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, 2013

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.

 (Exact name of Registrant as specified in its charter)

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

No. 9 Yanyu Middle Road

Qianzhou Village, Huishan District, Wuxi City

Jiangsu Province, China 214181

 (Address of principal executive offices)

(86) 51083397559

 (Registrant’s telephone number, including area code)

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. 3,503,502 shares of common stock are issued and outstanding as of November 13, 2013.

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

FORM 10-Q

September 30, 2013

TABLE OF CONTENTS

		Page No.
PART I. - FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets as of September 30, 2013 (Unaudited) and December 31, 2012	3
	Consolidated Statements of Income and Comprehensive Income for the Three and Nine Months Ended September 30, 2013 and 2012 (unaudited)	4
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012 (unaudited)	5
	Notes to Unaudited Consolidated Financial Statements.	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	24
Item 3	Quantitative and Qualitative Disclosures About Market Risk.	39
Item 4	Controls and Procedures.	39
	PART II - OTHER INFORMATION
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.

2

PART 1 - FINANCIAL INFORMATION

Item 1.         Financial Statements.

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	September 30,		December 31,
	2013		2012
	(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	2,223,017	$	1,445,728
Restricted cash		796,567		-
Notes receivable		485,793		88,029
Accounts receivable, net of allowance for doubtful accounts		11,545,834		10,078,623
Inventories, net of reserve for obsolete inventory		6,216,215		5,897,555
Advances to suppliers		1,303,911		593,104
Prepaid VAT on purchases		830,361		542,032
Prepaid expenses and other		227,651		428,326
Total Current Assets		23,629,349		19,073,397
PROPERTY AND EQUIPMENT - net		66,699,091		59,436,100
OTHER ASSETS:
Deferred tax assets		566,666		551,890
Equipment held for sale		7,309,150		7,118,555
Land use rights, net		3,784,841		3,756,342
Total Assets	$	101,989,097	$	89,936,284
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank loans	$	3,088,728	$	2,216,558
Bank acceptance notes payable		796,567		-
Accounts payable		5,494,461		5,474,479
Accrued expenses		552,758		986,824
Capital lease obligation - current portion		-		251,413
Advances from customers		2,210,102		1,851,987
VAT and service taxes payable		-		206,527
Income taxes payable		1,069,434		822,082
Total Current Liabilities		13,212,050		11,809,870
OTHER LIABILITIES:
Capital lease obligation - net of current portion		-		132,756
Total Liabilities		13,212,050		11,942,626
STOCKHOLDERS' EQUITY:
Preferred stock ($0.001 par value; 10,000,000 shares authorized; 0 share issued and
outstanding at September 30, 2013 and December 31, 2012, respectively)		-		-
Common stock ($0.001 par value; 50,000,000 shares authorized; 3,503,502 and 2,894,586
shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively)		3,503		2,894
Additional paid-in capital		31,532,308		28,987,128
Retained earnings		44,200,317		38,401,734
Statutory reserve		2,757,044		2,479,738
Accumulated other comprehensive gain - foreign currency translation adjustment		10,283,875		8,122,164
Total Stockholders' Equity		88,777,047		77,993,658
Total Liabilities and Stockholders' Equity	$	101,989,097	$	89,936,284

See notes to unaudited consolidated financial statements

3

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
REVENUES	$	18,213,508		$	17,343,723		$	49,312,341		$	39,585,815
COST OF REVENUES		13,576,808			13,024,265			37,572,531			30,689,436
GROSS PROFIT		4,636,700			4,319,458			11,739,810			8,896,379
OPERATING EXPENSES:
Depreciation		109,652			373,896			461,539			1,122,432
Selling, general and administrative		1,316,925			739,386			2,675,076			2,157,053
Total Operating Expenses		1,426,577			1,113,282			3,136,615			3,279,485
INCOME FROM OPERATIONS		3,210,123			3,206,176			8,603,195			5,616,894
OTHER INCOME (EXPENSE):
Interest income		14,840			5,069			16,009			10,919
Interest expense		(74,638	)		(84,289	)		(244,291	)		(244,685	)
Foreign currency (loss) gain		(9,821	)		1,251			(15,800	)		6,642
Warrant modification expense		-			-			-			(235,133	)
Other income		5,933			51,523			43,015			64,803
Total Other Income (Expense), net		(63,686	)		(26,446	)		(201,067	)		(397,454	)
INCOME BEFORE INCOME TAXES		3,146,437			3,179,730			8,402,128			5,219,440
INCOME TAXES		1,015,701			824,628			2,326,239			1,490,173
NET INCOME	$	2,130,736		$	2,355,102		$	6,075,889		$	3,729,267
COMPREHENSIVE INCOME:
NET INCOME	$	2,130,736		$	2,355,102		$	6,075,889		$	3,729,267
OTHER COMPREHENSIVE INCOME:
Unrealized foreign currency translation gain (loss)		516,244			(169,625	)		2,161,711			342,015
COMPREHENSIVE INCOME	$	2,646,980		$	2,185,477		$	8,237,600		$	4,071,282
NET INCOME PER COMMON SHARE:
Basic	$	0.61		$	0.88		$	1.95		$	1.51
Diluted	$	0.61		$	0.88		$	1.95		$	1.42
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic		3,479,646			2,667,017			3,112,148			2,469,818
Diluted		3,479,646			2,667,017			3,112,148			2,617,798

See notes to unaudited consolidated financial statements

4

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Nine Months Ended
	September 30,
	2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	6,075,889		$	3,729,267
Adjustments to reconcile net income from operations to net cash
provided by operating activities:
Depreciation		4,882,899			4,719,769
Amortization of land use rights		71,261			70,068
Increase (decrease) in allowance for doubtful accounts		76,784			(46,616	)
Warrant modification expense		-			235,133
Stock-based compensation expense		278,034			129,030
Changes in operating assets and liabilities:
Notes receivable		(390,950	)		(112,209	)
Accounts receivable		(1,260,651	)		(3,368,092	)
Inventories		(158,944	)		(1,925,810	)
Prepaid value-added taxes on purchases		(270,730	)		844,969
Prepaid and other current assets		82,378			(41,315	)
Advances to suppliers		(687,094	)		(627,455	)
Accounts payable		(672,461	)		1,310,123
Accrued expenses		(451,672	)		(49,578	)
VAT and service taxes payable		(209,667	)		-
Income taxes payable		222,801			289,230
Advances from customers		305,052			668,446
NET CASH PROVIDED BY OPERATING ACTIVITIES		7,892,929			5,824,960
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(9,943,309	)		(6,334,776	)
NET CASH USED IN INVESTING ACTIVITIES		(9,943,309	)		(6,334,776	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease		(390,009	)		(205,509	)
Proceeds from bank loans		4,821,973			2,686,706
Repayments of bank loans		(4,018,311	)		(2,370,623	)
(Increase) decrease in restricted cash		(787,589	)		316,083
Increase (decrease) in bank acceptance notes payable		787,589			(316,083	)
Net proceeds from sale of common stock		2,388,589			-
Proceeds from exercise of warrants		-			198,142
NET CASH PROVIDED BY FINANCING ACTIVITIES		2,802,242			308,716
EFFECT OF EXCHANGE RATE ON CASH AND CASH EQUIVALENTS		25,427			3,898
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		777,289			(197,202	)
CASH AND CASH EQUIVALENTS - beginning of period		1,445,728			1,152,607
CASH AND CASH EQUIVALENTS - end of period	$	2,223,017		$	955,405
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest	$	244,291		$	244,685
Income taxes	$	2,103,438		$	1,200,944
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Property and equipment acquired on credit as payable	$	547,294		$	-
Series A preferred converted to common shares	$	-		$	13,198
Common stock issued for future service	$	78,600		$	27,440

See notes to unaudited consolidated financial statements

5

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

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 unaudited 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, 2012.

6

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

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 unaudited 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.

7

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

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 unaudited 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 three and nine months ended September 30, 2013 and 2012 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 warrant 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. As of September 30, 2013 and December 31, 2012, balances in banks in the PRC of $1,756,117 and $1,414,674, respectively, are uninsured.

8

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

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 following tables present information about equipment held for sale measured at fair value on a nonrecurring basis as of September 30, 2013 and December 31, 2012:

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at  September 30, 2013		Gains (Losses)
Equipment held for sale	$	-	$	-	$	7,309,150	$	7,309,150	$	-

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at December 31, 2012		Loss
Equipment held for sale	$	-	$	-	$	7,118,555	$	7,118,555	$	2,206,253

The Company conducted an impairment assessment on the equipment held for sale based on the guidelines established in FASB ASC Topic 360 to determine the estimated fair market value of the equipment as of December 31, 2012. Upon completion of its 2012 impairment analysis, the Company determined that the carrying value exceeded the fair market value on equipment which is held for sale. The Company recorded an impairment charge of $2,206,253 at December 31, 2012. The difference in the value of equipment held for sale at September 30, 2013 from December 31, 2012 reflects changes in the currency exchange ratio.

The carrying amounts reported in the consolidated 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.

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.

9

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

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

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, 2013 and December 31, 2012, the Company’s cash balances by geographic area were as follows:

	September 30, 2013				December 31, 2012
Country:
United States	$	466,900	21.0	%	$	31,054	2.1	%
China		1,756,117	79.0	%		1,414,674	97.9	%
Total cash and cash equivalents	$	2,223,017	100.0	%	$	1,445,728	100.0	%

Restricted cash

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

Notes receivable

Notes receivable represents trade accounts receivable due from 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 $485,793 and $88,029 at September 30, 2013 and December 31, 2012, 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, 2013 and December 31, 2012, the Company has established, based on a review of its outstanding balances, an allowance for doubtful accounts in the amounts of $2,739,117 and $2,592,057, respectively.

10

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

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

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 $139,621 and $135,980 at September 30, 2013 and December 31, 2012, 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 $1,303,911 and $593,104 as of September 30, 2013 and December 31, 2012, 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.

Equipment held for sale

Long-lived assets are classified as held for sale when certain criteria are met. These criteria include: management’s commitment to a plan to sell the assets; the availability of the assets for immediate sale in their present condition; an active program to locate buyers and other actions to sell the assets has been initiated; the sale of the assets is probable and their transfer is expected to qualify for recognition as a completed sale within one year; the assets are being marketed at reasonable prices in relation to their fair value; and it is unlikely that significant changes will be made to the plan to sell the assets. We measure long-lived assets to be disposed of by sale at the lower of carrying amount or fair value, less associated costs to sell. At September 30, 2013 and December 31, 2012, the Company reflected certain electro-slag re-melted (“ESR”) equipment that was used in 2010 and 2011 to produce forged products for the high performance components market as equipment held for sale on the accompanying consolidated balance sheets.

11

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

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

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 charge for the three and nine months ended September 30, 2013 and 2012.

Advances from customers

Advances from customers at September 30, 2013 and December 31, 2012 amounted to $2,210,102 and $1,851,987, 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 and title to the assets is transferred to customers in accordance with the Company’s 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 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 three and nine months ended September 30, 2013 and 2012, amounts allocated to installation and warranty revenues were minimal. 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, 2013 and December 31, 2012, the Company had no uncertain tax positions, and will continue to evaluate for uncertain positions in the future.

12

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

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

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 $354,164 and $311,275 for the three months ended September 30, 2013 and 2012, respectively. Shipping costs totaled $910,095 and $803,951 for the nine months ended September 30, 2013 and 2012, 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. The costs of these payments are charged to the same accounts as the related salary costs in the same period as the related salary costs. Employee benefit costs totaled $56,491 and $48,020 for the three months ended September 30, 2013 and 2012, respectively. Employee benefit costs totaled $157,588 and $137,575 for the nine months ended September 30, 2013 and 2012, respectively.

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 totaled $18,260 and $16,997 for the three months ended September 30, 2013 and 2012, respectively. Advertising expenses totaled $18,260 and $20,653 for the nine months ended September 30, 2013 and 2012, respectively.

Research and development

Research and development costs are expensed as incurred and are included in selling, general and administrative expenses. The costs primarily consist of raw materials and salaries paid for the development and improvement of the Company’s new dyeing machinery. Research and development costs totaled $29,050 and $66,846 for the three and nine months ended September 30, 2013, respectively.  The Company did not incur any research and development expense during the three and nine months ended September 30, 2012.

13

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

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

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, 2013 and 2012 was $25,427 and $3,898, 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, 2013 and December 31, 2012 were translated at 6.15140 RMB to $1.00 and at 6.31610 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, 2013 and 2012 were 6.22152 RMB and 6.32745 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).

14

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

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

Income per share of common stock (continued)

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Net income available to common stockholders for basic and diluted net income per share of common stock	$	2,130,736	$	2,355,102	$	6,075,889	$	3,729,267
Weighted average common stock outstanding - basic		3,479,646		2,667,017		3,112,148		2,469,818
Effect of dilutive securities:
Series A convertible preferred stock		-		-		-		137,783
Warrants		-		-		-		10,197
Weighted average common stock outstanding - diluted	$	3,479,646		2,667,017		3,112,148		2,617,798
Net income per common share - basic	$	0.61	$	0.88	$	1.95	$	1.51
Net income per common share - diluted	$	0.61	$	0.88	$	1.95	$	1.42

The Company did not have any common stock equivalents at September 30, 2013 and December 31, 2012.

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 are recorded at fair value of the goods or services exchanged.

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, 2013 and 2012 included net income and unrealized gains/losses from foreign currency translation adjustments.

Recent accounting pronouncement

In March 2013, the FASB issued ASU 2013-05 “Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.” ASU 2013-05 addresses the accounting for the cumulative translation adjustment when a parent either sells part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. For public entities, the ASU is effective prospectively for fiscal years, and interim periods, within those years, beginning after December 15, 2013. Early adoption is permitted. The adoption of ASU 2013-05 is not expected to have a material impact on the Company’s consolidated financial statements.

15

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

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

Recent accounting pronouncement (continued)

In July 2013, the FASB issued ASU 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists." ASU 2013-11 provides guidance on the presentation of unrecognized tax benefits related to any disallowed portion of net operating loss carryforwards, similar tax losses, or tax credit carryforwards, if they exist. ASU 2013-11 is effective for fiscal years beginning after December 15, 2013. The adoption of ASU 2013-11 is not expected to have a material impact on the Company’s consolidated financial statements.

Other 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. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.

Reclassification

Certain reclassifications have been made in prior year same period’s financial statements to conform to the current period’s financial presentation.

NOTE 2 – ACCOUNTS RECEIVABLE

At September 30, 2013 and December 31, 2012, accounts receivable consisted of the following:

	September 30, 2013			December 31, 2012
Accounts receivable	$	14,284,951		$	12,670,680
Less: allowance for doubtful accounts		(2,739,117	)		(2,592,057	)
	$	11,545,834		$	10,078,623

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. After evaluating the collectability of individual receivable balances, the Company increased the allowance for doubtful accounts in the amount of $76,784 for the nine months ended September 30, 2013 and decreased the allowance for doubtful accounts of $46,616 for the nine months ended September 30, 2012.

NOTE 3 - INVENTORIES

At September 30, 2013 and December 31, 2012, inventories consisted of the following:

	September 30, 2013			December 31, 2012
Raw materials	$	1,560,581		$	1,685,493
Work in process		2,580,155			2,602,990
Finished goods		2,215,100			1,745,052
		6,355,836			6,033,535
Less: reserve for obsolete inventory		(139,621	)		(135,980	)
	$	6,216,215		$	5,897,555

For the three and nine months ended September 30, 2013 and 2012, the Company did not make any change for reserve for obsolete inventory.

