 Spółka z ograniczoną odpowiedzialnością spółka jawna to the requirements expressed in the new limits. As part of this process, the Group is building a new desulfurization and denitrification installation for one of the existing boilers, and a new fluid-bed boiler. The technological commissioning of these installations was slated for 31 March 2017. Each delay in execution of the process described above may result in imposition of penalties for breach of these regulations. As part of the changes introduced in the Environmental Protection Act, an “Opening Report” was prepared for all the installations of Synthos Dwory 7 spółka z ograniczoną odpowiedzialnością spółka jawna.

Ensuring compliance with the more restrictive environmental requirements may also increase the Group’s costs of transport and storage of raw materials and finished products, as well as the costs of storage and disposal of waste. The Group may additionally incur significant costs, including financial penalties, fines, damages, criminal and civil-law sanctions and reclamation costs, or experience disruptions in our activity in the case of noncompliance with these regulations or failure to satisfy the requirements contained in the permits obtained.

Emissions of carbon dioxide, methane and other greenhouse gasses (“GHG”) are a standard by-product of the Group’s production processes. For the past few decades the concerns regarding the relation between GHG and global climate changes have led to increased control of regulatory bodies and the public and to proposal and approval on the national and international level of regulations pertaining to monitoring, regulation and control of carbon dioxide emissions and other GHG emissions.

In the EU the Group’s emissions are controlled within the framework of the European Emissions Trading System (“EU ETS”) – pan-European industrial GHG emissions trading system. The Group has been subject to the EU ETS from 1 January 2013. The Group has been granted emission rights for the period from 2014 to 2020 and it is probable that it will be obligated to purchase additional CO² emission entitlements in the future. It is expected that the EU ETS system will become increasingly restrictive with time. If the current proposals are implemented they may have influence on the Group’s compliance costs under the EU ETS.

Ensuring compliance with the existing and future GHG regulations affecting our operations, including those discussed above, may result in increase of capital expenditures on fixed assets such as, for example, installation of more high-efficiency environmental technologies or purchase of entitlements to emissions of carbon dioxide or other greenhouse gases.

It is not possible to anticipate what form the future regulations will assume, nor to estimate any of the costs the Group will have to incur in connection with these or other future requirements. In addition to elevated expenditures, as discussed above, these requirements may also have an adverse impact on the supply of energy in the Group and the costs (and types) of raw materials used by the Group as fuel, and ultimately may reduce the demand for its products. Occurrence of any of the aforementioned consequences, or all of them, may exert a significant adverse impact on the Group’s business, results, financial standing and prospects.

The Group’s products are used for many different applications which have to satisfy specified regulatory requirements, e.g. requirements for products used for food, used in the packaging industry or products used in the automotive industry. Many of the product applications in the end markets in which the Group sells its products are regulated by different national and local regulations, laws and provisions. For example, such aromatic compounds as benzene or styrene and more complex compounds, such as antioxidants or plasticizers, which are used for manufacturing the Group’s products have been subject to increased attention of the regulators due to potentially significant or perceived health and safety issues. Changes of regulations may necessitate additional costs of compliance, seizure, confiscation, withdrawal or fines; each of these measures may prevent or stop the process of development of the Group’s products, their distribution and sales. For example, the demand for polystyrene from the packaging market may gradually decline due to the observed pursuit of administrative bans (as is the case in some US cities with respect to expandable polystyrene in the catering packaging and the food service chain).

Changes of environmental and occupational health and safety regulations prohibiting or limiting the use of such waste materials in the Group’s products or in the products of its customers may have an adverse impact on the Group’s business, results, financial standing and prospects. Inability to properly manage the security, health, product liability or environmental risk associated with them, product life cycles and production processes, may have significant adverse impact on the employees, local communities, stakeholders, the Group’s reputation and the results of its operations.

