10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

COMMISSION FILE NUMBER: 001-34591

CLEANTECH SOLUTIONS INTERNATIONAL, INC.

 (Name of Registrant as specified in its charter)

NEVADA	90-0648920
(State or other jurisdiction of	(I.R.S. Employer
incorporation of organization)	Identification No.)

No. 9 Yanyu Middle Road

Qianzhou Township, Huishan District, Wuxi City

Jiangsu Province, China 150090

 (Address of principal executive office)

(86) 51083397559

 (Registrant’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer (Do not check if smaller reporting company)	o	Smaller reporting company	x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.  2,667,017 shares of common stock are issued and outstanding as of November 13, 2012.

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

FORM 10-Q

September 30, 2012

TABLE OF CONTENTS

		Page No.
PART I. - FINANCIAL INFORMATION
Item 1.	Financial Statements	2
	Consolidated Balance Sheets as of September 30, 2012 (Unaudited) and December 31, 2011 (Audited)	2
	Consolidated Statements of Income and Comprehensive Income for the Three and Nine Months Ended September 30, 2012 and 2011 (unaudited)	3
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011 (unaudited)	4
	Notes to Unaudited Consolidated Financial Statements.	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	22
Item 3	Quantitative and Qualitative Disclosures About Market Risk.	39
Item 4	Controls and Procedures.	40
PART II - OTHER INFORMATION
Item 2.	Unregistered Sales of Equity Securities and Use Of Proceeds.	41
Item 6.	Exhibits.	41

FORWARD LOOKING STATEMENTS

This report contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this report. Additionally, statements concerning future matters are forward-looking statements.

Although forward-looking statements in this report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the headings “Risks Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q and information contained in other reports that we file with the SEC. You are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report.

We file reports with the SEC. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us. You can also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report, except as required by law. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this quarterly report, which are designed to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

1

PART 1 - FINANCIAL INFORMATION

Item 1.  Financial Statements.

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	September 30,		December 31,
	2012		2011
	(Unaudited)		(Audited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	955,405	$	1,152,607
Restricted cash		-		314,233
Notes receivable		165,772		53,420
Accounts receivable, net of allowance for doubtful accounts		10,533,490		7,087,958
Inventories, net of reserve for obsolete inventory		6,220,634		4,276,090
Advances to suppliers		847,216		219,347
Prepaid VAT on purchases		675,448		1,512,213
Prepaid expenses and other		179,826		110,670
Total Current Assets		19,577,791		14,726,538
PROPERTY AND EQUIPMENT - net		65,965,819		64,042,079
OTHER ASSETS:
Land use rights, net		3,769,058		3,820,536
Total Assets	$	89,312,668	$	82,589,153
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank loans	$	2,683,928	$	2,356,749
Bank acceptance notes payable		-		314,233
Accounts payable		6,329,876		4,997,109
Accrued expenses		725,423		771,597
Capital lease obligations- current portion		249,597		244,747
Advances from customers		1,840,352		1,166,942
Income taxes payable		884,003		592,202
Total Current Liabilities		12,713,179		10,443,579
OTHER LIABILITIES:
Capital lease obligations - net of current portion		174,123		381,235
Total Liabilities		12,887,302		10,824,814
STOCKHOLDERS' EQUITY:
Preferred stock $0.001 par value (30,000,000 shares authorized, all of which were designated as series A convertible preferred, 0 and 10,995,807 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively)		-		10,996
Common stock ($0.001 par value; 50,000,000 shares authorized; 2,667,017 and 2,101,849 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively)		2,667		2,102
Additional paid-in capital		28,089,776		27,489,600
Retained earnings		38,128,307		34,618,341
Statutory reserve		2,283,852		2,064,551
Accumulated other comprehensive gain - foreign currency translation adjustment		7,920,764		7,578,749
Total Stockholders' Equity		76,425,366		71,764,339
Total Liabilities and Stockholders' Equity	$	89,312,668	$	82,589,153

See notes to unaudited consolidated financial statements

2

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

`	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
REVENUES	$	17,343,723		$	11,676,696		$	39,585,815		$	41,851,257
COST OF REVENUES		13,024,265			9,046,015			30,689,436			31,617,025
GROSS PROFIT		4,319,458			2,630,681			8,896,379			10,234,232
OPERATING EXPENSES:
Depreciation		373,896			84,531			1,122,432			505,326
Selling, general and administrative		739,386			913,198			2,157,053			2,773,694
Total Operating Expenses		1,113,282			997,729			3,279,485			3,279,020
INCOME FROM OPERATIONS		3,206,176			1,632,952			5,616,894			6,955,212
OTHER INCOME (EXPENSE):
Interest income		5,069			110			10,919			940
Interest expense		(84,289	)		(60,452	)		(244,685	)		(122,980	)
Foreign currency gain (loss)		1,251			(1,476	)		6,642			(4,817	)
Warrants modification expense		-			-			(235,133	)		-
Other income		51,523			14,266			64,803			91,379
Total Other Income (Expense)		(26,446	)		(47,552	)		(397,454	)		(35,478	)
INCOME BEFORE INCOME TAXES		3,179,730			1,585,400			5,219,440			6,919,734
INCOME TAXES		824,628			450,410			1,490,173			1,949,625
NET INCOME	$	2,355,102		$	1,134,990		$	3,729,267		$	4,970,109
COMPREHENSIVE INCOME:
NET INCOME	$	2,355,102		$	1,134,990		$	3,729,267		$	4,970,109
OTHER COMPREHENSIVE INCOME:
Unrealized foreign currency translation (loss) gain		(169,625	)		655,213			342,015			2,145,996
COMPREHENSIVE INCOME	$	2,185,477		$	1,790,203		$	4,071,282		$	7,116,105
NET INCOME PER COMMON SHARE:
Basic	$	0.88		$	0.57		$	1.51		$	2.57
Diluted	$	0.88		$	0.46		$	1.42		$	1.98
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic		2,667,017			1,997,674			2,469,818			1,937,028
Diluted		2,667,017			2,462,159			2,617,798			2,512,637

See notes to unaudited consolidated financial statements

3

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Nine Months Ended
	September 30,
	2012			2011
	(Unaudited)			(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	3,729,267		$	4,970,109
Adjustments to reconcile net income from operations to net cash provided by operating activities:
Depreciation		4,719,769			3,651,168
Amortization of land use rights		70,068			68,145
(Decrease) increase in allowance for doubtful accounts		(46,616	)		389,120
Warrants modification expense		235,133			-
Stock-based compensation expense		129,030			282,259
Changes in assets and liabilities:
Notes receivable		(112,209	)		(96,409	)
Accounts receivable		(3,368,092	)		(70,783	)
Inventories		(1,925,810	)		(1,935,112	)
Prepaid value-added taxes on purchases		844,969			814,967
Prepaid and other current assets		(41,315	)		(48,340	)
Advances to suppliers		(627,455	)		(495,317	)
Accounts payable		1,310,123			(2,741,480	)
Accrued expenses		(49,578	)		58,098
VAT and service taxes payable		-			(82,941	)
Income taxes payable		289,230			(712,490	)
Advances from customers		668,446			1,839,882
NET CASH PROVIDED BY OPERATING ACTIVITIES		5,824,960			5,890,876
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for deposit on equipment		-			(768,520	)
Purchase of property and equipment		(6,334,776	)		(6,413,874	)
NET CASH USED IN INVESTING ACTIVITIES		(6,334,776	)		(7,182,394	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease		(205,509	)		(143,545	)
Proceeds from bank loans		2,686,706			2,612,969
Repayment of bank loans		(2,370,623	)		(2,151,857	)
Decrease (increase) in restricted cash		316,083			(461,112	)
(Decrease) increase in bank acceptance notes payable		(316,083	)		461,112
Proceeds from sale of common stock		-			125,000
Proceeds from exercise of warrants		198,142			400,000
NET CASH PROVIDED BY FINANCING ACTIVITIES		308,716			842,567
EFFECT OF EXCHANGE RATE ON CASH AND CASH EQUIVALENTS		3,898			20,048
NET DECREASE IN CASH AND CASH EQUIVALENTS		(197,202	)		(428,903	)
CASH AND CASH EQUIVALENTS - beginning of period		1,152,607			947,177
CASH AND CASH EQUIVALENTS - end of period	$	955,405		$	518,274
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest	$	244,685		$	122,980
Income taxes	$	1,200,944		$	2,662,115
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Security deposit and leased property in exchange for capital lease obligations	$	-		$	795,022
Series A preferred converted to common shares	$	13,198		$	3,536
Common stock issued for future service	$	27,440		$	63,576

See notes to unaudited consolidated financial statements

4

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

Cleantech Solutions International, Inc. (the “Company”) was incorporated in Delaware on June 24, 1987 under the name of Malex, Inc.  On December 18, 2007, the Company’s corporate name was changed to China Wind Systems, Inc., and on June 13, 2011, the Company’s corporate name was changed to Cleantech Solutions International, Inc.   On August 7, 2012, the Company was converted into a Nevada corporation. Through its affiliated companies and subsidiaries, the Company manufactures and sells forged products and fabricated products to a range of clean technology customers including high precision forged rolled rings and related products for the wind power industry and other industries and equipment to the solar industry.  The Company also makes textile dyeing and finishing machines. The Company is the sole owner of Fulland Limited (“Fulland”), a Cayman Island limited liability company, which was organized on May 9, 2007.  Fulland owns 100% of the capital stock of Green Power Environment Technology (Shanghai) Co., Ltd. (“Green Power”) and Wuxi Fulland Wind Energy Equipment Co., Ltd. (“Fulland Wind Energy”), which are wholly foreign-owned enterprises (“WFOE”) organized under the laws of the People’s Republic of China (“PRC” or “China”).  Green Power is a party to a series of contractual arrangements, as fully described below, dated October 12, 2007 with Wuxi Huayang Electrical Power Equipment Co., Ltd. (“Electrical”) and Wuxi Huayang Dyeing Machinery Co., Ltd. (“Dyeing”), both of which are limited liability companies organized under the laws of, and based in, the PRC.   Electrical and Dyeing are sometimes collectively referred to as the “Huayang Companies.”

Fulland was organized by the owners of the Huayang Companies as a special purpose vehicle for purposes of raising capital, in accordance with requirements of the PRC State Administration of Foreign Exchange (“SAFE”). On May 31, 2007, SAFE issued an official notice known as Hui Zong Fa [2007] No. 106 (“Circular 106”), which requires the owners of any Chinese company to obtain SAFE’s approval before establishing any offshore holding company structure for foreign financing as well as subsequent acquisition matters in China. Accordingly, the owners of the Huayang Companies, Mr. Jianhua Wu and Ms. Lihua Tang, submitted their application to SAFE in early September 2007. On October 11, 2007, SAFE approved their application, permitting these Chinese citizens to establish Fulland as a special purpose vehicle for any foreign ownership and capital raising activities by the Huayang Companies.

Electrical was formed on May 21, 2004, and Fulland Wind Energy was formed on August 27, 2008.  Beginning in April 2007, Electrical began to produce large-scaled forged rolled rings that are up to three meters in diameter for the wind-power and other industries.  In 2009, the Company began to produce and sell forged products through Fulland Wind Energy. Through Fulland Wind Energy, the Company manufactures and machines all forged products, including wind products such as shafts, rolled rings, gear rims, gearboxes, bearings and other components and finished products and assemblies for the wind power industry, and solar products, including large-scale equipment used in the manufacturing process for the solar industry. The Company refers to this segment of its business as the forged rolled rings and related components division.

Dyeing, which was formed on August 17, 1995, produces and sells a variety of high and low temperature dyeing and finishing machinery for the textile industry. The Company refers to this segment as the dyeing division.

Basis of presentation; management’s responsibility for preparation of financial statements

Management acknowledges its responsibility for the preparation of the accompanying interim consolidated financial statements which reflect all adjustments, consisting of normal recurring adjustments, considered necessary in its opinion for a fair statement of its consolidated financial position and the results of its operations for the interim period presented.

These consolidated financial statements should be read in conjunction with the summary of significant accounting policies and notes to consolidated financial statements included in the Company’s Form 10-K annual report for the year ended December 31, 2011.

5

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Basis of presentation; management’s responsibility for preparation of financial statements (continued)

The accompanying unaudited consolidated financial statements for Cleantech Solutions International, Inc., its subsidiaries and variable interest entities, have been prepared in accordance with accounting principles generally accepted in the United States of America (the “U.S.”) for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole.

The Company’s consolidated financial statements include the financial statements of its wholly-owned subsidiaries, Fulland, Green Power and Fulland Wind Energy, as well as the financial statements of Huayang Companies, Dyeing and Electric.  All significant intercompany accounts and transactions have been eliminated in consolidation.

Pursuant to Accounting Standards Codification (“ASC”) Topic 810, the Huayang Companies are considered variable interest entities (“VIE”), and the Company is the primary beneficiary.  The Company’s relationships with the Huayang Companies and their shareholders are governed by a series of contractual arrangements between Green Power, the Company’s wholly foreign-owned enterprise in the PRC, and each of the Huayang Companies, which are the operating companies of the Company in the PRC. Under PRC laws, each of Green Power, Dyeing and Electrical is an independent legal entity and none of them is exposed to liabilities incurred by the other parties. The contractual arrangements constitute valid and binding obligations of the parties of such agreements. Each of the contractual arrangements and the rights and obligations of the parties thereto are enforceable and valid in accordance with the laws of the PRC. On October 12, 2007, the Company entered into the following contractual arrangements with each of Dyeing and Electrical:

Consulting Services Agreement. Pursuant to the exclusive consulting services agreements between Green Power and the Huayang Companies, Green Power has the exclusive right to provide to the Huayang Companies general business operation services, including advice and strategic planning, as well as consulting services related to the technological research and development of dyeing and finishing machines, electrical equipment and related products (the “ Services ”). Under this agreement, Green Power owns the intellectual property rights developed or discovered through research and development, in the course of providing the Services, or derived from the provision of the Services. The Huayang Companies shall pay a quarterly consulting service fees in Renminbi (“RMB”) to Fulland that is equal to all of the Huayang Companies’ profits for such quarter.

Operating Agreement. Pursuant to the operating agreement among Green Power, the Huayang Companies and all shareholders of the Huayang Companies, Green Power provides guidance and instructions on the Huayang Companies’ daily operations, financial management and employment issues. The Huayang Companies shareholders must designate the candidates recommended by Green Power as their representatives on the boards of directors of each of the Huayang Companies. Green Power has the right to appoint senior executives of the Huayang Companies. In addition, Green Power agrees to guarantee the Huayang Companies’ performance under any agreements or arrangements relating to the Huayang Companies’ business arrangements with any third party. The Huayang Companies, in return, agree to pledge their accounts receivable and all of their assets to Green Power. Moreover, each of the Huayang Companies agrees that, without the prior consent of Green Power, it will not engage in any transactions that could materially affect its assets, liabilities, rights or operations, including, without limitation, incurrence or assumption of any indebtedness, sale or purchase of any assets or rights, incurrence of any encumbrance on any of their assets or intellectual property rights in favor of a third party or transfer of any agreements relating to their business operation to any third party. The term of this agreement, as amended on November 1, 2008, is 20 years from October 12, 2007 and may be extended only upon Green Power’s written confirmation prior to the expiration of the this agreement, with the extended term to be mutually agreed upon by the parties.

6

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Basis of presentation; management’s responsibility for preparation of financial statements (continued)

Equity Pledge Agreement. Under the equity pledge agreement between the Huayang Companies’ shareholders and Green Power, the Huayang Companies’ shareholders pledged all of their equity interests in the Huayang Companies to Green Power to guarantee the Huayang Companies’ performance of their respective obligations under the consulting services agreement. If the Huayang Companies or the Huayang Companies’ shareholders breach their respective contractual obligations, Green Power, as pledgee, will be entitled to certain rights, including the right to sell the pledged equity interests. The Huayang Companies’ shareholders also agreed that, upon occurrence of any event of default, Green Power shall be granted an exclusive, irrevocable power of attorney to take actions in the place and stead of the Huayang Companies’ shareholders to carry out the security provisions of the equity pledge agreement and take any action and execute any instrument that Green Power may deem necessary or advisable to accomplish the purposes of the equity pledge agreement. The Huayang Companies’ shareholders agreed not to dispose of the pledged equity interests or take any actions that would prejudice Green Power’s interest. The equity pledge agreement will expire two years after the Huayang Companies’ obligations under the consulting services agreements have been fulfilled.

Option Agreement.Under the option agreement between the Huayang Companies’ shareholders and Green Power, the Huayang Companies’ shareholders irrevocably granted Green Power or its designated person an exclusive option to purchase, to the extent permitted under PRC law, all or part of the equity interests in the Huayang Companies for the cost of the initial contributions to the registered capital or the minimum amount of consideration permitted by applicable PRC law. Green Power or its designated person has sole discretion to decide when to exercise the option, whether in part or in full. The term of this agreement, as amended on November 1, 2008, is 20 years from October 12, 2007 and may be extended prior to its expiration by written agreement of the parties.

Pursuant to ASC Topic 810 and related subtopics related to the consolidation of variable interest entities, the accounts of the Huayang Companies are consolidated in the accompanying financial statements.  As VIEs, the Huayang Companies’ sales are included in the Company’s total sales, its income from operations is consolidated with the Company’s, and the Company’s net income includes all of the Huayang Companies net income. The Company does not have any non-controlling interest and, accordingly, did not subtract any net income in calculating the net income of the VIEs that is attributable to the Company. Because of the contractual arrangements, the Company has a pecuniary interest in the Huayang Companies that requires consolidation of the Company’s and the Huayang Companies’ financial statements.

Use of estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures at the date of the financial statements and during the reporting period. Actual results could materially differ from these estimates. Significant estimates in the nine months ended September 30, 2012 and 2011 include the allowance for doubtful accounts, the allowance for obsolete inventory, the useful life of property and equipment and intangible assets, assumptions used in assessing impairment of long-term assets and valuation of deferred tax assets, accruals for taxes due, and the value of stock-based compensation and warrants modification expense.

Cash and cash equivalents

For purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments purchased with a maturity of three months or less and money market accounts to be cash equivalents. The Company maintains cash and cash equivalents with various financial institutions mainly in the PRC and the U.S.  Balances in banks in the PRC are uninsured.

7

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Fair value of financial instruments

The Company adopted the guidance of ASC Topic 820 for fair value measurements which clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.

Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.

The carrying amounts reported in the balance sheets for cash and cash equivalents, restricted cash, notes receivable, accounts receivable, inventories, advances to suppliers, prepaid VAT on purchases, prepaid expenses and other, short-term bank loans, bank acceptance notes payable, accounts payable, accrued expenses, capital lease obligations, advances from customers, VAT and service taxes payable and income taxes payable approximate their fair market value based on the short-term maturity of these instruments. The Company did not identify any assets or liabilities that are required to be presented on the consolidated balance sheets at fair value in accordance with the accounting guidance.

ASC Topic 825-10 “Financial Instruments” allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding instruments.

Concentrations of credit risk

The Company’s operations are carried out in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC’s economy. The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable. Substantially all of the Company’s cash is maintained with state-owned banks within the PRC, and none of these deposits are covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts. A significant portion of the Company’s sales are credit sales which are primarily to customers whose ability to pay is dependent upon the industry economics prevailing in these areas; however, concentrations of credit risk with respect to trade accounts receivables is limited due to generally short payment terms.  The Company also performs ongoing credit evaluations of its customers to help further reduce credit risk.

8

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Concentrations of credit risk (continued)

At September 30, 2012 and December 31, 2011, the Company’s cash balances by geographic area were as follows:

	September 30, 2012				December 31, 2011
Country:
United States	$	138,786	14.5	%	$	288,090	25.0	%
China		816,619	85.5	%		864,517	75.0	%
Total cash and cash equivalents	$	955,405	100.0	%	$	1,152,607	100.0	%

Restricted cash

Restricted cash consists of cash deposits held by a bank to secure bank acceptance notes payable to the bank.

Notes receivable

Notes receivable represents trade accounts receivable due from various customers where the customers’ bank has guaranteed the payment of the receivable. This amount is non-interest bearing and is normally paid within six months. Historically, the Company has experienced no losses on notes receivable. The Company’s notes receivable totaled $165,772 and $53,420 at September 30, 2012 and December 31, 2011, respectively.

Accounts receivable

Accounts receivable are presented net of an allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance, a customer’s historical payment history, its current credit-worthiness and current economic trends. Accounts are written off after exhaustive efforts at collection. At September 30, 2012 and December 31, 2011, the Company has established, based on a review of its outstanding balances, an allowance for doubtful accounts in the amounts of $2,584,732 and $2,618,608, respectively.

Inventories

Inventories, consisting of raw materials, work in process and finished goods related to the Company’s products are stated at the lower of cost or market utilizing the weighted average method. An allowance is established when management determines that certain inventories may not be saleable. If inventory costs exceed expected market value due to obsolescence or quantities in excess of expected demand, the Company will record reserves for the difference between the cost and the market value. These reserves are recorded based on estimates. The Company recorded an inventory reserve of $173,393 and $172,557 at September 30, 2012 and December 31, 2011, respectively.

Advances to suppliers

Advances to suppliers represent the cash paid in advance for the purchase of raw material from suppliers. The advance payments are intended to ensure preferential pricing and delivery. The amounts advanced under such arrangements totaled $847,216 and $219,347 as of September 30, 2012 and December 31, 2011, respectively.

9

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Property and equipment

Property and equipment are carried at cost and are depreciated on a straight-line basis over the estimated useful lives of the assets. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized.  When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. The Company examines the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.

Included in property and equipment is construction-in-progress which consisted of factory improvements and machinery pending installation and includes the costs of construction, machinery and equipment, and any interest charges arising from borrowings used to finance these assets during the period of construction or installation of the assets. No provision for depreciation is made on construction-in-progress until such time as the relevant assets are completed and ready for their intended use. Property purchased from a related party is recorded at the cost to the related party and any payment to or on behalf of the related party in excess of the cost is reflected as a distribution to a related party.

Impairment of long-lived assets

In accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value. The Company did not record any impairment charges for the nine months ended September 30, 2012 and 2011.

Advances from customers

Advances from customers at September 30, 2012 and December 31, 2011 amounted to $1,840,352 and $1,166,942, respectively, and consist of prepayments from customers for merchandise that had not yet been shipped. The Company will recognize the deposits as revenue as customers take delivery of the goods in accordance with its revenue recognition policy.

Revenue recognition

Pursuant to the guidance of ASC Topic 605 and ASC Topic 360, the Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the purchase price is fixed or determinable and collectability is reasonably assured. The Company accounts for the product sale as a multiple element arrangement. Revenue from multiple element arrangements is allocated among the separate accounting units based on the residual method. Under the residual method, the revenue is allocated to undelivered elements based on fair value of such undelivered elements and the residual amounts of revenue allocated to delivered elements. The Company recognizes revenues from the sale of dyeing and finishing equipment, forged rolled rings and other components upon shipment and transfer of title. The other elements may include installation and, generally, a one-year warranty. Equipment installation revenue is valued based on estimated service person hours to complete installation and is recognized when the labor has been completed and the equipment has been accepted by the customer, which is generally within a couple days of the delivery of the equipment. Warranty revenue is valued based on estimated service person hours to complete a service and generally is recognized over the contract period.  For the nine months ended September 30, 2012 and 2011, amounts allocated to warranty revenues were not material. Based on historical experience, warranty service calls and any related labor costs have been minimal. All other product sales with customer specific acceptance provisions, including the forged rolled rings, are recognized upon customer acceptance and the delivery of the parts or service. Revenues related to spare part sales are recognized upon shipment or delivery based on the trade terms.

