MATCHES, INC.AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

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(Note: pro forma earnings per share reflect the effect from 100,948,684 shares of common stock to be issued and authorized as of September 30, 2011and 2010, respectively, see Note 1and Note 21 for details)

See notes to the consolidated financial statements.

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MATCHES, INC.AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Supplementary cash flow information:

See notes to the consolidated financial statements

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MATCHES, INC.AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FININACIAL STATEMENTS

Note 1 - Organization and Description of Business

Matches, Inc. (the "Company") was incorporated pursuant to the laws of the State of Wyoming on November 28, 2007. On December 17, 2010, the Company entered into an Agreement and Plan of Reorganization (the "Exchange Agreement"), pursuant to which we intended to acquire Golden Stone Rising Limited, a British Virgin Islands company ("Golden"). Golden, through its subsidiaries and controlled operations in the People's Republic of China (the "PRC" or "China"), is in the business of producing polyester chemical fibers.  

The transaction closed on December 22, 2010 the ("Closing Date"). On the Closing Date, pursuant to the terms of the Exchange Agreement, the Company acquired Golden by agreeing to issue 170,948,684 shares of common stock of the Company, constituting 95.25% of the Company's shares to Golden's owners after giving effect to the issuance of such shares. Due to a shortage of currently authorized shares, 70,000,000 shares were issued at the closing of the acquisition and the remaining shares will be issued at such time as the Company has completed an amendment to its articles to increase its authorized shares or the Company completes a contemplated reverse stock split, which will not affect the total authorized shares.  The stockholder entitled to the additional shares owns a majority of the outstanding common shares, which entitles her to approve the reverse stock split. Golden's owners waived the right to receive the remaining shares as the condition of closing the transaction, subject to being able to receive them at some future time. As of September 30, 2011 and December 31, 2010, 78,525,000 shares are issued and outstanding and 100,948,684 shares are pending to be authorized and issued. These shares have been recorded in the balance sheets as common stock to be authorized and issued.

Taicang Kehui Consulting Service Limited ("Kehui") was incorporated under the laws of the PRC as the wholly owned subsidiary of Triple Success Holding LLC ("Triple Success") on October 22, 2010. Triple Success was incorporated in the United States of America as a limited liability company on May 25, 2010, which was a wholly owned subsidiary of Golden.

Suzhou Jinkai Textile Co., Ltd. ("Jinkai") was organized under the laws of the PRC on April 17, 2001 with registered capital of $60,401 (RMB 500,000). By the end of 2007, the owners made further injection to increase the registered  capital to $7,140,958(RMB56,000,000), which was 90% owned by Mr. Chen Jinle, the Company's chairman, and 10% owned by Mr. Chen Chenxu, Mr. Chen Jinle's nephew. In 2008, the owners injected further capital of $1,459,769 (RMB10,000,000) in Jinkai.

Suzhou Hangyu Textile Co., Ltd ("Hangyu") was organized under the laws of the PRC on January 11, 2006 with registered capital of $2,279,343 (RMB18,000,000), which was 90% owned by Mr. Chen Jinle, and 10% owned by Mr. Chen Chenxu. On January 28, 2010, Mr. Chen Jinle and Mr. Chen Chenxu, the two shareholders of Hangyu, each signed Share Transfer Agreements (the "Agreements") with Jinkai. Pursuant to the Agreements, Mr. Chen Jinle and Mr. Chen Chenxu transferred their total equity interest of Hangyu, representing 90% and 10%, respectively, to Jinkai as a capital contribution. Jinkai increased its registered capital from $8,600,727 (RMB66,000,000) to $11,465,122 (RMB88,000,000). As a result of the Agreements, Hangyu became a wholly owned subsidiary of Jinkai.

Taicang Jinkai Differentiated Fibers Research and Development Co., Ltd. ("Taicang Jinkai") was established on April 25, 2008 with registered capital of $146,088 (RMB1,000,000), as a wholly owned subsidiary of Jinkai.

