SHARING ECONOMY INTERNATIONAL INC. - Annual Report: 2013 (Form 10-K)

f10k2013_cleantechsolutions.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, 2013
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to ______________

Commission file number: 001-34591

CLEANTECH SOLUTIONS INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

NEVADA		90-0648920
(State or other jurisdiction of incorporation 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

1345 Avenue of the Americas, New York, NY 10105-0302

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 $11,484,000 on June 30, 2013.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 3,503,502 shares of common stock are outstanding as of March 28, 2014.

Documents Incorporated by Reference: None.

CLEANTECH SOLUTIONS INTERNATIONAL, INC.

FORM 10-K

TABLE OF CONTENTS

		Page No.
Part I
Item 1.	Business.	3
Item 1A.	Risk Factors.	13
Item 1B.	Unresolved Staff Comments.	24
Item 2.	Properties.	24
Item 3.	Legal Proceedings.	25
Item 4.	Mine Safety Disclosures	25

Part II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.	25
Item 6.	Selected Financial Data.	26
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	27
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk.	39
Item 8.	Financial Statements and Supplementary Data.	F-1
Item 9.	Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.	40
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.	45
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, 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 Operations.” 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 and variable interest entities 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 consolidated 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, shafts, flanges, and other forged components for the energy industry including wind power and other industries, 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

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

Commencing in 2011, we began to manufacture and delivered test subassemblies for solar cell manufacturing equipment, which marked our entry into the solar products market. We generated revenue from the sale of solar industry related products of approximately $1,335,000, or 1.9% of total revenue for 2013, and $1,078,000, or 1.9% of total revenue for 2012. However, we do not anticipate any new orders for solar in the near term.

The demand for products used in manufacturing in general, and the wind power industries, in particular, 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 and other alternative energy such as solar 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.

According to a February 13, 2014 article in WindPower Monthly, which is at http://www.windpowermonthly.com/article/1231035/china-boosts-grid-connected-capacity-24, electricity generated by wind power in 2013 was 140.10TWh. The average turbine's operational period increased 151 hours on 2012 to 2,080 hours, which is a new high since 2005. The rise is largely thanks to the reduction of 2013's curtailment policy. These figures indicate a recovery of the Chinese market after a gloomy year in 2012. However, curtailment is still a big problem in China, which lost Chinese wind farms the opportunity to generate 15TWh of electricity in 2013, according to the China Wind Energy Association.

According to a September 9, 2012 article in Reuters, which is at http://www.reuters.com/article/2012/09/09/us-china-windpower-idUSBRE8880J720120909, Chinese wind power developers posted worse-than-expected results for the first half of 2012, with grid operators increasingly reluctant to distribute the costly and unpredictable source of power amid a sharp economic downturn. Grid construction has so far not kept up with the rise in wind power capacity. In the absence of high-voltage lines, grid firms are unable to absorb all the wind power under their local networks.

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

We sustained a decrease in revenue of forged rolled rings and related products for the wind power industry, which declined $1.2 million, or 7.2%, during the year ended December 31, 2013 as compared to the year ended December 31, 2012.

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 to the textile industry. 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. We are continuing to seek to utilize our expertise in manufacturing precision products to meet demand in new and existing end markets.

Revenue from our dyeing segment increased $13.1 million, or 51.8% in the year ended December 31, 2013 from the year ended December 31, 2012. We believe that the increase reflects our marketing effort for our new airflow dyeing units, which use air instead of water. Water is used in the traditional dyeing process. We believe that our air-flow technology, which is designed to enable users to meet the stricter environmental standards, results in reduced input costs, fewer wrinkles, less damage to the textile, and reduced emissions. With the growing acceptance of our new dyeing technology and the China government’s mandate to phase out older machinery in China’s textile industry that does not meet the new environmental standards, we expect our revenue from this segment will continue to increase in the near future. Our gross margin from our dyeing segment increased from 23.9% for the year ended December 31, 2012 to 24.7% for the year ended December 31, 2013.

The factors that affected our revenue, gross margin and net income during the year ended December 31, 2013 may affect our operations in the near future. 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.

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 changed our corporate name to Cleantech Solutions International, Inc.

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, 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 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 and new business is being generated through Wuxi Fulland Wind Energy Equipment Co., Ltd..

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 or 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 Dyeing 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.

The Forged Rolled Rings and Related Components Segment

We are manufacturing rolled rings and other related components designed to be used for issue in the wind power industry as well as other uses. We employ axial close-die forging technology in producing precision forgings, a 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 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 is designed to cause 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

In 2009, we opened our state-of-the-art forging facility. 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 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 believe that we are a major Chinese manufacturer 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.

During the years ended December 31, 2011 and 2010, we generated revenue from one customer for products which required the use of our electro-slag remelted (“ESR”) equipment. We had purchased the equipment in anticipation of a demand for ESR products which did not materialize. At December 31, 2012, we reflected the ESR equipment as equipment held for sale, since we did not anticipate that we would generate further revenue from the equipment and we had made a determination to sell the ESR equipment. On March 3, 2014, we entered into an equipment operating lease with Shanghai Liangting Metallurgy Roll Manufacture Co., Ltd. pursuant to which we leased the ESR equipment to for a quarterly rate of RMB 1,450,000, which, at the present exchange rate is approximately $234,000. The lease has an eight-year term commencing April 1, 2014. The equipment will remain on our premises, and the lease gives the lessee a right of access to our premises for the purpose of using the equipment. The equipment is shown on our consolidated balance sheet at December 31, 2013 as equipment held for operating lease.

Marketing and Distribution

Based at our facilities in Wuxi, we have a sales team of five employees for our forged rolled rings and shafts. Our marketing efforts include participation at industrial conferences and trade fairs, sales training, and advertising. Our sales team works 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 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 our forged rolled rings and related products 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 and the market for the product has slowed. Additionally, we believe some turbine manufacturers that use forged products and 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 other industry by supplying superior quality, high performance forged products. 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 covers machining and related service of shaft-shaped forging, ring forging, tubular forging and component assembly.

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. 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 large part because of the environmental policies of the Chinese government which are resulting in an increased market for equipment designed to enable dyeing companies to comply with the environmental standards.

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 for our dyeing products.

We hold six Chinese patents (Patent Nos. ZL 2012 2 0165878.7, ZL 2012 2 0752919. 2, ZL 2012 2 0752924. 3, ZL 2012 2 0752922. 4, ZL 2012 2 0752921. X and ZL 2012 2 0752917. 3). These patents cover an innovative production technique enabling more-effective cloth washing in dyeing machines under high temperature and pressure, the dyeing liquid mixing device, dyeing liquid atomizing device, horizontal manipulated devices, mechanical seal and atomizer of its airflow dyeing machine. The patents were issued by the State Intellectual Property Office of the People’s Republic of China in November 2012, as to the first patent, and June 2013 as to the other five. Under the PRC patent laws, the patents give us the exclusive right to use the patented process or product for a period of ten years.

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 meets the requisite Chinese environmental standards.

During the fourth quarter of 2013, we began to sell our new after-treatment drying and compacting machine.

Marketing and Distribution

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. During the year ended December 31, 2013, no customer accounted for 10% or more of our sales.

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, we believe that, due to the high quality of our products, our principal competition is from suppliers 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 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.

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 2013 and 2012, our purchases of steel from Wuxi City Fanshun Materials Co., Ltd accounted for approximately 27% and 21%, respectively, of our total purchases. No other supplier accounted for 10% or more of our 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. 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 incurred research and development expense in the amount of $92,803 related to the development and improvement of our new dyeing machinery in 2013. We did not incur any research and development expenses in 2012. 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 other industries.

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 certification was renewed in August 2012 and expires on August 12, 2015. 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 was renewed in 2013 and expires on December 6, 2015.

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 December 7, 2007 and renewed it on November 11, 2011. This certificate 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 October 11, 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 hold six Chinese patents (Patent Nos. ZL 2012 2 0165878.7, ZL 2012 2 0752919. 2, ZL 2012 2 0752924. 3, ZL 2012 2 0752922.4, ZL 2012 2 0752921.X and ZL 2012 2 0752917.3), all of which relate to our dyeing products. The patents were issued by the State Intellectual Property Office of the People’s Republic of China in November 2012, as to the first patent, and June 2013 as to the other five. Under the PRC patent laws, the patents give us the exclusive right to use the patented process or product for a period of ten years.

The following table sets forth information concerning our patents.

Patent No.	Description	Expiration
ZL 2012 2 0165878.7	a process to enable more-effective cloth washing in dyeing machines under high temperature and pressure	November 2022
ZL 2012 2 0752919. 2	atomizer of airflow dyeing machine	June 2023
ZL 2012 2 0752924.3,	mechanical seal for dyeing machine	June 2023
ZL 2012 2 0752922.4	horizontal manipulated devices for dyeing machine	June 3023
ZL 2012 2 0752921.X	dyeing liquid atomizing device for dyeing machine	June 2023
ZL 2012 2 0752917.3	dyeing liquid mixing device for dyeing machine	June 2023

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 28, 2014, we had 212 full time employees. Of these, 137 employees are in the dyeing and finishing segment (seven executives, managers and administrative staff, four accounting staff, ten quantity control staff, five engineers and technicians, eight marketing and salespeople, four purchasing staff and 99 manufacturing staff) and 75 employees are with our forged rolled rings and related products segment (seven executive, managers and administrative staff, five accounting staff, nine quality control, three engineers and technicians, five salespeople, two purchasing staff, and 44 manufacturing staff.).

Our manufacturing employees usually work in two shifts, based upon our manufacturing requirements. We may also send our engineers and technicians to our customers’ work sites to provide after-sale customer service for them.

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 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. Further, to date, our revenue from solar products has not been significant, we do not anticipate any new orders for solar products in the near term, and we cannot assure you that it will ever constitute more than a nominal percentage of our revenue.

Our ability to continue to operate profitably is dependent upon our continued development of our dyeing segment and our generation of new revenue from our forged rolled rings and related products division.

Although our revenue increased in the year ended December 31, 2013, we sustained a 7.2% decline in revenue from our forged rolled rings and related products for wind power industry. The decrease in revenue from our forged rolled rings and related products for wind power industry reflect, among other factors, increased competition, 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 reflecting both the tightening of credit and the reduction in the growth of the wind power industry in China. We cannot assure you that these factors, as well as other factors not presently known to us, will not result in continued decline in revenue from forged rolled rings and related products for wind power industry or will not result in a decline in revenue from other markets for our forged rolled rings and related products or from the dyeing segment..

We will require additional funds to expand our operations.

In connection with any expansion projects 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 expand our business. If we are unable to generate cash flow from operations and obtain necessary bank or other financing to pay for significant capital or operational expenses, 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 situation, 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 expanse or business and remain profitable.

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 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. We cannot predict the extent that the market for capital equipment in the wind power, dyeing 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 business will not be significantly impaired as a result of the worldwide economic downturn.

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. 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.

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 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.

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. Further, from time to time, we have had to adjust the prices of our products to remain competitive.

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 our growth plans, we will incur additional operating 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 product development, manufacturing, customer service and support, and marketing. We do not have any significant research and development activities. 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 the filing date of this report, our officers and directors and members of their families beneficially owned approximately 32.9% of our outstanding voting shares. Our by-laws provide that a quorum for action by stockholders is one-third of the outstanding shares. Consequently, 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.

A significant portion of our business is conducted through the Huayang Companies, which are owned by our chief executive officer and his wife.

Approximately 9.7% of our forged rolled rings and related products revenue and all of our dyeing and finishing equipment business is conducted by the Huayang Companies, which are variable interest entities that are owned by our chief executive officer and his wife and whose financial results are included with ours because the Huayang Companies are deemed as variable interest entities and we are the sole beneficiary of their operations. The variable interest entity relationship is derived from a series of agreements between us and our chief executive officer and his wife, as the sole stockholders of the Huayang Companies. Pursuant to these agreements, we are responsible for the operations of the Huayang Companies and receive the benefits of those operations. However, in the event that we have to seek to enforce these agreements, such enforcement would be sought in Chinese courts, and we cannot assure you that we will prevail or that we will be able to obtain the benefits intended by these agreement. Any inability to enforce our rights under these agreements would materially impair our operations, financial position and cash flows.

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. Although we have received patents for our new dyeing machines, we cannot assure you that there patents will provide us with adequate protection against infringers or other parties who design around our patents.

We do not have business liability or disruption 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.

We may experience major accidents in the course of our operations, which may cause significant property damage and personal injuries.

We may experience major accidents in the course of our operations, which may cause significant property damage and personal injuries. Significant industry-related accidents and disasters may cause interruptions to various parts of our operations, or could result in property or environmental damage, increase in operating expenses or loss of revenue. We do not carry any insurance policy covering our capital assets. In accordance with customary practice in China, we do not carry any business interruption insurance or third party liability insurance for personal injury or environmental damage arising from accidents on our property or relating to our operations other than our automobiles. Losses or payments incurred may have a material adverse effect on our operating performance if such losses or payments are not fully insured.

Our status as an emerging growth company may result in reduced disclosure obligations.

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act (which we refer to as the “JOBS Act”), and we are eligible to take advantage of certain exemptions from various reporting and financial disclosure requirements that are applicable to other public companies, that are not emerging growth companies, including, but not limited to, (1) presenting only two years of audited financial statements and only two years of related management’s discussion and analysis of financial condition and results of operations in this prospectus, (2) not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), (3) reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and (4) exemptions from the requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We intend to take advantage of these exemptions. Because of the reduced disclosure and because our business is conducted in the PRC, investors may find investing in our common shares less attractive as a result, which could have an adverse effect on our stock price.

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting standards. As a result, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We elected to opt out of such extended transition period and acknowledge such election is irrevocable pursuant to Section 107 of the JOBS Act.

We could remain an emerging growth company for up to five years, or until the earliest of (1) the last day of the first fiscal year in which our annual gross revenues exceed $1 billion, (2) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our ordinary shares that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter and we have been publicly reporting for at least 12 months, or (3) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period.

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 and, recently through a wholly-owned subsidiary which is a wholly foreign owned entity known as a WFOE. The Huayang Companies and the subsidiary 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 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.

U.S. public companies that have substantially all of their operations in China, particularly companies like us that have completed so-called reverse acquisition 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 developing our growth. 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. 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 and working capital advances paid by our subsidiaries and VIEs for our cash needs

We conduct substantially all of our operations through our subsidiaries and variable interest entities. We rely on dividends and working capital advances 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 and working capital advances 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.

China’s Unified Corporate Income Tax Law also imposes a withholding income tax of 10% on dividends distributed by a foreign invested enterprise to its immediate holding company outside of China, if such immediate holding company is considered as a non-resident enterprise without any establishment or place within China or if the received dividends have no connection with the establishment or place of such immediate holding company within China, unless such immediate holding company’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement.

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 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 has been and may continue to 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 problems encountered by other Chinese companies that became public companies in the United States through the reverse merger process.
●	Market reaction to reports written by investors about us and about Chinese companies in general.
●	Market reaction to the slowdown in the Chinese wind power industry.
●	General economic conditions and slow or negative growth of related markets.

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

Any failure to meet the Nasdaq continued listing requirements may result in our delisting.

During 2011, our stock failed to meet the Nasdaq continued listing requirement resulting from our failure to maintain a $1.00 bid price and our 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. In Item 9A of this annual report, we report that our disclosure controls and procedures and our internal controls over financial reporting were not adequate at December 31, 2013. We are continuing to institute changes to satisfy our obligations under 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.

Our financial statements for 2011 were audited by an accounting firm that became subject to a cease-and-desist order from the SEC.

Our financial statements for the year ended December 31, 2011, which are included in our Form 10-K for the year ended December 31, 2012, and prior years were audited by Sherb & Co., LLP. Sherb was subject to a cease-and-desist order as a result of its audit of China-based companies that are registered pursuant to the Securities Act of 1934. As a result of the SEC’s action, Sherb was denied the privilege of appearing before the SEC as an accountant. Although the SEC action did not relate to our financial statement, as a result of the cease and desist order, we were not able to use the 2011 financial statements, and the fact that our 2011 financial statements were audited by Sherb may affect the willingness of investors to purchase our securities. We did not have our financial statements for 2011 reaudited.

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. 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 2012 and 2013 and reflect the one-for-ten reverse split which became effective on March 16, 2012. These prices reflect inter-dealer quotations, do not include retail markups, markdowns or commissions and do not necessarily reflect actual transactions.

	2012				2013
	High		Low		High		Low
First quarter	$	4.00	$	1.88	$	4.70	$	3.18
Second quarter		5.71		1.98		9.70		2.97
Third quarter		3.38		2.08		6.85		4.94
Fourth quarter	$	4.86	$	2.54	$	7.36	$	5.07

On March 26, 2014, the last sale price of our common stock as reported by NASDAQ was $5.30 per share.

Shareholders

As of March 28, 2014, we had approximately 1,118 record 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.

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, 2013.

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		322,009
Equity compensation plan not approved by security holders		0	$	0		0

In January 2010, our board of directors adopted, and in March 2010, the stockholders approved, the 2010 long-term incentive plan (the “2010 plan”), covering 200,000 shares of common stock. In October 2013, the directors adopted and in December 2013, the stockholders approved, an amendment to the 2010 plan which increased the number of shares subject to the 2010 plan from 200,000 shares to 500,000 shares.

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

Unregistered Sales of Equity Securities and Use of Proceeds

We had no sales of unregistered securities during the fourth quarter of 2013.

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, and the dyeing and finishing equipment segment, in which we manufacture and sell textile dyeing and finishing machines.

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

	Years Ended December 31,
	2013					2012
	Dollars		%			Dollars		%
Forged rolled rings and related components:
wind power industry	$	14,816		20.5	%	$	15,973		27.9	%
other industries		18,960		26.3	%		15,968		27.9	%
Total forged rolled rings and related components		33,776		46.8	%		31,941		55.8	%
Dyeing and finishing equipment		38,337		53.2	%		25,258		44.2	%
Total	$	72,113		100.0	%	$	57,199		100.0	%

Forged Rolled Rings and Related Components Segment

Through our forged rolled rings and other related products division

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

We manufacture and deliver test subassemblies for solar cell manufacturing equipment, which marked our entry into the solar products market. For the years ended December 31, 2013 and 2012, we generated revenue from the sale of solar industry related products of approximately $1,335,000, or 1.9% of total revenue, and $1,078,000, or 1.9% of total revenue, respectively. However, we do not anticipate new orders for solar products in the near term.

The demand for products used in manufacturing in general including wind power industry and other industries, is uncertain. Although we believe that over the long term, the forged rolled rings and related components segment will expand, and the government of the PRC has announced its desire to increase the use of wind power as an energy source, in the short term other factors, such as economic factors and the fluctuations in the price of oil and coal and the availability of credit, 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.

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

Dyeing and Finishing Equipment Segment

Revenue from our dyeing segment increased $13.1 million, or 51.8%, for the year ended December 31, 2013 as compared to the year ended December 31, 2012. We believe that the increase reflects both our marketing effort for our new airflow dyeing units, which use air instead of water which is used in the traditional dyeing process and the response to China’s stricter environmental standards for the dyeing industry. We believe that our air-flow technology, which is designed to enable users to meet China’s stricter environmental standards, provides the customer with reduced input costs, fewer wrinkles, less damage to the textile and reduced emissions. With the growing acceptance of our new dyeing technology and the China government’s mandate to phase out obsolete machinery in China’s textile industry, we expect our revenue from this segment will continue to increase in the near future. Our gross margin from our dyeing segment increased to 24.7% for the year ended December 31, 2013, from 23.9% for the year ended December 31, 2012.

The factors that affected our revenue, gross margin and net income in both of our segments during the year ended December 31, 2013 are likely to continue to affect our operations in the near future. 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 power, which affect our products for these industries. Our business is also affected by general economic conditions. Because of the nature of our products, our customers’ projection of future economic conditions are an integral part of their decisions as to whether to purchase capital equipment at this time or defer such purchases until a future date.

Inventory and Raw Materials

A major element of our cost of revenues is raw materials, principally steel as well as other metals. These metals are subject to price fluctuations, and recently these fluctuations have been significant. In times of increasing prices, we need to try to establish 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. One major supplier provided approximately 27% of our purchases of raw materials for the year ended December 31, 2013. No other supplier accounted for 10% or more of our purchases during the year ended December 31, 2013.

Critical Accounting Policies and Estimates

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

Variable Interest Entities

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

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

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

Accounts Receivable

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

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

Inventories

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

Advances to Suppliers

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

Property and Equipment

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

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

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

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

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

Equipment Held for Operating Lease and Rental Revenue

Long-lived assets are classified as held for operating lease when certain criteria are met. These criteria include: management’s commitment to a plan to lease the assets; the availability of the assets for immediate lease in their present condition; an active program to locate lessees and other actions to lease the assets has been initiated; the lease of the assets is probable and their transfer is expected to qualify for recognition as a completed operating lease within one year; the assets are being marketed at reasonable prices in relation to their fair value; and it is unlikely that significant changes will be made to the plan to lease the assets. We measure long-lived assets to be leased at the lower of carrying amount or fair value, less associated costs to lease.

At December 31, 2013, we reflected electro-slag re-melted (“ESR”) equipment that was used in 2010 and 2011 to produce forged products for the high performance components market as equipment held for operating lease on the accompanying consolidated balance sheets. This equipment was classified as equipment held for sale at December 31, 2012. In March 2014, we signed an operating lease agreement related to the lease of such equipment for a period of eight years from its April 1, 2014 commencement date. Equipment held for operating lease is depreciated over its estimated useful life of eight years commencing April 1, 2014. Rental payments are recorded as revenue over the lease term as earned.

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 recognize revenue from the sale of dyeing and finishing equipment upon shipment and transfer of title. The other elements may include installation and generally a one-year warranty.

Equipment installation revenue is valued based on estimated service person hours to complete installation and is recognized when the labor has been completed and the equipment has been accepted by the customer, which is generally close to the date of delivery of the equipment. For the years ended December 31, 2013 and 2012, the amounts allocated to installation revenues were minimal.

Warranty revenue is valued based on estimated service person hours to complete a service and generally is recognized over the contract period. For the years ended December 31, 2013 and 2012, amounts allocated to warranty revenues were minimal. Based on historical experience, warranty service calls and any related labor costs have been minimal.

Rental revenue is recognized on a straight-line basis over the term of the operating lease.

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

Income Taxes

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

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

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

Stock-based Compensation

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

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

Recent Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, which concludes an unrecognized tax benefit should be presented as a reduction of a deferred tax asset when settlement in this manner is available under the tax law. The amendments are effective for reporting periods beginning after December 15, 2013. Early adoption is permitted. We do not expect the adoption of ASU No. 2013-11 will have a significant effect on our consolidated financial statements.

Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. We do not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to our financial condition, results of operations, cash flows, or disclosures.

Currency Exchange Rates

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

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

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

RESULTS OF OPERATIONS

Comparison of Results of Operations for the Years Ended December 31, 2013 and 2012

The following table sets forth the results of our operations for the years ended December 31, 2013 and 2012 indicated as a percentage of net revenues (dollars in thousands):

	Years Ended December 31,
	2013						2012
	Dollars			Percentage			Dollars			Percentage
Revenues	$	72,113			100.0	%	$	57,199			100.0	%
Cost of revenues		54,447			75.5	%		44,063			77.0	%
Gross profit		17,666			24.5	%		13,136			23.0	%
Operating expenses		6,273			8.7	%		6,793			11.9	%
Income from operations		11,393			15.8	%		6,343			11.1	%
Other income (expenses)		(208	)		(0.3	)%		(443	)		(0.8	)%
Income before provision for income taxes		11,185			15.5	%		5,900			10.3	%
Provision for income taxes		3,000			4.1	%		1,701			3.0	%
Net income		8,185			11.4	%		4,199			7.3	%
Other comprehensive income:
Foreign currency translation adjustment		2,752			3.8	%		543			1.0	%
Comprehensive income	$	10,937			15.2	%	$	4,742			8.3	%

The following table sets forth information as to the revenues, gross profit and gross margin for our two business segments for the years ended December 31, 2013 and 2012 (dollars in thousands).

	Forged rolled rings and related products			Dyeing and finishing equipment			Total
	Year ended December 31, 2013
Revenues	$	33,776		$	38,337		$	72,113
Cost of revenues	$	25,598		$	28,849		$	54,447
Gross profit	$	8,178		$	9,488		$	17,666
Gross margin		24.2	%		24.7	%		24.5	%

	Forged rolled rings and related products			Dyeing and finishing equipment			Total
	Year ended December 31, 2012
Revenues	$	31,941		$	25,258		$	57,199
Cost of revenues	$	24,852		$	19,211		$	44,063
Gross profit	$	7,089		$	6,047		$	13,136
Gross margin		22.2	%		23.9	%		23.0	%

Revenues. For the year ended December 31, 2013, we had revenues of $72,113,000, as compared to revenues of $57,199,000 for the year ended December 31, 2012, an increase of $14,914,000 or approximately 26.1%. The increase in revenue for the year ended December 31, 2013 was primarily attributable to an increase in revenue from our dyeing segment, and an increase in sales from forged rolled rings and related products for other industries, offset by a decrease in sales from forged rolled rings and related products to the wind power industry, and is summarized as follows (dollars in thousands):

	For the Year Ended December 31, 2013		For the Year Ended December 31, 2012		(Decrease) Increase			Percentage Change
Forged rolled rings and related products
Wind power industry	$	14,816	$	15,973	$	(1,157	)		(7.2	)%
Other industries		18,960		15,968		2,992			18.7	%
Total forged rolled rings and related products		33,776		31,941		1,835			5.7	%
Dyeing and finishing equipment		38,337		25,258		13,079			51.8	%
Total revenues	$	72,113	$	57,199	$	14,914			26.1	%

Forged rolled rings and related products segment

For the year ended December 31, 2013, revenue from forged rolled rings and related products for the wind power industry decreased by approximately $1.2 million or 7.2% as compared to the year ended December 31, 2012. The decrease in revenue from forging of rolled rings and related products for wind power industry was primarily attributable to a reduced demand from our customers, who had sufficient inventory from purchases of forging of rolled rings and related products for wind power industry in prior periods, and the absence of sufficient sales to new customers to offset such reduction. The wind power industry has many challenges. Issues of wind turbine overcapacity, grid connectivity issues, international trade protectionism and tight credit conditions persist. Given this environment, we anticipate sales volumes of forged rolled rings and related products to customers in the wind power industry will remain around their current levels for the near future. We expect that over the longer term these issues will be resolved, to the extent that China is successful in moving forward to its stated goals of 100 GW of installed wind power capacity by 2015 and 200 GW by 2020.

For the year ended December 31, 2013, revenue from the sale of forged rolled rings and related products to other industries increased by approximately $3.0 million or 18.7% as compared to the year ended December 31, 2012. The increase in revenue from forging of rolled rings and related products for other industries was mainly attributable to our increased sales efforts and repeat order to use your forged products in various industries. Commencing in 2011, we began to manufacture and delivered test subassemblies for solar cell manufacturing equipment, which marked our entry into the solar products market. For the years ended December 31, 2013 and 2012, we generated revenue from the sale of solar industry related products of approximately $1,335,000, or 1.9% of total revenues, and $1,078,000, or 1.9% of total revenues, respectively, which is included in the sale of forged rolled rings and related products to other industries. However, we do not anticipate new orders for solar products in the near future.

The demand for products such as ours which are used for wind power industry and solar power industry is uncertain. We believe that over the long term, our forged rolled rings and related components for wind power industry will expand since the government of the PRC has announced its desire to increase the use of wind power as an energy source. So far, sales to the solar energy sector have not yet contributed a significant amount to our revenue and may never represent a significant portion of our revenue. Revenue from solar products has not represented a significant percentage of our revenues, and we cannot assure you that we will ever generate significant revenue from such products. We are currently seeking to expand into other industries, including oil and natural gas, although we can give no assurances that the expansion will be successful. To date, we have not generated any revenues from the oil and gas industries.

Dyeing and finishing equipment segment

The increase in revenue from the sale of dyeing and finishing equipment for the year ended December 31, 2013 was primarily attributable to our marketing efforts and the effects of the policies of the PRC local governments to encourage the purchase of low-emission airflow dyeing machine which are intended to reduce pollution from the dyeing process. With the growing acceptance of our new dyeing technology and the China government’s mandate to phase out obsolete machinery in China’s textile industry, we expect our revenue from this segment will continue to increase in the near future.

Additionally, during the year ended December 31, 2013, we received five PRC patents for devices and parts of our airflow dyeing machine. These patents cover the dyeing liquid mixing device, dyeing liquid atomizing device, horizontal manipulated devices, mechanical seal and atomizer of its airflow dyeing machine. The patents relate to devices and parts that allow for lower water and energy usage, improved dyeing effects, extend the service life of the machine and provide easier cleaning of atomized dyeing equipment.

Cost of revenues. Cost of revenues includes the cost of raw materials, labor, depreciation and other overhead costs. For the year ended December 31, 2013, cost of revenues was $54,447,000 as compared to $44,063,000 for the year ended December 31, 2012, an increase of $10,384,000, or 23.6%. Cost of revenues related to the manufacture of forged rolled rings and related products was $25,598,000 for the year ended December 31, 2013 as compared to $24,852,000 for the year ended December 31, 2012. Cost of revenues for the dyeing and finishing equipment segment was $28,849,000 for the year ended December 31, 2013, as compared to $19,211,000 for the year ended December 31, 2012.

Gross profit and gross margin. Our gross profit was $17,666,000 for the year ended December 31, 2013 as compared to $13,136,000 for the year ended December 31, 2012, representing gross margins of 24.5% and 23.0%, respectively.

Gross profit from forged rolled rings and related products segment was $8,178,000 for the year ended December 31, 2013 as compared to $7,089,000 for the year ended December 31, 2012, representing gross margins of approximately 24.2% and 22.2%, respectively. The increase in our gross margin for the forged rolled rings and related products segment for the year ended December 31, 2013 as compared to the year ended December 31, 2012 was mainly attributed to the increase in operational and cost efficiencies, including the allocation of fixed costs primarily consisting of depreciation, to cost of revenues as we operated at higher production levels and a slight decrease in our raw materials costs. We expect that we can improve our gross margin from forged rolled rings and related products segment to the extent that we can become more efficient and be able to produce larger quantities for inventory and revenues.

Gross profit for the dyeing and finishing equipment segment was $9,488,000 for the year ended December 31, 2013 as compared to $6,047,000 for the year ended December 31, 2012, representing gross margins of approximately 24.7% and 23.9%, respectively. For the year ended December 31, 2013, the significant portion of our revenue for the dyeing and finishing equipment segment is from airflow dyeing machinery. For the year ended December 31, 2012, a smaller portion of our revenue for the dyeing and finishing equipment segment is from airflow dyeing machinery. Our airflow dyeing machinery uses air flow rather than water which is used in the traditional dyeing process. The technology used in airflow machinery is designed to result in reduced input costs, fewer wrinkles, less damage to the textile and reduced emissions. Our unit sale price for airflow dyeing machinery is a little higher than our unit sale price for traditional dyeing machinery. Therefore, our gross margin for the dyeing and finishing equipment segment for the year ended December 31, 2013 increased from the year ended December 31, 2012.

Depreciation. Depreciation was $6,704,000 and $6,519,000 for the year ended December 31, 2013 and 2012, respectively. Depreciation for the year ended December 31, 2013 and 2012 was included in the following categories (dollars in thousands):

	Years Ended December 31,
	2013		2012
Cost of revenues	$	6,131	$	4,983
Operating expenses		573		1,536
Total	$	6,704	$	6,519

The increase in depreciation expense for cost of revenues for the year ended December 31, 2013 as compared to the year ended December 31, 2012 is attributable to the increase in our depreciable production equipment in our dyeing and finishing equipment segment and forged rolled rings and related products segment.

During the year ended December 31, 2012, we recorded depreciation expense related to ESR production equipment in operating expenses since we did not perform any production for ESR products and we did not use the equipment in 2012. As of December 31, 2012, the Company committed to a plan to sell the ESR production equipment that was used to produce forged products for the high performance components market and recorded it as equipment held for sale on the December 31, 2012 consolidated balance sheet. The assets held for sale were not subject to depreciation during 2013 since the equipment was held for sale and not used in operations. Accordingly, during the year ended December 31, 2013, we did not record any depreciation expense related to the ESR production equipment. Depreciation included in operating expenses for the year ended December 31, 2013 decreased by approximately $963,000 as compared to the year ended December 31, 2012. In March 2014, we entered into an operating lease agreement with a third party and accordingly, we will begin we will begin to record depreciation expense upon the commencement of the equipment lease, which is scheduled for April 1, 2014.

Impairment loss. For the year ended December 31, 2013, we recognized $2,573,000 of impairment loss as compared to $2,206,000 for the year ended December 31, 2012, as a result of writing down the carrying value of equipment to its estimated fair value based on our management’s estimate. The impairment loss for the year ended December 31, 2013 reflects the anticipated cash flow from the operating lease, net of reserves.

Selling, general and administrative expenses. Selling, general and administrative expenses totaled $3,127,000 for the year ended December 31, 2013, as compared to $3,051,000 for the year ended December 31, 2012, an increase of $76,000 or approximately 2.5%. Selling, general and administrative expenses for the years ended December 31, 2013 and 2012 consisted of the following (dollars in thousands):

	Year Ended December 31, 2013			Year Ended December 31, 2012
Professional fees	$	328		$	331
Bad debt recovery		(628	)		(47	)
Payroll and related benefits		1,074			786
Travel and entertainment		369			202
Shipping		1,291			1,125
Research and development expense		93			-
Other		600			654
Total	$	3,127		$	3,051

·	Professional fees for the year ended December 31, 2013 decreased by $3,000, or 0.9%, as compared to the year ended December 31, 2012.

For the year ended December 31, 2013 and 2012, we decreased the allowance for doubtful accounts of approximately $628,000 (net of approximately $1,200,000 write-offs) and $47,000, respectively. During the year ended December 31, 2013, we collected approximately $857,000 of accounts receivable for which we have previously reserved at December 31, 2012. 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, the write off of uncollectible receivables against the existing reserve, and recent economic events.

Payroll and related benefits for the year ended December 31, 2013 increased by $288,000, or 36.6%, as compared to the year ended December 31, 2012. The increase was mainly attributable to an increase in stock-based compensation of approximately $262,000 which reflected an increase in our average stock price used to value shares issued as compensation during the year ended December 31, 2013 as compared to the year ended December 31, 2012, and an increase in employee salaries and related benefits of approximately $26,000 due to the increase in personnel for our expanding business. We expect that payroll and related benefits will keep in its current level with minimal increase in the near future.

Travel and entertainment expense for the year ended December 31, 2013 increased by $167,000, or 82.7%, as compared to the year ended December 31, 2012. The increase was primarily attributable to the increased spending in our travel due to increased on-site communication and discussion with our customers in order to more efficiently manage our business and compete with our competitor and to enhance our visibility.

·	Shipping expense for the year ended December 31, 2013 increased by $166,000, or 14.8%, as compared to the year ended December 31, 2012. The increase was mainly attributable to the increase in our revenues during the year ended December 31, 2013 as compared to the year ended December 31, 2012.

·	For the year ended December 31, 2013, we recorded research and development expense of approximately $93,000. Research and development expense related to the development new dyeing and finishing products. We did not record any research and development expense for the year ended December 31, 2012.

·	Other selling, general and administrative expenses for the year ended December 31, 2013 decreased by $54,000, or 8.3% as compared to the year ended December 31, 2012, which reflected the efforts at reducing non-sales related corporate activities as well as stricter controls on corporate spending.

Income from operations. As a result of the factors described above, for the year ended December 31, 2013, income from operations amounted to $11,393,000, as compared to $6,344,000 for the year ended December 31, 2012, an increase of $5,049,000 or 79.6%.

Other income (expense). Other income (expense) includes interest expense, nominal foreign currency transaction gain, warrant modification expense, interest income and other income. For the year ended December 31, 2013, total other expense amounted to $208,000 as compared to total other expense $444,000 for the year ended December 31, 2012, a decrease of $236,000 or 53.2%. The decrease in other expenses, net was primarily attributable to the decrease in warrant modification expense of approximately $235,000, an increase in interest income of approximately $11,000 and an increase in foreign currency gain of approximately $28,000, offset by a decrease in other income of approximately $43,000.

Income tax expense. Income tax expense was $3,000,000 for the year ended December 31, 2013, as compared to $1,702,000 for the year ended December 31, 2012, an increase of $1,298,000, or 76.3%. The increase in income tax expense was attributable to the increase in taxable income generated by our operating entities.

Net income. As a result of the foregoing, our net income was $8,186,000, or $2.55 per share (basic and diluted), for the year ended December 31, 2013, as compared with $4,199,000, or $1.65 per share (basic) and $1.58 per share (diluted), for the year ended December 31, 2012, an increase of $3,987,000, or 95.0%.

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. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations. As a result of foreign currency translations, which are a non-cash adjustment, we reported a foreign currency translation gain of $2,752,000 for the year ended December 31, 2013, as compared to $543,000 for the year ended December 31, 2012. This non-cash gain had the effect of increasing our reported comprehensive income.

Comprehensive income. As a result of our foreign currency translation gain, we had comprehensive income for the year ended December 31, 2013 of $10,937,000, compared to $4,742,000 for the year ended December 31, 2012.

Liquidity and Capital Resources

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis. At December 31, 2013 and 2012, we had cash balances of approximately $1,115,000 and $1,446,000, respectively. These funds are located in financial institutions located as follows (dollars in thousands):

Country:	December 31, 2013				December 31, 2012
United States	$	411	36.8	%	$	31	2.1	%
China		704	63.2	%		1,415	97.9	%
Total cash and cash equivalents	$	1,115	100.0	%	$	1,446	100.0	%

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

					December 31, 2012 to December 31, 2013
	December 31, 2013		December 31, 2012		Change		Percentage Change
Working capital:
Total current assets	$	23,986	$	19,073	$	4,913		25.8	%
Total current liabilities		12,864		11,810		1,054		8.9	%
Working capital:	$	11,122	$	7,263	$	3,859		53.1	%

Our working capital increased $3,859,000 to $11,122,000 at December 31, 2013 from $7,263,000 at December 31, 2012. This increase in working capital is primarily attributable to an increase in notes receivable of approximately $616,000, an increase in accounts receivable, net of allowance for doubtful accounts, of approximately $5,156,000 due to the increase in sales revenue, an increase in advances to suppliers of approximately $102,000, an increase in deferred tax assets – current portion of approximately $253,000 and a decrease in accounts payable of approximately $513,000, a decrease in capital lease obligation – current portion of approximately $251,000 and a decrease in advances from customers of approximately $396,000, offset by a decrease in cash and cash equivalents of approximately $331,000, a decrease in inventories, net of reserve for obsolete inventory, of approximately $1,164,000, a decrease in prepaid expenses and other of approximately $354,000, an increase in short-term bank loans of approximately $893,000, and an increase in income taxes payable of approximately $802,000.

Because the exchange rate conversion is different for the balance sheet and the statements of cash flows, the changes in assets and liabilities reflected on the statements of cash flows are not necessarily identical with the comparable changes reflected on the balance sheet.

Net cash flow provided by operating activities was $11,469,000 for the year ended December 31, 2013 as compared to $10,635,000 for the year ended December 31, 2012, an increase of $834,000.

·	Net cash flow provided by operating activities for the year ended December 31, 2013 primarily reflected net income of $8,186,000 and the add-back of non-cash items primarily consisting of depreciation of $6,704,000, amortization of land use rights of $95,000, an increase in inventory reserve of $41,000, a loss on impairment of equipment held for lease of $2,573,000, and stock-based compensation of $423,000, which was offset by a decrease in allowance for doubtful accounts of $628,000 mainly due to the collection of approximately $857,000 accounts receivable for which we have previously reserved for at December 31, 2012, and changes in operating assets and liabilities primarily consisting of a decrease in inventories of $1,304,000, offset primarily by an increase in notes receivable of $605,000, an increase in accounts receivable of $4,126,000, a decrease in accounts payable of $1,810,000, a decrease in accrued expenses of $113,000, a decrease in income taxes payable of $129,000, and a decrease in advances from customers of $453,000.

·	Net cash flow provided by operating activities for the year ended December 31, 2012 mainly reflected net income of $4,199,000 and the add-back of non-cash items primarily including depreciation of $6,519,000, the amortization of land use rights of $94,000, loss on impairment of equipment of $2,206,000, the warrant modification expense of $235,000, and stock-based compensation of $168,000, and changes in operating assets and liabilities such as: a decrease in prepaid value-added taxes on purchases of $981,000, an increase in accounts payable of $439,000, an increase in accrued expenses of $210,000, an increase in VAT and service taxes payable of $206,000, an increase in advances from customers of $676,000, offset primarily by an increase in accounts receivable of $2,888,000, an increase in inventories of $1,550,000, an increase in advance to suppliers of $372,000 and a decrease in income tax payable of $326,000.

Net cash flow used in investing activities reflects the purchase of property and equipment of $14,634,000 and $10,744,000 for the year ended December 31, 2013 and 2012, respectively.

Net cash flow provided by financing activities was $2,804,000 for the year ended December 31, 2013 as compared to $406,000 for the year ended December 31, 2012. During the year ended December 31, 2013, we received proceeds from bank loans of $5,654,000, proceeds from an increase in bank acceptance notes payable of $678,000, and net proceeds from sale of common stock of $2,389,000, offset by the repayments of bank loans of $4,846,000, repayments of principal on capital lease obligations of $392,000 and the increase in restricted cash of $678,000. During the year ended December 31, 2012, we received proceeds from bank loans of $3,481,000, offset by repayments of bank loans of $3,639,000, proceeds from decrease in restricted cash of $316,000, proceeds from sale of common stock – related parties of $613,000, and proceeds from exercise of warrants of $198,000, offset by the repayments of principal on capital lease obligations of $246,000 and decrease in bank acceptance notes payable of $316,000.

Our capital requirements for the next twelve months relate to purchasing machinery for the manufacture of products in our forged rolled rings division and for our dyeing business. We believe that our cash flow from operations will be sufficient to meet our anticipated cash requirements for the next twelve months.

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

Contractual Obligations and Off-Balance Sheet Arrangements

Contractual Obligations

We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the tables, in order to assist in the review of this information within the context of our consolidated financial position, results of operations, and cash flows. The following tables summarize our contractual obligations as of December 31, 2013 (dollars in thousands), and the effect these obligations are expected to have on our liquidity and cash flows in future periods.

	Payments Due by Period
Contractual obligations:	Total		Less than 1 year		1-3 years		3-5 years		5+ years
Bank loans (1)	$	3,109	$	3,109	$	-	$	-	$	-
Total	$	3,109	$	3,109	$	-	$	-	$	-

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

Off-balance Sheet Arrangements

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

Foreign Currency Exchange Rate Risk

We produce and sell almost all of our products in China. Thus, most of our revenues and operating results may be impacted by exchange rate fluctuations between RMB and US dollars. For the year ended December 31, 2013, we had unrealized foreign currency translation gain of $2,751,842, 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

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013 and 2012

CONTENTS

Report of Independent Registered Public Accounting Firm	F-2

Consolidated Financial Statements:

Consolidated Balance Sheets - As of December 31, 2013 and 2012	F-3

Consolidated Statements of Income and Comprehensive Income -
For the Years Ended December 31, 2013 and 2012	F-4

Consolidated Statements of Changes in Stockholders’ Equity -
For the Years Ended December 31, 2013 and 2012	F-5

Consolidated Statements of Cash Flows –
For the Years Ended December 31, 2013 and 2012	F-6

Notes to Consolidated Financial Statements	F-7 to F-27

F-1

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, 2013 and 2012 and the related consolidated statements of operations and comprehensive income, changes in stockholders' equity and cash flows for each of the two years in the period ended December 31, 2013. 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 audit 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 Cleantech Solutions International, Inc. and Subsidiaries as of December 31, 2013 and 2012 and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.

/s/ RBSM LLP

New York, New York

March 28, 2014

F-2

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

	December 31,
	2013		2012
ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$	1,114,873	$	1,445,728
Restricted cash		687,353		-
Notes receivable		703,718		88,029
Accounts receivable, net of allowance for doubtful accounts		15,234,863		10,078,623
Inventories, net of reserve for obsolete inventory		4,733,558		5,897,555
Advances to suppliers		695,254		593,104
Prepaid VAT on purchases		489,302		542,032
Deferred tax assets - current portion		253,173		-
Prepaid expenses and other		74,030		428,326

Total Current Assets		23,986,124		19,073,397

PROPERTY AND EQUIPMENT - net		70,595,138		59,436,100

OTHER ASSETS:
Deferred tax assets - net of current portion		1,222,216		551,890
Equipment held for operating lease		4,751,206		7,118,555
Land use rights, net		3,786,051		3,756,342

Total Assets	$	104,340,735	$	89,936,284

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Short-term bank loans	$	3,109,453	$	2,216,558
Bank acceptance notes payable		687,353		-
Accounts payable		4,961,555		5,474,479
Accrued expenses		899,816		986,824
Capital lease obligation - current portion		-		251,413
Advances from customers		1,455,740		1,851,987
VAT and service taxes payable		126,349		206,527
Income taxes payable		1,623,603		822,082

Total Current Liabilities		12,863,869		11,809,870

OTHER LIABILITIES:
Capital lease obligation - net of current portion		-		132,756

Total Liabilities		12,863,869		11,942,626

STOCKHOLDERS' EQUITY:
Preferred stock ($0.001 par value; 10,000,000 shares authorized; 0 share issued and
outstanding at December 31, 2013 and 2012, respectively)		-		-
Common stock ($0.001 par value; 50,000,000 shares authorized; 3,503,502 and 2,894,586
shares issued and outstanding at December 31, 2013 and 2012, respectively)		3,503		2,894
Additional paid-in capital		31,532,308		28,987,128
Retained earnings		46,322,329		38,401,734
Statutory reserve		2,744,720		2,479,738
Accumulated other comprehensive gain - foreign currency translation adjustment		10,874,006		8,122,164

Total Stockholders' Equity		91,476,866		77,993,658

Total Liabilities and Stockholders' Equity	$	104,340,735	$	89,936,284

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,
	2013			2012

REVENUES	$	72,112,662		$	57,199,221

COST OF REVENUES		54,446,324			44,062,636

GROSS PROFIT		17,666,338			13,136,585

OPERATING EXPENSES:
Depreciation		573,090			1,535,715
Impairment loss		2,573,256			2,206,253
Selling, general and administrative		3,126,992			3,050,911

Total Operating Expenses		6,273,338			6,792,879

INCOME FROM OPERATIONS		11,393,000			6,343,706

OTHER INCOME (EXPENSE):
Interest income		22,287			11,384
Interest expense		(300,381	)		(305,659	)
Foreign currency gain		27,686			157
Warrant modification expense		-			(235,133	)
Other income		42,780			85,727

Total Other Income (Expense), net		(207,628	)		(443,524	)

INCOME BEFORE INCOME TAXES		11,185,372			5,900,182

INCOME TAXES		2,999,795			1,701,602

NET INCOME	$	8,185,577		$	4,198,580

COMPREHENSIVE INCOME:
NET INCOME	$	8,185,577		$	4,198,580

OTHER COMPREHENSIVE INCOME:
Unrealized foreign currency translation gain		2,751,842			543,415

COMPREHENSIVE INCOME	$	10,937,419		$	4,741,995

NET INCOME PER COMMON SHARE:
Basic	$	2.55		$	1.65
Diluted	$	2.55		$	1.58

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic		3,210,791			2,538,246
Diluted		3,210,791			2,649,043

See notes to consolidated financial statements

F-4

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended December 31, 2013 and 2012
	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, 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

Common stock issued for services		-			-			121,053		121		441,025		-			-		-		441,146

Series A preferred converted to common shares		(13,197,389	)		(13,198	)		439,912		440		12,758		-			-		-		-

Series A preferred issued for warrant modification		2,201,582			2,202			-		-		232,931		-			-		-		235,133

Exercise of stock warrants		-			-			73,386		73		198,069		-			-		-		198,142

Sale of common stock - related parties		-			-			157,966		158		612,745		-			-		-		612,903

Shares issued for adjustments for 1:10 reverse split		-			-			420		-		-		-			-		-		-

Adjustment to statutory reserve		-			-			-		-		-		(415,187	)		415,187		-		-

Net income for the year		-			-			-		-		-		4,198,580			-		-		4,198,580

Foreign currency translation adjustment		-			-			-		-		-		-			-		543,415		543,415

Balance, December 31, 2012		-			-			2,894,586		2,894		28,987,128		38,401,734			2,479,738		8,122,164		77,993,658

Sale of common stock		-			-			578,916		579		2,388,010		-			-		-		2,388,589

Common stock issued for services		-			-			30,000		30		157,170		-			-		-		157,200

Adjustment to statutory reserve		-			-			-		-		-		(264,982	)		264,982		-		-

Net income for the year		-			-			-		-		-		8,185,577			-		-		8,185,577

Foreign currency translation adjustment		-			-			-		-		-		-			-		2,751,842		2,751,842

Balance, December 31, 2013		-		$	-			3,503,502	$	3,503	$	31,532,308	$	46,322,329		$	2,744,720	$	10,874,006	$	91,476,866

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,
	2013			2012

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	8,185,577		$	4,198,580
Adjustments to reconcile net income from operations to net cash
provided by operating activities:
Depreciation		6,704,386			6,519,394
Amortization of land use rights		95,491			93,537
Increase (decrease) in inventory reserve		41,381			(37,882	)
Decrease in allowance for doubtful accounts		(628,188	)		(46,672	)
Loss on impairment of equipment held for operating lease		2,573,256			2,206,253
Loss on disposal of fixed assets		11,391			-
Warrant modification expense		-			235,133
Stock-based compensation expense		423,112			167,714
Changes in operating assets and liabilities:
Notes receivable		(604,798	)		(34,178	)
Accounts receivable		(4,126,440	)		(2,887,716	)
Inventories		1,303,519			(1,549,740	)
Prepaid value-added taxes on purchases		70,059			981,236
Prepaid and other current assets		91,666			(43,513	)
Advances to suppliers		(81,120	)		(371,849	)
Accounts payable		(1,809,914	)		438,945
Accrued expenses		(112,797	)		209,831
VAT and service taxes payable		(86,004	)		206,405
Income taxes payable		(129,378	)		(326,373	)
Advances from customers		(452,658	)		675,667

NET CASH PROVIDED BY OPERATING ACTIVITIES		11,468,541			10,634,772

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(14,633,745	)		(10,744,247	)

NET CASH USED IN INVESTING ACTIVITIES		(14,633,745	)		(10,744,247	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease		(391,963	)		(246,485	)
Proceeds from bank loans		5,653,824			3,481,101
Repayments of bank loans		(4,846,135	)		(3,639,333	)
(Increase) decrease in restricted cash		(678,459	)		316,464
Increase (decrease) in bank acceptance notes payable		678,459			(316,464	)
Net proceeds from sale of common stock		2,388,589			-
Proceeds from sale of common stock - related parties		-			612,903
Proceeds from exercise of warrants		-			198,142

NET CASH PROVIDED BY FINANCING ACTIVITIES		2,804,315			406,328

EFFECT OF EXCHANGE RATE ON CASH AND CASH EQUIVALENTS		30,034			(3,732	)

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(330,855	)		293,121

CASH AND CASH EQUIVALENTS - beginning of year		1,445,728			1,152,607

CASH AND CASH EQUIVALENTS - end of year	$	1,114,873		$	1,445,728

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest	$	300,381		$	305,659
Income taxes	$	3,129,174		$	2,027,976

NON-CASH INVESTING AND FINANCING ACTIVITIES:
Property and equipment acquired on credit as payable	$	1,121,719		$	-
Series A preferred converted to common shares	$	-		$	13,198
Common stock issued for future service	$	-		$	281,265

See notes to consolidated financial statements

F-6

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013 and 2012

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

Cleantech Solutions International, Inc. (the “Company”) was incorporated in Delaware on June 24, 1987 under the name of Malex, Inc. On December 18, 2007, the Company’s corporate name was changed to China Wind Systems, Inc., and on June 13, 2011, the Company’s corporate name was changed to Cleantech Solutions International, Inc. On August 7, 2012, the Company was converted into a Nevada corporation.

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

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

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

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

Basis of presentation

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 Electric. 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, 2013 and 2012

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, 2013 and 2012

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 consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures at the date of the financial statements and during the reporting period. Actual results could materially differ from these estimates. Significant estimates in 2013 and 2012 include the allowance for doubtful accounts, the allowance for obsolete inventory, the useful life of property and equipment and intangible assets, assumptions used in assessing impairment of long-term assets and valuation of deferred tax assets, accruals for taxes due, and the value of stock-based compensation and warrant modification expense.

Cash and cash equivalents

For purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments purchased with a maturity of three months or less and money market accounts to be cash equivalents. The Company maintains cash and cash equivalents with various financial institutions mainly in the PRC and the U.S. As of December 31, 2013 and 2012, cash balances in banks in the PRC of $704,391 and $1,414,674, respectively, are uninsured.

Fair value of financial instruments

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

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

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

F-9

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013 and 2012

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

		Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Balance at December 31, 2013				Loss
Equipment held for operating lease		$	-			$	-			$	4,751,206			$	4,751,206			$	2,573,256

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

The Company conducted an impairment assessment on the equipment held for lease based on the guidelines established in ASC Topic 360 to determine the estimated fair market value of the equipment as of December 31, 2013 and 2012. Upon completion of its 2013 and 2012 impairment analysis, the Company determined that the carrying value exceeded the fair market value on equipment which is held for lease. Accordingly, for the years ended December 31, 2013 and 2102, the Company recorded an impairment loss of $2,573,256 and $2,206,253, respectively.

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, restricted cash, notes receivable, accounts receivable, inventories, advances to suppliers, prepaid VAT on purchases, deferred tax assets, prepaid expenses and other, short-term bank loans, bank acceptance notes payable, accounts payable, accrued expenses, capital lease obligations, advances from customers, VAT and service taxes payable and income taxes payable approximate their fair market value based on the short-term maturity of these instruments.

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

Concentrations of credit risk

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

F-10

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013 and 2012

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

Concentrations of credit risk (continued)

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

	December 31, 2013				December 31, 2012
Country:
United States	$	410,482	36.8	%	$	31,054	2.1	%
China		704,391	63.2	%		1,414,674	97.9	%
Total cash and cash equivalents	$	1,114,873	100.0	%	$	1,445,728	100.0	%

Restricted cash

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

Notes receivable

Notes receivable represents trade accounts receivable due from customers where the customers’ bank has guaranteed the payment of the receivable. This amount is non-interest bearing and is normally paid within six months. Historically, the Company has experienced no losses on notes receivable. The Company’s notes receivable totaled $703,718 and $88,029 at December 31, 2013 and 2012, respectively.

Accounts receivable

Accounts receivable are presented net of an allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance, a customer’s historical payment history, its current credit-worthiness and current economic trends. Accounts are written off after exhaustive efforts at collection. During the year ended December 31, 2013, accounts with the amount of approximately $1,200,000 were written off after exhaustive efforts at collection with a corresponding debit to the allowance for doubtful account. The writes-offs of accounts receivable against the allowance for doubtful accounts only impact the balance sheet accounts. During the year ended December 31, 2013, the Company has recovered and collected approximately $857,000 of accounts receivable for which the Company has previously reserved for as of December 31, 2012. At December 31, 2013 and 2012, the Company has established, based on a review of its outstanding balances, an allowance for doubtful accounts in the amounts of $830,211 and $2,592,057, respectively.

F-11

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013 and 2012

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

Inventories

Inventories, consisting of raw materials, work in process and finished goods related to the Company’s products are stated at the lower of cost or market utilizing the weighted average method. An allowance is established when management determines that certain inventories may not be saleable. If inventory costs exceed expected market value due to obsolescence or quantities in excess of expected demand, the Company will record reserves for the difference between the cost and the market value. These reserves are recorded based on estimates. The Company recorded an inventory reserve of $182,482 and $135,980 at December 31, 2013 and 2012, respectively.

Advances to suppliers

Advances to suppliers represent the cash paid in advance for the purchase of raw material from suppliers. The advance payments are intended to ensure preferential pricing and delivery. The amounts advanced under such arrangements totaled $695,254 and $593,104 as of December 31, 2013 and 2012, respectively.

Property and equipment

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

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

Equipment held for operating lease and related rental revenue

At December 31, 2013, the Company reflected electro-slag re-melted (“ESR”) equipment that was used in 2010 and 2011 to produce forged products for the high performance components market as equipment held for operating lease on the accompanying consolidated balance sheets, which was originally classified as equipment held for sale at December 31, 2012. In March 2014, the Company signed an operating lease agreement related to the lease of such equipment for a period of eight years. Equipment held for operating lease is depreciated over its estimated useful life of eight years starting from the operating lease commencement date, April 1, 2014. Rental payments are recorded as revenue over the lease term as earned.

At December 31, 2013, the Company reclassified the prior year’s account of equipment held for sale to equipment held for operating lease in order to conform to the current year’s financial presentation.

F-12

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013 and 2012

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. For the years ended December 31, 2013 and 2012, the Company incurred impairment charge in operations of $2,573,256 and $2,206,253, respectively, on the electro-slag re-melted equipment. The valuations of the ESR equipment which is held for lease pursuant to an operating lease, and the amounts of the impairment charge, were based on the impairment assessments conducted on ESR equipment at December 31, 2013 and 2012.

Advances from customers

Advances from customers at December 31, 2013 and 2012 amounted to $1,455,740 and $1,851,987, respectively, and consist of prepayments from customers for merchandise that had not yet been shipped. The Company will recognize the deposits as revenue as customers take delivery of the goods and title to the assets is transferred to customers in accordance with the Company’s revenue recognition policy.

Revenue recognition

Pursuant to the guidance of ASC Topic 605 and ASC Topic 360, the Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the purchase price is fixed or determinable and collectability is reasonably assured. The Company recognizes revenues from the sale of dyeing and finishing equipment, forged rolled rings and other components upon shipment and transfer of title. The other elements may include installation and, generally, a one-year warranty. Equipment installation revenue is valued based on estimated service person hours to complete installation and is recognized when the labor has been completed and the equipment has been accepted by the customer, which is generally within a couple days of the delivery of the equipment. Warranty revenue is valued based on estimated service person hours to complete a service and generally is recognized over the contract period. For the years ended December 31, 2013 and 2012, amounts allocated to installation and warranty revenues were minimal. Based on historical experience, warranty service calls and any related labor costs have been minimal. All other product sales with customer specific acceptance provisions, including the forged rolled rings, are recognized upon customer acceptance and the delivery of the parts or service. Revenues related to spare part sales are recognized upon shipment or delivery based on the trade terms.

Income taxes

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

F-13

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013 and 2012

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, 2013 and 2012, the Company had no uncertain tax positions, and will continue to evaluate for uncertain positions in the future.

Stock-based compensation

Stock-based compensation is accounted for based on the requirements of the Share-Based Payment topic of ASC Topic 718 which requires recognition in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). The Financial Accounting Standards Board (“FASB”) 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 $1,291,197 and $1,124,667 for the years ended December 31, 2013 and 2012, respectively.

Employee benefits

The Company’s operations and employees are all located in the PRC. The Company makes mandatory contributions to the PRC government’s health, retirement benefit and unemployment funds in accordance with the relevant Chinese social security laws. The costs of these payments are charged to the same accounts as the related salary costs in the same period as the related salary costs. Employee benefit costs totaled $217,513 and $186,010 for the years ended December 31, 2013 and 2012, respectively.

Advertising

Advertising is expensed as incurred and is included in selling, general and administrative expenses on the accompanying consolidated statements of income and comprehensive income and totaled $18,352 and $20,678 for the years ended December 31, 2013 and 2012, respectively.

F-14

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013 and 2012

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

Research and development

Research and development costs are expensed as incurred and are included in selling, general and administrative expenses. The costs primarily consist of raw materials and salaries paid for the development and improvement of the Company’s new dyeing machinery. Research and development costs totaled $92,803 and $0 for the years ended December 31, 2013 and 2012, respectively.

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, 2013 and 2012 was $30,034 and $(3,732), 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, 2013 and 2012 were translated at 6.1104 RMB to $1.00 and at 6.31610 RMB to $1.00, respectively, which were the exchange rates on the balance sheet dates. Equity accounts were stated at their historical rate. The average translation rates applied to the statements of income for the years ended December 31, 2013 and 2012 were 6.1905 RMB and 6.31984 RMB to $1.00, respectively. Cash flows from the Company’s operations are calculated based upon the local currencies using the average translation rate. As a result, amounts related to assets and liabilities reported on the consolidated statements of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheets.

Reverse stock split

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

F-15

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013 and 2012

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

Income per share of common stock

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

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

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

	Years Ended December 31,
	2013		2012
Net income available to common stockholders for basic and diluted net income per share of common stock	$	8,185,577	$	4,198,580

Weighted average common stock outstanding – basic		3,210,791		2,538,246
Effect of dilutive securities:
Series A convertible preferred stock		-		103,149
Warrants		-		7,648
Weighted average common stock outstanding– diluted		3,210,791		2,649,043
Net income per common share - basic	$	2.55	$	1.65
Net income per common share - diluted	$	2.55	$	1.58

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

Related parties

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

Comprehensive income

Comprehensive income is comprised of net income and all changes to the statements of stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. For the Company, comprehensive income for the years ended December 31, 2013 and 2012 included net income and unrealized gains from foreign currency translation adjustments.

F-16

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013 and 2012

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

Recent accounting pronouncements

In July 2013, the Financial Accounting Standards Board issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, which concludes an unrecognized tax benefit should be presented as a reduction of a deferred tax asset when settlement in this manner is available under the tax law. The amendments are effective for reporting periods beginning after December 15, 2013. Early adoption is permitted. The Company does not expect the adoption of ASU No. 2013-11 will have a significant effect on its consolidated financial statements.

Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its consolidated financial condition, results of operations, cash flows or disclosures.

Reclassification

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

NOTE 2 – ACCOUNTS RECEIVABLE

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

	December 31, 2013			December 31, 2012
Accounts receivable	$	16,065,074		$	12,670,680
Less: allowance for doubtful accounts		(830,211	)		(2,592,057	)
	$	15,234,863		$	10,078,623

The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. After evaluating the collectability of individual receivable balances, the Company decreased the allowance for doubtful accounts in the amount of $1,825,180 and $46,672 for the year ended December 31, 2013 and 2012, respectively. During the year ended December 31, 2013, accounts with the amount of approximately $1,200,000 were written off after exhaustive efforts at collection with a corresponding debit to the allowance for doubtful account. The writes-offs of accounts receivable against the allowance for doubtful accounts only impact the balance sheet accounts. During the year ended December 31, 2013, the Company has recovered and collected approximately $857,000 accounts receivable for which the Company has previously reserved for at December 31, 2012.

F-17

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013 and 2012

NOTE 3 - INVENTORIES

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

	December 31, 2013			December 31, 2012
Raw materials	$	1,627,784		$	1,685,493
Work in process		1,778,650			2,602,990
Finished goods		1,509,606			1,745,052
		4,916,040			6,033,535
Less: reserve for obsolete inventory		(182,482	)		(135,980	)
	$	4,733,558		$	5,897,555

For the year ended December 31, 2013, the Company increased reserve for obsolete inventory in the amount of $41,381. For the year ended December 31, 2012, the Company decreased reserve for obsolete inventory in the amount of $37,882 as the part of reserved inventory in prior years had been sold out in 2012.

NOTE 4 - PROPERTY AND EQUIPMENT

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

	Useful Life	December 31, 2013			December 31, 2012
Office equipment and furniture	5 Years	$	156,810		$	222,853
Manufacturing equipment	5 – 10 Years		74,187,972			56,916,700
Vehicles	5 Years		129,380			125,167
Construction in progress	-		477,299			28,785
Building and building improvements	20 Years		21,487,286			20,785,597
			96,438,747			78,079,102
Less: accumulated depreciation			(25,843,609	)		(18,643,002	)
		$	70,595,138		$	59,436,100

For the years ended December 31, 2013 and 2012, depreciation expense amounted to $6,704,386 and $6,519,394, respectively, of which $6,131,296 and $4,983,679, respectively, is included in cost of revenues and the remainder is included in operating expenses. Depreciation is not taken during the period of construction or equipment installation. Upon completion of the installation of manufacturing equipment or any construction in progress, construction in progress balances will be classified to their respective property and equipment category.

NOTE 5 – LAND USE RIGHTS

There is no private ownership of land in China. Land is owned by the government and the government grants land use rights for specified terms. The Company’s land use rights have terms of 45 and 50 years and expire on January 1, 2053 and October 30, 2053. The Company amortizes the land use rights over the term of the respective land use right. For the years ended December 31, 2013 and 2012, amortization of land use rights amounted to $95,491 and $93,537, respectively. At December 31, 2013 and 2012, land use rights consisted of the following:

	Useful Life	December 31, 2013			December 31, 2012
Land use rights	45 - 50 years	$	4,418,826		$	4,274,916
Less: accumulated amortization			(632,775	)		(518,574	)
		$	3,786,051		$	3,756,342

F-18

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013 and 2012

NOTE 5 – LAND USE RIGHTS (continued)

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

Years ending December 31:	Amount
2014	$	96,743
2015		96,743
2016		96,743
2017		96,743
2018		96,743
Thereafter		3,302,336
	$	3,786,051

NOTE 6 – EQUIPMENT HELD FOR OPERATING LEASE

The Company measures long-lived assets to be leased at the lower of carrying amount or fair value, less associated costs to lease these assets. As of December 31, 2012, the Company committed to a plan to sell ESR equipment that was used to produce forged products for the high performance components market. During the last quarter of 2013, the Company decided to lease the ESR equipment to a third party and various negotiation took place during such time through March 2014. In March 2014, the Company entered into an operating lease agreement with an eight-year term commencing April 1, 2014, with a third party (the “Lessee”), whereby the Lessee will lease the ESR equipment from the Company for quarterly lease payments of 1,450,000 RMB (approximately $234,000 per quarter). Accordingly, at December 31, 2013, the ESR equipment has been reflected as equipment held for operating lease on the accompanying consolidated balance sheets. At December 31, 2013 and 2012, the Company evaluated the ESR equipment for impairment. The Company compared the estimated fair values of the equipment to its carrying value with impairment indicators and recorded an impairment charge for the excess of carrying value over fair value. For the years ended December 31, 2013 and 2012, the Company recorded an impairment loss on ESR equipment in the amount of $2,573,256 and $2,206,253, respectively.

F-19

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013 and 2012

NOTE 7 – SHORT-TERM BANK LOANS

Short-term bank loan represents an amount due to a bank that is due within one year. This loan can be renewed with the bank upon maturity. At December 31, 2013 and 2012, short-term bank loans consisted of the following:

	December 31, 2013		December 31, 2012
Loan from Agricultural and Commercial Bank, due on August 26, 2013 with annual interest rate of 6.90% at December 31, 2012, secured by certain assets of the Company and repaid on May 15, 2013.	$	-	$	474,977

Loan from Agricultural and Commercial Bank, due on May 9, 2014 with annual interest rate of 7.20% at December 31, 2013, secured by certain assets of the Company.		490,966		-

Loan from Bank of Communications, due on May 8, 2013 with annual interest rate of 6.72% at December 31, 2012, repaid on due date.		-		316,651

Loan from Bank of Communications, due on May 12, 2013 with annual interest rate of 6.72% at December 31, 2012, repaid on due date.		-		474,977

Loan from Bank of China, due on January 16, 2013 with annual interest rate of 7.35% at December 31, 2012, secured by certain assets of the Company, repaid on due date.		-		949,953

Loan from Bank of China, due on March 1, 2014 with annual interest rate of 6.27% at December 31, 2013, secured by certain assets of the Company and repaid on due date (see note 16).		490,966		-

Loan from Bank of China, due on March 4, 2014 with annual interest rate of 6.27% at December 31, 2013, secured by certain assets of the Company and repaid on due date (see note 16).		490,966		-

Loan from Jiangsu Huishan Mintai Village Town Bank, due on July 15, 2014 with annual interest rate of 9.30% at December 31, 2013, secured by certain assets of the Company.		818,277		-

Loan from Bank of Communications, due on April 21, 2014 with annual interest rate of 6.72% at December 31, 2013.		327,312		-

Loan from Bank of Communications, due on April 23, 2014 with annual interest rate of 6.72% at December 31, 2013.		490,966		-

Total short-term bank loans	$	3,109,453	$	2,216,558

F-20

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013 and 2012

NOTE 8 – BANK ACCEPTANCE NOTES PAYABLE

Bank acceptance notes payable represent amounts due to a bank which are collateralized. All bank acceptance notes payable are secured by the Company’s restricted cash which is on deposit with the lender. At December 31, 2013 and 2012, the Company’s bank acceptance notes payables consisted of the following:

	December 31, 2013		December 31, 2012
Bank of China, non-interest bearing, due on January 4, 2014, collateralized by 100% of restricted cash deposited.	$	81,828	$	-
Jiangsu Huishan Mintai Village Town Bank, non-interest bearing, due on February 23, 2014, collateralized by 100% of restricted cash deposited.		327,311		-
Jiangsu Huishan Mintai Village Town Bank, non-interest bearing, due on April 15, 2014, collateralized by 100% of restricted cash deposited.		163,655		-
Bank of China, non-interest bearing, due on May 12, 2014, collateralized by 100% of restricted cash deposited.		81,828		-
Bank of Communications, non-interest bearing, due on January 3, 2014, collateralized by 100% of restricted cash deposited.		32,731		-
Total	$	687,353	$	-

NOTE 9 - CAPITAL LEASE OBLIGATION

In 2011, the Company entered into a non-cancelable capital lease agreement with expiration date of June 3, 2014. The asset and liability under the capital lease are recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. The asset and future obligations related to the capital lease are included in the accompanying consolidated balance sheets in property and equipment and capital lease obligations, respectively. The Company paid off the capital lease obligation in the third quarter of 2013. At December 31, 2013 and 2012, capital lease obligations consisted of the following:

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

F-21

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013 and 2012

NOTE 10 – INCOME TAXES

The Company accounts for income taxes pursuant to the accounting standards that require the recognition of deferred tax assets and liabilities for both the expected impact of differences between the financial statements and the tax basis of assets and liabilities, and for the expected future tax benefit to be derived from tax losses and tax credit carry forwards. Additionally, the accounting standards require the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. Realization of deferred tax assets, including those related to the U.S. net operating loss carry forwards and to the temporary differences related to the deduction of impairment losses in PRC for income tax purposes as compared to financial statement purposes, are dependent upon future taxable income during the periods in which those temporary differences become deductible or are utilized.

Net deferred tax asset related to the U.S. net operating loss carry forward has been fully offset by a valuation allowance. The Company is governed by the Income Tax Law of the PRC and the U.S. Internal Revenue Code of 1986, as amended. 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 $5,426,000 for income tax purposes through December 31, 2013, 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 carry forwards will expire, if not utilized, through 2033. 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 necessary.

The Company has cumulative undistributed earnings from its foreign subsidiaries of approximately $60 million and $51 million as of December 31, 2013 and 2012, 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 for the years ended December 31, 2013 and 2012:

	2013			2012
U.S. statutory rates		34.0	%		34.0	%
U.S. effective rate in excess of China tax rate		(9.6	)%		(10.4	)%
Other		0.0	%		1.4	%
U.S. valuation allowance		2.4	%		3.8	%
Total provision for income taxes		26.8	%		28.8	%

For the years ended December 31, 2013 and 2012, income tax expense related to our operations in the PRC and amounted to $2,999,795 and $1,701,602, respectively.

F-22

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013 and 2012

NOTE 10 – INCOME TAXES (continued)

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

	December 31, 2013			December 31, 2012
Deferred tax assets:
Net U.S. operating loss carry forward	$	1,844,921		$	1,571,055
Loss on impairment of equipment		1,222,216			551,890
Allowance for doubtful accounts and inventory reserve		253,173			-
Total gross deferred tax assets		3,320,310			2,122,945

Less: valuation allowance		(1,844,921	)		(1,571,055	)
Net deferred tax assets	$	1,475,389		$	551,890

The valuation allowance at December 31, 2013 and 2012 were $1,844,921 and $1,571,055, respectively, related to the U.S. net operating loss carry forward. During 2013, the valuation allowance was increased by approximately $274,000 from the prior year.

In assessing the ability to realize the deferred tax asset from the loss on impairment of equipment held for lease in PRC and allowance for doubtful accounts and inventory reserve, management considers whether it is more likely than not that some portion or the entire deferred tax asset will be realized. The Company concluded that the temporary difference on the impairment loss of equipment held for lease in PRC and allowance for doubtful accounts and inventory reserve will be deductible or utilized on the future PRC taxable income and a deferred tax asset of $1,475,389 and $551,890 has been set up at December 31, 2013 and 2012, respectively.

NOTE 11 – STOCKHOLDERS’ EQUITY

(a) Preferred stock issued for warrants modification

On February 7, 2012, in an effort to induce its warrant holder to exercise their warrants, the Company signed an agreement with Barron Partners LP (“Barron”), pursuant to which Barron, as the holder of warrants to purchase 55,158 shares of common stock at $12.00 per share and 165,000 shares of common stock at $16.98 per share, agreed to exchange or convert such warrants into (i) 2,201,582 shares of the Company’s series A preferred stock which are convertible into 73,386 shares of common stock, and (ii) warrants to purchase 73,386 shares of this Company’s common stock at $2.70 per common share, with the proceeds from the exercise of the warrants being used to pay expenses incurred by the Company in connection with its public company expenses. In connection with the warrant modification, the Company valued the 2,201,582 series A preferred shares issued at fair market value on the date of grant of $197,408 based on the 73,386 common shares issuable upon conversion of the series A preferred stock multiplied by the quoted trading price of the common stock on the grant date of $2.70 per share. In connection with the transaction, on February 7, 2012, the Company revalued the fair market value of the original warrants by using the Black-Scholes option-pricing model. The total fair market value of the original warrants was estimated to be $52,896 on February 7, 2012. The fair market value of the newly issued exchanged warrants was estimated to be $90,621 using the Black-Scholes option-pricing model. In connection with the Black-Scholes option pricing calculation, the following weighted-average assumptions were used: stock price of $2.70; expected dividend yield 0%; risk-free interest rate of 0.15%; volatility of 139.58% and an expected term of 0.77 year. The Company recorded the difference between the fair market value of original warrants of $52,896 and the fair market value of exchanged warrants of $90,621 which amounted to $37,725 as a warrant modification expense with a corresponding credit of additional paid-in capital. Accordingly, for the year ended December 31, 2012, the Company recorded an aggregate warrant modification expense of $235,133 on the accompanying consolidated statement of income. For the year ended December 31, 2013, the Company did not record any warrant modification expense.

F-23

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013 and 2012

NOTE 11 – STOCKHOLDERS’ EQUITY (continued)

(b) Common stock issued for services

During the year ended December 31, 2012, the Company issued a total of 121,053 shares of common stock pursuant to its 2010 long-term incentive plan, of which 250 shares were issued to a director, 35,000 shares were issued to the chief executive officer, 28,403 shares were issued to the chief financial officer and 57,400 shares were issued to other employees and consultants. These shares were issued for services rendered through December 31, 2012, which had been accounted for as stock-based compensation and for services to be rendered during 2013, which had been accounted for as prepaid expense at December 31, 2012. The shares were valued at the fair market value on the date of grant. During the year ended December 31, 2012, the Company recorded stock-based compensation of $159,881 and prepaid expense of $281,265, which was amortized in 2013.

On July 29, 2013, the Company issued a total of 30,000 shares of common stock pursuant to its 2010 long-term incentive plan, of which 8,000 shares were issued to the chief executive officer’s wife, who the Company employs in its sales department, 8,000 shares were issued to the chief financial officer and 14,000 shares were issued to other employees. The shares were valued at the fair market value on the grant date, and the Company recorded stock-based compensation of $157,200 in 2013.

During the year ended December 31, 2012, the Company issued 439,912 shares of common stock upon the conversion of 13,197,389 shares of series A preferred stock. As of December 31, 2013 and 2012, the Company had no preferred stock outstanding and all authorized shares of preferred stock were without designation as to series.

(d) Common stock sold for cash

On November 28, 2012, the Company sold 157,966 shares of its common stock to its chief executive officer and his wife for $612,903, representing the market price on November 28, 2012, the date of the stock purchase agreement.

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

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

(e) Common stock issued for exercise of warrants

During the year ended December 31, 2012, the Company issued 73,386 shares of its common stock upon the exercise of warrants, for which the Company received cash proceeds of $198,142. As of December 31, 2013 and 2012, there were no warrants outstanding.

F-24

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013 and 2012

NOTE 11 – STOCKHOLDERS’ EQUITY (continued)

(f) Warrants

The Company did not have any warrant activity for the year ended December 31, 2013. Warrant activities for the year ended December 31, 2012 were summarized as follows:

	Year Ended December 31, 2012
	Number of Warrants			Weighted Average Exercise Price
Balance at beginning of year		220,158		$	15.73
Issued		73,386			2.70
Exercised		(73,386	)		(2.70	)
Cancelled		(220,158	)		(15.73	)
Balance at end of year		-		$	-
Warrant exercisable at end of year		-		$	-

(g) 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. In October 2013, the Company’s board of directors adopted, and in December 2013, the stockholders approved, an amendment to the 2010 long-term incentive plan to increase the number of shares of common stock subject to the plan, to 500,000 shares. 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, 2013, the Company had issued a total of 177,991 shares of common stock under the plan.

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

For the years ended December 31, 2013 and 2012, statutory reserve activities were as follows:

	Dyeing		Electrical		Fulland Wind Energy		Total
Balance – December 31, 2011	$	72,407	$	1,168,796	$	823,348	$	2,064,551
Addition to statutory reserves		300,641		-		114,546		415,187
Balance – December 31, 2012		373,048		1,168,796		937,894		2,479,738
Addition to statutory reserves		-		-		264,982		264,982
Balance – December 31, 2013	$	373,048	$	1,168,796	$	1,202,876	$	2,744,720

F-25

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013 and 2012

NOTE 13 – SEGMENT INFORMATION

For the years ended December 31, 2013 and 2012, the Company operated in two reportable business segments - (1) the manufacture of forged rolled rings and related components for the wind power and other industries segment, which also includes the manufacture of the Company’s solar industry products, and (2) the manufacture of dyeing and finishing equipment segment. The Company’s reportable segments are strategic business units that offer different products. They are managed separately based on the fundamental differences in their operations. All of the Company’s operations are conducted in the PRC.

Information with respect to these reportable business segments for the years ended December 31, 2013 and 2012 was as follows:

	2013			2012
Revenues:
Forged rolled rings and related components	$	33,775,849		$	31,940,931
Dyeing and finishing equipment		38,336,813			25,258,290
		72,112,662			57,199,221
Depreciation:
Forged rolled rings and related components		4,355,417			5,077,390
Dyeing and finishing equipment		2,348,969			1,442,004
		6,704,386			6,519,394
Interest expense:
Forged rolled rings and related components		141,324			239,974
Dyeing and finishing equipment		159,057			65,685
		300,381			305,659
Net income (loss):
Forged rolled rings and related components		3,244,455			1,359,449
Dyeing and finishing equipment		5,747,096			3,737,787
Other (a)		(805,974	)		(898,656	)
		8,185,577			4,198,580
Identifiable long-lived tangible assets at December 31, 2013 and 2012 by segment:
Forged rolled rings and related components	$	43,987,670		$	40,636,142
Dyeing and finishing equipment		26,607,468			18,799,958
Equipment held for operating lease (b)		4,751,206			7,118,555
	$	75,346,344		$	66,554,655
Identifiable long-lived tangible assets at December 31, 2013 and 2012 by geographical location:
China	$	75,346,344		$	66,554,655
United States		-			-
	$	75,346,344		$	66,554,655

(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.

(b)	The Company does not allocate the equipment held for operating lease to any operating segment.

F-26

CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013 and 2012

NOTE 14 – CONCENTRATIONS

Customers

No customer accounted for 10% or more of the Company’s revenues during the years ended December 31, 2013 and 2012.

Suppliers

The following table sets forth information as to each supplier that accounted for 10% or more of the Company’s purchases for the years ended December 31, 2013 and 2012.

	Years Ended December 31,
Supplier	2013	2012
A	27%	21%
B	*	12%
C	*	18%

* Less than 10%.

The largest supplier accounted for 10.2% of the Company’s total outstanding accounts payable at December 31, 2013. The three largest suppliers accounted for 18.7% of the Company’s total outstanding accounts payable at December 31, 2012.

NOTE 15 – 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. Dyeing and Electric had reached the cumulative limit as of December 31, 2012 and 2013, respectively. 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, 2013 and 2012, substantially all of the Company’s net assets are attributable to the PRC VIE’s and its subsidiary located in the PRC. Accordingly, the Company’s restricted net assets at December 31, 2013 and 2012 were approximately $90,291,000 and $77,514,000, respectively.

NOTE 16 – SUBSEQUENT EVENTS

In March 2014, the Company repaid short-term loan from Bank of China in the principal amount of $490,966, and borrowed the same amount from Bank of China. The new loan bears interest rate at 6.27% per annum and is due on February 16, 2015.

In March 2014, the Company entered into an operating lease agreement whereby the Company leased its ERS equipment to a third party for a period of eight year, effective April 1, 2014 (See Note 6).

F-27

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

Not Applicable.

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 Adam Wasserman, our chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2013.

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

Management conducted its evaluation of disclosure controls and procedures under the supervision of our chief executive officer and our chief financial officer. Based on that evaluation, Mr. Wu and Mr. Wasserman concluded that our disclosure controls and procedures were not effective as of December 31, 2013.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act. Our management is also required to assess and report on the effectiveness of our internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”). Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2013. 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, 2013, 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, 2013.

A major hurdle of our internal control efforts was the segregation of duties and installation of a company-wide Enterprise Resource Planning (“ERP”) system which are important parts of a good internal control system. During the year ended December 31, 2013, due to our working capital requirements and the lack of local professionals with the necessary experience in implementing the ERP system, we postponed the hiring of professional staff to implement ERP system. We have found that engaging professionals who are based outside of Wuxi is very costly and we have not been able to find qualified personnel in the Wuxi area.

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

Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. As a result, we have not been able to take steps to improve our internal controls over financial reporting during the year ended December 31, 2013. However, to the extent possible, we are implementing procedures to assure that the initiation of transactions, the custody of assets and the recording of transactions will be performed by separate individuals.

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

In light of this significant deficiency, we performed additional analyses and procedures in order to conclude that our consolidated financial statements for the year ended December 31, 2013 included in this Annual Report on Form 10-K were fairly stated in accordance with GAAP. Accordingly, management believes that despite our significant deficiency, our consolidated financial statements for the year ended December 31, 2013 are fairly stated, in all material respects, in accordance with GAAP.

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 (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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	58	Chief executive officer, chairman and director
Adam Wasserman	49	Chief financial officer
Tianxiang Zhou2,3	75	Director
Xi Liu1,3	45	Director
Baowen Wang1,2,3	67	Director
Furen Chen1,2	69	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.

Adam Wasserman has been our chief financial officer since December 10, 2012. Mr. Wasserman served as our vice president of financial reporting from 2008 until his appointment as chief financial officer in December 2012. Mr. Wasserman is chief executive officer for CFO Oncall, Inc. and CFO Oncall Asia, Inc. (collectively “CFO Oncall”), in both of which he is the controlling stockholder. CFO Oncall provides chief financial officer services to various companies. Currently, Mr. Wasserman also serves as the chief financial officer of Oriental Dragon Corp, a position he has held since June 2010, FAL Explorations Corp, (formerly Apps Genius Corp) since January 2011, and Wally World Media, Inc. since November 2012. Mr. Wasserman also served as chief financial officer of other companies all under the terms of consulting agreements with CFO Oncall. Mr. Wasserman holds a bachelor of science in accounting from the State University of New York at Albany. He is a member of The American Institute of Certified Public Accountants and is a director and an executive board member of Gold Coast Venture Capital Association.

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.

Baowen Wang has been a director since July 2012. Mr. Wang works as a senior engineer at the National 559th factory research center, a state-owned precision optical research center, a position he has held since 2005, when he retired as head of the Wuxi HuGuang Instrument Research Institute, a position he has held since 1979. Mr. Wang graduated from NanJing University, majoring in weather station and radar. Mr. Wang’s background in engineering and his practical industrial experience is important to us as we plan and develop our business.

Furen Chen has been a director since July 2012. Mr. Chen is general manger and chairman of the board of Wuxi City ZhengCheng Accounting Services, Ltd., a position he has held since February 2000. From 1990 until February 2000, Mr. Chen was accounting manager at Qian Zhou Agricultural Financial Co., Ltd. Mr. Chen is a certified public accountant in China. Mr. Chen’s finance and accounting experience background is important to us as we improve our financial accounting controls.

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 Baowen Wang, Xi Liu and Furen Chen, with Mr. Baowen Wang serving as chairman. The compensation committee is comprised of Tianxiang Zhou, Baowen Wang and Furen Chen, with Mr. Tianxiang Zhou as chairman. The corporate governance/nominating committee is comprised of Xi Liu, Baowen Wang, and Tianxiang Zhou, with Mr. Xi 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. We are in the process of amending our compensation committee charter to meet the requirements of Nasdaq. We will include provisions which give the compensation committee specific responsibilities and authority relating to the retention, compensation, oversight and funding of compensation consultants, legal counsel and other compensation advisers, as well as the requirement to consider six independence factors before selecting, or receiving advice from, such advisers.

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 2013:

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 2013.

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, 2013. Except for Adam Wasserman, our chief financial officer, 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, 2013, Mr. Wu and Mr. Wasserman were late in the filing of one or more 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, 2013 and 2012 by each person who served as chief executive officer and chief financial officer during the year ended December 31, 2013. 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)		2013 2012	28,241 23,735		0 0	102,250 28,000		0 0	130,491 51,735

Adam Wasserman, chief financial officer (2)		2013	52,000		0	103,332		0	155,332
		2012	42,556		0	28,051		0	70,607

(1)	Mr. Wu’s 2013 compensation consisted of salary of $28,241 and 25,000 shares of common stock, valued at $102,250. Mr. Wu’s 2012 compensation consisted of salary of $23,735 and 10,000 shares of common stock, valued at $28,000.

(2)

Mr. Wasserman has been our chief financial officer since December 2012. Mr. Wasserman served as our vice president of financial reporting from 2008 until his appointment as chief financial officer in December 2012. Mr. Wasserman’s compensation is paid to CFO Oncall Inc. where he serves as chief executive officer. Mr. Wasserman’s 2013 compensation included salary of $52,000 and 23,015 shares of common stock, valued at $103,332. Mr. Wasserman’s 2012 compensation included salary of $42,556 and 9,634 shares of common stock, valued at $28,051.

Employment Agreement

Pursuant to an employment agreement dated December 10, 2012, Adam Wasserman receives compensation at the annual rate of $52,000. In addition, Mr. Wasserman was granted 19,603 shares of common stock pursuant to our long-term incentive plan. The agreement has a term commencing December 10, 2012 through March 31, 2014.

Compensation of Directors

We do not have any agreements or formal plan for compensating our current 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 current directors.

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 2013. The value attributable to any stock grants is computed in accordance with ASC Topic 718.

Name	Fees earned or paid in cash ($)		Stock awards ($)		Total ($)
Tianxiang Zhou		0		0		0
Xi Liu		0		0		0
Furen Chen		0		0		0
Baowen Wang		0		0		0

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. In October 2013, the board of directors adopted and in December 2013, the stockholders approved, an amendment to the 2010 plan which increased the number of shares subject to the 2010 plan from 200,000 shares to 500,000 shares. 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, 2013, the Company had issued a total of 177,991 shares of common stock pursuant to this plan.

The following table sets forth information as options outstanding on December 31, 2013.

	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 or 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
Adam Wasserman	0	0	0	0	0	0	0	0	0

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 the filing date of this report, 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 (1) (3)		806,675		23.0	%
Adam Wasserman (5)		17,286		*
Lihua Tang (1) (3)		806,675		23.0	%
Maxworthy International Limited (1)		544,267		15.5	%
Yunxia Ren (2) (4)		327,274		9.3	%
Haoyang Wu (2) (4)		327,274		9.3	%
Xi Liu		0		0.0	%
Tianxiang Zhou		0		0.0	%
Baowen Wang		0		0.0	%
Furen Chen		0		0.0	%
All current officers and directors as a group (two persons owning stock)		823,961		23.5	%

* 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 (ii) 175,425 shares owned by Mr. Wu and (iii) 86,983 shares owned by Ms. Tang. Each of Mr. Wu and Ms. Tang disclaims beneficial ownership in the shares of beneficially owned by the other. The address for Maxworthy is P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands.

(2)

Yunxia Ren and Haoyang Wu are the daughter-in-law and son of Jianhua Wu and Lihua Tang. Ms. Ren owns 259,022 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, P.R.C.

(4)

(5)

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

P.R.C.

17,000 shares are held by Adam Wasserman and 286 shares are held in the name of CFO Oncall Asia, Inc. of which Mr. Wasserman is chief executive office.

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

Director Independence

Four of our directors, Furen Chen, Baowen Wang, Xi Liu, and Tianxiang Zhou, are independent directors, using the Nasdaq definition of independence. Each of these directors serves on at least two of our board committees. The audit committee is comprised of Baowen Wang (chair), Xi Liu and Furen Chen, the compensation committee is comprised of Tianxiang Zhou (chair), Baowen Wang, and Furen Chen, and the corporate governance/nominating committee is comprised of Xi Liu (chair), Baowen Wang, and Tianxiang Zhou. Our board has determined that Mr. Wang is an audit committee financial expert.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

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

	Year Ended December 31,
Category	2013		2012
Audit Fees	$	105,500	$	105,500
Audit Related Fees	$	0	$	0
Tax Fees	$	3,500	$	3,500
All Other Fees	$	3,500	$	0

Audit fees. Consists of fees billed for the audit of our annual financial statements, review of our Form 10-K, review of our interim financial statements included in our Form 10-Q 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 assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “Audit Fees”, review of our Forms 8-K filings 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
3.1		Articles of incorporation. (4)
3.2		Bylaws. (1)
10.1		Agreement between the Company and Adam Wasserman, dated February 1, 2010 (3)
10.2		2010 Long-Term Incentive Plan (3)
10.3		English translation of equipment lease dated March 3, 2014 between Wuxi Fulland Wind Power Equipment Co., Ltd. and Shanghai Liangting Metallurgy Roll Manufacture Co., Ltd. *
14.1		Code of ethics and business conduct for officers, directors and employees (2)
14.2		Cleantech Solutions International, Inc. ethics hotline/whistleblower program (2)
21.0		List of subsidiaries*
23.1		Consent of RBSM 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

(1)	Incorporated by reference to the Form 8-K filed by the Company on August 9, 2012.
(2)	Incorporated by reference to the Form 10-K filed by the Company on March 31, 2009.
(3) (4) (5)	Incorporated by reference to the Company’s definitive proxy statement for the 2013 annual meeting of shareholders, which was filed by the Company on October 30, 2013. Incorporated by reference to the Form 10-K filed by the Company on April 11, 2013. Incorporated by reference to the Form 8-K filed by the Company on July 11, 2013.
*	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.

Date: March 28, 2014	CLEANTECH SOLUTIONS INTERNATIONAL, INC.

	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 and Director	March 28, 2014
Jianhua Wu	(Principal Executive Officer)

/s/ Adam Wasserman	Chief Financial Officer	March 28, 2014
Adam Wasserman	(Principal Financial and Accounting Officer)

/s/ Tianxiang Zhou	Director	March 28, 2014
Tianxiang Zhou

/s/ Xi Liu	Director	March 28, 2014
Xi Liu

/s/ Baowen Wang	Director	March 28, 2014
Baowen Wang

/s/ Furen Chen	Director	March 28, 2014
Furen Chen