10

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Income taxes

The Company is governed by the Income Tax Law of the PRC and the U.S. Internal Revenue Code of 1986, as amended.  The Company accounts for income taxes using the liability method prescribed by ASC Topic 740, “Income Taxes.” Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date.

The Company applied the provisions of ASC 740-10-50, “Accounting for Uncertainty in Income Taxes,” which provides clarification related to the process associated with accounting for uncertain tax positions recognized in our financial statements. Audit periods remain open for review until the statute of limitations has passed. The completion of review or the expiration of the statute of limitations for a given audit period could result in an adjustment to the Company’s liability for income taxes. Any such adjustment could be material to the Company’s results of operations for any given quarterly or annual period based, in part, upon the results of operations for the given period. As of September 30, 2012 and December 31, 2011, the Company had no uncertain tax positions, and will continue to evaluate for uncertain positions in the future.

Stock-based compensation

Stock-based compensation is accounted for based on the requirements of the Share-Based Payment topic of ASC Topic 718 which requires recognition in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). The Financial Accounting Standards Board (“FASB”) ASC also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.

Pursuant to ASC Topic 505-50, for share-based payments to consultants and other third-parties, compensation expense is determined at the “measurement date.” The expense is recognized over the vesting period of the award. Until the measurement date is reached, the total amount of compensation expense remains uncertain. The Company records compensation expense based on the fair value of the award at the reporting date. The awards to consultants and other third-parties are then revalued, or the total compensation is recalculated, based on the then current fair value, at each subsequent reporting date.

Shipping costs

Shipping costs are included in selling expenses and totaled $803,951 and $933,465 for the nine months ended September 30, 2012 and 2011, respectively. Shipping costs totaled $311,275 and $262,747 for the three months ended September 30, 2012 and 2011, respectively.

Employee benefits

The Company’s operations and employees are all located in the PRC.  The Company makes mandatory contributions to the PRC government’s health, retirement benefit and unemployment funds in accordance with the relevant Chinese social security laws, equal to approximately 25% of salaries. The costs of these payments are charged to income in the same period as the related salary costs and are not material.

11

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Advertising

Advertising is expensed as incurred and is included in selling, general and administrative expenses on the accompanying consolidated statements of income and comprehensive income and was not material.

Research and development

Research and development costs are expensed as incurred. For the nine months ended September 30, 2012 and 2011, research and development costs were not material.

Foreign currency translation

The reporting currency of the Company is the U.S. dollar. The functional currency of the parent company is the U.S. dollar and the functional currency of the Company’s operating subsidiaries is the Chinese Renminbi (“RMB”). For the subsidiaries and affiliates, whose functional currencies are the RMB, results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period, and equity is translated at historical exchange rates. As a result, amounts relating to assets and liabilities reported on the statements of cash flows may not necessarily agree with the changes in the corresponding balances on the balance sheets.  Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income. The cumulative translation adjustment and effect of exchange rate changes on cash for the nine months ended September 30, 2012 and 2011 was $3,898 and $20,048, respectively. Transactions denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing on the transaction dates. Assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing at the balance sheet date with any transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

All of the Company’s revenue transactions are transacted in the functional currency of the operating subsidiaries and affiliates. Other than for the purchase of equipment from non-Chinese suppliers, the Company does not enter into any material transaction in foreign currencies. Transaction gains or losses have not had, and are not expected to have, a material effect on the results of operations of the Company.

Asset and liability accounts at September 30, 2012 and December 31, 2011 were translated at 6.3340 RMB to $1.00 and at 6.36470 RMB to $1.00, respectively, which were the exchange rates on the balance sheet dates. Equity accounts were stated at their historical rate. The average translation rates applied to the statements of income for the nine months ended September 30, 2012 and 2011 were 6.32745 RMB and 6.50601 RMB to $1.00, respectively.  Cash flows from the Company’s operations are calculated based upon the local currencies using the average translation rate. As a result, amounts related to assets and liabilities reported on the consolidated statements of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheets.

Reverse stock split

The Company effected a one-for-ten reverse stock split on March 6, 2012.  All share and per share information has been retroactively adjusted to reflect this reverse stock split.

12

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Income per share of common stock

ASC Topic 260 “Earnings per Share,” requires presentation of both basic and diluted earnings per share (“EPS”) with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.

Basic net income per share is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted income per share is computed by dividing net income by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. Potentially dilutive common stock consist of common stock issuable upon the conversion of series A convertible preferred stock (using the if-converted method) and common stock purchase warrants (using the treasury stock method). 

The following table presents a reconciliation of basic and diluted net income per share:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Net income available to common stockholders for basic and diluted net income per share of common stock	$	2,355,102	$	1,134,990	$	3,729,267	$	4,970,109
Weighted average common stock outstanding - basic		2,667,017		1,997,674		2,469,818		1,937,028
Effect of dilutive securities:
Series A convertible preferred stock		-		464,485		137,783		508,857
Warrants		-		-		10,197		66,752
Weighted average common stock outstanding - diluted		2,667,017		2,462,159		2,617,798		2,512,637
Net income per common share - basic	$	0.88	$	0.57	$	1.51	$	2.57
Net income per common share - diluted	$	0.88	$	0.46	$	1.42	$	1.98

The Company’s aggregate common stock equivalents at September 30, 2012 and December 31, 2011 include the following:

	September 30, 2012		December 31, 2011
Warrants		-		220,158
Series A convertible preferred stock		-		366,527
Total		-		586,685

13

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Accumulated other comprehensive income

Comprehensive income is comprised of net income and all changes to the statements of stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. For the Company, comprehensive income for the three and nine months ended September 30, 2012 and 2011 included net income and unrealized gains from foreign currency translation adjustments.

Related parties

Parties are considered to be related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company discloses all related party transactions. All transactions shall be recorded at fair value of the goods or services exchanged. Property purchased from a related party is recorded at the cost to the related party and any payment to or on behalf of the related party in excess of the cost is reflected as a distribution to related party.

Recent accounting pronouncement

Accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.

NOTE 2 – ACCOUNTS RECEIVABLE

At September 30 2012 and December 31, 2011, accounts receivable consisted of the following:

	September 30, 2012			December 31, 2011
Accounts receivable	$	13,118,222		$	9,706,566
Less: allowance for doubtful accounts		(2,584,732	)		(2,618,608	)
	$	10,533,490		$	7,087,958

NOTE 3 - INVENTORIES

At September 30, 2012 and December 31, 2011, inventories consisted of the following:

	September 30, 2012			December 31, 2011
Raw materials	$	1,861,015		$	1,514,928
Work in process		2,363,824			1,441,231
Finished goods		2,169,188			1,492,488
		6,394,027			4,448,647
Less: reserve for obsolete inventory		(173,393	)		(172,557	)
	$	6,220,634		$	4,276,090

14

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

NOTE 4 - PROPERTY AND EQUIPMENT

At September 30, 2012 and December 31, 2011, property and equipment consisted of the following:

	Useful Life		September 30, 2012			December 31, 2011
Office equipment and furniture	5 Years		$	220,447		$	215,145
Manufacturing equipment	5 – 10 Years			64,252,326			57,347,726
Vehicles	5 Years			124,813			124,211
Construction in progress		-		26,679			330,730
Building and building improvements	20 Years			20,726,857			20,623,919
				85,351,122			78,641,731
Less: accumulated depreciation				(19,385,303	)		(14,599,652	)
			$	65,965,819		$	64,042,079

For the nine months ended September 30, 2012 and 2011, depreciation expense amounted to $4,719,769 and $3,651,168, respectively, of which $3,597,337 and $3,145,842, respectively, is included in inventory and cost of revenues and the remainder is included in general and administrative expenses. For the three months ended September 30, 2012 and 2011, depreciation expense amounted to $1,627,258 and $1,147,409, respectively, of which $1,253,362 and $1,062,878, respectively, is included in inventory and cost of revenues and the remainder is included in general and administrative expenses. Depreciation is not taken during the period of construction or equipment installation. Upon completion of the installation of manufacturing equipment or any construction in progress, construction in progress balances will be classified to their respective property and equipment category.

NOTE 5 – LAND USE RIGHTS

There is no private ownership of land in China. Land is owned by the government and the government grants land use rights for specified terms. The Company’s land use rights have terms of 45 and 50 years and expire on January 1, 2053 and October 30, 2053. The Company amortizes the land use rights over the term of the respective land use right. For the nine months ended September 30, 2012 and 2011, amortization of land use rights amounted to $70,068 and $68,145, respectively. For the three months ended September 30, 2012 and 2011, amortization of land use rights amounted to $23,341 and $23,007, respectively. At September 30, 2012 and December 31, 2011, land use rights consisted of the following:

	Useful Life	September 30, 2012			December 31, 2011
Land use rights	45 - 50 years	$	4,262,835		$	4,242,273
Less: accumulated amortization			(493,777	)		(421,737	)
		$	3,769,058		$	3,820,536

Amortization of land use rights attributable to future periods is as follows:

Twelve-month periods ending September 30:
2013	$	93,328
2014		93,328
2015		93,328
2016		93,328
2017		93,328
Thereafter		3,302,418
	$	3,769,058

15

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

NOTE 6 – SHORT-TERM BANK LOANS

Short-term bank loan represents an amount due to a bank that is due within one year. This loan can be renewed with the bank upon maturity. At September 30, 2012 and December 31, 2011, short-term bank loans consisted of the following:

	September 30, 2012		December 31, 2011
Loan from Agricultural and Commercial Bank, due on March 30, 2012 with annual interest at December 31, 2011 of 7.88%, secured by certain assets of the Company and repaid on due date.	$	-	$	628,466
Loan from China Merchants Bank, due on May 20, 2012 with annual interest rate of 6.73% at March 31, 2012 and December 31, 2011, respectively, and repaid on due date.		-		471,350
Loan from China Merchants Bank, due on November 17, 2012 with annual interest rate being adjusted quarterly based on 130% of People’s Bank of China’s base rate.		473,634		-
Loan from Agricultural and Commercial Bank, due on October 10, 2012 with annual interest rate of 5.75%, secured by certain assets of the Company and repaid on August 22, 2012.		-		471,350
Loan from Agricultural and Commercial Bank, due on August 26, 2013 with annual interest rate of 5.75% at September 30, 2012, secured by certain assets of the Company.		473,634		-
Loan from Bank of Communications, due on May 14, 2012 with annual interest rate being adjusted quarterly based on 120% of People’s Bank of China’s base rate, and repaid on due date.		-		471,350
Loan from Bank of Communications, due on November 14, 2012 with annual interest rate of 7.32% at September 30, 2012.		473,634		-
Loan from Bank of Communications, due on May 23, 2012 with annual interest rate being adjusted quarterly based on 120% of People’s Bank of China’s base rate, and repaid on due date.		-		314,233
Loan from Bank of Communications, due on November 21, 2012 with annual interest rate of 7.32% at September 30, 2012.		315,757		-
Loan from Bank of China, due on January 16, 2013 with annual interest rate of 7.35% at September 30, 2012 and secured by certain assets of the Company.		947,269		-
Total short-term bank loans	$	2,683,928	$	2,356,749

16

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

NOTE 7 – BANK ACCEPTANCE NOTES PAYABLE

Bank acceptance notes payable represents amounts due to a bank which are collateralized and typically renewed. All bank acceptance notes payable are secured by the Company’s restricted cash which is on deposit with the lender. At September 30, 2012 and December 31, 2011, the Company’s bank acceptance notes payables consisted of the following:

	September 30, 2012		December 31, 2011
Agricultural and Commercial Bank, non-interest bearing, due and paid on January 15, 2012, collateralized by 100% of restricted cash deposited.	$	-	$	314,233
Total	$	-	$	314,233

NOTE 8 - CAPITAL LEASE OBLIGATIONS

The Company has entered into a non-cancelable capital lease agreement with expiration date of June 3, 2014. The asset and liability under the capital lease are recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. The asset and future obligations related to the capital lease included in the accompanying consolidated balance sheets in property and equipment and capital lease obligations, respectively.  Minimum future lease payments under the capital lease are as follows:

Twelve-month periods ending September 30,	Amount
2013	$	379,104
2014		233,133
Total minimum lease payments		612,237
Less: amount representing interest		(81,355	)
Less: security deposit due		(107,162	)
Present value of net minimum lease payment		423,720
Less: current portion		(249,597	)
Long-term portion	$	174,123

NOTE 9 – INCOME TAXES

The Company accounts for income taxes pursuant to the accounting standards that require the recognition of deferred tax assets and liabilities for both the expected impact of differences between the financial statements and the tax basis of assets and liabilities, and for the expected future tax benefit to be derived from tax losses and tax credit carry forwards.  Additionally, the accounting standards require the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. Realization of deferred tax assets, including those related to the U.S. net operating loss carry forwards, are dependent upon future earnings, if any, of which the timing and amount are uncertain.

Accordingly, the net deferred tax asset related to the U.S. net operating loss carry forward has been fully offset by a valuation allowance. The Company is governed by the Income Tax Law of the PRC and the U.S. Internal Revenue Code of 1986, as amended.  In 2012 and 2011, under the Income Tax Laws of PRC, Chinese companies are generally subject to an income tax at an effective rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments. The Company’s VIEs (Dyeing and Electric) and the Company’s subsidiary, Fulland Wind Energy, are subject to these statutory rates. The Company’s wholly-owned subsidiary, Fulland Limited was incorporated in the Cayman Islands. Under the current laws of the Cayman Islands, this entity is not subject to income taxes.

17

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

NOTE 10– STOCKHOLDERS’ EQUITY

(a)        Preferred stock issued for warrants modification

On February 7, 2012, in an effort to induce its warrant holder to exercise their warrants, the Company signed an agreement with Barron Partners LP (“Barron”), pursuant to which Barron, as the holder of warrants to purchase 55,158 shares of common stock at $12.00 per share and 165,000 shares of common stock at $16.98 per share, agreed to exchange or convert such warrants into (i) 2,201,582 shares of the Company’s series A preferred stock which are convertible into 73,386 shares of common stock, and (ii) warrants to purchase 73,386 shares of this Company’s common stock at $2.70 per common share, with the proceeds from the exercise of the warrants being used to pay expenses incurred by the Company in connection with its public company expenses. In connection with the warrant modification, the Company valued the 2,201,582 series A preferred shares issued at fair market value on the date of grant of $197,408 based on the 73,386 common shares issuable upon conversion of the series A preferred stock multiplied by the quoted trading price of the common stock on the grant date of $2.70 per share.  In connection with the transaction, on February 7, 2012, the Company revalued the fair market value of the original warrants by using the Black-Scholes option-pricing model.    The total fair market value of the original warrants was estimated to be $52,896 on February 7, 2012. The fair market value of the newly issued exchanged warrants was estimated to be $90,621 using the Black-Scholes option-pricing model.  In connection with the Black-Scholes option pricing calculation, the following weighted-average assumptions were used:  stock price of $2.70; expected dividend yield 0%; risk-free interest rate of 0.15%; volatility of 139.58% and an expected term of 0.77 year. The Company recorded the difference between the fair market value of original warrants of $52,896 and the fair market value of exchanged warrants of $90,621 which amounted to $37,725 as a warrants modification expense with a corresponding credit of additional paid-in capital.  Accordingly, for the nine months ended September 30, 2012, the Company recorded an aggregate warrant modification expense of $235,133 on the accompanying consolidated statement of income. For the three months ended September 30, 2012, the Company did not record any warrant modification expense.

(b)        Common stock issued for services

During the nine months ended September 30, 2012, the Company issued a total of 51,450 shares of common stock pursuant to its 2010 long-term incentive plan, of which 250 shares were issued to a director, 10,000 shares were issued to the chief executive officers and 41,200 shares were issued to other employees and consultants.  The shares were valued at the fair market value on the date of grant.During the nine months ended September 30, 2012, the Company record stock-based compensation of $129,030 and prepaid expense of $27,440, which is being amortized over the balance of 2012.

(c)        Common stock issued for preferred share conversions

During the nine months ended September 30, 2012, the Company issued 439,912 shares of common stock upon the conversion of 13,197,389 shares of series A preferred stock. As of September 30, 2012, the Company had no series A preferred stock outstanding.

(d)        Common stock issued on exercise of warrants

During the nine months ended September 30, 2012, the Company issued 73,386 shares of its common stock upon the exercise of warrants, for which the Company received cash proceeds of $198,142.  At September 30, 2012, there were no warrants outstanding.

18

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

NOTE 10– STOCKHOLDERS’ EQUITY (continued)

Warrant activity for the nine months ended September 30, 2012 was summarized as follows:

	Nine Months Ended September 30, 2012
	Number of Warrants			Weighted Average Exercise Price
Balance at December 31, 2011		220,158		$	15.73
Granted		73,386			2.70
Exercised		(73,386	)		(2.70	)
Cancelled		(220,158	)		(15.73	)
Balance at September 30, 2012		-		$	-
Warrants exercisable at September 30, 2012		-		$	-

NOTE 11 – STATUTORY RESERVES

The Company is required to make appropriations to reserve funds, comprising the statutory surplus reserve, statutory public welfare fund and discretionary surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the PRC (the “PRC GAAP”). Appropriation to the statutory surplus reserve should be at least 10% of the after tax net income determined in accordance with the PRC GAAP until the reserve is equal to 50% of the entities’ registered capital or members’ equity. Appropriations to the statutory public welfare fund are at a minimum of 5% of the after tax net income determined in accordance with PRC GAAP. Commencing on January 1, 2006, the new PRC regulations waived the requirement for appropriating retained earnings to a welfare fund. Prior to December 31, 2009, the Company appropriated the required maximum 50% of its registered capital to statutory reserves for Dyeing and Electric.

For the nine months ended September 30, 2012, statutory reserve activity is as follows:

	Dyeing		Electric		Wuxi Fulland		Total
Balance – December 31, 2011	$	72,407	$	1,168,796	$	823,348	$	2,064,551
Addition to statutory reserves		-		-		219,301		219,301
Balance – September 30, 2012	$	72,407	$	1,168,796	$	1,042,649	$	2,283,852

NOTE 12 - SEGMENT INFORMATION

For the three and nine months ended September 30, 2012 and 2011, the Company operated in two reportable business segments - (1) the manufacture of forged rolled rings and related components for the wind power and other industries segment, which also includes the manufacture of the Company’s solar industry products, and (2) the manufacture of dyeing and finishing equipment segment. The Company’s reportable segments are strategic business units that offer different products. They are managed separately based on the fundamental differences in their operations.  All of the Company’s operations are conducted in the PRC.

19

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

NOTE 12 - SEGMENT INFORMATION (continued)

Information with respect to these reportable business segments for the three and nine months ended September 30, 2012 and 2011 is as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Revenues:
Forged rolled rings and related components	$	9,826,210		$	7,608,796		$	23,619,875		$	29,733,041
Dyeing and finishing equipment		7,517,513			4,067,900			15,965,940			12,118,216
		17,343,723			11,676,696			39,585,815			41,851,257
Depreciation:
Forged rolled rings and related components		1,261,991			879,966			3,694,696			2,986,138
Dyeing and finishing equipment		365,267			267,443			1,025,073			665,030
		1,627,258			1,147,409			4,719,769			3,651,168
Interest expense:
Forged rolled rings and related components		66,494			60,452			196,690			122,980
Dyeing and finishing equipment		17,795			-			47,995			-
		84,289			60,452			244,685			122,980
Net income (loss):
Forged rolled rings and related components		1,270,837			838,628			2,347,542			4,329,039
Dyeing and finishing equipment		1,201,156			463,156			2,117,296			1,292,804
Other (a)		(116,891	)		(166,794	)		(735,571	)		(651,734	)
	$	2,355,102		$	1,134,990		$	3,729,267		$	4,970,109

Identifiable long-lived tangible assets at September 30, 2012 and December 31, 2011 by segment:
	September 30, 2012		December 31, 2011
Forged rolled rings and related components	$	51,194,448	$	51,930,395
Dyeing and finishing equipment		14,771,371		12,111,684
	$	65,965,819	$	64,042,079

Identifiable long-lived tangible assets at September 30, 2012 and December 31, 2011 by geographical location:
	September 30, 2012		December 31, 2011
China	$	65,965,819	$	64,042,079
United States		-		-
	$	65,965,819	$	64,042,079

 (a)      The Company does not allocate any general and administrative expenses of its U.S. activities to its reportable segments, because these activities are managed at a corporate level.

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CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

NOTE 13 – CONCENTRATIONS

Customers

No customer accounted for 10% or more of the Company’s revenues during the nine months ended September 30, 2012 and 2011.

Suppliers

The following table sets forth information as to each supplier that accounted for 10% or more of the Company’s purchases for the nine months ended September 30, 2012 and 2011.

	Nine Months Ended September 30,
Supplier	2012	2011
A	17%	*
B	11%	*
C	14%	13%
D	*	13%
E	*	12%
F	*	11%

*           Less than 10%.

NOTE 14 – RESTRICTED NET ASSETS

Regulations in the PRC permit payments of dividends by the Company’s PRC VIEs only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Subject to certain cumulative limit, a statutory reserve fund requires annual appropriations of at least 10% of after-tax profit, if any, of the relevant PRC VIE’s and subsidiary. The statutory reserve funds are not distributable as cash dividends. As a result of these PRC laws and regulations, the Company’s PRC VIE’s and its subsidiary are restricted in their abilities to transfer a portion of their net assets to the Company. Foreign exchange and other regulations in PRC may further restrict the Company’s PRC VIEs and its subsidiary from transferring funds to the Company in the form of loans and/or advances.

As of September 30, 2012 and December 31, 2011, substantially all of the Company’s net assets are attributable to the PRC VIE’s and its subsidiary located in the PRC. Accordingly, the Company’s restricted net assets at September 30, 2012 and December 31, 2011 were approximately $76,101,000 and $71,294,000, respectively.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We are engaged in two business segments – the forged rolled rings and related components segment, in which we manufacture and sell high precision forged rolled rings, shafts, flanges, and other forged components for the wind power and other industries as well as equipment for the solar power industry, and the dyeing and finishing equipment segment, in which we manufacture and sell textile dyeing and finishing machines.

The following table sets forth information as to revenue of our forged rolled rings and related components and dyeing and finishing equipment segments in dollars and as a percent of revenue (dollars in thousands):

	Nine Months Ended September 30,
	2012					2011
	Dollars		%			Dollars		%
Forged rolled rings and related components:
Wind power industry	$	10,391		26.2	%	$	20,918		50.0	%
Other industries		13,229		33.5	%		8,815		21.0	%
Total forged rolled rings and related components		23,620		59.7	%		29,733		71.0	%
Dyeing and finishing equipment		15,966		40.3	%		12,118		29.0	%
Total	$	39,586		100.0	%	$	41,851		100.0	%

	Three Months Ended September 30,
	2012					2011
	Dollars		%			Dollars		%
Forged rolled rings and related components:
Wind power industry	$	3,213		18.5	%	$	4,490		38.5	%
Other industries		6,613		38.2	%		3,119		26.7	%
Total forged rolled rings and related components		9,826		56.7	%		7,609		65.2	%
Dyeing and finishing equipment		7,518		43.3	%		4,068		34.8	%
Total	$	17,344		100.0	%	$	11,677		100.0	%

As discussed in further detail below in Results of Operations, our consolidated revenues declined by 5.4% for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011. For the three months ended September 30, 2012, our revenue increased 48.5% from the comparable period of 2011.  For the nine months ended September 30, 2012 our gross margin decreased from 24.5% to 22.5% from the comparable period of 2011, while, our gross margin increased from 22.5% to 24.9% for the three months ended September 30, 2012 from the three months ended September 30, 2011.  Our net income decreased 25.0% from the nine months ended September 30, 2011 to the nine months ended September 30, 2012, but our net income increased 107.5% from the third quarter of 2011 to the third quarter of 2012.