On February 2, 2010, Suzhou Zhongxian Supply Chain Management Co., Ltd. ("Zhongxian"), a new subsidiary of Jinkai, was organized under the laws of the PRC with registered capital of $1,170,104 (RMB 8,000,000). On the date of inception, Jinkai owned 20% and Mr. Chen Jinle owned 30% of Zhongxian's equity interest. In April 2010, Mr. Chen Jinle and another individual owner of Zhongxian transferred 10% and 25%, respectively, equity interest in Zhongxian to Jinkai for cash. As a result of these transactions, Jinkai owns a 55% equity interest of Zhongxian.

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Jiankai, together with its three subsidiaries, is engaged in the manufacturing and sales of terylene partially oriented filament and terylene draw textured yarn.

On November 20, 2010, Kehui entered into the following contractual arrangements with Jinkai and its shareholders, providing Kehui the ability to control Jinkai, including its financial interest as described below. Thus, Jinkai became a contractually controlled subsidiary of Kehui (the "Reorganization").

Entrusted Management Agreement-Pursuant to the Entrusted Management Agreement between Kehui, Jinkai and the Jinkai shareholders, Jinkai and its shareholders agreed to entrust the business operations of Jinkai and its management to Kehui until Kehui acquires all of the assets or equity of Jinkai (as more fully described under the "Exclusive Option Agreement" below).  Under the Entrusted Management Agreement, Kehui manages Jinkai's operations and assets, and controls all of Jinkai's cash flow and assets through entrusted or designated bank accounts.  In turn, it is entitled to all of Jinkai's net earnings as a management fee, and is obligated to pay all Jinkai's debts to the extent Jinkai is not able to pay such debts. The Entrusted Management Agreement will remain in effect until the acquisition of all assets or equity of Jinkai by Kehui is completed.

Shareholders' Voting Proxy Agreement-Under the Shareholders' Voting Proxy Agreement between Kehui and the Jinkai shareholders, the Jinkai shareholders irrevocably and exclusively appointed the board of directors of Kehui as their proxy to vote on all matters that require Jinkai shareholder approval.  The Shareholders' Voting Proxy Agreement shall not be terminated prior to the completion of acquisition of all assets or equity of Jinkai by Kehui.

Exclusive Option Agreement-Under the Exclusive Option Agreement between Kehui, Jinkai and the Jinkai shareholders, the Jinkai shareholders granted Kehui an irrevocable exclusive purchase option to purchase all or part of the shares or assets of Jinkai.  The option is exercisable at any time but only to the extent that such purchase does not violate any PRC law then in effect.  The exercise price shall be determined by relevant agreements entered into by and between Kehui and Jinkai shareholders based on the circumstances of the exercise of option, and such exercise price shall be refunded to Kehui or Jinkai. Jinkai and the Jinkai shareholders agreed in the Exclusive Option Agreement not to encumber any of the any assets, operations or legal or beneficiary interests with respect to its revenues, unless such sale, assignment, mortgage, disposal or encumbrance relates to its daily operation or has been disclosed to and agreed upon by Taicang in writing.  Although Suzhou has pledged its land and assets for a short-term bank loan, the purpose of the loan was to provide working capital for day to day operations and business development, and Taicang consented in writing to such pledge. Accordingly, the pledge did not violate the Exclusive Option Agreement.

 Shares Pledge Agreement-Under the Shares Pledge Agreement among Kehui, Jinkai and the Jinkai shareholders, the Jinkai shareholders pledged all of their equity interests in Jinkai, including the proceeds thereof, to guarantee all of Kehui's rights and benefits under the Entrusted Management Agreement, the Exclusive Option Agreement and the Shareholders' Voting Proxy Agreement. Prior to termination of the Shares Pledge Agreement, the pledged equity interests cannot be transferred without Kehui's prior consent. The Share Pledge Agreement is being filed with the State Administration for Industry and Commerce (SAIC) in the PRC. The SAIC is the registration authority for commercial entities. The Company believes that the Contractual Agreements are fully enforceable and are not required to be filed with the SAIC in order to be enforceable.   