Due to the nature of its activity, the Group is exposed to hazards associated with chemical production and the related storage and transportation of raw materials, products and waste. These hazards may lead to disruption or suspension of the Group’s activity and have an adverse impact on the efficiency and profitability of the given production facility or the overall Group. These potential risks of disruption comprise among others:

• leakages and cracks in the pipelines and storage tanks;
• explosions and fires;
• unfavorable weather, including flood and natural disasters;
• terrorist attacks;
• failure of mechanical equipment securing the process and limiting emission of pollutions;
• contamination, chemical leakages and other outflows or release of toxic or hazardous substances or gasses; and
• exposure to toxic chemicals.

As part of its operations the Group has come across such threats as the hazards and disruptions described above (excluding terrorist attacks), which are normally associated with chemical production. The Group’s production facility in Poland is listed in the State Fire Brigade list as a facility with high risk of occurrence of a serious industrial failure. This directly follows from the quantity of substances considered to be hazardous that are stored on the Company’s premises. Since the Group’s facilities operate near big population concentrations, any fire could impact the nearby communities.

In 2016 the Company updated its safety system documentation on account of the amended legal requirements associated with the entry into force of the Seveso III Directive. The outcome of these efforts was that the production facility of Synthos Dwory 7 spółka z ograniczoną odpowiedzialnością spółka jawna had its “Safety Report” approved on 4 September 2016 by the Małopolskie Voivodship Commander of the Voivodship State Fire Brigade. The Group’s other companies hold up-to-date documentation regarding their safety system and the pertinent decisions of the competent authorities for their facilities.

All of the aforementioned risks may also expose employees, customers and local community and other persons to toxic chemical compounds and other hazards, pollute the natural environment, cause damage to property, damage to body or death, lead to disruption or suspension of activity, damage the Group’s reputation and negatively impact efficiency and profitability of the given production facility or the whole Group, and entail the necessity to remove the damages, state intervention, closure by regulatory bodies, imposition of penalties or fines by the state authorities or claims of state entities or third parties. Legal claims and actions taken by regulatory authorities may entail imposition of civil and criminal penalties which may influence the sale of products, reputation and profitability of the Group. There is no certainty that the compliance, management and response systems in the area of environmental protection and health and safety at work are sufficient to prevent such potential risks or to remedy any such disruption or incident.

Additionally, the activities performed by the Group’s employees in the production process and the resulting contact with hazardous substances may increase the risk of accident. Despite the Group’s best efforts to promote awareness through training, there is no certainty that the implemented measures and safety programs will prevent accidents on site or occupational diseases among the Group’s employees, which may have an adverse impact on the Group’s business and financial results.

If a natural person successfully makes a claim against the Group it may not have appropriate insurance to cover the amount of such claim or its cash flows may be insufficient to pay it. Such situations may have a significant adverse impact on the Group’s business, results, financial standing and prospects.

If any disruption occurs, other plants with adequate capacity may not be available, may cost much more or may require ample time to launch production. Each of these scenarios may have an adverse impact on the Group’s business, results, financial standing and prospects. If one of the Group’s key production facilities is not able to manufacture products for a longer period of time, such limitation of production following from the disruption may reduce the sales and the Group may not be able to satisfy the customers’ needs, as a result of which they may look for new suppliers. Additionally if disruption of production occurs in a production facility that fully or nearly fully uses its production capacity, subsequent product shortages may be particularly painful since the production of such facility may not return to the levels from before the disruption.

Although the Group has insurance, inter alia, property insurance, insurance against environmental damage and general third party liability insurance, in the amounts and of the types that in the Group’s opinion, are typical of the industry, it does not currently have a business interruption insurance and additionally the Group may not be fully insured against all possible disruptions, in connection with the limitations and exclusions comprised in the Group’s insurance agreements. Although so far the risks associated with chemical production have not materialized in the form of incidents which would significantly disrupt the Group’s activity or expose it to significant losses, it may not guarantee that it will not incur such losses in the future.

The Group’s ability to maintain its competitive position and implement the business strategy depend to a large extent on its senior management. Loss or limitation of the services of the Group’s top management, or inability to attract and retain additional senior executives may have an adverse impact on the Group’s business, results, financial standing and prospects. The competition for staff with appropriate experience is very high in connection with the relatively small resources of qualified people, which impacts the Group’s ability to retain the existing senior management and attract additional qualified personnel. In the event of departure of any of the members of top management the Group may have difficulties with replacing them and incur additional costs to recruit people to replace them. The Group does not have life insurance for any of the management board members and does not intend to purchase such a product in the near future.