Industry Outlook

Forged Rolled Rings And Other Related Products Division

Through our forged rolled rings and other related products division, we supply the following:

● We produce precision forged rolled rings and other forged components to the wind and other industries.  Our forged rolled rings and other related products are sold for use by manufacturers of industrial equipment.  Forged rolled rings and other forged components for the wind industry are used in wind turbines, which are used to generate wind power. 

● Commencing in 2011, we began to manufacture and delivered test subassemblies for solar cell manufacturing equipment, which marked our entry into the solar products market.   For the nine months ended September 30, 2012 and 2011, we generated revenue from the sale of solar industry related products of approximately $409,000 and $126,000, respectively.

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The demand for products used in manufacturing in general including wind power industries, is uncertain.  Although we believe that over the long term, the forged rolled rings and related components segment will expand, and the government of the PRC has announced its desire to increase the use of wind power as an energy source, in the short term other factors, such as economic factors and the fluctuations in the price of oil and coal, may affect the requirements by our customers and potential customers for our products.  To the extent that the demand for our forged rolled rings and related components declines, our revenue and net income will be affected.

Chinese wind power developers posted worse-than-expected results for the first half of 2012, with grid operators increasingly reluctant to distribute the costly and unpredictable source of power amid a sharp economic downturn. China aims to expand its installed wind power generating capacity to 100 gigawatts (GW) by 2015 and to 200 GW by 2020. The country currently has 62 GW of capacity. Beijing would force grid operators to buy wind power representing 5 to 15 percent of their total offtake, depending on locations, Xie Changjun, president of Longyuan, the world's second-largest wind power developer, said this month. The quota system should underpin long-term demand for renewable energy like wind-generated electricity, but the earnings outlook for wind power developers will remain obscure for the next few years, people in the industry say. Grid construction has so far not kept up with the rise in wind power capacity. In the absence of high-voltage lines, grid firms are unable to absorb all the wind power under their local networks.

In contrast, according to an article published by Greenpeace East Asia on September 19. 2012, in its latest edition, “China Wind Power Outlook 2012”, a report that presents a joint assessment and analysis of the wind power sector in China in 2011, including a reading of most recent policy trends made by Greenpeace, the Chinese Renewable Energy Industries Association (CREIA), and the Global Wind Energy Council (GWEC), as well as an outlook for the sector’s future development, this annual industry analysis highlights an encouraging trend in the development of the sector. In 2011, apart from the “old market” – namely the Northern, Northeastern and Northwestern areas of China (or the “Sanbei” region) that are rich in wind resources but weak on consumption power, wind power in China saw the emergence of a new market with huge potential. The overwhelming majority of accumulated and added installment is now still focused on these regions. However, due to the long distance between the power stations and major power user markets, they continue to be plagued by grid connectivity and curtailment problems. In the meantime, a new wind power market located closer to power consumers in the central and eastern provinces has steadily become a vigorous, if not prominent, market in 2011.

We believe that this market expansion will continue into 2012. The key issues for the wind power sector in 2012 will be how to break the intrinsic restrictions on the traditional market and how to take the next step in promoting the emerging markets in eastern and central China. In 2011, China added 17.63 GW of newly installed wind power capacity, slightly less than 2010 (18.93 GW). Total installed wind capacity reached 62.36 GW. After years of rapid growth, China’s wind power market is now entering a period marked by stable growth, but it is still the global leader in terms of total installed capacity.

In 2011 China’s wind energy sector generated 71.5 billion kilowatt hours, or 1.5% of the national total electricity output. Looking at its environmental benefits, wind power has a clear advantage: every 1 kWh generated saves 320 grams of standard coal being burned. That means in 2011 China’s wind power sector saved more than 22 million tons of coal from being burned, in total, reducing sulfur dioxide emissions by 360,000 tons, and carbon dioxide emissions by about 70 million tons. Assuming that the average Chinese household uses 1,500 kWh of electricity every year, China’s wind power sector met the electricity demands of over 47 million households in 2011.

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Among all the renewable energies, wind power is at a mature stage in terms of the technology and possesses the best prospects for large-scale commercial development. We believe that it is becoming more competitive against traditional energy sources as the industry continues to grow and production costs continue to fall. We believe that wind power will see its share of China’s national energy mix gradually increase.

The decline in our consolidated revenues for the nine months ended September 30, 2012 was attributable to the decrease in revenue for forged rolled rings and related products for the wind power industry, which declined $10.5 million, or 50.3%, during the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011.  We believe that the decline in our revenue of forged rolled rings and related products for the wind power industry reflects:

● An apparent decline in the growth rate for the wind industry, following six years of growth.

● Increased competition among Chinese turbine makers and related parts manufacturers.

● The effects of a 2011 decision by the China central bank to tighten the monetary supply, which reduced the availability of bank financing both for owners of wind farms who require bank loans to purchase equipment and for potential purchasers of heavy equipment.

● Decisions by turbine manufactures to establish vertically integrated operations, thus eliminating the need to purchase components from outside companies such as us.

● A decrease in the installation of windmills due the China’s curbing of construction on land resulting in part from the situation where power-delivery grids for wind power have not matched the significant growth of wind energy in recent years.

Dyeing and Finishing Segment

Revenue from our dyeing segment increased in both the nine and three months ended September 30, 2012 from the comparable periods of 2011.  For the nine-month period, the increase was $3.8 million, or 31.8%, and for the three-month period, the increase was $3.4 million, or 84.8%.  We believe that the increase reflects our marketing effort for our new airflow dyeing units, which use air instead of water which is used in the traditional dyeing process.  We believe that our air-flow technology, which is designed to enable users to meet the stricter environmental standards, results in reduced input costs, fewer wrinkles, less damage to the textile, and reduced emissions. With the growing acceptance of our new dyeing technology and the China government’s mandate to phase out obsolete machinery in China’s textile industry, we expect our revenue from this segment will continue to increase in the near future. Our gross margins from our dyeing segment increased from 21.4% for the nine months ended September 30, 2011 to 22.2% for the nine months ended September 30, 2012 and from 22.0% for the third quarter of 2011 to 24.7% for the third quarter of 2012.

The factors that affected our revenue, gross margin and net income during the nine months ended September 30, 2012 may affect our operations during the rest of 2012.  Our ability to expand our operations and increase our revenue is largely affected by the PRC government’s policy on such matters as the availability of credit, which affects all of our operations, and its policies relating to alternative energy such as wind and solar power, which affect our products for these industries.  Our business is also affected by general economic conditions. Because of the nature of our products, our customers’ projection of future economic conditions are an integral part of their decisions as to whether to purchase capital equipment at this time or defer such purchases until a future date.

Inventory and Raw materials

A major element of our cost of revenues is raw materials, principally steel as well as other metals. These metals are subject to price fluctuations, and recently these fluctuations have been significant.  In times of increasing prices, we need to try to fix the price at which we purchase raw materials in order to avoid increases in costs which we cannot recoup through increases in sales prices.  Similarly, in times of decreasing prices, we may have purchased metals at prices which are high in terms of the price at which we can sell our products, which also can impair our margins. Three major suppliers provided approximately 42% of our purchases of raw materials for the nine months ended September 30, 2012.

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During the nine months ended September 30, 2012, our inventory increased by approximately $1.9 million and our advance from customers was approximately $1.8 million at September 30, 2012.  This increase in inventory was attributable to an increase in steel inventory to secure steel pricing for anticipated forging orders, an increase in work-in-process for dyeing machinery to meet increased customers’ orders, and an increase in inventory related to our solar products.  A significant portion of the inventory increase relates to products for our solar customer, for which we received advance payments.  At the request of the customer we have kept the products in our warehouse.  This sale will be recognized when the last step of the sale, which is passing Chinese customs, is completed.  Upon the completion of the sale, the advances from this customer will be recognized as revenues and our inventory will be reduced by the products sold. We expect to recognize this sale in the last quarter of 2012.

Critical accounting policies and estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our estimates, including those related to bad debts, inventories, recovery of long-lived assets, income taxes, and the valuation of equity transactions. We base our estimates on historical experience and on various other assumptions that we believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Any future changes to these estimates and assumptions could cause a material change to our reported amounts of revenues, expenses, assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of the financial statements.

Exchange of Warrants

On May 4, 2012, our board of directors approved a previously negotiated agreement with Barron Partners LP, dated February 7, 2012,  pursuant to which the holder of warrants to purchase 55,160 shares of common stock at $12.00 per share and 165,000 shares of common stock at $16.98 per share, agreed to exchange or convert such warrants into (i) 2,201,582 shares of series A preferred stock which were convertible into 73,386 shares of common stock, and (ii) warrants to purchase 73,386 shares of this Corporation’s common stock at $2.70 per share, which was the market price of the common stock on February 7, 2012, the date the terms of the exchange were negotiated. The 2,201,582 shares of series A preferred stock were valued at the closing price of the underlying common stock on February 7, 2012 of $2.70 per share, and we recorded it as warrants modification expense of $197,408.

As a result of the transaction, we revalued the fair market value of the original warrants by using the Black-Scholes option-pricing model.    The total fair market value of the original warrants was estimated to be $52,896 on February 7, 2012. The fair market value of the newly issued exchanged warrants was estimated to be $90,621 using the Black-Scholes option-pricing model.  In connection with the Black-Scholes option pricing calculation, the following weighted-average assumptions were used:  stock price of $2.70; expected dividend yield 0%; risk-free interest rate of 0.15%; volatility of 139.58% and an expected term of 0.77 year. We recorded the difference between the fair market value of original warrants of $52,896 and the fair market value of exchanged warrants of $90,621 amounting to $37,725 as warrants modification expense with a corresponding credit of additional paid-in capital.

Variable interest entities

Pursuant to ASC Topic 810 and related subtopics related to the consolidation of variable interest entities, we are required to include in our consolidated financial statements the financial statements of variable interest entities (“VIEs”).  The accounting standards require a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss for the VIE or is entitled to receive a majority of the VIE’s residual returns. VIEs are those entities in which we, through contractual arrangements, bear the risk of, and enjoy the rewards normally associated with ownership of the entity, and therefore we are the primary beneficiary of the entity.

25

The Huayang Companies are considered VIEs, and we are the primary beneficiary. On November 13, 2007, we entered into agreements with the Huayang Companies pursuant to which we shall receive 100% of the Huayang Companies’ net income. In accordance with these agreements, the Huayang Companies shall pay consulting fees equal to 100% of its net income to our wholly-owned subsidiary, Green Power, and Green Power shall supply the technology and administrative services needed to service the Huayang Companies.

The accounts of the Huayang Companies are consolidated in the accompanying financial statements. As VIEs, the Huayang Companies sales are included in our total sales, their income from operations is consolidated with ours, and our net income includes all of the Huayang Companies’ net income, and their assets and liabilities are included in our consolidated balance sheets. The VIEs do not have any non-controlling interest and, accordingly, we did not subtract any net income in calculating the net income attributable to us. Because of the contractual arrangements, we have pecuniary interest in the Huayang Companies that require consolidation of the Huayang Companies financial statements with our financial statements.

Accounts receivable

We have a policy of reserving for uncollectible accounts based on our best estimate of the amount of probable credit losses in our existing accounts receivable.  We periodically review our accounts receivable to determine whether an allowance is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt.  Account balances deemed to be uncollectible are charged to the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

As a basis for estimating the likelihood of collection has been established, we consider a number of factors when determining reserves for uncollectable accounts.   We believe that we use a reasonably reliable methodology to estimate the collectability of our accounts receivable. We review our allowances for doubtful accounts on at least a quarterly basis. We also consider whether the historical economic conditions are comparable to current economic conditions. If the financial condition of our customers or other parties that we have business relations with were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Inventories

Inventories, consisting of raw materials, work-in-process and finished goods, are stated at the lower of cost or market utilizing the weighted average method. An allowance is established when management determines that certain inventories may not be saleable. If inventory costs exceed expected market value due to obsolescence or quantities in excess of expected demand, we will record additional reserves for the difference between the cost and the market value. These reserves are recorded based on estimates.  We review inventory quantities on hand and on order and record, on a quarterly basis, a provision for excess and obsolete inventory, if necessary. If the results of the review determine that a write-down is necessary, we recognize a loss in the period in which the loss is identified, whether or not the inventory is retained. Our inventory reserves establish a new cost basis for inventory and are not reversed until we sell or dispose of the related inventory. Such provisions are established based on historical usage, adjusted for known changes in demands for such products, or the estimated forecast of product demand and production requirements.

Advances to suppliers

Advances to suppliers represent the cash paid in advance for the purchase of raw material from suppliers. The advance payments are intended to ensure preferential pricing and delivery.

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Property and equipment

Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using straight-line method over the estimated useful lives of the assets. The estimated useful lives of the assets are as follows:

	Useful Life
Building and building improvements		20	Years
Manufacturing equipment		5 – 10	Years
Office equipment and furniture		5	Years
Vehicle		5	Years

The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition.

Included in property and equipment is construction-in-progress which consists of factories and office buildings under construction and machinery pending installation and includes the costs of construction, machinery and equipment, and any interest charges arising from borrowings used to finance these assets during the period of construction or installation. No provision for depreciation is made on construction-in-progress until such time as the relevant assets are completed and ready for their intended use.

We examine the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable. We recognize an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value.

Land use rights

There is no private ownership of land in the PRC. All land in the PRC is owned by the government and cannot be sold to any individual or company. The government grants a land use right that permits the holder of the land use right to use the land for a specified period. Our land use rights were granted with a term of 45 or 50 years.  Any transfer of the land use right requires government approval.  We have recorded as an intangible asset the costs paid to acquire a land use right. The land use rights are amortized on the straight-line method over the land use right terms.

Revenue recognition

We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the purchase price is fixed or determinable and collectability is reasonably assured. We account for the product sales as a multiple element arrangement. Revenue from multiple element arrangements is allocated among the separate accounting units based on the residual method. Under the residual method, the revenue is allocated to undelivered elements based on fair value of such undelivered elements and the residual amounts of revenue allocated to delivered elements. We recognize revenue from the sale of dyeing and finishing equipment upon shipment and transfer of title. The other elements may include installation and generally a one-year warranty.

Equipment installation revenue is valued based on estimated service person hours to complete installation and is recognized when the labor has been completed and the equipment has been accepted by the customer, which is generally close to the date of delivery of the equipment.

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Warranty revenue is valued based on estimated service person hours to complete a service and generally is recognized over the contract period. For the nine months ended September 30, 2012 and 2011, amounts allocated to warranty revenues were not material. Based on historical experience, warranty service calls and any related labor costs have been minimal.

All other product sales, including the forged rolled rings, with customer specific acceptance provisions, are recognized upon customer acceptance and the delivery of the parts or service. Revenues related to spare part sales are recognized upon shipment or delivery based on the trade terms.

Income taxes

We are governed by the income tax laws of the PRC and the United States. Income taxes are accounted for pursuant to accounting standards, which is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. The charge for taxes is based on the results for the year as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probably that taxable profit will be available against which deductible temporary differences can be utilized.

Deferred tax is calculated using tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it is related to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when they related to income taxes levied by the same taxation authority and we intend to settle its current tax assets and liabilities on a net basis.

Stock-based compensation

Stock based compensation is accounted for based on the requirements of the Share-Based Payment topic of ASC 718 which requires recognition in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award.  The Accounting Standards Codification also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.

Pursuant to ASC Topic 505-50, for share-based payments to consultants and other third-parties, compensation expense is determined at the “measurement date.” The expense is recognized over the period of services or the vesting period, whichever is applicable. Until the measurement date is reached, the total amount of compensation expense remains uncertain. We record compensation expense based on the fair value of the award at the reporting date. The awards to consultants and other third-parties are then revalued, or the total compensation is recalculated based on the then current fair value, at each subsequent reporting date.

Recent accounting pronouncements

Accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on our consolidated financial statements upon adoption.

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Currency exchange rates

Our functional currency is the U.S. dollar, and the functional currency of our operating subsidiaries and VIEs is the RMB.  All of our sales are denominated in RMB. As a result, changes in the relative values of U.S. dollars and RMB affect our reported levels of revenues and profitability as the results of our operations are translated into U.S. dollars for reporting purposes. In particular, fluctuations in currency exchange rates could have a significant impact on our financial stability due to a mismatch among various foreign currency-denominated sales and costs. Fluctuations in exchange rates between the U.S. dollar and RMB affect our gross and net profit margins and could result in foreign exchange and operating losses.

Our exposure to foreign exchange risk primarily relates to currency gains or losses resulting from timing differences between signing of sales contracts and settling of these contracts. Furthermore, we translate monetary assets and liabilities denominated in other currencies into RMB, the functional currency of our operating subsidiaries. Our results of operations and cash flow are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rate at the end of the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income in our statement of shareholders’ equity. We have not used any forward contracts, currency options or borrowings to hedge our exposure to foreign currency exchange risk. We cannot predict the impact of future exchange rate fluctuations on our results of operations and may incur net foreign currency losses in the future.

Our financial statements are expressed in U.S. dollars, which is the functional currency of our parent company. The functional currency of our operating subsidiaries and affiliates is RMB.  To the extent we hold assets denominated in U.S. dollars, any appreciation of the RMB against the U.S. dollar could result in a charge in our statement of operations and a reduction in the value of our U.S. dollar denominated assets. On the other hand, a decline in the value of RMB against the U.S. dollar could reduce the U.S. dollar equivalent amounts of our financial results.

RESULTS OF OPERATIONS

Results of Operations for the Three and Nine Months ended September 30, 2012 and 2011

The following table sets forth the results of our operations for the nine months ended September 30, 2012 and 2011 indicated as a percentage of net revenues (dollars in thousands):

	Nine Months Ended September 30,
	2012						2011
	Dollars			Percentage			Dollars			Percentage
Revenues	$	39,586			100.0	%	$	41,851			100.0	%
Cost of revenues		30,690			77.5	%		31,617			75.6	%
Gross profit		8,896			22.5	%		10,234			24.4	%
Operating expenses		3,279			8.3	%		3,279			7.8	%
Income from operations		5,617			14.2	%		6,955			16.6	%
Other (expenses), net		(398	)		(1.0	)%		(35	)		(0.1	)%
Income before provision for income taxes		5,219			13.2	%		6,920			16.5	%
Provision for income taxes		1,490			3.8	%		1,950			4.6	%
Net income		3,729			9.4	%		4,970			11.9	%
Other comprehensive income:
Foreign currency translation adjustment		342			0.9	%		2,146			5.1	%
Comprehensive income	$	4,071			10.3	%	$	7,116			17.1	%

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The following table sets forth the results of our operations for the three months ended September 30, 2012 and 2011 indicated as a percentage of net revenues (dollars in thousands):

	Three Months Ended September 30,
	2012						2011
	Dollars			Percentage			Dollars			Percentage
Revenues	$	17,344			100.0	%	$	11,677			100.0	%
Cost of revenues		13,025			75.1	%		9,046			77.5	%
Gross profit		4,319			24.9	%		2,631			22.5	%
Operating expenses		1,113			6.4	%		998			8.5	%
Income from operations		3,206			18.5	%		1,633			14.0	%
Other (expenses), net		(26	)		(0.2	)%		(48	)		(0.4	)%
Income before provision for income taxes		3,180			18.3	%		1,585			13.6	%
Provision for income taxes		825			4.8	%		450			3.9	%
Net income		2,355			13.6	%		1,135			9.7	%
Other comprehensive income:
Foreign currency translation adjustment		(170	)		(1.0	)%		655			5.6	%
Comprehensive income	$	2,185			12.6	%	$	1,790			15.3	%

The following table sets forth information as to the gross margin for our two business segments for the nine months ended September 30, 2012 and 2011 (dollars in thousands).

	Forged rolled rings and related products			Dyeing and finishing equipment			Total			Forged rolled rings and related products			Dyeing and finishing equipment			Total
	Nine Months Ended September 30, 2012									Nine Months Ended September 30, 2011
Revenues	$	23,620		$	15,966		$	39,586		$	29,733		$	12,118		$	41,851
Cost of revenues	$	18,276		$	12,414		$	30,690		$	22,097		$	9,520		$	31,617
Gross profit	$	5,344		$	3,552		$	8,896		$	7,636		$	2,598		$	10,234
Gross margin %		22.6	%		22.2	%		22.5	%		25.7	%		21.4	%		24.4	%

The following table sets forth information as to the gross margin for our two business segments for the three months ended September 30, 2012 and 2011 (dollars in thousands).

	Forged rolled rings and related products			Dyeing and finishing equipment			Total			Forged rolled rings and related products			Dyeing and finishing equipment			Total
	Three Months Ended September 30, 2012									Three Months Ended September 30, 2011
Revenues	$	9,826		$	7,518		$	17,344		$	7,610		$	4,067		$	11,677
Cost of revenues	$	7,365		$	5,660		$	13,025		$	5,875		$	3,171		$	9,046
Gross profit	$	2,461		$	1,858		$	4,319		$	1,735		$	896		$	2,631
Gross margin %		25.0	%		24.7	%		24.9	%		22.8	%		22.0	%		22.5	%

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Revenues

For the nine months ended September 30, 2012, we had revenues of $39,586,000, as compared to revenues of $41,851,000 for the nine months ended September 30, 2011, a decrease of approximately 5.4%. The decrease in revenue was attributable to the decrease in revenue from our forged rolled rings and related products for wind power industry, offset by the increase in revenue from our forged rolled rings and related products for other industries and the increase in revenue from dyeing segment, and was summarized as follows (dollars in thousands):

	For the Nine Months Ended September 30, 2012		For the Nine Months Ended September 30, 2011		(Decrease) Increase			Percentage Change
Forged rolled rings and related products:
Wind power industry	$	10,391	$	20,918	$	(10,527	)		(50.3	)%
Other industries		13,229		8,815		4,414			50.1	%
Total forged rolled rings and related products		23,620		29,733		(6,113	)		(20.6	)%
Dyeing and finishing equipment		15,966		12,118		3,848			31.8	%
Total revenues	$	39,586	$	41,851	$	(2,265	)		(5.4	)%

For the three months ended September 30, 2012, we had revenues of $17,344,000, as compared to revenues of $11,677,000 for the three months ended September 30, 2011, an increase of approximately 48.5%. The increase in revenue was attributable to the increase in revenue from our forged rolled rings and related products for other industries and the increase in revenue from dyeing and finishing equipment segment, and offset by the decrease in revenue from our forged rolled rings and related products for wind power industry, and was summarized as follows (dollars in thousands):

	For the Three Months Ended September 30, 2012		For the Three Months Ended September 30, 2011		(Decrease) Increase			Percentage Change
Forged rolled rings and related products:
Wind power industry	$	3,213	$	4,490	$	(1,277	)		(28.4	)%
Other industries		6,613		3,119		3,494			112.1	%
Total forged rolled rings and related products		9,826		7,609		2,217			29.1	%
Dyeing and finishing equipment		7,518		4,068		3,450			84.8	%
Total revenues	$	17,344	$	11,677	$	5,667			48.5	%

Forged rolled rings and related products segment

Although we saw an increase in revenues from the sale of forged rolled rings and related products to other industries, including revenues generated from our solar products for the nine and three months ended September 30, 2012 of $4.4 million and $3.5 million, respectively, for the nine and three months ended September 30, 2012, revenue from forging of rolled rings and related products for the wind power industry decreased by 50.3% and 28.4%, respectively.

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The decrease in revenue from forging of rolled rings and related products for wind power industry for the nine and three months ended September 30, 2012 as compared to the comparable periods of 2011 was primarily attributable to:

● An apparent decline in the market for capital equipment, including products for the wind power industry, as well as the reduced demand for wind power products and the difficulties facing the wind power industry in China as discussed under “Industry Outlook”. Although we have been experiencing a decrease in the sale of forged products during the nine months ended September 30, 2012, we believe that, on a long-term basis, the demand for forged products in the wind industry in China will continue.  As discussed in our industry outlook, the Chinese government has reported that it is still committed to the development of alternative energy sources, including wind power.