Call Option Agreements-Chen Jinle and other several senior management and other parties (each of them, the "Purchaser") have entered into call option agreements, dated as of November 30, 2010, with our major shareholder, Hung Tsui Mei, pursuant to which they are entitled to purchase up to 100% of the issued and outstanding shares of Hung Tsui Mei at a price of $0.0001 per share for a period of five years upon satisfaction of certain conditions. These conditions are (1) if the Purchaser and Jinkai enter into a binding employment agreement for a term of not less than five years, the Purchaser will be entitled to purchase up to 40% of the total shares granted to the Purchaser; (2) if Jinkai achieves not less than after tax net income of US$ 400,000 as determined under United States Generally Accepted Accounting Principles consistently applied ("US GAAP") for the fiscal year ended December 31, 2010, the Purchaser will be entitle to purchase up to 40% of the total shares granted to the Purchaser; and (3) if Jinkai

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achieves not less than after tax net income of US$ 100,000 as determined under US GAAP for the period from January 1, 2011 to September 30, 2011. The shares covered under such call option agreements amount to 88% of all issued and outstanding shares as of this time, among which Chen Jinle will be entitled to purchase 35% of all issued and outstanding shares of Matches, Inc.

As a result of these arrangements, Kehui maintains the ability to approve decisions made by Jinkai and is entitled to substantially all of the economic benefits of Jinkai. Therefore, Kehui is deemed to be the indirect sole interest-holder of Jinkai and consolidates Jinkai from the date of the agreements in accordance with ASC 810-10, "Consolidation." Jinkai's controlling shareholder also substantially owned more than 50% of Golden at November 20, 2010. Golden and Jinkai were considered under common control at the date of Reorganization. Therefore the Reorganization was accounted for as a transaction between entities under common control in a manner similar to pooling of interests.

Details of the Company and its subsidiaries as of September 30, 2011 were as follows:

Note 2 - Summary of Significant Accounting Policies

Changes of reporting entity and basis of presentation

As a result of the Share Exchange on December 22, 2010, the former Golden shareholders own a majority of the common stock of the Company. The transaction was regarded as a reverse merger whereby Golden was considered to be the accounting acquirer as its shareholders retained control of the Company after the Share Exchange, although the Company is the legal parent company. The share exchange was treated as a recapitalization of the Company. As such, Golden (and its historical financial statements) is the continuing entity for financial reporting purposes. Pursuant to the terms of the Share Exchange, control of the Company was delivered with no assets and no liabilities at time of closing. The financial statements have been prepared as if Golden had always been the reporting company and then had reorganized its capital stock on December 22, 2010.

The accompanying consolidated financial statements have been presented in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP").

In addition, the consolidated financial statements of the Company have been prepared on a going-concern basis which assumes that the Company will be able to realize assets and discharge liabilities in the normal course of business for the foreseeable future.

As of September 30, 2011 and December 31, 2010, the Company had negative working capital of $3,393,926 and $6,143,493, which raises substantial doubt about the Company's ability to continue as a going concern.  The ability of the Company to meet its commitments as they become payable is dependent on the ability of the Company to obtain necessary financing or achieve a consistently profitable level of operations.  The management plans to raise

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necessary working capital by obtaining new loans from banks, and the owners of the Company would provide any capital gap. There are no assurances that the Company will be successful in achieving these goals.

These financial statements do not give effect to adjustments to the amounts and classifications to assets and liabilities that would be necessary should the Company be unable to continue as a going concern.

Principles of consolidation

The accompanying consolidated balance sheets as of September 30, 2011 and December 31, 2010 and the related consolidated statements of income and comprehensive income for the three month and nine month period and cash flows for the nine month period ended September 30, 2011 and 2010 include those of the Company and its subsidiaries. All transactions and balances between the Company and its direct or indirect owned subsidiaries have been eliminated upon consolidation.