16

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

NOTE 4 - PROPERTY AND EQUIPMENT

At September 30, 2013 and December 31, 2012, property and equipment consisted of the following:

	Useful Life	September 30, 2013			December 31, 2012
Office equipment and furniture	5 Years	$	253,404		$	222,853
Manufacturing equipment	5 – 10 Years		67,477,040			56,916,700
Vehicles	5 Years		128,518			125,167
Construction in progress	-		1,578,728			28,785
Building and building improvements	20 Years		21,342,118			20,785,597
			90,779,808			78,079,102
Less: accumulated depreciation			(24,080,717	)		(18,643,002	)
		$	66,699,091		$	59,436,100

For the three months ended September 30, 2013 and 2012, depreciation expense amounted to $1,661,740 and $1,627,258, respectively, of which $1,552,088 and $1,253,362, respectively, is included in cost of revenues and the remainder is included in operating expenses. For the nine months ended September 30, 2013 and 2012, depreciation expense amounted to $4,882,899 and $4,719,769, respectively, of which $4,421,360 and $3,597,337, respectively, is included in cost of revenues and the remainder is included in operating 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 three months ended September 30, 2013 and 2012, amortization of land use rights amounted to $23,954 and $23,341, respectively. For the nine months ended September 30, 2013 and 2012, amortization of land use rights amounted to $71,261 and $70,068, respectively. At September 30, 2013 and December 31, 2012, land use rights consisted of the following:

	Useful Life	September 30, 2013			December 31, 2012
Land use rights	45 - 50 years	$	4,389,374		$	4,274,916
Less: accumulated amortization			(604,533	)		(518,574	)
		$	3,784,841		$	3,756,342

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

Twelve-month periods ending September 30:	Amount
2014	$	96,098
2015		96,098
2016		96,098
2017		96,098
2018		96,098
Thereafter		3,304,351
	$	3,784,841

17

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

NOTE 6 – EQUIPMENT HELD FOR SALE

The Company measures long-lived assets to be disposed of by sale at the lower of carrying amount or fair value, less associated costs to sell these assets. The assets held for sale are no longer subject to depreciation as they are not used in operations. As of September 30, 2013 and December 31, 2012, the Company committed to a plan to sell certain ESR equipment that was used to produce forged products for the high performance components market as equipment held for sale on the accompanying consolidated balance sheet. The Company evaluated equipment for impairment at September 30, 2013 and December 31, 2012. The Company compared the estimated fair values of the equipment to its carrying value with impairment indicators and recorded an impairment charge for the excess of carrying value over fair value. For the nine months ended September 30, 2013 and 2012, the Company did not incur any impairment charge on ESR equipment. Although the Company is actively seeking and negotiating with potential buyers, the Company can give no assurances that the sale process will be successful and, if it were successful, there are no assurances as to the amount or timing of any potential proceeds.

NOTE 7 – 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, 2013 and December 31, 2012, short-term bank loans consisted of the following:

	September 30, 2013		December 31, 2012
Loan from Agricultural and Commercial Bank, due on August 26, 2013 with annual interest rate of 6.90% at December 31, 2012, secured by certain assets of the Company and repaid on May 15, 2013.	$	-	$	474,977
Loan from Agricultural and Commercial Bank, due on May 9, 2014 with annual interest rate of 7.20% at September 30, 2013, secured by certain assets of the Company.		487,694		-
Loan from Bank of Communications, due on May 8, 2013 with annual interest rate of 6.72% at December 31, 2012, repaid on due date.		-		316,651
Loan from Bank of Communications, due on May 12, 2013 with annual interest rate of 6.72% at December 31, 2012, repaid on due date.		-		474,977
Loan from Bank of Communications, due on November 5, 2013 with annual interest rate of 6.72% at September 30, 2013, repaid on due date. (see note 16)		325,129		-
Loan from Bank of Communications, due on November 12, 2013 with annual interest rate of 6.72% at September 30, 2013, repaid on due date. (see note 16)		487,694		-
Loan from Bank of China, due on January 16, 2013 with annual interest rate of 7.35% at December 31, 2012, secured by certain assets of the Company, repaid on due date.		-		949,953
Loan from Bank of China, due on March 1, 2014 with annual interest rate of 6.27% at September 30, 2013, secured by certain assets of the Company.		487,694		-
Loan from Bank of China, due on March 3, 2014 with annual interest rate of 6.27% at September 30, 2013, secured by certain assets of the Company.		487,694		-
Loan from Jiangsu Huishan Mintai Village Town Bank, due on July 15, 2014 with annual interest rate of 9.30% at September 30, 2013, secured by certain assets of the Company.		812,823		-
Total short-term bank loans	$	3,088,728	$	2,216,558

18

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

NOTE 8 – 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, 2013 and December 31, 2012, the Company’s bank acceptance notes payables consisted of the following:

	September 30, 2013		December 31, 2012
Bank of China, non-interest bearing, due on January 4, 2014, collateralized by 100% of restricted cash deposited.	$	81,283	$	-
Jiangsu Huishan Mintai Village Town Bank, non-interest bearing, due on February 23, 2014, collateralized by 100% of restricted cash deposited.		325,129		-
Bank of Communications, non-interest bearing, due on November 23, 2013, collateralized by 100% of restricted cash deposited.		32,513		-
Bank of Communications, non-interest bearing, due on November 30, 2013, collateralized by 100% of restricted cash deposited.		325,129		-
Bank of Communications, non-interest bearing, due on January 3, 2014, collateralized by 100% of restricted cash deposited.		32,513		-
Total	$	796,567	$	-

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 and to the temporary differences related to the deduction of impairment losses in PRC for income tax purposes as compared to financial statement purposes, are dependent upon future taxable income during the periods in which those temporary differences become deductible or are utilized.

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. Effective in January 2008, 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.

The tax effects of temporary differences under the Income Tax Law of the PRC that give rise to significant portions of deferred tax assets and liabilities as of September 30, 2013 and December 31, 2012 are as follows:

19

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

NOTE 9 – INCOME TAXES (continued)

	September 30, 2013			December 31, 2012
Deferred tax asset:
Net U.S. operating loss carry forward	$	1,786,309		$	1,614,245
Loss on impairment of equipment		566,666			551,890
Total gross deferred tax asset		2,352,975			2,166,135
Less: valuation allowance		(1,786,309	)		(1,614,245	)
Net deferred tax asset	$	566,666		$	551,890

The valuation allowance at September 30, 2013 and December 31, 2012 was $1,786,309 and $1,614,245, respectively, related to the U.S. net operating loss carry forward. During the nine months ended September 30, 2013, the valuation allowance was increased by approximately $172,000.

In assessing the ability to realize the deferred tax asset from the loss on impairment of equipment held for sale in PRC, management considers whether it is more likely than not that some portion or the entire deferred tax asset will be realized. The Company concluded that the temporary difference on the impairment loss of equipment held for sale in PRC will be deductible or utilized on the future PRC taxable income and a deferred tax asset of $566,666 and $551,890 has been set up at September 30, 2013 and December 31, 2012, respectively.

NOTE 10 – SHAREHOLDERS’ EQUITY

Common stock sold for cash

On June 18, 2013, the Company sold 428,398 shares of common stock at a purchase price of $4.50 per share.  The shares were sold pursuant to a prospectus supplement dated June 18, 2013 to the Company’s registration statement on Form S-3.  The Company did not engage a placement agent with respect to the sale.  The Company paid a fee of 10% and a non-accountable expense allowance of 2%, for a total of $154,745, to an individual in connection with sales made to investors introduced to the Company by this individual who is not a U.S. citizen or resident.  The net proceeds received by the Company from the sale of the shares were approximately $1,768,000.

On July 10, 2013, the Company sold a total of 150,518 shares of common stock at a price of $4.70 per share to an investor. The shares were issued pursuant to a prospectus supplement for the Company’s registration statement on Form S-3.  The Company paid a fee of 10% and a non-accountable expense allowance of 2%, for a total of $84,892, to an individual in connection with sales made to investors introduced to the Company by this individual who is not a U.S. citizen or resident.  The net proceeds received by the Company from the sale of the shares were approximately $620,000.

Common stock issued for services

On July 29, 2013, the Company issued a total of 30,000 shares of common stock pursuant to its 2010 long-term incentive plan, of which 8,000 shares were issued to the chief executive officer’s wife, who the Company employs in its sales department, 8,000 shares were issued to the chief financial officer and 14,000 shares were issued to other employees. The shares were valued at the fair market value on the grant date, and the Company recorded stock-based compensation of $78,600 in the third quarter of fiscal 2013 and prepaid expenses of $78,600 which will be amortized in the fourth quarter of fiscal 2013.

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

20

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

NOTE 11 – STATUTORY RESERVES (continued)

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. As of December 31, 2012, the Company appropriated the required maximum 50% of its registered capital to statutory reserves for Dyeing and Electric, accordingly, no additional statutory reserve is required at September 30, 2013. As of December 31, 2012, the Company had not appropriated the required maximum 50% of its registered capital to statutory reserve for Fulland Wind Energy.

For the nine months ended September 30, 2013, statutory reserve activity was as follows:

	Dyeing		Electrical		Fulland Wind Energy		Total
Balance – December 31, 2012	$	373,048	$	1,168,796	$	937,894	$	2,479,738
Addition to statutory reserves		-		-		277,306		277,306
Balance – September 30, 2013	$	373,048	$	1,168,796	$	1,215,200	$	2,757,044

NOTE 12 - SEGMENT INFORMATION

For the three and nine months ended September 30, 2013 and 2012, 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, 2013 and 2012 was as follows:

	Three Months Ended  September 30,						Nine Months Ended  September 30,
	2013			2012			2013			2012
Revenues:
Forged rolled rings and related components	$	8,722,683		$	9,826,210		$	23,447,214		$	23,619,875
Dyeing and finishing equipment		9,490,825			7,517,513			25,865,127			15,965,940
		18,213,508			17,343,723			49,312,341			39,585,815
Depreciation:
Forged rolled rings and related components		1,065,933			1,261,991			3,171,777			3,694,696
Dyeing and finishing equipment		595,807			365,267			1,711,122			1,025,073
		1,661,740			1,627,258			4,882,899			4,719,769
Interest expense:
Forged rolled rings and related components		38,428			66,494			118,341			196,690
Dyeing and finishing equipment		36,210			17,795			125,950			47,995
		74,638			84,289			244,291			244,685
Net income (loss):
Forged rolled rings and related components		1,094,210			1,270,837			3,114,330			2,347,542
Dyeing and finishing equipment		1,248,012			1,201,156			3,467,999			2,117,296
Other (a)		(211,486	)		(116,891	)		(506,440	)		(735,571	)
	$	2,130,736		$	2,355,102		$	6,075,889		$	3,729,267

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CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

NOTE 12 - SEGMENT INFORMATION (continued)

Identifiable long-lived tangible assets at September 30, 2013 and December 31, 2012 by segment:	September 30, 2013		December 31, 2012
Forged rolled rings and related components	$	44,867,148	$	40,636,142
Dyeing and finishing equipment		21,831,943		18,799,958
	$	66,699,091	$	59,436,100
Identifiable long-lived tangible assets at September 30, 2013 and December 31, 2012 by geographical location:	September 30, 2013			December 31, 2012
China	$	66,699,091	$	59,436,100
United States		-		-
	$	66,699,091	$	59,436,100

(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.

NOTE 13 – CONCENTRATIONS

Customers

No customer accounted for 10% or more of the Company’s revenues during the nine months ended September 30, 2013 and 2012.

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, 2013 and 2012.

	Nine Months Ended September 30,
Supplier	2013			2012
A		19	%		17	%
B		*			14	%
C		15	%		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, 2013 and December 31, 2012, 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, 2013 and December 31, 2012 were approximately $87,292,000 and $77,514,000, respectively.

22

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

NOTE 15 - CAPITAL LEASE OBLIGATIONS

In 2011, the Company 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 are included in the accompanying consolidated balance sheets in property and equipment and capital lease obligations, respectively. The Company paid off the capital lease obligation in the third quarter of 2013. At September 30, 2013 and December 31, 2012, capital lease obligations consisted of the following:

	September 30, 2013		December 31, 2012
Capital lease obligation - current portion	$	-	$	251,413
Capital lease obligation - long-term portion		-		132,756
	$	-	$	384,169

NOTE 16 – SUBSEQUENT EVENTS

In November 2013, the Company repaid a short-term loan from Bank of Communications in the principal amount of $325,129, and borrowed the same amount from Bank of Communications.  The new loan bears interest at 6.72% and is due on April 21, 2014.

In November 2013, the Company repaid a short-term loan from Bank of Communications in the principal amount of $487,694, and borrowed the same amount from Bank of Communications.  The new loan bears interest at 6.72% and is due on April 23, 2014.

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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):

	Three Months Ended September 30,
	2013					2012
	Dollars		%			Dollars		%
Forged rolled rings and related components:
Wind power industry	$	3,726		20.5	%	$	3,213		18.5	%
Other industries		4,996		27.4	%		6,613		38.2	%
Total forged rolled rings and related components		8,722		47.9	%		9,826		56.7	%
Dyeing and finishing equipment		9,491		52.1	%		7,518		43.3	%
Total	$	18,213		100.0	%	$	17,344		100.0	%

	Nine Months Ended September 30,
	2013					2012
	Dollars		%			Dollars		%
Forged rolled rings and related components:
Wind power industry	$	10,515		21.3	%	$	10,391		26.2	%
Other industries		12,932		26.2	%		13,229		33.5	%
Total forged rolled rings and related components		23,447		47.5	%		23,620		59.7	%
Dyeing and finishing equipment		25,865		52.5	%		15,966		40.3	%
Total	$	49,312		100.0	%	$	39,586		100.0	%

Forged Rolled Rings and Related Components Segment

Through our forged rolled rings and other related products division

● 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 to 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.

● We manufacture and deliver test subassemblies for solar cell manufacturing equipment, which marked our entry into the solar products market. For the nine months ended September 30, 2013 and 2012, we generated revenue from the sale of solar industry related products of approximately $777,324 and $409,000, respectively. All of the revenue for the nine months ended September 30, 2013 was generated in the second quarter of 2013.

The demand for products used in manufacturing in general including wind power industry and other 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.

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Among all the renewable energies, we believe that 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, although difficulties in transmission of electricity generated by wind power continues to affect the market for wind power energy. We believe that wind power will see its share of China’s national energy mix gradually increase.

Dyeing and Finishing Equipment Segment

Revenue from our dyeing segment increased $2.0 million, or 26.2%, in the three months ended September 30, 2013 from the three months ended September 30, 2012.  Revenue from our dyeing segment increased $9.9 million, or 62.0%, in the nine months ended September 30, 2013 from the nine months ended September 30, 2012. 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, as well as the effect of China’s stricter environmental standards. We believe that our air-flow technology, which is designed to enable users to meet China’s stricter environmental standards, provides the customer with 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 margin from our dyeing segment increased to 25.0% for the three months ended September 30, 2013, from 24.7% for the three months ended September 30, 2012. Our gross margin from our dyeing segment increased to 24.1% for the nine months ended September 30, 2013, from 22.2% for the nine months ended September 30, 2012.

The factors that affected our revenue, gross margin and net income in both of our segments during the nine months ended September 30, 2013 are likely to continue to affect our operations in the rest of fiscal 2013. 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. Two major suppliers provided approximately 34% of our purchases of raw materials for the nine months ended September 30, 2013.

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 consolidated financial statements.

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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.

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.

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Advances to Suppliers

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

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 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.

Equipment Held for Sale

Long-lived assets are classified as held for sale when certain criteria are met. These criteria include: management’s commitment to a plan to sell the assets; the availability of the assets for immediate sale in their present condition; an active program to locate buyers and other actions to sell the assets has been initiated; the sale of the assets is probable and their transfer is expected to qualify for recognition as a completed sale within one year; the assets are being marketed at reasonable prices in relation to their fair value; and it is unlikely that significant changes will be made to the plan to sell the assets. We measure long-lived assets to be disposed of by sale at the lower of carrying amount or fair value, less associated costs to sell. At September 30, 2013 and December 31, 2012, we reflected certain electro-slag re-melted (“ESR”) equipment that was used to produce forged products for the high performance components market as equipment held for sale on the accompanying consolidated balance sheets.

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.

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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 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. For the three and nine months ended September 30, 2013 and 2012, the amounts allocated to installation revenues were minimal.

Warranty revenue is valued based on estimated service person hours to complete a service and generally is recognized over the contract period. For the three and nine months ended September 30, 2013 and 2012, amounts allocated to warranty revenues were minimal. 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 period 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.

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Recent Accounting Pronouncements

In March 2013, the FASB issued ASU 2013-05 “Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.” ASU 2013-05 addresses the accounting for the cumulative translation adjustment when a parent either sells part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. For public entities, the ASU is effective prospectively for fiscal years, and interim periods, within those years, beginning after December 15, 2013. Early adoption is permitted. The adoption of ASU 2013-05 is not expected to have a material impact on our consolidated financial statements.

In July 2013, the FASB issued ASU 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists." ASU 2013-11 provides guidance on the presentation of unrecognized tax benefits related to any disallowed portion of net operating loss carryforwards, similar tax losses, or tax credit carryforwards, if they exist. ASU 2013-11 is effective for fiscal years beginning after December 15, 2013. The adoption of ASU 2013-11 is not expected to have a material impact on our consolidated financial statements.

Other 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. We do not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to our financial condition, results of operations, cash flows, or disclosures.

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.

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RESULTS OF OPERATIONS

Comparison of Results of Operations for the Three and Nine Months Ended September 30, 2013 and 2012

Introduction

The following table sets forth the results of our operations for the three months ended September 30, 2013 and 2012 indicated as a percentage of net revenues (dollars in thousands):

	Three Months Ended September 30,
	2013						2012
	Dollars			Percentage			Dollars			Percentage
Revenues	$	18,213			100.0	%	$	17,344			100.0	%
Cost of revenues		13,576			74.5	%		13,025			75.1	%
Gross profit		4,637			25.5	%		4,319			24.9	%
Operating expenses		1,427			7.9	%		1,113			6.4	%
Income from operations		3,210			17.6	%		3,206			18.5	%
Other expenses		(64	)		(0.3	)%		(26	)		(0.2	)%
Income before provision for income taxes		3,146			17.3	%		3,180			18.3	%
Provision for income taxes		1,015			5.6	%		825			4.8	%
Net income		2,131			11.7	%		2,355			13.6	%
Other comprehensive income:
Foreign currency translation adjustment		516			2.8	%		(170	)		(1.0	)%
Comprehensive income	$	2,647			14.5	%	$	2,185			12.6	%

The following table sets forth the results of our operations for the nine months ended September 30, 2013 and 2012 indicated as a percentage of net revenues (dollars in thousands):

	Nine Months Ended September 30,
	2013						2012
	Dollars			Percentage			Dollars			Percentage
Revenues	$	49,312			100.0	%	$	39,586			100.0	%
Cost of revenues		37,572			76.2	%		30,690			77.5	%
Gross profit		11,740			23.8	%		8,896			22.5	%
Operating expenses		3,137			6.4	%		3,279			8.3	%
Income from operations		8,603			17.4	%		5,617			14.2	%
Other expenses		(201	)		(0.4	)%		(398	)		(1.0	)%
Income before provision for income taxes		8,402			17.0	%		5,219			13.2	%
Provision for income taxes		2,326			4.7	%		1,490			3.8	%
Net income		6,076			12.3	%		3,729			9.4	%
Other comprehensive income:
Foreign currency translation adjustment		2,162			4.4	%		342			0.9	%
Comprehensive income	$	8,238			16.7	%	$	4,071			10.3	%

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The following table sets forth information as to the gross margin for our two business segments for the three months ended September 30, 2013 and 2012 (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, 2013									Three Months Ended September 30, 2012
Revenues	$	8,722		$	9,491		$	18,213		$	9,826		$	7,518		$	17,344
Cost of revenues	$	6,462		$	7,114		$	13,576		$	7,365		$	5,660		$	13,025
Gross profit	$	2,260		$	2,377		$	4,637		$	2,461		$	1,858		$	4,319
Gross margin %		26.0	%		25.0	%		25.5	%		25.0	%		24.7	%		24.9	%

The following table sets forth information as to the gross margin for our two business segments for the nine months ended September 30, 2013 and 2012 (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, 2013									Nine Months Ended September 30, 2012
Revenues	$	23,447		$	25,865		$	49,312		$	23,620		$	15,966		$	39,586
Cost of revenues	$	17,939		$	19,633		$	37,572		$	18,276		$	12,414		$	30,690
Gross profit	$	5,508		$	6,232		$	11,740		$	5,344		$	3,552		$	8,896
Gross margin %		23.5	%		24.1	%		23.8	%		22.6	%		22.2	%		22.5	%

Revenues

For the three months ended September 30, 2013, we had revenues of $18,213,000, as compared to revenues of $17,344,000 for the three months ended September 30, 2012, an increase of $869,000 or approximately 5.0%. For the nine months ended September 30, 2013, we had revenues of $49,312,000, as compared to revenues of $39,586,000 for the nine months ended September 30, 2012, an increase of $9,726,000 or approximately 24.6%. The increase in revenue for both the three and nine months periods was primarily attributable to the increase in revenue from our dyeing segment, a modest increase in sales from forged rolled rings and related products to the wind power industry and the decrease in revenue from our forged rolled rings and related products for other industries, and is summarized as follows (dollars in thousands):

	For the Three Months Ended September 30, 2013		For the Three Months Ended September 30, 2012		Increase (Decrease)			Percentage Change
Forged rolled rings and related products
Wind power industry	$	3,726	$	3,213	$	513			16.0	%
Other industries		4,996		6,613		(1,617	)		(24.4	)%
Total forged rolled rings and related products		8,722		9,826		(1,104	)		(11.2	)%
Dyeing and finishing equipment		9,491		7,518		1,973			26.2	%
Total revenues	$	18,213	$	17,344	$	869			5.0	%

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	For the Nine Months Ended September 30, 2013		For the Nine Months Ended September 30, 2012		Increase (Decrease)			Percentage Change
Forged rolled rings and related products
Wind power industry	$	10,515	$	10,391	$	124			1.2	%
Other industries		12,932		13,229		(297	)		(2.2	)%
Total forged rolled rings and related products		23,447		23,620		(173	)		(0.7	)%
Dyeing and finishing equipment		25,865		15,966		9,899			62.0	%
Total revenues	$	49,312	$	39,586	$	9,726			24.6	%

Forged rolled rings and related products segment

For the three months ended September 30, 2013, revenue from forged rolled rings and related products for the wind power industry increased by approximately $0.5 million or 16.0% as compared to the three months ended September 30, 2012. For the nine months ended September 30, 2013, revenue from forged rolled rings and related products for the wind power industry increased by approximately $0.1 million or 1.2% as compared to the nine months ended September 30, 2012. The increase in revenue from forging of rolled rings and related products for wind power industry was primarily attributable to our increased sales efforts.

For the three months ended September 30, 2013, revenue from the sale of forged rolled rings and related products to other industries decreased by approximately $1.6 million or 24.4% as compared to the three months ended September 30, 2012. For the nine months ended September 30, 2013, revenue from the sale of forged rolled rings and related products to other industries decreased by approximately $0.3 million or 2.2% as compared to the nine months ended September 30, 2012. The decrease in revenue from forging of rolled rings and related products for other industries was mainly attributable to a reduced demand from our customers, who had sufficient inventory from purchases of forging of rolled rings and related products for other industries in prior periods, and the absence of sufficient sales to new customers to offset such reduction. We expect that the sales of forging of rolled rings and related products for other industries will remain at its current level during the remainder of 2013.

Although recent data from the China Wind Energy Association cites that wind power surpassed nuclear to become the third largest source of electric power in China, the industry remains fraught with challenges. Issues of wind turbine overcapacity, grid connectivity issues, international trade protectionism and tight credit conditions persist. In fact, the reported growth rate of new capacity actually slowed in 2012 to 14 gigawatts from about 21 gigawatts in 2011.

Given this environment, we anticipate sales volumes of forged rolled rings and related products to customers in the wind power industry will remain around their current levels for the remainder of 2013. We expect that over the longer term these issues will be resolved, to the extent that China is successful in moving forward to its stated goals of 100 GW of installed wind power capacity by 2015 and 200 GW by 2020.

The demand for products such as ours which are used for wind power industry and solar power industry 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. So far, sales to the solar energy sector have not yet contributed a significant amount to our revenue and may never represent a significant portion of our revenue. We are currently seeking to expand into other industries, including oil and natural gas, although we can give no assurances that the expansion will be successful.

Dyeing and finishing equipment segment

The increase in revenue from the sale of dyeing and finishing equipment for the three and nine months ended September 30, 2013 was primarily attributable to the effects of the policies of the PRC local governments 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. Thus far in 2013, we have seen strong order flow in our dyeing machine segment which we expect to continue throughout the year.  As a result, we have added shifts, increased staff and installed additional equipment to expand capacity and meet anticipated demand.

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Additionally, we recently received five PRC patent certificates for devices and parts of its airflow dyeing machine. These patents cover the dyeing liquid mixing device, dyeing liquid atomizing device, horizontal manipulated devices, mechanical seal and atomizer of its airflow dyeing machine.  The patents relate to devices and parts that allow for lower water and energy usage, improved dyeing effects, extend the service life of the machine and provide easier cleaning of atomized dyeing equipment.  We applied for such patents on December 25, 2012.  The patents were issued by the State Intellectual Property Office of the People’s Republic of China (“SIPO”) and were granted to the Company’s variable interest entity (VIE), Wuxi Huayang Dyeing Machinery Co., Ltd., on June 5, 2013. The patents provide us with the exclusive use of these designs in dyeing equipment for a period of ten years, although we cannot assure you as to the effectiveness of the patents in protecting our competitive position.

Cost of revenues

Cost of revenues includes the cost of raw materials, labor, depreciation and other overhead costs.

For the three months ended September 30, 2013, cost of revenues was $13,576,000 as compared to $13,025,000 for the three months ended September 30, 2012, an increase of $552,000, or 4.2%. Cost of revenues related to the manufacture of forged rolled rings and related products was $6,462,000 for the three months ended September 30, 2013 as compared to $7,365,000 for the three months ended September 30, 2012. Cost of revenues for the dyeing and finishing equipment segment was $7,114,000 for the three months ended September 30, 2013, as compared to $5,660,000 for the three months ended September 30, 2012.

For the nine months ended September 30, 2013, cost of revenues was $37,572,000 as compared to $30,690,000 for the nine months ended September 30, 2012, an increase of $6,883,000, or 22.4%. Cost of revenues related to the manufacture of forged rolled rings and related products was $17,939,000 for the nine months ended September 30, 2013 as compared to $18,276,000 for the nine months ended September 30, 2012. Cost of revenues for the dyeing and finishing equipment segment was $19,633,000 for the nine months ended September 30, 2013, as compared to $12,414,000 for the nine months ended September 30, 2012.

Gross profit and gross margin

Our gross profit was $4,637,000 for the three months ended September 30, 2013 as compared to $4,319,000 for the three months ended September 30, 2012, representing gross margins of 25.5% and 24.9%, respectively. Our gross profit was $11,740,000 for the nine months ended September 30, 2013 as compared to $8,896,000 for the nine months ended September 30, 2012, representing gross margins of 23.8% and 22.5%, respectively.

Gross profit from forged rolled rings and related products segment was $2,260,000 for the three months ended September 30, 2013 as compared to $2,461,000 for the three months ended September 30, 2012, representing gross margins of approximately 26.0% and 25.0%, respectively.Gross profit from forged rolled rings and related products segment was $5,508,000 for the nine months ended September 30, 2013 as compared to $5,344,000 for the nine months ended September 30, 2012, representing gross margins of approximately 23.5% and 22.6%, respectively.The increase in our gross margin for the forged rolled rings and related products segment for the three and nine months ended September 30, 2013 as compared to the comparable periods in 2012 was mainly attributed to the increase in 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 and a slight decrease in our raw materials costs.  We expect that we can improve our gross margin from forged rolled rings and related products segment to the extent that we can become more efficient and be able to produce larger quantities for inventory and revenues.

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Gross profit for the dyeing and finishing equipment segment was $2,377,000 for the three months ended September 30, 2013 as compared to $1,858,000 for the three months ended September 30, 2012, representing gross margins of approximately 25.0% and 24.7%, respectively. The increase in our gross margin for the dyeing and finishing equipment segment for the three months ended September 30, 2013 as compared to the comparable period in 2012 was mainly attributed to a slight decrease in our raw materials costs. Gross profit for the dyeing and finishing equipment segment was $6,232,000 for the nine months ended September 30, 2013 as compared to $3,552,000 for the nine months ended September 30, 2012, representing gross margins of approximately 24.1% and 22.2%, respectively. For the nine months ended September 30, 2013, the significant portion of our revenue for the dyeing and finishing equipment segment is from airflow dyeing machinery. For the nine months ended September 30, 2012, a smaller portion of our revenue for the dyeing and finishing equipment segment is from airflow 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 is designed to result 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 months ended September 30, 2013 increased from the nine months ended September 30, 2012.

Depreciation

Depreciation was $1,662,000 and $1,627,000 for the three months ended September 30, 2013 and 2012, and was $4,883,000 and $4,720,000 for the nine months ended September 30, 2013 and 2012, respectively. Depreciation for the three and nine months ended September 30, 2013 and 2012 was included in the following categories (dollars in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Cost of revenues	$	1,552	$	1,253	$	4,421	$	3,597
Operating expenses		110		374		462		1,123
Total	$	1,662	$	1,627	$	4,883	$	4,720

The increase in depreciation expense for cost of revenues for the three and nine months ended September 30, 2013 as compared to the corresponding periods in fiscal 2012 is attributable to the increase in our depreciable production equipment primarily in our dyeing segment.

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 2012. As of December 31, 2012, the Company committed to a plan to sell the ESR production equipment that was used to produce forged products for the high performance components market and recorded it as equipment held for sale on the accompanying consolidated balance sheet. The assets held for sale is no longer subject to depreciation as they are not used in operations. Accordingly, during the three and nine months ended September 30, 2013, we did not record any depreciation expense related to the ESR production equipment.  Depreciation included in operating expenses for the three and nine months ended September 30, 2013 decreased by approximately $264,000 and $661,000, respectively, as compared to the three and nine months ended September 30, 2012.

Selling, general and administrative expenses

Selling, general and administrative expenses totaled $1,317,000 for the three months ended September 30, 2013, as compared to $739,000 for the three months ended September 30, 2012, an increase of $578,000 or approximately 78.1%.

Selling, general and administrative expenses totaled $2,675,000 for the nine months ended September 30, 2013, as compared to $2,157,000 for the nine months ended September 30, 2012, an increase of $518,000 or approximately 24.0%.

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Selling, general and administrative expenses for the three and nine months ended September 30, 2013 and 2012 consisted of the following (dollars in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Professional fees	$	47	$	60	$	161	$	216
Increase (decrease) in bad debt allowance		389		-		77		(47	)
Payroll and related benefits		270		155		655		528
Travel and entertainment		51		42		296		133
Shipping		354		311		910		804
Research and development expense		29		-		67		-
Other		177		171		509		523
Total	$	1,317	$	739	$	2,675	$	2,157

● Professional fees for the three months ended September 30, 2013 decreased by $13,000, or 22.0%, as compared to the three months ended September 30, 2012. The decrease was primarily attributable to the decrease in fees incurred and paid for investor relations of approximately $13,000. Professional fees for the nine months ended September 30, 2013 decreased by $55,000, or 25.5%, as compared to the nine months ended September 30, 2012. The decrease was primarily attributable to a decrease in fees incurred and paid for investor relations of approximately $59,000, offset by an increase in other miscellaneous service fees of approximately $4,000.