● Notwithstanding the Chinese government’s commitment to wind power development, the ability and willingness of manufacturing companies and wind power companies to purchase equipment was affected by a 2011 decision by the China central bank to tighten the monetary supply, which reduced the availability of bank financing both for owners of wind farms who require bank loans to purchase equipment and for potential purchasers of heavy equipment.

● Decisions by turbine manufactures to establish vertically integrated operations, thus eliminating the reducing the potential market for our wind power products.

● The cancellation in 2012 by government of China of  a number of preferential policies for forged rolled rings and related products for wind power industry, such as government’s subsidies and tax rebates.

The demand for products such as ours which are used for wind power specifically is uncertain.  We believe that over the long term, our forged rolled rings and related components for wind power industry will expand since the government of the PRC has announced its desire to increase the use of wind power as an energy source.

The increase in revenue from forging of rolled rings and related products for other industries was primarily attributable to our increased sales efforts.

In 2011, we began to manufacture and delivery test subassemblies for solar cell manufacturing equipment, which marked our entry into the solar products market.  This equipment is being marketed and manufactured in our forged rolled rings segment. We are seeking to use our technical knowledge to manufacture and market solar components used in production of multi crystalline and mono crystalline silicon wafers.   Solar industry capabilities include the manufacture of complex pressure vessels and chamber, high temperature vessels, and thick-walled vessels. For the nine months ended September 30, 2012 and 2011, we generated revenue from the sale of solar industry related products of approximately $409,000 and $126,000, respectively.  Additionally, at September 30, 2012, we have deposits from our international solar customer amounting to $1,650,000.

Dyeing and finishing equipment segment

The increase in revenue from the sale of dyeing and finishing equipment was primarily attributable to the effects of the preferential policies of the PRC local government to encourage the purchase of low-emission airflow dyeing machine which are intended to reduce pollution from the dyeing process. With the growing acceptance of our new dyeing technology and the China government’s mandate to phase out obsolete machinery in China’s textile industry, we expect our revenue from this segment will continue to increase in the near future.

In August 2012, we received a new purchase order to supply 21 units of airflow dyeing machines and related components to a domestic customer. The purchase order provides for us to deliver the airflow dyeing machines and components for a purchase price of RMB11.6 million (approximately $1.8 million). We expect to deliver the units in the near future.

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Cost of revenues

For the nine months ended September 30, 2012, cost of revenues was $30,690,000 as compared to $31,617,000 for the nine months ended September 30, 2011, a decrease of $927,000, or 2.9%. Cost of revenues related to the manufacture of forged rolled rings and related products was $18,276,000 for the nine months ended September 30, 2012 as compared to $22,097,000 for the nine months ended September 30, 2011. Cost of revenues for the dyeing and finishing equipment segment was $12,414,000 for the nine months ended September 30, 2012, as compared to $9,520,000 for the nine months ended September 30, 2011.

For the three months ended September 30, 2012, cost of revenues was $13,025,000 as compared to $9,046,000 for the three months ended September 30, 2011, an increase of $3,979,000, or 44.0%. Cost of revenues related to the manufacture of forged rolled rings and related products was $7,365,000 for the three months ended September 30, 2012 as compared to $5,875,000 for the three months ended September 30, 2011. Cost of revenues for the dyeing and finishing equipment segment was $5,660,000 for the three months ended September 30, 2012, as compared to $3,171,000 for the three months ended September 30, 2011.

Gross profit and gross margin

Our gross profit was $8,896,000 for the nine months ended September 30, 2012 as compared to $10,234,000 for the nine months ended September 30, 2011, representing gross margins of 22.5% and 24.5%, respectively. Our gross profit was $4,319,000 for the three months ended September 30, 2012 as compared to $2,631,000 for the three months ended September 30, 2011, representing gross margins of 24.9% and 22.5%, respectively.

Gross profit from forged rolled rings and related products segment was $5,344,000 for the nine months ended September 30, 2012 as compared to $7,636,000 for the nine months ended September 30, 2011, representing gross margins of approximately 22.6% and 25.7%, respectively.Gross profit from forged rolled rings and related products segment was $2,461,000 for the three months ended September 30, 2012 as compared to $1,735,000 for the three months ended September 30, 2011, representing gross margins of approximately 25.0% and 22.8%, respectively.The decrease in our gross margin for the forged rolled rings and related products segment for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011 was mainly attributed to the decline in operational and cost efficiencies, including the allocation of fixed costs primarily consisting of depreciation, to cost of revenues as we operated at lower production levels. The increase in our gross margin for forged rolled rings and related products segment for the third quarter of 2012 as compared to the third quarter of 2011 was primarily attributed to the increased operational and cost efficiencies, including the allocation of fixed costs primarily consisting of depreciation, to cost of revenues as we operated at higher production levels in response to higher revenues. We expect that we can improve our gross margin from forged rolled rings and related products segment in the near future since we estimate we will become more efficient and be able to produce larger quantities for inventory and revenues.

Gross profit for the dyeing and finishing equipment segment was $3,552,000 for the nine months ended September 30, 2012 as compared to $2,598,000 for the nine months ended September 30, 2011, representing gross margins of approximately 22.2% and 21.4%, respectively. Gross profit for the dyeing and finishing equipment segment was $1,858,000 for the three months ended September 30, 2012 as compared to $896,000 for the three months ended September 30, 2011, representing gross margins of approximately 24.7% and 22.0%, respectively. For the nine months ended September 30, 2012, the significant portion of our revenue for the dyeing and finishing equipment segment is from airflow dyeing machinery. But, for the nine months ended September 30, 2011, the primary portion of our revenue for the dyeing and finishing equipment segment is from traditional dyeing machinery. Our airflow dyeing machinery uses air flow rather than water which is used in the traditional dyeing process. The technology used in airflow machinery results in reduced input costs, fewer wrinkles, less damage to the textile and reduced emissions. Our unit sale price for airflow dyeing machinery is a little higher than our unit sale price for traditional dyeing machinery. Therefore, our gross margins for the dyeing and finishing equipment segment for the nine and three months ended September 30, 2012 were increased as compared to the corresponding periods of 2011.

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Depreciation. Depreciation was $4,720,000 and $3,651,000 for the nine months ended September 30, 2012 and 2011, respectively. Depreciation was $1,627,000 and $1,147,000 for the three months ended September 30, 2012 and 2011, respectively. Depreciation for the three and nine months ended September 30, 2012 and 2011 is included in the following categories (dollars in thousands):

	Nine Months Ended September 30,				Three Months Ended September 30,
	2012		2011		2012		2011
Inventories and cost of revenues	$	3,597	$	3,146	$	1,253	$	1,063
Operating expenses		1,123		505		374		84
Total	$	4,720	$	3,651	$	1,627	$	1,147

The increase in depreciation for inventories and cost of revenues is attributable to the increase in our depreciable production equipment. 

During the nine months ended September 30, 2012, we recorded depreciation expense related to ESR production equipment in operating expenses since we did not perform any production for ESR products and we did not use the equipment in this period. During the first quarter of 2011, we recorded depreciation expense related to ESR production equipment in inventories and cost of revenues since we generated production activities for ESR products in the first quarter of 2011. Accordingly, for the nine months ended September 30, 2012, depreciation included in operating expenses increased by approximately $618,000 as compared to the comparable period in 2011.

Selling, general and administrative expenses. Selling, general and administrative expenses totaled $2,157,000 for the nine months ended September 30, 2012, as compared to $2,774,000 for the nine months ended September 30, 2011, a decrease of $617,000 or approximately 22.2%. Selling, general and administrative expenses totaled $739,000 for the three months ended September 30, 2012, as compared to $913,000 for the three months ended September 30, 2011, a decrease of $174,000 or approximately 19.0%.

Selling, general and administrative expenses for the three and nine months ended September 30, 2012 and 2011 consisted of the following (dollars in thousands):

	Nine Months Ended September 30,					Three Months Ended September 30,
	2012			2011		2012		2011
Professional fees	$	216		$	242	$	60	$	56
Bad debt (recovery) expense		(47	)		389		-		222
Payroll and related benefits		528			575		155		194
Travel and entertainment		133			171		42		44
Shipping		804			933		311		263
Other		523			464		171		135
Total	$	2,157		$	2,774	$	739	$	914

● Professional fees for the nine months ended September 30, 2012 decreased by $26,000, or 10.7%, as compared to the nine months ended September 30, 2011. The decrease was primarily attributable to a decrease in accounting fees of approximately $16,000 and a decrease in fees paid for investor relations of approximately $21,000, offset by an increase in other miscellaneous service fees of approximately $11,000. Professional fees for the three months ended September 30, 2012 decreased by $4,000, or 7.1%, as compared to the three months ended September 30, 2011. The decrease was primarily attributable to the decrease in fees paid for investor relations of approximately $5,000, offset by an increase in other miscellaneous service fees of approximately $1,000.

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● For the nine months ended September 30, 2012, we had bad debt recovery of approximately $47,000, while for the nine months ended September 30, 2011, we had bad debt expense of approximately $389,000. For the three months ended September 30, 2012, we did not have any bad debt expense, while, for the three months ended September 30, 2011, we had bad debt expense of $222,000. Based on our periodic review of accounts receivable balances, we adjusted the allowance for doubtful accounts after considering management’s evaluation of the collectability of individual receivable balances, including the analysis of subsequent collections, the customers’ collection history, and recent economic events.

● Payroll and related benefits decreased for the nine months ended September 30, 2012 by $47,000, or 8.2%, as compared to the nine months ended September 30, 2011. The decrease was mainly attributable to a decrease in stock-based compensation of approximately $107,000 which reflected a drop in our average stock price used to value shares issued as compensation during the nine months ended September 30, 2012 as compared to the comparable period in 2011, and a decrease in compensation of approximately $6,000 related to our directors’ service, offset by an increase in compensation and related benefits of approximately $66,000 in our forged rolled rings and related products segment and dyeing and finishing equipment segment resulting from increased salaries paid to management. Payroll and related benefits decreased for the three months ended September 30, 2012 by $39,000, or 20.1%, as compared to the three months ended September 30, 2011. The decrease was mainly attributable to a decrease in stock-based compensation of approximately $35,000 which reflected a drop in our average stock price used to value shares issued as compensation during the third quarter of 2012 as compared to the corresponding period in 2011, and a decrease in compensation of approximately $4,000 related to our directors’ service.

● Travel and entertainment expense for the nine months ended September 30, 2012 decreased by $38,000, or 22.2%, as compared to the nine months ended September 30, 2011. Travel and entertainment expense for the three months ended September 30, 2012 decreased by $2,000, or 4.5%, as compared to the three months ended September 30, 2011. The decrease for the periods shown is primarily related to the decrease in travel for investor road shows and conferences.

● Shipping expense for the nine months ended September 30, 2012 decreased by $129,000, or 13.8%, as compared to the nine months ended September 30, 2011. The decrease was primarily attributable to the decrease in our revenues during the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011. Shipping expense for the three months ended September 30, 2012 increased by $48,000, or 18.3%, as compared to the three months ended September 30, 2011. The increase was mainly attributable to the increase in our revenues during the third quarter of 2012 as compared to the third quarter of 2011.

● Other selling, general and administrative expenses for the nine months ended September 30, 2012 increased by $59,000, or 12.7% as compared to the nine months ended September 30, 2011. The increase was primarily attributable to the payment of Delaware franchise taxes in March 2012 of approximately $67,000 for fiscal year of 2011 and fiscal year of 2010, offset by a decrease in other miscellaneous items of approximately $8,000. Other selling, general and administrative expenses for the three months ended September 30, 2012 increased by $36,000, or 26.7% as compared to the three months ended September 30, 2011, which was primarily attributable to an increase in expense for vehicle of approximately $7,000 and an increase in other miscellaneous items of approximately $29,000.

Income from operations.For the nine months ended September 30, 2012, income from operations amounted to $5,617,000, as compared to $6,955,000 for the nine months ended September 30, 2011, a decrease of $1,338,000 or 19.2%, as a result of the factors described above. For the three months ended September 30, 2012, income from operations amounted to $3,206,000, as compared to $1,633,000 for the three months ended September 30, 2011, an increase of $1,573,000 or 96.3% as a result of the factors described above.

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Other (expense). Other (expense) includes interest expense, nominal foreign currency transaction gain or losses, warrants modification expense, nominal interest income and other income. For the nine months ended September 30, 2012, total other expense amounted to $397,000 as compared to total other expense of $35,000 for the nine months ended September 30, 2011, an increase of $362,000. The increase was primarily attributable to the warrant modification expense of approximately $235,000, as well as an increase in interest expense of approximately $122,000 attributable to an increase in debt and capital lease obligations and a decrease in other income of approximately $27,000.  For the three months ended September 30, 2012, total other expense amounted to $27,000 as compared to total other expense of $48,000 for the three months ended September 30, 2011, a decrease of $21,000. The decrease was primarily attributable to an increase in other income of approximately $37,000, offset by an increase in interest expense of approximately $24,000 attributable to an increase in debt and capital lease obligations.

Income tax expense. Income tax expense was $1,490,000 for the nine months ended September 30, 2012, as compared to $1,950,000 for the nine months ended September 30, 2011, a decrease of $459,000, or 23.6%, The decrease in income tax expense was attributable to the decrease in taxable income generated by our operating entities. Income tax expense was $825,000 for the three months ended September 30, 2012, as compared to 450,000 for the three months ended September 30, 2011, an increase of $374,000, or 83.1%, The increase in income tax expense was attributable to the increase in taxable income generated by our operating entities.

Net income. As a result of the foregoing, our net income was $3,729,000, or $1.51 per share (basic) and $1.42 per share (diluted), for the nine months ended September 30, 2012, as compared with $4,970,000, or $2.57 per share (basic) and $1.98 per share (diluted) for the nine months ended September 30, 2011, a decrease of $1,241,000 or 25.0%. As a result of the foregoing, our net income was $2,355,000, or $0.88 per share (basic and diluted), for the three months ended September 30, 2012, as compared with $1,135,000, or $0.57 per share (basic) and $0.46 per share (diluted) for the three months ended September 30, 2011, an increase of $1,220,000 or 107.5%.

Foreign currency translation gain.The functional currency of our subsidiaries and variable interest entities operating in the PRC is the Chinese Yuan or Renminbi (“RMB”). The financial statements of our subsidiaries are translated to U.S. dollars using period end rates of exchange for assets and liabilities, and average rates of exchange (for the period) for revenues, costs, and expenses. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations. As a result of these translations, which are a non-cash adjustment, we reported a foreign currency translation gain of $342,000 for the nine months ended September 30, 2012, as compared to $2,146,000 for the nine months ended September 30, 2011. We reported a foreign currency translation loss of $170,000 for the three months ended September 30, 2012, as compared to a foreign currency translation gain of $655,000 for the three months ended September 30, 2011. This non-cash loss/gain had the effect of decreasing/increasing our reported comprehensive income.

Comprehensive income.As a result of our foreign currency translation gains, we had comprehensive income for the nine months ended September 30, 2012 of $4,071,000, compared to $7,116,000 for the nine months ended September 30, 2011. We had comprehensive income for the three months ended September 30, 2012 of $2,185,000, compared to $1,790,000 for the three months ended September 30, 2011.

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Liquidity and Capital Resources

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis.  At September 30, 2012 and December 31, 2011, we had cash balances of $955,405 and $1,152,607, respectively. These funds are located in financial institutions located as follows (dollars in thousands):

Country:	September 30, 2012				December 31, 2011
United States	$	139	14.5	%	$	288	25.0	%
China		816	85.5	%		865	75.0	%
Total cash and cash equivalents	$	955	100.0	%	$	1,153	100.0	%

The following table sets forth information as to the principal changes in the components of our working capital from December 31, 2011 to September 30, 2012 (dollars in thousands):

					December 31, 2011 to September 30, 2012
	2012		2011		Change			Percentage Change
Current assets:
Cash and cash equivalents	$	955	$	1,153	$	(198	)		(17.1	)%
Restricted cash		-		314		(314	)		(100.0	)%
Notes receivable		166		54		112			210.3	%
Accounts receivable, net		10,534		7,088		3,446			48.6	%
Inventories, net of reserve for obsolete inventory		6,221		4,276		1,945			45.5	%
Advances to suppliers		847		219		628			286.2	%
Prepaid value-added taxes on purchase		675		1,512		(837	)		(55.3	)%
Prepaid expenses and other current assets		180		111		69			62.5	%
Current liabilities:
Short-term bank loans		2,684		2,357		327			13.9	%
Bank acceptance notes payable		-		314		(314	)		(100.0	)%
Accounts payable		6,330		4,997		1,333			26.7	%
Accrued expenses		725		772		(47	)		(6.0	)%
Capital lease obligations – current portion		250		245		5			2.0	%
Advances from customers		1,840		1,167		673			57.7	%
Income taxes payable		884		592		292			49.3	%
Working capital:
Total current assets	$	19,578	$	14,727	$	4,851			32.9	%
Total current liabilities		12,713		10,444		2,269			21.7	%
Working capital:	$	6,865	$	4,283	$	2,582			60.3	%

Our working capital increased $2,582,000 to $6,865,000 at September 30, 2012 from working capital of $4,283,000 at December 31, 2011. This increase in working capital is primarily attributable to an increase in notes receivable of approximately $112,000, an increase in accounts receivable, net of allowance for doubtful accounts, of approximately $3,446,000 due to the increase in revenues during the third quarter of 2012, an increase in inventories, net of reserve for obsolete inventory, of approximately $1,945,000, an increase in advances to suppliers of approximately $628,000, a decrease in bank acceptance notes payable of approximately $314,000, offset by a decrease in cash and cash equivalents of approximately $197,000, a decrease in restricted cash of approximately $314,000, a decrease in prepaid VAT on purchases of approximately $837,000, an increase in short-term bank loans of approximately $327,000, an increase in accounts payable of approximately $1,333,000, an increase in advances from customers of approximately $673,000 and an increase in income taxes payable of approximately $292,000.

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Net cash flow provided by operating activities was $5,825,000 for the nine months ended September 30, 2012 as compared to $5,891,000 for the nine months ended September 30, 2011, a decrease of $66,000. Because the exchange rate conversion is different for the balance sheet and the statements of cash flows, the changes in assets and liabilities reflected on the statements of cash flows is not necessarily identical with the comparable changes reflected on the balance sheet.

● Net cash flow provided by operating activities for the nine months ended September 30, 2012 primarily reflected net income of $3,729,000 adjusted for non-cash items primarily consisting of depreciation of $4,720,000, warrant modification expense of $235,000, stock-based compensation expense of $129,000, and changes in operating assets and liabilities primarily consisting of a decrease in  prepaid value-added taxes on purchases of $845,000, an increase in accounts payable of $1,310,000, an increase in income taxes payable of $289,000, an increase in advances from customers of $668,000, offset primarily by an increase in notes receivable of $112,000, an increase in accounts receivable of $3,368,000 due to the increase in revenues during the third quarter of 2012, an increase in inventories of $1,926,000 and an increase in advances to suppliers of $627,000 to secure favorable raw material pricing.

● Net cash flow provided by operating activities for the nine months ended September 30, 2011 primarily reflected net income of $4,970,000, also reflected the add-back of non-cash items, such as depreciation of $3,651,000, an increase in allowance for doubtful accounts of $389,000 and stock-based compensation expense of $282,000, a decrease in prepaid value-added taxes on purchases of $815,000, an increase in advance from customers of $1,840,000, offset by an increase in inventories of $1,935,000, an increase in advances to suppliers of $495,000, a decrease in accounts payable of $2,741,000 and a decrease in income taxes payable of $712,000.

Net cash flow used in investing activities reflects the purchase of property and equipment of $6,335,000 for the nine months ended September 30, 2012. Net cash flow used in investing activities reflects the purchase of property and equipment of $6,414,000 and payments for deposit on equipment of $769,000 for the nine months ended September 30, 2011.

Net cash flow provided by financing activities was $309,000 for the nine months ended September 30, 2012 as compared to net cash flow provided by financing activities $843,000 for the nine months ended September 30, 2011. During the nine months ended September 30, 2012, we received proceeds from bank loans of $2,687,000, proceeds from decrease in restricted cash of $316,000, and proceeds from exercise of warrants of $198,000, offset by the repayment of bank loans of $2,371,000, repayments of principal on capital lease obligations of $205,000 and decrease in bank acceptance notes payable of $316,000. During the nine months ended September 30, 2011, we received proceeds from bank loans of $2,613,000, proceeds from increase in bank acceptance notes payable of $461,000, proceeds from the sale of common stock of $125,000, and proceeds from the exercise of warrants of $400,000, offset by the repayment of bank loans of $2,152,000 and repayments of principal on capital lease obligations of $144,000 and decrease in restricted cash of $461,000.

Our capital requirements for the next twelve months relate to purchasing machinery for the manufacture of products for the solar industry as well as additional investment in our forged rolled rings division.  We also expect to incur modest expenses in maintaining our dyeing business.  We believe that our cash flow from operations will be sufficient to meet our anticipated cash requirements for the next twelve months.

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Contractual Obligations and Off-Balance Sheet Arrangements

Contractual Obligations

We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the tables, in order to assist in the review of this information within the context of our consolidated financial position, results of operations, and cash flows. The following tables summarize our contractual obligations as of September 30, 2012 (dollars in thousands), and the effect these obligations are expected to have on our liquidity and cash flows in future periods.

	Payments Due by Period
Contractual obligations:	Total		Less than 1 year		1-3 years		3-5 years		5+ years
Bank loans (1)	$	2,684	$	2,684	$	-	$	-	$	-
Capital lease obligations (2)		424		250		174		-		-
Total	$	3,108	$	2,934	$	174	$	-	$	-

(1)   Bank loans consisted of short term bank loans. Historically, we have refinanced these bank loans for an additional term of one year and we expect to continue to refinance these loans upon expiration.

(2)   Capital lease obligations include the interest portion, security deposit due and present value of net minimum lease payment.

Off-balance Sheet Arrangements

We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

Foreign Currency Exchange Rate Risk

We produce and sell almost all of our products in China. Thus, most of our revenues and operating results may be impacted by exchange rate fluctuations between RMB and US dollars.  For the nine months ended September 30, 2012, we had unrealized foreign currency translation gain of $342,015, because of the change in the exchange rate.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not required for smaller reporting companies.

39

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As required by Rule 13a-15 under the Exchange Act, our management, including Jianhua Wu, our chief executive officer, and Wanfen Xu, our chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2012.

Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating and implementing possible controls and procedures.

Management conducted its evaluation of disclosure controls and procedures under the supervision of our chief executive officer and our chief financial officer. Based on that evaluation, Mr. Wu and Ms. Xu concluded that our disclosure controls and procedures were not effective as of September 30, 2012.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act.  Our management is also required to assess and report on the effectiveness of our internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”).   As previously reported in our Form 10-K for the year ended December 31, 2011, management assessed the effectiveness of our internal control over financial reporting as of December 31, 2011 and, during our assessment, management identified significant deficiencies related to (i) the U.S. GAAP expertise of our internal accounting staff, (ii) our internal audit functions and (iii) a lack of segregation of duties within accounting functions. Although management believes that these deficiencies do not amount to a material weakness, our internal controls over financial reporting were not effective at December 31, 2011.

Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible.  As a result, we have not been able to take steps to improve our internal controls over financial reporting during the nine months ended September 30, 2012.  However, to the extent possible, we are implementing procedures to assure that the initiation of transactions, the custody of assets and the recording of transactions will be performed by separate individuals.

A material weakness (within the meaning of PCAOB Auditing Standard No. 5) is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the company’s financial reporting.

Changes in Internal Controls over Financial Reporting

There were no changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls over financial reporting that occurred during the nine months ended September 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

40

PART II - OTHER INFORMATION

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
No.

ITEM 6.	EXHIBITS
31.1	Rule 13a-14(a)/15d-14(a) certification of Chief Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) certification of Principal Financial Officer
32.1	Section 1350 certification of Chief Executive Officer and Chief Financial Officer
101.INS	XBRL Instance Document
101.SCH	RL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

41

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	CLEANTECH SOLUTIONS INTERNATIONAL, INC.
Date: November 13, 2012	By:	/s/ Jianhua Wu
		Jianhua Wu, Chief Executive Officer
		and Principal Executive Officer)
Date: November 13, 2012	By:	/s/ Wanfen Xu
		Wanfen Xu, Chief Financial Officer
		and Principal Accounting Officer

42

EX-31.1

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

I, Jianhua Wu, certify that:

1.    I have reviewed this quarterly report on Form 10-Q of Cleantech Solutions International, Inc.;

2.    Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.    Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

5.    The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a)	all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Dated:  November 13, 2012	By:	/s/ Jianhua Wu
		Jianhua Wu Chief Executive Officer (Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER

PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

I, Wanfen Xu, certify that:

1.    I have reviewed this quarterly report on Form 10-Q of Cleantech Solutions International, Inc.;

2.    Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.    Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

5.    The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a)	all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Dated:  November 13, 2012	By:	/s/ Wanfen Xu
		Wanfen Xu Chief Financial Officer (Principal Accounting Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Cleantech Solutions International, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Jianhua Wu, chief executive officer of the Company, and Wanfen Xu, chief financial officer of the Company, certify, pursuant to 18 U.S.C. section 1350 of the Sarbanes-Oxley Act of 2002, that:

           (1)   The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

           (2)   The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 13, 2012	By:	/s/ Jianhua Wu
		Jianhua Wu Chief  Executive Officer
		(Principal Executive Officer)

Date: November 13, 2012	By:	/s/ Wanfen Xu
		Wanfen Xu Chief  Financial Officer (Principal Accounting Officer)

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

XML

Property and Equipment (Details) (USD $)	9 Months Ended
	Sep. 30, 2012	Dec. 31, 2011
Components of property and equipment
Property and equipment, gross	$ 85,351,122	$ 78,641,731
Less: accumulated depreciation	(19,385,303)	(14,599,652)
Property and equipment, net	65,965,819	64,042,079
Office equipment and furniture [Member]
Components of property and equipment
Property and equipment, useful life	5 years
Property and equipment, gross	220,447	215,145
Manufacturing equipment [Member]
Components of property and equipment
Property and equipment, gross	64,252,326	57,347,726
Manufacturing equipment [Member] | Minimum [Member]
Components of property and equipment
Property and equipment, useful life	5 years
Manufacturing equipment [Member] | Maximum [Member]
Components of property and equipment
Property and equipment, useful life	10 years
Vehicles [Member]
Components of property and equipment
Property and equipment, useful life	5 years
Property and equipment, gross	124,813	124,211
Construction in progress [Member]
Components of property and equipment
Property and equipment, gross	26,679	330,730
Building and building improvements [Member]
Components of property and equipment
Property and equipment, useful life	20 years
Property and equipment, gross	$ 20,726,857	$ 20,623,919

XML

Statutory Reserves (Details Textual)	9 Months Ended
	Sep. 30, 2012
Statutory Reserves (Textual)
Appropriation to the statutory surplus reserve	Should be at least 10% of the after tax net income determined in accordance with the PRC GAAP until the reserve is equal to 50% of the entities'' registered capital or members'' equity.
Appropriations to the statutory public welfare fund	Minimum of 5% of the after tax net income determined in accordance with PRC GAAP.
Appropriations of registered capital to statutory reserves	Maximum 50% of its registered capital to statutory reserves for Dyeing and Electric.

XML

Capital Lease Obligations (Details) (USD $)	Sep. 30, 2012	Dec. 31, 2011
Present value of net minimum future lease payments under the capital lease
2013	$ 379,104
2014	233,133
Total minimum lease payments	612,237
Less: amount representing interest	(81,355)
Less: security deposit due	(107,162)
Present value of net minimum lease payment	423,720
Capital lease obligations- current portion	249,597	244,747
Long-term portion	$ 174,123	$ 381,235

XML

Segment Information (Details) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011	Dec. 31, 2011
Revenues:
Revenues	$ 17,343,723	$ 11,676,696	$ 39,585,815	$ 41,851,257
Depreciation:
Depreciation	1,627,258	1,147,409	4,719,769	3,651,168
Interest expense:
Interest expense	84,289	60,452	244,685	122,980
Net income (loss):
Net income	2,355,102	1,134,990	3,729,267	4,970,109
Identifiable long-lived tangible assets by segment:
Identifiable long-lived tangible assets	65,965,819		65,965,819		64,042,079
Identifiable long-lived tangible assets by geographical location:
Identifiable long-lived tangible assets	65,965,819		65,965,819		64,042,079
Forged Rolled Rings and Related Components [Member]
Revenues:
Revenues	9,826,210	7,608,796	23,619,875	29,733,041
Depreciation:
Depreciation	1,261,991	879,966	3,694,696	2,986,138
Interest expense:
Interest expense	66,494	60,452	196,690	122,980
Net income (loss):
Net income	1,270,837	838,628	2,347,542	4,329,039
Identifiable long-lived tangible assets by segment:
Identifiable long-lived tangible assets	51,194,448		51,194,448		51,930,395
Dyeing and Finishing Equipment [Member]
Revenues:
Revenues	7,517,513	4,067,900	15,965,940	12,118,216
Depreciation:
Depreciation	365,267	267,443	1,025,073	665,030
Interest expense:
Interest expense	17,795		47,995
Net income (loss):
Net income	1,201,156	463,156	2,117,296	1,292,804
Identifiable long-lived tangible assets by segment:
Identifiable long-lived tangible assets	14,771,371		14,771,371		12,111,684
Other Segment [Member]
Net income (loss):
Net income	(116,891)	(166,794)	(735,571)	(651,734)
China [Member]
Identifiable long-lived tangible assets by geographical location:
Identifiable long-lived tangible assets	65,965,819		65,965,819		64,042,079
United States [Member]
Identifiable long-lived tangible assets by geographical location:
Identifiable long-lived tangible assets

XML

Bank Acceptance Notes Payable (Details) (USD $)	Sep. 30, 2012	Dec. 31, 2011
Summary of bank acceptance notes payables
Total		$ 314,233
Agricultural and Commercial Bank Notes due and paid on January 15, 2012 [Member]
Summary of bank acceptance notes payables
Total		$ 314,233

XML

Organization and Summary of Significant Accounting Policies (Details) (USD $)	Sep. 30, 2012	Dec. 31, 2011	Sep. 30, 2011	Dec. 31, 2010
Cash balances by geographic area
Total cash and cash equivalents	$ 955,405	$ 1,152,607	$ 518,274	$ 947,177
Total cash and cash equivalents, Percentage	100.00%	100.00%
United States
Cash balances by geographic area
Total cash and cash equivalents	138,786	288,090
Total cash and cash equivalents, Percentage	14.50%	25.00%
China
Cash balances by geographic area
Total cash and cash equivalents	$ 816,619	$ 864,517
Total cash and cash equivalents, Percentage	85.50%	75.00%

XML

Concentrations (Details) (Purchase [Member])	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011
Supplier A [Member]
Concentration of purchases from suppliers
Concentration risk supplier, Percentage	17.00%
Concentration risk, Supplier		Less than 10
Supplier B [Member]
Concentration of purchases from suppliers
Concentration risk supplier, Percentage	11.00%
Concentration risk, Supplier		Less than 10
Supplier C [Member]
Concentration of purchases from suppliers
Concentration risk supplier, Percentage	14.00%	13.00%
Supplier D [Member]
Concentration of purchases from suppliers
Concentration risk supplier, Percentage		13.00%
Concentration risk, Supplier	Less than 10
Supplier E [Member]
Concentration of purchases from suppliers
Concentration risk supplier, Percentage		12.00%
Concentration risk, Supplier	Less than 10
Supplier F [Member]
Concentration of purchases from suppliers
Concentration risk supplier, Percentage		11.00%
Concentration risk, Supplier	Less than 10

XML

Land Use Rights (Tables)

9 Months Ended

Sep. 30, 2012

Land Use Rights [Abstract]

Components of land use rights

	Useful Life	September 30, 2012			December 31, 2011
Land use rights	45 - 50 years	$	4,262,835		$	4,242,273
Less: accumulated amortization			(493,777	)		(421,737	)
		$	3,769,058		$	3,820,536

Amortization of land use rights attributable to future period

Twelve-month periods ending September 30:
2013	$	93,328
2014		93,328
2015		93,328
2016		93,328
2017		93,328
Thereafter		3,302,418
	$	3,769,058

XML

Income Taxes (Details)	9 Months Ended
	Sep. 30, 2012
Income Taxes (Textual)
Effective iincome tax rate	25.00%

XML

Land Use Rights (Details 1) (USD $)	Sep. 30, 2012	Dec. 31, 2011
Amortization of land use rights attributable to future periods
2013	$ 93,328
2014	93,328
2015	93,328
2016	93,328
2017	93,328
Thereafter	3,302,418
Land use rights, net	$ 3,769,058	$ 3,820,536

XML

Accounts Receivable (Details) (USD $)	Sep. 30, 2012	Dec. 31, 2011
Components of accounts receivable
Accounts receivable	$ 13,118,222	$ 9,706,566
Less: allowance for doubtful accounts	(2,584,732)	(2,618,608)
Accounts receivable, net	$ 10,533,490	$ 7,087,958

XML

Stockholders' Equity (Details Textual) (USD $)	1 Months Ended	3 Months Ended		9 Months Ended
	Feb. 29, 2012	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Stockholders' Equity (Textual)
Exercise of warrants, number of shares issuable at purchase price one	55,158
Exercise of warrants, Share purchase price one	$ 12.00
Exercise of warrants, number of shares issuable at purchase price two	165,000
Exercise of warrants, Share purchase price two	$ 16.98
Fair market value of original warrants	$ 52,896
Fair market value of newly issued exchanged warrants	90,621
Purchase price of common stock	$ 2.70			$ 2.70
Warrants modification expense	37,725			235,133
Stock-based compensation expense				129,030
Common stock issued for future service				27,440	63,576
Director [Member]
Stockholders' Equity (Textual)
Stock issued pursuant to long-term incentive plan				250
Chief Executive Officer [Member]
Stockholders' Equity (Textual)
Stock issued pursuant to long-term incentive plan				10,000
Other Employees and Consultants [Member]
Stockholders' Equity (Textual)
Stock issued pursuant to long-term incentive plan				41,200
Warrant [Member]
Stockholders' Equity (Textual)
Warrants pricing weighted-average assumptions, stock price	$ 2.70
Warrants pricing weighted-average assumptions, expected dividend yield	0.00%
Warrants pricing weighted-average assumptions, risk-free interest rate	0.15%
Warrants pricing weighted-average assumptions, volatility	139.58%
Warrants pricing weighted-average assumptions, weighted average expected term	9 months 7 days
Series A Preferred Stock [Member]
Stockholders' Equity (Textual)
Conversion of stock, shares converted	2,201,582			13,197,389
Conversion of stock, shares issued	197,408			439,912
Common Stock [Member]
Stockholders' Equity (Textual)
Conversion of stock, shares converted	73,386
Conversion of stock, shares issued				73,386
Stock issued pursuant to long-term incentive plan				51,450
Total stock issued				$ 198,142

XML

Bank Acceptance Notes Payable (Details Textual) (Agricultural and Commercial Bank Notes due and paid on January 15, 2012 [Member])	9 Months Ended
	Sep. 30, 2012
Agricultural and Commercial Bank Notes due and paid on January 15, 2012 [Member]
Bank Acceptance Notes Payables (Textual)
Percentage of assets collateralized for non-interest bearing notes payables	100.00%

XML

Property and Equipment

9 Months Ended

Sep. 30, 2012

Property and Equipment [Abstract]

PROPERTY AND EQUIPMENT

NOTE 4 - PROPERTY AND EQUIPMENT

At September 30, 2012 and December 31, 2011, property and equipment consisted of the following:

	Useful Life		September 30, 2012			December 31, 2011
Office equipment and furniture	5 Years		$	220,447		$	215,145
Manufacturing equipment	5 – 10 Years			64,252,326			57,347,726
Vehicles	5 Years			124,813			124,211
Construction in progress		-		26,679			330,730
Building and building improvements	20 Years			20,726,857			20,623,919
				85,351,122			78,641,731
Less: accumulated depreciation				(19,385,303	)		(14,599,652	)
			$	65,965,819		$	64,042,079

For the nine months ended September 30, 2012 and 2011, depreciation expense amounted to $4,719,769 and $3,651,168, respectively, of which $3,597,337 and $3,145,842, respectively, is included in inventory and cost of revenues and the remainder is included in general and administrative expenses. For the three months ended September 30, 2012 and 2011, depreciation expense amounted to $1,627,258 and $1,147,409, respectively, of which $1,253,362 and $1,062,878, respectively, is included in inventory and cost of revenues and the remainder is included in general and administrative expenses. Depreciation is not taken during the period of construction or equipment installation. Upon completion of the installation of manufacturing equipment or any construction in progress, construction in progress balances will be classified to their respective property and equipment category.

XML

Land Use Rights (Details Textual) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Land Use Rights (Textual)
Amortization of land use rights	$ 23,341	$ 23,007	$ 70,068	$ 68,145
Minimum [Member]
Land Use Rights (Textual)
Land use rights, Useful Life			40 years
Maximum [Member]
Land Use Rights (Textual)
Land use rights, Useful Life			50 years

XML

Stockholders' Equity (Tables)

9 Months Ended

Sep. 30, 2012

Stockholders' Equity [Abstract]

Summary of warrant activity

	Nine Months Ended September 30, 2012
	Number of Warrants			Weighted Average Exercise Price
Balance at December 31, 2011		220,158		$	15.73
Granted		73,386			2.70
Exercised		(73,386	)		(2.70	)
Cancelled		(220,158	)		(15.73	)
Balance at September 30, 2012		-		$	-
Warrants exercisable at September 30, 2012		-		$	-

XML

Capital Lease Obligations (Tables)

9 Months Ended

Sep. 30, 2012

Capital Lease Obligations [Abstract]

Schedule of future minimum lease payments for capital leases

Twelve-month periods ending September 30,	Amount
2013	$	379,104
2014		233,133
Total minimum lease payments		612,237
Less: amount representing interest		(81,355	)
Less: security deposit due		(107,162	)
Present value of net minimum lease payment		423,720
Less: current portion		(249,597	)
Long-term portion	$	174,123

XML

Segment Information (Details Textual)	3 Months Ended		9 Months Ended
	Sep. 30, 2012 Segment	Sep. 30, 2011 Segment	Sep. 30, 2012 Segment	Sep. 30, 2011 Segment
Segment Information (Textual)
Number of reportable business segments	2	2	2	2

XML

Short-Term Bank Loans (Details) (USD $)	Sep. 30, 2012	Dec. 31, 2011
Summary of short-term bank loans
Short-term bank loans	$ 2,683,928	$ 2,356,749
Agricultural and Commercial Bank, Loan due on March 30, 2012 [Member]
Summary of short-term bank loans
Short-term bank loans		628,466
China Merchants Bank, Loan due on May 20, 2012 [Member]
Summary of short-term bank loans
Short-term bank loans		471,350
China Merchants Bank, Loan due on November 17, 2012 [Member]
Summary of short-term bank loans
Short-term bank loans	473,634
Agricultural and Commercial Bank, Loan due on October 10, 2012 [Member]
Summary of short-term bank loans
Short-term bank loans		471,350
Agricultural and Commercial Bank, Loan due on August 26, 2013 [Member]
Summary of short-term bank loans
Short-term bank loans	473,634
Bank of Communications, Loan due on May 14, 2012 [Member]
Summary of short-term bank loans
Short-term bank loans		471,350
Bank of Communications, Loan due on November 14, 2012 [Member]
Summary of short-term bank loans
Short-term bank loans	473,634
Bank of Communications, Loan due on May 23, 2012 [Member]
Summary of short-term bank loans
Short-term bank loans		314,233
Bank of Communications, Loan due on November 21, 2012 [Member]
Summary of short-term bank loans
Short-term bank loans	315,757
Bank of China, Loan due on January 16, 2013 [Member]
Summary of short-term bank loans
Short-term bank loans	$ 947,269

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Statutory Reserves (Tables)

9 Months Ended

Sep. 30, 2012

Statutory Reserves [Abstract]

Statutory Reserves

	Dyeing		Electric		Wuxi Fulland		Total
Balance – December 31, 2011	$	72,407	$	1,168,796	$	823,348	$	2,064,551
Addition to statutory reserves		-		-		219,301		219,301
Balance – September 30, 2012	$	72,407	$	1,168,796	$	1,042,649	$	2,283,852

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Segment Information (Tables)

9 Months Ended

Sep. 30, 2012

Segment Information [Abstract]

Segment Information

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Revenues:
Forged rolled rings and related components	$	9,826,210		$	7,608,796		$	23,619,875		$	29,733,041
Dyeing and finishing equipment		7,517,513			4,067,900			15,965,940			12,118,216
		17,343,723			11,676,696			39,585,815			41,851,257
Depreciation:
Forged rolled rings and related components		1,261,991			879,966			3,694,696			2,986,138
Dyeing and finishing equipment		365,267			267,443			1,025,073			665,030
		1,627,258			1,147,409			4,719,769			3,651,168
Interest expense:
Forged rolled rings and related components		66,494			60,452			196,690			122,980
Dyeing and finishing equipment		17,795			-			47,995			-
		84,289			60,452			244,685			122,980
Net income (loss):
Forged rolled rings and related components		1,270,837			838,628			2,347,542			4,329,039
Dyeing and finishing equipment		1,201,156			463,156			2,117,296			1,292,804
Other (a)		(116,891	)		(166,794	)		(735,571	)		(651,734	)
	$	2,355,102		$	1,134,990		$	3,729,267		$	4,970,109

Identifiable long-lived tangible assets at September 30, 2012 and December 31, 2011 by segment:
	September 30, 2012		December 31, 2011
Forged rolled rings and related components	$	51,194,448	$	51,930,395
Dyeing and finishing equipment		14,771,371		12,111,684
	$	65,965,819	$	64,042,079

Identifiable long-lived tangible assets at September 30, 2012 and December 31, 2011 by geographical location:
	September 30, 2012		December 31, 2011
China	$	65,965,819	$	64,042,079
United States		-		-
	$	65,965,819	$	64,042,079

 (a)      The Company does not allocate any general and administrative expenses of its U.S. activities to its reportable segments, because these activities are managed at a corporate level.

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Inventories

9 Months Ended

Sep. 30, 2012

Inventories [Abstract]

INVENTORIES

NOTE 3 - INVENTORIES

At September 30, 2012 and December 31, 2011, inventories consisted of the following:

	September 30, 2012			December 31, 2011
Raw materials	$	1,861,015		$	1,514,928
Work in process		2,363,824			1,441,231
Finished goods		2,169,188			1,492,488
		6,394,027			4,448,647
Less: reserve for obsolete inventory		(173,393	)		(172,557	)
	$	6,220,634		$	4,276,090

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Concentrations (Tables)

9 Months Ended

Sep. 30, 2012

Concentrations [Abstract]

Concentration of purchase from suppliers

	Nine Months Ended September 30,
Supplier	2012	2011
A	17%	*
B	11%	*
C	14%	13%
D	*	13%
E	*	12%
F	*	11%

*           Less than 10%.

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Property and Equipment (Details Textual) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Property and Equipment (Textual)
Depreciation expense	$ 1,627,258	$ 1,147,409	$ 4,719,769	$ 3,651,168
Depreciation included in inventory and cost of revenues	$ 1,253,362	$ 1,062,878	$ 3,597,337	$ 3,145,842

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Statutory Reserves (Details) (USD $)	9 Months Ended
	Sep. 30, 2012
Summary of statutory reserve activity
Balance – December 31, 2011	$ 2,064,551
Addition to statutory reserves	219,301
Balance – September 30, 2012	2,283,852
Dyeing [Member]
Summary of statutory reserve activity
Balance – December 31, 2011	72,407
Addition to statutory reserves
Balance – September 30, 2012	72,407
Electric [Member]
Summary of statutory reserve activity
Balance – December 31, 2011	1,168,796
Addition to statutory reserves
Balance – September 30, 2012	1,168,796
Wuxi Fulland [Member]
Summary of statutory reserve activity
Balance – December 31, 2011	823,348
Addition to statutory reserves	219,301
Balance – September 30, 2012	$ 1,042,649

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Consolidated Balance Sheets (USD $)	Sep. 30, 2012	Dec. 31, 2011
CURRENT ASSETS:
Cash and cash equivalents	$ 955,405	$ 1,152,607
Restricted cash		314,233
Notes receivable	165,772	53,420
Accounts receivable, net of allowance for doubtful accounts	10,533,490	7,087,958
Inventories, net of reserve for obsolete inventory	6,220,634	4,276,090
Advances to suppliers	847,216	219,347
Prepaid VAT on purchases	675,448	1,512,213
Prepaid expenses and other	179,826	110,670
Total Current Assets	19,577,791	14,726,538
PROPERTY AND EQUIPMENT - net	65,965,819	64,042,079
OTHER ASSETS:
Land use rights, net	3,769,058	3,820,536
Total Assets	89,312,668	82,589,153
CURRENT LIABILITIES:
Short-term bank loans	2,683,928	2,356,749
Bank acceptance notes payable		314,233
Accounts payable	6,329,876	4,997,109
Accrued expenses	725,423	771,597
Capital lease obligations- current portion	249,597	244,747
Advances from customers	1,840,352	1,166,942
Income taxes payable	884,003	592,202
Total Current Liabilities	12,713,179	10,443,579
OTHER LIABILITIES:
Capital lease obligations - net of current portion	174,123	381,235
Total Liabilities	12,887,302	10,824,814
STOCKHOLDERS' EQUITY:
Preferred stock $0.001 par value (30,000,000 shares authorized, all of which were designated as series A convertible preferred, 0 and 10,995,807 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively)		10,996
Common stock ($0.001 par value; 50,000,000 shares authorized; 2,667,017 and 2,101,849 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively)	2,667	2,102
Additional paid-in capital	28,089,776	27,489,600
Retained earnings	38,128,307	34,618,341
Statutory reserve	2,283,852	2,064,551
Accumulated other comprehensive gain - foreign currency translation adjustment	7,920,764	7,578,749
Total Stockholders' Equity	76,425,366	71,764,339
Total Liabilities and Stockholders' Equity	$ 89,312,668	$ 82,589,153

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Short-Term Bank Loans (Details Textual)	Sep. 30, 2012
Agricultural and Commercial Bank, Loan due on March 30, 2012 [Member]
Short-term bank loans (Textual)
Short-term loan, interest rate, stated percentage	7.88%
China Merchants Bank, Loan due on May 20, 2012 [Member]
Short-term bank loans (Textual)
Short-term loan, interest rate, stated percentage	6.73%
China Merchants Bank, Loan due on November 17, 2012 [Member]
Short-term bank loans (Textual)
Short-term loan, interest rate, stated percentage	7.28%
Agricultural and Commercial Bank, Loan due on October 10, 2012 [Member]
Short-term bank loans (Textual)
Short-term loan, interest rate, stated percentage	5.75%
Agricultural and Commercial Bank, Loan due on August 26, 2013 [Member]
Short-term bank loans (Textual)
Short-term loan, interest rate, stated percentage	5.75%
Bank of Communications, Loan due on May 14, 2012 [Member]
Short-term bank loans (Textual)
Short-term loan, interest rate, stated percentage	6.72%
Bank of Communications, Loan due on November 14, 2012 [Member]
Short-term bank loans (Textual)
Short-term loan, interest rate, stated percentage	7.32%
Bank of Communications, Loan due on May 23, 2012 [Member]
Short-term bank loans (Textual)
Short-term loan, interest rate, stated percentage	6.72%
Bank of Communications, Loan due on November 21, 2012 [Member]
Short-term bank loans (Textual)
Short-term loan, interest rate, stated percentage	7.32%
Bank of China, Loan due on January 16, 2013 [Member]
Short-term bank loans (Textual)
Short-term loan, interest rate, stated percentage	7.35%

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Organization and Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2012

Organization and Summary Of Significant Accounting Policies [Abstract]

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

Cleantech Solutions International, Inc. (the “Company”) was incorporated in Delaware on June 24, 1987 under the name of Malex, Inc.  On December 18, 2007, the Company’s corporate name was changed to China Wind Systems, Inc., and on June 13, 2011, the Company’s corporate name was changed to Cleantech Solutions International, Inc.   On August 7, 2012, the Company was converted into a Nevada corporation. Through its affiliated companies and subsidiaries, the Company manufactures and sells forged products and fabricated products to a range of clean technology customers including high precision forged rolled rings and related products for the wind power industry and other industries and equipment to the solar industry.  The Company also makes textile dyeing and finishing machines. The Company is the sole owner of Fulland Limited (“Fulland”), a Cayman Island limited liability company, which was organized on May 9, 2007.  Fulland owns 100% of the capital stock of Green Power Environment Technology (Shanghai) Co., Ltd. (“Green Power”) and Wuxi Fulland Wind Energy Equipment Co., Ltd. (“Fulland Wind Energy”), which are wholly foreign-owned enterprises (“WFOE”) organized under the laws of the People’s Republic of China (“PRC” or “China”).  Green Power is a party to a series of contractual arrangements, as fully described below, dated October 12, 2007 with Wuxi Huayang Electrical Power Equipment Co., Ltd. (“Electrical”) and Wuxi Huayang Dyeing Machinery Co., Ltd. (“Dyeing”), both of which are limited liability companies organized under the laws of, and based in, the PRC.   Electrical and Dyeing are sometimes collectively referred to as the “Huayang Companies.”

Fulland was organized by the owners of the Huayang Companies as a special purpose vehicle for purposes of raising capital, in accordance with requirements of the PRC State Administration of Foreign Exchange (“SAFE”). On May 31, 2007, SAFE issued an official notice known as Hui Zong Fa [2007] No. 106 (“Circular 106”), which requires the owners of any Chinese company to obtain SAFE’s approval before establishing any offshore holding company structure for foreign financing as well as subsequent acquisition matters in China. Accordingly, the owners of the Huayang Companies, Mr. Jianhua Wu and Ms. Lihua Tang, submitted their application to SAFE in early September 2007. On October 11, 2007, SAFE approved their application, permitting these Chinese citizens to establish Fulland as a special purpose vehicle for any foreign ownership and capital raising activities by the Huayang Companies.

Electrical was formed on May 21, 2004, and Fulland Wind Energy was formed on August 27, 2008.  Beginning in April 2007, Electrical began to produce large-scaled forged rolled rings that are up to three meters in diameter for the wind-power and other industries.  In 2009, the Company began to produce and sell forged products through Fulland Wind Energy. Through Fulland Wind Energy, the Company manufactures and machines all forged products, including wind products such as shafts, rolled rings, gear rims, gearboxes, bearings and other components and finished products and assemblies for the wind power industry, and solar products, including large-scale equipment used in the manufacturing process for the solar industry. The Company refers to this segment of its business as the forged rolled rings and related components division.

Dyeing, which was formed on August 17, 1995, produces and sells a variety of high and low temperature dyeing and finishing machinery for the textile industry. The Company refers to this segment as the dyeing division.

Basis of presentation; management’s responsibility for preparation of financial statements

Management acknowledges its responsibility for the preparation of the accompanying interim consolidated financial statements which reflect all adjustments, consisting of normal recurring adjustments, considered necessary in its opinion for a fair statement of its consolidated financial position and the results of its operations for the interim period presented.

These consolidated financial statements should be read in conjunction with the summary of significant accounting policies and notes to consolidated financial statements included in the Company’s Form 10-K annual report for the year ended December 31, 2011.

The accompanying unaudited consolidated financial statements for Cleantech Solutions International, Inc., its subsidiaries and variable interest entities, have been prepared in accordance with accounting principles generally accepted in the United States of America (the “U.S.”) for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole.

The Company’s consolidated financial statements include the financial statements of its wholly-owned subsidiaries, Fulland, Green Power and Fulland Wind Energy, as well as the financial statements of Huayang Companies, Dyeing and Electric.  All significant intercompany accounts and transactions have been eliminated in consolidation.

Pursuant to Accounting Standards Codification (“ASC”) Topic 810, the Huayang Companies are considered variable interest entities (“VIE”), and the Company is the primary beneficiary.  The Company’s relationships with the Huayang Companies and their shareholders are governed by a series of contractual arrangements between Green Power, the Company’s wholly foreign-owned enterprise in the PRC, and each of the Huayang Companies, which are the operating companies of the Company in the PRC. Under PRC laws, each of Green Power, Dyeing and Electrical is an independent legal entity and none of them is exposed to liabilities incurred by the other parties. The contractual arrangements constitute valid and binding obligations of the parties of such agreements. Each of the contractual arrangements and the rights and obligations of the parties thereto are enforceable and valid in accordance with the laws of the PRC. On October 12, 2007, the Company entered into the following contractual arrangements with each of Dyeing and Electrical:

Consulting Services Agreement. Pursuant to the exclusive consulting services agreements between Green Power and the Huayang Companies, Green Power has the exclusive right to provide to the Huayang Companies general business operation services, including advice and strategic planning, as well as consulting services related to the technological research and development of dyeing and finishing machines, electrical equipment and related products (the “ Services ”). Under this agreement, Green Power owns the intellectual property rights developed or discovered through research and development, in the course of providing the Services, or derived from the provision of the Services. The Huayang Companies shall pay a quarterly consulting service fees in Renminbi (“RMB”) to Fulland that is equal to all of the Huayang Companies’ profits for such quarter.

Operating Agreement. Pursuant to the operating agreement among Green Power, the Huayang Companies and all shareholders of the Huayang Companies, Green Power provides guidance and instructions on the Huayang Companies’ daily operations, financial management and employment issues. The Huayang Companies shareholders must designate the candidates recommended by Green Power as their representatives on the boards of directors of each of the Huayang Companies. Green Power has the right to appoint senior executives of the Huayang Companies. In addition, Green Power agrees to guarantee the Huayang Companies’ performance under any agreements or arrangements relating to the Huayang Companies’ business arrangements with any third party. The Huayang Companies, in return, agree to pledge their accounts receivable and all of their assets to Green Power. Moreover, each of the Huayang Companies agrees that, without the prior consent of Green Power, it will not engage in any transactions that could materially affect its assets, liabilities, rights or operations, including, without limitation, incurrence or assumption of any indebtedness, sale or purchase of any assets or rights, incurrence of any encumbrance on any of their assets or intellectual property rights in favor of a third party or transfer of any agreements relating to their business operation to any third party. The term of this agreement, as amended on November 1, 2008, is 20 years from October 12, 2007 and may be extended only upon Green Power’s written confirmation prior to the expiration of the this agreement, with the extended term to be mutually agreed upon by the parties.

Equity Pledge Agreement. Under the equity pledge agreement between the Huayang Companies’ shareholders and Green Power, the Huayang Companies’ shareholders pledged all of their equity interests in the Huayang Companies to Green Power to guarantee the Huayang Companies’ performance of their respective obligations under the consulting services agreement. If the Huayang Companies or the Huayang Companies’ shareholders breach their respective contractual obligations, Green Power, as pledgee, will be entitled to certain rights, including the right to sell the pledged equity interests. The Huayang Companies’ shareholders also agreed that, upon occurrence of any event of default, Green Power shall be granted an exclusive, irrevocable power of attorney to take actions in the place and stead of the Huayang Companies’ shareholders to carry out the security provisions of the equity pledge agreement and take any action and execute any instrument that Green Power may deem necessary or advisable to accomplish the purposes of the equity pledge agreement. The Huayang Companies’ shareholders agreed not to dispose of the pledged equity interests or take any actions that would prejudice Green Power’s interest. The equity pledge agreement will expire two years after the Huayang Companies’ obligations under the consulting services agreements have been fulfilled.

Option Agreement.Under the option agreement between the Huayang Companies’ shareholders and Green Power, the Huayang Companies’ shareholders irrevocably granted Green Power or its designated person an exclusive option to purchase, to the extent permitted under PRC law, all or part of the equity interests in the Huayang Companies for the cost of the initial contributions to the registered capital or the minimum amount of consideration permitted by applicable PRC law. Green Power or its designated person has sole discretion to decide when to exercise the option, whether in part or in full. The term of this agreement, as amended on November 1, 2008, is 20 years from October 12, 2007 and may be extended prior to its expiration by written agreement of the parties.

Pursuant to ASC Topic 810 and related subtopics related to the consolidation of variable interest entities, the accounts of the Huayang Companies are consolidated in the accompanying financial statements.  As VIEs, the Huayang Companies’ sales are included in the Company’s total sales, its income from operations is consolidated with the Company’s, and the Company’s net income includes all of the Huayang Companies net income. The Company does not have any non-controlling interest and, accordingly, did not subtract any net income in calculating the net income of the VIEs that is attributable to the Company. Because of the contractual arrangements, the Company has a pecuniary interest in the Huayang Companies that requires consolidation of the Company’s and the Huayang Companies’ financial statements.

Use of estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures at the date of the financial statements and during the reporting period. Actual results could materially differ from these estimates. Significant estimates in the nine months ended September 30, 2012 and 2011 include the allowance for doubtful accounts, the allowance for obsolete inventory, the useful life of property and equipment and intangible assets, assumptions used in assessing impairment of long-term assets and valuation of deferred tax assets, accruals for taxes due, and the value of stock-based compensation and warrants modification expense.

Cash and cash equivalents

For purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments purchased with a maturity of three months or less and money market accounts to be cash equivalents. The Company maintains cash and cash equivalents with various financial institutions mainly in the PRC and the U.S.  Balances in banks in the PRC are uninsured.

Fair value of financial instruments

The Company adopted the guidance of ASC Topic 820 for fair value measurements which clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.

Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.

The carrying amounts reported in the balance sheets for cash and cash equivalents, restricted cash, notes receivable, accounts receivable, inventories, advances to suppliers, prepaid VAT on purchases, prepaid expenses and other, short-term bank loans, bank acceptance notes payable, accounts payable, accrued expenses, capital lease obligations, advances from customers, VAT and service taxes payable and income taxes payable approximate their fair market value based on the short-term maturity of these instruments. The Company did not identify any assets or liabilities that are required to be presented on the consolidated balance sheets at fair value in accordance with the accounting guidance.

ASC Topic 825-10 “Financial Instruments” allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding instruments.

Concentrations of credit risk

The Company’s operations are carried out in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC’s economy. The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable. Substantially all of the Company’s cash is maintained with state-owned banks within the PRC, and none of these deposits are covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts. A significant portion of the Company’s sales are credit sales which are primarily to customers whose ability to pay is dependent upon the industry economics prevailing in these areas; however, concentrations of credit risk with respect to trade accounts receivables is limited due to generally short payment terms.  The Company also performs ongoing credit evaluations of its customers to help further reduce credit risk.

At September 30, 2012 and December 31, 2011, the Company’s cash balances by geographic area were as follows:

	September 30, 2012				December 31, 2011
Country:
United States	$	138,786	14.5	%	$	288,090	25.0	%
China		816,619	85.5	%		864,517	75.0	%
Total cash and cash equivalents	$	955,405	100.0	%	$	1,152,607	100.0	%

Restricted cash

Restricted cash consists of cash deposits held by a bank to secure bank acceptance notes payable to the bank.

Notes receivable

Notes receivable represents trade accounts receivable due from various customers where the customers’ bank has guaranteed the payment of the receivable. This amount is non-interest bearing and is normally paid within six months. Historically, the Company has experienced no losses on notes receivable. The Company’s notes receivable totaled $165,772 and $53,420 at September 30, 2012 and December 31, 2011, respectively.

Accounts receivable

Accounts receivable are presented net of an allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance, a customer’s historical payment history, its current credit-worthiness and current economic trends. Accounts are written off after exhaustive efforts at collection. At September 30, 2012 and December 31, 2011, the Company has established, based on a review of its outstanding balances, an allowance for doubtful accounts in the amounts of $2,584,732 and $2,618,608, respectively.

Inventories

Inventories, consisting of raw materials, work in process and finished goods related to the Company’s products are stated at the lower of cost or market utilizing the weighted average method. An allowance is established when management determines that certain inventories may not be saleable. If inventory costs exceed expected market value due to obsolescence or quantities in excess of expected demand, the Company will record reserves for the difference between the cost and the market value. These reserves are recorded based on estimates. The Company recorded an inventory reserve of $173,393 and $172,557 at September 30, 2012 and December 31, 2011, respectively.

Advances to suppliers

Advances to suppliers represent the cash paid in advance for the purchase of raw material from suppliers. The advance payments are intended to ensure preferential pricing and delivery. The amounts advanced under such arrangements totaled $847,216 and $219,347 as of September 30, 2012 and December 31, 2011, respectively.

Property and equipment

Property and equipment are carried at cost and are depreciated on a straight-line basis over the estimated useful lives of the assets. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized.  When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. The Company examines the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.

Included in property and equipment is construction-in-progress which consisted of factory improvements and machinery pending installation and includes the costs of construction, machinery and equipment, and any interest charges arising from borrowings used to finance these assets during the period of construction or installation of the assets. No provision for depreciation is made on construction-in-progress until such time as the relevant assets are completed and ready for their intended use. Property purchased from a related party is recorded at the cost to the related party and any payment to or on behalf of the related party in excess of the cost is reflected as a distribution to a related party.

Impairment of long-lived assets

In accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value. The Company did not record any impairment charges for the nine months ended September 30, 2012 and 2011.

Advances from customers

Advances from customers at September 30, 2012 and December 31, 2011 amounted to $1,840,352 and $1,166,942, respectively, and consist of prepayments from customers for merchandise that had not yet been shipped. The Company will recognize the deposits as revenue as customers take delivery of the goods in accordance with its revenue recognition policy.

Revenue recognition

Pursuant to the guidance of ASC Topic 605 and ASC Topic 360, the Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the purchase price is fixed or determinable and collectability is reasonably assured. The Company accounts for the product sale as a multiple element arrangement. Revenue from multiple element arrangements is allocated among the separate accounting units based on the residual method. Under the residual method, the revenue is allocated to undelivered elements based on fair value of such undelivered elements and the residual amounts of revenue allocated to delivered elements. The Company recognizes revenues from the sale of dyeing and finishing equipment, forged rolled rings and other components upon shipment and transfer of title. The other elements may include installation and, generally, a one-year warranty. Equipment installation revenue is valued based on estimated service person hours to complete installation and is recognized when the labor has been completed and the equipment has been accepted by the customer, which is generally within a couple days of the delivery of the equipment. Warranty revenue is valued based on estimated service person hours to complete a service and generally is recognized over the contract period.  For the nine months ended September 30, 2012 and 2011, amounts allocated to warranty revenues were not material. Based on historical experience, warranty service calls and any related labor costs have been minimal. All other product sales with customer specific acceptance provisions, including the forged rolled rings, are recognized upon customer acceptance and the delivery of the parts or service. Revenues related to spare part sales are recognized upon shipment or delivery based on the trade terms.

Income taxes

The Company is governed by the Income Tax Law of the PRC and the U.S. Internal Revenue Code of 1986, as amended.  The Company accounts for income taxes using the liability method prescribed by ASC Topic 740, “Income Taxes.” Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date.

The Company applied the provisions of ASC 740-10-50, “Accounting for Uncertainty in Income Taxes,” which provides clarification related to the process associated with accounting for uncertain tax positions recognized in our financial statements. Audit periods remain open for review until the statute of limitations has passed. The completion of review or the expiration of the statute of limitations for a given audit period could result in an adjustment to the Company’s liability for income taxes. Any such adjustment could be material to the Company’s results of operations for any given quarterly or annual period based, in part, upon the results of operations for the given period. As of September 30, 2012 and December 31, 2011, the Company had no uncertain tax positions, and will continue to evaluate for uncertain positions in the future.

Stock-based compensation

Stock-based compensation is accounted for based on the requirements of the Share-Based Payment topic of ASC Topic 718 which requires recognition in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). The Financial Accounting Standards Board (“FASB”) ASC also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.

Pursuant to ASC Topic 505-50, for share-based payments to consultants and other third-parties, compensation expense is determined at the “measurement date.” The expense is recognized over the vesting period of the award. Until the measurement date is reached, the total amount of compensation expense remains uncertain. The Company records compensation expense based on the fair value of the award at the reporting date. The awards to consultants and other third-parties are then revalued, or the total compensation is recalculated, based on the then current fair value, at each subsequent reporting date.

Shipping costs

Shipping costs are included in selling expenses and totaled $803,951 and $933,465 for the nine months ended September 30, 2012 and 2011, respectively. Shipping costs totaled $311,275 and $262,747 for the three months ended September 30, 2012 and 2011, respectively.

Employee benefits

The Company’s operations and employees are all located in the PRC.  The Company makes mandatory contributions to the PRC government’s health, retirement benefit and unemployment funds in accordance with the relevant Chinese social security laws, equal to approximately 25% of salaries. The costs of these payments are charged to income in the same period as the related salary costs and are not material.

Advertising

Advertising is expensed as incurred and is included in selling, general and administrative expenses on the accompanying consolidated statements of income and comprehensive income and was not material.

Research and development

Research and development costs are expensed as incurred. For the nine months ended September 30, 2012 and 2011, research and development costs were not material.

Foreign currency translation

The reporting currency of the Company is the U.S. dollar. The functional currency of the parent company is the U.S. dollar and the functional currency of the Company’s operating subsidiaries is the Chinese Renminbi (“RMB”). For the subsidiaries and affiliates, whose functional currencies are the RMB, results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period, and equity is translated at historical exchange rates. As a result, amounts relating to assets and liabilities reported on the statements of cash flows may not necessarily agree with the changes in the corresponding balances on the balance sheets.  Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income. The cumulative translation adjustment and effect of exchange rate changes on cash for the nine months ended September 30, 2012 and 2011 was $3,898 and $20,048, respectively. Transactions denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing on the transaction dates. Assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing at the balance sheet date with any transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

All of the Company’s revenue transactions are transacted in the functional currency of the operating subsidiaries and affiliates. Other than for the purchase of equipment from non-Chinese suppliers, the Company does not enter into any material transaction in foreign currencies. Transaction gains or losses have not had, and are not expected to have, a material effect on the results of operations of the Company.

Asset and liability accounts at September 30, 2012 and December 31, 2011 were translated at 6.3340 RMB to $1.00 and at 6.36470 RMB to $1.00, respectively, which were the exchange rates on the balance sheet dates. Equity accounts were stated at their historical rate. The average translation rates applied to the statements of income for the nine months ended September 30, 2012 and 2011 were 6.32745 RMB and 6.50601 RMB to $1.00, respectively.  Cash flows from the Company’s operations are calculated based upon the local currencies using the average translation rate. As a result, amounts related to assets and liabilities reported on the consolidated statements of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheets.

Reverse stock split

The Company effected a one-for-ten reverse stock split on March 6, 2012.  All share and per share information has been retroactively adjusted to reflect this reverse stock split.

Income per share of common stock

ASC Topic 260 “Earnings per Share,” requires presentation of both basic and diluted earnings per share (“EPS”) with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.

Basic net income per share is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted income per share is computed by dividing net income by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. Potentially dilutive common stock consist of common stock issuable upon the conversion of series A convertible preferred stock (using the if-converted method) and common stock purchase warrants (using the treasury stock method). 

The following table presents a reconciliation of basic and diluted net income per share:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Net income available to common stockholders for basic and diluted net income per share of common stock	$	2,355,102	$	1,134,990	$	3,729,267	$	4,970,109
Weighted average common stock outstanding - basic		2,667,017		1,997,674		2,469,818		1,937,028
Effect of dilutive securities:
Series A convertible preferred stock		-		464,485		137,783		508,857
Warrants		-		-		10,197		66,752
Weighted average common stock outstanding - diluted		2,667,017		2,462,159		2,617,798		2,512,637
Net income per common share - basic	$	0.88	$	0.57	$	1.51	$	2.57
Net income per common share - diluted	$	0.88	$	0.46	$	1.42	$	1.98

The Company’s aggregate common stock equivalents at September 30, 2012 and December 31, 2011 include the following:

	September 30, 2012		December 31, 2011
Warrants		-		220,158
Series A convertible preferred stock		-		366,527
Total		-		586,685

Accumulated other comprehensive income

Comprehensive income is comprised of net income and all changes to the statements of stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. For the Company, comprehensive income for the three and nine months ended September 30, 2012 and 2011 included net income and unrealized gains from foreign currency translation adjustments.

Related parties

Parties are considered to be related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company discloses all related party transactions. All transactions shall be recorded at fair value of the goods or services exchanged. Property purchased from a related party is recorded at the cost to the related party and any payment to or on behalf of the related party in excess of the cost is reflected as a distribution to related party.

Recent accounting pronouncement

Accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.

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Restricted Net Assets (Details) (USD $)	9 Months Ended
	Sep. 30, 2012	Dec. 31, 2011
Restricted Net Assets (Textual)
Annual appropriations required by statutory reserve fund	At least 10% of after-tax profit, if any, of the relevant PRC VIE''s and subsidiary.
Company’s restricted net assets	$ 76,101,000	$ 71,294,000

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Organization and Summary of Significant Accounting Policies (Details 2)	Sep. 30, 2012	Dec. 31, 2011
Company's aggregate common stock equivalents
Aggregate common stock equivalents		586,685
Warrant [Member]
Company's aggregate common stock equivalents
Aggregate common stock equivalents		220,158
Series A convertible preferred stock [Member]
Company's aggregate common stock equivalents
Aggregate common stock equivalents		366,527

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Accounts Receivable (Tables)

9 Months Ended

Sep. 30, 2012

Receivable [Abstract]

Components of accounts receivable

	September 30, 2012			December 31, 2011
Accounts receivable	$	13,118,222		$	9,706,566
Less: allowance for doubtful accounts		(2,584,732	)		(2,618,608	)
	$	10,533,490		$	7,087,958

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Organization and Summary of Significant Accounting Policies (Details Textual) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011	Dec. 31, 2011
Organization and Summary of Significant Accounting Policies (Additional Textual)
Allowance for doubtful accounts	$ 2,584,732		$ 2,584,732		$ 2,618,608
Inventory reserves	173,393		173,393		172,557
Notes receivable	165,772		165,772		53,420
Advances from customers	1,840,352		1,840,352		1,166,942
Shipping costs	311,275	262,747	803,951	933,465
Impairment charges			0	0
Product warranty, period			1 year
Percentage contibution in employee benefits plan			25.00%
Advances to suppliers	847,216		847,216		219,347
Cumulative translation adjustment and effect of exchange rate changes on cash			$ 3,898	$ 20,048
Reverse stock split			One-for-ten reverse stock split on March 6, 2012
Average translation rates (RMB to USD)	6.32745	6.50601	6.32745	6.50601
Asset and liability translation rate (RMB to USD)	6.3340		6.3340		6.36470
Period for non-interest bearing amount			6 months
Operating agreement [Member]
Organization and Summary of Significant Accounting Policies (Textual)
Term of agreement from October 12, 2007			20 years
Equity Pledge Agreement [Member]
Organization and Summary of Significant Accounting Policies (Textual)
Condition for the term of agreement			The equity pledge agreement will expire two years after the Huayang Companies' obligations under the consulting services agreements have been fulfilled.
Option Agreement [Member]
Organization and Summary of Significant Accounting Policies (Textual)
Term of agreement from October 12, 2007			20 years
Green Power Environment Technology (Shanghai) Co [Member]
Organization and Summary of Significant Accounting Policies (Textual)
Pecentage of capital stock owned by Fulland	100.00%		100.00%
Wuxi Fulland Wind Energy Equipment Co., Ltd [Member]
Organization and Summary of Significant Accounting Policies (Textual)
Pecentage of capital stock owned by Fulland	100.00%		100.00%

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Property and Equipment (Tables)

9 Months Ended

Sep. 30, 2012

Property and Equipment [Abstract]

Components of property and equipment

	Useful Life		September 30, 2012			December 31, 2011
Office equipment and furniture	5 Years		$	220,447		$	215,145
Manufacturing equipment	5 – 10 Years			64,252,326			57,347,726
Vehicles	5 Years			124,813			124,211
Construction in progress		-		26,679			330,730
Building and building improvements	20 Years			20,726,857			20,623,919
				85,351,122			78,641,731
Less: accumulated depreciation				(19,385,303	)		(14,599,652	)
			$	65,965,819		$	64,042,079

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Accounts Receivable

9 Months Ended

Sep. 30, 2012

Receivable [Abstract]

ACCOUNTS RECEIVABLE

NOTE 2 – ACCOUNTS RECEIVABLE

At September 30 2012 and December 31, 2011, accounts receivable consisted of the following:

	September 30, 2012			December 31, 2011
Accounts receivable	$	13,118,222		$	9,706,566
Less: allowance for doubtful accounts		(2,584,732	)		(2,618,608	)
	$	10,533,490		$	7,087,958

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Condensed Balance Sheets (Parenthetical) (USD $)	Sep. 30, 2012	Dec. 31, 2011
Statement Of Financial Position [Abstract]
Preferred stock, par value	$ 0.001	$ 0.001
Preferred stock, shares authorized	30,000,000	30,000,000
Preferred stock, shares issued		10,995,807
Preferred stock, shares outstanding		10,995,807
Common stock, par value	$ 0.001	$ 0.001
Common stock, shares authorized	50,000,000	50,000,000
Common stock, shares issued	2,667,017	2,101,849
Common stock, shares outstanding	2,667,017	2,101,849

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Segment Information

9 Months Ended

Sep. 30, 2012

Segment Information [Abstract]

SEGMENT INFORMATION

NOTE 12 - SEGMENT INFORMATION

For the three and nine months ended September 30, 2012 and 2011, the Company operated in two reportable business segments - (1) the manufacture of forged rolled rings and related components for the wind power and other industries segment, which also includes the manufacture of the Company’s solar industry products, and (2) the manufacture of dyeing and finishing equipment segment. The Company’s reportable segments are strategic business units that offer different products. They are managed separately based on the fundamental differences in their operations.  All of the Company’s operations are conducted in the PRC.

Information with respect to these reportable business segments for the three and nine months ended September 30, 2012 and 2011 is as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Revenues:
Forged rolled rings and related components	$	9,826,210		$	7,608,796		$	23,619,875		$	29,733,041
Dyeing and finishing equipment		7,517,513			4,067,900			15,965,940			12,118,216
		17,343,723			11,676,696			39,585,815			41,851,257
Depreciation:
Forged rolled rings and related components		1,261,991			879,966			3,694,696			2,986,138
Dyeing and finishing equipment		365,267			267,443			1,025,073			665,030
		1,627,258			1,147,409			4,719,769			3,651,168
Interest expense:
Forged rolled rings and related components		66,494			60,452			196,690			122,980
Dyeing and finishing equipment		17,795			-			47,995			-
		84,289			60,452			244,685			122,980
Net income (loss):
Forged rolled rings and related components		1,270,837			838,628			2,347,542			4,329,039
Dyeing and finishing equipment		1,201,156			463,156			2,117,296			1,292,804
Other (a)		(116,891	)		(166,794	)		(735,571	)		(651,734	)
	$	2,355,102		$	1,134,990		$	3,729,267		$	4,970,109

Identifiable long-lived tangible assets at September 30, 2012 and December 31, 2011 by segment:
	September 30, 2012		December 31, 2011
Forged rolled rings and related components	$	51,194,448	$	51,930,395
Dyeing and finishing equipment		14,771,371		12,111,684
	$	65,965,819	$	64,042,079

Identifiable long-lived tangible assets at September 30, 2012 and December 31, 2011 by geographical location:
	September 30, 2012		December 31, 2011
China	$	65,965,819	$	64,042,079
United States		-		-
	$	65,965,819	$	64,042,079

 (a)      The Company does not allocate any general and administrative expenses of its U.S. activities to its reportable segments, because these activities are managed at a corporate level.

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Document and Entity Information	9 Months Ended
	Sep. 30, 2012	Nov. 13, 2012
Document and Entity Information [Abstract]
Entity Registrant Name	Cleantech Solutions International, Inc.,
Entity Central Index Key	0000819926
Document Type	10-Q
Document Period End Date	Sep. 30, 2012
Amendment Flag	false
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q3
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		2,667,017

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Concentrations

9 Months Ended

Sep. 30, 2012

Concentrations [Abstract]

CONCENTRATIONS

NOTE 13 – CONCENTRATIONS

Customers

No customer accounted for 10% or more of the Company’s revenues during the nine months ended September 30, 2012 and 2011.

Suppliers

The following table sets forth information as to each supplier that accounted for 10% or more of the Company’s purchases for the nine months ended September 30, 2012 and 2011.

	Nine Months Ended September 30,
Supplier	2012	2011
A	17%	*
B	11%	*
C	14%	13%
D	*	13%
E	*	12%
F	*	11%

*           Less than 10%.

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Consolidated Statements of Income and Comprehensive Income (Unaudited) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Income Statement [Abstract]
REVENUES	$ 17,343,723	$ 11,676,696	$ 39,585,815	$ 41,851,257
COST OF REVENUES	13,024,265	9,046,015	30,689,436	31,617,025
GROSS PROFIT	4,319,458	2,630,681	8,896,379	10,234,232
OPERATING EXPENSES:
Depreciation	373,896	84,531	1,122,432	505,326
Selling, general and administrative	739,386	913,198	2,157,053	2,773,694
Total Operating Expenses	1,113,282	997,729	3,279,485	3,279,020
INCOME FROM OPERATIONS	3,206,176	1,632,952	5,616,894	6,955,212
OTHER INCOME (EXPENSE):
Interest income	5,069	110	10,919	940
Interest expense	(84,289)	(60,452)	(244,685)	(122,980)
Foreign currency gain (loss)	1,251	(1,476)	6,642	(4,817)
Warrants modification expense			(235,133)
Other income	51,523	14,266	64,803	91,379
Total Other Income (Expense)	(26,446)	(47,552)	(397,454)	(35,478)
INCOME BEFORE INCOME TAXES	3,179,730	1,585,400	5,219,440	6,919,734
INCOME TAXES	824,628	450,410	1,490,173	1,949,625
NET INCOME	2,355,102	1,134,990	3,729,267	4,970,109
COMPREHENSIVE INCOME:
Net income	2,355,102	1,134,990	3,729,267	4,970,109
OTHER COMPREHENSIVE INCOME:
Unrealized foreign currency translation (loss) gain	(169,625)	655,213	342,015	2,145,996
COMPREHENSIVE INCOME	$ 2,185,477	$ 1,790,203	$ 4,071,282	$ 7,116,105
NET INCOME PER COMMON SHARE:
Basic	$ 0.88	$ 0.57	$ 1.51	$ 2.57
Diluted	$ 0.88	$ 0.46	$ 1.42	$ 1.98
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic	2,667,017	1,997,674	2,469,818	1,937,028
Diluted	2,667,017	2,462,159	2,617,798	2,512,637

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Bank Acceptance Notes Payable

9 Months Ended

Sep. 30, 2012

Bank Acceptance Notes Payables [Abstract]

BANK ACCEPTANCE NOTES PAYABLE

NOTE 7 – BANK ACCEPTANCE NOTES PAYABLE

Bank acceptance notes payable represents amounts due to a bank which are collateralized and typically renewed. All bank acceptance notes payable are secured by the Company’s restricted cash which is on deposit with the lender. At September 30, 2012 and December 31, 2011, the Company’s bank acceptance notes payables consisted of the following:

	September 30, 2012		December 31, 2011
Agricultural and Commercial Bank, non-interest bearing, due and paid on January 15, 2012, collateralized by 100% of restricted cash deposited.	$	-	$	314,233
Total	$	-	$	314,233

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Short-Term Bank Loans

9 Months Ended

Sep. 30, 2012

Short-Term Bank Loans [Abstract]

SHORT-TERM BANK LOANS

NOTE 6 – SHORT-TERM BANK LOANS

Short-term bank loan represents an amount due to a bank that is due within one year. This loan can be renewed with the bank upon maturity. At September 30, 2012 and December 31, 2011, short-term bank loans consisted of the following:

	September 30, 2012		December 31, 2011
Loan from Agricultural and Commercial Bank, due on March 30, 2012 with annual interest at December 31, 2011 of 7.88%, secured by certain assets of the Company and repaid on due date.	$	-	$	628,466
Loan from China Merchants Bank, due on May 20, 2012 with annual interest rate of 6.73% at March 31, 2012 and December 31, 2011, respectively, and repaid on due date.		-		471,350
Loan from China Merchants Bank, due on November 17, 2012 with annual interest rate being adjusted quarterly based on 130% of People’s Bank of China’s base rate.		473,634		-
Loan from Agricultural and Commercial Bank, due on October 10, 2012 with annual interest rate of 5.75%, secured by certain assets of the Company and repaid on August 22, 2012.		-		471,350
Loan from Agricultural and Commercial Bank, due on August 26, 2013 with annual interest rate of 5.75% at September 30, 2012, secured by certain assets of the Company.		473,634		-
Loan from Bank of Communications, due on May 14, 2012 with annual interest rate being adjusted quarterly based on 120% of People’s Bank of China’s base rate, and repaid on due date.		-		471,350
Loan from Bank of Communications, due on November 14, 2012 with annual interest rate of 7.32% at September 30, 2012.		473,634		-
Loan from Bank of Communications, due on May 23, 2012 with annual interest rate being adjusted quarterly based on 120% of People’s Bank of China’s base rate, and repaid on due date.		-		314,233
Loan from Bank of Communications, due on November 21, 2012 with annual interest rate of 7.32% at September 30, 2012.		315,757		-
Loan from Bank of China, due on January 16, 2013 with annual interest rate of 7.35% at September 30, 2012 and secured by certain assets of the Company.		947,269		-
Total short-term bank loans	$	2,683,928	$	2,356,749

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Inventories (Tables)

9 Months Ended

Sep. 30, 2012

Inventories [Abstract]

Components of inventories

	September 30, 2012			December 31, 2011
Raw materials	$	1,861,015		$	1,514,928
Work in process		2,363,824			1,441,231
Finished goods		2,169,188			1,492,488
		6,394,027			4,448,647
Less: reserve for obsolete inventory		(173,393	)		(172,557	)
	$	6,220,634		$	4,276,090

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Restricted Net Assets

9 Months Ended

Sep. 30, 2012

Receivable [Abstract]

RESTRICTED NET ASSETS

NOTE 14 – RESTRICTED NET ASSETS

Regulations in the PRC permit payments of dividends by the Company’s PRC VIEs only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Subject to certain cumulative limit, a statutory reserve fund requires annual appropriations of at least 10% of after-tax profit, if any, of the relevant PRC VIE’s and subsidiary. The statutory reserve funds are not distributable as cash dividends. As a result of these PRC laws and regulations, the Company’s PRC VIE’s and its subsidiary are restricted in their abilities to transfer a portion of their net assets to the Company. Foreign exchange and other regulations in PRC may further restrict the Company’s PRC VIEs and its subsidiary from transferring funds to the Company in the form of loans and/or advances.

As of September 30, 2012 and December 31, 2011, substantially all of the Company’s net assets are attributable to the PRC VIE’s and its subsidiary located in the PRC. Accordingly, the Company’s restricted net assets at September 30, 2012 and December 31, 2011 were approximately $76,101,000 and $71,294,000, respectively.

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Stockholders' Equity

9 Months Ended

Sep. 30, 2012

Stockholders' Equity [Abstract]

STOCKHOLDERS’ EQUITY

NOTE 10– STOCKHOLDERS’ EQUITY

(a)        Preferred stock issued for warrants modification

On February 7, 2012, in an effort to induce its warrant holder to exercise their warrants, the Company signed an agreement with Barron Partners LP (“Barron”), pursuant to which Barron, as the holder of warrants to purchase 55,158 shares of common stock at $12.00 per share and 165,000 shares of common stock at $16.98 per share, agreed to exchange or convert such warrants into (i) 2,201,582 shares of the Company’s series A preferred stock which are convertible into 73,386 shares of common stock, and (ii) warrants to purchase 73,386 shares of this Company’s common stock at $2.70 per common share, with the proceeds from the exercise of the warrants being used to pay expenses incurred by the Company in connection with its public company expenses. In connection with the warrant modification, the Company valued the 2,201,582 series A preferred shares issued at fair market value on the date of grant of $197,408 based on the 73,386 common shares issuable upon conversion of the series A preferred stock multiplied by the quoted trading price of the common stock on the grant date of $2.70 per share.  In connection with the transaction, on February 7, 2012, the Company revalued the fair market value of the original warrants by using the Black-Scholes option-pricing model.    The total fair market value of the original warrants was estimated to be $52,896 on February 7, 2012. The fair market value of the newly issued exchanged warrants was estimated to be $90,621 using the Black-Scholes option-pricing model.  In connection with the Black-Scholes option pricing calculation, the following weighted-average assumptions were used:  stock price of $2.70; expected dividend yield 0%; risk-free interest rate of 0.15%; volatility of 139.58% and an expected term of 0.77 year. The Company recorded the difference between the fair market value of original warrants of $52,896 and the fair market value of exchanged warrants of $90,621 which amounted to $37,725 as a warrants modification expense with a corresponding credit of additional paid-in capital.  Accordingly, for the nine months ended September 30, 2012, the Company recorded an aggregate warrant modification expense of $235,133 on the accompanying consolidated statement of income. For the three months ended September 30, 2012, the Company did not record any warrant modification expense.

(b)        Common stock issued for services

During the nine months ended September 30, 2012, the Company issued a total of 51,450 shares of common stock pursuant to its 2010 long-term incentive plan, of which 250 shares were issued to a director, 10,000 shares were issued to the chief executive officers and 41,200 shares were issued to other employees and consultants.  The shares were valued at the fair market value on the date of grant.During the nine months ended September 30, 2012, the Company record stock-based compensation of $129,030 and prepaid expense of $27,440, which is being amortized over the balance of 2012.

(c)        Common stock issued for preferred share conversions

During the nine months ended September 30, 2012, the Company issued 439,912 shares of common stock upon the conversion of 13,197,389 shares of series A preferred stock. As of September 30, 2012, the Company had no series A preferred stock outstanding.

(d)        Common stock issued on exercise of warrants

During the nine months ended September 30, 2012, the Company issued 73,386 shares of its common stock upon the exercise of warrants, for which the Company received cash proceeds of $198,142.  At September 30, 2012, there were no warrants outstanding.

Warrant activity for the nine months ended September 30, 2012 was summarized as follows:

	Nine Months Ended September 30, 2012
	Number of Warrants			Weighted Average Exercise Price
Balance at December 31, 2011		220,158		$	15.73
Granted		73,386			2.70
Exercised		(73,386	)		(2.70	)
Cancelled		(220,158	)		(15.73	)
Balance at September 30, 2012		-		$	-
Warrants exercisable at September 30, 2012		-		$	-

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Capital Lease Obligations

9 Months Ended

Sep. 30, 2012

Capital Lease Obligations [Abstract]

CAPITAL LEASE OBLIGATION

NOTE 8 - CAPITAL LEASE OBLIGATIONS

The Company has entered into a non-cancelable capital lease agreement with expiration date of June 3, 2014. The asset and liability under the capital lease are recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. The asset and future obligations related to the capital lease included in the accompanying consolidated balance sheets in property and equipment and capital lease obligations, respectively.  Minimum future lease payments under the capital lease are as follows:

Twelve-month periods ending September 30,	Amount
2013	$	379,104
2014		233,133
Total minimum lease payments		612,237
Less: amount representing interest		(81,355	)
Less: security deposit due		(107,162	)
Present value of net minimum lease payment		423,720
Less: current portion		(249,597	)
Long-term portion	$	174,123

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Income Taxes

9 Months Ended

Sep. 30, 2012

Income Taxes [Abstract]

INCOME TAXES

NOTE 9 – INCOME TAXES

The Company accounts for income taxes pursuant to the accounting standards that require the recognition of deferred tax assets and liabilities for both the expected impact of differences between the financial statements and the tax basis of assets and liabilities, and for the expected future tax benefit to be derived from tax losses and tax credit carry forwards.  Additionally, the accounting standards require the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. Realization of deferred tax assets, including those related to the U.S. net operating loss carry forwards, are dependent upon future earnings, if any, of which the timing and amount are uncertain.

Accordingly, the net deferred tax asset related to the U.S. net operating loss carry forward has been fully offset by a valuation allowance. The Company is governed by the Income Tax Law of the PRC and the U.S. Internal Revenue Code of 1986, as amended.  In 2012 and 2011, under the Income Tax Laws of PRC, Chinese companies are generally subject to an income tax at an effective rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments. The Company’s VIEs (Dyeing and Electric) and the Company’s subsidiary, Fulland Wind Energy, are subject to these statutory rates. The Company’s wholly-owned subsidiary, Fulland Limited was incorporated in the Cayman Islands. Under the current laws of the Cayman Islands, this entity is not subject to income taxes.

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Statutory Reserves

9 Months Ended

Sep. 30, 2012

Statutory Reserves [Abstract]

STATUTORY RESERVES

NOTE 11 – STATUTORY RESERVES

The Company is required to make appropriations to reserve funds, comprising the statutory surplus reserve, statutory public welfare fund and discretionary surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the PRC (the “PRC GAAP”). Appropriation to the statutory surplus reserve should be at least 10% of the after tax net income determined in accordance with the PRC GAAP until the reserve is equal to 50% of the entities’ registered capital or members’ equity. Appropriations to the statutory public welfare fund are at a minimum of 5% of the after tax net income determined in accordance with PRC GAAP. Commencing on January 1, 2006, the new PRC regulations waived the requirement for appropriating retained earnings to a welfare fund. Prior to December 31, 2009, the Company appropriated the required maximum 50% of its registered capital to statutory reserves for Dyeing and Electric.

For the nine months ended September 30, 2012, statutory reserve activity is as follows:

	Dyeing		Electric		Wuxi Fulland		Total
Balance – December 31, 2011	$	72,407	$	1,168,796	$	823,348	$	2,064,551
Addition to statutory reserves		-		-		219,301		219,301
Balance – September 30, 2012	$	72,407	$	1,168,796	$	1,042,649	$	2,283,852

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Organization and Summary of Significant Accounting Policies (Details 1) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Reconciliation of basic and diluted net income per share
Net income available to common stockholders for basic and diluted net income per share of common stock	$ 2,355,102	$ 1,134,990	$ 3,729,267	$ 4,970,109
Weighted average common stock outstanding - basic	2,667,017	1,997,674	2,469,818	1,937,028
Effect of dilutive securities:
Series A convertible preferred stock		464,485	137,783	508,857
Warrants			10,197	66,752
Weighted average common stock outstanding - diluted	2,667,017	2,462,159	2,617,798	2,512,637
Net income per common share - basic	$ 0.88	$ 0.57	$ 1.51	$ 2.57
Net income per common share - diluted	$ 0.88	$ 0.46	$ 1.42	$ 1.98

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Stockholders' Equity (Details) (USD $)	9 Months Ended
	Sep. 30, 2012
Summery of warrant activity
Balance, Number of Warrants	220,158
Granted, Number of Warrants	73,386
Exercised, Number of Warrants	(73,386)
Cancelled, Number of Warrants	(220,158)
Balance ending, Number of Warrants
Warrants exercisable, Number of Warrants
Balance, Weighted average pxercise price	$ 15.73
Granted, Weighted average pxercise price	$ 2.70
Exercised, Weighted average pxercise price	$ (2.70)
Cancelled, Weighted average pxercise price	$ (15.73)
Balance ending, Weighted average pxercise price
Warrants exercisable, Weighted average pxercise price

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Organization and Summary of Significant Accounting Policies (Tables)

9 Months Ended

Sep. 30, 2012

Organization and Summary Of Significant Accounting Policies [Abstract]

Cash balances by geographic area

	September 30, 2012				December 31, 2011
Country:
United States	$	138,786	14.5	%	$	288,090	25.0	%
China		816,619	85.5	%		864,517	75.0	%
Total cash and cash equivalents	$	955,405	100.0	%	$	1,152,607	100.0	%

Reconciliation of basic and diluted net income per share

	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Net income available to common stockholders for basic and diluted net income per share of common stock	$	2,355,102	$	1,134,990	$	3,729,267	$	4,970,109
Weighted average common stock outstanding - basic		2,667,017		1,997,674		2,469,818		1,937,028
Effect of dilutive securities:
Series A convertible preferred stock		-		464,485		137,783		508,857
Warrants		-		-		10,197		66,752
Weighted average common stock outstanding - diluted		2,667,017		2,462,159		2,617,798		2,512,637
Net income per common share - basic	$	0.88	$	0.57	$	1.51	$	2.57
Net income per common share - diluted	$	0.88	$	0.46	$	1.42	$	1.98

Aggregate common stock equivalents

	September 30, 2012		December 31, 2011
Warrants		-		220,158
Series A convertible preferred stock		-		366,527
Total		-		586,685

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Short-Term Bank Loans (Tables)

9 Months Ended

Sep. 30, 2012

Short-Term Bank Loans [Abstract]

Schedule of short-term bank loans

	September 30, 2012		December 31, 2011
Loan from Agricultural and Commercial Bank, due on March 30, 2012 with annual interest at December 31, 2011 of 7.88%, secured by certain assets of the Company and repaid on due date.	$	-	$	628,466
Loan from China Merchants Bank, due on May 20, 2012 with annual interest rate of 6.73% at March 31, 2012 and December 31, 2011, respectively, and repaid on due date.		-		471,350
Loan from China Merchants Bank, due on November 17, 2012 with annual interest rate being adjusted quarterly based on 130% of People’s Bank of China’s base rate.		473,634		-
Loan from Agricultural and Commercial Bank, due on October 10, 2012 with annual interest rate of 5.75%, secured by certain assets of the Company and repaid on August 22, 2012.		-		471,350
Loan from Agricultural and Commercial Bank, due on August 26, 2013 with annual interest rate of 5.75% at September 30, 2012, secured by certain assets of the Company.		473,634		-
Loan from Bank of Communications, due on May 14, 2012 with annual interest rate being adjusted quarterly based on 120% of People’s Bank of China’s base rate, and repaid on due date.		-		471,350
Loan from Bank of Communications, due on November 14, 2012 with annual interest rate of 7.32% at September 30, 2012.		473,634		-
Loan from Bank of Communications, due on May 23, 2012 with annual interest rate being adjusted quarterly based on 120% of People’s Bank of China’s base rate, and repaid on due date.		-		314,233
Loan from Bank of Communications, due on November 21, 2012 with annual interest rate of 7.32% at September 30, 2012.		315,757		-
Loan from Bank of China, due on January 16, 2013 with annual interest rate of 7.35% at September 30, 2012 and secured by certain assets of the Company.		947,269		-
Total short-term bank loans	$	2,683,928	$	2,356,749

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Capital Lease Obligations (Details Textual)	9 Months Ended
	Sep. 30, 2012
Capital Lease Obligation (Textual)
Non-cancelable capital lease expiration date	Jun. 03, 2014

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Land Use Rights (Details) (USD $)			9 Months Ended
	Sep. 30, 2012	Dec. 31, 2011	Sep. 30, 2012 Minimum [Member]	Sep. 30, 2012 Maximum [Member]
Components of land use rights
Land use rights, Useful Life			40 years	50 years
Land use rights	$ 4,262,835	$ 4,242,273
Less: accumulated amortization	(493,777)	(421,737)
Land use rights, net	$ 3,769,058	$ 3,820,536

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Consolidated Satatements of Cash Flows (Unaudited) (USD $)	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$ 3,729,267	$ 4,970,109
Adjustments to reconcile net income from operations to net cash provided by operating activities:
Depreciation	4,719,769	3,651,168
Amortization of land use rights	70,068	68,145
(Decrease) increase in allowance for doubtful accounts	(46,616)	389,120
Warrants modification expense	235,133
Stock-based compensation expense	129,030	282,259
Changes in assets and liabilities:
Notes receivable	(112,209)	(96,409)
Accounts receivable	(3,368,092)	(70,783)
Inventories	(1,925,810)	(1,935,112)
Prepaid value-added taxes on purchases	844,969	814,967
Prepaid and other current assets	(41,315)	(48,340)
Advances to suppliers	(627,455)	(495,317)
Accounts payable	1,310,123	(2,741,480)
Accrued expenses	(49,578)	58,098
VAT and service taxes payable		(82,941)
Income taxes payable	289,230	(712,490)
Advances from customers	668,446	1,839,882
NET CASH PROVIDED BY OPERATING ACTIVITIES	5,824,960	5,890,876
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for deposit on equipment		(768,520)
Purchase of property and equipment	(6,334,776)	(6,413,874)
NET CASH USED IN INVESTING ACTIVITIES	(6,334,776)	(7,182,394)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease	(205,509)	(143,545)
Proceeds from bank loans	2,686,706	2,612,969
Repayment of bank loans	(2,370,623)	(2,151,857)
Decrease (increase) in restricted cash	316,083	(461,112)
(Decrease) increase in bank acceptance notes payable	(316,083)	461,112
Proceeds from sale of common stock		125,000
Proceeds from exercise of warrants	198,142	400,000
NET CASH PROVIDED BY FINANCING ACTIVITIES	308,716	842,567
EFFECT OF EXCHANGE RATE ON CASH AND CASH EQUIVALENTS	3,898	20,048
NET DECREASE IN CASH AND CASH EQUIVALENTS	(197,202)	(428,903)
CASH AND CASH EQUIVALENTS - beginning of period	1,152,607	947,177
CASH AND CASH EQUIVALENTS - end of period	955,405	518,274
Cash paid for:
Interest	244,685	122,980
Income taxes	1,200,944	2,662,115
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Security deposit and leased property in exchange for capital lease obligations		795,022
Series A preferred converted to common shares	13,198	3,536
Common stock issued for future service	$ 27,440	$ 63,576

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Land Use Rights

9 Months Ended

Sep. 30, 2012

Land Use Rights [Abstract]

LAND USE RIGHTS

NOTE 5 – LAND USE RIGHTS

There is no private ownership of land in China. Land is owned by the government and the government grants land use rights for specified terms. The Company’s land use rights have terms of 45 and 50 years and expire on January 1, 2053 and October 30, 2053. The Company amortizes the land use rights over the term of the respective land use right. For the nine months ended September 30, 2012 and 2011, amortization of land use rights amounted to $70,068 and $68,145, respectively. For the three months ended September 30, 2012 and 2011, amortization of land use rights amounted to $23,341 and $23,007, respectively. At September 30, 2012 and December 31, 2011, land use rights consisted of the following:

	Useful Life	September 30, 2012			December 31, 2011
Land use rights	45 - 50 years	$	4,262,835		$	4,242,273
Less: accumulated amortization			(493,777	)		(421,737	)
		$	3,769,058		$	3,820,536

Amortization of land use rights attributable to future periods is as follows:

Twelve-month periods ending September 30:
2013	$	93,328
2014		93,328
2015		93,328
2016		93,328
2017		93,328
Thereafter		3,302,418
	$	3,769,058

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Concentrations (Details Textual)	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011
Concentrations (Textual)
Customers accounted for segment revenue	No customer accounted for 10% or more	No customer accounted for 10% or more
Suppliers accounted for segment purchases	Three suppliers that accounted for 10% or more	Four suppliers that accounted for 10% or more

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Bank Acceptance Notes Payable (Tables)

9 Months Ended

Sep. 30, 2012

Bank Acceptance Notes Payables [Abstract]

Schedule of bank acceptance notes payables

	September 30, 2012		December 31, 2011
Agricultural and Commercial Bank, non-interest bearing, due and paid on January 15, 2012, collateralized by 100% of restricted cash deposited.	$	-	$	314,233
Total	$	-	$	314,233

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Inventories (Details) (USD $)	Sep. 30, 2012	Dec. 31, 2011
Components of inventories
Raw materials	$ 1,861,015	$ 1,514,928
Work in process	2,363,824	1,441,231
Finished goods	2,169,188	1,492,488
Inventory, Gross, Total	6,394,027	4,448,647
Less: reserve for obsolete inventory	(173,393)	(172,557)
Inventory net, Total	$ 6,220,634	$ 4,276,090

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Organization and Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2012

Organization and Summary Of Significant Accounting Policies [Abstract]

Basis of presentation; management’s responsibility for preparation of financial statements

Basis of presentation; management’s responsibility for preparation of financial statements

Management acknowledges its responsibility for the preparation of the accompanying interim consolidated financial statements which reflect all adjustments, consisting of normal recurring adjustments, considered necessary in its opinion for a fair statement of its consolidated financial position and the results of its operations for the interim period presented.

These consolidated financial statements should be read in conjunction with the summary of significant accounting policies and notes to consolidated financial statements included in the Company’s Form 10-K annual report for the year ended December 31, 2011.

The accompanying unaudited consolidated financial statements for Cleantech Solutions International, Inc., its subsidiaries and variable interest entities, have been prepared in accordance with accounting principles generally accepted in the United States of America (the “U.S.”) for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole.

The Company’s consolidated financial statements include the financial statements of its wholly-owned subsidiaries, Fulland, Green Power and Fulland Wind Energy, as well as the financial statements of Huayang Companies, Dyeing and Electric.  All significant intercompany accounts and transactions have been eliminated in consolidation.

Pursuant to Accounting Standards Codification (“ASC”) Topic 810, the Huayang Companies are considered variable interest entities (“VIE”), and the Company is the primary beneficiary.  The Company’s relationships with the Huayang Companies and their shareholders are governed by a series of contractual arrangements between Green Power, the Company’s wholly foreign-owned enterprise in the PRC, and each of the Huayang Companies, which are the operating companies of the Company in the PRC. Under PRC laws, each of Green Power, Dyeing and Electrical is an independent legal entity and none of them is exposed to liabilities incurred by the other parties. The contractual arrangements constitute valid and binding obligations of the parties of such agreements. Each of the contractual arrangements and the rights and obligations of the parties thereto are enforceable and valid in accordance with the laws of the PRC. On October 12, 2007, the Company entered into the following contractual arrangements with each of Dyeing and Electrical:

Consulting Services Agreement. Pursuant to the exclusive consulting services agreements between Green Power and the Huayang Companies, Green Power has the exclusive right to provide to the Huayang Companies general business operation services, including advice and strategic planning, as well as consulting services related to the technological research and development of dyeing and finishing machines, electrical equipment and related products (the “ Services ”). Under this agreement, Green Power owns the intellectual property rights developed or discovered through research and development, in the course of providing the Services, or derived from the provision of the Services. The Huayang Companies shall pay a quarterly consulting service fees in Renminbi (“RMB”) to Fulland that is equal to all of the Huayang Companies’ profits for such quarter.

Operating Agreement. Pursuant to the operating agreement among Green Power, the Huayang Companies and all shareholders of the Huayang Companies, Green Power provides guidance and instructions on the Huayang Companies’ daily operations, financial management and employment issues. The Huayang Companies shareholders must designate the candidates recommended by Green Power as their representatives on the boards of directors of each of the Huayang Companies. Green Power has the right to appoint senior executives of the Huayang Companies. In addition, Green Power agrees to guarantee the Huayang Companies’ performance under any agreements or arrangements relating to the Huayang Companies’ business arrangements with any third party. The Huayang Companies, in return, agree to pledge their accounts receivable and all of their assets to Green Power. Moreover, each of the Huayang Companies agrees that, without the prior consent of Green Power, it will not engage in any transactions that could materially affect its assets, liabilities, rights or operations, including, without limitation, incurrence or assumption of any indebtedness, sale or purchase of any assets or rights, incurrence of any encumbrance on any of their assets or intellectual property rights in favor of a third party or transfer of any agreements relating to their business operation to any third party. The term of this agreement, as amended on November 1, 2008, is 20 years from October 12, 2007 and may be extended only upon Green Power’s written confirmation prior to the expiration of the this agreement, with the extended term to be mutually agreed upon by the parties.

Equity Pledge Agreement. Under the equity pledge agreement between the Huayang Companies’ shareholders and Green Power, the Huayang Companies’ shareholders pledged all of their equity interests in the Huayang Companies to Green Power to guarantee the Huayang Companies’ performance of their respective obligations under the consulting services agreement. If the Huayang Companies or the Huayang Companies’ shareholders breach their respective contractual obligations, Green Power, as pledgee, will be entitled to certain rights, including the right to sell the pledged equity interests. The Huayang Companies’ shareholders also agreed that, upon occurrence of any event of default, Green Power shall be granted an exclusive, irrevocable power of attorney to take actions in the place and stead of the Huayang Companies’ shareholders to carry out the security provisions of the equity pledge agreement and take any action and execute any instrument that Green Power may deem necessary or advisable to accomplish the purposes of the equity pledge agreement. The Huayang Companies’ shareholders agreed not to dispose of the pledged equity interests or take any actions that would prejudice Green Power’s interest. The equity pledge agreement will expire two years after the Huayang Companies’ obligations under the consulting services agreements have been fulfilled.

Option Agreement.Under the option agreement between the Huayang Companies’ shareholders and Green Power, the Huayang Companies’ shareholders irrevocably granted Green Power or its designated person an exclusive option to purchase, to the extent permitted under PRC law, all or part of the equity interests in the Huayang Companies for the cost of the initial contributions to the registered capital or the minimum amount of consideration permitted by applicable PRC law. Green Power or its designated person has sole discretion to decide when to exercise the option, whether in part or in full. The term of this agreement, as amended on November 1, 2008, is 20 years from October 12, 2007 and may be extended prior to its expiration by written agreement of the parties.

Pursuant to ASC Topic 810 and related subtopics related to the consolidation of variable interest entities, the accounts of the Huayang Companies are consolidated in the accompanying financial statements.  As VIEs, the Huayang Companies’ sales are included in the Company’s total sales, its income from operations is consolidated with the Company’s, and the Company’s net income includes all of the Huayang Companies net income. The Company does not have any non-controlling interest and, accordingly, did not subtract any net income in calculating the net income of the VIEs that is attributable to the Company. Because of the contractual arrangements, the Company has a pecuniary interest in the Huayang Companies that requires consolidation of the Company’s and the Huayang Companies’ financial statements.

Use of Estimates

Use of estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures at the date of the financial statements and during the reporting period. Actual results could materially differ from these estimates. Significant estimates in the nine months ended September 30, 2012 and 2011 include the allowance for doubtful accounts, the allowance for obsolete inventory, the useful life of property and equipment and intangible assets, assumptions used in assessing impairment of long-term assets and valuation of deferred tax assets, accruals for taxes due, and the value of stock-based compensation and warrants modification expense.

Cash and cash equivalents

Cash and cash equivalents

For purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments purchased with a maturity of three months or less and money market accounts to be cash equivalents. The Company maintains cash and cash equivalents with various financial institutions mainly in the PRC and the U.S.  Balances in banks in the PRC are uninsured.

Fair value of financial instruments

Fair value of financial instruments

The Company adopted the guidance of ASC Topic 820 for fair value measurements which clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.

Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.

The carrying amounts reported in the balance sheets for cash and cash equivalents, restricted cash, notes receivable, accounts receivable, inventories, advances to suppliers, prepaid VAT on purchases, prepaid expenses and other, short-term bank loans, bank acceptance notes payable, accounts payable, accrued expenses, capital lease obligations, advances from customers, VAT and service taxes payable and income taxes payable approximate their fair market value based on the short-term maturity of these instruments. The Company did not identify any assets or liabilities that are required to be presented on the consolidated balance sheets at fair value in accordance with the accounting guidance.

ASC Topic 825-10 “Financial Instruments” allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding instruments.

Concentrations of credit risk

Concentrations of credit risk

The Company’s operations are carried out in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC’s economy. The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable. Substantially all of the Company’s cash is maintained with state-owned banks within the PRC, and none of these deposits are covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts. A significant portion of the Company’s sales are credit sales which are primarily to customers whose ability to pay is dependent upon the industry economics prevailing in these areas; however, concentrations of credit risk with respect to trade accounts receivables is limited due to generally short payment terms.  The Company also performs ongoing credit evaluations of its customers to help further reduce credit risk.

At September 30, 2012 and December 31, 2011, the Company’s cash balances by geographic area were as follows:

	September 30, 2012				December 31, 2011
Country:
United States	$	138,786	14.5	%	$	288,090	25.0	%
China		816,619	85.5	%		864,517	75.0	%
Total cash and cash equivalents	$	955,405	100.0	%	$	1,152,607	100.0	%

Restricted cash

Restricted cash

Restricted cash consists of cash deposits held by a bank to secure bank acceptance notes payable to the bank.

Notes receivable

Notes receivable

Notes receivable represents trade accounts receivable due from various customers where the customers’ bank has guaranteed the payment of the receivable. This amount is non-interest bearing and is normally paid within six months. Historically, the Company has experienced no losses on notes receivable. The Company’s notes receivable totaled $165,772 and $53,420 at September 30, 2012 and December 31, 2011, respectively.

Accounts receivable

Accounts receivable

Accounts receivable are presented net of an allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance, a customer’s historical payment history, its current credit-worthiness and current economic trends. Accounts are written off after exhaustive efforts at collection. At September 30, 2012 and December 31, 2011, the Company has established, based on a review of its outstanding balances, an allowance for doubtful accounts in the amounts of $2,584,732 and $2,618,608, respectively.

Inventory

Inventories

Inventories, consisting of raw materials, work in process and finished goods related to the Company’s products are stated at the lower of cost or market utilizing the weighted average method. An allowance is established when management determines that certain inventories may not be saleable. If inventory costs exceed expected market value due to obsolescence or quantities in excess of expected demand, the Company will record reserves for the difference between the cost and the market value. These reserves are recorded based on estimates. The Company recorded an inventory reserve of $173,393 and $172,557 at September 30, 2012 and December 31, 2011, respectively.

Advances to suppliers

Advances to suppliers

Advances to suppliers represent the cash paid in advance for the purchase of raw material from suppliers. The advance payments are intended to ensure preferential pricing and delivery. The amounts advanced under such arrangements totaled $847,216 and $219,347 as of September 30, 2012 and December 31, 2011, respectively.

Property and equipment

Property and equipment

Property and equipment are carried at cost and are depreciated on a straight-line basis over the estimated useful lives of the assets. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized.  When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. The Company examines the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.

Included in property and equipment is construction-in-progress which consisted of factory improvements and machinery pending installation and includes the costs of construction, machinery and equipment, and any interest charges arising from borrowings used to finance these assets during the period of construction or installation of the assets. No provision for depreciation is made on construction-in-progress until such time as the relevant assets are completed and ready for their intended use. Property purchased from a related party is recorded at the cost to the related party and any payment to or on behalf of the related party in excess of the cost is reflected as a distribution to a related party.

Impairment of long-lived assets

Impairment of long-lived assets

In accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value. The Company did not record any impairment charges for the nine months ended September 30, 2012 and 2011.

Advances from customers

Advances from customers

Advances from customers at September 30, 2012 and December 31, 2011 amounted to $1,840,352 and $1,166,942, respectively, and consist of prepayments from customers for merchandise that had not yet been shipped. The Company will recognize the deposits as revenue as customers take delivery of the goods in accordance with its revenue recognition policy.

Revenue recognition

Revenue recognition

Pursuant to the guidance of ASC Topic 605 and ASC Topic 360, the Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the purchase price is fixed or determinable and collectability is reasonably assured. The Company accounts for the product sale as a multiple element arrangement. Revenue from multiple element arrangements is allocated among the separate accounting units based on the residual method. Under the residual method, the revenue is allocated to undelivered elements based on fair value of such undelivered elements and the residual amounts of revenue allocated to delivered elements. The Company recognizes revenues from the sale of dyeing and finishing equipment, forged rolled rings and other components upon shipment and transfer of title. The other elements may include installation and, generally, a one-year warranty. Equipment installation revenue is valued based on estimated service person hours to complete installation and is recognized when the labor has been completed and the equipment has been accepted by the customer, which is generally within a couple days of the delivery of the equipment. Warranty revenue is valued based on estimated service person hours to complete a service and generally is recognized over the contract period.  For the nine months ended September 30, 2012 and 2011, amounts allocated to warranty revenues were not material. Based on historical experience, warranty service calls and any related labor costs have been minimal. All other product sales with customer specific acceptance provisions, including the forged rolled rings, are recognized upon customer acceptance and the delivery of the parts or service. Revenues related to spare part sales are recognized upon shipment or delivery based on the trade terms.

Income taxes

Income taxes

The Company is governed by the Income Tax Law of the PRC and the U.S. Internal Revenue Code of 1986, as amended.  The Company accounts for income taxes using the liability method prescribed by ASC Topic 740, “Income Taxes.” Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date.

The Company applied the provisions of ASC 740-10-50, “Accounting for Uncertainty in Income Taxes,” which provides clarification related to the process associated with accounting for uncertain tax positions recognized in our financial statements. Audit periods remain open for review until the statute of limitations has passed. The completion of review or the expiration of the statute of limitations for a given audit period could result in an adjustment to the Company’s liability for income taxes. Any such adjustment could be material to the Company’s results of operations for any given quarterly or annual period based, in part, upon the results of operations for the given period. As of September 30, 2012 and December 31, 2011, the Company had no uncertain tax positions, and will continue to evaluate for uncertain positions in the future.

Stock-based compensation

Stock-based compensation

Stock-based compensation is accounted for based on the requirements of the Share-Based Payment topic of ASC Topic 718 which requires recognition in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). The Financial Accounting Standards Board (“FASB”) ASC also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.

Pursuant to ASC Topic 505-50, for share-based payments to consultants and other third-parties, compensation expense is determined at the “measurement date.” The expense is recognized over the vesting period of the award. Until the measurement date is reached, the total amount of compensation expense remains uncertain. The Company records compensation expense based on the fair value of the award at the reporting date. The awards to consultants and other third-parties are then revalued, or the total compensation is recalculated, based on the then current fair value, at each subsequent reporting date.

Shipping costs

Shipping costs

Shipping costs are included in selling expenses and totaled $803,951 and $933,465 for the nine months ended September 30, 2012 and 2011, respectively. Shipping costs totaled $311,275 and $262,747 for the three months ended September 30, 2012 and 2011, respectively.

Employee benefits

Employee benefits

The Company’s operations and employees are all located in the PRC.  The Company makes mandatory contributions to the PRC government’s health, retirement benefit and unemployment funds in accordance with the relevant Chinese social security laws, equal to approximately 25% of salaries. The costs of these payments are charged to income in the same period as the related salary costs and are not material.

Advertising

Advertising

Advertising is expensed as incurred and is included in selling, general and administrative expenses on the accompanying consolidated statements of income and comprehensive income and was not material.

Research and development

Research and development

Research and development costs are expensed as incurred. For the nine months ended September 30, 2012 and 2011, research and development costs were not material.

Foreign currency translation

Foreign currency translation

The reporting currency of the Company is the U.S. dollar. The functional currency of the parent company is the U.S. dollar and the functional currency of the Company’s operating subsidiaries is the Chinese Renminbi (“RMB”). For the subsidiaries and affiliates, whose functional currencies are the RMB, results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period, and equity is translated at historical exchange rates. As a result, amounts relating to assets and liabilities reported on the statements of cash flows may not necessarily agree with the changes in the corresponding balances on the balance sheets.  Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income. The cumulative translation adjustment and effect of exchange rate changes on cash for the nine months ended September 30, 2012 and 2011 was $3,898 and $20,048, respectively. Transactions denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing on the transaction dates. Assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing at the balance sheet date with any transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

All of the Company’s revenue transactions are transacted in the functional currency of the operating subsidiaries and affiliates. Other than for the purchase of equipment from non-Chinese suppliers, the Company does not enter into any material transaction in foreign currencies. Transaction gains or losses have not had, and are not expected to have, a material effect on the results of operations of the Company.

Asset and liability accounts at September 30, 2012 and December 31, 2011 were translated at 6.3340 RMB to $1.00 and at 6.36470 RMB to $1.00, respectively, which were the exchange rates on the balance sheet dates. Equity accounts were stated at their historical rate. The average translation rates applied to the statements of income for the nine months ended September 30, 2012 and 2011 were 6.32745 RMB and 6.50601 RMB to $1.00, respectively.  Cash flows from the Company’s operations are calculated based upon the local currencies using the average translation rate. As a result, amounts related to assets and liabilities reported on the consolidated statements of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheets.

Reverse stock split

Reverse stock split

The Company effected a one-for-ten reverse stock split on March 6, 2012.  All share and per share information has been retroactively adjusted to reflect this reverse stock split.

Income per share of common stock

Income per share of common stock

ASC Topic 260 “Earnings per Share,” requires presentation of both basic and diluted earnings per share (“EPS”) with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.

Basic net income per share is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted income per share is computed by dividing net income by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. Potentially dilutive common stock consist of common stock issuable upon the conversion of series A convertible preferred stock (using the if-converted method) and common stock purchase warrants (using the treasury stock method). 

The following table presents a reconciliation of basic and diluted net income per share:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Net income available to common stockholders for basic and diluted net income per share of common stock	$	2,355,102	$	1,134,990	$	3,729,267	$	4,970,109
Weighted average common stock outstanding - basic		2,667,017		1,997,674		2,469,818		1,937,028
Effect of dilutive securities:
Series A convertible preferred stock		-		464,485		137,783		508,857
Warrants		-		-		10,197		66,752
Weighted average common stock outstanding - diluted		2,667,017		2,462,159		2,617,798		2,512,637
Net income per common share - basic	$	0.88	$	0.57	$	1.51	$	2.57
Net income per common share - diluted	$	0.88	$	0.46	$	1.42	$	1.98

The Company’s aggregate common stock equivalents at September 30, 2012 and December 31, 2011 include the following:

	September 30, 2012		December 31, 2011
Warrants		-		220,158
Series A convertible preferred stock		-		366,527
Total		-		586,685

Accumulated other comprehensive income

Accumulated other comprehensive income

Comprehensive income is comprised of net income and all changes to the statements of stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. For the Company, comprehensive income for the three and nine months ended September 30, 2012 and 2011 included net income and unrealized gains from foreign currency translation adjustments.

Related parties

Related parties

Parties are considered to be related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company discloses all related party transactions. All transactions shall be recorded at fair value of the goods or services exchanged. Property purchased from a related party is recorded at the cost to the related party and any payment to or on behalf of the related party in excess of the cost is reflected as a distribution to related party.

Recent accounting pronouncements

Recent accounting pronouncement

Accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.