Non-controlling interest represents the ownership interests in the subsidiary that are held by owners other than the parent. In December 2007, the Financial Account Standards Board ("FASB") issued "Non-controlling Interests in Consolidated Financial Statements, an amendment of ARB No. 51, ASC Topic 810-10. ASC 810-10 requires that the non-controlling interest is reported in the consolidated statement of financial position within equity, separately from the parent's equity and that net income or loss and comprehensive income or loss are attributed to the parent and the non-controlling interest.  If losses attributable to the parent and the non-controlling interest in a subsidiary exceed their interests in the subsidiary's equity, the excess, and any further losses attributable to the parent and the non-controlling interest, is attributed to those interests.

Interim Financial Statements

The accompanying unaudited consolidated financial statements have been prepared in accordance with US GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Certain information and disclosures that are normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted pursuant to these rules and regulations.  These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2010 (the "2010 Form 10-K"), previously filed with the Securities and Exchange Commission.

In the opinion of management, all adjustments (consisting solely of normal recurring accruals) considered necessary for a fair presentation of the Company's results for the interim periods have been included.  The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the period.  Actual results could differ from those estimates.  The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.  Subsequent events were evaluated through the issuance date of the consolidated financial statements.

Use of estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include allowance for doubtful accounts, the useful lives of fixed assets, amortization of land use right and the assessment of impairment of long-lived assets. The current economic environment has increased the degree of uncertainty inherent in those estimates and assumptions.

Accounts receivable

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Accounts receivable mainly represent amounts earned and are collectible from customers.  Accounts receivable are stated at the amount the Company expects to collect.  The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make the required payments and uses the specific identification method to record such allowances.  Management of the Company considers the following factors when determining the collectability of accounts receivable:  a customer's credit-worthiness, past collection history, and changes in a customer's payment terms. Allowance for doubtful accounts is made based on any specifically identified accounts receivable that may become uncollectible.

Impairment of long-lived assets

 In accordance with Impairment or Disposal of Long-Lived Assets Subsections of FASB ASC Subtopic 360-10, Property, Plant, and Equipment - Overall, long-lived assets, such as property, plant and equipment, and purchased intangible asset subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, the Company first compare undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. No impairment of long-lived assets was recognized for the three and nine months ended September 30, 2011 and 2010.

Revenue recognition

Revenue from product sales is recognized when title has been transferred, which is generally at the time of customer's receipt of product, the risks and rewards of ownership have been transferred to the customer, the price is fixed and determinable, and the collection of the related receivable is probable. The Company reports revenue net of value added taxes if applicable.

Recently issued accounting pronouncements

In May 2011, the FASB issued ASU No. 2011-04, "Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs," which is not expected to have a material impact on the consolidated financial statements upon adoption.

In June 2011, the FASB issued ASU No. 2011-05, "Presentation of Comprehensive Income." Under the amendments in this ASU, an entity has two options for presenting its total comprehensive income: to present total comprehensive income and its components along with the components of net income in a single continuous statement, or in two separate but consecutive statements. The amendments in this ASU are required to be applied retrospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. The Company intends to conform to the new presentation required in this ASU beginning with its Form 10-Q for the three months ended March 31, 2012.  This pronouncement is not expected to have a material impact on the consolidated financial statements upon adoption.

NOTE 3 -Restricted cash

The Company is required to make a restricted security deposit between 30% and 100% of the face amount of the notes accepted by the bank for the Company until the notes are settled. Cash restricted for this purpose amounted to $8,170,456 and $8,798,401, as of September 30, 2011 and December 31, 2010, respectively. (See Note 12)

NOTE 4 - Notes receivable

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Notes receivable of $3,420,913 as of September 30, 2011 and $2,266,870 as of December 31, 2010 represents bank acceptance notes the Company received from customers for sales of products. The notes have maturity durations of 6 months, and are accepted by banks.