● For the three months ended September 30, 2013 and 2012, we increased the allowance for doubtful accounts of approximately $389,000 and $0, respectively. For the nine months ended September 30, 2013, we increased the allowance for doubtful accounts of approximately $77,000. For the nine months ended September 30, 2012, we decreased the allowance for doubtful accounts of approximately $47,000. 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 for the three months ended September 30, 2013 increased by $115,000, or 74.2%, as compared to the three months ended September 30, 2012. The increase was mainly attributable to an increase in stock-based compensation of approximately $118,000 which reflected an increase in our average stock price used to value shares issued as compensation during the third quarter of 2013 as compared to the third quarter of 2012, offset by a decrease in compensation of approximately $3,000 in our forged rolled rings and related products segment resulting from decreased salaries incurred and paid to management due to stricter controls on corporate spending.  Payroll and related benefits for the nine months ended September 30, 2013 increased by $127,000, or 24.1%, as compared to the nine months ended September 30, 2012. The increase was mainly attributable to an increase in stock-based compensation of approximately $147,000 which reflected an increase in our average stock price used to value shares issued as compensation during the nine months ended September 30, 2013 as compared to the nine months ended September 30, 2012, offset by a decrease in compensation of approximately $20,000 in our forged rolled rings and related products segment resulting from decreased salaries incurred and paid to management due to stricter controls on corporate spending.  We expect that payroll and related benefits will increase as we expand our manufacturing operations for the airflow dyeing equipment.

● Travel and entertainment expense for the three months ended September 30, 2013 increased by $9,000, or 21.4%, as compared to the three months ended September 30, 2012. Travel and entertainment expense for the nine months ended September 30, 2013 increased by $163,000, or 122.6%, as compared to the nine months ended September 30, 2012. The increase was primarily attributable to the increased spending in our travel due to increased on-site communication and discussion with our customers in order to more efficiently manage our business and compete with our competitor and to enhance our visibility.

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● Shipping expense for the three months ended September 30, 2013 increased by $43,000, or 13.8%, as compared to the three months ended September 30, 2012. Shipping expense for the nine months ended September 30, 2013 increased by $106,000, or 13.2%, as compared to the nine months ended September 30, 2012. The increase was mainly attributable to the increase in our revenues during the nine months ended September 30, 2013 as compared to the corresponding periods in 2012.

● For the three and nine months ended September 30, 2013, we recorded research and development expense of approximately $29,000 and $67,000, respectively. Research and development expense was related to our new dyeing machinery. We did not record any research and development expense for the three and nine months ended September 30, 2012.

● Other selling, general and administrative expenses for the three months ended September 30, 2013 increased by $6,000, or 3.5% as compared to the three months ended September 30, 2012. The increase was primarily attributable to the increase in miscellaneous taxes of approximately $11,000 offset by the decrease in other miscellaneous items of approximately $5,000. Other selling, general and administrative expenses for the nine months ended September 30, 2013 decreased by $14,000, or 2.7% as compared to the nine months ended September 30, 2012, which reflected the efforts at reducing non-sales related corporate activities as well as stricter controls on corporate spending.

Income from operations

As a result of the factors described above, for the three months ended September 30, 2013, income from operations amounted to $3,210,000, as compared to $3,206,000 for the three months ended September 30, 2012, an increase of $4,000 or 0.1%, and for the nine months ended September 30, 2013, income from operations amounted to $8,603,000, as compared to $5,617,000 for the nine months ended September 30, 2012, an increase of $2,986,000 or 53.2%.

Other income (expense)

Other income (expense) includes interest expense, nominal foreign currency transaction gain/loss, warrant modification expense, interest income and other income. For the three months ended September 30, 2013, total other expense amounted to $64,000 as compared to total other expense of $26,000 for the three months ended September 30, 2012, an increase of $37,000 or 140.8%. The increase was mainly attributable to the decrease in other income of approximately $46,000 and we had a foreign currency loss of approximately $10,000 in the third quarter of 2013 as compared to a foreign currency gain of approximated $1,000 in the third quarter of 2012, which was offset by an increase in interest income of approximately $10,000 and a decrease in interest expense of approximately $10,000. For the nine months ended September 30, 2013, total other expense amounted to $201,000 as compared to total other expense $397,000 for the nine months ended September 30, 2012, a decrease of $196,000 or 49.4%. The decrease was primarily attributable to the decrease in warrant modification expense of approximately $235,000 offset by a decrease in other income of approximately $22,000 and we had a foreign currency loss of approximately $16,000 in the nine months ended September 30, 2013 as compared to a foreign currency gain of approximately $7,000 in the corresponding period in 2012.

Income tax expense

Income tax expense was $1,016,000 for the three months ended September 30, 2013, as compared to $825,000 for the three months ended September 30, 2012, an increase of $191,000, or 23.2%. Income tax expense was $2,326,000 for the nine months ended September 30, 2013, as compared to $1,490,000 for the nine months ended September 30, 2012, an increase of $836,000, or 56.1%. The increase in income tax expense was attributable to theincrease in taxable income generated by our operating entities.

Net income

As a result of the foregoing, our net income was $2,131,000, or $0.61 per share (basic and diluted), for the three months ended September 30, 2013, as compared with $2,355,000, or $0.88 per share (basic and diluted), for the three months ended September 30, 2012, a decrease of $224,000 or 9.5%. Our net income was $6,076,000, or $1.95 per share (basic and diluted), for the nine months ended September 30, 2013, as compared with $3,729,000, or $1.51 per share (basic) and $1.42 per share (diluted), for the nine months ended September 30, 2012, an increase of $2,347,000 or 62.9%.

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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 foreign currency translations, which are a non-cash adjustment, we reported a foreign currency translation gain of $516,000 for the three months ended September 30, 2013, as compared to a foreign currency translation loss of $170,000 for the three months ended September 30, 2012, and we reported a foreign currency translation gain of $2,162,000 for the nine months ended September 30, 2013, as compared to $342,000 for the nine months ended September 30, 2012. This non-cash gain/loss had the effect of increasing/decreasing our reported comprehensive income.

Comprehensive income

As a result of our foreign currency translation gains, we had comprehensive income for the three months ended September 30, 2013 of $2,647,000, compared to $2,185,000 for the three months ended September 30, 2012, and we had comprehensive income for the nine months ended September 30, 2013 of $8,238,000, compared to $4,071,000 for the nine months ended September 30, 2012.

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, 2013 and December 31, 2012, we had cash balances of approximately $2,223,000 and $1,446,000, respectively. These funds are located in financial institutions located as follows (dollars in thousands):

Country:	September 30, 2013				December 31, 2012
United States	$	467	21.0	%	$	31	2.1	%
China		1,756	79.0	%		1,415	97.9	%
Total cash and cash equivalents	$	2,223	100.0	%	$	1,446	100.0	%

The following table sets forth a summary of changes in our working capital from December 31, 2012 to September 30, 2013 (dollars in thousands):

					December 31, 2012 to September 30, 2013
	September 30, 2013		December 31, 2012		Change		Percentage Change
Working capital:
Total current assets	$	23,629	$	19,073	$	4,556		23.9	%
Total current liabilities		13,212		11,810		1,402		11.9	%
Working capital:	$	10,417	$	7,263	$	3,154		43.4	%

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Our working capital increased $3,154,000 to $10,417,000 at September 30, 2013 from $7,263,000 at December 31, 2012. This increase in working capital is primarily attributable to an increase in cash and cash equivalents of approximately $777,000, an increase in restricted cash of approximately $797,000, an increase in notes receivable of approximately $398,000, an increase in accounts receivable, net of allowance for doubtful accounts, of approximately $1,467,000 due to the increase in revenues in 2013, an increase in inventories, net of reserve for obsolete inventory, of approximately $319,000, an increase in advances to suppliers of approximately $711,000, an increase in prepaid VAT on purchases of approximately $288,000, a decrease in accrued expenses of approximately $434,000, a decrease in capital lease obligation – current portion of approximately $251,000 and a decrease in VAT and service taxes payable of approximately $207,000, offset by a decrease in prepaid expenses and other of approximately $201,000, an increase in short-term bank loans of approximately $872,000, an increase in bank acceptance notes payable of approximately $797,000, an increase in advances from customers of approximately $358,000 and an increase in income taxes payable of approximately $247,000.

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 are not necessarily identical with the comparable changes reflected on the balance sheet.

Net cash flow provided by operating activities was $7,893,000 for the nine months ended September 30, 2013 as compared to $5,825,000 for the nine months ended September 30, 2012, an increase of $2,068,000.

· Net cash flow provided by operating activities for the nine months ended September 30, 2013 primarily reflected net income of $6,076,000 adjusted for non-cash items primarily consisting of depreciation of $4,883,000, an increase in allowance for doubtful accounts of $77,000, amortization of land use rights of $71,000, and stock-based compensation of $278,000, and changes in operating assets and liabilities primarily consisting of a decrease in prepaid and other current assets of $82,000, an increase in income taxes payable of $223,000 and an increase in advances from customers of $305,000, offset primarily by an increase in notes receivable of $391,000, an increase in accounts receivable of $1,261,000, an increase in inventories of $159,000, an increase in prepaid value-added taxes on purchases of $271,000, an increase in advances to suppliers of $687,000, a decrease in accounts payable of $672,000, a decrease in accrued expenses of $452,000 and a decrease in VAT and service taxes payable of $210,000.

· 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 used in investing activities reflects the purchase of property and equipment of $9,943,000 and $6,335,000 for the nine months ended September 30, 2013 and 2012, respectively.

Net cash flow provided by financing activities was $2,802,000 for the nine months ended September 30, 2013 as compared to $309,000 for the nine months ended September 30, 2012. During the nine months ended September 30, 2013, we received proceeds from bank loans of $4,822,000, proceeds from an increase in bank acceptance notes payable of $787,000, and net proceeds from sale of common stock of $2,389,000, offset by the repayments of bank loans of $4,018,000, repayments of principal on capital lease obligations of $390,000 and the increase in restricted cash of $788,000. 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.

Our capital requirements for the next twelve months relate to purchasing machinery for the manufacture of products 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.

38

During June and July 2013, we received net proceeds of approximately $2,389,000 from the sale of our common stock. We are using the proceeds for working capital and other general corporate purposes.

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, 2013 (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)	$	3,089	$	3,089	$	-	$	-	$	-
Total	$	3,089	$	3,089	$	-	$	-	$	-

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

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 three and nine months ended September 30, 2013, we had unrealized foreign currency translation gains of $516,244 and $2,161,711, respectively, because of the change in the exchange rate.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not required for smaller reporting companies.

ITEM 4. CONTROLS AND PROCEDURES

39

Disclosure Controls and Procedures

As required by Rule 13a-15 under the Exchange Act, our management, including Jianhua Wu, our chief executive officer, and Adam Wasserman, our chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2013.

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 Mr. Wasserman concluded that our disclosure controls and procedures were not effective as of September 30, 2013.
 

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, 2012, management assessed the effectiveness of our internal control over financial reporting as of December 31, 2012 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, 2012.

A major hurdle of our internal control efforts was the segregation of duties and installation of a company-wide Enterprise Resource Planning (“ERP”) system which are important parts of a good internal control system. During the nine months ended September 30, 2013, due to our working capital requirements and the lack of local professionals with the necessary experience in implementing the ERP system, we postponed the hiring of professional staff to implement ERP system. We have found that engaging professionals who are based outside of Wuxi is very costly and we have not been able to find qualified personnel in the Wuxi area.

We plan on expanding our ERP system during 2014 by implementing further ERP modules to manage inventory and to expand existing ERP systems to other areas of our factory.

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, 2013. 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.

40

In light of this significant deficiency, we performed additional analyses and procedures in order to conclude that our financial statements for the quarter ended September 30, 2013 included in this Quarterly Report on Form 10-Q were fairly stated in accordance with GAAP. Accordingly, management believes that despite our significant deficiency, our consolidated financial statements for the quarter ended September 30, 2013 are fairly stated, in all material respects, in accordance with GAAP.

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 period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

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*	XBRL 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

*XBRL (Extensible Business Reporting Language) information is furnished and not filed herewith, is not a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

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, 2013	By:	/s/ Jianhua Wu
		Jianhua Wu, Chief Executive Officer
		and Principal Executive Officer
Date: November 13, 2013	By:	/s/ Adam Wasserman
		Adam Wasserman, Chief Financial Officer
		and Principal Accounting Officer

41

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, 2013	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, Adam Wasserman, 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, 2013	By:	/s/ Adam Wasserman
		Adam Wasserman 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, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Jianhua Wu, chief executive officer of the Company, and Adam Wasserman, 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, 2013	By:	/s/ Jianhua Wu
		Jianhua Wu Chief  Executive Officer
		(Principal Executive Officer)
Date: November 13, 2013	By:	/s/ Adam Wasserman
		Adam Wasserman 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.

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Segment Information

9 Months Ended

Sep. 30, 2013

Segment Information [Abstract]

SEGMENT INFORMATION

NOTE 12 - SEGMENT INFORMATION

For the three and nine months ended September 30, 2013 and 2012, 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, 2013 and 2012 was as follows:

	Three Months Ended  September 30,						Nine Months Ended  September 30,
	2013			2012			2013			2012
Revenues:
Forged rolled rings and related components	$	8,722,683		$	9,826,210		$	23,447,214		$	23,619,875
Dyeing and finishing equipment		9,490,825			7,517,513			25,865,127			15,965,940
		18,213,508			17,343,723			49,312,341			39,585,815
Depreciation:
Forged rolled rings and related components		1,065,933			1,261,991			3,171,777			3,694,696
Dyeing and finishing equipment		595,807			365,267			1,711,122			1,025,073
		1,661,740			1,627,258			4,882,899			4,719,769
Interest expense:
Forged rolled rings and related components		38,428			66,494			118,341			196,690
Dyeing and finishing equipment		36,210			17,795			125,950			47,995
		74,638			84,289			244,291			244,685
Net income (loss):
Forged rolled rings and related components		1,094,210			1,270,837			3,114,330			2,347,542
Dyeing and finishing equipment		1,248,012			1,201,156			3,467,999			2,117,296
Other (a)		(211,486	)		(116,891	)		(506,440	)		(735,571	)
	$	2,130,736		$	2,355,102		$	6,075,889		$	3,729,267

Identifiable long-lived tangible assets at September 30, 2013 and December 31, 2012 by segment:	September 30, 2013		December 31, 2012
Forged rolled rings and related components	$	44,867,148	$	40,636,142
Dyeing and finishing equipment		21,831,943		18,799,958
	$	66,699,091	$	59,436,100
Identifiable long-lived tangible assets at September 30, 2013 and December 31, 2012 by geographical location:	September 30, 2013			December 31, 2012
China	$	66,699,091	$	59,436,100
United States		-		-
	$	66,699,091	$	59,436,100

(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.

XML

Stockholders' Equity (Details Textual) (USD $)	9 Months Ended			9 Months Ended	0 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Dec. 31, 2012	Sep. 30, 2013 2010 long-term incentive plan [Member]	Jul. 29, 2013 2010 long-term incentive plan [Member] Chief Executive Officer's wife [Member]	Jul. 29, 2013 2010 long-term incentive plan [Member] Chief Financial Officer [Member]	Jul. 29, 2013 2010 long-term incentive plan [Member] Other Employees [Member]	Jul. 10, 2013 Investor [Member]	Jun. 18, 2013 Investor [Member]
Stockholders' Equity (Textual)
Sale of common stock, Shares								150,518	428,398
Sale of stock, Per price share								$ 4.70	$ 4.50
Sale of common stock								$ 620,000	$ 1,768,000
Payment related to stock issuance costs								84,892	154,745
Percentage of fee payment								10.00%	10.00%
Percentage of non accountable expense allowance								2.00%	2.00%
Common stock issued for services					8,000	8,000	14,000
Stock-based compensation expense	278,034	129,030		78,600
Prepaid expenses	$ 160,431		$ 281,265	$ 78,600

XML

Unaudited Consolidated Statements of Income and Comprehensive Income (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Statements of Income and Comprehensive Income [Abstract]
REVENUES	$ 18,213,508	$ 17,343,723	$ 49,312,341	$ 39,585,815
COST OF REVENUES	13,576,808	13,024,265	37,572,531	30,689,436
GROSS PROFIT	4,636,700	4,319,458	11,739,810	8,896,379
OPERATING EXPENSES:
Depreciation	109,652	373,896	461,539	1,122,432
Selling, general and administrative	1,316,925	739,386	2,675,076	2,157,053
Total Operating Expenses	1,426,577	1,113,282	3,136,615	3,279,485
INCOME FROM OPERATIONS	3,210,123	3,206,176	8,603,195	5,616,894
OTHER INCOME (EXPENSE):
Interest income	14,840	5,069	16,009	10,919
Interest expense	(74,638)	(84,289)	(244,291)	(244,685)
Foreign currency (loss) gain	(9,821)	1,251	(15,800)	6,642
Warrant modification expense				(235,133)
Other income	5,933	51,523	43,015	64,803
Total Other Income (Expense), net	(63,686)	(26,446)	(201,067)	(397,454)
INCOME BEFORE INCOME TAXES	3,146,437	3,179,730	8,402,128	5,219,440
INCOME TAXES	1,015,701	824,628	2,326,239	1,490,173
NET INCOME	2,130,736	2,355,102	6,075,889	3,729,267
COMPREHENSIVE INCOME:
NET INCOME	2,130,736	2,355,102	6,075,889	3,729,267
OTHER COMPREHENSIVE INCOME:
Unrealized foreign currency translation gain (loss)	516,244	(169,625)	2,161,711	342,015
COMPREHENSIVE INCOME	$ 2,646,980	$ 2,185,477	$ 8,237,600	$ 4,071,282
NET INCOME PER COMMON SHARE:
Basic	$ 0.61	$ 0.88	$ 1.95	$ 1.51
Diluted	$ 0.61	$ 0.88	$ 1.95	$ 1.42
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic	3,479,646	2,667,017	3,112,148	2,469,818
Diluted	3,479,646	2,667,017	3,112,148	2,617,798

XML

Land Use Rights

9 Months Ended

Sep. 30, 2013

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 three months ended September 30, 2013 and 2012, amortization of land use rights amounted to $23,954 and $23,341, respectively. For the nine months ended September 30, 2013 and 2012, amortization of land use rights amounted to $71,261 and $70,068, respectively. At September 30, 2013 and December 31, 2012, land use rights consisted of the following:

	Useful Life	September 30, 2013			December 31, 2012
Land use rights	45 - 50 years	$	4,389,374		$	4,274,916
Less: accumulated amortization			(604,533	)		(518,574	)
		$	3,784,841		$	3,756,342

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

Twelve-month periods ending September 30:	Amount
2014	$	96,098
2015		96,098
2016		96,098
2017		96,098
2018		96,098
Thereafter		3,304,351
	$	3,784,841

XML

Accounts Receivable (Tables)

9 Months Ended

Sep. 30, 2013

Accounts Receivable and Restricted Net Assets [Abstract]

Components of accounts receivable

	September 30, 2013			December 31, 2012
Accounts receivable	$	14,284,951		$	12,670,680
Less: allowance for doubtful accounts		(2,739,117	)		(2,592,057	)
	$	11,545,834		$	10,078,623

XML

Segment Information (Details) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Dec. 31, 2012
Revenues:
Revenues	$ 18,213,508	$ 17,343,723	$ 49,312,341	$ 39,585,815
Depreciation:
Depreciation	1,661,740	1,627,258	4,882,899	4,719,769
Interest expense:
Interest expense	74,638	84,289	244,291	244,685
Net income (loss):
Net income (loss)	2,130,736	2,355,102	6,075,889	3,729,267
Identifiable long-lived tangible assets by segment:
Identifiable long-lived tangible assets	66,699,091		66,699,091		59,436,100
Identifiable long-lived tangible assets by geographical location:
Identifiable long-lived tangible assets	66,699,091		66,699,091		59,436,100
Forged Rolled Rings and Related Components [Member]
Revenues:
Revenues	8,722,683	9,826,210	23,447,214	23,619,875
Depreciation:
Depreciation	1,065,933	1,261,991	3,171,777	3,694,696
Interest expense:
Interest expense	38,428	66,494	118,341	196,690
Net income (loss):
Net income (loss)	1,094,210	1,270,837	3,114,330	2,347,542
Identifiable long-lived tangible assets by segment:
Identifiable long-lived tangible assets	44,867,148		44,867,148		40,636,142
Dyeing and Finishing Equipment [Member]
Revenues:
Revenues	9,490,825	7,517,513	25,865,127	15,965,940
Depreciation:
Depreciation	595,807	365,267	1,711,122	1,025,073
Interest expense:
Interest expense	36,210	17,795	125,950	47,995
Net income (loss):
Net income (loss)	1,248,012	1,201,156	3,467,999	2,117,296
Identifiable long-lived tangible assets by segment:
Identifiable long-lived tangible assets	21,831,943		21,831,943		18,799,958
Other Segment [Member]
Net income (loss):
Net income (loss)	(211,486)	(116,891)	(506,440)	(735,571)
China [Member]
Identifiable long-lived tangible assets by geographical location:
Identifiable long-lived tangible assets	66,699,091		66,699,091		59,436,100
United States [Member]
Identifiable long-lived tangible assets by geographical location:
Identifiable long-lived tangible assets

XML

Concentrations

9 Months Ended

Sep. 30, 2013

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, 2013 and 2012.

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, 2013 and 2012.

	Nine Months Ended September 30,
Supplier	2013			2012
A		19	%		17	%
B		*			14	%
C		15	%		11	%

*less than 10%

XML

Short-Term Bank Loans (Details Textual)	9 Months Ended
	Sep. 30, 2013
Agricultural and Commercial Bank, Loan due on August 26, 2013 [Member]
Short-term bank loans (Textual)
Short term bank loan, Maturity date	Aug. 26, 2013
Short-term loan, interest rate, stated percentage	6.90%
Agricultural and Commercial Bank, Loan due on May 9, 2014 [Member]
Short-term bank loans (Textual)
Short term bank loan, Maturity date	May 09, 2014
Short-term loan, interest rate, stated percentage	7.20%
Bank of Communications, Loan due on May 8, 2013 [Member]
Short-term bank loans (Textual)
Short term bank loan, Maturity date	May 08, 2013
Short-term loan, interest rate, stated percentage	6.72%
Bank of Communications, Loan due on May 12, 2013 [Member]
Short-term bank loans (Textual)
Short term bank loan, Maturity date	May 12, 2013
Short-term loan, interest rate, stated percentage	6.72%
Bank of Communications, Loan due on November 5, 2013 [Member]
Short-term bank loans (Textual)
Short term bank loan, Maturity date	Nov. 05, 2013
Short-term loan, interest rate, stated percentage	6.72%
Bank of Communications, Loan due on November 12, 2013 [Member]
Short-term bank loans (Textual)
Short term bank loan, Maturity date	Nov. 12, 2013
Short-term loan, interest rate, stated percentage	6.72%
Bank of China, Loan due on January 16, 2013 [Member]
Short-term bank loans (Textual)
Short term bank loan, Maturity date	Jan. 16, 2013
Short-term loan, interest rate, stated percentage	7.35%
Bank of China, Loan due on March 1, 2014 [Member]
Short-term bank loans (Textual)
Short term bank loan, Maturity date	Mar. 01, 2014
Short-term loan, interest rate, stated percentage	6.27%
Bank of China, Loan due on March 3, 2014 [Member]
Short-term bank loans (Textual)
Short term bank loan, Maturity date	Mar. 03, 2014
Short-term loan, interest rate, stated percentage	6.27%
Jiangsu Huishan Mintai Village Town Bank, Loan due on July 15, 2014 [Member]
Short-term bank loans (Textual)
Short term bank loan, Maturity date	Jul. 15, 2014
Short-term loan, interest rate, stated percentage	9.30%

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Segment Information (Details Textual)	9 Months Ended
	Sep. 30, 2013 Segment	Sep. 30, 2012 Segment
Segment Information (Textual)
Number of reportable business segments	2	2

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Organization and Summary of Significant Accounting Policies (Details Textual) (USD $)	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Dec. 31, 2012
Organization and Summary of Significant Accounting Policies (Additional Textual)
Cash and cash equivalents uninsured amount	$ 1,756,117		$ 1,756,117		$ 1,414,674
Impairment charges					2,206,253
Period for non-interest bearing amount					6 months
Notes receivable	485,793		485,793		88,029
Allowance for doubtful accounts	2,739,117		2,739,117		2,592,057
Inventory reserves	139,621		139,621		135,980
Advances to suppliers	1,303,911		1,303,911		593,104
Advances from customers	2,210,102		2,210,102		1,851,987
Product warranty, period			1 year
Shipping costs	354,164	311,275	910,095	803,951
Employee benefit costs	56,491	48,020	157,588	137,575
Advertising expense	18,260	16,997	18,260	20,653
Research and development expense	29,050	66,846
Asset and liability translation rate (RMB to USD)	6.15140		6.15140		6.31610
Average translation rates (RMB to USD)	6.22152	6.32745	6.22152	6.32745
Cumulative translation adjustment and effect of exchange rate changes on cash			$ 25,427	$ 3,898
Reverse stock split			one-for-ten
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)
Percentage of capital stock owned by Fulland	100.00%		100.00%

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Land Use Rights (Tables)

9 Months Ended

Sep. 30, 2013

Land Use Rights [Abstract]

Components of land use rights

	Useful Life	September 30, 2013			December 31, 2012
Land use rights	45 - 50 years	$	4,389,374		$	4,274,916
Less: accumulated amortization			(604,533	)		(518,574	)
		$	3,784,841		$	3,756,342

Summary of amortization of land use rights attributable to future periods

Twelve-month periods ending September 30:	Amount
2014	$	96,098
2015		96,098
2016		96,098
2017		96,098
2018		96,098
Thereafter		3,304,351
	$	3,784,841

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Property and Equipment (Tables)

9 Months Ended

Sep. 30, 2013

Property and Equipment [Abstract]

Components of property and equipment

	Useful Life	September 30, 2013			December 31, 2012
Office equipment and furniture	5 Years	$	253,404		$	222,853
Manufacturing equipment	5 – 10 Years		67,477,040			56,916,700
Vehicles	5 Years		128,518			125,167
Construction in progress	-		1,578,728			28,785
Building and building improvements	20 Years		21,342,118			20,785,597
			90,779,808			78,079,102
Less: accumulated depreciation			(24,080,717	)		(18,643,002	)
		$	66,699,091		$	59,436,100

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Land Use Rights (Details Textual) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Land Use Rights (Textual)
Amortization of land use rights	$ 23,954	$ 23,341	$ 71,261	$ 70,068
Land use rights expiration date			Expire on January 1, 2053 and October 30, 2053
Minimum [Member]
Land Use Rights (Textual)
Land use rights, Useful Life			45 years
Maximum [Member]
Land Use Rights (Textual)
Land use rights, Useful Life			50 years
Land use rights [Member] | Minimum [Member]
Land Use Rights (Textual)
Land use rights, Useful Life			45 years
Land use rights [Member] | Maximum [Member]
Land Use Rights (Textual)
Land use rights, Useful Life			50 years

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Capital Lease Obligation (Tables)

9 Months Ended

Sep. 30, 2013

Capital Lease Obligations [Abstract]

Schedule of future minimum lease payments for capital leases

	September 30, 2013		December 31, 2012
Capital lease obligation - current portion	$	-	$	251,413
Capital lease obligation - long-term portion		-		132,756
	$	-	$	384,169

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Accounts Receivable (Details Textual) (USD $)	9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012
Accounts Receivable (Textual)
Increase (decrease) in allowance for doubtful accounts	$ 76,784	$ (46,616)

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Bank Acceptance Notes Payable (Details) (USD $)	Sep. 30, 2013	Dec. 31, 2012
Summary of bank acceptance notes payables
Total	$ 796,567
Bank of China, Due on January 4, 2014 [Member]
Summary of bank acceptance notes payables
Total	81,283
Jiangsu Huishan Mintai Village Town Bank, non-interest bearing, due on February 23, 2014 [Member]
Summary of bank acceptance notes payables
Total	325,129
Bank of Communications, Due on November 23, 2013 [Member]
Summary of bank acceptance notes payables
Total	32,513
Bank of Communications, Due on November 30, 2013 [Member]
Summary of bank acceptance notes payables
Total	325,129
Bank of Communications, Due on January 3, 2014 [Member]
Summary of bank acceptance notes payables
Total	$ 32,513

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Statutory Reserves (Tables)

9 Months Ended

Sep. 30, 2013

Statutory Reserves [Abstract]

Summary of statutory reserve activity

	Dyeing		Electrical		Fulland Wind Energy		Total
Balance – December 31, 2012	$	373,048	$	1,168,796	$	937,894	$	2,479,738
Addition to statutory reserves		-		-		277,306		277,306
Balance – September 30, 2013	$	373,048	$	1,168,796	$	1,215,200	$	2,757,044

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Subsequent Events (Details) (USD $)	1 Months Ended	9 Months Ended	1 Months Ended	9 Months Ended	0 Months Ended
	Sep. 30, 2013 Bank of Communications, Loan due on April 21, 2014 [Member]	Sep. 30, 2013 Bank of Communications, Loan due on April 21, 2014 [Member]	Sep. 30, 2013 Bank of Communications, Loan due on April 23, 2014 [Member]	Sep. 30, 2013 Bank of Communications, Loan due on April 23, 2014 [Member]	Nov. 10, 2013 Subsequent Event [Member] Bank of Communications, Loan due on April 21, 2014 [Member]	Nov. 10, 2013 Subsequent Event [Member] Bank of Communications, Loan due on April 23, 2014 [Member]
Subsequent Events (Textual)
Short-term loan, repaid	$ 325,129		$ 487,694		$ 325,129	$ 487,694
New short-term loan, interest rate, stated percentage	6.72%	6.72%	6.72%	6.72%	6.72%	6.72%
Loan due date		Nov. 05, 2013		Nov. 12, 2013	Apr. 21, 2014	Apr. 23, 2014

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Property and Equipment (Details Textual) (USD $)	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Dec. 31, 2012
Property and Equipment (Textual)
Depreciation expense	$ 1,661,740	$ 1,627,258	$ 4,882,899	$ 4,719,769
Depreciation included in cost of revenues	$ 1,552,088	$ 1,253,362	$ 4,421,360	$ 3,597,337
Non-cancelable capital lease expiration date			Jun. 03, 2014		Jun. 03, 2014

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Inventories (Tables)

9 Months Ended

Sep. 30, 2013

Inventories [Abstract]

Components of inventories

	September 30, 2013			December 31, 2012
Raw materials	$	1,560,581		$	1,685,493
Work in process		2,580,155			2,602,990
Finished goods		2,215,100			1,745,052
		6,355,836			6,033,535
Less: reserve for obsolete inventory		(139,621	)		(135,980	)
	$	6,216,215		$	5,897,555

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Organization and Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2013

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 unaudited 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, 2012.

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 unaudited 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 unaudited 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 three and nine months ended September 30, 2013 and 2012 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 warrant 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. As of September 30, 2013 and December 31, 2012, balances in banks in the PRC of $1,756,117 and $1,414,674, respectively, 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 following tables present information about equipment held for sale measured at fair value on a nonrecurring basis as of September 30, 2013 and December 31, 2012:

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at  September 30, 2013		Gains (Losses)
Equipment held for sale	$	-	$	-	$	7,309,150	$	7,309,150	$	-

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at December 31, 2012		Loss
Equipment held for sale	$	-	$	-	$	7,118,555	$	7,118,555	$	2,206,253

The Company conducted an impairment assessment on the equipment held for sale based on the guidelines established in FASB ASC Topic 360 to determine the estimated fair market value of the equipment as of December 31, 2012. Upon completion of its 2012 impairment analysis, the Company determined that the carrying value exceeded the fair market value on equipment which is held for sale. The Company recorded an impairment charge of $2,206,253 at December 31, 2012. The difference in the value of equipment held for sale at September 30, 2013 from December 31, 2012 reflects changes in the currency exchange ratio.

The carrying amounts reported in the consolidated 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.

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, 2013 and December 31, 2012, the Company’s cash balances by geographic area were as follows:

	September 30, 2013				December 31, 2012
Country:
United States	$	466,900	21.0	%	$	31,054	2.1	%
China		1,756,117	79.0	%		1,414,674	97.9	%
Total cash and cash equivalents	$	2,223,017	100.0	%	$	1,445,728	100.0	%

Restricted cash

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

Notes receivable

Notes receivable represents trade accounts receivable due from 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 $485,793 and $88,029 at September 30, 2013 and December 31, 2012, 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, 2013 and December 31, 2012, the Company has established, based on a review of its outstanding balances, an allowance for doubtful accounts in the amounts of $2,739,117 and $2,592,057, 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 $139,621 and $135,980 at September 30, 2013 and December 31, 2012, 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 $1,303,911 and $593,104 as of September 30, 2013 and December 31, 2012, 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.

Equipment held for sale

Long-lived assets are classified as held for sale when certain criteria are met. These criteria include: management’s commitment to a plan to sell the assets; the availability of the assets for immediate sale in their present condition; an active program to locate buyers and other actions to sell the assets has been initiated; the sale of the assets is probable and their transfer is expected to qualify for recognition as a completed sale within one year; the assets are being marketed at reasonable prices in relation to their fair value; and it is unlikely that significant changes will be made to the plan to sell the assets. We measure long-lived assets to be disposed of by sale at the lower of carrying amount or fair value, less associated costs to sell. At September 30, 2013 and December 31, 2012, the Company reflected certain electro-slag re-melted (“ESR”) equipment that was used in 2010 and 2011 to produce forged products for the high performance components market as equipment held for sale on the accompanying consolidated balance sheets.

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 charge for the three and nine months ended September 30, 2013 and 2012.

Advances from customers

Advances from customers at September 30, 2013 and December 31, 2012 amounted to $2,210,102 and $1,851,987, 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 and title to the assets is transferred to customers in accordance with the Company’s 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 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 three and nine months ended September 30, 2013 and 2012, amounts allocated to installation and warranty revenues were minimal. 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, 2013 and December 31, 2012, 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 $354,164 and $311,275 for the three months ended September 30, 2013 and 2012, respectively. Shipping costs totaled $910,095 and $803,951 for the nine months ended September 30, 2013 and 2012, 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. The costs of these payments are charged to the same accounts as the related salary costs in the same period as the related salary costs. Employee benefit costs totaled $56,491 and $48,020 for the three months ended September 30, 2013 and 2012, respectively. Employee benefit costs totaled $157,588 and $137,575 for the nine months ended September 30, 2013 and 2012, respectively.

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 totaled $18,260 and $16,997 for the three months ended September 30, 2013 and 2012, respectively. Advertising expenses totaled $18,260 and $20,653 for the nine months ended September 30, 2013 and 2012, respectively.

Research and development

Research and development costs are expensed as incurred and are included in selling, general and administrative expenses. The costs primarily consist of raw materials and salaries paid for the development and improvement of the Company’s new dyeing machinery. Research and development costs totaled $29,050 and $66,846 for the three and nine months ended September 30, 2013, respectively.  The Company did not incur any research and development expense during the three and nine months ended September 30, 2012.

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, 2013 and 2012 was $25,427 and $3,898, 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, 2013 and December 31, 2012 were translated at 6.15140 RMB to $1.00 and at 6.31610 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, 2013 and 2012 were 6.22152 RMB and 6.32745 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,
	2013		2012		2013		2012
Net income available to common stockholders for basic and diluted net income per share of common stock	$	2,130,736	$	2,355,102	$	6,075,889	$	3,729,267
Weighted average common stock outstanding - basic		3,479,646		2,667,017		3,112,148		2,469,818
Effect of dilutive securities:
Series A convertible preferred stock		-		-		-		137,783
Warrants		-		-		-		10,197
Weighted average common stock outstanding - diluted	$	3,479,646		2,667,017		3,112,148		2,617,798
Net income per common share - basic	$	0.61	$	0.88	$	1.95	$	1.51
Net income per common share - diluted	$	0.61	$	0.88	$	1.95	$	1.42

The Company did not have any common stock equivalents at September 30, 2013 and December 31, 2012.

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 are recorded at fair value of the goods or services exchanged.

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, 2013 and 2012 included net income and unrealized gains/losses from foreign currency translation adjustments.

Recent accounting pronouncement

In March 2013, the FASB issued ASU 2013-05 “Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.” ASU 2013-05 addresses the accounting for the cumulative translation adjustment when a parent either sells part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. For public entities, the ASU is effective prospectively for fiscal years, and interim periods, within those years, beginning after December 15, 2013. Early adoption is permitted. The adoption of ASU 2013-05 is not expected to have a material impact on the Company’s consolidated financial statements.

In July 2013, the FASB issued ASU 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists." ASU 2013-11 provides guidance on the presentation of unrecognized tax benefits related to any disallowed portion of net operating loss carryforwards, similar tax losses, or tax credit carryforwards, if they exist. ASU 2013-11 is effective for fiscal years beginning after December 15, 2013. The adoption of ASU 2013-11 is not expected to have a material impact on the Company’s consolidated financial statements.

Other 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. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.

Reclassification

Certain reclassifications have been made in prior year same period’s financial statements to conform to the current period’s financial presentation.

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Inventories

9 Months Ended

Sep. 30, 2013

Inventories [Abstract]

INVENTORIES

NOTE 3 - INVENTORIES

At September 30, 2013 and December 31, 2012, inventories consisted of the following:

	September 30, 2013			December 31, 2012
Raw materials	$	1,560,581		$	1,685,493
Work in process		2,580,155			2,602,990
Finished goods		2,215,100			1,745,052
		6,355,836			6,033,535
Less: reserve for obsolete inventory		(139,621	)		(135,980	)
	$	6,216,215		$	5,897,555

For the three and nine months ended September 30, 2013 and 2012, the Company did not make any change for reserve for obsolete inventory.

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Equipment Held For Sale

9 Months Ended

Sep. 30, 2013

Equipment Held For Sale [Abstract]

EQUIPMENT HELD FOR SALE

NOTE 6 – EQUIPMENT HELD FOR SALE

The Company measures long-lived assets to be disposed of by sale at the lower of carrying amount or fair value, less associated costs to sell these assets. The assets held for sale are no longer subject to depreciation as they are not used in operations. As of September 30, 2013 and December 31, 2012, the Company committed to a plan to sell certain ESR equipment that was used to produce forged products for the high performance components market as equipment held for sale on the accompanying consolidated balance sheet. The Company evaluated equipment for impairment at September 30, 2013 and December 31, 2012. The Company compared the estimated fair values of the equipment to its carrying value with impairment indicators and recorded an impairment charge for the excess of carrying value over fair value. For the nine months ended September 30, 2013 and 2012, the Company did not incur any impairment charge on ESR equipment. Although the Company is actively seeking and negotiating with potential buyers, the Company can give no assurances that the sale process will be successful and, if it were successful, there are no assurances as to the amount or timing of any potential proceeds.

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Property and Equipment

9 Months Ended

Sep. 30, 2013

Property and Equipment [Abstract]

PROPERTY AND EQUIPMENT

NOTE 4 - PROPERTY AND EQUIPMENT

At September 30, 2013 and December 31, 2012, property and equipment consisted of the following:

	Useful Life	September 30, 2013			December 31, 2012
Office equipment and furniture	5 Years	$	253,404		$	222,853
Manufacturing equipment	5 – 10 Years		67,477,040			56,916,700
Vehicles	5 Years		128,518			125,167
Construction in progress	-		1,578,728			28,785
Building and building improvements	20 Years		21,342,118			20,785,597
			90,779,808			78,079,102
Less: accumulated depreciation			(24,080,717	)		(18,643,002	)
		$	66,699,091		$	59,436,100

For the three months ended September 30, 2013 and 2012, depreciation expense amounted to $1,661,740 and $1,627,258, respectively, of which $1,552,088 and $1,253,362, respectively, is included in cost of revenues and the remainder is included in operating expenses. For the nine months ended September 30, 2013 and 2012, depreciation expense amounted to $4,882,899 and $4,719,769, respectively, of which $4,421,360 and $3,597,337, respectively, is included in cost of revenues and the remainder is included in operating 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.

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Inventories (Details) (USD $)	Sep. 30, 2013	Dec. 31, 2012
Components of inventories
Raw materials	$ 1,560,581	$ 1,685,493
Work in process	2,580,155	2,602,990
Finished goods	2,215,100	1,745,052
Inventory gross	6,355,836	6,033,535
Less: reserve for obsolete inventory	(139,621)	(135,980)
Inventory net	$ 6,216,215	$ 5,897,555

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Short-Term Bank Loans (Tables)

9 Months Ended

Sep. 30, 2013

Short-Term Bank Loans [Abstract]

Summary of short-term bank loans

	September 30, 2013		December 31, 2012
Loan from Agricultural and Commercial Bank, due on August 26, 2013 with annual interest rate of 6.90% at December 31, 2012, secured by certain assets of the Company and repaid on May 15, 2013.	$	-	$	474,977
Loan from Agricultural and Commercial Bank, due on May 9, 2014 with annual interest rate of 7.20% at September 30, 2013, secured by certain assets of the Company.		487,694		-
Loan from Bank of Communications, due on May 8, 2013 with annual interest rate of 6.72% at December 31, 2012, repaid on due date.		-		316,651
Loan from Bank of Communications, due on May 12, 2013 with annual interest rate of 6.72% at December 31, 2012, repaid on due date.		-		474,977
Loan from Bank of Communications, due on November 5, 2013 with annual interest rate of 6.72% at September 30, 2013, repaid on due date. (see note 16)		325,129		-
Loan from Bank of Communications, due on November 12, 2013 with annual interest rate of 6.72% at September 30, 2013, repaid on due date. (see note 16)		487,694		-
Loan from Bank of China, due on January 16, 2013 with annual interest rate of 7.35% at December 31, 2012, secured by certain assets of the Company, repaid on due date.		-		949,953
Loan from Bank of China, due on March 1, 2014 with annual interest rate of 6.27% at September 30, 2013, secured by certain assets of the Company.		487,694		-
Loan from Bank of China, due on March 3, 2014 with annual interest rate of 6.27% at September 30, 2013, secured by certain assets of the Company.		487,694		-
Loan from Jiangsu Huishan Mintai Village Town Bank, due on July 15, 2014 with annual interest rate of 9.30% at September 30, 2013, secured by certain assets of the Company.		812,823		-
Total short-term bank loans	$	3,088,728	$	2,216,558

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Segment Information (Tables)

9 Months Ended

Sep. 30, 2013

Segment Information [Abstract]

Segment Information

	Three Months Ended  September 30,						Nine Months Ended  September 30,
	2013			2012			2013			2012
Revenues:
Forged rolled rings and related components	$	8,722,683		$	9,826,210		$	23,447,214		$	23,619,875
Dyeing and finishing equipment		9,490,825			7,517,513			25,865,127			15,965,940
		18,213,508			17,343,723			49,312,341			39,585,815
Depreciation:
Forged rolled rings and related components		1,065,933			1,261,991			3,171,777			3,694,696
Dyeing and finishing equipment		595,807			365,267			1,711,122			1,025,073
		1,661,740			1,627,258			4,882,899			4,719,769
Interest expense:
Forged rolled rings and related components		38,428			66,494			118,341			196,690
Dyeing and finishing equipment		36,210			17,795			125,950			47,995
		74,638			84,289			244,291			244,685
Net income (loss):
Forged rolled rings and related components		1,094,210			1,270,837			3,114,330			2,347,542
Dyeing and finishing equipment		1,248,012			1,201,156			3,467,999			2,117,296
Other (a)		(211,486	)		(116,891	)		(506,440	)		(735,571	)
	$	2,130,736		$	2,355,102		$	6,075,889		$	3,729,267

Identifiable long-lived tangible assets at September 30, 2013 and December 31, 2012 by segment:	September 30, 2013		December 31, 2012
Forged rolled rings and related components	$	44,867,148	$	40,636,142
Dyeing and finishing equipment		21,831,943		18,799,958
	$	66,699,091	$	59,436,100
Identifiable long-lived tangible assets at September 30, 2013 and December 31, 2012 by geographical location:	September 30, 2013			December 31, 2012
China	$	66,699,091	$	59,436,100
United States		-		-
	$	66,699,091	$	59,436,100

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Organization and Summary of Significant Accounting Policies (Details 2) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Summary of 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	$ 2,130,736	$ 2,355,102	$ 6,075,889	$ 3,729,267
Weighted average common stock outstanding - basic	3,479,646	2,667,017	3,112,148	2,469,818
Effect of dilutive securities:
Series A convertible preferred stock				137,783
Warrants				10,197
Weighted average common stock outstanding - diluted	3,479,646	2,667,017	3,112,148	2,617,798
Net income per common share - basic	$ 0.61	$ 0.88	$ 1.95	$ 1.51
Net income per common share - diluted	$ 0.61	$ 0.88	$ 1.95	$ 1.42

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Statutory Reserves (Details Textual)	9 Months Ended
	Sep. 30, 2013
Statutory Reserves (Textual)
Appropriation to the statutory surplus reserve, Description	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, Description	Minimum of 5% of the after tax net income determined in accordance with PRC GAAP.
Appropriations of registered capital to statutory reserves, Description	Maximum 50% of its registered capital to statutory reserves for Dyeing and Electric, accordingly, no additional statutory reserve is required at September 30, 2013.
Company had not appropriated required maximum of registered capital to statutory reserves, Description	Maximum 50% of its registered capital to statutory reserve for Fulland Wind Energy.

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Bank Acceptance Notes Payable (Details Textual)	9 Months Ended
	Sep. 30, 2013
Bank of China, Due on January 4, 2014 [Member]
Bank Acceptance Notes Payables (Textual)
Loan due date	Jan. 04, 2014
Percentage of assets collateralized for non-interest bearing notes payables	100.00%
Jiangsu Huishan Mintai Village Town Bank, non-interest bearing, due on February 23, 2014 [Member]
Bank Acceptance Notes Payables (Textual)
Loan due date	Feb. 23, 2014
Percentage of assets collateralized for non-interest bearing notes payables	100.00%
Bank of Communications, Due on November 23, 2013 [Member]
Bank Acceptance Notes Payables (Textual)
Loan due date	Nov. 23, 2013
Percentage of assets collateralized for non-interest bearing notes payables	100.00%
Bank of Communications, Due on November 30, 2013 [Member]
Bank Acceptance Notes Payables (Textual)
Loan due date	Nov. 30, 2013
Percentage of assets collateralized for non-interest bearing notes payables	100.00%
Bank of Communications, Due on January 3, 2014 [Member]
Bank Acceptance Notes Payables (Textual)
Loan due date	Jan. 03, 2014
Percentage of assets collateralized for non-interest bearing notes payables	100.00%

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Land Use Rights (Details 1) (USD $)	Sep. 30, 2013	Dec. 31, 2012
Summary of amortization of land use rights attributable to future periods
2014	$ 96,098
2015	96,098
2016	96,098
2017	96,098
2018	96,098
Thereafter	3,304,351
Land use rights, net	$ 3,784,841	$ 3,756,342

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Condensed Balance Sheets (Parenthetical) (USD $)	Sep. 30, 2013	Dec. 31, 2012
Balance Sheets [Abstract]
Preferred stock, par value	$ 0.001	$ 0.001
Preferred stock, shares authorized	10,000,000	10,000,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par value	$ 0.001	$ 0.001
Common stock, shares authorized	50,000,000	50,000,000
Common stock, shares issued	3,503,502	2,894,586
Common stock, shares outstanding	3,503,502	2,894,586

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Income Taxes

9 Months Ended

Sep. 30, 2013

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 and to the temporary differences related to the deduction of impairment losses in PRC for income tax purposes as compared to financial statement purposes, are dependent upon future taxable income during the periods in which those temporary differences become deductible or are utilized.

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. Effective in January 2008, 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.

The tax effects of temporary differences under the Income Tax Law of the PRC that give rise to significant portions of deferred tax assets and liabilities as of September 30, 2013 and December 31, 2012 are as follows:

	September 30, 2013			December 31, 2012
Deferred tax asset:
Net U.S. operating loss carry forward	$	1,786,309		$	1,614,245
Loss on impairment of equipment		566,666			551,890
Total gross deferred tax asset		2,352,975			2,166,135
Less: valuation allowance		(1,786,309	)		(1,614,245	)
Net deferred tax asset	$	566,666		$	551,890

The valuation allowance at September 30, 2013 and December 31, 2012 was $1,786,309 and $1,614,245, respectively, related to the U.S. net operating loss carry forward. During the nine months ended September 30, 2013, the valuation allowance was increased by approximately $172,000.

In assessing the ability to realize the deferred tax asset from the loss on impairment of equipment held for sale in PRC, management considers whether it is more likely than not that some portion or the entire deferred tax asset will be realized. The Company concluded that the temporary difference on the impairment loss of equipment held for sale in PRC will be deductible or utilized on the future PRC taxable income and a deferred tax asset of $566,666 and $551,890 has been set up at September 30, 2013 and December 31, 2012, respectively.

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Unaudited Consolidated Satatements of Cash Flows (USD $)	9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$ 6,075,889	$ 3,729,267
Adjustments to reconcile net income from operations to net cash provided by operating activities:
Depreciation	4,882,899	4,719,769
Amortization of land use rights	71,261	70,068
Increase (decrease) in allowance for doubtful accounts	76,784	(46,616)
Warrant modification expense		235,133
Stock-based compensation expense	278,034	129,030
Changes in operating assets and liabilities:
Notes receivable	(390,950)	(112,209)
Accounts receivable	(1,260,651)	(3,368,092)
Inventories	(158,944)	(1,925,810)
Prepaid value-added taxes on purchases	(270,730)	844,969
Prepaid and other current assets	82,378	(41,315)
Advances to suppliers	(687,094)	(627,455)
Accounts payable	(672,461)	1,310,123
Accrued expenses	(451,672)	(49,578)
VAT and service taxes payable	(209,667)
Income taxes payable	222,801	289,230
Advances from customers	305,052	668,446
NET CASH PROVIDED BY OPERATING ACTIVITIES	7,892,929	5,824,960
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment	(9,943,309)	(6,334,776)
NET CASH USED IN INVESTING ACTIVITIES	(9,943,309)	(6,334,776)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease	(390,009)	(205,509)
Proceeds from bank loans	4,821,973	2,686,706
Repayments of bank loans	(4,018,311)	(2,370,623)
(Increase) decrease in restricted cash	(787,589)	316,083
Increase (decrease) in bank acceptance notes payable	787,589	(316,083)
Net proceeds from sale of common stock	2,388,589
Proceeds from exercise of warrants		198,142
NET CASH PROVIDED BY FINANCING ACTIVITIES	2,802,242	308,716
EFFECT OF EXCHANGE RATE ON CASH AND CASH EQUIVALENTS	25,427	3,898
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	777,289	(197,202)
CASH AND CASH EQUIVALENTS - beginning of period	1,445,728	1,152,607
CASH AND CASH EQUIVALENTS - end of period	2,223,017	955,405
Cash paid for:
Interest	244,291	244,685
Income taxes	2,103,438	1,200,944
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Property and equipment acquired on credit as payable	547,294
Series A preferred converted to common shares		13,198
Common stock issued for future service	$ 78,600	$ 27,440

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Concentrations (Details) (Purchase [Member])	9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012
Customer A [Member]
Concentration of purchase from suppliers
Concentration risk supplier, Percentage	19.00%	17.00%
Customer B [Member]
Concentration of purchase from suppliers
Concentration risk supplier, Percentage		14.00%
Customer C [Member]
Concentration of purchase from suppliers
Concentration risk supplier, Percentage	15.00%	11.00%

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Consolidated Balance Sheets (USD $)	Sep. 30, 2013	Dec. 31, 2012
CURRENT ASSETS:
Cash and cash equivalents	$ 2,223,017	$ 1,445,728
Restricted cash	796,567
Notes receivable	485,793	88,029
Accounts receivable, net of allowance for doubtful accounts	11,545,834	10,078,623
Inventories, net of reserve for obsolete inventory	6,216,215	5,897,555
Advances to suppliers	1,303,911	593,104
Prepaid VAT on purchases	830,361	542,032
Prepaid expenses and other	227,651	428,326
Total Current Assets	23,629,349	19,073,397
PROPERTY AND EQUIPMENT - net	66,699,091	59,436,100
OTHER ASSETS:
Deferred tax asset	566,666	551,890
Equipment held for sale	7,309,150	7,118,555
Land use rights, net	3,784,841	3,756,342
Total Assets	101,989,097	89,936,284
CURRENT LIABILITIES:
Short-term bank loans	3,088,728	2,216,558
Bank acceptance notes payable	796,567
Accounts payable	5,494,461	5,474,479
Accrued expenses	552,758	986,824
Capital lease obligation - current portion		251,413
Advances from customers	2,210,102	1,851,987
VAT and service taxes payable		206,527
Income taxes payable	1,069,434	822,082
Total Current Liabilities	13,212,050	11,809,870
OTHER LIABILITIES:
Capital lease obligation - net of current portion		132,756
Total Liabilities	13,212,050	11,942,626
STOCKHOLDERS' EQUITY:
Preferred stock ($0.001 par value; 10,000,000 shares authorized; 0 share issued and outstanding at September 30, 2013 and December 31, 2012, respectively
Common stock ($0.001 par value; 50,000,000 shares authorized; 3,503,502 and 2,894,586 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively	3,503	2,894
Additional paid-in capital	31,532,308	28,987,128
Retained earnings	44,200,317	38,401,734
Statutory reserve	2,757,044	2,479,738
Accumulated other comprehensive gain - foreign currency translation adjustment	10,283,875	8,122,164
Total Stockholders' Equity	88,777,047	77,993,658
Total Liabilities and Stockholders' Equity	$ 101,989,097	$ 89,936,284

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Income Taxes (Details) (USD $)	Sep. 30, 2013	Dec. 31, 2012
Deferred tax assets:
Net U.S. operating loss carry forward	$ 1,786,309	$ 1,614,245
Loss on impairment of equipment	566,666	551,890
Total gross deferred tax asset	2,352,975	2,166,135
Less: valuation allowance	(1,786,309)	(1,614,245)
Net deferred tax asset	$ 566,666	$ 551,890

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Bank Acceptance Notes Payable (Tables)

9 Months Ended

Sep. 30, 2013

Bank Acceptance Notes Payables [Abstract]

Summary of bank acceptance notes payables

	September 30, 2013		December 31, 2012
Bank of China, non-interest bearing, due on January 4, 2014, collateralized by 100% of restricted cash deposited.	$	81,283	$	-
Jiangsu Huishan Mintai Village Town Bank, non-interest bearing, due on February 23, 2014, collateralized by 100% of restricted cash deposited.		325,129		-
Bank of Communications, non-interest bearing, due on November 23, 2013, collateralized by 100% of restricted cash deposited.		32,513		-
Bank of Communications, non-interest bearing, due on November 30, 2013, collateralized by 100% of restricted cash deposited.		325,129		-
Bank of Communications, non-interest bearing, due on January 3, 2014, collateralized by 100% of restricted cash deposited.		32,513		-
Total	$	796,567	$	-

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Organization and Summary of Significant Accounting Policies (Tables)

9 Months Ended

Sep. 30, 2013

Organization and Summary of Significant Accounting Policies [Abstract]

Summary of equipment held for sale measured at fair value on nonrecurring basis

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at  September 30, 2013		Gains (Losses)
Equipment held for sale	$	-	$	-	$	7,309,150	$	7,309,150	$	-

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at December 31, 2012		Loss
Equipment held for sale	$	-	$	-	$	7,118,555	$	7,118,555	$	2,206,253

Cash balances by geographic area

	September 30, 2013				December 31, 2012
Country:
United States	$	466,900	21.0	%	$	31,054	2.1	%
China		1,756,117	79.0	%		1,414,674	97.9	%
Total cash and cash equivalents	$	2,223,017	100.0	%	$	1,445,728	100.0	%

Summary of reconciliation of basic and diluted net income per share

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Net income available to common stockholders for basic and diluted net income per share of common stock	$	2,130,736	$	2,355,102	$	6,075,889	$	3,729,267
Weighted average common stock outstanding - basic		3,479,646		2,667,017		3,112,148		2,469,818
Effect of dilutive securities:
Series A convertible preferred stock		-		-		-		137,783
Warrants		-		-		-		10,197
Weighted average common stock outstanding - diluted	$	3,479,646		2,667,017		3,112,148		2,617,798
Net income per common share - basic	$	0.61	$	0.88	$	1.95	$	1.51
Net income per common share - diluted	$	0.61	$	0.88	$	1.95	$	1.42

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Land Use Rights (Details) (USD $)			9 Months Ended
	Sep. 30, 2013	Dec. 31, 2012	Sep. 30, 2013 Minimum [Member]	Sep. 30, 2013 Maximum [Member]
Components of land use rights
Land use rights, Useful Life			45 years	50 years
Land use rights	$ 4,389,374	$ 4,274,916
Less: accumulated amortization	(604,533)	(518,574)
Land use rights, net	$ 3,784,841	$ 3,756,342

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Statutory Reserves (Details) (USD $)	9 Months Ended
	Sep. 30, 2013
Summary of statutory reserve activity
Beginning Balance	$ 2,479,738
Addition to statutory reserves	277,306
Balance	2,757,044
Dyeing [Member]
Summary of statutory reserve activity
Beginning Balance	373,048
Addition to statutory reserves
Balance	373,048
Electrical [Member]
Summary of statutory reserve activity
Beginning Balance	1,168,796
Addition to statutory reserves
Balance	1,168,796
Fulland Wind Energy [Member]
Summary of statutory reserve activity
Beginning Balance	937,894
Addition to statutory reserves	277,306
Balance	$ 1,215,200

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Accounts Receivable (Details) (USD $)	Sep. 30, 2013	Dec. 31, 2012
Components of accounts receivable
Accounts receivable	$ 14,284,951	$ 12,670,680
Less: allowance for doubtful accounts	(2,739,117)	(2,592,057)
Accounts receivable, net	$ 11,545,834	$ 10,078,623

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Organization and Summary of Significant Accounting Policies (Details) (USD $)	9 Months Ended	12 Months Ended
	Sep. 30, 2013	Dec. 31, 2012
Summary of equipment held for sale measured at fair value on nonrecurring basis
Equipment held for sale	$ 7,309,150	$ 7,118,555
Gains (Losses)		2,206,253
Fair Value, Measurements, Nonrecurring [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]
Summary of equipment held for sale measured at fair value on nonrecurring basis
Equipment held for sale
Fair Value, Measurements, Nonrecurring [Member] | Significant Other Observable Inputs (Level 2) [Member]
Summary of equipment held for sale measured at fair value on nonrecurring basis
Equipment held for sale
Fair Value, Measurements, Nonrecurring [Member] | Significant Unobservable Inputs (Level 3) [Member]
Summary of equipment held for sale measured at fair value on nonrecurring basis
Equipment held for sale	$ 7,309,150	$ 7,118,555

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Organization and Summary of Significant Accounting Policies (Details 1) (USD $)	Sep. 30, 2013	Dec. 31, 2012	Sep. 30, 2012	Dec. 31, 2011
Cash balances by geographic area
Total cash and cash equivalents	$ 2,223,017	$ 1,445,728	$ 955,405	$ 1,152,607
Total cash and cash equivalents, Percentage	100.00%	100.00%
United States [Member]
Cash balances by geographic area
Total cash and cash equivalents	466,900	31,054
Total cash and cash equivalents, Percentage	21.00%	2.10%
China [Member]
Cash balances by geographic area
Total cash and cash equivalents	$ 1,756,117	$ 1,414,674
Total cash and cash equivalents, Percentage	79.00%	97.90%

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Bank Acceptance Notes Payable

9 Months Ended

Sep. 30, 2013

Bank Acceptance Notes Payables [Abstract]

BANK ACCEPTANCE NOTES PAYABLE

NOTE 8 – 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, 2013 and December 31, 2012, the Company’s bank acceptance notes payables consisted of the following:

	September 30, 2013		December 31, 2012
Bank of China, non-interest bearing, due on January 4, 2014, collateralized by 100% of restricted cash deposited.	$	81,283	$	-
Jiangsu Huishan Mintai Village Town Bank, non-interest bearing, due on February 23, 2014, collateralized by 100% of restricted cash deposited.		325,129		-
Bank of Communications, non-interest bearing, due on November 23, 2013, collateralized by 100% of restricted cash deposited.		32,513		-
Bank of Communications, non-interest bearing, due on November 30, 2013, collateralized by 100% of restricted cash deposited.		325,129		-
Bank of Communications, non-interest bearing, due on January 3, 2014, collateralized by 100% of restricted cash deposited.		32,513		-
Total	$	796,567	$	-

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Capital Lease Obligation (Details Textual)	9 Months Ended	12 Months Ended
	Sep. 30, 2013	Dec. 31, 2012
Capital Lease Obligation (Textual)
Non-cancelable capital lease expiration date	Jun. 03, 2014	Jun. 03, 2014

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Income Taxes (Tables)

9 Months Ended

Sep. 30, 2013

Income Taxes [Abstract]

Deferred tax assets

	September 30, 2013			December 31, 2012
Deferred tax asset:
Net U.S. operating loss carry forward	$	1,786,309		$	1,614,245
Loss on impairment of equipment		566,666			551,890
Total gross deferred tax asset		2,352,975			2,166,135
Less: valuation allowance		(1,786,309	)		(1,614,245	)
Net deferred tax asset	$	566,666		$	551,890

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Property and Equipment (Details) (USD $)	9 Months Ended
	Sep. 30, 2013	Dec. 31, 2012
Components of property and equipment
Property and equipment, gross	$ 90,779,808	$ 78,079,102
Less: accumulated depreciation	(24,080,717)	(18,643,002)
Property and equipment, net	66,699,091	59,436,100
Office equipment and furniture [Member]
Components of property and equipment
Property and equipment, useful life	5 years
Property and equipment, gross	253,404	222,853
Manufacturing equipment [Member]
Components of property and equipment
Property and equipment, gross	67,477,040	56,916,700
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	128,518	125,167
Construction in progress [Member]
Components of property and equipment
Property and equipment, gross	1,578,728	28,785
Building and building improvements [Member]
Components of property and equipment
Property and equipment, useful life	20 years
Property and equipment, gross	$ 21,342,118	$ 20,785,597

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Statutory Reserves

9 Months Ended

Sep. 30, 2013

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. As of December 31, 2012, the Company appropriated the required maximum 50% of its registered capital to statutory reserves for Dyeing and Electric, accordingly, no additional statutory reserve is required at September 30, 2013. As of December 31, 2012, the Company had not appropriated the required maximum 50% of its registered capital to statutory reserve for Fulland Wind Energy.

For the nine months ended September 30, 2013, statutory reserve activity was as follows:

	Dyeing		Electrical		Fulland Wind Energy		Total
Balance – December 31, 2012	$	373,048	$	1,168,796	$	937,894	$	2,479,738
Addition to statutory reserves		-		-		277,306		277,306
Balance – September 30, 2013	$	373,048	$	1,168,796	$	1,215,200	$	2,757,044

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Short-Term Bank Loans

9 Months Ended

Sep. 30, 2013

Short-Term Bank Loans [Abstract]

SHORT-TERM BANK LOANS

NOTE 7 – 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, 2013 and December 31, 2012, short-term bank loans consisted of the following:

	September 30, 2013		December 31, 2012
Loan from Agricultural and Commercial Bank, due on August 26, 2013 with annual interest rate of 6.90% at December 31, 2012, secured by certain assets of the Company and repaid on May 15, 2013.	$	-	$	474,977
Loan from Agricultural and Commercial Bank, due on May 9, 2014 with annual interest rate of 7.20% at September 30, 2013, secured by certain assets of the Company.		487,694		-
Loan from Bank of Communications, due on May 8, 2013 with annual interest rate of 6.72% at December 31, 2012, repaid on due date.		-		316,651
Loan from Bank of Communications, due on May 12, 2013 with annual interest rate of 6.72% at December 31, 2012, repaid on due date.		-		474,977
Loan from Bank of Communications, due on November 5, 2013 with annual interest rate of 6.72% at September 30, 2013, repaid on due date. (see note 16)		325,129		-
Loan from Bank of Communications, due on November 12, 2013 with annual interest rate of 6.72% at September 30, 2013, repaid on due date. (see note 16)		487,694		-
Loan from Bank of China, due on January 16, 2013 with annual interest rate of 7.35% at December 31, 2012, secured by certain assets of the Company, repaid on due date.		-		949,953
Loan from Bank of China, due on March 1, 2014 with annual interest rate of 6.27% at September 30, 2013, secured by certain assets of the Company.		487,694		-
Loan from Bank of China, due on March 3, 2014 with annual interest rate of 6.27% at September 30, 2013, secured by certain assets of the Company.		487,694		-
Loan from Jiangsu Huishan Mintai Village Town Bank, due on July 15, 2014 with annual interest rate of 9.30% at September 30, 2013, secured by certain assets of the Company.		812,823		-
Total short-term bank loans	$	3,088,728	$	2,216,558

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Accounts Receivable

9 Months Ended

Sep. 30, 2013

Accounts Receivable and Restricted Net Assets [Abstract]

ACCOUNTS RECEIVABLE

NOTE 2 – ACCOUNTS RECEIVABLE

At September 30, 2013 and December 31, 2012, accounts receivable consisted of the following:

	September 30, 2013			December 31, 2012
Accounts receivable	$	14,284,951		$	12,670,680
Less: allowance for doubtful accounts		(2,739,117	)		(2,592,057	)
	$	11,545,834		$	10,078,623

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. After evaluating the collectability of individual receivable balances, the Company increased the allowance for doubtful accounts in the amount of $76,784 for the nine months ended September 30, 2013 and decreased the allowance for doubtful accounts of $46,616 for the nine months ended September 30, 2012.

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Income Taxes (Details Textual) (USD $)	9 Months Ended
	Sep. 30, 2013	Dec. 31, 2012
Income Taxes (Textual)
Effective income tax rate	25.00%
Valuation allowance	$ 1,786,309	$ 1,614,245
Valuation allowance increased	172,000
Deferred tax asset	$ 566,666	$ 551,890

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Short-Term Bank Loans (Details) (USD $)	Sep. 30, 2013	Dec. 31, 2012
Summary of short-term bank loans
Short-term bank loans	$ 3,088,728	$ 2,216,558
Agricultural and Commercial Bank, Loan due on August 26, 2013 [Member]
Summary of short-term bank loans
Short-term bank loans		474,977
Agricultural and Commercial Bank, Loan due on May 9, 2014 [Member]
Summary of short-term bank loans
Short-term bank loans	487,694
Bank of Communications, Loan due on May 8, 2013 [Member]
Summary of short-term bank loans
Short-term bank loans		316,651
Bank of Communications, Loan due on May 12, 2013 [Member]
Summary of short-term bank loans
Short-term bank loans		474,977
Bank of Communications, Loan due on November 5, 2013 [Member]
Summary of short-term bank loans
Short-term bank loans	325,129
Bank of Communications, Loan due on November 12, 2013 [Member]
Summary of short-term bank loans
Short-term bank loans	487,694
Bank of China, Loan due on January 16, 2013 [Member]
Summary of short-term bank loans
Short-term bank loans		949,953
Bank of China, Loan due on March 1, 2014 [Member]
Summary of short-term bank loans
Short-term bank loans	487,694
Bank of China, Loan due on March 3, 2014 [Member]
Summary of short-term bank loans
Short-term bank loans	487,694
Jiangsu Huishan Mintai Village Town Bank, Loan due on July 15, 2014 [Member]
Summary of short-term bank loans
Short-term bank loans	$ 812,823

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Concentrations (Tables)

9 Months Ended

Sep. 30, 2013

Concentrations [Abstract]

Concentration of purchase from suppliers

	Nine Months Ended September 30,
Supplier	2013			2012
A		19	%		17	%
B		*			14	%
C		15	%		11	%

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Concentrations (Details Textual)	9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012
Sales revenue [Member]
Concentrations (Textual)
Customers accounted for total revenue	No customer accounted for 10% or more	No customer accounted for 10% or more
Purchase [Member]
Concentrations (Textual)
Suppliers accounted for total purchase	Two suppliers accounted for 10% or more	Thres suppliers accounted for 10% or more

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Restricted Net Assets

9 Months Ended

Sep. 30, 2013

Accounts Receivable and Restricted Net Assets [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, 2013 and December 31, 2012, 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, 2013 and December 31, 2012 were approximately $87,292,000 and $77,514,000, respectively.

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Stockholders' Equity

9 Months Ended

Sep. 30, 2013

Stockholders' Equity [Abstract]

STOCKHOLDERS' EQUITY

NOTE 10 – SHAREHOLDERS’ EQUITY

Common stock sold for cash

On June 18, 2013, the Company sold 428,398 shares of common stock at a purchase price of $4.50 per share.  The shares were sold pursuant to a prospectus supplement dated June 18, 2013 to the Company’s registration statement on Form S-3.  The Company did not engage a placement agent with respect to the sale.  The Company paid a fee of 10% and a non-accountable expense allowance of 2%, for a total of $154,745, to an individual in connection with sales made to investors introduced to the Company by this individual who is not a U.S. citizen or resident.  The net proceeds received by the Company from the sale of the shares were approximately $1,768,000.

On July 10, 2013, the Company sold a total of 150,518 shares of common stock at a price of $4.70 per share to an investor. The shares were issued pursuant to a prospectus supplement for the Company’s registration statement on Form S-3.  The Company paid a fee of 10% and a non-accountable expense allowance of 2%, for a total of $84,892, to an individual in connection with sales made to investors introduced to the Company by this individual who is not a U.S. citizen or resident.  The net proceeds received by the Company from the sale of the shares were approximately $620,000.

Common stock issued for services

On July 29, 2013, the Company issued a total of 30,000 shares of common stock pursuant to its 2010 long-term incentive plan, of which 8,000 shares were issued to the chief executive officer’s wife, who the Company employs in its sales department, 8,000 shares were issued to the chief financial officer and 14,000 shares were issued to other employees. The shares were valued at the fair market value on the grant date, and the Company recorded stock-based compensation of $78,600 in the third quarter of fiscal 2013 and prepaid expenses of $78,600 which will be amortized in the fourth quarter of fiscal 2013.

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Organization and Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2013

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 unaudited 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, 2012.

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 unaudited 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 unaudited 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 three and nine months ended September 30, 2013 and 2012 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 warrant 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. As of September 30, 2013 and December 31, 2012, balances in banks in the PRC of $1,756,117 and $1,414,674, respectively, 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 following tables present information about equipment held for sale measured at fair value on a nonrecurring basis as of September 30, 2013 and December 31, 2012:

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at  September 30, 2013		Gains (Losses)
Equipment held for sale	$	-	$	-	$	7,309,150	$	7,309,150	$	-

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at December 31, 2012		Loss
Equipment held for sale	$	-	$	-	$	7,118,555	$	7,118,555	$	2,206,253

The Company conducted an impairment assessment on the equipment held for sale based on the guidelines established in FASB ASC Topic 360 to determine the estimated fair market value of the equipment as of December 31, 2012. Upon completion of its 2012 impairment analysis, the Company determined that the carrying value exceeded the fair market value on equipment which is held for sale. The Company recorded an impairment charge of $2,206,253 at December 31, 2012. The difference in the value of equipment held for sale at September 30, 2013 from December 31, 2012 reflects changes in the currency exchange ratio.

The carrying amounts reported in the consolidated 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.

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, 2013 and December 31, 2012, the Company’s cash balances by geographic area were as follows:

	September 30, 2013				December 31, 2012
Country:
United States	$	466,900	21.0	%	$	31,054	2.1	%
China		1,756,117	79.0	%		1,414,674	97.9	%
Total cash and cash equivalents	$	2,223,017	100.0	%	$	1,445,728	100.0	%

Restricted cash

Restricted cash

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

Notes receivable

Notes receivable

Notes receivable represents trade accounts receivable due from 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 $485,793 and $88,029 at September 30, 2013 and December 31, 2012, 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, 2013 and December 31, 2012, the Company has established, based on a review of its outstanding balances, an allowance for doubtful accounts in the amounts of $2,739,117 and $2,592,057, respectively.

Inventories

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 $139,621 and $135,980 at September 30, 2013 and December 31, 2012, 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 $1,303,911 and $593,104 as of September 30, 2013 and December 31, 2012, 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.

Equipment held for sale

Equipment held for sale

Long-lived assets are classified as held for sale when certain criteria are met. These criteria include: management’s commitment to a plan to sell the assets; the availability of the assets for immediate sale in their present condition; an active program to locate buyers and other actions to sell the assets has been initiated; the sale of the assets is probable and their transfer is expected to qualify for recognition as a completed sale within one year; the assets are being marketed at reasonable prices in relation to their fair value; and it is unlikely that significant changes will be made to the plan to sell the assets. We measure long-lived assets to be disposed of by sale at the lower of carrying amount or fair value, less associated costs to sell. At September 30, 2013 and December 31, 2012, the Company reflected certain electro-slag re-melted (“ESR”) equipment that was used in 2010 and 2011 to produce forged products for the high performance components market as equipment held for sale on the accompanying consolidated balance sheets.

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 charge for the three and nine months ended September 30, 2013 and 2012.

Advances from customers

Advances from customers

Advances from customers at September 30, 2013 and December 31, 2012 amounted to $2,210,102 and $1,851,987, 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 and title to the assets is transferred to customers in accordance with the Company’s 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 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 three and nine months ended September 30, 2013 and 2012, amounts allocated to installation and warranty revenues were minimal. 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, 2013 and December 31, 2012, 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 $354,164 and $311,275 for the three months ended September 30, 2013 and 2012, respectively. Shipping costs totaled $910,095 and $803,951 for the nine months ended September 30, 2013 and 2012, 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. The costs of these payments are charged to the same accounts as the related salary costs in the same period as the related salary costs. Employee benefit costs totaled $56,491 and $48,020 for the three months ended September 30, 2013 and 2012, respectively. Employee benefit costs totaled $157,588 and $137,575 for the nine months ended September 30, 2013 and 2012, respectively.

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 totaled $18,260 and $16,997 for the three months ended September 30, 2013 and 2012, respectively. Advertising expenses totaled $18,260 and $20,653 for the nine months ended September 30, 2013 and 2012, respectively.

Research and development

Research and development

Research and development costs are expensed as incurred and are included in selling, general and administrative expenses. The costs primarily consist of raw materials and salaries paid for the development and improvement of the Company’s new dyeing machinery. Research and development costs totaled $29,050 and $66,846 for the three and nine months ended September 30, 2013, respectively.  The Company did not incur any research and development expense during the three and nine months ended September 30, 2012.

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, 2013 and 2012 was $25,427 and $3,898, 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, 2013 and December 31, 2012 were translated at 6.15140 RMB to $1.00 and at 6.31610 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, 2013 and 2012 were 6.22152 RMB and 6.32745 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,
	2013		2012		2013		2012
Net income available to common stockholders for basic and diluted net income per share of common stock	$	2,130,736	$	2,355,102	$	6,075,889	$	3,729,267
Weighted average common stock outstanding - basic		3,479,646		2,667,017		3,112,148		2,469,818
Effect of dilutive securities:
Series A convertible preferred stock		-		-		-		137,783
Warrants		-		-		-		10,197
Weighted average common stock outstanding - diluted	$	3,479,646		2,667,017		3,112,148		2,617,798
Net income per common share - basic	$	0.61	$	0.88	$	1.95	$	1.51
Net income per common share - diluted	$	0.61	$	0.88	$	1.95	$	1.42

The Company did not have any common stock equivalents at September 30, 2013 and December 31, 2012.

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 are recorded at fair value of the goods or services exchanged.

Comprehensive income

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, 2013 and 2012 included net income and unrealized gains/losses from foreign currency translation adjustments.

Recent accounting pronouncement

Recent accounting pronouncement

In March 2013, the FASB issued ASU 2013-05 “Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.” ASU 2013-05 addresses the accounting for the cumulative translation adjustment when a parent either sells part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. For public entities, the ASU is effective prospectively for fiscal years, and interim periods, within those years, beginning after December 15, 2013. Early adoption is permitted. The adoption of ASU 2013-05 is not expected to have a material impact on the Company’s consolidated financial statements.

In July 2013, the FASB issued ASU 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists." ASU 2013-11 provides guidance on the presentation of unrecognized tax benefits related to any disallowed portion of net operating loss carryforwards, similar tax losses, or tax credit carryforwards, if they exist. ASU 2013-11 is effective for fiscal years beginning after December 15, 2013. The adoption of ASU 2013-11 is not expected to have a material impact on the Company’s consolidated financial statements.

Other 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. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.

Reclassification

Reclassification

Certain reclassifications have been made in prior year same period’s financial statements to conform to the current period’s financial presentation.

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Capital Lease Obligation

9 Months Ended

Sep. 30, 2013

Capital Lease Obligations [Abstract]

CAPITAL LEASE OBLIGATION

NOTE 15 - CAPITAL LEASE OBLIGATIONS

In 2011, the Company 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 are included in the accompanying consolidated balance sheets in property and equipment and capital lease obligations, respectively. The Company paid off the capital lease obligation in the third quarter of 2013. At September 30, 2013 and December 31, 2012, capital lease obligations consisted of the following:

	September 30, 2013		December 31, 2012
Capital lease obligation - current portion	$	-	$	251,413
Capital lease obligation - long-term portion		-		132,756
	$	-	$	384,169

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Document and Entity Information	9 Months Ended
	Sep. 30, 2013	Nov. 13, 2013
Document and Entity Information [Abstract]
Entity Registrant Name	Cleantech Solutions International, Inc.,
Entity Central Index Key	0000819926
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Document Type	10-Q
Document Period End Date	Sep. 30, 2013
Document Fiscal Year Focus	2013
Document Fiscal Period Focus	Q3
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		3,503,502

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Subsequent Events

9 Months Ended

Sep. 30, 2013

Subsequent Events [Abstract]

SUBSEQUENT EVENTS

NOTE 16 – SUBSEQUENT EVENTS

In November 2013, the Company repaid a short-term loan from Bank of Communications in the principal amount of $325,129, and borrowed the same amount from Bank of Communications.  The new loan bears interest at 6.72% and is due on April 21, 2014.

In November 2013, the Company repaid a short-term loan from Bank of Communications in the principal amount of $487,694, and borrowed the same amount from Bank of Communications.  The new loan bears interest at 6.72% and is due on April 23, 2014.

XML

Capital Lease Obligation (Details) (USD $)	Sep. 30, 2013	Dec. 31, 2012
Schedule of future minimum lease payments for capital leases
Capital lease obligation - current portion		$ 251,413
Capital lease obligation - long-term portion		132,756
Capital lease obligations		$ 384,169

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Restricted Net Assets (Details) (USD $)	9 Months Ended
	Sep. 30, 2013	Dec. 31, 2012
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	$ 87,292,000	$ 77,514,000