SHARING ECONOMY INTERNATIONAL INC. - Annual Report: 2011 (Form 10-K)

Incorporated by reference to the Form 8-K filed by the Company on June 17, 2011.

Incorporated by reference to the Form 8-K/A filed by the Company on February 1, 2008.

Incorporated by reference to the Form 10-K filed by the Company on March 31, 2009.

Incorporated by reference to the Form 8-K filed by the Company on April 30, 2009.

Incorporated by reference to the Form 8-K filed by the Company on March 16, 2012.

Incorporated by reference to the Form 10-K filed by the Company on March 31, 2010.

f10k2011_cleantech.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2011

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)

DELAWARE		90-0648920
(State or other jurisdiction of incorporation or 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)

Copies to:

Asher S. Levitsky

Ellenoff Grossman & Schole LLP

150 East 42nd Street, New York, NY 10017

Telephone: (212) 370-1300

Fax: (212) 370-7889

alevitsky@egsllp.com

Securities registered under Section 12(b) of the Act: common stock, par value $0.001 per share

Securities registered under Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

Indicate by check whether the issuer: (1) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an 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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked prices of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. Approximately $11,828,762 on June 30, 2011.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 2,294,014 shares of common stock are issued and outstanding as of March 25, 2012.

Documents Incorporated by Reference: None.

CLEANTECH SOLUTIONS INTERNATIONAL, INC.

FORM 10-K

TABLE OF CONTENTS

		Page No.
Part I
Item 1.	Business.	1
Item 1A.	Risk Factors.	13
Item 1B.	Unresolved Staff Comments.	23
Item 2.	Properties.	23
Item 3.	Legal Proceedings.	24
Item 4.	Mine Safety Disclosures	24

Part II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.	24
Item 6.	Selected Financial Data.	25
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation.	26
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk.	39
Item 8.	Financial Statements and Supplementary Data.	39
Item 9.	Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.	39
Item 9A.	Controls and Procedures.	40
Item 9B.	Other Information.	41

Part III
Item 10.	Directors, Executive Officers and Corporate Governance.	41
Item 11.	Executive Compensation	44
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.	46
Item 13.	Certain Relationships and Related Transactions, and Director Independence.	46
Item 14.	Principal Accountant Fees and Services.	47

Part IV
Item 15.	Exhibits, Financial Statement Schedules.	48

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This report contains forward-looking statements. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements were based on various factors and were derived utilizing numerous assumptions and other factors that could cause our actual results to differ materially from those in the forward-looking statements. These factors include, but are not limited to, the risk of doing business in the People’s Republic of China (“PRC”), our ability to implement our strategic initiatives, our access to sufficient capital, the effective integration of our subsidiaries in the PRC into a U.S. public company structure, economic, political and market conditions and fluctuations, government and industry regulation, Chinese and global competition, and other factors. Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements and readers should carefully review this report in its entirety, including the risks described in “Item 1A. - Risk Factors” and Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operation.” Except for our ongoing obligations to disclose material information under the federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. These forward-looking statements speak only as of the date of this report, and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.

OTHER PERTINENT INFORMATION

References in this annual report to “we,” “us,” and words of like import refer to Cleantech Solutions International, Inc., its wholly-owned subsidiaries, and Wuxi Huayang Dyeing Machinery Co., Ltd. (“Dyeing”) and Wuxi Huayang Electrical Power Equipment Co., Ltd. (“Electrical”), both of which are variable interest entities under contractual arrangements with us whose financial statements are consolidated with ours, unless the context specifically states or implies otherwise.

Our reporting currency is the United States dollar. Our business is conducted by our subsidiaries in China, using RMB, the currency of China, and our consolidated financial statements are presented in United States dollars. In this annual report, we refer to assets, obligations, commitments and liabilities in our financial statements in United States dollars. These dollar references are based on the exchange rate of RMB to United States dollars, determined as of a specific date. Changes in the exchange rate will affect the amount of our obligations and the value of our assets in terms of United States dollars which may result in an increase or decrease in the amount of our obligations (expressed in dollars) and the value of our assets, including accounts receivable (expressed in dollars).

We effected a one-for-ten reverse stock split of our common stock on March 6, 2012. All share and per share information in this annual report has been retroactively adjusted to reflect this reverse stock split.

PART I

ITEM 1. BUSINESS

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, yaw bearings and shafts, 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.

Forged Rolled Rings and Related Components Segment

Prior to 2009, the manufacturing of textile dyeing and finishing machines was our principal source of revenue. We have changed our focus to emphasize the manufacture of forged rolled rings, yaw bearings and shafts for use in large-scale windmills in order to meet the perceived growing demands of China’s wind energy and other industries that require precision-manufactured products, including equipment for the solar power industry.

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

We produce precision forged rolled rings and other forged components to the wind and other industries. Forged rolled rings and other forged components for the wind industry are used in wind turbines, which are used to generate wind power. The government of the PRC continues to expand significantly its goal for installed wind energy capacity. According to the Global Wind Energy Council report dated February 7, 2012, at the end of 2011, wind power in China accounted for 62,000 megawatts (MW) of electricity generating capacity. Additionally, according to an article written by Reuters dated August 29, 2011, China aims to “have 100 gigawatts (GW) of on-grid wind power generating capacity by the end of 2015 and to generate 190 billion kilowatt hours (kWh) of wind power annually as reported by the China Securities Journal, citing the government plan. We also manufacture shafts and forged rolled rings for gear rims, flanges and other applications. In addition to the wind industry, we sell our forged rolled rings and other forged components in other industries, including heavy machinery manufacturing, petrochemical, metallurgical, sea port machinery, defense and radar manufacturing industries, which use our forged rolled rings railway as components in the manufacture of equipment. We produce precision forgings using axial close-die forging technology, which is a new technology for producing rotary precision forgings, using forging equipment which we manufactured for our own use. The axial close-die forging technology reduces the use of raw materials by as much as 35%, provides a high precision and surface flatness, reduces the cutting output, has excellent mechanical strength and high flexibility, and is a fully automatic operation.

In October 2009, we ordered the initial machinery to expand our completed state-of-the-art forged product facility with a new production line, enabling us to manufacture electro-slag re-melted (“ESR”) forged products for the high performance components market for various industries. We believe that ESR forged products will be important components in the next generation of larger wind turbines, offshore wind turbines and other high performance components, which will require stronger steel alloy precision forged components than the smaller turbines. ESR technology is used to increase the durability and quality of steel and to blend specific alloys that are required to meet the anticipated strength requirements of the next generation of wind turbines. We delivered the initial units from this production line in July 2010 to one customer, which has been our only ESR customer through December 31, 2011. For the year ended December 31, 2011, we generated revenue of $1,687,756 from the sale of ESR forged products as compared to $7,568,774 for the year ended December 31, 2010. This customer used our ESR products primarily in the steel manufacturing equipment and accordingly revenues from the sale of ESR products are included in forged rolled rings - other industries. The contract with this customer expired, and we have no new orders for ESR products. As a result of our inability to market ESR products, we did generate any additional clients for these ESR products. Currently, we are trying to development this market and are seeking to develop a relationship with a third party to develop and promote products that can take advantages of the properties of our ESR technology.

In 2011, we manufactured and delivered test subassemblies for solar cell manufacturing equipment, which marked our entry into the solar products market. We are using our technical capabilities to supply solar components used in production of multi crystalline and mono crystalline silicon wafers. Solar industry capabilities include the manufacture of complex pressure vessels and chamber, high temperature vessels, and thick-walled vessels. For the year ended December 31, 2011, we generated revenues from the sale of these vessels to one customer of $455,453 which are included in forged rolled rings – other industries. We had no revenue from solar related products for 2010.

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

Our revenue, gross margin and net income have declined significantly in fiscal 2011. For the year ended December 31, 2011, our revenue declined by 30.1% from the year ended December 31, 2010, and our net income declined by 48.0%. The most significant decline was for forged rolled rings and related products for the wind power industry, which declined $14.9 million, or 36.6%, in fiscal 2011 from fiscal 2010. However, we have experienced declines in all of our product sales. We believe that these declines reflect:

·	An apparent decline in the growth rate for the wind industry, following six years of growth during which the total installed capacity doubled each year.

·	Increased competition.

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

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

·	Our failure to sell our ESR forged products for the high performance components market for various industries to more than our initial customer.

Delays by customers of our dyeing and finishing products in purchasing new equipment designed to meet stricter environmental standards imposed by the Chinese government as textile manufacturers evaluate both their projected business in uncertain economic times and new equipment designed to meet the new standards.

Further, although we have entered the solar market in 2011, our revenues from this industry have only been approximately $455,000 for the year ended December 31, 2011.

The factors that affected our revenue, gross margin and net income during fiscal 2011 are continuing to affect our operations during fiscal 2012. Since our equipment is capital equipment, which generally requires financing, 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.

During 2011, our forging and related components segment inventory increased by approximately $0.9 million and our advance from customers increased by approximately $0.9 million. These increases are related. This increase in inventory was attributable to a) an increase in steel inventory to secure steel pricing for anticipated forging orders, and an increase in inventory related to our solar products. A significant portion of the inventory increase relates to products for our solar customer, for which we received advance payments. At the request of the customer we are keeping the products in our warehouse. This sale will be recognized when the last step of the sale, which is passing Chinese customs, is completed. Upon the completion of the sale, the advance from this customer will be recognized as revenues and our inventory will be reduced by the products sold.

Dyeing and Finishing Equipment Segment

Through our dyeing and finishing segment, we design, manufacture and distribute a line of proprietary high and low temperature dyeing and finishing machinery. Our products feature a high degree of both automation and mechanical-electrical integration. Our products are widely used in dyeing yarns such as pure cotton, cotton-polyester, terylene, polyester wool, poly-acrylic fiber, nylon, cotton ramie, and wool yarn.

In connection with our Dyeing and finishing equipment segment, despite the world economic slowdown, for the year 2009, China’s gross output value for textiles rose by 10.3% year on year to RMB 3.8 trillion (approximately $576 billion), while the amount of clothes produced increased by 6.9% year on year to 23.75 billion units, as reported by the China National Textile and Apparel Council (“CNTAC”), Ministry and Industry Information Technology. According to data posted on the CNTAC website at www.english.ctei.gov.cn, in January to June 2011, China's textile industry realized the industrial output value of RMB 2,393.8 billion (approximately $374 million), increasing by 30% year over year. We believe weak overseas demand has been more than offset by strong demand within China.

Organization

We were incorporated in Delaware on June 24, 1987 under the name Malex, Inc. We changed our corporate name to China Wind Systems, Inc. on December 18, 2007. On June 13, 2011, we filed articles of amendment to our certificate of incorporation which changed our corporate name from China Wind Systems, Inc. to Cleantech Solutions International, Inc. At the time of the reverse acquisition, described below, we were not engaged in any business activities and we were considered to be a blank-check shell company.

We are the sole stockholder of Fulland Limited, a Cayman Islands limited liability company 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 organized under the laws of the PRC. We formed Fulland Wind Energy in August 2008. We currently manufacture our forged products and ESR products, which are sold for use in the wind, steel, solar power industry and other industries through Fulland Wind Energy.

Green Power is a party to a series of contractual arrangements dated October 12, 2007 with the Huayang Companies, both of which are limited liability companies organized under the laws of the PRC, and their stockholders. Our corporate organizational structure, including the contractual arrangements with the Huayang Companies, is designed to comply with certain laws and regulations of the PRC which restrict the manner in which Chinese companies, particularly companies owned by Chinese residents, may raise funds from non-Chinese sources.

The following table sets forth our relationship our subsidiaries and the variable interest entities whose financial statements are consolidated with ours.

Name of Entity	Relationship to Us	Nature of Business
Cleantech Solutions International, Inc	N.A.	Holding company
Fulland Limited	100% owned by us	Holding company
Wuxi Fulland Wind Energy Equipment Co., Ltd.	100% owned by Fulland Limited	Manufacture of forged rolled rings, ESR products and related products at new plant
Green Power Environment Technology (Shanghai) Co., Ltd.	100% owned by Fulland Limited	Operates business of Wuxi Huayang Dyeing Machinery Co., Ltd. and Wuxi Huayang Electrical Power Equipment Co., Ltd. pursuant to contracts
Wuxi Huayang Dyeing Machinery Co., Ltd.	Variable interest entity operated by Green Power pursuant to contracts	Operates dyeing and finishing equipment segment
Wuxi Huayang Electrical Power Equipment Co., Ltd.	Variable interest entity operated by Green Power pursuant to contracts	Operated electric power equipment segment; manufactures and sells forged rolled ring segment pursuant to existing contracts. The business of this entity is being phased out.

The Huayang Companies are both owned by our chief executive officer, Jianhua Wu, and his wife, Lihua Tang.

Our executive offices are located No. 9 Yanyu Middle Road, Qianzhou Village, Huishan District, Wuxi City, Jiangsu Province, China 214181, telephone (86)51083397559. Our website is www.cleantechsolutionsinternational.com. Information on our website of any other website does not constitute a part of this annual report.

Contractual Arrangements with the Huayang Companies and their Stockholders

We have contractual arrangements with the Huayang Companies and their stockholders, who are our chief executive officer, Jianhua Wu, and his wife, Lihua Tang, pursuant to which we provide these companies with technology consulting and other general business operation services. Through these contractual arrangements, we also have the ability to substantially influence these companies’ daily operations and financial affairs, appoint their senior executives and approve all matters requiring stockholder approval. As a result of these contractual arrangements, which enable us to control the Huayang Companies, we are considered the primary beneficiary of the Huayang Companies. Accordingly, we consolidate the results, assets and liabilities of the Huayang Companies in our financial statements.

Our relationships with the Huayang Companies and their stockholders are governed by a series of contractual arrangements between Green Power, our wholly foreign owned enterprise in the PRC, and each of the Huayang Companies, which are our operating companies in the PRC. Under PRC laws, each of Green Power, Fulland Wind Energy, Huayang Dye Machine and Huayang Electrical Power Equipment is an independent legal person and none of them is exposed to liabilities incurred by the other parties. Other than pursuant to the contractual arrangements between Green Power and the Huayang Companies described below, generally, neither of the Huayang Companies transfers any other funds generated from its operations to any other member of the Huayang Group. On October 12, 2007, we entered into the following contractual arrangements with each of the Huayang Companies.

Consulting Services Agreement. Pursuant to the exclusive consulting services agreements between Green Power and each of 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 dye and finishing machines, electrical equipment and related products. Under this agreement, Green Power owns the intellectual property rights developed or discovered through research and development, in the course of providing its services under the agreement, or derived from the provision of the services. The Huayang Companies shall pay a quarterly consulting service fees to Green Power that is equal to all of the Huayang Companies’ profits for such quarter. 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 agreement, with the extended term to be mutually agreed upon by the parties.

Operating Agreement. Pursuant to the operating agreement among Green Power, the Huayang Companies and all stockholders of the Huayang Companies, Green Power provides guidance and instruction on the Huayang Companies’ daily operations, financial management and employment issues. The Huayang Companies stockholders 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, agrees to pledge their accounts receivable and all of their assets to Green Power. Moreover, the Huayang Companies agree that without the prior consent of Green Power, the Huayang Companies will not engage in any transactions that could materially affect their respective 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 stockholders and Green Power, the Huayang Companies’ stockholders pledged all of their equity interests in the Huayang Companies to Green Power to guarantee the Huayang Companies’ performance of their obligations under the consulting services agreement. If the Huayang Companies or the Huayang Companies’ stockholders 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 stockholders 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 stockholders 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’ stockholders 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 Stockholders and Green Power, the Huayang Companies Stockholders 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, is 20 years from October 12, 2007 and may be extended prior to its expiration by written agreement of the parties.

Proxy Agreement. Pursuant to the proxy agreement between the Huayang Companies’ stockholders and Green Power, the Huayang Companies’ stockholders agreed to irrevocably grant a person to be designated by Green Power with the right to exercise the Huayang Companies’ stockholders’ voting rights and their other rights, including the attendance at and the voting of the Huayang Companies’ stockholders’ shares at stockholders’ meetings (or by written consent in lieu of such meetings) in accordance with applicable laws and its articles of association, including but not limited to the rights to sell or transfer all or any of his equity interests of the Huayang Companies, and appoint and vote for the directors and chairman as the authorized representative of the stockholders of the Huayang Companies. The proxy agreement may be terminated by joint consent of the parties or upon 30-day written notice from Green Power.

The Forged Rolled Rings and Related Components Segment

The following table represents the Global Wind Energy Council’s outlook and analysis of China’s future wind power potential.

Currently, China is focusing on wind power for the following reasons:

·	China has small oil reserves and depends mainly on high-polluting coal for power;

·	According to China National Energy Administration, China investment in coal-fired power projects declined by 11% while investment in wind power increased by 44% in 2009;

·	Wind power is considered the most scalable cost effective renewable energy and is cost competitive with coal;

·	The Chinese government has announced that it is aggressively driving renewable energy both for energy-independence as well as environmental reasons;

·	On July 20, 2010, the Chinese government announced RMB 5 trillion (approximately $758 billion) will be spent on renewable energy over the next 10 years.

At the end of 2009, the Chinese government made a political commitment to the international community at the Copenhagen Conference on climate change that nonfossil energy would satisfy 15% of the country’s energy demand by 2020. Meeting this goal will require an unprecedented boost to the scale and pace of future clean energy development, including a new orientation toward wind power development. Wind energy is encouraged by a range of laws and regulations, the most important being the Renewable Energy Law, originally introduced in 2005.

Renewable energy is clean and sustainable. We believe that wind is one of the most competitive and promising renewable energies. Wind energy brings great environmental benefits, but also minor negative side effects, such as noise, visual intrusion, effects on bird migration and electromagnetic radiation. Compared with conventional power generation, however, wind power has few environmental effects, and we believe that these effects can be reduced. On the whole, its advantages outweigh its disadvantages. However, wind power can only be generated in areas where there is a generally consistent wind and there continue to be difficulties is integrating wind power into an electric grid to serve a larger geographic range.

We are manufacturing rolled rings and other related components designed to be used for wind power generation as well as other uses. We employ axial close-die forging technology in producing precision forgings. It is a new technology for producing rotary precision forgings. We made the forging machine, providing a strong advantage in machine maintenance and cost compared to other companies using foreign equipment. Our rolled rings are essentially hollow cylindrical sections forged from a stainless steel stock of varying thickness and height. The rings are called rolled rings because of the nature of the forging process. Forging is a manufacturing process where metal is pressed, pounded or squeezed under great pressure to create high strength parts. Rolled ring forging turns a hollow round piece of metal under extreme pressure against a rotating roller, thereby squeezing out a single-piece ring without any welding required.

Rings can also be manufactured through machining or casting. We believe that the forging provides increased strength and flexibility for the finished product. A ring’s strength affects its fatigue resistance, and is determined by the orientation of the grain flow of the ring’s metal material. Unlike the machining process, which creates a unidirectional grain flow, or the casting process, which creates no grain flow, the forging process causes alignment and orientation of the grain flow in a direction creating maximum strength, thereby providing maximum fatigue resistance. This high strength property also reduces sectional thickness and overall weight of the ring without compromising the overall integrity of the finished product.

High tangential strength and ductility make forged rings well-suited for torque- and pressure-resistant components, such as gears, engine bearings for aircraft, wheel bearings, couplings, rotor spacers, sealed discs and cases, flanges, pressure vessels and valve bodies. As such, rolled rings have a wide variety of applications. Presently, the majority of Chinese rolled ring producers rely on technologies such as the steam hammer and friction press, which consume large amounts of energy and cause pollution, and which, we believe, generate a less desirable product.