NOTE 5 - Trade accounts receivable

Trade accounts receivable at September 30, 2011 and December 31, 2010 consisted of the following:

The interest expenses for these bank loans were $245,046 and $367,451 for the three months ended September 30, 2011 and 2010, respectively. The interest expenses for these bank loans were $705,806 and $974,258 for the nine months ended September 30, 2011 and 2010, respectively. The weighted average interest rates for these bank loans were 7.23% and 6.03% at September 30, 2011 and December 31, 2010, respectively. The loans' terms are between one and twelve months. The collateralized net book value of the lands for these bank loans was $4,053,541 and $3,988,899 at September 30, 2011 and December 31, 2010, respectively. The collateralized net book value of the equipment for these bank loans was $2,456,729 and $5,875,942 at September 30, 2011 and December 31, 2010, respectively. The collateralized net book value of the buildings for these bank loans was $5,373,337 and $3,646,585 at September 30, 2011 and December 31, 2010, respectively. The company subsequently repaid matured bank loans through the date the financial statements have been issued.

NOTE 11 - Long-term loan

In January 2011, the Company borrowed $706,051, from Jiangsu Rural Commercial Bank, with a fixed interest rate of 6.71%, 110% over the benchmark interest rate of the People's Bank of China. Pursuant to the loan agreement, the Company shall repay in average capital method each quarter during the period from January 18, 2011 to January 17, 2014. As of September 30, 2011, $173,389 was due within one year.

NOTE 12 - Notes payable

The Company issued certain notes payable to suppliers which are collateralized by the banks. These notes payable were issued as replacements of the accounts payable. The terms of these draft notes payable vary depending on the negotiations with the suppliers. Typical terms are six months. On the maturity dates, the note holders present these notes to the banks to draw cash based on the note amounts. The Company is subject to a bank fee of 0.05% on notes payable amounts.

The Company is required to keep a restricted security deposit between 30% and 100% of the face amount of the notes in the banks until the notes are settled. Cash restricted for this purpose amounted to $8,170,456 and $8,798,401 at September 30, 2011 and December 31, 2010.

NOTE 13 - Other payables

Other payables as of September 30, 2011 and December 31, 2010 consisted of the following:

All share and per share data have been retroactively adjusted to reflect the recapitalization of the Company after the share exchange agreement.

(b) In the share exchange on December 22, 2010, the Company agreed to issue 170,948,684 shares of common stock. Due to a shortage of currently authorized shares, 70,000,000 shares were issued at the closing of this transaction. Therefore, the Company has 78,525,000 shares of common stock issued and outstanding as of September 30, 2011, and the remaining shares will be issued in the future. The following table presents a reconciliation of pro forma basic and diluted earnings per share which give the effect that the remaining shares to be issued as if the remaining shares had issued on the closing of this transaction. All share and per share data have been retroactively adjusted to reflect the recapitalization of the Company after the share exchange agreement.

NOTE 22 - Subsequent events

Management has considered all events occurring through the date the financial statements have been issued, and has determined that there are no such events that are material to the financial statements, or all such material events have been fully disclosed.

Item 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

Disclaimer Regarding Forward-Looking Statements

This Current Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. These include statements about our expectations, beliefs, intentions or strategies for the future, which we indicate by words or phrases such as "anticipate," "expect," "intend," "plan," "will," "we believe,""believes," "management believes," and similar language. Except for the historical information contained herein, the matters discussed in this "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in this report are forward-looking statements that involve risks and uncertainties. The factors listed in the section captioned "Risk Factors," as well as any cautionary language in this report; provide examples of risks, uncertainties and events that may cause our actual results to differ materially from those projected. Except as may be required by law, we undertake no obligation to update any forward-looking statement to reflect events after the date of this Form 10-Q.

Overview

We are a premium chemical fiber manufacturer of polyester fibers with operations based in Suzhou, Jiangsu Province. We commenced operations in 2001. The products we manufacture are of two major chemical fiber categories, Pre-Oriented Yarn ("POY") and Draw Texturing Yarn ("DTY"). Our products are widely used to produce a variety of textile products for both home use and industrial use.  