The Group relies on its own capabilities to recruit, retain and train management, sales and marketing personnel, administration, operations, research and development and other staff. The nature of the Group’s operations and research and development activity require employment of personnel with qualifications and skills in the area of chemistry and other technical and scientific specializations. There is a high demand for qualified and skillful technical personnel, including chemists, and the competition between potential employers is intensive. If qualified and skillful employees leave or if the Group is not able to attract, retain, train and motivate additional qualified and skilled employees, this may have an adverse impact on the Group’s business, results, financial standing and prospects.

The Group’s future financial results and success depend largely on its ability to effectively implement its business strategy. The Group may not guarantee that it will successfully implement the business strategy or that implementation of the strategy will allow it to maintain or improve its competitive position. The Group’s business strategy is based on assumptions regarding future demand for the Group’s existing products and new products and applications on which the Group works, and also the Group’s further capability to manufacture its products profitably. The Group’s ability to implement its business strategy depends, among others, on its ability to dispose of specific entities or discontinue specific product lines on attractive terms and with minimum disturbances, to finance operations and develop products, maintain efficient high-quality production activity, respond to changes in the competitive and regulatory environment, access to high-quality raw materials, on time and in a cost-efficient manner, and to retain and attract highly skilled technical, management, marketing and financial personnel.

The Group may not be able to implement its business strategy comprising expansion to new markets such as South America or North America. Preparations to expand the Group’s product portfolios may turn out unprofitable and launch of the Group’s innovative products may be difficult. Additionally, the costs associated with implementation of the Group’s strategy may turn out much higher than currently expected, and the costs associated with the Group’s own research may not be fully recovered. Each failure in preparation, verification or implementation of the Group’s business strategies in a timely and efficient manner may have an adverse impact on the Group’s business, results, financial standing, prospects and cash flow.

The Group develops and protects its intellectual property rights to products and processes for development, production and marketing of its products, using a combination of patents, trade secrets, copyrights and trademarks. The Group uses unpatented know-how, trade secrets, processes and other proprietary information, using different methods of protecting such information. These methods include non-disclosure agreements, agreements on transfer of rights to inventions, agreements with employees, independent sales agents, distributors, consultants, universities and research institutes with which the Group maintains partner cooperation. Nonetheless these agreements may be breached. Governmental agencies and other national and state regulatory bodies may require disclosure of such information in order for the Group to obtain the right to sell the product. An agency or regulator may also disclose such information on its own initiative if it concludes that the information does not constitute confidential business information or trade secret. The Group’s competition may also otherwise come into possession of the trade secrets, knowhow and other unpatented proprietary technologies or develop them independently.

In addition, the Group has patents associated with a number of components and products and has filed patent applications for other components and products. The Group also files applications for further patents in the ordinary course of business, as needed. Nonetheless these preventive measures offer only limited protection and do not protect, for example, against competitors coming into possession of proprietary information or independent development of such information by other entities. The Group may not guarantee that existing or future patents of the Group will ensure its appropriate protection or any competitive advantage and that any future patent applications will lead to obtaining the patent, or that the Group’s patents will not be omitted, nullified or found impossible to enforce.

The Group’s additional proprietary rights to intellectual property may be also be challenged, which would have a significant adverse impact on the Group’s business, results, financial standing and prospects. In specific cases a litigation regarding intellectual property may be used to obtain competitive advantage. In the past the Group has been a party to litigation regarding patents and other intellectual property and may be a party to such litigation in the future. If a third party takes legal action against the Group, the Group may incur significant defense costs and may not guarantee that such litigation will be resolved to the Group’s advantage. If such litigation is resolved to the Group’s disadvantage it may suffer significant losses and be subject to prohibition to carry out tests, production or sale of certain Group technologies and products.

All proceedings before the national patent or trademark office or national or state court may end with negative resolutions regarding the priority of our inventions and limitation or rejection of claims in issued and requested patents. The Group may also incur significant costs of such proceedings. Additionally the laws of certain countries in which the Group’s products are or may be sold may not protect its products and intellectual property to the same extent as in Europe or at all. The Group may also not be able to protect, in certain countries, its rights associated with trade secrets, trademarks and proprietary unpatented technologies.

The Group still looks the possibility of improving its business processes and developing new products and applications. Many of the Group’s competitors have significant intellectual property resources, which the Group has to constantly monitor to avoid their breach. Although the Group follows the principle of avoidance of intentional breach of valid patents, existing or future, and other intellectual property rights belonging to other entities, it cannot guarantee that the Group’s processes and products do not breach and will not breach issued patents. If there are patents owned by other entities, or if such patents are issued in the future for the Group’s products, processes or technologies, it is possible that the Group will be liable for breach of such patents and may be forced to take remedial or recovery actions to continue its production and sales activity as regards the products found breaching such patents. Litigation pertaining to intellectual property is often costly and time-consuming, regardless of the substantive value of the claim made and the Group’s involvement in such litigation may distract the Group’s management’s attention from operating activities. If the Group identifies that any of its processes, technologies or products breaches valid intellectual property rights of other entities, it may try to obtain a license from the owners of such rights or significantly redesign its products to avoid a breach. The Group may not be able to obtain the required licenses on satisfactory terms or at all, or may not be able to redesign its products in a way allowing it to avoid the breach. In addition, if the Group is accused of a breach and loses the case, it may be forced to pay significant compensations or may be subject to an injunction prohibiting it to use the technology or sell products breaching such rights. Occurrence of any of the above cases may force the Group to incur significant costs and prevent it from selling its products.

The Group has established and maintained internal control measures required for reliable reporting of financial results and facilitating effective prevention of fraud. As at 31 December 2016, the Group has not identified any material weakness in this system. The Group continues to assess and improve its internal control measures in financial reporting; nonetheless, it cannot guarantee that the measures it has taken so far, or measures it may take in the future, will be sufficient to prevent deficiencies in the internal control system, which may have a significant adverse impact on the Group’s ability to satisfy the prevailing requirements in financial reporting.

Maintaining good relations with the Group’s employees, trade unions, Employee Councils and other employee representatives is of key importance in the Group’s business. Each deterioration of relations with the Group’s employees, trade unions, Employee Councils and other employee representatives may have an adverse impact on the Group’s business, results, financial standing and prospects.

Some Group employees employed in the Czech Republic, France and The Netherlands are covered by company and national collective bargaining agreements. These agreements usually supplement pertinent statutory provisions pertaining to, among others, general work conditions, such as maximum number of work hours, holiday leaves, termination rules, retirement rules, social benefits and incentive schemes. National collective bargaining agreements and company collective bargaining agreements also comprise provisions which may impact the Group’s ability to restructure the activities and the facilities or to lay off employees. The Group may not be able to extend the prevailing collective bargaining agreements or renew them on the existing terms or after their expiry negotiate favorable collective bargaining agreements in due time, without disruption of work, strikes or similar protest actions. The Group may additionally be party to additional company collective bargaining agreements and the existing national collective bargaining agreements may be amended. Such additional company collective bargaining agreements or changes may increase the Group’s operating costs and have adverse impact on the Group’s business, results, financial standing and prospects.

There is a similar threat on the Polish side, however the remuneration rules are regulated by the Remuneration Bylaws.

The Group may not reliably predict the cost of instigation, defense or final resolution of litigation or other proceedings instigated by the Group or against it, including injunctions and awarded compensations. The Group has already been and may be in the future a party to court and other proceedings pertaining to intellectual property, trade agreements, environmental protection, health and safety at work, work and employment conditions or other damages following from the actions taken by natural persons or entities beyond the Group’s control. In the case of court proceedings pertaining to intellectual property, unfavorable resolution may comprise annulment, cancellation or other loss of significant intellectual property rights used in the Group’s activities, or injunction prohibiting the Group from using the business processes or technologies subject to patents of third parties or other intellectual property rights of third parties. Court proceedings in cases pertaining to environmental pollution or exposure to hazardous substances in the work place or the Group’s products may expose the Group to significant liability. Unfavorable resolution of any court proceedings or other proceedings may have significant adverse impact on the Group’s business, results, financial standing and prospects.