Yaw bearings, which are found in every wind turbine, are made from rolled rings. Essentially, a yaw bearing is a large ring with teeth, all of which are either pointing outward or inward. The teeth allow the yaw bearing to engage with a smaller wheel attached to the yaw motor. The yaw motor turns the wind turbine so that the rotor (to which blades are attached) faces the wind in order to optimize electricity generation. The yaw bearing is used by the yaw motor to turn the wind turbine.

Manufacturing

With the opening of our state-of-the-art forging facility in 2009, we further solidified our position as a preferred supplier to the global wind, solar and other clean technology industries. Our operations feature a 4,500-ton press and a ring-rolling mill, employing our advanced axial close-die forging technology, to manufacture rolled rings measuring up to 6.3 meters in diameter and a cross section up to 700mm and shafts used in wind turbine units, measuring 1MW-3MW. We also have a series of workshops dedicated for fabrication, welding, machining and assembly of high strength materials.

We believe that our expanded forging facility, which includes an advanced ESR (Electro Slag Remelt) line, is able to meet the quality requirements of our most demanding customers, has an annual capacity of 50,000 tons.

The melting, forging, heat-treating and machining capability at our facility allows for the manufacturing of a wide range of custom-forged products. Multi-diameter shafts, gear blanks, mandrel-forged rings and specialized shapes, are available in a wide range of sizes and weights ranging from a few hundred pounds to over 25,000 pounds. Most popular carbon and alloy AISI/SAE grades such as 1026, 1045, 4140, 4150F, 4340, and 8620 are readily available. We also have experience with the melting and forming of specialized alloys. We believe that we are capable of producing components that meet various industry specifications as well as product-specific specifications.

Our manufacturing site covers over 1.1 million square feet. In addition to our forging operation we have established state-of-the-art fabrication, machining, assembly and finishing workshops to meet the manufacturing needs of our clean technology focused customer base. We are leading specialists in the manufacturing of:

·	Large forged rolled rings, yaw bearings, tower flanges and shafts used in large-scale windmills

·	Stainless steel pressure vessel/chambers used in the manufacturing of multi-crystalline solar wafers

·	Specialty, high tolerance, fabricated components and assemblies used in various clean technology industries

·	Other fabricated and machined components, assemblies and equipment requiring high precision manufacturing

Marketing and Distribution

Based at our facilities in Wuxi, we have a sales team for our forged rolled rings and shafts. Our marketing efforts include industrial conferences, trade fairs, sales training, and advertising. Our sales teams work closely with our product development and manufacturing teams to coordinate our product development activities, product launches and ongoing demand and supply planning. Our rolled rings and flanges are currently sold to companies in various cities and provinces throughout China including Luoyang, Shenyang, Zhenjiang province, Jiangsu province, Qingdao, Jinan, Shanghai, Chongqing, Beijing and Zhengzhou. We are an ISO9001:2000 certified supplier.

Competition

The markets for products in both of our business segments are intensely competitive. Many of our competitors have established more prominent market positions, and if we fail to attract and retain customers and establish successful distribution networks in our target markets for our products, we will be unable to increase our sales. Many of our existing and potential competitors have substantially greater financial, technical, manufacturing and other resources than we do. Our competitors’ greater size in some cases provides them with a competitive advantage with respect to manufacturing costs because of their economies of scale and their ability to purchase raw materials at lower prices, as well as securing supplies at times of shortages. Many of our competitors also have greater brand name recognition, more established distribution networks and larger customer bases. In addition, many of our competitors have well-established relationships with our current and potential distributors and have extensive knowledge of our target markets. As a result, they may be able to devote greater resources to the research, development, promotion and sale of their products or respond more quickly to evolving industry standards and changes in market conditions than we can. Our failure to adapt to changing market conditions and to compete successfully with existing or new competitors may materially and adversely affect our financial condition and results of operations.

We believe there has been an increase in overall competition in the forged product market as industry capacity has increased. Additionally, we believe some turbine manufacturers that use forged products, which are not our customers or potential customers, have built their own forging capacity to save costs by vertical integration and to have better leverage when negotiating with the component suppliers. This may result in downward pressure on our pricing and may indirectly affect our sales as a result of increased competition for a smaller number of potential customers. Our products are sold for use by manufacturers of industrial equipment. The demand for products such as ours which are used both for manufacturing in general and for wind power specifically is uncertain. Although we believe that over the long term, our 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 have affected the requirements of our customers and potential customers for our products which has had an effect of lessening the demand for products such as ours. To the extent that the demand for our forged rolled rings and related components declines, our revenue and net income will continue to be affected.

We believe that we are well positioned to capitalize on the opportunities provided by the demand for products by the wind power industry and solar power industry by supplying superior quality, high performance forged products produced by utilizing ESR technology. We believe that we offer:

·	High quality manufacturing facilities and production quality;

·	A prime location in Jiangsu province near major transportation routes which can provide shipping cost savings and a good response time;

·	Strong management, engineering and technical capabilities;

·	ISO9001 certification, which we received in July 2009 and which covers machining and related service of shaft-shaped forging, ring forging, tubular forging and component assembly.

We are currently aware that Wuxi Dachang Group is capable of producing rolled rings with diameters comparable to ours, but we believe that that company does not supply main shafts.

The Dyeing and Finishing Segment

In recent years, China has been one of the world’s leading textile producers, and the textile industry has been a pillar in the Chinese national economy, experiencing steady growth over the last few decades. The global economic downturn has had an adverse impact on almost every industry, and the textile industry is no exception. Experts from the Chinese Ministry of Commerce attributed the slowdown in the growth of textile exports to appreciation of the Chinese currency, industry liquidity shortage and the surge in raw materials costs. Moreover, as major global markets for Chinese textile products, such as the U.S. and Europe, were hit hard by the global recession, many Chinese textile manufacturers that exported to these markets suffered cancellation of orders and reductions in orders from continuing customers. We believe that the textile business has continued to improve due to the tax reimbursement for export incentive given by the PRC government and we believe that the market for dyeing and finishing equipment is improving.

In our dyeing and finishing segment, we design, manufacture and distribute a line of proprietary high and low temperature dyeing and finishing machinery. We believe that we are one of the leading domestic Chinese manufacturers of textile dyeing machines, and our Huayang brand is nationally recognized. We currently have the capacity to manufacture and assemble approximately 550 textile-dyeing machines annually. Our state-of-the-art and automated production line enables us to manufacture our products efficiently, with lower labor and energy costs compared to traditional manufacturing methods. As part of our manufacturing process, we make corrosion-resistant stainless steel pumps and pressure vessels, which are not only critical components for our dyeing and finishing products but have other industrial applications as well.

We have received the “Advanced Enterprise for Progress in Science and Technology Award” from Wuxi City in 1999, and the “Star of Brilliance Medal” from the Wuxi City Bureau of Industrial and Commercial Administration in the same year. In 2002, we were recognized as an “Advanced Enterprise for Technical Reform Input” by Qianzhou, a municipality within Wuxi City.

Our dyeing and finishing products are generally compact in design compared with alternatives on the market and feature a high degree of both automation and mechanical-electrical integration. Our products are used in dyeing yarns such as pure cotton, cotton-polyester, terylene, polyester wool, poly-acrylic fiber, nylon, cotton ramie, and wool yarn. In 2010, we introduced an advanced dyeing technology enabling a quick, economic and environment-friendly operation designed for optimal performance. The liquid pressure and quantity are adjusted to the respective type and quantity of fabric. The special layout of the pressure pump circuit is designed to provide constant and safe operations of the machine reducing resources wastage and enhancing performance.

Recently, we developed a new model of dyeing machine – high (low) temperature airflow dyeing machine. We believe that this new model of dyeing machine is efficient and cost effective and can provide the competitive edge to meet the most challenge of the market today.

Marketing and Distribution

Presently, all of our revenue from the textile dyeing machine segment is derived from sales in China. We presently sell our products in Jiangsu and Zhejiang Provinces, both regions with significant textile production, as well as in many of the coastal regions of China such as Shandong and Guangdong provinces.

We market and sell our products through our internal sales force, which is based in our facilities in Wuxi. Our marketing programs include industrial conferences, trade fairs, sales training and advertising. Our sales and marketing groups work closely with our manufacturing groups to coordinate our product development activities, product launches and ongoing demand and supply planning. We sell our products directly to many of China’s largest textile producers, including Haining City Shengda Dyeing & Finishing Co., Ltd. and Tongxiang City Hengfeng Bleaching & Dyeing Co., Ltd.

Growth Strategies

According to China’s National Development and Reform Commission, the main focus of the country’s textile industry has shifted from gaining competitive advantages based on labor costs toward the objectives of developing scientific and technological innovation as well as brand creation. Under the auspices of China’s Eleventh Five Year Plan, which was implemented in 2006, the next stage for the textile and dyeing industries in China is the development of textile products that use cleaner production technologies, according to the Bureau of Economic Operation under the National Development and Reform Commission.

In support of this objective, we are continuing our efforts to develop and implement next-generation low energy consumption and high heating efficiency features to our machines. The current emphasis of our efforts continues to be on increasing automation features in our existing products and implementing power line communication technology throughout our production facilities to enable our customers to reduce their use of electricity.

Competition

Because of the importance of the Chinese textile industry in the world market, we face competition from both domestic and foreign suppliers. However, due to the high quality of our products, our competitors are primarily based in foreign countries, including Japan, Germany, Italy and France. Domestically, our chief competitor is Fong’s National Engineering (Shenzhen) Co., Ltd., a subsidiary of Fong’s Industries Company Ltd., a Hong-Kong based conglomerate.

We believe that we can effectively compete with these companies on the basis of the quality and performance of our products, our after-sales service, and cost. We provide one year of maintenance and repair services free of charge for all of our products and based on historical we experience, maintenance and repair service calls have been minimal. Moreover, we provide customers in the Jiangsu and Zhejiang Provinces, our top markets, with on-site support which is generally provided within 24 hours of receiving a request. However, many of our competitors have longer operating histories and significantly greater financial or technological resources than we do and presently enjoy greater brand recognition.

China’s economic recovery is affecting our industry as a whole and the demand for our products, as well as those of our competitors, has increased. However, economic downturns have recently impacted the market for products such as ours and we would suffer in the event of an economic downturn.

Source of Supply

Stainless steel is the principal raw material for the manufacture of all of our products. We purchase stainless steel tubes from Wuxi City Zhongtian Stainless Steel Co., Ltd. and stainless steel plates from Wuxi City Fanshun Materials Co., Ltd. In each of 2011 and 2010, our purchases of steel from Wuxi City Fanshun Materials Co., Ltd accounted for approximately 13% of our total purchases. In both 2011 and 2010 our purchases of steel from Wuxi City Zhongtian Stainless Steel Co., Ltd accounted for less than 10% of our total purchases. While we do not have long-term contracts with these suppliers, we have long-term business relationship with them, and these companies have generally met our supply requirements. The price of stainless steel in China, while unstable, generally does not affect our forging business significantly, because our contracts with our customers are usually structured so that we are able to pass along any significant change in steel price to customers. For the textile machinery business, the price of steel can have more significant impact. Any significant rise in the price of or demand for stainless steel could have an adverse effect on our results of operations. Inflation has recently affected raw materials generally, and inflationary pressures could have a significant effect on our business, particularly on our dyeing and finishing segment. To the extent that we are not able to pass along price increases for stainless steel to our forging customers, these factors will affect this segment as well.

Other raw materials, such as stainless steel planks and transducers, are readily available from a number of suppliers on commercially reasonable terms.

Research and Development

We do not conduct any significant research and development, and we did not incur any research and development expense in 2011 or 2010. In our forged rolled rings and related product segment, we plan to concentrate our product development efforts on developing enhancement of rolled rings and related products principally for the wind power and solar power industry.

Government Regulations

Environmental Regulations

Our manufacturing processes generate noise, waste water, gaseous and other industrial wastes, and we use, generate and discharge toxic, volatile and otherwise hazardous chemicals and wastes in our operations. As a result, we are required to comply with all national and local regulations regarding protection of the environment. Our operations are subject to regulations promulgated by China’s Environmental Protection Administration, Jiangsu Province Environmental Protection Administration and the Wuxi City Environmental Administration. We are also subject to periodic monitoring by local environmental protection authorities in Wuxi. We have installed various types of anti-pollution equipment in our facilities to reduce, treat, and, where feasible, recycle the wastes generated in our manufacturing processes. We believe that our manufacturing facilities and equipment are in substantial compliance with all applicable environmental regulations. Based on the requirement of present law, we do not expect that any additional measures that may be required to maintain compliance will materially affect our capital expenditures, competitive position, financial position or results of operations.

The Chinese government has expressed a concern about pollution and other environmental hazards. Although we believe that we comply with current national and local government regulations, if it is determined that we are in violation of these regulations, we can be subject to financial penalties as well as the loss of our business license, in which event we would be unable to continue in business. Further, if the national or local government adopts more stringent regulations, we may incur significant costs in complying with such regulations. If we fail to comply with present or future environmental regulations, we may be required to pay substantial fines, suspend production or cease operations. Any failure by us to control the use of or to restrict adequately the discharge of, hazardous substances could subject us to potentially significant monetary damages and fines or suspensions in our business operations.

Business License

Green Power, Fulland Wind Energy and both of the Huayang Companies have been issued business licenses with the appropriate municipal and provincial governments which specifically authorize the companies to operate their respective businesses. All of these business licenses, which are subject to annual review by the issuing agencies, are current as of the date of this annual report. No additional approval or license is required for the manufacturing and sale of the textile dyeing and finishing machines or the rolled rings.

ISO Certification

We received the International Organization for Standardization (ISO) certificate for our new facility in Wuxi City on July 15, 2009. The certificate accredits our quality management system as compliant with ISO9001:2008 and covers machining and related service of shaft-shaped forging, ring forging, tubular forging and component assembly. The certificate expires on June 24, 2012. We also received the certificate of Level A Pressure Vessel from the General Administration of Quality Supervision, Inspection and Quarantine of the People’s Republic China on August 18, 2009 and covers the manufacturing of pressure vessel pipelines. This certificate expires on August 17, 2013.

Our Dyeing segment also has received the certificate to manufacture D1 and D2 levels of pressure vessels, which includes our current line of dyeing machines, from the Quality and Technical Supervision Bureau of Jiangsu Province. We received the certificate on Dec 7, 2007 and renewed it on November 11, 2011, which expires on December 6, 2015.

Circular 106 Compliance and Approval

On May 31, 2007, the State Administration of Foreign Exchange, or SAFE, issued an official notice known as “Circular 106,” which requires the owners of any Chinese companies to obtain SAFE’s approval before establishing any offshore holding company structure for foreign financing as well as subsequent acquisition matters in China. Accordingly, in early September 2007, the owners of 100% of the equity in the Huayang Companies, namely Jianhua Wu and Lihua Tang, submitted their application to SAFE. On September 19, 2007, SAFE approved their application, permitting them to establish an offshore company, Fulland, as a “special purpose vehicle” for any foreign ownership and capital raising activities by the Huayang Companies. After SAFE’s approval, Mr. Wu and Ms. Tang became the majority owners of Fulland on October 11, 2007. Fulland was acquired by us in November 2007.

Intellectual Property Rights

We rely on a combination of trademark, copyright and trade secret protection laws in China and other jurisdictions, as well as confidentiality procedures and contractual provisions to protect our intellectual property and our brand. We have received one patent in China in connection for one of our textile dyeing machines, which expired April 28, 2009, and we intend to apply for more patents to protect our core technologies. We also have confidentiality and non-competition policies in place as part of our company employment guideline which is given to each employee, and we enter into nondisclosure agreements with third parties. However, we cannot assure you that we will be able to protect or enforce our intellectual property rights.

Employees

As of March 22, 2012, we had 233 employees, including 168 full time employees and 65 part time employees. Of these, 120 employees are in the dyeing and finishing segment (six executives, managers and administrative staff, two accounting staff, three quantity control staff, three engineers and technicians, four marketing and salespeople, three purchasing staff and 99 manufacturing staff) and 113 employees are with our forged rolled rings and related products segment (six executive, managers and administrative staff, three accounting staff, three salespeople, and 90 manufacturing staff, and 11 quality control and engineers/technicians).

All of these employees are members of a union, organized by the Union for Huishan District, Wuxi City, as mandated by the PRC Union Law. We have not experienced a work strike. We believe that our relations with our employees are good.

ITEM 1A. RISK FACTORS

An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below, together with all of the other information included in this report, before making an investment decision, and you should only consider an investment in our common stock if you can afford to sustain the loss of your entire investment. You should carefully consider the risks described below together with all of the other information included in this report before making an investment decision with regard to our securities. If any of the following risks actually occurs, our business, financial condition or results of operations could be harmed. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.

Risks Related to Our Business

We are incurring significant obligations in developing the manufacture of forged rolled rings and solar power machinery for use in the wind power industry, other industries and solar power industry with no assurance that we can or will be successful in this business.

Wind power and solar power account for a small percentage of the power generated in the PRC, and our ability to market to this segment is dependent upon both an increased acceptance of wind power and solar power as an energy source in the PRC and the acceptance of our products. We are making the financial and manpower commitment in our belief that there will be an increased demand for wind power and solar power in China and elsewhere and that the companies that manufacture wind power generation equipment and other equipment that uses our products will purchase our products. We cannot assure you that we will be able to successfully develop this business, and our failure to develop the business will have a material adverse effect on our overall financial condition and the results of our operations.

Our revenue and net income, which declined significantly from 2010 to 2011, may continue to decline.

For the year ended December 31, 2011 our revenue decreased $24.0 million, or 30.1%, and our net income decreased $5.3 million, or 48.0%. This decline reflected a decline in revenue from all our products, but the most significant decline was for forged rolled rings and related products for the wind power industry, which declined $14.9 million, or 36.6%. In addition, revenue from our only customer for ESR forged products declined from $7.6 million in 2010 to $1.7 million in 2011, and the contract from this customer has expired and was not renewed. These decreased reflect, among other factors, increased competition for all of our products, which affected both our revenues and our gross margin, a tightening of the monetary supply by China, which affected wind farm developers and other industrial companies who require financing to purchase capital equipment such as our products, vertical integration by wind power manufactures which reduce the need for outside suppliers such as us, and delays by potential customers of dyeing and finishing equipment reflecting both the tightening of credit and decisions to evaluate new products, such as ours, that are designed to meet higher environmental standards. We cannot assure you that these factors, as well as other factors not presently known to us, will not result in continued declines in revenue and net income.

We will require additional funds to expand our operations.

In connection with our expansion project for our business, we will incur significant capital and operational expenses. We do not presently have any funding commitments other than our present credit arrangements which we do not believe are sufficient to enable us to satisfy our current and anticipated purchase commitments. If we are unable to generate cash flow from operations and obtain necessary bank or other financing to pay our purchase commitments we may be unable to finance the growth of our existing business, which may impair our ability to operate profitably. Because of our stock price and the worldwide economic downturn, we may not be able to raise any additional funds that we require on favorable terms, if any. The failure to obtain necessary financing may impair our ability to manufacture our products and continue in business.

Because we sell capital equipment, our business is subject to our customers’ capital budget and we may suffer delays or cancellations of orders and the effects of the recent worldwide economic downturn.

Our customers purchase our equipment as part of their capital budget. As a result, we are dependent upon receiving orders from companies that are either expanding their business, commencing a new business, upgrading their capital equipment or otherwise purchasing capital equipment. Our business is therefore dependent upon both the economic health of these industries and our ability to offer products that meet regulatory requirements, including environmental requirements, of these industries and are cost justifiable, based on potential cost savings in using our equipment in contrast to existing equipment or equipment offered by others. As a result of the worldwide economic downturn and the tightening of credit in China, the market for capital equipment in the textile industry has significantly declined, and sales of our dying products declined significantly. If we are not able to generate sufficient business in our dyeing segment, we may discontinue this segment of our operations and limit our business to forged rolled rings and related products and solar power machinery. We cannot predict the extent that the market for capital equipment in the wind power and solar power and other industries will be affected. However, any economic slowdown or continued lack of credit availability in China can affect all purchasers and manufactures of capital equipment, and we cannot assure you that our forged rolled rings business and solar power machinery business will not be significantly impaired as a result of the worldwide economic downturn.

Further, the textile and apparel industries have historically been subject to substantial cyclical variations and are particularly affected by adverse trends in the general economy. These industries are presently subject to the effects of the worldwide economic downturn and trade policies of other countries which have severely impacted these industries in China. The reduction in demand for textile products has resulted in a reduction in the demand for capital equipment used in these industries. This reduction in demand affects both our sales and our gross margin, which could have a material adverse effect on our results of operations, liquidity and financial condition.

A decrease in supply or increase in cost of the materials used in our products could harm our profitability.

Any restrictions on the supply or the increase in the cost of the materials used by us in manufacturing our products, especially steel, could significantly reduce our profit margins. Efforts to mitigate restrictions on the supply or price increases of materials by entering into long-term purchase agreements, by implementing productivity improvements or by passing cost increases on to our customers may not be successful. However, increased competition may affect our ability to pass on to our customers’ price increases in raw materials, particularly, stainless steel, which is our principal raw material for all of our products. Our profitability depends largely on the price and continuity of supply of the materials used in the manufacture of our products, which in many instances are supplied by a limited number of sources.

Inflationary and competitive pressures may affect our ability to maintain our margins.

In recent years, raw materials, including steel, which is our principal raw material, have been subject to significant price increases. The Chinese government has expressed concern about inflation in certain segments of the economy. We cannot predict the extent or effect of inflationary pressures with respect to steel and steel products. To the extent that we have to raise our prices to maintain our margins, our sales may suffer. If we are unable to raise prices, either because of competitive factors or customer resistance, our margins and net income may suffer. We cannot assure you that our business will not be impaired by inflation.

The nature of our products creates the possibility of significant product liability and warranty claims, which could harm our business.

Customers use some of our products in potentially hazardous applications that can cause injury or loss of life and damage to property, equipment or the environment. In addition, some of our products are integral to the production process for some end-users and any failure of our products could result in a suspension of operations. We cannot be certain that our products will be completely free from defects. Moreover, we do not have any product liability insurance and may not have adequate resources to satisfy a judgment in the event of a successful claim against us. The successful assertion of product liability claims against us could result in potentially significant monetary damages and require us to make significant payments. In addition, because the insurance industry in China is still in its early stages of development, business interruption insurance available in China offers limited coverage compared to that offered in many other countries. We do not have any business interruption insurance. Any business disruption or natural disaster could result in substantial costs and diversion of resources.

If we fail to introduce enhancements to our existing products or to keep abreast of technological changes in our markets, our business and results of operations could be adversely affected.

Although certain technologies in the industries that we occupy are well established, we believe our future success depends in part on our ability to enhance our existing products and develop new products in order to continue to meet customer demands. In particular, the next generation of wind turbines requires components that are stronger than the present generation. Although we are seeking to address these requirements with our ESR forged products, our failure to introduce and develop a market for these and any other new or enhanced products on a timely and cost-competitive basis, as well as the development of processes that make our existing technologies or products obsolete, could harm our business and results of operations.

Because we face intense competition from other companies for both of our operating segments, many of which have greater resources than we do, we may not be able to compete successfully and we may lose or be unable to gain market share.

Compliance with environmental regulations can be expensive, and noncompliance with these regulations may result in adverse publicity and potentially significant monetary damages and fines.

As our manufacturing processes generate noise, wastewater, gaseous and other industrial wastes, we are required to comply with all national and local regulations regarding protection of the environment. If we fail to comply with present or future environmental regulations, we may be required to pay substantial fines, suspend production or cease operations. We use, generate and discharge toxic, volatile and otherwise hazardous chemicals and wastes in our activities. Any failure by us to control the use of or to restrict adequately, the discharge of hazardous substances could subject us to potentially significant monetary damages and fines or suspensions in our business operations. We do not have insurance to cover any liability which we may incur as a result of personal injury or property damages resulting from emissions of toxic material into the environment.

Our products are subject to PRC regulations, which may materially adversely affect our business.

Government regulations influence the design, components or operation of our products. New regulations and changes to current regulations are always possible and, in some jurisdictions, regulations may be introduced with little or no time to bring related products into compliance with these regulations. Our failure to comply with these regulations may restrict our ability to sell our products in the PRC. In addition, these regulations may increase our cost of supplying the products by forcing us to redesign existing products or to use more expensive designs or components. In these cases, we may experience unexpected disruptions in our ability to supply customers with products, or we may incur unexpected costs or operational complexities to bring products into compliance. This could have an adverse effect on our revenues, gross profit margins and results of operations and increase the volatility of our financial results.

The success of our businesses will depend on our ability to effectively develop and implement strategic business initiatives.

In connection with the development and implementation of growth plans, we will incur additional expenses and capital expenditures. The development and implementation of these plans also requires management to divert a portion of its time from day-to-day operations. These expenses and diversions could have a significant impact on our operations and profitability, particularly if our plans for any new initiative prove to be unsuccessful. Moreover, if we are unable to implement any of our plans in a timely manner, or if those plans turn out to be ineffective or are executed improperly, our business and operating results would be adversely affected.

Failure to successfully reduce our production costs may adversely affect our financial results.

A significant portion of our strategy relies upon our ability to successfully rationalize and improve the efficiency of our operations. If we are not able to implement cost reduction measures, especially in times of either an economic downturn or inflationary pressures, or if these efforts do not generate the level of cost savings that we expect going forward or result in higher than expected costs, there could be a material adverse effect on our business, financial condition, results of operations or cash flows.

If we are unable to make necessary capital investments or respond to pricing pressures, our business may be harmed.

In order to remain competitive, we need to invest in research and development, manufacturing, customer service and support, and marketing. We do not have any significant research and development activities. From time to time we also have to adjust the prices of our products to remain competitive. We may not have available sufficient financial or other resources to continue to make investments necessary to maintain our competitive position. Currently, our research and development is not significant.

Unforeseen or recurring operational problems at our facilities may cause significant lost production, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our manufacturing processes could be affected by operational problems that could impair our production capability. Our facilities contain complex and sophisticated machines that are used in our manufacturing process. Disruptions at our facilities could be caused by maintenance outages; prolonged power failures or reductions; a breakdown, failure or substandard performance of any of our machines; the effect of noncompliance with material environmental requirements or permits; disruptions in the transportation infrastructure, including railroad tracks, bridges, tunnels or roads; fires, floods, earthquakes or other catastrophic disasters; labor difficulties; or other operational problems. Any prolonged disruption in operations at our facilities could cause significant lost production, which would have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our officers and directors own a substantial portion of our outstanding common stock, which will enable them to influence many significant corporate actions and in certain circumstances may prevent a change in control that would otherwise be beneficial to our shareholders.

As of March 15, 2012, our officers and directors and members of their families beneficially owned approximately 42.6% of our outstanding voting shares. These stockholders, acting together, could have a substantial impact on matters requiring the vote of the shareholders, including the election of our directors and most of our corporate actions. This control could delay, defer or prevent others from initiating a potential merger, takeover or other change in our control, even if these actions would benefit our shareholders and us. This control could adversely affect the voting and other rights of our other shareholders and could depress the market price of our common stock.

Our business depends substantially on the continuing efforts of our executive officers and our ability to maintain a skilled labor force, and our business may be severely disrupted if we lose their services.

Our future success depends substantially on the continued services of our executive officers, especially Mr. Jianhua Wu, our chief executive officer and the chairman of our board of directors. We do not maintain key man life insurance on any of our executive officers. If one or more of our executive officers are unable or unwilling to continue in their present positions, we may not be able to replace them readily, if at all. Therefore, our business may be severely disrupted, and we may incur additional expenses to recruit and retain new officers. In addition, if any of our executives joins a competitor or forms a competing company, we may lose some of our customers. Our chief executive officer is a party to contractual agreements as described elsewhere in our annual report.

If we are unable to attract, train and retain technical and financial personnel, our business may be materially and adversely affected.

Our future success depends, to a significant extent, on our ability to attract, train and retain technical and financial personnel. Recruiting and retaining capable personnel, particularly those with expertise in our industries and in the industries to which we market, are vital to our success. There is substantial competition for qualified technical and financial personnel, and there can be no assurance that we will be able to attract or retain our technical and financial personnel. If we are unable to attract and retain qualified employees, our business may be materially and adversely affected.

Our failure to protect our intellectual property rights may undermine our competitive position, and litigation to protect our intellectual property rights or defend against third-party allegations of infringement may be costly.

We rely primarily on trade secret and contractual restrictions to protect our intellectual property. Nevertheless, these afford only limited protection and the actions we take to protect our intellectual property rights may not be adequate and we may not be able to protect our intellectual property under Chinese laws. As a result, third parties may infringe or misappropriate our proprietary technologies or other intellectual property rights, which could have a material adverse effect on our business, financial condition or operating results. In addition, policing unauthorized use of proprietary technology can be difficult and expensive. Litigation may be necessary to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of the proprietary rights of others and the enforcement of intellectual property rights in China may be difficult. We cannot assure you that the outcome of any litigation will be in our favor. Intellectual property litigation may be costly and may divert management attention as well as expend our other resources away from our business. An adverse determination in any such litigation will impair our intellectual property rights and may harm our business, prospects and reputation. In addition, we have no insurance coverage against litigation costs and would have to bear all costs arising from such litigation to the extent we are unable to recover them from other parties. The occurrence of any of the foregoing could have a material adverse effect on our business, results of operations and financial condition.

Implementation of China’s intellectual property-related laws has historically been lacking, primarily because of ambiguities in China’s laws and difficulties in enforcement. Accordingly, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other countries.

We have limited business insurance coverage.

The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited business insurance products. We do not have any business liability or disruption insurance coverage for our operations in China. Any business disruption, litigation or natural disaster may result in our incurring substantial costs and the diversion of our resources.

You may suffer significant dilution if we raise additional capital.

If we need to raise additional capital to expand or continue operations, it may be necessary for us to issue additional equity or convertible debt securities. If we issue equity or convertible debt securities, our net tangible book value per share may decrease, and the percentage ownership of our current stockholders would be diluted, and any equity securities we may issue may have rights, preferences or privileges senior or more advantageous to our common stockholders.

Risks Related to Conducting Business in the PRC

PRC laws and regulations governing our businesses and the validity of certain of our contractual arrangements are uncertain. If we are found to be in violation, we could be subject to sanctions. In addition, changes in such PRC laws and regulations may materially and adversely affect our business.

There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including, but not limited to, the laws and regulations governing our business, or the enforcement and performance of our contractual arrangements with our affiliated Chinese entities, the Huayang Companies, and its shareholders. We are considered a foreign person or foreign invested enterprise under PRC law. As a result, we are subject to PRC law limitations on foreign ownership of Chinese companies. These laws and regulations are relatively new and may be subject to change, and their official interpretation and enforcement may involve substantial uncertainty. The effectiveness of newly enacted laws, regulations or amendments may be delayed, resulting in detrimental reliance by foreign investors. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively.

The PRC government has broad discretion in dealing with violations of laws and regulations, including levying fines, revoking business and other licenses and requiring actions necessary for compliance. In particular, licenses and permits issued or granted to us by relevant governmental bodies may be revoked at a later time by higher regulatory bodies. We cannot predict the effect of the interpretation of existing or new PRC laws or regulations on our businesses. We cannot assure you that our current ownership and operating structure would not be found in violation of any current or future PRC laws or regulations. As a result, we may be subject to sanctions, including fines, and could be required to restructure our operations or cease to provide certain services. Any of these or similar actions could significantly disrupt our business operations or restrict us from conducting a substantial portion of our business operations, which could materially and adversely affect our business, financial condition and results of operations.

The PRC government restricts foreign investment in businesses in China. Accordingly, we operate our business in China through the Huayang Companies. The Huayang Companies hold the licenses and approvals necessary to operate our businesses in China. We have contractual arrangements with the Huayang Companies and its shareholders that allow us to substantially control the Huayang Companies. We cannot assure you, however, that we will be able to enforce these contracts.

Although we believe we comply with current PRC regulations, we cannot assure you that the PRC government would agree that these operating arrangements comply with PRC licensing, registration or other regulatory requirements, with existing policies or with requirements or policies that may be adopted in the future. If the PRC government determines that we do not comply with applicable law, it could revoke our business and operating licenses, require us to discontinue or restrict our operations, restrict our right to collect revenues, require us to restructure our operations, impose additional conditions or requirements with which we may not be able to comply, impose restrictions on our business operations or on our customers, or take other regulatory or enforcement actions against us that could be harmful to our business.

If we become directly subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and resolve the matter which could harm our business operations, stock price and reputation.

Recently, U.S. public companies that have substantially all of their operations in China, particularly companies like us which have completed so-called reverse merger transactions, have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered on financial and accounting irregularities and mistakes, a lack of effective internal controls over financial accounting, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese companies has sharply decreased in value and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits and SEC enforcement actions and are conducting internal and external investigations into the allegations. It is not clear what effect this sector-wide scrutiny, criticism and negative publicity will have on us, our business and our stock price. If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate such allegations and/or defend our company. This situation will be costly and time consuming and distract our management from growing our company. If such allegations are not proven to be groundless, we and our business operations will be severely affected and you could sustain a significant decline in the value of our stock.

The disclosures in our reports and other filings with the SEC and our other public pronouncements are not subject to the scrutiny of any regulatory bodies in the PRC.

We are regulated by the SEC and our reports and other filings with the SEC are subject to SEC review in accordance with the rules and regulations promulgated by the SEC under the Securities Act and the Exchange Act. Our SEC reports and other disclosure and public pronouncements are not subject to the review or scrutiny of any PRC regulatory authority. For example, the disclosure in our SEC reports and other filings are not subject to the review by China Securities Regulatory Commission, a PRC regulator that is responsible for oversight of the capital markets in China. Accordingly, you should review our SEC reports, filings and our other public pronouncements with the understanding that no local regulator has done any review of us, our SEC reports, other filings or any of our other public pronouncements.

Our contractual arrangements with the Huayang Companies and its shareholders may not be as effective in providing control over these entities as direct ownership.

Since the law of the PRC limits foreign equity ownership in companies in China, we operate a significant portion of our business through the Huayang Companies. The equity in these companies is owned by our chief executive officer and his wife, and we have no equity ownership interest in the Huayang Companies. We rely on contractual arrangements to control and operate such businesses. These contractual arrangements may not be effective in providing control over the Huayang Companies as direct ownership. For example, the Huayang Companies could fail to take actions required for our businesses despite its contractual obligation to do so. If the Huayang Companies fail to perform under their agreements with us, we may have to incur substantial costs and resources to enforce such arrangements and may have to rely on legal remedies under the law of the PRC, which may not be effective. In addition, we cannot assure you that the Huayang Companies’ shareholders would always act in our best interests.

Adverse changes in political and economic policies of the Chinese government could have a material adverse effect on the overall economic growth of China, which could reduce the demand for our products and materially and adversely affect our competitive position.

All of our business operations are conducted and all of our revenues are made in China. Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. The Chinese economy differs from the economies of most developed countries in many respects, including:

•	the amount of government involvement;

•	the level of development;

•	the growth rate;

•	the control of foreign exchange; and

•	the allocation of resources.

While the Chinese economy has grown significantly in the past 20 years, the growth has been uneven, both geographically and among various sectors of the economy, and the worldwide economic downturn has affected China. As a result, Chinese exports, including textiles, have decreased substantially and a number of companies have closed their businesses, which affects the demand for capital goods. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall Chinese economy, but may also have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us.

The Chinese economy has been transitioning from a planned economy to a more market-oriented economy. Although in recent years the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of the productive assets in China is still owned by the Chinese government. The continued control of these assets and other aspects of the national economy by the Chinese government could materially and adversely affect our business. The Chinese government also exercises significant control over Chinese economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Efforts by the Chinese government to slow the pace of growth of the Chinese economy could result in decreased capital expenditure by our customers and potential customers, which in turn could reduce demand for our products. Furthermore, in response to the worldwide economic downturn, the Chinese government may seek to increase its control over businesses which could affect our business.

Any adverse change in the economic conditions or government policies in China could have a material adverse effect on the overall economic growth and the level of renewable energy investments and expenditures in China, which in turn could lead to a reduction in demand for our products and consequently have a material adverse effect on our businesses.

Uncertainties with respect to the Chinese legal system could have a material adverse effect on us.

We conduct substantially all of our business through our Chinese subsidiaries and affiliates, which are generally subject to laws and regulations applicable to foreign investment in China and, in particular, laws applicable to wholly foreign-owned enterprises. China’s legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value. Since 1979, Chinese legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, since these laws and regulations are relatively new and China’s legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties, which may limit legal protections available to us. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.

We rely on dividends paid by our subsidiaries for our cash needs

We conduct substantially all of our operations through our subsidiaries and variable interest entities. We rely on dividends from our subsidiaries for our cash needs, including the funds necessary to pay any dividends which we may declare and other cash distributions to our shareholders, to service any debt we may incur and to pay our operating expenses. The payment of dividends by entities organized in China is subject to limitations. Regulations in China currently permit payment of dividends only out of accumulated profits as determined in accordance with accounting standards and regulations in China. Each subsidiary and VIE entity is also required to set aside at least 10% of its after-tax profit based on China’s accounting standards each year to its general reserves until the accumulated amount of such reserves reach 50% of its registered capital. These reserves are not distributable as cash dividends. Our subsidiaries are also required to allocate a portion of their after-tax profits to their staff welfare and bonus funds, which may not be distributed to equity owners except in the event of liquidation. In addition, if our subsidiaries incur debt, the instruments governing the debt may restrict their ability to pay dividends or make other distributions to us.

Fluctuation in the value of the Renminbi may have a material adverse effect on your investment.

The change in value of the Renminbi against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions. On July 21, 2005, the Chinese government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in appreciation of Renminbi against U.S. dollar. While the international reaction to the Renminbi revaluation has generally been positive, there remains significant international pressure on the Chinese government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of the Renminbi against the U.S. dollar. As a portion of our costs and expenses is denominated in Renminbi, the revaluation in July 2005 and potential future revaluation has and could further increase our costs. Any significant revaluation of the Renminbi may have a material adverse effect on our revenues and financial condition, and the value of, and any of our dividends payable on our ordinary shares in foreign currency terms.

Restrictions on currency exchange may limit our ability to receive and use our revenues effectively.

Under China’s existing foreign exchange regulations, our Chinese subsidiaries are able to pay dividends in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. However, we cannot assure you that that the Chinese government will not take further measures in the future to restrict access to foreign currencies for current account transactions. Foreign exchange transactions by our Chinese subsidiaries under the capital account continue to be subject to significant foreign exchange controls and require the approval of China’s governmental authorities, including the SAFE. In particular, if a subsidiary borrows foreign currency loans from us or other foreign lenders, these loans must be registered with the SAFE, and if we finance the subsidiary by means of additional capital contributions, these capital contributions must be approved by certain government authorities including the Ministry of Commerce or its local counterparts. These limitations could affect the ability of our subsidiaries to obtain foreign exchange through debt or equity financing.

Failure to comply with PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident stockholders to personal liability, limit our ability to acquire PRC companies or to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute profits to us or otherwise materially adversely affect us.

In October 2005, the PRC State Administration of Foreign Exchange, or SAFE, issued the Notice on Relevant Issues in the Foreign Exchange Control over Financing and Return Investment Through Special Purpose Companies by Residents Inside China, generally referred to as Circular 75, which required PRC residents to register with the competent local SAFE branch before establishing or acquiring control over an offshore special purpose company for the purpose of engaging in an equity financing outside of China on the strength of domestic PRC assets originally held by those residents. Internal implementing guidelines issued by SAFE, which became public in June 2007 (known as Notice 106), expanded the reach of Circular 75 by (i) purporting to cover the establishment or acquisition of control by PRC residents of offshore entities which merely acquire “control” over domestic companies or assets, even in the absence of legal ownership; (ii) adding requirements relating to the source of the PRC resident’s funds used to establish or acquire the offshore entity; (iii) covering the use of existing offshore entities for offshore financings; (iv) purporting to cover situations in which an offshore special purpose vehicle establishes a new subsidiary in China or acquires an unrelated company or unrelated assets in China; and (v) making the domestic affiliate of the special purpose vehicle responsible for the accuracy of certain documents which must be filed in connection with any such registration, notably, the business plan which describes the overseas financing and the use of proceeds. Amendments to registrations made under Circular 75 are required in connection with any increase or decrease of capital, transfer of shares, mergers and acquisitions, equity investment or creation of any security interest in any assets located in China to guarantee offshore obligations, and Notice 106 makes the offshore special purpose vehicle jointly responsible for these filings. In the case of an special purpose vehicle which was established, and which acquired a related domestic company or assets, before the implementation date of Circular 75, a retroactive SAFE registration was required to have been completed before March 31, 2006; this date was subsequently extended indefinitely by Notice 106, which also required that the registrant establish that all foreign exchange transactions undertaken by the special purpose vehicle and its affiliates were in compliance with applicable laws and regulations. Failure to comply with the requirements of Circular 75, as applied by SAFE in accordance with Notice 106, may result in fines and other penalties under PRC laws for evasion of applicable foreign exchange restrictions. Any such failure could also result in the special purpose vehicle’s affiliates being impeded or prevented from distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation to the special purpose vehicle, or from engaging in other transfers of funds into or out of China. We cannot provide any assurances that their existing registrations have fully complied with, and they have made all necessary amendments to their registration to fully comply with, all applicable registrations or approvals required by Circular 75. Moreover, because of uncertainty over how Circular 75 will be interpreted and implemented, and how or whether SAFE will apply it to us, we cannot predict how it will affect our business operations or future strategies.

Risks Related to our Common Stock

Our stock price may be volatile.

The trading price of our common stock has been and is expected to continue to be highly volatile as well as subject to wide fluctuations in price in response to various factors, some of which are beyond our control. These factors include:

	•	Quarterly variations in our results of operations.
	•	Announcements by us or our competitors of acquisitions, new products, significant contracts, commercial relationships or capital commitments.
	•	Our ability to develop and market new and enhanced products on a timely basis.
	•	Changes in governmental regulations or in the status of our regulatory approvals.
	•	Changes in earnings estimates or recommendations by securities analysts.
	•	Market reaction to our recent one-for-ten reverse split.
	•	General economic conditions and slow or negative growth of related markets.

These broad market and industry factors may seriously harm the market price of our Common Stock, regardless of our actual operating performance.

During 2011, our stock failed to meet the Nasdaq continued listing requirements, and any subsequent failure may result in our delisting.

During 2011, our stock failed to meet the Nasdaq continued listing requirement resulting from its failure to maintain a $1.00 bid price and its failure to maintain a minimum market value of publicly held common stock. In order to maintain our listing on Nasdaq we transferred our listing from the Nasdaq Global Market to the Nasdaq Capital Market, and we effected a one-for-ten reverse split. In the event that our stock price falls below $1.00 per share, we may not be able to maintain our Nasdaq listing, which could have a material adverse effect on the market for and the market price of our common stock.

If we fail to maintain the adequacy of our internal controls, our ability to provide accurate financial statements and comply with the requirements of the Sarbanes-Oxley Act of 2002 could be impaired, which could cause our stock price to decrease substantially.

Prior to November 2007, the Huayang Companies operated as private companies without public reporting obligations, and they committed limited personnel and resources to the development of the external reporting and compliance obligations that would be required of a public company. We are continuing to institute changes to satisfy our obligations in under the Sarbanes-Oxley Act. We will need to continue to improve our financial and managerial controls, reporting systems and procedures, and documentation thereof. If our financial and managerial controls, reporting systems or procedures fail, we may not be able to provide accurate financial statements on a timely basis or comply with the Sarbanes-Oxley Act. Any failure of our internal controls or our ability to provide accurate financial statements could cause the trading price of our common stock to decrease substantially.

We do not anticipate paying any cash dividends.

We presently do not anticipate that we will pay any dividends on any of our capital stock in the foreseeable future. The securities purchase agreement relating to our November 2007 private placement prohibits the payment of dividends on our common stock or the purchase of common stock while the series A preferred stock is outstanding. Subject to this restriction, the payment of any dividends is within the discretion of our board of directors. We presently intend to retain all earnings, if any, to implement our business plan; and we do not anticipate the declaration of any dividends in the foreseeable future.

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2. PROPERTIES

Our main office and our manufacturing facilities are located in Wuxi, China, in seven buildings with approximately 215,000 square feet. We have been issued a land use right certificate for the land until June 7, 2015 by the municipal government of Wuxi City, which may be renewed at our option with no expected capital requirement. The seven buildings are an office building, warehouse, raw material processing hall, metal processing hall, assembling hall, laboratory and quality control, and guard house. We believe that our existing facilities are well maintained and in good operating condition.

In 2003, we acquired land use rights to a plot of land approximately 5.1 acres from the local government of the Town of Qianzhou in Wuxi City. This land, along with the land use rights acquired from a related party as discussed in the following paragraph, house our new factory and employee housing facilities. The land lease has a term of 50 years, expiring October 30, 2053.

During 2008, we completed the purchase of land use rights for an approximately 100,000 square foot factory, employee housing facilities and other leasehold improvements from a related party, Wuxi Huayang Boiler Company, Ltd. (“Huayang Boiler”) for approximately $10.9 million. The land use rights expire on January 1, 2053. In March 2009, we received the title to the buildings.

ITEM 3. LEGAL PROCEEDINGS.

There are no material legal proceedings pending against us.

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information.

Our common stock has traded on The NASDAQ Capital Market under the symbol “CLNT” since December 29, 2011. Our stock was previously traded on The NASDAQ Global Market under the symbol “CLNT” from June 16, 2011 to December 28, 2011 and under the symbol “CWS” from December 24, 2009 until June 15, 2011. Prior to December 24, 2009, it was traded on the OTC Bulletin Board under the symbol “CHWY” from October 13, 2009 until December 23, 2009, and prior to October 13, 2009, it was traded under the symbol “CWSI.” The following table sets forth, for the periods indicated, the reported high and low closing bid quotations for our common stock by calendar quarters during 2010 and 2011 and the first quarter of 2012, through March 22, 2012. These prices reflect inter-dealer quotations, do not include retail markups, markdowns or commissions and do not necessarily reflect actual transactions.

	2010				2011				2012
	High		Low		High		Low		High		Low
First quarter*	$	77.30	$	48.30	$	44.70	$	30.50	$	4.00	$	2.17
Second quarter		54.30		35.90		31.40		9.20
Third quarter		49.00		40.80		11.40		4.00
Fourth quarter		51.20		28.90		4.60		2.10

On March 22, 2012, the last sale price of our common stock as reported by NASDAQ was $2.17 per share.

Shareholders

As of March 22, 2012, we had approximately 2,700 holders of our common stock.

Transfer Agent

The transfer agent for the common stock is Empire Stock Transfer Inc. The transfer agent’s address is 1859 Whitney Mesa Dr., Henderson, Nevada 89014, and its telephone number is (702) 818-5898.

Dividend Policy

We have not paid cash dividends on our common stock since we became public through reverse acquisition. We intend to keep any future earnings to finance the expansion of our business, and we do not anticipate that any cash dividends will be paid in the foreseeable future. The securities purchase agreement with the investors in the November 2007 private placement prohibits the payment of dividends on our common stock or the purchase of common stock while the series A preferred stock is outstanding.

In addition, due to various restrictions under PRC laws on the distribution of dividends by our PRC operating companies, we may not be able to pay dividends to our shareholders. The Wholly Foreign Owned Enterprise Law (1986), as amended and The Wholly Foreign Owned Enterprise Law Implementing Rules (1990), as amended and the Company Law of the PRC (2006) contain the principal regulations governing dividend distributions by wholly foreign owned enterprises. Under these regulations, wholly foreign owned enterprises may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. Additionally, such companies are required to set aside a certain amount of their accumulated profits each year, if any, to fund certain reserve funds. These reserves are not distributable as cash dividends except in the event of liquidation and cannot be used for working capital purposes.

The PRC government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of the PRC. Therefore, we may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency for the payment of dividends from the Company’s profits. Furthermore, if our subsidiaries and affiliates in China incur debt on their own in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments. If we or our subsidiaries and affiliates are unable to receive all of the revenues from our operations through the current contractual arrangements, we may be unable to pay dividends on our common stock.

Equity Compensation Plan Information

The following table summarizes the equity compensation plans under which our securities have been or may be issued as of December 31, 2011.

Plan Category	Number of securities to be issued upon exercise of outstanding options and warrants		Weighted-average exercise price of outstanding options and warrants		Number of securities remaining available for future issuance under equity compensation plans
Equity compensation plans approved by security holders		0	$	0		173,062

Equity compensation plan not approved by security holders		0	$	0		-

The 2010 long-term incentive plan is the equity compensation plan that was approved by stockholders.

We did not have any equity compensation plans that were not approved by stockholders.

Unregistered Sales of Equity Securities and Use of Proceeds

On October 11, 2011, we issued 750 shares of common stock to our chief financial officer for services rendered pursuant to an employment agreement. The shares were valued at fair value on the grant date and we recorded stock-based compensation of $2,475. The issuance of the shares was exempt from registration pursuant to Regulation S, since such shares were issued to a person who is not a U.S. Person.

During the fourth quarter of fiscal 2011, we issued 79,339 shares of common stock upon the conversion of 2,380,176 shares of series A preferred stock. The issuance of these shares is exempt from registration pursuant to Section 3(a)(9) of the Securities Act.

No underwriting or brokerage fees or commissions were paid in connection with either of the foregoing issuances.

ITEM 6. SELECTED FINANCIAL DATA

As a smaller reporting company, we are not required to provide the information called for by Item 6 of Form 10-K.

ITEM 7. 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 and solar industry related products in dollars and as a percent of revenue (dollars in thousands):

	Years Ended December 31,
	2011					2010
	Dollars		%			Dollars		%
Forged rolled rings and related components - wind power industry	$	25,750		46.3	%	$	40,611		51.0	%
Forged rolled rings and related components – other industries		12,096		21.8	%		17,720		22.3	%
Dyeing and finishing equipment		17,733		31.9	%		21,218		26.7	%
Total	$	55,579		100	%	$	79,549		100	%

Forged Rolled Rings and Related Components Segment

Prior to 2009, the manufacturing of textile dyeing and finishing machines was our principal source of revenue. We have changed our focus to the manufacture of forged rolled rings, shafts, gear rims and yaw bearings in order to meet the perceived growing demands of China’s wind energy and other industries that require precision-manufactured products.

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

·	We produce precision forged rolled rings and other forged components to the wind and other industries. Forged rolled rings and other forged components for the wind industry are used in wind turbines, which are used to generate wind power.

In October 2009, we ordered machinery to expand our completed state-of-the-art forged product facility with a new production line, enabling us to manufacture ESR forged products for the high performance components market for various industries. We delivered the initial units from this production line in July 2010 to one customer, which has been our only ESR customer through December 31, 2011. For fiscal 2011, we generated revenue of $1,687,756 from the sale of ESR forged products as compared to $7,568,774 for fiscal 2010. This customer is using our ESR products primarily in the steel manufacturing equipment and accordingly revenues from the sale of ESR products are included in forged rolled rings - other industries. The contract with this customer has expired and we have no new orders for ESR products as of the date of this report.

In 2011, we manufactured and delivered test subassemblies for solar cell manufacturing equipment, which marked our entry into the solar products market. For the year ended December 31, 2011, we generated revenue from the sale of solar industry related products of $455,453. We had no revenue from solar related products for year 2010.

Our revenue, gross margin and net income have declined significantly in fiscal 2011. For fiscal 2011, our revenue declined by 30.1% from fiscal 2010, our gross margin decreased from 26.3% to 23.9%, and our net income decreased 48.0%. The most significant decline was for forged rolled rings and related products for the wind power industry, which declined $14.9 million, or 36.6%, in fiscal 2011 from fiscal 2010. However, we have seen declines in all of our product sales. We believe that these declines reflect:

·	An apparent decline in the growth rate for the wind industry, following six years of growth during which the total installed capacity doubled each year.

·	Increased competition.

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

·	Our failure to sell our ESR forged products for the high performance components market for various industries to more than our initial customer.

Further, although we have entered the solar market in 2011, our revenues from this industry have only been approximately $455,000 for 2011.

The factors that affected our revenue, gross margin and net income during 2011 are continuing to affect our operations during 2012. Our ability to expand our operations and increase our revenue is largely affected by the PRC government’s policy on such matters as the availability of credit, which affects all of our operations, and its policies relating to alternative energy such as wind and solar power, which affect our products for these industries. Our business is also affected by general economic conditions. Because of the nature of our products, our customers’ projection of future economic conditions are an integral part of their decisions as to whether to purchase capital equipment at this time or defer such purchases until a future date.

During the year ended December 31, 2011, our forging and related components segment inventory increased by approximately $0.9 million and our advance from customers increased by $0.9 million. These increases are related. This increase in inventory was attributable to a) an increase in steel inventory to secure steel pricing for anticipated forging orders, and an increase in inventory related to our solar products. A significant portion of the inventory increase relates to products for our solar customer, from which we received advance payments. At the request of the customer we are keeping the products in our warehouse. This sale will be recognized when the last step of the sale, which is passing Chinese customs, is completed. Upon the completion of the sale, the advances from this customer will be recognized as revenues and our inventory will be reduced by the products sold.

Dyeing and Finishing Equipment Segment

In connection with our Dyeing segment, despite the world economic slowdown, for the year 2009, China’s gross output value for textiles rose by 10.3% year on year to RMB 3.8 trillion (approximately $576 billion), while the amount of clothes produced increased by 6.9% year on year to 23.75 billion units, as reported by the China National Textile and Apparel Council (“CNTAC”), Ministry and Industry Information Technology. According to data posted on the CNTAC website at www.english.ctei.gov.cn , in January to June 2011, China's textile industry realized the industrial output value of RMB 2,393.8 billion (approximately $374 million), increasing by 30% year over year. We believe weak overseas demand has been more than offset by strong demand within China.

Raw Materials

A major element of our cost of revenues is raw materials, principally steel as well as other metals. These metals are subject to price fluctuations, and recently these fluctuations have been significant. In times of increasing prices, we need to try to fix the price at which we purchase raw materials in order to avoid increases in costs which we cannot recoup through increases in sales prices. Similarly, in times of decreasing prices, we may have purchased metals at prices which are high in terms of the price at which we can sell our products, which also can impair our margins. Three major suppliers provided approximately 40% of our purchases of raw materials for the year ended December 31, 2011 primarily consisting of steel for the forged rolled rings and related components segment. These three suppliers provided approximately 47% of our purchases of raw materials for the year ended December 31, 2010.

Critical Accounting Policies and Estimates

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

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

Inventories

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

Advances to Suppliers

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

Property and Equipment

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

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

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

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

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

Land Use Rights

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

Revenue Recognition

We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the purchase price is fixed or determinable and collectability is reasonably assured. We account for the product sales as a multiple element arrangement. Revenue from multiple element arrangements is allocated among the separate accounting units based on the residual method. Under the residual method, the revenue is allocated to undelivered elements based on fair value of such undelivered elements and the residual amounts of revenue allocated to delivered elements. We recognize revenue from the sale of dyeing and electric 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.

Warranty revenue is valued based on estimated service person hours to complete a service and generally is recognized over the contract period. For the nine months ended September 30, 2011 and 2010, amounts allocated to warranty revenues were not material. Based on historical experience, warranty service calls and any related labor costs have been minimal.

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

Research and Development

Research and development costs are expensed as incurred. We incurred minimal research and development expenses in the years ended December 31, 2011 and 2010. Product development expenses, which primarily consist of cost of material used and salaries paid for the development of our products and fees paid to third parties, are included in general and administrative expenses.

Income Taxes

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

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

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

Deemed Preferred Stock Dividend

When we sell shares of convertible preferred stock at a price that is, on an “as if converted” basis, less than the market price of the underlying shares of common stock, the difference between the value of the underlying shares of common stock and the purchase price of the convertible preferred stock is treated as a deemed preferred stock dividend. In connection with the issuance of shares of preferred stock upon exercise of warrants as a result of board approval of the issuance of series A preferred stock instead of common stock, We do not record a deemed preferred stock dividend since we issue the number of shares of preferred stock that are convertible into the number of shares of common stock that would have been issued upon exercise. There were no deemed preferred stock dividends during the years ended December 31, 2011 or 2010.

Stock-based Compensation

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

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

Recent Accounting Pronouncements

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income.” Under the amendments in this ASU, an entity has two options for presenting its total comprehensive income: to present total comprehensive income and its components along with the components of net income in a single continuous statement, or in two separate but consecutive statements. The amendments in this ASU are required to be applied retrospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. We intend to conform to the new presentation required in this ASU beginning with our Form 10-Q for the three months ended March 31, 2012.

In September 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-08, Intangibles — Goodwill and Other (Topic 350). This Accounting Standards Update amends FASB ASC Topic 350. This amendment specifies the change in method for determining the potential impairment of goodwill. It includes examples of circumstances and events that the entity should consider in evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption does not have any material impact on our consolidated financial position and results of operations.

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

Currency Exchange Rates

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

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

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

RESULTS OF OPERATIONS

Comparison of Results of Operations for the Years Ended December 31, 2011 and 2010

The following table sets forth the results of our operations for the years indicated as a percentage of net revenues (dollars in thousands):

	Years Ended December 31,
	2011						2010
	Dollars			Percentage			Dollars			Percentage
Revenues	$	55,579			100.0	%	$	79,549			100.0	%
Cost of revenues		42,276			76.1	%		58,628			73.7	%
Gross profit		13,303			23.9	%		20,921			26.3	%
Operating expenses		5,121			9.2	%		5,410			6.7	%
Income from operations		8,182			14.7	%		15,509			19.6	%
Other income (expenses)		(81	)		(0.1	)%		(109	)		(0.2	)%
Income before provision for income taxes		8,101			14.6	%		15,400			19.4	%
Provision for income taxes		2,340			4.2	%		4,326			5.4	%
Net income		5,761			10.4	%		11,074			13.9	%
Other comprehensive income:
Foreign currency translation adjustment		2,549			4.6	%		1,908			2.4	%
Comprehensive income	$	8,310			15.0	%	$	12,982			16.3	%

The following table sets forth information as to the gross margin for our two business segments for the years ended December 31, 2011 and 2010 (dollars in thousands).

	Forged rolled rings and related products			Dyeing and finishing equipment			Total
	Year ended December 31, 2011
Revenues	$	37,846		$	17,733		$	55,579
Cost of revenues	$	28,469		$	13,807		$	42,276
Gross profit	$	9,377		$	3,926		$	13,303
Gross margin %		24.8	%		22.1	%		23.9	%

	Forged rolled rings and related products			Dyeing and finishing equipment			Total
	Year ended December 31, 2010
Revenues	$	58,331		$	21,218		$	79,549
Cost of revenues	$	41,854		$	16,774		$	58,628
Gross profit	$	16,477		$	4,444		$	20,921
Gross margin %		28.2	%		20.9	%		26.3	%

Revenues. For the year ended December 31, 2011, we had revenues of $55,579,000, as compared to revenues of $79,549,000 for the year ended December 31, 2010, a decrease of approximately 30.1%. The decrease in revenue was attributable to the decrease in revenue from both our forged rolled rings and related products segment and dyeing and finishing equipment segment, and is summarized as follows (dollars in thousands):

	For the Year Ended December 31, 2011		For the Year Ended December 31, 2010		Increase (Decrease)			Percentage Change
Forged rolled rings and related products - wind power industry	$	25,750	$	40,611	$	(14,861	)		(36.6	)%
Forged rolled rings and related products – other industries		12,096		17,720		(5,624	)		(31.7	)%
Dyeing and finishing equipment		17,733		21,218		(3,485	)		(16.4	)%
Total net revenues	$	55,579	$	79,549	$	(23,970	)		(30.1	)%

Forged rolled rings and related products segment

Revenue from forging of rolled rings and related products totaled $37,846,000 for the year ended December 31, 2011, with revenues of $25,750,000 from the wind power industry and revenues of $12,096,000 from other forging operations. Revenues from forging of rolled rings and related products totaled $58,331,000 for the year ended December 31, 2010, with revenues from the wind power industry amounting to $40,611,000 and revenues from other forging operations amounting to $17,720,000. The decrease in revenue from forging of rolled rings and related products was primarily attributable to:

An apparent decline in the growth rate for our forged products. Although, we had a decrease in the sale of forged products, we are confident that demand for forged products in the wind industry in China will continue. According to the Global Wind Energy Council’s “Global Wind Energy Outlook 2010 Report” as published on the council’s website, 2009 marked China’s sixth consecutive year of doubling its total installed capacity and surpassed 25.8 gigawatts (“GW”) in total capacity installed at the end of 2009. Pursuant to Global Wind Energy Council’s press release dated April 6, 2011, in 2010, China added 18.9 GW of new wind power capacity, thereby reaching a total installed capacity of 44.7 GW The Chinese government’s twelfth Five-Year Plan, which was passed by the Chinese Parliament in March 2011, reflects the Chinese government’s continued commitment to wind power development, with a target of building an additional 90 GW of wind energy by 2015. During the year ended December 31, 2011, we sold approximately 23,999 metric tons of forged products as compared to 38,064 metric tons for the year ended December 31, 2010, a decrease of 37.0%. During the year ended December 31, 2011, we increased our selling price by approximately 1.7% as compared to the year ended December 31, 2010. The increase in our selling price reflected a portion of the cost increases in raw materials and labor. We were not able to increase our prices to reflect the full cost increase, which affected our gross margins.

We believe there has been an increase in overall competition in the forged product market as industry capacity has increased. Additionally, some turbine manufacturers that use forged products, which are not our customers or potential customers, have built their own forging capacity to save costs by vertical integration and to have better leverage when negotiating with the component suppliers. This may result in downward pressure on our pricing and may indirectly affect our sales as a result of increased competition for a smaller number of potential customers. Our products are sold for use by manufacturers of industrial equipment. The demand for products such as ours which are used both for manufacturing in general and for wind power specifically is uncertain. Although we believe that over the long term, our 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 have affected the requirements of our customers and potential customers for our products which has had an effect of lessening the demand for products such as ours. To the extent that the demand for our forged rolled rings and related components declines, our revenue and net income will continue to be affected.

In 2011, the China central bank tightened the monetary supply which has negatively affected both wind farm developers who rely heavily on bank loans to develop new wind farms and has resulted in a reduced demand for wind turbines and turbine systems, and other industrial companies who required financing to purchase our equipment, all of which affects sales of our products.

In 2011, we manufactured and delivered test subassemblies for solar cell manufacturing equipment, which marked our entry into the solar products market. This equipment is being marketed and manufactured in our forged rolled rings segment. We are seeking to use our technical knowledge to manufacture and market solar components used in production of multi crystalline and mono crystalline silicon wafers. Solar industry capabilities include the manufacture of complex pressure vessels and chamber, high temperature vessels, and thick-walled vessels. For the year ended December 31, 2011, we generated revenue from the sale of solar industry related products of $455,453 as compared to $0 for the year ended December 31, 2010.

Dyeing and finishing equipment segment

The decrease in revenue from the sale of dyeing and finishing equipment reflects the business cycle as well as delays by customers in purchasing new equipment designed to meet stricter environmental standards imposed by the Chinese government as textile manufacturers evaluate both their projected business in uncertain economic times and new equipment designed to meet the new standards. We believe that our newest equipment meets the new standards. In addition, some customers have a shortage of working capital due to more restrictive finance policies established recently by Chinese government, resulting in a delay in the purchase of new production machinery. We believe that our customers are using their existing equipment longer before replacing the equipment. We believe that 2012 revenues from the sale of dyeing and finishing equipment will continue to be weak.

Cost of revenues. Cost of revenues, which includes the cost of raw materials, labor, depreciation and other overhead costs for the year ended December 31, 2011 decreased $16,352,000, or 27.9%, from $58,628,000 for 2010 to $42,276,000 for 2011. Cost of revenues for the dyeing segment was $13,807,000 for 2011, as compared to $16,774,000 for 2010. Cost of revenues related to the manufacture of forged rolled rings and related products was $28,469,000 for 2011 as compared to $41,854,000 for 2010.

Gross profit and gross margin. Our gross profit was $13,303,000 for 2011 as compared to $20,920,000 for 2010, representing gross margins of 23.9% and 26.3%, respectively. Gross profit for the dyeing segment was $3,926,000 for 2011 as compared to $4,444,000 for 2010, representing gross margins of approximately 22.1% and 20.9%, respectively. The slight increase in our gross margin for the dyeing segment was mainly attributable to the slight increase in our sales price for dyeing machinery and equipment primarily related to the sale of our new environmental efficient dyeing equipment model. Gross profit from forged rolled rings and related products segment was $9,377,000 for 2011 as compared to $16,477,000 for 2010, representing gross margins of approximately 24.8% and 28.2%, respectively. The decrease in our gross margin for the year ended December 31, 2011 was mainly attributed to an increase in the cost of raw materials and labor costs in 2011 which could not be passed on to our customers and a decline in operational and cost efficiencies, including the allocation of fixed costs such as depreciation to cost of revenues as we operated at lower production levels. We do not expect that we will be able to improve our gross margin from forged rolled rings and related products segment until we become more efficient and are able to produce larger quantities for inventory and revenues.

Depreciation. Depreciation was $5,351,000 and $3,193,000 for the years ended December 31, 2011 and 2010, respectively, and is included in the following categories (dollars in thousands):

	Years Ended December 31,
	2011			2010
Cost of revenues		$	4,238	$	2,874
Operating expenses			1,113		319
Total		$	5,351	$	3,193

The increase in depreciation is attributable to the increase in our depreciable production equipment. We expect depreciation to increase in future periods as we install and place in service new equipment related to our production line.

Selling, general and administrative expenses. Selling, general and administrative expenses totaled $4,008,000 for 2011, as compared to $5,091,000 for 2010, a decrease of $1,083,000 or approximately 21.3%. Selling, general and administrative expenses consisted of the following (dollars in thousands):

	Year Ended December 31, 2011		Year Ended December 31, 2010
Professional fees	$	392	$	357
Bad debt expense		720		1,006
Payroll and related benefits		780		1,055
Travel and entertainment		249		408
Shipping		1,192		1,537
Other		675		728
Total	$	4,008	$	5,091

·	Professional fees increased for 2011 by $35,000, or 9.8%, as compared to 2010. The slight increase was mainly attributable to the increase in investor relations fees.

For 2011, we had bad debt expense of approximately $720,000 as compared to a bad debt expense of approximately $1,006,000 for 2010. Based on our periodic review of accounts receivable balances, we adjusted the allowance for doubtful accounts after considering management’s evaluation of the collectability of individual receivable balances, including the analysis of subsequent collections, the customers’ collection history, and recent economic events.

Payroll and related benefits decreased for 2011 by $275,000, or 26.1%, as compared to 2010. The decrease was mainly attributable to the decrease in stock-based compensation of approximately $274,000 which reflected a drop in our stock price from 2010 to 2011 used to value shares issued as compensation.

Travel and entertainment expense for 2011 decreased by $159,000, or 39.0%, as compared to 2010. The decrease was primarily attributable to a decrease in travel expense of approximately $171,000 due to the decrease in travel for investor road shows and conferences, offset by an increase in entertainment expense of approximately $12,000.

·	Shipping expense for 2011 decreased by $345,000, or 22.4%, as compared to 2010. The decrease was primarily attributable to the decrease in our revenues in 2011 as compared to 2010.

·	Other selling, general and administrative expenses for 2011 decreased by $53,000, or 7.3%, as compared to 2010, which reflected the stricter control on corporation expenditure.

Income from operations. For 2011, income from operations amounted to $8,183,000, as compared to $15,510,000 for 2010, a decrease of $7,327,000 or 47.2%.

Other income (expense). For 2011, other expenses amounted to $82,000 as compared to $109,000 for 2010. For the years ended December 31, 2011 and 2010, total other income (expense) mainly included:

·	Interest expense of $194,000 and $147,000, respectively, which was related to our outstanding loans and capital lease obligations; with the interest expense for the 2010 including non-cash interest expense of $45,000 from the amortization of debt discount arising from our March 2009 financing;

·	Other income of $103,000 in 2011, which was mainly attributable to income from the sale of scrap and grant income of $50,000 from local government in 2010, which we used to increase production of forged products.

Income tax expense. Income tax expense totaled $2,340,000 for 2011, as compared to $4,326,000 for 2010, a decrease of $1,986,000, or approximately 45.9% which was primarily attributable to the decrease in taxable income generated by our operating entities.

Net income. As a result of the foregoing, our net income was $5,761,000 for 2011, as compared with $11,074,000 for 2010, a decrease of 48.0%.

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. As a result of these foreign currency translations, which are a non-cash adjustment, we reported a foreign currency translation gain of $2,549,000 for 2011, as compared to $1,908,000 for 2010. This non-cash gain had the effect of increasing our reported comprehensive income. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations and were not material.

Comprehensive income. As a result of our foreign currency translation gains, we had comprehensive income for 2011 of $8,310,000, compared with $12,982,000 for 2010.

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 December 31, 2011 and 2010, we had cash balances of $1,152,607 and $947,177, respectively. These funds are located in financial institutions located as follows (dollars in thousands):

	December 31, 2011				December 31, 2010
Country:
United States	$	288	25.0	%	$	97	10.3	%
China		865	75.0	%		850	89.7	%
Total cash and cash equivalents	$	1,153	100.0	%	$	947	100.0	%

The following table sets forth information as to the principal changes in the components of our working capital from December 31, 2010 to December 31, 2011 (dollars in thousands):

					December 31, 2010 to December 31, 2011
Category	2011		2010		Change			Percentage Change
Current assets:
Cash and cash equivalents	$	1,153	$	947	$	206			21.7	%
Restricted cash		314		-		314			100.0	%
Notes receivable		54		51		3			5.6	%
Accounts receivable, net of allowance for doubtful accounts		7,088		8,208		(1,120	)		(13.6	)%
Inventories, net of reserve for obsolete inventory		4,276		3,371		905			26.8	%
Advances to suppliers		219		334		(115	)		(34.3	)%
Prepaid value-added taxes on purchase		1,512		2,760		(1,248	)		(45.2	)%
Prepaid expenses and other current assets		111		36		75			204.6	%

Current liabilities:
Short-term bank loans		2,357		1,815		542			29.9	%
Bank acceptance notes payable		314		-		314			100.0	%
Accounts payable		4,997		7,661		(2,664	)		(34.8	)%
Accrued expenses		772		526		246			46.7	%
Capital lease obligations – current portion		245		-		245			100.0	%
VAT and service taxes payable		-		81		(81	)		(100.0	)%
Advances from customers		1,167		236		931			394.5	%
Income taxes payable		592		1,332		(740	)		(55.5	)%
Working capital:
Total current assets	$	14,727	$	15,707	$	(980	)		(6.2	)%
Total current liabilities		10,444		11,651		(1,207	)		(10.4	)%
Working capital:	$	4,283	$	4,056	$	227			5.6	%

Our working capital increased $227,000 to $4,283,000 at December 31, 2011 from working capital of $4,056,000 at December 31, 2010. This increase in working capital is primarily attributable to an increase in cash and cash equivalents of $206,000, an increase in inventories of $905,000, an increase in prepaid expenses and other current assets of $75,000, a decrease in accounts payable of $2,664,000, a decrease in VAT and service taxes payable of $81,000 and a decrease in income taxes payable of $740,000, offset by a decrease in accounts receivable, net of allowance for doubtful accounts, of $1,120,000, a decrease in advances to suppliers of $115,000, a decrease in prepaid VAT on purchases of $1,248,000, an increase in short-term bank loans of $542,000, an increase in accrued expenses of $246,000, an increase in current portion of capital lease obligation of $245,000 and an increase in advances from customers of $931,000.

Net cash flow provided by operating activities was $10,448,000 for 2011 as compared to net cash flow provided by operating activities of $14,667,000 for 2010, a decrease of $4,219,000. Net cash flow provided by operating activities for the year ended December 31, 2011 was mainly due to:

·	net income of $5,761,000 and the add-back of non-cash items, such as depreciation of $5,351,000, amortization of land use rights of $91,000, the increase in allowance for doubtful accounts of $720,000 and stock-based compensation expense of $356,000, and,

changes in operating assets and liabilities, including a decrease in accounts receivable of $694,000 due to a reduction in revenues, a decrease in prepaid VAT taxes on purchases of $1,332,000 related to the netting of current VAT against amounts prepaid, a decrease in advances to suppliers of $125,000, an increase in accrued expenses of $224,000, an increase in advances from customers of $906,000 primarily related to deposits on future solar equipment orders, offset by an increase in inventories of $761,000 primarily related to future solar equipment orders, a decrease in accounts payable of $3,425,000 and a decrease in income taxes payable of $778,000.

Net cash flow provided by operating activities for the year ended December 31, 2010 was mainly due to

net income of $11,074,000 and the add-back of non-cash items including depreciation of $3,193,000, the amortization of debt discount to interest expense of $45,000, the amortization of land use rights of $87,000, the increase in allowance for doubtful accounts of $1,006,000, and stock-based compensation of $547,000, and,

changes in operating assets and liabilities such as a decrease in notes receivable of $283,000, a decrease in prepaid and other current assets of $159,000, a decrease in advances to suppliers of $129,000, an increase in accounts payable of $4,040,000, an increase in VAT and service taxes payable of $54,000, an increase in income taxes payable of $272,000 and an increase in advances from customers of $86,000 offset by an increase in accounts receivable of $2,913,000, an increase in inventories of $1,037,000, an increase in prepaid value-added taxes on purchases of $2,310,000 related to VAT paid of equipment purchased that can be deducted from future VAT due, and a decrease in accrued expenses of $48,000.

Net cash flow used in investing activities, which reflected the purchase of property and equipment was $11,116,000 for 2011 as compared to $19,406,000 for 2010. We do not expect to purchase significant amounts of equipment during 2012.

Net cash flow provided by financing activities was $832,000 in 2011 as compared to $3,370,000 for 2010. During 2011, we received proceeds from loans of $4,325,000, proceeds from sale of common stock of $125,000, proceeds from exercise of common stock warrants of $400,000 and made repayment of bank loans of $3,862,000 and repayments of principal on capital lease obligations of $157,000. During 2010, we received proceeds from loans of $1,770,000, proceeds from sale of common stock of $380,000, proceeds from exercise of common stock warrants of $3,320,000 and made repayment for loans payable of $2,100,000.

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 December 31, 2011 (dollars in thousands), and the effect these obligations are expected to have on our liquidity and cash flows in future periods.

	Payments Due by Period
Contractual obligations:	Total		Less than 1 year		1-3 years		3-5 years		5+ years
Bank loans (1)	$	2,357	$	2,357	$	-	$	-	$	-
Capital lease obligations (2)		960		416		544		-		-
Total	$	3,317	$	2,773	$	544	$	-	$	-

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

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

Off-balance Sheet Arrangements

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

Foreign Currency Exchange Rate Risk

We produce and sell almost all of our products in China. Thus, most of our revenues and operating results may be impacted by exchange rate fluctuations between RMB and US dollars. For the year ended December 31, 2011, we had unrealized foreign currency translation gain of $2,549,279, because of the change in the exchange rate.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable for smaller reporting companies

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements begin on page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

ITEM 9A. CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures

As required by Rule 13a-15 under the Exchange Act, our management, including Jianhua Wu, our chief executive officer, and Wanfen Xu, our chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2011.

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

Management conducted its evaluation of disclosure controls and procedures under the supervision of our chief executive officer and our chief financial officer. Based on that evaluation, Mr. Wu and Ms. Xu concluded that our disclosure controls and procedures were not effective as of December 31, 2011.

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”). Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2011. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework. During our assessment of the effectiveness of internal control over financial reporting as of December 31, 2011, management identified significant deficiencies related to (i) the U.S. GAAP expertise of our internal accounting staff, (ii) our internal audit functions and (iii) a lack of segregation of duties within accounting functions. Although management believes that these deficiencies do not amount to a material weakness, our internal controls over financial reporting were not effective at December 31, 2011.

In order to correct or mitigate the foregoing deficiencies, we have taken the following remediation measures:

•

Adam Wasserman, our vice president of financial reporting, has experience in internal control and U.S. GAAP reporting compliance, and together with our chief executive officer and chief financial officer oversees and manages our financial reporting process and the required training of the accounting staff.

•

We have committed to the establishment of effective internal audit functions and in 2011, we hired a Sarbanes-Oxley consulting firm to assist us with implementation of stronger internal controls and procedures as discussed below.

•

Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. 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.

In January 2011, we engaged KRC Consulting (Shanghai) to assist us in identifying deficiencies, to recommend methods of remedying the deficiencies, and to assist us in the implementation of these remedies. KRC delivered its report on our deficiencies and recommendations in March 2011. KRC also set up training sessions for our staff in April. However, KRC has not provided any further assistance after the second quarter of 2011. We have not made significant progress in implementing the program. Further, because a large percentage of our employees are computer illiterate, we could only partially implement the ERP computerized accounting system which is a cornerstone to SOX compliance. While the Company has remedied a number of its deficiencies during 2011, it anticipates that these deficiencies remained in December 31, 2011. No new deficiencies have arisen since December 31, 2010.

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 our financial reporting.

Auditor Attestation

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.

Changes in Internal Controls over Financial Reporting

There were no changes in our internal controls over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCES

Our current directors and executive officers are:

Name	Age	Position
Jianhua Wu	55	Chief executive officer, chairman and director
Wanfen Xu	31	Chief financial officer
Tianxiang Zhou2,3	73	Director
Xi Liu1,3	43	Director
Drew Bernstein1,2,3	54	Director
Min Li1,2	31	Director

1 Member of the audit committee.

2 Member of the compensation committee.

3 Member of the corporate governance/ nominating committee.

Jianhua Wu has been our chief executive officer, chairman and a director since the completion of the reverse acquisition in November 2007. Mr. Wu founded our predecessor companies, Wuxi Huayang Dyeing Machinery Co., Ltd. and Wuxi Huayang Electrical Power Equipment Co., Ltd., in 1995 and 2004, respectively, and was executive director and general manager of these companies prior to becoming our chief executive officer. Mr. Wu is a certified mechanical engineer. Mr. Wu is qualified to serve as a director because of his experience with us as our chief executive officer.

Wanfen Xu has been our chief financial officer since March 2012. Ms. Xu has been the financial controller of Electrical and Dyeing from 2009 until her appointment as chief financial officer in 2012. She was senior finance manager and financial controller of Dyeing between 2000 and 2009.

Tianxiang Zhou has been a director since July 2010. Mr. Zhou served as lead engineer in Wuxi Angyida Mechanism Limited Company since 2004. From 1998 to 2004, he was general engineer in Wuxi Huayang Dye Machinery Equipment Limited. From 1994 to 1998 Mr. Zhou worked for Wuxi Chemicals Holdings as chief engineer of its design division. Mr. Zhou received his bachelor degree in engineering from Nanjing Institute of Chemical Technology in August 1961. Mr. Zhou’s engineering background and his experience in the manufacturing business are important qualifications for his service as a director.

Xi Liu has been a director since November 2007. Mr. Liu has an extensive background in material engineering, being a 1989 graduate of Jiangsu University of Technology with a degree in metal material and heat treatment, and having been trained at the Volvo facilities in Penta, Sweden in 1999. Immediately after graduating from university, Mr. Liu worked at China FAW Group Corporation, the oldest and one of largest Chinese automakers, as an engineer, before leaving in 2005 as an assistant manager in the purchasing department of the Wuxi Diesel Engine Works plant. He then joined WAM Bulk Handling Machinery (Shanghai) Co., Ltd., part of the Italian industrial giant WAMGROUP, as a purchasing and sourcing manager, which is his current position. Mr. Liu’s background in engineering and his practical industrial experience is important to us as we plan and develop our business.

Mr. Bernstein has been a director since April 2009. Mr. Bernstein is co-founder and managing partner of the accounting firm Bernstein & Pinchuk LLP, a PCAOB registered accounting firm headquartered in New York, a position he has held since 1983. Mr. Bernstein is also a partner of the recently formed accounting firm of Marcum Bernstein & Pinchuk. Mr. Bernstein, a certified public accountant, received his BS degree from the University of Maryland Business School. He is a member of the American Institute of Certified Public Accounts, The New York State Society of Certified Public Accounts and The National Society of Accountants. Mr. Bernstein’s accounting experience and his work with a number of China-based public companies is important as we continue to implement and improve our internal controls. Mr. Bernstein is also a director and chairman of the audit committee of NeoStem, Inc., a biopharmaceutical company, and Orient Paper, Inc., a producer and distributor of paper products in China.

Min Li has been a director since July 2011. Mr. Li has been head of an alternative energy and power technology research at Yuanta Securities in Hong Kong since 2009. From 2007 to 2009, Mr. Li was an equity analyst with Goldman Sachs, covering the solar and wind power industries. Mr. Li received his MBA degree from Duke University in 2008. Mr. Li received his bachelor’s degree in electrical engineering from Nanyang Technological University in Singapore and his Master of Science degree from National University of Singapore. Mr. Li’s experience and familiarity with the solar and wind industries are important to us as we continue to orient our business toward renewable energy such as wind and solar power.

Committees

Our business, property and affairs are managed by or under the direction of the board of directors. Members of the board are kept informed of our business through discussion with the chief executive and financial officers and other officers, by reviewing materials provided to them and by participating at meetings of the board and its committees.

Our board of directors has three committees - the audit committee, the compensation committee and the corporate governance/nominating committee. The audit committee is comprised of Drew Bernstein, Xi Liu and Min Li, with Mr. Bernstein serving as chairman. The compensation committee is comprised of Tianxiang Zhou, Drew Bernstein and Min Li, with Mr. Zhou as chairman. The corporate governance/nominating committee is comprised of Xi Liu, Drew Bernstein, and Tianxiang Zhou, with Mr. Liu as chairman.

Our audit committee is involved in discussions with our independent auditor with respect to the scope and results of our year-end audit, our quarterly results of operations, our internal accounting controls and the professional services furnished by the independent auditor. Our board of directors has adopted a written charter for the audit committee which the audit committee reviews and reassesses for adequacy on an annual basis.

The compensation committee oversees the compensation of our chief executive officer and our other executive officers and reviews our overall compensation policies for employees generally. If so authorized by the board of directors, the committee may also serve as the granting and administrative committee under any option or other equity-based compensation plans which we may adopt. The compensation committee does not delegate its authority to fix compensation; however, as to officers who report to the chief executive officer, the compensation committee consults with the chief executive officer, who may make recommendations to the compensation committee. Any recommendations by the chief executive officer are accompanied by an analysis of the basis for the recommendations. The committee will also discuss compensation policies for employees who are not officers with the chief executive officer and other responsible officers.

The corporate governance/nominating committee is involved in evaluating the desirability of and recommending to the board any changes in the size and composition of the board, evaluation of and successor planning for the chief executive officer and other executive officers. The qualifications of any candidate for director will be subject to the same extensive general and specific criteria applicable to director candidates generally.

The board and its committees held the following number of meetings during 2011:

Board of directors	4
Audit committee	4
Compensation committee	0
Nomination committee	0

The meetings include meetings that were held by means of a conference telephone call, but do not include actions taken by unanimous written consent.

Each director attended at least 75% of the total number of meetings of the board and those committees on which he served during the year.

Our non-management directors did not meet in executive session during 2011.

Compensation Committee Interlocks and Insider Participation

Aside from his/her service as director, no member of our compensation committee had any relationship with us as of December 31, 2011. None of our executive officers served as a director or compensation committee member of another entity.

Section 16(a) Compliance

Section 16(a) of the Securities Exchange Act of 1934, requires our directors, executive officers and persons who own more than 10% of our common stock to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other of our equity securities. During the year ended December 31, 2011, Mr. Wu, Mr. Bernstein, Mr. Liu and Mr. Li were delinquent in making Form 4 filings.

ITEM 11. EXECUTIVE COMPENSATION.

The following summary compensation table indicates the cash and non-cash compensation earned during the years ended December 31, 2011 and 2010 by each person who served as chief executive officer and chief financial officer. No other executive officer received compensation equal or exceeding $100,000.

Summary Annual Compensation Table

Name and Principal Position	Fiscal Year	Salary ($)		Bonus ($)		Stock Awards ($)		All Other Compensation ($)		Total ($)
Jianhua Wu, chief executive officer (1)	2011		0		0		98,740		0		98,740
	2010		0		0		136,430		0		136,430

Fernando Liu, chief financial officer (2)	2011		77,238		0		59,700		0		136,938
	2010		0		0		0		0		0

(1)	Mr. Wu’s 2011 compensation consisted of 4,800 shares of common stock, valued at $98,740. Mr. Wu’s 2010 compensation consisted of 2,800 shares of common stock, valued at $136,430.

(2)	Mr. Liu served as our chief financial officer during 2011, and he resigned in December 2011. Mr. Liu’s 2011 compensation includes salary of $77,238 and 3,000 shares of common stock, valued at $59,700.

Employment Agreement

We have no employment agreements with any of our officers.

Compensation of Directors

Except for Mr. Li, we do not have any agreements or formal plan for compensating our directors for their service in their capacity as directors, although our board may, in the future, award stock options to purchase shares of common stock to our directors. For services as a director, we pay Mr. Li an annual fee of $6,000, payable quarterly, and in 2011, we issued to Mr. Li 438 shares of common stock, which represents $6,000 divided by the closing price of our common stock on the date of his election.

The following table provides information concerning the compensation of each member of our board of directors whose compensation is not included in the Summary Compensation Table for his or her services as a director and committee member for 2011. The value attributable to any stock grants is computed in accordance with FAS 123R.

Name	Fees earned or paid in cash ($)		Stock awards ($)		Total ($)
Tianxiang Zhou		0		0		0
Xi Liu		0		0		0
Drew Bernstein		10,000		19,825		29,825
Megan Penick(1)		5,000		6,995		11,995
Min Li		3,000		6,000		9,000

(1) Ms. Penick was a director during a portion of 2011.

2010 Long-Term Incentive Plan

In January 2010, the board of directors adopted, and in March 2010, the stockholders approved the 2010 long-term incentive plan, covering 200,000 shares of common stock. The 2010 plan provides for the grant of incentive and non-qualified options and stock grants to employees, including officers, directors and consultants. The 2010 plan is to be administered by a committee of not less than three directors, each of whom is to be an independent director. In the absence of a committee, the plan is administered by the board of directors. The board has granted the compensation committee the authority to administer the 2010 plan. Members of the committee are not eligible for stock options or stock grants pursuant to the 2010 plan unless such stock options or stock grant are granted by a majority of our independent directors other than the proposed grantee. As of December 31, 2011, the Company had issued a total of 26,938 shares of common stock pursuant to this plan.

The following table set forth information as options outstanding on December 31, 2011.

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

OPTION AWARDS											STOCK AWARDS
Name (a)	Number of Securities Underlying Unexercised options (#) (b)		Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) (c)		Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) (d)		Option Exercise Price ($) (e)		Option Expiration Date ($) (f)		Number of Shares or Units of Stock that have not Vested (#) (g)		Market Value of Shares of Units of Stock that Have not Vested ($) (h)		Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights that have not Vested (#) (i)		Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or other Rights that have not Vested ($) (j)
Jianhua Wu		0		0		0		0		0		0		0		0	0

Mr. Wu received a grant of 4,800 and 2,800 shares pursuant to the 2010 plan during 2011 and 2010, respectively. These shares are reflected in the summary compensation table. No other person named in the summary compensation table was employed by us at December 31, 2011.

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The following table provides information as to shares of common stock beneficially owned as of March 15, 2012, by:

	•	each current director;
	•	each current officer named in the summary compensation table;

	•	each person owning of record or known by us, based on information provided to us by the persons named below, to own beneficially at least 5% of our common stock; and
	•	all current directors and executive officers as a group.

Name of Beneficial Owner	Amount and Nature of Beneficial Ownership		% of Class

Jianhua Wu CEO, President and Chairman (1) (3)		615,709		27.5	%
Wanfen Xu, CFO		0		*
Lihua Tang (1) (3)		615,709		27.5	%
Maxworthy International Limited (1) P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands		544,267		24.3	%
Yunxia Ren (2) (4)		332,074		14.8	%
Haoyang Wu (2) (4)		332,074		14.8	%
Xi Liu		0		*
Tianxiang Zhou		0		*
Drew Bernstein		4,233		*
Min Li		438		*
All current officers and directors as a group (three persons owning stock)		620,380		27.7	%

* less than 1%.

(1)

Jianhua Wu and Lihua Tang, who are husband and wife, are majority stockholders of Maxworthy International Ltd. Mr. Wu is also managing director of Maxworthy. The shares reflected as being owned by Mr. Wu and Ms. Tang represent (i) 544,267 shares owned by Maxworthy and (ii) 71,442 shares owned by Mr. Wu. Each of Mr. Wu and Ms. Tang disclaims beneficial ownership in the shares of beneficially owned by the other.

(2)

Yunxia Ren and Haoyang Wu are the daughter-in-law and son of Jianhua Wu and Lihua Tang. Ms. Ren owns 263,822 shares of common stock and Mr. Wu owns 68,252 shares of common stock. Each of Ms. Ren and Mr. Wu disclaims ownership of the shares owned by the other.

(3)

Address is No. 9 Yanyu Middle Road, Qianzhou Village, Huishan District, Wuxi City, Jiangsu Province, PRC

(4)

Address is No. 25 Jin Xiu Second Village, Qianzhou Town Huishan District, Wuxi City, Jiangsu Province, PRC.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.

Director Independence

Four of our directors, Drew Bernstein, Min Li, Xi Liu, and Tianxiang Zhou, are independent directors, using the Nasdaq definition of independence. These directors serve on at least two of our board committees. The audit committee is comprised of Drew Bernstein (chair), Xi Liu and Min Li, the compensation committee is comprised of Tianxiang Zhou (chair), Drew Bernstein, and Min Li, and the corporate governance/nominating committee is comprised of Xi Liu (chair), Drew Bernstein, and Tianxiang Zhou. Our board has determined that Mr. Bernstein is an audit committee financial expert.

Related Party Transactions

On January 18, 2011, we sold 3,501 shares of common stock, to Fernando Liu, who was then our chief financial officer, at a market price of $35.70 per share for a total purchase price of $125,000 pursuant to a stock purchase agreement dated January 18, 2011. The purchase price per share represents the market price on January 18, 2011, the date we and Mr. Liu agreed upon the sale.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

The following table sets forth the fees billed by our principal independent accountants, Sherb and Co., LLP, for each of our last two fiscal years for the categories of services indicated.

	Years Ended December 31,
Category	2011		2010
Audit Fees	$	80,000	$	80,000
Audit Related Fees		25,500		22,500
Tax Fees		7,500		0
All Other Fees		0		7,500

Audit fees. Consists of fees billed for the audit of our annual financial statements, review of our Form 10-K and services that are normally provided by the accountant in connection with year-end statutory and regulatory filings or engagements.

Audit-related fees. Consists of fees billed for the review of our quarterly financial statements, review of our forms 10-Q and 8-K and services that are normally provided by the accountant in connection with non-year end statutory and regulatory filings or engagements.

Tax fees. Consists of professional services rendered by a company aligned with our principal accountant for tax compliance, tax advice and tax planning.

Other fees. The services provided by our accountants within this category consisted of advice and other services relating to SEC matters, registration statement review, accounting issues and client conferences.

Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors

The audit committee’s policy is to pre-approve all audit and permissible non-audit services provided by the independent registered public accounting firm. These services may include audit services, audit-related services, tax services and other services. The independent registered public accounting firm and management are required to periodically report to the audit committee regarding the extent of services provided by the independent registered public accounting firm in accordance with this pre-approval, and the fees for the services performed to date. The audit committee may also pre-approve particular services on a case-by-case basis. All services since October 1, 2008 were pre-approved by the audit committee.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

Exhibit Number	Description
2.1	Share Exchange Agreement among Malex Inc., Malex’s Majority Stockholder, Fulland and the Fulland Shareholders dated November 13, 2007 (1)
3.1	Restated Certificate of Incorporation, as amended.*
3.2	By-laws (1)
10.1	Agreement between the Company and Adam Wasserman, dated February 1, 2010 (6)
10.2	2010 Long-Term Incentive Plan (6)
10.3	Director’s agreement with Drew Bernstein (4)
10.4	Employment agreement dated March 12, 2012 between the Company and Wanfen Xu (5).
14.1	Code of ethics and business conduct for officers, directors and employees (3)
14.2	China Wind Systems, Inc. ethics hotline/whistleblower program (3)
21.0	List of subsidiaries*
23.1	Consent of Sherb & Co. LLP*
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
32.1	Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Schema
101.CAL	XBRL Taxonomy Calculation Linkbase
101.DEF	XBRL Taxonomy Definition Linkbase
101.LAB	XBRL Taxonomy Label Linkbase
101.PRE	XBRL Taxonomy Presentation Linkbase

* filed herewith.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	CLEANTECH SOLUTIONS INTERNATIONAL, INC.

Date: March 28, 2012	By:	/s/ Jianhua Wu
		Jianhua Wu, Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities on the dates indicated. Each person whose signature appears below hereby authorizes Jianhua Wu as his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution for him or her and in his or her name, place and stead, in any and all capacities to sign any and all amendments to this report, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission.

Signature	Title	Date

/s/ Jianhua Wu	Chief Executive Officer	March 28, 2012
Jianhua Wu	and Director (Principal Executive Officer)

/s/ Wanfen Xu	Chief Financial Officer	March 28, 2012
Wanfen Xu	(Principal Financial and Accounting Officer)

/s/ Tianxiang Zhou	Director	March 28, 2012
Tianxiang Zhou

/s/ Xi Liu	Director	March 28, 2012
Xi Liu

/s/ Drew Bernstein	Director	March 28, 2012
Drew Bernstein

/s/ Min Li	Director	March 28, 2012
Min Li

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011 and 2010

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011 and 2010

CONTENTS

Report of Independent Registered Public Accounting Firm	F-2

Consolidated Financial Statements:

Consolidated Balance Sheets - As of December 31, 2011 and 2010	F-3

Consolidated Statements of Income -
For the Years ended December 31, 2011 and 2010	F-4

Consolidated Statements of Shareholders’ Equity -
For the Years ended December 31, 2011 and 2010	F-5

Consolidated Statements of Cash Flows -
For the Years ended December 31, 2011 and 2010	F-6

Notes to Consolidated Financial Statements	F-7 to F-28

F-1

	805 Third Ave, 9h Floor New York, New York 10022 Tel. 212-838-5100 Fax. 212-838-2676 e-maibinfo@sherbcpa.com Offices in New York, Florida, Beijing and Shanghai China
SHERB & CO., UP

Certified Public Accountants

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

Cleantech Solutions. International, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Cleantech Solutions International, Inc. and Subsidiaries (the "Company") as of December 31, 2011 and 2010 and the related consolidated statements of operations and comprehensive income, stockholders' equity and cash flows for the years ended December 31, 2011 and 2010. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2011 and 2010 and the results of their operations and their cash flows for the years ended December 31, 2011 and 2010, in conformity with accounting principles generally accepted in the United States of America.

New York, New York

March 27, 2012

F-2

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

	December 31,
	2011		2010
ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$	1,152,607	$	947,177
Restricted cash		314,233		-
Notes receivable		53,420		50,593
Accounts receivable, net of allowance for doubtful accounts		7,087,958		8,207,797
Inventories, net of reserve for obsolete inventory		4,276,090		3,371,128
Advances to suppliers		219,347		333,923
Prepaid VAT on purchases		1,512,213		2,759,763
Prepaid expenses and other		110,670		36,338

Total Current Assets		14,726,538		15,706,719

PROPERTY AND EQUIPMENT - net		64,042,079		54,742,993

OTHER ASSETS:
Land use rights, net		3,820,536		3,767,159

Total Assets	$	82,589,153	$	74,216,871

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Short-term bank loans	$	2,356,749	$	1,814,937
Bank acceptance notes payable		314,233		-
Accounts payable		4,997,109		7,660,768
Accrued expenses		771,597		526,006
Capital lease obligations- current portion		244,747		-
VAT and service taxes payable		-		81,614
Advances from customers		1,166,942		236,004
Income taxes payable		592,202		1,331,713

Total Current Liabilities		10,443,579		11,651,042

OTHER LIABILITIES:
Capital lease obligations - net of current portion		381,235		-

Total Liabilities		10,824,814		11,651,042

STOCKHOLDERS' EQUITY:
Preferred stock $0.001 par value (30,000,000 shares authorized, all of which were designated
as series A convertible preferred, 10,995,807 and 16,205,268 shares issued and outstanding
at December 31, 2011 and 2010, respectively)		10,996		16,205
Common stock ($0.001 par value; 50,000,000 shares authorized;
2,101,849 and 1,875,113 shares issued and outstanding
at December 31, 2011 and 2010, respectively)		2,102		1,875
Additional paid-in capital		27,489,600		26,595,929
Retained earnings		34,618,341		29,264,152
Statutory reserve		2,064,551		1,658,197
Accumulated other comprehensive gain - foreign currency translation adjustment		7,578,749		5,029,471

Total Stockholders' Equity		71,764,339		62,565,829

Total Liabilities and Stockholders' Equity	$	82,589,153	$	74,216,871

See notes to consolidated financial statements

F-3

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

`	For the Years Ended
	December 31,
	2011			2010

REVENUES	$	55,579,262		$	79,548,609

COST OF REVENUES		42,275,919			58,628,150

GROSS PROFIT		13,303,343			20,920,459

OPERATING EXPENSES:
Depreciation		1,112,769			319,239
Selling, general and administrative		4,007,997			5,091,592

Total Operating Expenses		5,120,766			5,410,831

INCOME FROM OPERATIONS		8,182,577			15,509,628

OTHER INCOME (EXPENSE):
Interest income		3,652			3,794
Interest expense		(193,709	)		(147,428	)
Foreign currency gain (loss)		5,046			(15,338	)
Grant income		-			49,552
Other income		103,448			-

Total Other Income (Expense)		(81,563	)		(109,420	)

INCOME BEFORE INCOME TAXES		8,101,014			15,400,208

INCOME TAXES		2,340,471			4,325,876

NET INCOME	$	5,760,543		$	11,074,332

COMPREHENSIVE INCOME:
NET INCOME	$	5,760,543		$	11,074,332

OTHER COMPREHENSIVE INCOME:
Unrealized foreign currency translation gain		2,549,278			1,907,789

COMPREHENSIVE INCOME	$	8,309,821		$	12,982,121

NET INCOME PER COMMON SHARE:
Basic	$	2.94		$	6.19
Diluted	$	2.30		$	4.36

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic		1,962,146			1,787,994
Diluted		2,500,805			2,539,682

See notes to consolidated financial statements

F-4

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 2011 and 2010


	Series A Preferred Stock						Common Stock				Additional							Accumulated Other		Total
	Number of						Number of				Paid-in		Retained			Statutory		Comprehensive		Stockholders'
	Shares			Amount			Shares		Amount		Capital		Earnings			Reserve		Income		Equity

Balance, December 31, 2009		15,419,088		$	15,419			1,640,221	$	1,640	$	22,347,518	$	18,595,037		$	1,252,980	$	3,121,682	$	45,334,276

Common stock issued for services		-			-			11,372		11		549,421		-			-		-		549,432

Series A preferred converted to common shares		(5,469,000	)		(5,469	)		182,300		182		5,287		-			-		-		-

Exercise of stock warrants		6,255,180			6,255			31,720		32		3,313,713		-			-		-		3,320,000

Sale of common stock		-			-			9,500		10		379,990		-			-		-		380,000

Adjustment to statutory reserve		-			-			-		-		-		(405,217	)		405,217		-		-

Comprehensive income: Net income for the year		-			-			-		-		-		11,074,332			-		-		11,074,332

Foreign currency translation adjustment		-			-			-		-		-		-			-		1,907,789		1,907,789

Total comprehensive income		-			-			-		-		-		-			-		-		12,982,121

Balance, December 31, 2010		16,205,268			16,205			1,875,113		1,875		26,595,929		29,264,152			1,658,197		5,029,471		62,565,829

Common stock issued for services		-			-			21,116		21		363,668		-			-		-		363,689

Series A preferred converted to common shares		(5,916,176	)		(5,916	)		197,206		197		5,719		-			-		-		-

Exercise of stock warrants		706,715			707			4,185		4		399,289		-			-		-		400,000

Sale of common stock		-			-			3,501		5		124,995		-			-		-		125,000

Shares issued for adjustments for 1:10 reverse split		-			-			728		-		-		-			-		-		-

Adjustment to statutory reserve		-			-			-		-		-		(406,354	)		406,354		-		-

Comprehensive income: Net income for the year		-			-			-		-		-		5,760,543			-		-		5,760,543

Foreign currency translation adjustment		-			-			-		-		-		-			-		2,549,278		2,549,278

Total comprehensive income		-			-			-		-		-		-			-		-		8,309,821

Balance, December 31, 2011		10,995,807		$	10,996			2,101,849	$	2,102	$	27,489,600	$	34,618,341		$	2,064,551	$	7,578,749	$	71,764,339

See notes to consolidated financial statements

F-5

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Years Ended
	December 31,
	2011			2010

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	5,760,543		$	11,074,332
Adjustments to reconcile net income from operations to net cash
provided by operating activities:
Depreciation		5,351,359			3,192,662
Amortization of debt discount to interest expense		-			44,993
Amortization of land use rights		91,316			87,204
Increase in allowance for doubtful accounts		720,302			1,006,162
Stock-based compensation expense		355,856			546,963
Changes in assets and liabilities:
Notes receivable		(848	)		282,986
Accounts receivable		694,014			(2,913,257	)
Inventories		(761,072	)		(1,036,591	)
Prepaid value-added taxes on purchases		1,331,923			(2,309,987	)
Prepaid and other current assets		(64,667	)		159,152
Advances to suppliers		125,396			128,693
Accounts payable		(3,425,206	)		4,040,484
Accrued expenses		224,493			(48,312	)
VAT and service taxes payable		(83,358	)		54,102
Income taxes payable		(777,914	)		271,619
Advances from customers		906,282			85,695

NET CASH PROVIDED BY OPERATING ACTIVITIES		10,448,419			14,666,900

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(11,115,640	)		(19,406,064	)

NET CASH USED IN INVESTING ACTIVITIES		(11,115,640	)		(19,406,064	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease		(156,918	)		-
Proceeds from loans payable		4,325,320			1,770,238
Repayment of loans payable		(3,861,893	)		(2,100,238	)
Increase in restricted cash		(308,951	)		-
Increase in bank acceptance notes payable		308,951			-
Proceeds from sale of common stock		125,000			380,000
Proceeds from exercise of warrants		400,000			3,320,000

NET CASH PROVIDED BY FINANCING ACTIVITIES		831,509			3,370,000

EFFECT OF EXCHANGE RATE ON CASH AND CASH EQUIVALENTS		41,142			37,703

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		205,430			(1,331,461	)

CASH AND CASH EQUIVALENTS - beginning of year		947,177			2,278,638

CASH AND CASH EQUIVALENTS - end of year	$	1,152,607		$	947,177

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest	$	193,709		$	104,578
Income taxes	$	3,118,384		$	4,054,257

NON-CASH INVESTING AND FINANCING ACTIVITIES:
Capital leased property in exchange for capital lease obligations	$	772,379		$	-
Increase in property in exchange for increase in payable	$	516,531		$	-
Series A preferred converted to common shares	$	5,916		$	5,469
Common stock issued for future service	$	7,833		$	2,469

See notes to consolidated financial statements

F-6

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011 and 2010

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. 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, electro-slag re-melted (“ESR”) products used in the steel 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

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

F-7

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011 and 2010

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

Basis of presentation (continued)

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.

F-8

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011 and 2010

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

Basis of presentation (continued)

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 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 2011 and 2010 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.

Cash and cash equivalents

For purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments purchased with a maturity of three months or less and money market accounts to be cash equivalents. The Company maintains cash and cash equivalents with various financial institutions mainly in the PRC and the U.S. Balances in the U.S. are insured up to $250,000 at each bank. Balances in banks in the PRC are uninsured.

Fair value of financial instruments

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

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

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

F-9

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011 and 2010

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

Fair value of financial instruments (continued)

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

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

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

Concentrations of credit risk

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

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable. Substantially all of the Company’s cash is maintained with state-owned banks within the PRC, and none of these deposits are covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts. A significant portion of the Company’s sales are credit sales which are primarily to customers whose ability to pay is dependent upon the industry economics prevailing in these areas; however, concentrations of credit risk with respect to trade accounts receivables is limited due to generally short payment terms. The Company also performs ongoing credit evaluations of its customers to help further reduce credit risk. At December 31, 2011 and 2010, the Company’s cash balances by geographic area were as follows:

	December 31, 2011				December 31, 2010
Country:
United States	$	288,090	25.0	%	$	97,188	10.3	%
China		864,517	75.0	%		849,989	89.7	%
Total cash and cash equivalents	$	1,152,607	100.0	%	$	947,177	100.0	%

Restricted cash

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

F-10

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011 and 2010

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

Notes receivable

Notes receivable represents trade accounts receivable due from various customers where the customers’ bank has guaranteed the payment of the receivable. This amount is non-interest bearing and is normally paid within three to nine months. Historically, the Company has experienced no losses on notes receivable. The Company‘s notes receivable totaled $53,420 and $50,593 at December 31, 2011 and 2010, 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 December 31, 2011 and 2010, the Company has established, based on a review of its outstanding balances, an allowance for doubtful accounts in the amounts of $2,618,608 and $1,815,508, 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 $172,557 and $166,108 at December 31, 2011 and 2010, 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 $219,347 and $333,923 as of December 31, 2011 and 2010, respectively.

Property and equipment

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

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

F-11

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011 and 2010

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 charges for the years ended December 31, 2011 and 2010.

Advances from customers

Advances from customers at December 31, 2011 and 2010 amounted to $1,166,942 and $236,004, respectively, and consist of prepayments from customers for merchandise that had not yet been shipped. The Company will recognize the deposits as revenue as customers take delivery of the goods in accordance with its revenue recognition policy.

Revenue recognition

Pursuant to the guidance of ASC Topic 605 and ASC Topic 360, the Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the purchase price is fixed or determinable and collectability is reasonably assured. The Company accounts for the product sale as a multiple element arrangement. Revenue from multiple element arrangements is allocated among the separate accounting units based on the residual method. Under the residual method, the revenue is allocated to undelivered elements based on fair value of such undelivered elements and the residual amounts of revenue allocated to delivered elements. The Company recognizes revenues from the sale of dyeing 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. Grant income is recognized when funds have been received and all significant terms of the grant have been fulfilled by the Company. Warranty revenue is valued based on estimated service person hours to complete a service and generally is recognized over the contract period. For the years ended December 31, 2011 and 2010, amounts allocated to warranty revenues were not material. Based on historical experience, warranty service calls and any related labor costs have been minimal.

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

Income taxes

The Company is governed by the Income Tax Law of the PRC and the U.S. 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 year 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.

F-12

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011 and 2010

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

Income taxes (continued)

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 December 31, 2011 and 2010, 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 $1,192,268 and $1,537,392 for the years ended December 31, 2011 and 2010, respectively.

Employee benefits

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

Advertising

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

Research and development

Research and development costs are expensed as incurred. For the years ended December 31, 2011 and 2010, research and development costs were not material.

F-13

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011 and 2010

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 years ended December 31, 2011 and 2010 was $41,142 and $37,703, 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 December 31, 2011 and 2010 were translated at 6.3647 RMB to $1.00 and at 6.6118 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 years ended December 31, 2011 and 2010 were 6.47351 RMB and 6.77875 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 statement 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 shareholders 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).

F-14

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011 and 2010

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:

	2011		2010
Net income available to common stockholders for basic and diluted net income per share of common stock	$	5,760,543	$	11,074,332

Weighted average common stock outstanding – basic		1,962,146		1,787,994
Effect of dilutive securities:
Series A convertible preferred stock		488,599		498,027
Warrants		50,060		253,661
Weighted average common stock outstanding– diluted		2,500,805		2,539,682
Net income per common share - basic	$	2.94	$	6.19
Net income per common share - diluted	$	2.30	$	4.36

The Company's aggregate common stock equivalents at December 31, 2011 and 2010 include the following:

	2011		2010
Warrants		220,158		252,465
Series A convertible preferred stock		366,527		540,176
Total		586,685		792,641

Deemed preferred stock dividend

When we issue shares of convertible preferred stock at a price that is, on an “as if converted” basis, less than the market price of the underlying shares of common stock, the difference between the value of the underlying shares of common stock and the purchase price of the convertible preferred stock is treated as a deemed preferred stock dividend. In connection with the issuance of shares of preferred stock upon exercise of warrants, as a result of board approval of the issuance of series A preferred stock instead of common stock, the Company does not record a deemed preferred stock dividend since the Company issues the equivalent number of preferred shares which are convertible into the number of common shares that would have been issued upon exercise.

Accumulated other comprehensive income

Comprehensive income is comprised of net income and all changes to the statements of stockholders' equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. For the Company, comprehensive income for the years ended December 31, 2011 and 2010 included net income and unrealized gains from foreign currency translation adjustments.

Related parties

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

F-15

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011 and 2010

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

Recent accounting pronouncements

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income.” Under the amendments in this ASU, an entity has two options for presenting its total comprehensive income: to present total comprehensive income and its components along with the components of net income in a single continuous statement, or in two separate but consecutive statements. The amendments in this ASU are required to be applied retrospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. The adoption of ASU No. 2011-05 will not have any material impact on the Company’s consolidated financial position and results of operations.

In September 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-08, Intangibles — Goodwill and Other (Topic 350). This Accounting Standards Update amends FASB ASC Topic 350. This amendment specifies the change in method for determining the potential impairment of goodwill. It includes examples of circumstances and events that the entity should consider in evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption does not have any material impact on the Company’s consolidated financial position and results of operations.

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

NOTE 2 – ACCOUNTS RECEIVABLE

At December 31, 2011 and 2010, accounts receivable consisted of the following:

	December 31, 2011			December 31, 2010
Accounts receivable	$	9,706,566		$	10,023,305
Less: allowance for doubtful accounts		(2,618,608	)		(1,815,508	)
	$	7,087,958		$	8,207,797

NOTE 3 - INVENTORIES

At December 31, 2011 and 2010, inventories consisted of the following:

	December 31, 2011			December 31, 2010
Raw materials	$	1,514,928		$	1,573,841
Work in process		1,441,231			1,302,015
Finished goods		1,492,488			661,380
		4,448,647			3,537,236
Less: reserve for obsolete inventory		(172,557	)		(166,108	)
	$	4,276,090		$	3,371,128

F-16

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011 and 2010

NOTE 4 - PROPERTY AND EQUIPMENT

At December 31, 2011 and 2010, property and equipment consist of the following:

	Useful Life		December 31, 2011			December 31, 2010
Office equipment and furniture	5 Years		$	215,145		$	127,522
Manufacturing equipment	5 – 10 Years			57,347,726			42,473,873
Vehicles	5 Years			124,211			119,569
Construction in progress		-		330,730			3,837,975
Building and building improvements	20 Years			20,623,919			16,998,647
				78,641,731			63,557,586
Less: accumulated depreciation				(14,599,652	)		(8,814,593	)

			$	64,042,079		$	54,742,993

For the years ended December 31, 2011 and 2010, depreciation expense amounted to $5,351,359 and $3,192,662, of which $4,238,590 and $2,873,423 is included in inventory and cost of sales and the remainder is included in general and administrative expenses, respectively. 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 years ended December 31, 2011 and 2010, amortization of land use rights amounted to $91,316 and $87,204, respectively. At December 31, 2011 and 2010, land use rights consist of the following:

	Useful Life	December 31, 2011			December 31, 2010
Land Use Rights	45 - 50 years	$	4,242,273		$	4,083,728
Less: Accumulated Amortization			(421,737	)		(316,569	)
		$	3,820,536		$	3,767,159

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

Years ending December 31:	Amount
2012	$	92,878
2013		92,878
2014		92,878
2015		92,878
2016		92,878
Thereafter		3,356,146
	$	3,820,536

F-17

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011 and 2010

NOTE 6 – STOCKHOLDERS’ EQUITY

(a) Common stock issued for services

During the year ended December 31, 2010, the Company issued 300 shares of common stock to its prior chief financial officer for services rendered pursuant to an employment agreement. The shares, which were issued pursuant to the Company’s 2010 long–term incentive plan, were valued at fair value on the respective dates of grant, and the Company recorded stock-based compensation of $14,670.

During the year ended December 31, 2010, the Company issued an aggregate of 5,600 shares of common stock to its chief executive officer pursuant to its 2010 long-term incentive plan. The shares were valued at fair value of the common stock on the date of grant, and the Company recorded stock-based compensation of $275,030.

During the year ended December 31, 2010, the Company issued an aggregate of 4,000 shares of common stock to two key employees who are not executive officers pursuant to its 2010 long-term incentive plan. The shares were valued at fair value on the respective dates of grant, and the Company recorded stock-based compensation of $196,450.

The Company has a consulting agreement with a company that provides the services of its vice president of financial reporting. Pursuant to this agreement, the Company issued 200 shares of common stock on each of March 31, 2010, June 30, 2010, September 30, 2010 and December 31, 2010, for an aggregate of 800 shares of common stock. The shares were valued at fair value on the respective dates of grant date based on the quoted trading price of the common stock, and the Company recorded stock-based compensation of $34,560 during the year ended December 31, 2010.

On July 29, 2010, the Company entered into an amended director’s agreement with a director for the period from July 1, 2010 to June 30, 2011. Pursuant to this agreement, the Company is to issue an aggregate of 1,000 shares of common stock of which 250 were issued on July 29, 2010 and 250 are issuable on a quarterly basis on each of October 1, 2010, January 1, 2011 and April 1, 2011. The 500 shares issued during 2010 are valued at fair value on the date of grant, and the Company recorded stock-based compensation of $22,550 during 2010.

On December 31, 2010, the Company issued 172 shares of its common stock to a director. The shares, which were issued pursuant to the Company’s 2010 long–term incentive plan, were valued at fair value on the grant date of $6,172 date based on the quoted trading price of the common stock, and the Company recorded stock-based compensation of $6,172, of which $3,703 was recognized in 2010 and $2,469 was recognized in 2011.

During the year ended December 31, 2011, the Company issued an aggregate of 1,891 shares of its common stock to its three directors. The shares are valued at the fair value on the grant date based on the quoted trading price of the common stock and the Company recorded stock-based compensation of $30,351.

During the year ended December 31, 2011, the Company issued an aggregate of 3,000 shares of its common stock to its chief financial officer pursuant to an employment agreement which terminated effective December 31, 2011. The shares are valued at the fair value on the grant date based on the quoted trading price of the common stock and the Company recorded stock-based compensation of $59,700.

During the year ended December 31, 2011, the Company issued an aggregate of 12,175 shares of its common stock to employees, of which 4,800 shares were granted to the Company’s chief executive officer. None of the other shares were issued to executive officers or directors. The shares are valued at the fair value on the grant date based on the quoted trading price of the common stock and the Company recorded stock-based compensation of $200,478.

F-18

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011 and 2010

NOTE 6 – STOCKHOLDERS’ EQUITY (continued)

(a) Common stock issued for services (continued)

The Company has a consulting agreement with a company that provides the services of its vice president of financial reporting. Pursuant to this agreement, the Company issued 200 shares of common stock on each of March 31, 2011, June 30, 2011, September 30, 2011 and December 31, 2011 and an additional 700 shares in December 2011, for an aggregate of 1,500 shares of common stock. The shares were valued at fair value on the respective dates of grant based on the quoted trading price of the common stock, and the Company recorded stock-based compensation of $12,220 during the year ended December 31, 2011.

On April 14, 2011, the Company issued 1,300 shares of common stock to an investor relations firm pursuant to an agreement with the firm for the twelve months beginning May 1, 2010. The shares were valued at the fair value on the grant date based on the quoted trading price of the common stock. For the year ended December 31, 2011, the Company recorded stock-based professional fees of $37,440.

On May 26, 2011, the Company issued 1,250 shares of common stock to an investor relations firm pursuant to an agreement with the firm for the twelve months beginning May 1, 2011. The shares were valued at the fair value on the grant date based on the quoted trading price of the common stock, and the Company recorded stock-based professional fees of $15,667 and prepaid expenses of $7,833 which will be amortized over the remaining service period.

All of the shares issued as compensation, other than the shares issued to the former chief financial officer pursuant to his employment agreement, were issued pursuant to the Company’s long-term incentive plan.

(b) Common stock issued for preferred share conversions

During the year ended December 31, 2010, the Company issued 182,300 shares of common stock upon the conversion of 5,469,000 shares of series A preferred stock.

During the year ended December 31, 2011, the Company issued 197,206 shares of common stock upon the conversion of 5,916,176 shares of series A preferred stock.

On November 25, 2010, the Company sold 9,500 shares of common stock to an investor and received cash of $380,000.

On January 18, 2011, the Company sold 3,501 shares of its common stock to its chief financial officer for $125,000, representing the market price on January 18, 2011, the date of the stock purchase agreement.

(d) Common stock issued on exercise of warrants

During 2010, the Company issued 27,345 shares of common stock and 6,255,180 shares of series A preferred stock upon the exercise of warrants, for which the Company received cash proceeds of $3,320,000. In connection with the issuance of the 2,380,176 shares of series A preferred stock, the investor entered into an agreement with the Company’s chief executive officer, who is the Company’s principal beneficial owner of common stock, pursuant to which the chief executive officer has the right to vote the series A preferred stock and the underlying common stock as to all matters for which stockholder approval is obtained as long as the investor or its affiliates own the stock. Upon the sale of the series A preferred stock or the underlying common stock to a person other than an affiliate of the investor, the voting agreement terminates as to the transferred shares and the chief executive officer has no voting rights with respect to the transferred shares. The investor had executed similar agreements in connection with the purchase of series A preferred stock in September and October 2009. As of December 31, 2011, all of these shares of series A preferred stock had been converted into common stock and all but 64,192 shares had been sold.

F-19

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011 and 2010

NOTE 6 – STOCKHOLDERS’ EQUITY (continued)

(d) Common stock issued on exercise of warrants (continued)

Subsequent to December 31, 2011, all of the shares to which the Company’s chief executive officer had voting rights had been sold.

On May 4, 2010, the Company issued 4,375 shares of its common stock upon cashless exercise of warrants to purchase 5,833 shares of common stock.

In May 2011, the Company issued 4,185 shares of its common stock upon the cashless exercise of warrants.

(e) Series A preferred stock issued upon exercise of warrants

During the year ended December 31, 2011, the Company issued a total of 706,715 shares of series A preferred stock upon the exercise of warrants, for which the Company received total cash proceeds of $400,000. Each share of series A preferred stock is convertible into one-thirtieth of a share of common stock.

(f) Warrants

Warrant activities for the years ended December 31, 2011 and 2010 are summarized as follows:

	Year Ended December 31, 2011					Year Ended December 31, 2010
	Number of Warrants			Weighted Average Exercise Price		Number of Warrants			Weighted Average Exercise Price
Balance at beginning of year		252,465		$	15.73		494,150		$	14.90
Issued		-			-		-			-
Exercised		(32,307	)		15.60		(241,685	)		14.00
Forfeited		-			-		-			-
Balance at end of year		220,158		$	15.73		252,465		$	15.73

Warrants exercisable at end of year		220,158		$	15.73		252,465		$	15.73

The following table summarizes the shares of the Company's common stock issuable upon exercise of warrants outstanding at December 31, 2011:

Warrants Outstanding								Warrants Exercisable
Range of Exercise Price		Number Outstanding at December 31, 2011		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Number Exercisable at December 31, 2011		Weighted Average Exercise Price
$	16.98		164,999		0.87	$	16.98		164,999	$	16.98
$	12.00		55,159		0.87		12.00		55,159		12.00
			220,158		0.87	$	15.73		220,158	$	15.73

F-20

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011 and 2010

NOTE 6 – STOCKHOLDERS’ EQUITY (continued)

(g) Agreement with respect to Series A Preferred Stock and Common Stock Purchase Warrants

On March 26, 2010, the holders of the outstanding shares of series A preferred shares and the sole holder of all of the Company’s common stock purchase warrants that included a provision that provided for an adjustment in the exercise price in the event of a sale of common stock at a price below the exercise price of the warrants agreed to eliminate and waive any rights they may have under the provisions of the Statement of Designations relating to the series A preferred stock that provide for a reduction in the conversion price of the series A preferred stock, in the event that the Company issues stock at a price which is less than the conversion price of the series A preferred stock; and the warrant holder agreed to delete from the warrants the provisions that provide for a reduction in the exercise price of the warrants in the event that the Company issues stock at a price which is less than the exercise price of the warrants. The Company agreed not to issue shares of Common Stock at a price, or options, warrants or convertible securities with an exercise or conversion price, that is less than the conversion price of the then outstanding series A preferred stock or the exercise price of the then outstanding warrants, as the case may be. Accordingly, the Company did not record a derivative liability related to the warrants at December 31, 2011 and 2010.

(h) Series A Preferred Stock

The series A preferred stock has the following rights, preferences and limitations:

·	There are 30,000,000 authorized shares of series A preferred stock.

No dividends shall be payable with respect to the series A preferred stock. No dividends shall be declared or payable with respect to the common stock while the series A preferred stock is outstanding. The Company shall not redeem or purchase any shares of common stock or any other class or series of capital stock which is junior to or on parity with the series A preferred stock while the series A preferred stock is outstanding.

The holders of the series A preferred stock have no voting rights except as required by law. However, so long as any shares of series A preferred stock are outstanding, the Company shall not, without the affirmative approval of the holders of 75% of the shares of the series A preferred stock then outstanding, (a) alter or change adversely the powers, preferences or rights given to the series A preferred stock or alter or amend the statement of designations relating to the series A preferred stock, (b) authorize or create any class of stock ranking as to dividends or distribution of assets upon a liquidation senior to or pari passu with the series A preferred stock, or any of preferred stock possessing greater voting rights or the right to convert at a more favorable price than the series A preferred stock, (c) amend its certificate of incorporation or other charter documents in breach of any of the provisions of the certificate of designation, (d) increase the authorized number of shares of series A preferred stock or the number of authorized shares of preferred stock, or (e) enter into any agreement with respect to the foregoing.

·	Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, the holders of the series A preferred stock have a liquidation preference of $0.374 per share.

·	Each share of series A preferred stock is convertible at any time (subject to the 4.9% limitations described below) into 1/30th of a share of common stock, subject to adjustment.

All of the outstanding shares of series A preferred stock shall be automatically converted into common stock upon the close of business on the business day immediately preceding the date fixed for consummation of any transaction resulting in a change of control of the Company, as defined in the statement of designation.

·	The holders may not convert the series A preferred stock to the extent that such conversion would result in the holder and its affiliates beneficially owning more than 4.9% of the Company’s common stock. This provision may not be waived or amended.

F-21

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011 and 2010

NOTE 6 – STOCKHOLDERS’ EQUITY (continued)

(i) November 2007 Securities Purchase Agreement

Pursuant to the securities purchase agreement relating to the Company’s November 2007 private placement, as amended:

The Company agreed to have appointed such number of independent directors that would result in a majority of its directors being independent directors, that the audit committee would be composed solely of not less than three independent directors and the compensation committee would have at least three directors, a majority of which shall be independent directors.

The Company agreed to have a qualified chief financial officer. If the Company cannot hire a qualified chief financial officer promptly upon the resignation or termination of employment of a former chief financial officer, the Company may engage an accountant or accounting firm to perform the duties of the chief financial officer. In no event shall the Company either (i) fail to file an annual, quarterly or other report in a timely manner because of the absence of a qualified chief financial officer, or (ii) not have a person who can make the statements and sign the certifications required to be filed in an annual or quarterly report under the Securities Exchange Act of 1934.

Liquidated damages would be payable if, during the period which ended November 13, 2010, the Company failed to comply with the independent director requirement or the Company failed to file an annual or quarterly report in a timely manner because of the absence or lack of a qualified chief financial officer.

·	Until November 13, 2010, the Investors had a right of first refusal on future financings.

·	Until November 13, 2011, the Company was restricted from issuing convertible debt or preferred stock.

·	Until November 13, 2010, the Company’s debt could not exceed twice the preceding four quarters earnings before interest, taxes, depreciation and amortization.

·	The Company’s officers and directors agreed, with certain limited exceptions, not to publicly sell shares of common stock for 27 months. This 27 month period expired on February 13, 2010.

(j) 2010 Long-Term Incentive Plan

In January 2010, the Company’s board of directors adopted, and in March 2010, the stockholders approved the Company’s 2010 long-term incentive plan, which covers 200,000 shares of common stock. The plan provides for the grant of incentive and non-qualified options and stock grants to employees, including officers, directors and consultants. The plan is to be administered by a committee of not less than three directors, each of whom is to be an independent director. In the absence of a committee, the plan is administered by the board of directors. Members of the committee are not eligible for stock options or stock grants pursuant to the plan unless such stock options or stock grant are granted by a majority of the Company’s independent directors other than the proposed grantee. As of December 31, 2011, the Company had issued a total of 26,938 shares of common stock under the plan.

NOTE 7 – 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 carryforwards. 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 carryforwards, are dependent upon future earnings, if any, of which the timing and amount are uncertain.

F-22

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011 and 2010

NOTE 7 – INCOME TAXES (continued)

Accordingly, the net deferred tax asset related to the U.S. net operating loss carryforward has been fully offset by a valuation allowance. The Company is governed by the Income Tax Law of the PRC and the U.S. In 2011 and 2010, 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.

Cleantech Solutions International, Inc. was incorporated in the United States and has incurred an aggregate net operating loss of approximately $4,085,000 for income tax purposes through December 31, 2011, subject to the Internal Revenue Code Section 382, which places a limitation on the amount of taxable income that can be offset by net operating losses after a change in ownership. The net operating loss carries forward for United States income taxes, and may be available to reduce future years’ taxable income. These carryforwards will expire, if not utilized, through 2031. Management believes that the realization of the benefits from these losses appears not more than likely due to the Company’s limited operating history and continuing losses for United States income tax purposes. Accordingly, the Company has provided a 100% valuation allowance on the deferred tax asset benefit to reduce the asset to zero. Management will review this valuation allowance periodically and make adjustments as warranted.

The Company has cumulative undistributed earnings from its foreign subsidiaries of approximately $55 million and $50 million as of December 31, 2011 and 2010, respectively, which is included in the consolidated retained earnings and will continue to be indefinitely reinvested in the Company’s PRC operations. Accordingly, no provision has been made for any deferred taxes related to future repatriation of these earnings, nor is it practicable to estimate the amount of income taxes that would have to be provided if we concluded that such earnings will be remitted in the future.

The table below summarizes the differences between the U.S. statutory federal rate and the Company’s effective tax rate and as follows for the years ended December 31, 2011 and 2010:

	2011			2010
U.S. statutory rates		34.0	%		34.0	%
U.S. effective rate in excess of China tax rate		(10.4	)%		(8.7	)%
Other		1.4	%		0.1	%
U.S. valuation allowance		3.9	%		2.7	%
Total provision for income taxes		28.9	%		28.1	%

For the years ended December 31, 2011 and 2010, income tax expense related to our operations in the PRC and amounted to $2,340,471 and $4,325,876, respectively.

The Company’s deferred tax assets as of December 31, 2011 and 2010 are as follows:

	December 31,
	2011			2010
Deferred tax asset:
Net U.S. operating loss carryforward	$	1,388,805		$	1,074,788
Total gross deferred tax asset		1,388,805			1,074,788

Less: valuation allowance		(1,388,805	)		(1,074,788	)
Net deferred tax asset	$	-		$	-

During 2011, the valuation allowance was increased by approximately $314,000 from the prior year.

F-23

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011 and 2010

NOTE 8 – 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 December 31, 2011 and 2010, short-term bank loans consisted of the following:

	December 31,
	2011		2010
Loan from Bank of Communications, due on February 1, 2011 with annual interest at December 31, 2010 of 4.86%, the rate being adjusted quarterly based on 120% of People’s Bank of China’s base rate and repaid on due date.	$	-	$	756,224

Loan from Agricultural and Commercial Bank, due on March 31, 2011 with annual interest rate at December 31, 2010 of 5.75%, secured by certain assets of the Company and repaid on due date.		-		604,979

Loan from Agricultural and Commercial Bank, due on October 30, 2011 with annual interest rate at due date and December 31, 2010 of 5.75%, secured by certain assets of the Company and repaid on due date.		-		453,734

Loan from Agricultural and Commercial Bank, due on March 30, 2012 with annual interest at December 31, 2011 of 7.88%, secured by certain assets of the Company.		628,466		-

Loan from China Merchants Bank, due on May 20, 2012 with annual interest rate at December 31, 2011 of 6.73%.		471,350		-

Loan from Agricultural and Commercial Bank, due on October 10, 2012 with annual interest rate at December 31, 2011 of 5.75%, secured by certain assets of the Company.		471,350		-

Loan from Bank of Communications, due on May 14, 2012 with annual interest rate being adjusted quarterly based on 120% of People’s Bank of China’s base rate		471,350		-

Loan from Bank of Communications, due on May 23, 2012 with annual interest rate being adjusted quarterly based on 120% of People’s Bank of China’s base rate		314,233		-

Total short-term bank loans	$	2,356,749	$	1,814,937

NOTE 9 – 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. The Company’s bank acceptance notes payables consist of the following:

		December 31, 2011				December 31, 2010
Agricultural and Commercial Bank, non-interest bearing, due and paid on January 15, 2012, collateralized by 100% of restricted cash deposited.		$	314,233			$	-

F-24

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011 and 2010

NOTE 10 - SEGMENT INFORMATION

For the years ended December 31, 2011 and 2010, the Company operated in two reportable business segments - (1) the manufacture of dyeing and finishing equipment segment and (2) 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. 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 years ended December 31, 2011 and 2010 is as follows:

	2011			2010
Revenues:
Dyeing and finishing equipment	$	17,733,072		$	21,217,431
Forged rolled rings and related components		37,846,190			58,331,178
		55,579,262			79,548,609
Depreciation:
Dyeing and finishing equipment		934,780			529,828
Forged rolled rings and related components		4,416,579			2,662,834
		5,351,359			3,192,662
Interest expense:
Dyeing and finishing equipment		-			-
Forged rolled rings and related components		193,709			99,485
Other (a)		-			47,943
		193,709			147,428
Net income (loss):
Dyeing and finishing equipment		2,098,426			2,406,232
Forged rolled rings and related components		4,586,263			9,925,017
Other (a)		(924,146	)		(1,256,917	)
		5,760,543			11,074,332
Identifiable long-lived tangible assets at December 31, 2011 and 2010 by segment:
Dyeing and finishing equipment	$	12,111,684		$	6,033,004
Forged rolled rings and related components		51,930,395			48,709,989
	$	64,042,079		$	54,742,993
Identifiable long-lived tangible assets at December 31, 2011 and 2010 by geographical location:
China	$	64,042,079		$	54,742,993
United States		-			-
	$	64,042,079		$	54,742,993

(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.

F-25

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011 and 2010

NOTE 11 - CAPITAL LEASE OBLIGATIONS

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

Minimum future lease payments under the capital lease are as follows:

Years ending December 31,	Amount
2012	$	415,676
2013		369,960
2014		174,006
Total minimum lease payments		959,642
Less: amount representing interest		(174,647	)
Less: security deposit due		(159,013	)
Present value of net minimum lease payment		625,982
Less: current portion		(244,747	)
Long-term portion	$	381,235

NOTE 12– STATUTORY RESERVES

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

For the years ended December 31, 2011 and 2010, statutory reserve activity is as follows:

	Dyeing		Electrical		Fulland Wind Energy		Total
Balance – December 31, 2009	$	72,407	$	1,168,796	$	11,777	$	1,252,980
Addition to statutory reserves		-		-		405,217		405,217
Balance – December 31, 2010		72,407		1,168,796		416,994		1,658,197
Addition to statutory reserves		-		-		406,354		406,354
Balance – December 31, 2011	$	72,407	$	1,168,796	$	823,348	$	2,064,551

F-26

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011 and 2010

NOTE 13 – 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 December 31, 2011 and 2010, 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 were approximately $71,294,000 and $62,056,000, respectively.

NOTE 14 – CONCENTRATIONS

Customers

No customer accounted for 10% or more of the Company’s revenues during the year ended December 31, 2011. During the year ended December 31, 2010, three customers of the forged rolled rings and related components segment accounted for an aggregate of 31% of the Company’s total revenues. The following table sets forth sales to these customers.

	Years Ended December 31,
Customer	2011	2010
A	*	10%
B	*	10%
C	*	11%

* Less than 10%.

Suppliers

The following table sets forth information as to each supplier that accounted for 10% or more of the Company’s purchases for the years ended December 31, 2011 and 2010.

	Years Ended December 31,
Supplier	2011	2010
A	13%	20%
B	*	14%
C	13%	13%
D	14%	*

* Less than 10%.

F-27

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011 and 2010

NOTE 15 – SUBSEQUENT EVENTS

On January 3, 2012, the Company issued 250 shares of its common stock to its director. The shares are valued at the fair value on the grant date and the Company recorded stock-based compensation of $750.

On February 15, 2012, the Company issued 23,557 shares of common stock upon the conversion of 706,715 shares of series A preferred stock.

On February 23, 2012, the Company issued 73,333 shares of common stock upon the conversion of 2,200,002 shares of series A preferred stock.

On March 6, 2012, the Company issued 10,000 shares of common stock to its chief executive officer pursuant to its 2010 long-term incentive plan. The shares were valued at fair value of the common stock on the date of grant, and the Company recorded stock-based compensation of $7,000 and prepaid expense of $21,000 which will be amortized over the balance of 2012.

On March 6, 2012, the Company issued an aggregate of 20,400 shares of common stock to three key employees who are not executive officers pursuant to its 2010 long-term incentive plan. The shares were valued at fair value on the respective dates of grant, and the Company recorded stock-based compensation of $14,280 and prepaid expense of $42,840 which will be amortized over the balance of 2012.

On March 6, 2012, the Company issued 8,800 shares of common stock to its vice president of financial reporting pursuant to its 2010 long-term incentive plan. The shares were valued at fair value of the common stock on the date of grant, and the Company recorded stock-based compensation of $6,160 and prepaid expense of $18,480 which will be amortized in the balance of 2012.

On March 8, 2012, the Company issued 55,833 shares of common stock upon the conversion of 1,675,002 shares of series A preferred stock.

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.

F-28