We primarily sell our products to local distributors and textile manufacturers in the People's Republic of China (the "PRC"). Our products are sold under the "Jinkai" brand, which is widely recognized among our customers as a premium brand. We place strong emphasis on product quality and use our modern production facility and industry expertise to produce high quality polyester fibers.  

Sales

We primarily focus on maintaining current business relationships as well as developing new ones. We have established four sales offices in Jiangsu Taicang, Jiangsu Jiangyin, Jiangsu Wujiang and Zhejiang Haining to

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provide our customers more convenient sales points and easier access to customer support. We typically charge a slight premium on our products as compared with other nearby chemical fiber manufacturers. Our order sizes vary from 1 to 1,000 metric tons and the time for completion of orders varies from 10 days to 5 months. Typically, we require new customers to make full payment before shipment of our products. For long-time customers with good payment history, we will require them to pay 30% prior to shipment, with the remainder due 30 days after delivery.

Our business is affected by many factors, including:

(a) Raw Material Prices

Our main raw material is PET (Polyethylene Terephthalate), which is derived from crude oil; hence the fluctuation of crude oil price is an important factor affecting the PET prices, and market supply and demand relations will also affect PET prices.

(b) Our Production Capacity

Our production capacity is a function of our factory space, equipment, and staff's experience and technical level. We currently produce at full production capacity and our ability to expand our production will have a significant impact in our ability to increase sales. We added a new POY production line at the end of 2010, and a new facility put into service at the end of May, 2011. Currently, we have outsourced a portion of our DTY processing production to satisfy our growing sales demand.

(c) Competition

The chemical fiber market in China is large and fragmented. There are many other companies that make similar products, and thus price levels are set by competition in the marketplace. We believe that we are considered better than average in quality and service, and accordingly have been receiving a moderate price premium. We are located in a textile-intensive region and have a large number of customers within a 200KM radius of our facility. While the China chemical fiber market is vast and national price levels affect local levels, most of our competition takes place from regional companies, as customers desire quick delivery. In addition, since chemical fiber is a major cost component for fabric makers, they often prefer chemical fiber suppliers that are closer in proximity to foster closer business ties. Likewise, we place great emphasis on our customer relationships, because any of our customers could find other sources if our price, quality, or service became noncompetitive.

Cost of Sales

Our cost of sales consists primarily of raw material, direct labor and production overhead costs.

Our key raw material is PET and we primarily procure PET from two nearby raw material suppliers, both located within 200 kilometers of our production facility.  

Direct labor includes salaries, wages and staff related costs of plant operators and those who are directly involved in the production of our products. Overhead consists mainly of depreciation charges on machinery, utilities (water and electricity) and other factory related costs.

In addition to the volume of production, our costs of sales are affected by, (i) factors affecting the costs of raw materials, namely, the market demand and supply conditions for crude oil; (ii) factors affecting labor costs, namely demand and supply of labor, general wage levels, and government regulations; as well as (iii) factors affecting general manufacturing overhead, namely, our depreciation expense resulting from capital expenditures and general prices of utilities charges.

Selling, General and Administrative Expenses

Our selling and distribution costs consist of transportation fees,  payroll-related costs, depreciation and office expenses. Our general and administrative costs consist of payroll-related costs, depreciation, office expenses, bank service charges and legal and professional fees.

Other Income/ (Expense)

Our other income/ (expense) consist of government grants, interest income, interest expense and other income. Under governmental policies and regulations encouraging the development of domestic enterprises, we sometimes receive government grants including income-tax rebates, technical renovation subsidies, and incentive subsidies.

Interest Expense

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Our interest expense mainly consists of interest expense based on our bank borrowings.

Income Tax Expense

We pay income tax in accordance with our local divisional taxing authority.

Seasonality

As is typical in the PRC, we have lower sales in the first quarter resulting from the two-week long Chinese Spring Festival, which usually occurs in January or February. Our customers typically halt production during this time. We give our factory workers time off for this holiday and temporarily halt production.