Despite the fact that the Group is a supplier of raw materials rather than producer of finished products, its development, production and sale of specialized polymer emulsions and other materials entails a risk of exposure to third party liability claims for product, product recall and the related negative publicity. Although the Group makes efforts to protect against such claims and risk through observing the standards and specifications and through negotiation of contracts, it may not guarantee that the efforts made in this respect will protect it against this kind of claims. For example, a Group’s customer may make an attempt to obtain from it an input in a situation where a consumer has taken legal action against it regarding product liability or a consumer may make claims regarding product liability directly against the Group. A product liability claim or issuance of an unfavorable ruling may result in significant and unexpected expenditures, may impact consumer or customer trust in the Group’s products and may distract the management’s attention from other duties. Success of a claim regarding product liability or a number of such claims exceeding the Group’s sum insured, for which the Group does not have other securities, may have significant adverse impact on the Group’s business, results, financial standing and prospects.

The Group has typical insurance for companies from the industry with a similar standing, however such insurance may not cover all the risks associated with the Group’s activity or production process and the related use, storage, transport of raw materials, products and waste to and from the production facilities or distribution centers. The Group has purchased insurance with covers limits which it deemed appropriate, and with general wordings, nonetheless such cover is subject to limitations, including limitations pertaining to higher retentions and deductibles and limits of liability amounts and types. Despite making all due efforts to purchase specialized insurance for environmental liability and removal of pollutions, the Group may incur losses exceeding the insurance limits or outside the conditions of the Group’s insurance policy cover, including on account of liability for removal of environmental pollution. Additionally, from time to time different types of insurance for companies in specialized areas of chemical industry were not available on economically acceptable terms or in some cases they were not available at all. Potentially the Group incurs additional risk of bankruptcy of one or more insurers. Additionally serious disturbances in the domestic and global financial market may have negative impact on the ratings and financial standing of some insurers. Future downgrading of ratings of a number of insurers may have negative impact on both the availability of the appropriate insurance cover and its cost. In the future the Group may not be able to obtain the insurance cover at the existing level or at all, and the premiums for the purchased insurance may significantly increase.

Failures of IT systems, including the risks associated with system updates, disruptions in operation of networks or breaches of data security may cause disturbances in the Group’s operating activities through limitation of operational efficiency, delay in transaction processing and reducing the Group’s ability to protect customer information or internal information. The Group’s IT systems, including back-up systems, may be damaged or their operation may be disrupted by: power cuts, computer and telecommunication equipment failures, computer viruses, breach of internal or external securities, events such as fires, earthquakes, floods and/or errors of the Group’s employees. Although the Group has taken measures to eliminate such threats through implementation of sophisticated network safeguards, back-up systems and internal control measures, it cannot guarantee that a system failure or breach of data safeguards will not have significant negative impact on the Group’s business, results, financial standing and prospects.

One of the development paths of Group is the implementation of the acquisitions. Execution of capital acquisitions refers to entities having modern products, extending the Group's existing portfolio of products or market opportunities, i.e. relatively low-valued companies with good market prospects.

Each acquisition project carries the risks of failure to meet operational and financial targets.

In 2016 Synthos S.A. entered into purchase agreement of EPS business of INEOS Group with INEOS Industries Holdings Limited, seated in Lyndhurst, United Kingdom. Within the purchase transaction of INEOS Styrenics, Synthos S.A. took over three production sites, two of which are located in northern France (Wingles and Ribécourt) and the third in the Netherlands (Breda). In addition, the site in Breda has a state-of-the-art technology center, which houses a specialist research laboratory and pilot plants that test innovative products implemented by the company.

Synthos S.A. assumes that the purchase of INEOS Styrenics will allow the delivery of the highest quality expandable polystyrene (EPS).

At the same time Synthos S.A. assumes that in the long term it will be possible to obtain costcompetitive styrene (the Group’s styrene capacity exceeds 600,000 tones per annum). This may lead to the lack of achievement of the assumed efficiency of the acquisition that took place in 2016.

After issuing the Bonds and executing the Revolving Credit Facility, the Group’s level of financing with borrowed capital has increased significantly. As at 31 December 2016 the Group’s total liabilities for bonds, bank loans, borrowings and financial leases stood at roughly PLN 2.6 billion. In addition, the Group may incur further debt in the future, including debt to finance future acquisitions. Although the Bond Issue Agreement imposes certain limitations regarding further debt, they are subject to numerous exceptions and exclusions and therefore if certain terms and conditions are met, the debt amount incurred in compliance with those covenants may be considerable.

Subject to the limitations contained in the Bond Issue Agreement, the Group and its subsidiaries may incur additional liabilities, including liabilities with repayment priority over the Bonds in connection with collaterals established on specified assets. All possible future liabilities on the level of entities that are not sureties, have structural priority over Bonds. In addition the Group may incur a loan with a maturity preceding the maturity of the Bonds. Although the Bond Issue Agreement imposes certain limitations regarding further liabilities, they are subject to numerous exceptions and exclusions, therefore if certain conditions are met, the debt amount incurred in compliance with the Bond Issue Agreement may be considerable. If the Group or its subsidiaries incur additional liabilities, the scale of the existing risks may increase. In the Bond Issue Agreement does not prohibit the Company from incurring liabilities which, within the meaning of these agreements, do not constitute debt.

The ability to repay and refinance the debt and finance working capital and capital expenditures will depend on future operating results and ability to generate sufficient cash. This depends to a certain extent on implementation of the adopted business strategy, competitive, market, regulatory and other factors, also those discussed in the chapter “Risk Factors” which are in most cases beyond the Group’s control.

The Group may not guarantee that it will generate in the future sufficient cash flow on operating activity and that the debt and equity financing instruments will be available to the Group in the amount sufficient to enable timely repayment of liabilities and satisfy liquidity requirements.

If future cash flows on operating activity and other capital resources turn out insufficient to repay liabilities upon maturity or ensure liquidity the Group may be forced to:

• limit or defer specific business actions and capital expenditures;
• dispose of assets;
• raise additional capital or incur liabilities; or
• restructure or refinance all or part of the debt, including Bonds, on or before the redemption date.

The Group may not guarantee that it will be able to implement any of the aforementioned solutions at all, by a specific date or on economically viable conditions. In particular, the ability to restructure or refinance debt will depend partly on the Group’s financial standing at a given point in time. What is more, the Group may be unable to find alternative financing and even of the Group obtains alternative financing, it could be on unfavorable or unacceptable conditions. If the Group is not able to perform its liabilities thanks to alternative financing, it may also be unable to satisfy its liabilities on account of debt, including the Bonds. In such a case, the debt under other agreements or instruments which comprise acceleration clauses triggered by breach of other agreements or cross-default clauses regarding other agreements, including the Bond agreement, liabilities may become due and payable on demand, and the Group may not have sufficient funds to repay all of its debt, including repayment of the Bonds.

Each case of lack of timely repayment of the amount due on account of the Bonds will result in downgrading of the Group’s creditworthiness, which will impair its ability to incur additional liabilities. In addition, the terms of debt, including the Bonds, and each future debt, may impair the ability to implement the aforementioned alternative solutions. In the event of lack of results or operating resources, the Group may face liquidity problems and be forced to dispose of material assets or parts of business to service the debt and perform other liabilities. The terms and conditions of the Group’s debt, including the provisions of the Bond Issue Agreement, limit the possibility of transfer or disposal of assets. In addition, there is no certainty that the assets which the Group would like to dispose of would be marketable at a given point in time, and if so, if the impact of such sale and its timing would be acceptable. If the attempts to take the above actions fail the Group may have no sufficient resources to perform its liabilities.