Results of Operations for the Three Months Ended September 30, 2011 and for the Nine Months Ended September 30, 2011, as compared to the same periods Ended September 30, of 2010 

The following table sets forth a summary of certain key components of our results of operations for periods indicated in dollars and as a percentage of sales.

Sales

Comparing the three months ended September 30, 2011 with the same period of 2010, our sales has increased by 4.2%, also comparing the nine months ended September 30, 2011 with the same period of 2010, our sales has increased by 36.1%. The increase in our sales is mainly due to the increase in our product prices and increase in our sales volume, as results of the booming growth of chemical fiber market price and market demands during 2011. The unit price of the Company's key product, Polyester DTY, increased, as result of an increase in the price of the key raw material PET. Our selling price increased in 2011. For the three months ended September 30, 2011 and 2010, our average selling price increased by 14.3%. For the nine months ended September 30, 2011 and 2010, our average selling price increased by 10.6%. The high product price made our sales volume decrease by 9.1% for the three months ended September 30, 2011 compared to  2010. For the nine months ended September 30, 2011 and 2010, our sales volume increased by 22.9%.

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Cost of Sales

Comparing the three months ended September 30, 2011 with the three months ended September 30, 2010, our cost of sales increased by 4.5% from $ 19,679,878 to $ 20,557,638, also comparing the nine months ended September 30, 2011 with the same period of 2010, our cost of sales has increased by 40.1% from $46,751,772 to $ 65,478,402. Our cost of sales consists primarily of our main raw material PET (Polyethylene Terephthalate), a by-product of crude oil. There are two major reasons attributable to the increase of cost of sales in 2011: The higher increase of unit price of the main raw materials in 2011 than 2010, and the increase of relevant costs including labor and transportation. Our sales volume increased in 2011. Raw materials comprised 80% above of cost of sales for 2011. During this period, the price of crude oil increased, resulting in the increase in the price of PET and subsequently increasing our cost of sales.

Gross Margin

Comparing the three months ended September 30, 2011 with the three months ended September 30, 2010, our gross margin showed a slight increase by 2.6% from $3,444,198 to $ 3,534,490. The gross margin rate kept at 15%. Comparing the nine months ended September 30, 2011 with the nine months ended September 30, 2010, our gross margin increased by 10.0% from $7,099,408 to $ 7,812,457, but the gross margin rate decreased from 13% to 11% for the reason that in the second quarter we promoted the finished goods in a relative lower price in order to expand market share.

General and Administrative Expenses and Selling Expenses

General and administrative expenses include payroll-related costs, travel expenses, depreciation, bank service charges, and legal and professional fees. Comparing the three months ended September 30, 2011 with the three months ended September 30, 2010, our general and administrative expenses increased by 1.8% from $581,893 to $592,539, also comparing the nine months ended September 30, 2011 with the same period of 30, 2010, our general and administrative expenses increased by 25.3% from $1,551,129 to $1,943,710.

This increase was primarily due to the following expenses increasing in 2011; Travel Expenses, which was mainly due to frequent travelling for financing activities and market development activities; Bank service charges, which was mainly due to the increase of bank acceptance charges as the increasing raw materials procurement; Legal and professional fees which was mainly paid to lawyers, auditors and financial advisors after the Company went public; Payroll related costs which was mainly due to the increase of managements payroll as their better performance.

Selling expenses include transportation fee and payroll-related costs. For the three months ended September 30, 2011 and for the nine months ended September 30, 2011, the selling expenses decreased by 20.4% .and increased by 17.2% respectively. The fluctuation of selling expenses was primarily due to the transportation fees. The transportation fees decreased for three month ended September 30, 2011, it was primarily because we sold to more vicinity customers during the third quarter of 2011. The transportation price grew higher in 2011 as a result of transportation fee increased for nine month ended September 30, 2011.

Other Income/(Expense)

The following table sets forth a breakdown of the principal other expenses of the Company: