UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington , D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended: December 31, 2013

¨	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: 001-33959

SUTOR TECHNOLOGY GROUP LIMITED

(Exact Name of Registrant as Specified in Its Charter)

Nevada		87-0578370
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

No 8, Huaye Road

Dongbang Industrial Park

Changshu, 215534
People’s Republic of China

(Address of principal executive offices, Zip Code)

(+86) 512-52680988

(Registrant’s telephone number, including area code)

_____________________________________________________

(Former name, former address and former fiscal year, if changed since last report)

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

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

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

	Large accelerated filer ¨	Accelerated filer ¨
	Non-accelerated filer ¨ (Do not check if a smaller reporting company)	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 ¨ No x

The number of shares outstanding of each of the issuer’s classes of common stock, as of February 9, 2014 is as follows:

Class of Securities		Shares Outstanding
Common Stock, $0.001 par value		41,651,429

SUTOR TECHNOLOGY GROUP LIMITED

Quarterly Report on Form 10-Q

Period Ended December 31, 2013

TABLE OF CONTENTS

	PART I
	FINANCIAL INFORMATION

Item 1.	Financial Statements	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	36

	PART II
	OTHER INFORMATION

Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 3.	Defaults Upon Senior Securities	37
Item 4.	Mine Safety Disclosures	37
Item 5.	Other Information	37
Item 6.	Exhibits	37

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

		Page

Unaudited Condensed Consolidated Balance Sheets as of December 31, 2013 and June 30, 2013		F-1 – F-2

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income for the Three and Six Months Ended December 31, 2013 and 2012		F-3

Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2013 and 2012		F-4 – F-5

Notes to Unaudited Condensed Consolidated Financial Statements		F-6 – F-22

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	December 31,		June 30,
	2013		2013

ASSETS
Current Assets:
Cash and cash equivalents	$	12,525,255	$	3,601,385
Restricted cash		108,741,521		108,825,425
Short-term investments		3,272,144		-
Trade accounts receivable, net of allowance for doubtful accounts of $753,383 and $623,742, respectively		9,622,962		7,331,291
Notes receivable		109,617		320,888
Other receivables and prepayments, net of allowance for doubtful accounts of $275,483 and $248,128, respectively		9,256,709		3,446,187
Advances to suppliers, unrelated parties, net of allowance for doubtful accounts of $780,924 and $796,026, respectively		25,943,158		43,175,047
Advances to suppliers, related parties, net of allowance for doubtful accounts of nil, and net of right to offset (Note 11)		153,903,862		185,615,973
Inventories, net		114,409,491		52,377,135
Deferred tax assets		1,050,243		952,417
Total Current Assets		438,834,962		405,645,748
Non-current Assets:
Advances for purchase of long term assets		85,857		17,085,958
Property, plant and equipment, net		92,366,660		71,508,912
Intangible assets, net		3,638,359		3,074,372
Equity method investments		7,029,062		6,686,539
Total Non-current Assets		103,119,938		98,355,781
TOTAL ASSETS	$	541,954,900	$	504,001,529

	F-1

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(CONTINUED)

	December 31,		June 30,
	2013		2013

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Short-term loans	$	124,838,100	$	138,968,845
Long-term loans, current portion		3,542,760		7,418,003
Accounts payable, unrelated parties		130,117,238		82,602,243
Accounts payable, related parties		-		20,162,069
Other payables and accrued expenses		7,066,224		7,291,220
Advances from customers		21,644,382		11,008,550
Warrant liabilities		211,433		144,535
Total Current Liabilities		287,420,137		267,595,465
Long-Term Loans		2,859,995		1,180,877
Total Liabilities		290,280,132		268,776,342

Commitments and Contingencies (Note 16)

Stockholders' Equity
Undesignated preferred stock - $0.001 par value; 1,000,000 shares authorized; nil shares outstanding		-		-
Common stock - $0.001 par value; authorized: 500,000,000 shares as of December 31, 2013 and June 30, 2013; issued: 42,107,267 and 40,965,602 shares as of December 31, 2013 and June 30, 2013.		42,107		40,965
Additional paid-in capital		43,521,086		41,793,142
Statutory reserves		20,426,971		20,426,971
Retained earnings		143,894,975		132,311,592
Accumulated other comprehensive income		44,441,138		41,304,026
Less: Treasury stock, at cost, 590,838 shares as of December 31, 2013 and June 30, 2013		(651,509)		(651,509)
Total Stockholders' Equity		251,674,768		235,225,187
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	541,954,900	$	504,001,529

The accompanying notes are an integral part of the condensed consolidated financial statements

	F-2

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

	For The Three Months Ended				For The Six Months Ended
	December 31,				December 31,
	2013		2012		2013		2012

Revenue:
Revenue from unrelated parties	$	102,230,215	$	103,844,847	$	204,412,337	$	191,073,017
Revenue from related parties		26,086,595		54,022,011		63,012,798		83,980,532
		128,316,810		157,866,858		267,425,135		275,053,549

Cost of Revenue
Cost of revenue from unrelated parties		(91,296,065)		(94,105,510)		(183,571,592)		(174,320,698)
Cost of revenue from related parties		(23,395,036)		(51,552,002)		(58,025,289)		(79,976,521)
		(114,691,101)		(145,657,512)		(241,596,881)		(254,297,219)

Gross Profit		13,625,709		12,209,346		25,828,254		20,756,330

Operating Expenses:

Selling expenses		(1,337,918)		(1,978,916)		(3,332,774)		(4,292,168)
General and administrative expenses		(2,624,720)		(2,550,249)		(5,528,990)		(4,680,073)
Total Operating Expenses		(3,962,638)		(4,529,165)		(8,861,764)		(8,972,241)
Income from Operations		9,663,071		7,680,181		16,966,490		11,784,089

Other Incomes/(Expenses):
Interest income		786,544		1,059,709		1,836,766		2,022,050
Interest expense		(2,574,958)		(2,340,244)		(4,378,253)		(5,874,436)
Changes in fair value of warrant liabilities		(54,311)		(1,501)		(66,898)		14,523
Income from equity method investments		180,956		185,888		266,128		174,446
Other income		174,752		122,520		219,026		159,138
Other expense		(201,757)		(563,209)		(219,780)		(667,524)
Total Other Expenses, net		(1,688,774)		(1,536,837)		(2,343,011)		(4,171,803)

Income Before Taxes		7,974,297		6,143,344		14,623,479		7,612,286
Income tax expense		(1,579,161)		(1,371,012)		(3,040,096)		(1,004,609)
Net Income	$	6,395,136	$	4,772,332	$	11,583,383	$	6,607,677

Other Comprehensive Income:
Foreign currency translation adjustment		1,477,555		708,871		3,137,112		226,470
Comprehensive Income	$	7,872,691	$	5,481,203	$	14,720,495	$	6,834,147

Basic Earnings per Share	$	0.15	$	0.12	$	0.28	$	0.16
Diluted Earnings per Share	$	0.15	$	0.12	$	0.28	$	0.16

Basic Weighted Average Shares Outstanding		41,453,386		40,224,003		41,383,956		40,222,247
Diluted Weighted Average Shares Outstanding		41,453,386		40,224,003		41,383,956		40,222,247

The accompanying notes are an integral part of the condensed consolidated financial statements

	F-3

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	For The Six Months Ended
	December 31,
	2013		2012
Cash Flows from Operating Activities:
Net income	$	11,583,383	$	6,607,677
Adjustments to reconcile net income to net cash provided by/(used in) operating activities
Depreciation and amortization		4,510,854		4,408,037
Provision/(reversal) for doubtful accounts		123,435		(708,630)
Stock based compensation		238,320		71,524
Foreign currency exchange gain		(194,913)		(10,234)
(Gain)/loss on disposal of property, plant and equipment		(10,985)		85,198
Interest income from short-term investments carried at amortized cost		-		(30,900)
Income from equity method investments		(266,128)		(174,446)
Deferred income taxes		(86,678)		(179,476)
Changes in fair value of warrant liabilities		66,898		(14,523)
Changes in current assets and liabilities:
Restricted cash		(20,188,832)		2,221,324
Trade accounts receivable		(2,320,586)		3,910,051
Notes receivable		213,696		364,553
Other receivable and prepayments		(5,775,579)		868,254
Advances to suppliers, unrelated parties		17,643,081		(5,968,905)
Advances to suppliers, related parties		33,716,400		(15,026,467)
Inventories		(61,110,422)		(7,330,679)
Accounts payable, unrelated parties		46,830,652		(5,156,443)
Accounts payable, related parties		(20,276,893)		17,975,273
Other payables and accrued expenses		(293,095)		(1,078,382)
Advances from customers		10,458,615		5,368,031
Net Cash Provided by Operating Activities		14,861,223		6,200,837

Cash Flows from Investing Activities:
Purchase of property, plant and equipment		(7,818,783)		(3,217,771)
Proceeds from disposal of property, plant and equipment		15,052		523,761
Purchase of intangible assets		(567,268)		(3,560,563)
Payments for short-term investments		(3,254,308)		-
Proceeds from sale of short-term investments		-		4,884,009
Investment in affiliated company		-		(6,181,547)
Net Cash Used In Investing Activities		(11,625,307)		(7,552,111)

Cash Flows from Financing Activities:
Proceeds from loans		93,079,729		94,118,588
Repayment of loans		(110,464,374)		(94,530,050)
Proceeds from issuance of common stock		1,500,000		-
Changes in restricted cash		21,485,248		10,065,475
Payments on repurchase of common stock		-		(43,841)
Net Cash Provided by Financing Activities		5,600,603		9,610,172

Effect of Exchange Rate Changes on Cash and Cash Equivalents		87,351		8,980

Net Change in Cash and Cash Equivalents		8,923,870		8,267,878
Cash and Cash Equivalents at Beginning of Period		3,601,385		9,530,531
Cash and Cash Equivalents at End of Period	$	12,525,255	$	17,798,409

	F-4

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(CONTINUED)

Supplemental Non-Cash Information:
Offset of notes payable to related parties against receivable from related parties	$	11,126,897	$	10,609,363
Accounts payable for purchase of long-term assets	$	(495,344)	$	(658,841)
Advances for purchase of long-term assets	$	17,097,874	$	(334,858)
Supplemental Cash Flow Information:
Cash paid during the period for interest expense	$	(4,430,640)	$	(5,025,598)
Cash paid during the period for income tax	$	(3,122,617)	$	(1,669,952)

The accompanying notes are an integral part of the condensed consolidated financial statements

	F-5

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS

Sutor Technology Group Limited (“Sutor”) was incorporated on May 1, 1997 in the State of Nevada under the name of Bronze Marketing, Inc. and changed the name to Sutor Technology Group Limited effective March 6, 2007. Its principal activity is investment holding. The principal activities of its subsidiaries are described in the table below. Sutor together with its subsidiaries listed below are referred to as the “Company” hereinafter.

As of December 31, 2013, Sutor’s subsidiaries and affiliated company included the following entities:

	Date of
	incorporation/	Place of	Percentage of
Name of subsidiary or affiliate	acquisition	incorporation	shareholding	Principal activities

Sutor Steel Technology Co., Ltd. (“Sutor BVI”)	August 15, 2006	British Virgin Islands	100%	Investment holding

Changshu Huaye Steel Strip Co., Ltd. (“Changshu Huaye”)	January 17, 2003	PRC	100%	Manufacture of hot-dip galvanized steel (“HDG”) and pre-painted galvanized steel (“PPGI”)

Jiangsu Cold-Rolled Technology Co., Ltd. (“Jiangsu Cold-Rolled”)	August 28, 2003	PRC	100%	Manufacture of cold-rolled steel, acid pickled steel and hot-dip galvanized steel

Ningbo Zhehua Heavy Steel Pipe Manufacturing Co., Ltd. (“Ningbo Zhehua”)	April 5, 2004	PRC	100%	Manufacture of heavy steel pipe

Sutor Technology Co., Ltd. (“Sutor Technology”)	February 24, 2010	PRC	100%	Trading of steel products

China Railway Materials Suzhou Company Limited. (“CRM Suzhou”)	August 10, 2012	PRC	39%	Trading of metal materials

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

Interim Unaudited Financial Statements – The accompanying unaudited condensed consolidated financial statements of the Company reflect all adjustments (consisting only of normal recurring adjustments) that, in the opinion of management, are necessary to present fairly the consolidated financial position and results of operations of the Company for the periods presented. Operating results for the three and six months ended December 31, 2013 are not necessarily indicative of the results that may be expected for the year ending June 30, 2014. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2013. The Company follows the same accounting policies in the preparation of interim reports.

Principles of Consolidation – The accompanying unaudited condensed consolidated financial statements include the accounts and transactions of Sutor and its subsidiaries for all periods presented. All significant intercompany accounts and transactions have been eliminated in consolidation.

F-6

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES - continued

Functional Currency and Translating Financial Statements - Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are recorded in the condensed consolidated statement of operations and comprehensive income.

The reporting currency of the Company is the United States Dollars (“USD”). Sutor and Sutor BVI maintain their books and records in USD, their functional currency. The PRC subsidiaries maintain their books and records in its local currency, the Renminbi Yuan (“RMB”), which is their functional currencies as being the primary currency of the economic environment in which these entities operate. In general, for consolidation purposes, assets and liabilities of its subsidiaries whose functional currency is not the USD are translated into USD, in accordance with ASC Topic 830-30, “Translation of Financial Statement”, using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses resulting from translation of financial statements of foreign subsidiaries are recorded as a separate component of accumulated other comprehensive income.

Translation of amounts from RMB into US$ 1 has been made at the following exchange rates for the respective periods:

	December 31, 2013		December 31, 2012		June 30, 2013
Closing RMB : USD exchange rate at the period end		6.1122		6.3086		6.1807
Average six months RMB : USD exchange rate		6.1457		6.3091		n/a

The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into USD at the rates used in translation.

Accounting Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“US GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could materially differ from those estimates. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities are provision for doubtful accounts on trade accounts receivable, notes receivable, other receivables and prepayments, advances to suppliers, reserves for inventories, estimated useful lives of property, plant and equipment, valuation allowance for deferred tax assets, valuation of warrant liabilities and share-based compensation.

Restricted Cash - Restricted cash represents amounts held by banks in escrow as security for either notes payable that have yet to be drawn down or bank loans and therefore are not available for the Company’s use.

Trade Accounts Receivable - Trade accounts receivable are carried at original invoiced amounts less an allowance for doubtful accounts.

Allowance for doubtful accounts – The Company provides a general provision for doubtful accounts for the outstanding trade receivable balances based on historical experience and information available. Additionally, the Company makes specific provisions based on (i) specific assessment of the collectability of all significant accounts; and (ii) any specific knowledge the Company has acquired that might indicate that an account is uncollectible. The facts and circumstances of each account may require the Company to use substantial judgment in assessing its collectability.

F-7

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES - continued

Equity method investments – Affiliated company (partially owned affiliate) is an entity over which the Company has significant influence, but which it does not control. Investments in affiliated company (“Investee”) are accounted for as equity method investments. Under equity method, the Company’s share of the post-acquisition profits or losses of Investee is recognized in the consolidated statements of operations. Unrealized gains on transactions between the Company and its Investee are eliminated to the extent of the Company’s interest in Investee; unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. When the Company’s share of losses in Investee equals or exceeds its interest in the Investee, the Company does not recognize further losses, unless the Company has incurred obligations or made payments on behalf of the Investee.

The Company continually reviews its equity method investments to determine whether a decline in fair value below the carrying value is other than temporary. The primary factors the Company considers in its determination are the length of time that the fair value of the investment is below the Company’s carrying value and the financial condition, operating performance and near term prospects of Investee. In addition, the Company considers the reason for the decline in fair value, including general market conditions, industry specific or Investee specific reasons, changes in valuation subsequent to the balance sheet date and the Company’s intent and ability to hold the investments for a period of time sufficient to allow for a recovery in fair value. If the decline in fair value is deemed to be other than temporary, the carrying value of the investments is written down to fair value. There was no impairment for equity method investments as of December 31, 2013.

Fair Values of Financial Instruments - The Company adopted ASC 820 “Fair value measurements and disclosures”. This guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The guidance outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. Under US GAAP, certain assets and liabilities must be measured at fair value, and the guidance details the disclosures that are required for items measured at fair value.

The three levels are defined as follows: Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities. Level 2 – Valuations based other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 – Valuations based on inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.

Financial instruments of the Company primarily comprise of cash and cash equivalents, restricted cash, short-term investments, trade accounts receivable, other receivables, loans, accounts payable, other payables and warrant liabilities. As of December 31, 2013 and June 30, 2013, cash and cash equivalents, restricted cash, short-term investments, trade accounts receivable, other receivables, short-term loans, current portion of long-term loans, accounts payable and other payables were carried at cost on the condensed consolidated balance sheets, and carrying amounts approximated their fair values because of their generally short maturities. The estimated fair value of long-term loan approximated the carrying amount as of December 31, 2013 and June 30, 2013 as they bear floating interest rate and the market rate approximate the floating interest rates at the respective balance sheet dates. Warrants are recorded as liabilities at their estimated fair value at the date of issuance, with subsequent changes in estimated fair value recorded in changes in fair value of warrant liabilities on the Company’s statement of operations in each subsequent period. The warrants were measured at estimated fair value using the Black Scholes valuation model, which was based, in part, upon inputs for which there is little or no observable market data, requiring the Company to develop its own assumptions. Inherent in this model were assumptions related to expected stock-price volatility, expected life, risk free interest rate and dividend yield. We estimated the volatility of our common stock at the date of issuance, and at each subsequent reporting period, based on historical volatility that matches the expected remaining life of the warrants. The risk-free interest rate was based on the U.S. Treasury zero-coupon yield curve on the grant date for a maturity similar to the expected remaining life of the warrants. The expected life of the warrants was assumed to be equivalent to their remaining contractual term. The dividend rate was based on our historical rate, which we anticipated to remain at zero. The assumptions used in calculating the estimated fair value of the warrants represent our best estimates. However these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and different assumptions were used, the warrant liability and the changes in estimated fair value could be materially different.

	F-8

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES - continued

Liabilities measured at fair value on a recurring basis are summarized below:

	Balance as of December 31, 2013
			Fair Value Measurements
	Carrying Value		Level 1		Level 2		Level 3

Warrant liabilities	$	211,433	$	-	$	-	$	211,433

	Balance as of June 30, 2013
			Fair Value Measurements
	Carrying Value		Level 1		Level 2		Level 3

Warrant liabilities	$	144,535	$	-	$	-	$	144,535

For a summary of changes in warrant liabilities for the three and six months ended December 31, 2013, please see Note 13.

Revenue Recognition - The Company recognizes revenues from the sale of products when they are realized and earned. The Company considers revenue realized and earned when (1) it has persuasive evidence of an arrangement, (2) delivery has occurred, (3) the sales price is fixed or determinable, and (4) collectability is reasonably assured. Revenues are not recognized until products have been shipped to the client, risk of loss has transferred to the client and client acceptance has been obtained, client acceptance provisions have lapsed, or the Company has objective evidence that the criteria specified in client acceptance provisions have been satisfied.

Recent Accounting Pronouncements – In February 2013, the FASB issued ASU 2013-04, “Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date”. This update provides guidance for the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this update is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. GAAP. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The guidance in this update also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. This update should be applied retrospectively to all prior periods presented for those obligations resulting from joint and several liability arrangements within this update’s scope that exist at the beginning of an entity’s fiscal year of adoption. An entity may elect to use hindsight for the comparative periods (if it changed its accounting as a result of adopting the amendments in this update) and should disclose that fact. Early adoption is permitted. The adoption of this standard is not expected to have any impact on the Company’s financial position.

In March 2013, the FASB issued ASU 2013-05, “Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity”. This update provides that when a reporting entity (parent) ceases to have a controlling financial interest in a subsidiary or group of assets that is a non-profit activity or a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity, the parent is required to apply the guidance in Subtopic 830-30 to release any related cumulative translation adjustment into net income. Accordingly, the cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. For an equity method investment that is a foreign entity, a pro rata portion of the cumulative translation adjustment should be released into net income upon a partial sale of such an equity method investment. However, this treatment does not apply to an equity method investment that is not a foreign entity. In those instances, the cumulative translation adjustment is released into net income only if the partial sale represents a complete or substantially complete liquidation of the foreign entity that contains the equity method investment. Additionally, the amendments in this update clarify that the sale of an investment in a foreign entity includes both (1) events that result in the loss of a controlling financial interest in a foreign entity (that is, irrespective of any retained investment) and (2) events that result in an acquirer obtaining control of an acquiree in which it held an equity interest immediately before the acquisition date (sometimes also referred to as a “step acquisition”). Accordingly, the cumulative translation adjustment should be released into net income upon the occurrence of those events. This update is effective prospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. Early adoption is permitted. The adoption of this standard is not expected to have any impact on the Company’s financial position or operating results.

	F-9

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES - continued

On July 18, 2013, the FASB issued ASU 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (Income Taxes - Topic 740). This update applies to all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, unless otherwise provided in the update. To the extent that a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. For example, an entity should not evaluate whether the deferred tax asset has expired before the statute of limitations on the tax position or whether the deferred tax asset may be used prior to the unrecognized tax benefit being settled. The amendments in this update do not require new recurring disclosures. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The Company is currently evaluating the impact of adopting this update on its financial statements.

	F-10

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – REVISION OF PRIOR YEAR FINANCIAL STATEMENTS

During the year ended June 30, 2013, the Company identified an error related to the classification between revenue from unrelated parties and revenue from related parties. Previously, the Company reported the revenue from the sales to a related party under revenue from nonrelated parties. In addition, the Company failed to disclose the purchases from this related party as related party transaction. The Company assessed the materiality of this error on prior periods’ financial statements in accordance with the SEC’s Staff Accounting Bulletin No. 99 (“SAB 99”), and concluded that the error was not material to any of its prior annual or interim financial statements. As a result, the Company elected to revise its previously issued consolidated financial statements the next time they are filed as permitted in SEC’s Staff Accounting Bulletin No.108 (“SAB 108”) regarding immaterial revisions. As each subsequent filing is made in the future, the previous period consolidated financial statements affected by the errors will be revised. The Company has revised the unaudited condensed consolidated statements of operations for the three and six months ended December 31, 2012 included herein to reflect the correct numbers. The impact of correcting this error on net income as reported for the three and six months ended December 31 2012 was nil.

The Company has improved its internal control and implemented a new control for the identification of related parties in order to prevent similar errors in future.

Set out below are the line items within the consolidated statement of operations for the three and six months ended December 31, 2012 that have been affected by the revisions. The revisions had no impact on the Company’s consolidated balance sheets or consolidated statements of cash flows.

	For the three months ended December 31, 2012
	Previously reported		Adjustments		Revised
Consolidated Statement of Operations

Revenue from unrelated parties	$	106,478,486	$	(2,633,639)	$	103,844,847
Revenue from related parties		51,388,372		2,633,639		54,022,011
Cost of revenue from unrelated parties		(96,462,341)		2,356,831		(94,105,510)
Cost of revenue from related parties		(49,195,171)		(2,356,831)		(51,552,002)

	For the six months ended December 31, 2012
	Previously reported		Adjustments		Revised
Consolidated Statement of Operations

Revenue from unrelated parties	$	195,593,572	$	(4,520,555)	$	191,073,017
Revenue from related parties		79,459,977		4,520,555		83,980,532
Cost of revenue from unrelated parties		(178,489,766)		4,169,068		(174,320,698)
Cost of revenue from related parties		(75,807,453)		(4,169,068)		(79,976,521)

F-11

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 – SHORT-TERM INVESTMENTS

Short-term investments as of December 31, 2013 consisted of the following:

	Carrying		Unrealized		Estimated
	Value		Gains/(Losses)		Fair Value

Held-to-maturity securities
- Time deposits	$	3,272,144	$	-	$	3,272,144

The following table summarizes the movement of short-term investments for the six month ended December 31, 2013:

	Amount
As of June 30, 2013		-
Payment for time deposits		3,254,308
Foreign currency translation adjustment		17,836
As of December 31, 2013	$	3,272,144

NOTE 5 – OTHER RECEIVABLES AND PREPAYMENTS

Other receivables and prepayments as of December 31, 2013 and June 30, 2013 consisted of the following:

	December 31,		June 30,
	2013		2013
Tax recoverable	$	2,827,900	$	-
Prepaid expenses		126,824		136,058
Other receivables		6,577,468		3,558,257
		9,532,192		3,694,315
Less: allowance for doubtful accounts		(275,483)		(248,128)
Other receivables and prepayments, net	$	9,256,709	$	3,446,187

NOTE 6 – INVENTORIES

Inventories as of December 31, 2013 and June 30, 2013 consisted of the following:

		December 31,		June 30,
		2013		2013
Raw materials	$	85,272,686	$	28,844,850
Finished goods		29,401,197		23,793,747
		114,673,883		52,638,597
Less: allowance for obsolescence		(264,392)		(261,462)
Inventories, net	$	114,409,491	$	52,377,135

	F-12

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 – PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment as of December 31, 2013 and June 30, 2013 consisted of the following:

	December 31,		June 30,
	2013		2013
Buildings and plant	$	47,353,023	$	46,704,868
Machinery		74,180,500		73,096,228
Vehicles		673,940		471,456
Office and other equipment		1,657,597		1,346,734
		123,865,060		121,619,286
Less: accumulated depreciation		(58,741,773)		(53,682,239)
		65,123,287		67,937,047
Construction in progress		27,243,373		3,571,865
Property, Plant and Equipment, net	$	92,366,660	$	71,508,912

As of December 31, 2013 and June 30, 2013, certain of the Company’s property, plant and equipment amounted to approximately $ 42 million and $ 39 million, respectively, was pledged to banks to secure the loan granted to the Company (Note 10).

Depreciation expense for the three months ended December 31, 2013 and 2012 was $ 2,244,272 and $ 2,170,767 , respectively.

Depreciation expense for the six months ended December 31, 2013 and 2012 was $ 4,470,232 and $ 4,326,723 , respectively.

NOTE 8 – INTANGIBLE ASSETS

Intangible assets as of December 31, 2013 and June 30, 2013 consisted of the following:

	December 31,		June 30,
	2013		2013
Cost	$	4,369,641	$	3,757,157
Less: Accumulated amortization		(731,282)		(682,785)
Intangible Assets, net	$	3,638,359	$	3,074,372

The Company’s intangible assets represented several land use rights, which are amortized using the straight-line method over the lease term of 50 years. Amortization expense for the three months ended December 31, 2013 and 2012 was $ 21,789 and $ 40,764 , respectively. Amortization expense for the six months ended December 31, 2013 and 2012 was $ 40,622 and $ 81,314 , respectively.

As of December 31, 2013 and June 30, 2013, certain of the Company’s intangible assets amounted to approximately $ 2.9 million and $ 2.9 million, respectively, was pledged to banks to secure the loan granted to the Company (Note 10).

The following schedule sets forth the estimated amortization expense for the periods presented:

ESTIMATED AMORTIZATION EXPENSE
Remainder of the year ending June 30, 2014	$	43,696
For the year ending June 30, 2015		87,393
For the year ending June 30, 2016		87,393
For the year ending June 30, 2017		87,393
For the year ending June 30, 2018		87,393
For the year ending June 30, 2019 and thereafter		3,245,091
Total	$	3,638,359

	F-13

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 – EQUITY METHOD INVESTMENTS

In August 2012, the Company together with other two unrelated companies jointly established CRM Suzhou. The Company holds 39 % equity interest in CRM Suzhou with the consideration of $ 6,165,326 in cash. The Company evaluated its interest in CRM Suzhou under relevant guidance in ASC 810 and ASC 323 pertaining to consolidation and equity method accounting, respectively. The Company determined that it does not have a controlling financial interest in the investee, but rather possesses significant influence. Accordingly, the Company has accounted for this investment under the equity method.

		Balance as of June 30, 2013		Share of income		Translation difference		Balance as of December 31, 2013
Equity interest in CRM Suzhou		6,686,539		266,128		76,395		7,029,062

NOTE 10 – LOANS

Loans are as follows as of the respective balance sheet dates:

	December 31,		June 30,
	2013		2013
Short-term loans	$	124,838,100	$	138,968,845
Long-term loans, current portion		3,542,760		7,418,003
		128,380,860		146,386,848
Long-term loans, non-current portion		2,859,995		1,180,877
Total loans	$	131,240,855	$	147,567,725

The short-term loans outstanding as of December 31, 2013 and June 30, 2013 bore a weighted average interest rate of 5.17 % and 5.11 % per annum, respectively. These loans were obtained from financial institutions and have contract terms of three months to one year.

The long-term loans outstanding as of December 31, 2013 and June 30, 2013 bore a weighted average interest rate of 6.91 % and 7.10 % per annum, respectively. These loans were obtained from financial institutions and one individual. Long-term loans have contract terms of more than one year to three years.

Short-term loans as of December 31, 2013 were secured/guaranteed by the following:

Secured/guaranteed by
Guaranteed by a related party	$	56,073,789
Jointly guaranteed by (i) a related party, and (ii) the Company's property, plant and equipment		38,774,909
Guaranteed by the Company's property, plant and equipment		17,015,150
Guaranteed by the Company's trade accounts receivable		9,538,500
Jointly guaranteed by (i) a related party, and (ii) the Company's trade accounts receivable		2,781,323
Unsecured		654,429
Total short-term loans	$	124,838,100

Short-term loans as of June 30, 2013 were secured/guaranteed by the following:

Secured/guaranteed by
Jointly guaranteed by (i) a related party, and (ii) the Company's property, plant and equipment	$	45,464,106
Guaranteed by a related party		40,351,593
Guaranteed by the Company's property, plant and equipment		28,152,151
Guaranteed by the Company's cash deposit		10,000,000
Jointly guaranteed by (i) the Company's cash deposit, (ii) the Company's notes receivable		9,500,000
Unsecured		5,500,995
Total short-term loans	$	138,968,845

	F-14

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 – LOANS - continued

Long-term loans, current portion as of December 31, 2013 were secured/guaranteed by the following:

Secured/guaranteed by
Guaranteed by the Company's property, plant and equipment		$	3,542,760

Long-term loans, current portion as of June 30, 2013 were secured/guaranteed by the following:

Secured/guaranteed by
Guaranteed by the Company's property, plant and equipment		4,558,008
Unsecured		2,859,995
Total long-term loans, current portion	$	7,418,003

An amount of $ 7,518,718 and $ 7,418,003 has been reclassified from long-term loans, non-current to long-term loans, current as of December 31, 2013 and June 30, 2013, respectively, to reflect amounts will be due and paid within 12 months.

Long-term loans, non-current portion as of December 31, 2013 were secured/guaranteed by the following:

Secured/guaranteed by
Unsecured		$	2,859,995

Long-term loans, non-current portion as of June 30, 2013 were secured/guaranteed by the following:

Secured/guaranteed by
Guaranteed by the Company's property, plant and equipment		$	1,180,877

The Company must use the loans for the purpose specified in borrowing agreements, pay interest at the interest rate described in borrowing agreements. The Company also has to repay the principal outstanding on the specified date as described in borrowing agreements. Management believes that the Company had complied with such financial covenants as of December 31, 2013, and will continue to comply with them.

NOTE 11 – RELATED PARTY TRANSACTIONS

The Company’s related parties mainly include Shanghai Huaye Iron&Steel Group Co., Ltd. (“Shanghai Huaye”) and its subsidiaries, which were ultimately controlled by the same party as the Company; and CRM Suzhou, which is the Company’s equity investee.

Related Party Activities

	For the Three Months Ended				For the Six month ended
	December 31,				December 31,
	2013		2012		2013		2012
Sales to Shanghai Huaye and its subsidiaries	$	26,086,595	$	54,022,011	$	63,012,798	$	83,980,532
Purchases from Shanghai Huaye and its subsidiaries		49,751,644		82,114,625		145,882,058		146,199,156
Purchases from CRM Suzhou		3,579,917		-		26,916,087		-
Rental fees to Shanghai Huaye and its subsidiaries		39,176		38,145		78,103		76,081
Interest expenses to Shanghai Huaye		85,723		85,724		171,447		171,447

Period-End Related Party Balances

	December 31,		June 30,
	2013		2013
Advances to Shanghai Huaye and its subsidiaries ⁽¹⁾	$	152,709,836	$	183,936,990
Advances to CRM Suzhou		1,194,026		1,678,983
Accounts payable to CRM Suzhou		-		20,162,069

⁽¹⁾ The amounts charged for products to the Company by Shanghai Huaye and its subsidiaries under the same pricing, terms and conditions as those charged to third parties. Different to nonrelated party suppliers, the Company does not have to enter into a long-term contract with related party suppliers in which case is more flexible for the Company.

	F-15

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 – RELATED PARTY TRANSACTIONS - continued

Receivables from, advanced purchase deposits to, loans, payables to and advanced sales deposits from Shanghai Huaye and its subsidiaries have been netted due to the right of offset through agreements with these related parties. Below is a summary of the gross balances before the offset:

	December 31,		June 30,
	2013		2013
Trade accounts receivable	$	224,098	$	14,074,297
Notes receivable		45,032,885		16,796,650
Other receivables		1,050,000		4,062,751
Advances to suppliers		215,262,573		244,337,862
Accounts payable		(5,085,169)		(155,322)
Notes payable		(91,538,235)		(83,081,204)
Other payables		(1,345,997)		(1,331,079)
Advances from customers		(417,851)		(623,007)
Short-term borrowings		(8,182,018)		(8,182,018)
Accrued expenses		(2,290,450)		(1,961,940)
Netted balance		152,709,836		183,936,990

NOTE 12 – INCOME TAXES

The Company has total income tax of $ 1,579,161 and $ 3,040,096 for the three months and six months ended December 31, 2013, respectively. The Company continues to conduct most of its business through its major PRC subsidiaries whose applicable income tax rates are 15 % or 25 % for the three and six months ended December 31, 2013.

The Company’s effective tax rates were 20 % and 22 % for the three months ended December 31, 2013 and 2012, respectively and 21 % and 13 % for the six months ended December 31, 2013 and 2012. The change in effective tax rate was mainly resulted from the tax refund received during the six months ended December 31, 2012.

NOTE 13 – WARRANTS

On March 10, 2010, The Company issued warrants to purchase up to 685,000 shares of common stock in connection with the Company’s registered direct offering. The Warrants are exercisable for a five year period, expiring March 9, 2015 , with an exercise price of $3.76 per share, adjustable for stock dividends, stock splits and upon occurrence of a fundamental transaction as defined in the warrant agreement.

The fair values of the Warrants at the issuance date and the end of each reporting period were calculated using Black-Scholes pricing model and based on the following assumptions:

	December 31, 2013				June 30, 2013
	Quarter end date				Year end date
Warrants indexed to common stock		685,000			685,000
Trading market price	$	1.83		$	1.52
Exercise price	$	3.76		$	3.76
Estimated Term (Year)		1.19			1.67
Expected volatility		88.00	%		75.40	%
Risk-free rate		0.13	%		0.36	%
Dividend yield rates		0.00	%		0.00	%
Fair value of warrants	$	211,433		$	144,535

The Warrants were recorded as liabilities at their estimated fair value at the date of issuance, with subsequent changes in estimated fair value recorded in changes in fair value of warrant liabilities on the Company’s consolidated statement of operations in each subsequent period.

	F-16

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13 – WARRANTS - continued

The following table summarizes the changes in estimated fair value for the six months ended December 31, 2013 and the year ended June 30, 2013:

	Estimated Fair Value
Balance as of June 30, 2012	$	47,404
Changes in fair value		97,131
Balance as of June 30, 2013		144,535

	Estimated Fair Value
Balance as of June 30, 2013		144,535
Changes in fair value		66,898
Balance as of December 31, 2013	$	211,433

NOTE 14 – STOCK-BASED COMPENSATION

2009 Equity Incentive Plan

In April 2009, the Company authorized an equity incentive plan (“2009 Equity Incentive Plan”) that provides for issuance of up to 2,000,000 shares of the Company’s common stock. Under the 2009 Equity Incentive Plan, the management may, at their discretion, grant any employees and directors of the Company, and consultants (i) options to subscribe for common stocks, (ii) stock appreciation rights to receive payment, in cash and/or the Company’ common stocks, equals to the excess of the fair market value of the Company’ common stocks, (iii) Restricted stock awards and restricted stock units, or (iv) other types of compensation based on the performance of the Company’ common stocks. The exercise price of the options may not be less than the fair market value of the share on the grant date and the option term may not exceed ten years.

Non-Vested Stock Grants to employees and directors

On December 14, 2012, the Company granted an executive 50,000 shares of restricted common stock with a grant date fair value of $ 1.00 per share as part of his remuneration for his service commencing December 14, 2012 for a one year period. The restricted common stock will vest on the one-year anniversary date of the grant date.

On March 7, 2013, the Company granted a director 10,000 shares of restricted common stock with a grant date fair value of $ 2.43 per share as part of his remuneration for the service commencing March 7, 2013 for a one-year period. The restricted common stock will vest on the one-year anniversary date of the grant date.

Stock-based compensation expense for the three months ended December 31, 2013 and 2012 was $ 16,307 and $ 20,886 , respectively. Stock-based compensation expense for the six months ended December 31, 2013 and 2012 was $ 35,086 and $ 39,437 , respectively. The remaining $ 4,339 stock-based compensation will be expensed over the remainder of the one-year service period. The value of the non-vested stock at December 31, 2013 is $ 18,300 .

F-17

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14 – STOCK-BASED COMPENSATION - continued

Non-Vested Stock Grants to non-employees

On April 29, 2013 (“Agreement Date”), the Company entered into a consultancy agreement with a Company’s external consultant. In accordance with the agreement, the consultant will provide financing consultancy service to the Company and the Company will grant 200,000 restricted common stocks as consideration, out of which, 100,000 restricted common stock will vest 30 days after the Agreement Date (e.g. May 20, 2013) and the other 100,000 restricted common stock will vest 180 days after the Agreement Date (e.g. October 26, 2013). The service period is one year from April 29, 2013 to April 29, 2014.

The Company accounted for equity instruments granted to non-employees in accordance with ASC 505-50 “Equity-Based Payments to Non-Employees”. Restricted stocks granted to non-employees are measured at the fair value of the equity instrument as of the earlier of (a) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached (a performance commitment) or (b) the date at which the counterparty's performance is complete. Because the restricted stocks will vest 30 and 180 days after the Agreement Date for the first and second half of the grant of 200,000 restricted stocks, respectively, a measurement date has been reached on May 20, 2013 and October 26, 2013 for the first 100,000 and second 100,000 grant of restricted stocks, respectively. Since the service will be performed during the year started from April 29, 2013, the Company recognized a prepayment at the date of grant based on the fair value of the measurement date.

Stock-based compensation expense for the three months ended December 31, 2013 and 2012 were $ 108,598 and nil, respectively. Stock-based compensation expense for the six months ended December 31, 2013 and 2012 were $ 203,234 and nil, respectively. The remaining $ 126,824 stock-based compensation will be expensed over the remainder of the one year service period.

Options to employees

There were 105,000 options outstanding as of December 31 and June 30, 2013, respectively, under 2009 Equity Incentive Plan. Stock-based compensation expense for the three months ended December 31, 2013 and 2012 on the stock options were nil and $ 16,043 , respectively. Stock-based compensation expense for the six months ended December 31, 2013 and 2012 on the stock options were nil and $ 32,087 , respectively. The remaining stock-based compensation expenses of the stock options was nil as of December 31, 2013.

The following table summarizes the options activity for the six months ended December 31, 2013:

	Options		Weighted-average exercise price	Weighted average remaining contractual life (years)		Aggregate Intrinsic Value
Outstanding as of June 30, 2013	105,000		2.71	1.86		-
Issued	-		-	-		-
Exercised	-		-	-		-
Expired	-		-	-		-
Outstanding as of December 31, 2013	105,000	$	2.71	1.36	$	-

Both of total intrinsic value of stock options outstanding as of December 31, 2013 and June 30, 2013 was nil.

F-18

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15 – EARNINGS PER SHARE

Basic earnings per share are computed on the basis of the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed on the basis of the weighted-average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period. The following table sets forth the computation of basic and diluted earnings per share:

	For The Three Months Ended				For The Six Months Ended
	December 31,				December 31,
	2013		2012		2013		2012

Net income attributable to the common stockholders	$	6,395,136	$	4,772,332	$	11,583,383	$	6,607,677

Basic weighted-average common shares outstanding		41,453,386		40,224,003		41,383,956		40,222,247
Dilutive effect of warrants and options		-		-		-		-
Diluted weighted-average common shares outstanding		41,453,386		40,224,003		41,383,956		40,222,247

Earnings per share:
Basic	$	0.15	$	0.12	$	0.28	$	0.16
Diluted	$	0.15	$	0.12	$	0.28	$	0.16

Warrants and options to purchase 685,000 , and 105,000 shares of common stock, respectively were outstanding during as of December 31, 2013 and June 30, 2013, but were excluded from the computation of diluted earnings per share as their effect would have been anti-dilutive because the exercise prices of the warrants and options were larger than the average share price during the period.

NOTE 16 - COMMITMENTS AND CONTINGENCIES

Operating lease commitments - As of December 31, 2013, the Company has future minimum lease payments under non-cancelable operating leases in relation to office premises consisting of the following:

		Lease Payment
Remainder of the year ending June 30, 2014		78,531
For the year ending June 30, 2015		157,063
For the year ending June 30, 2016		157,063
For the year ending June 30, 2017		157,063
For the year ending June 30, 2018		157,063
For the year ending June 30, 2019 and thereafter		811,492
Total	$	1,518,275

Capital commitments – The Company entered into agreements with suppliers to purchase property, plant and equipment. As of December 31, 2013 and June 30, 2013, the Company had purchase obligations totaled $ 3,464,235 and $ 5,627,858 , respectively.

Indemnification Obligations – The Company entered into agreements whereby its directors are indemnified for certain events or occurrences while the director is, or was, serving at the Company's request in such capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a directors' liability insurance policy that reduces its exposure and enables the Company to recover a portion of future amounts paid. As a result of the Company's insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal. Accordingly, no liabilities have been recorded for these agreements as of December 31, 2013.

	F-19

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17 – SIGNIFICANT CONCENTRATIONS

Concentration of credit risk

Assets that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash, trade accounts receivable and advances to suppliers. The Company performs ongoing credit evaluations with respect to the financial condition of its debtors, but does not require collateral. As of December 31, 2013 and June 30, 2013, substantially all of the Company’s cash and cash equivalents and restricted cash were held in major financial institutions located in the PRC, which management considers to be of high credit quality. However, the deposit accounts in PRC were not insured in any manner. Trade accounts receivable are generally unsecured and denominated in RMB, and derived from revenues earned from operations primarily in the PRC. Advances to suppliers are typically unsecured and arise from deposits paid in advance for future purchases of raw materials. In order to determine the value of the Company’s trade accounts receivable and advances to suppliers, the Company records a provision for doubtful accounts to cover probable credit losses. Management reviews and adjusts this allowance periodically based on historical experience and its evaluation of the collectability of outstanding trade accounts receivable and advances to suppliers.

Concentration of customers

The Company currently sold a substantial portion of its products to Shanghai Huaye and its subsidiaries. As a percentage of revenues, 20.3 % and 34.2 % of the Company’s revenue was derived from Shanghai Huaye and its subsidiaries for the three months ended December 31, 2013 and 2012, respectively; 23.6 % and 30.5 % of the Company’s revenue was derived from Shanghai Huaye and its subsidiaries for the six months ended December 31, 2013 and 2012, respectively. The loss of sales from Shanghai Huaye and its subsidiaries would have a significant negative impact on the Company’s business. Sales to customers were mostly made through non-exclusive, short-term arrangements. Due to the Company’s dependence on Shanghai Huaye and its subsidiaries, any negative events with respect to Shanghai Huaye and its subsidiaries may cause material fluctuations or declines in the Company’s revenue and have a material adverse effect on the Company’s financial condition and results of operations.

Concentration of suppliers

A significant portion of the Company’s raw materials were sourced from Shanghai Huaye and its subsidiaries who collectively accounted for an aggregate of 43.1 % and 39.4 % of the Company’s total purchases for the three months ended December 31, 2013 and 2012, respectively; an aggregate of 50.5 % and 47.1 % of the Company’s total purchases for the six months ended December 31, 2013 and 2012, respectively. Failure to develop or maintain relationships with these suppliers may cause the Company to be unable to source adequate raw materials needed to manufacture its products. Any disruption in the supply of raw materials to the Company may adversely affect the Company’s business, financial condition and results of operations.

	F-20

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 18 – SEGMENT INFORMATION

The Company has four reportable segments represented by its four subsidiaries Changshu Huaye, Jiangsu Cold-Rolled, Ningbo Zhehua and Sutor Technology as described in Note 1.

Factors Management Used to Identify the Enterprise’s Reportable Segments - The Company’s reportable segments are business units that offer different products and are managed separately and require reporting to the various regulatory jurisdictions. Changshu Huaye mainly produces HDG products and PPGI products. Jiangsu Cold-Rolled offers cold-rolled steel strips, acid pickled steel and HDG steel products. Ningbo Zhehua manufactures heavy steel pipe products and Sutor Technology engages in trading of steel products.

Certain segment information is presented below:

As of December 31, 2013 and for the three months then ended	Changshu Huaye		Jiangsu Cold-Rolled		Ningbo Zhehua		Sutor Technology		Inter-Segment and Reconciling Items		Total
Revenue from unrelated parties	$	43,288,250	$	46,524,694	$	10,353,468	$	2,063,803	$	-	$	102,230,215
Revenue from related parties		11,062,462		10,063,382		4,960,733		18		-		26,086,595
Revenue from other operating segments		2,086,742		23,484,758		2,416,240		3,419		(27,991,159)		-
Total operating expenses		2,260,244		776,214		538,550		217,288		170,342		3,962,638
Interest income		310,259		466,569		9,464		91		161		786,544
Interest expense		467,340		1,767,976		1,626		-		338,016		2,574,958
Depreciation and amortization expense		598,493		1,274,540		255,920		137,108		-		2,266,061
Income tax expense		701,908		843,741		33,512		-		-		1,579,161
Net segment profit/(loss)		4,207,423		2,543,509		100,538		(88,724)		(367,610)		6,395,136
Capital expenditures		616,281		887,128		93,094		-		-		1,596,503
Segment assets		262,472,451	$	392,899,382	$	48,335,498	$	33,451,372	$	(195,203,803)	$	541,954,900

As of December 31, 2012 and for the three months then ended	Changshu Huaye		Jiangsu Cold-Rolled		Ningbo Zhehua		Sutor Technology		Inter-Segment and Reconciling Items		Total
Revenue	$	38,485,202	$	53,597,781	$	9,598,855	$	2,163,009	$	-	$	103,844,847
Revenue from related parties		2,041,386		51,980,625		-		-		-		54,022,011
Revenue from other operating segments		7,899,606		21,027,462		-		-		(28,927,068)		-
Total operating expenses		2,181,302		1,008,458		971,483		221,616		146,306		4,529,165
Interest income		475,634		582,497		1,470		108		-		1,059,709
Interest expense		428,291		1,733,860		39,294		-		138,799		2,340,244
Depreciation and amortization expense		571,042		1,245,613		216,888		133,481		44,507		2,211,531
Income tax expense/(benefit)		197,285		1,302,667		(128,940)		-		-		1,371,012
Net segment profit/(loss)		1,384,987		4,101,421		(385,424)		(75,895)		(252,757)		4,772,332
Capital expenditures, net of VAT refunds		286,521		761,257		355,990		-		-		1,403,768
Segment assets	$	233,745,892	$	319,195,988	$	35,038,583	$	33,143,378	$	(164,548,104)	$	456,575,737

	F-21

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 18 – SEGMENT INFORMATION - continued

As of December 31, 2013 and for the six months then ended	Changshu Huaye		Jiangsu Cold-Rolled		Ningbo Zhehua		Sutor Technology		Inter-Segment and Reconciling Items		Total
Revenue from unrelated parties	$	100,642,524	$	78,911,056	$	18,274,937	$	6,583,820	$	-	$	204,412,337
Revenue from related parties		17,845,221		32,209,387		12,952,614		5,576		-		63,012,798
Revenue from other operating segments		6,652,820		55,329,908		2,416,240		3,419		(64,402,387)		-
Total operating expenses		5,154,889		1,575,263		1,195,526		481,235		454,851		8,861,764
Interest income		819,637		910,920		105,626		256		327		1,836,766
Interest expense		921,797		2,780,219		50,207		-		626,030		4,378,253
Depreciation and amortization expense		1,192,991		2,540,349		504,171		273,343		-		4,510,854
Income tax expense/(benefit)		1,338,008		1,709,881		(7,793)		-		-		3,040,096
Net segment profit/(loss)		7,711,889		5,416,337		(23,377)		(208,418)		(1,313,048)		11,583,383
Capital expenditures		2,392,029		4,785,530		93,094		-		-		7,270,653
Segment assets	$	262,472,451	$	392,899,382	$	48,335,498	$	33,451,372	$	(195,203,803)	$	541,954,900

As of December 31, 2012 and for the six months then ended	Changshu Huaye		Jiangsu Cold-Rolled		Ningbo Zhehua		Sutor Technology		Inter-Segment and Reconciling Items		Total
Revenue	$	72,175,175	$	101,993,884	$	12,985,196	$	3,912,008	$	6,754	$	191,073,017
Revenue from related parties		3,768,296		80,212,236		-		-		-		83,980,532
Revenue from other operating segments		11,479,164		50,017,332		-		-		(61,496,496)		-
Total operating expenses		5,081,437		2,042,009		1,090,656		426,224		331,915		8,972,241
Interest income		1,167,539		734,227		120,056		218		10		2,022,050
Interest expense		904,719		4,177,973		74,065		-		717,679		5,874,436
Depreciation and amortization expense		1,138,799		2,485,788		472,679		266,264		44,507		4,408,037
Income tax expense/(benefit)		247,832		1,082,573		(325,796)		-		-		1,004,609
Net segment profit/(loss)		2,089,790		6,293,206		(445,322)		(249,651)		(1,080,346)		6,607,677
Capital expenditures, net of VAT refunds		376,914		1,507,155		3,918,665		-		-		5,802,734
Segment assets	$	233,745,892	$	319,195,988	$	35,038,583	$	33,143,378	$	(164,548,104)	$	456,575,737

NOTE 19 – GEOGRAPHIC INFORMATION

The following schedule summarizes the sources of the Company’s revenue by geographic regions for the three and six months ended December, 2013 and 2012:

	For the Three Months Ended				For the Six Months Ended
	December 31,				December 31,
Geographic Area	2013		2012		2013		2012
People's Republic of China	$	123,212,281	$	139,574,293	$	244,227,432	$	246,265,972
Other Countries		5,104,529		18,292,565		23,197,703		28,787,577
Total	$	128,316,810	$	157,866,858	$	267,425,135	$	275,053,549

	F-22

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

Special Note Regarding Forward Looking Statements

In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We use words such as “believe,” “expect,” “anticipate,” “project,” “target,” “plan,” “optimistic,” “intend,” “aim,” “will” or similar expressions which are intended to identify forward-looking statements. Such statements include, among others, those concerning market and industry segment growth and demand and acceptance of new and existing products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including those identified in Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the year ended June 30, 2013, as well as assumptions, which, if they were to ever materialize or prove incorrect, could cause the results of the Company to differ materially from those expressed or implied by such forward-looking statements.

Readers are urged to carefully review and consider the various disclosures made by us in this report and our other filings with the SEC. These reports attempt to advise interested parties of the risks and factors that may affect our business, financial condition and results of operations and prospects. The forward-looking statements made in this report speak only as of the date hereof and we disclaim any obligation, except as required by law, to provide updates, revisions or amendments to any forward-looking statements to reflect changes in our expectations or future events.

Use of Terms

Except as otherwise indicated by the context, all references in this report to:

“Company,” “we,” “us” and “our” are to the combined business of Sutor Technology Group Limited, a Nevada corporation, and its subsidiaries: Sutor BVI, Sutor Technology, Changshu Huaye, Jiangsu Cold-Rolled and Ningbo Zhehua;

“Sutor BVI” are to our wholly-owned subsidiary Sutor Steel Technology Co., Ltd., a BVI company;

“Sutor Technology PRC” are to our wholly-owned subsidiary Sutor Technology Co., Ltd., a PRC company;

“Changshu Huaye” are to our wholly-owned subsidiary Changshu Huaye Steel Strip Co., Ltd., a PRC company;

“Jiangsu Cold-Rolled” are to our wholly-owned subsidiary Jiangsu Cold-Rolled Technology Co., Ltd., a PRC company;

“Ningbo Zhehua” are to our wholly-owned subsidiary Ningbo Zhehua Heavy Steel Pipe Manufacturing Co., Ltd., a PRC company;

“Shanghai Huaye” are to Shanghai Huaye Iron & Steel Group Co., Ltd., a PRC company of which Lifang Chen, our major shareholder and Chairwoman, and her husband Feng Gao, are 100% owners, and its subsidiaries ;

“SEC” are to the United States Securities and Exchange Commission;

“Securities Act” are to the Securities Act of 1933, as amended;

“Exchange Act” are to the Securities Exchange Act of 1934, as amended.

“China” and “PRC” are to the People’s Republic of China;

“RMB” are to Renminbi, the legal currency of China; and

“U.S. dollar,” “$” and “US$” are to the legal currency of the United States.

	23

Overview of our Business

We are one of the leading China-based, non-state-owned manufacturers of fine finished steel products. We utilize a variety of processes and technological methodologies to convert steel manufactured by third parties into fine finished steel products. Our product offerings are focused on higher margin, value-added finished steel products, specifically hot-dip galvanized steel, or HDG steel, and pre-painted galvanized steel, or PPGI. In addition, we produce acid pickled steel, or AP steel, and cold-rolled steel, which represent the least processed of our finished products. Since November 2009, our product offerings have included welded steel pipe products. We use a large portion of our AP steel and cold-rolled steel to produce our HDG steel and PPGI products. Our vertical integration has allowed us to maintain more stable margins for our HDG steel and PPGI products.

We sell most of our products to customers who operate primarily in the green energy, appliances, automobile, construction, infrastructure, medical equipment and water resource industries. Most of our customers are located in China. Our primary export markets are Europe, the Middle East, Asia, and South America.

Our manufacturing facilities, located in Changshu, China, have three HDG steel production lines, one PPGI production line, one AP steel production line and one cold-rolled steel line. Our current annual production capacity is approximately 700,000 metric tons, or MT, for HDG steel, 200,000 MT for PPGI, 500,000 MT for AP steel and 250,000 MT for cold-rolled steel. Ningbo Zhehua, our subsidiary located in Ningbo, currently has an annual capacity of 400,000 MT for welded steel pipe products.

Executive Overview of Quarterly Results

In the second quarter of fiscal 2014, our revenue decreased 18.7% from $157.9 million to $128.3 million, or $29.6 million, as compared with the same period last year primarily due to reduced revenue of approximately $29.5 million from our AP products. During the second quarter of fiscal 2014, we produced 124,868 tons of AP steel and almost all of them were used internally for further processing. As the first stage of steel processing and being of low gross margin, acid-pickling historically had limited contribution to the Company’s gross profits. In general, depending on the requirements of our products, production scheduling and market conditions, we may use our AP products for the next stage of processing or sell them directly to the customers. Our overall capacity utilization was approximately 80.7% for the second quarter of fiscal 2014 as compared with 93.2% for the same period last year.

During the second quarter of fiscal 2014, our international sales accounted for approximately 4.0% of our total revenue, or $5.1 million, as compared with 11.6% of the total revenue, or $18.3 million, for the same period last year. We attribute the reduced international revenue mainly to the timing of contract deliveries. We signed more international contracts during the second quarter of fiscal 2014 than the same period last year, but we expect to deliver the products over the coming quarters.

We improved our product specifications to meet the market demand. We produced more HDG steel with thicker zinc coatings than we previously produced. We gained more traction for our new Galvalume product and substantially increased its production. We delivered more value-added customized services to retain customer loyalty and to gain more customers by extending our one-stop solution services further down-stream to cover certain steel processing services for selected customers.

As a result, our net income increased 33.3% to $6.4 million in the second quarter of fiscal 2014 from $4.8 million in the same period last year. The improvement in net income was primarily due to improved gross margin of 10.6% from 7.7% for the same period last year. Both improved gross margin for our HDG and PPGI products and changes in product composition affected the overall gross margin. During the second quarter of fiscal 2014, production was up 9.1% and 83.7% for total HDG steel and PPGI steel products, respectively, than the same period last year, leading to reduced unit depreciation and amortization cost and better production efficiency. In addition, our AP products whose gross margin was the lowest among our portfolio of products accounted for approximately 0% of the total revenue in the second quarter of fiscal 2014 as compared to approximately 19% of the total revenue in the second quarter of last year. More sales of higher margin products and less sales of lower margin products led to overall higher gross margin.

The following summarizes the major financial information for the second fiscal quarter:

Revenue : Revenue was $128.3 million for the three months ended December 31, 2013, a decrease of $29.6 million, or 18.7%, from $157.9 million for the same period last year.

Gross profit and margin : Gross profit was $13.6 million for the three months ended December 31, 2013, as compared to $12.2 million for the same period last year. Gross margin was10.6% for the three months ended December 31, 2013, as compared to 7.7% for the same period last year.

	24

Net income : Net income was $6.4 million for the three months ended December 31, 2013, an increase of $1.6 million, or 33.3%, from $4.8 million for the same period of last year.

Fully diluted earnings per share : Fully diluted earnings per share were approximately $0.15for the three months ended December 31, 2013, as compared to approximately $0.12 for the same period last year.

Reportable Operating Segments

We have four reportable operating segments which are categorized based on manufacturing facilities and nature of operations – Changshu Huaye, Jiangsu Cold-Rolled, Ningbo Zhehua and Sutor Technology PRC. Changshu Huaye manufactures and sells HDG steel and PPGI products. Jiangsu Cold-Rolled manufactures and sells AP steel, cold-rolled steel and HDG steel. Ningbo Zhehua manufactures and sells steel pipe products. Changshu Huaye and Jiangsu Cold-Rolled are adjacent to each other and use largely the same management resources. Ningbo Zhehua is located in Ningbo, China. Sutor Technology PRC is intended to cover R&D operations of the Company and so far had limited trading operations. See Note 18, “Segment Information” to the consolidated financial statements included elsewhere in this report.

Revenue

Our revenue is primarily generated from sales of our HDG steel, PPGI, AP steel, cold-rolled steel products, as well as our steel pipe products, such as longitudinally welded steel pipes and spiral welded steel pipes. Our revenue has historically been affected by sales volume, sales price of our products and our product mix.

In the three months ended December 31, 2013 and 2012, Changshu Huaye generated revenue of $54.4 million and $40.5 million, which represented 42.4% and 25.7% of our total revenue, respectively. Jiangsu Cold-Rolled generated revenue of $56.6 million and $105.6 million in the three months ended December 31, 2013 and 2012, which represented 44.1% and 66.9% of our total revenue, respectively. In the three months ended December 31, 2013 and 2012, Ningbo Zhehua generated revenue of $15.3 million and $9.6 million, which represented 11.9% and 6.0% of our total revenue, respectively. In addition, in the three months ended December 31, 2013 and 2012, Sutor Technology PRC generated revenue of $2.1 million and $2.2 million, which represented 1.6% and 1.4% of our total revenue, respectively.

A portion of our products are sold through our affiliate Shanghai Huaye, which also supplies to us a significant portion of our raw materials. Approximately 20.3% of our revenue was derived from Shanghai Huaye and its affiliates in the three months ended December 31, 2013, as compared to 34.2% last year. We intend to expand our own sales channel in an effort to gain more end customers and to build brand value. At the same time, we continue to take advantage of Shanghai Huaye’s extensive sales network to increase market reach.

Cost of Revenue

Cost of revenue includes direct costs to manufacture our products, including the cost of raw materials, labor, overhead, energy, handling charges and other expenses associated with the manufacture and delivery of product. Direct costs of manufacturing are generally highest when we first introduce a new product due to higher start-up costs and higher raw material costs. As production volume increases, we typically improve manufacturing efficiencies and are able to strengthen our purchasing power by buying raw materials in greater quantities.

In the three months ended December 31, 2013, approximately $49.8 million of raw material procurement was conducted through Shanghai Huaye and its affiliates. Due to the size of Shanghai Huaye and the economy of scale, it has stronger bargaining power than we do and our arrangement with Shanghai Huaye allows us to purchase raw materials at relatively lower prices than we could obtain from suppliers ourselves.

Gross Profit and Gross Margin

Gross profit is equal to the difference between revenue and the cost of revenue. Gross margin is equal to gross profit divided by revenue. For the three months ended December 31, 2013, gross margin for domestic and international sales was 10.0% and 20.6%, respectively. On a segment basis, Changshu Huaye, Jiangsu Cold-Rolled and Ningbo Zhehua’s gross margins were approximately 13.4%, 9.0% and 5.3%, respectively. Sutor Technology PRC has a gross margin of approximately 6.3% for the second quarter of fiscal 2014.

	25

To gain market penetration, we price our products at levels that we believe are competitive. We continually strive to improve manufacturing efficiencies and reduce our production costs in order to offer superior products and services at competitive prices. General economic conditions, the cost of raw materials, and supply and demand of fine finished steel products within our markets influence sales prices. Our high-end, value-added products, such as the PPGI products, generally tend to have higher profit margins.

We implemented a vertical integration strategy where we use our own AP steel and cold-rolled steel products as raw materials for HDG steel and PPGI products. We believe our vertically integrated operations will allow us to provide customers with one-stop solution services, build customer loyalty, and maintain stable operating margins.

Operating Expenses

Our operating expenses primarily consist of general and administrative expenses and selling expenses.

General and Administrative Expenses

General and administrative expenses consist primarily of compensation and benefits for our general management, finance and administrative staff, professional and advisory fees, bad debts reserves, and other expenses incurred in connection with general corporate purposes. We expect most components of our general and administrative expenses will increase as our business grows and as we incur increased costs as a public company.

Selling Expenses

Selling expenses consist primarily of compensation and benefits for our sales and marketing staff, sales commissions, the cost of advertising, promotional and travel activities, transportation expenses, after-sales support services and other sales related costs.

Our selling expenses are generally affected by the amount of international sales and our sales to unrelated parties. The transportation costs for our international sales are generally higher than domestic sales. In addition, when we sell products to Shanghai Huaye and its affiliates, Shanghai Huaye generally arranges and bears the cost of transportation. In contrast, when we sell products to customers other than Shanghai Huaye, we generally bear the transportation costs, but we are able to charge a higher price.

Provision for Income Taxes

Sutor Technology Group Limited is subject to United States federal income tax at a tax rate of 34%. Sutor BVI was incorporated in the British Virgin Islands and, under the current laws of the British Virgin Islands, is not subject to income taxes.

On March 16, 2007, the National People’s Congress of China passed a new Enterprise Income Tax Law, or the EIT Law, and on December 6, 2007, the State Council of China passed its implementing rules, which took effect on January 1, 2008. The EIT Law gives existing foreign invested enterprises a five-year grandfather period during which they can continue to enjoy their existing preferential tax treatments. Changshu Huaye was subject to an EIT of 15% from calendar years 2010 to 2012 because it qualified as a high-tech enterprise for the calendar years 2010, 2011 and 2012. In 2013, Jiangsu provincial government renewed the high-tech enterprise statue of Changshu Huaye. As a result, Changshu Huaye is entitled to the preferred tax rate of 15% for the three years 2013 through 2015. Jiangsu Cold-Rolled was subject to an EIT of 12.5% for the calendar years 2010 and 2011 and is subject to an EIT of 25% for the calendar year 2012 and beyond. Ningbo Zhehua and Sutor Technology PRC are subject to an EIT of 25% and have no preferential tax treatments.

Results of Operations

Comparison of Three Months Ended December 31, 2013 and December 31, 2012

The following table sets forth key components of our results of operations for the periods indicated, both in dollars and as a percentage of our revenue.

	26

(All amounts, other than percentages, in thousands of U.S. dollars)

	Three Months Ended				Three Months Ended
	December 31, 2013				December 31, 2012
			% of				% of
	Amount		Revenue		Amount		Revenue
Revenue
Revenue from unrelated parties	$	102,230	79.7	%	$	103,845	65.8	%
Revenue from related parties		26,087	20.3	%		54,022	34.2	%
Total		128,317	100.0	%		157,867	100.0	%
Cost of Revenue
Cost of revenue from unrelated parties		91,296	71.2	%		94,106	59.6	%
Cost of revenue from related parties		23,395	18.2	%		51,552	32.7	%
Total		114,691	89.4	%		145,658	92.3	%
Gross Profit		13,626	10.6	%		12,209	7.7	%
Operating Expenses
Selling expense		1,338	1.0	%		1,979	1.2	%
General and administrative expense		2,625	2.1	%		2,550	1.6	%
Total Operating Expenses		3,963	3.1	%		4,529	2.8	%
Income from Operations		9,663	7.5	%		7,680	4.9	%
Other Income (Expense)
Interest income		786	0.6	%		1,060	0.7	%
Other income		175	0.2	%		122	0.1	%
Interest expense		(2,575)	(2.0)	%		(2,340)	(1.5)	%
Other expense		(202)	(0.2)	%		(563)	(0.4)	%
Changes in fair value of warrant liabilities		(54)	-			(2)	-
Income from equity method investments		181	0.1	%		186	0.1	%
Total Other Income (Expense)		(1,689)	(1.3)	%		(1,537)	(2.3)	%
Income Before Taxes		7,974	6.2	%		6,143	3.9	%
Income tax (expense)/benefit		(1,579)	(1.2)	%		(1,371)	(0.9)	%
Net Income	$	6,395	5.0	%	$	4,772	3.0	%

Revenue . For the three months ended December 31, 2013, revenue was $128.3 million, compared to $157.9 million for the same period last year, a decrease of $29.6 million, or 18.7%. The decrease was mainly attributable to reduced revenue of approximately $29.5 million from our AP products. During the quarter, we produced124,868 tons of AP steel and almost all of them were used internally for further processing. In comparison, we sold 58,904 tons of AP steel during the second quarter of fiscal 2013. Depending on our product requirements, market conditions or our production line scheduling, we may use some or all of our AP steel for further processing. Historically the gross margin for our AP products was about 3% and contributed very limited gross profits to the Company. Nevertheless, acid-picking is still an important part of our fine finished steel manufacturing process.

The following table sets forth revenue by geography and by business segments for the three months ended December 31, 2013 and 2012.

(All amounts, other than percentages, in thousands of U.S. dollars)

	Three Months Ended				Three Months Ended
	December 31, 2013				December 31, 2012
			% of				% of
	Amount		Revenue		Amount		Revenue
Geographic Data
China	$	123,212	96.0	%	$	139,574	88.4	%
Other Countries		5,105	4.0	%		18,293	11.6	%

Segment Data
Changshu Huaye	$	54,351	42.4	%	$	40,527	25.7	%
Jiangsu Cold-Rolled		56,588	44.1	%		105,578	66.9	%
Ningbo Zhehua		15,314	11.9	%		9,599	6.0	%
Sutor Technology		2,064	1.6	%		2,163	1.4	%

	27

On a geographic basis, revenue generated from outside of China was approximately $5.1 million, or 4.0% of the total revenue, for the three months ended December 31, 2013, as compared to $18.3 million, or 11.6% of the total revenue, for the same period in 2012. The reduction was mainly due to the timing of the contract delivery. During the second quarter of fiscal 2014, we signed more contracts than the same period last year, but some of them are to be delivered over the coming quarters. Historically international sales accounted for approximately 10% of our total sales and we anticipate a similar ratio for fiscal 2014.

On a segment basis, after eliminating intercompany sales and adjusting reconciliation items, revenue contributed by Changshu Huaye was $54.4 million for the three months ended December 31, 2013, an increase of $13.9 million, or 34.3%, from $40.5 million for the same period last year. The increase mainly resulted from increased HDG sales by Changshu Huaye. While both Jiangsu Cold-Rolled and Changshu Huaye have the capacity to produce HDG steel, production is allocated to them based on product requirements and production line scheduling.

After eliminating inter-company sales and adjusting reconciliation items, revenue contributed by Jiangsu Cold-Rolled was $56.6 million for the three months ended December 31, 2013, as compared at $105.6 million for the same period last year. The decrease was primarily due to reduced HDG revenue generated from Jianhsu Cold-Rolled and reduced revenue of approximately $29.5 million from the AP products as almost all AP steel was used internally for further processing during the second quarter of fiscal 2014.

Revenue contributed by Ningbo Zhehua was $15.3million for the three months ended December 31, 2013, an increase of $5.7 million, or 59.4%, from $9.6 million for the same period in 2012, primarily resulting from a limited amount of trading sales. Revenue from welded pipe manufacturing business increased by approximately $0.7 million. To take advantage of the economy of scale, Ningbo Zhehua from time to time purchases a large amount of raw materials and then re-sells the extra ones.

Revenues contributed by Sutor Technology PRC were $2.1 million for the three months ended December 31, 2013, a decrease of approximately $0.1 million from $2.2 million for the same period in 2012. Currently Sutor Technology PRC primarily sells products manufactured by other subsidiaries of the Company.

In terms of related party sales as compared with sales to unrelated parties, our direct sales to unrelated parties in the three months ended December 31, 2013 decreased by $1.6 million, or 1.5%, to $102.2 million, from $ 103.8 million in the same period in 2012. As the percentage of sales, related party revenue accounted for approximately20.3% of the total revenue in the second quarter of fiscal 2014 as compared with approximately 34.2% of the total revenue in the same period last year.

Cost of revenue . Cost of revenue decreased by $31.0 million, or 21.3%, to $114.7 million in the three months ended December 31, 2013, from $145.7 million in the same period in 2012. As a percentage of revenue, cost of revenue decreased to 89.4% in the three months ended December 31, 2013, as compared to 92.3% in the same period last year. The decreased amount of the cost of revenue was generally in line with the decreased sales volume and revenue.

Gross profit and gross margin . Gross profit increased by $1.4 million to $13.6 million in the three months ended December 31, 2013, from $12.2 million in the same period in 2012. Gross profit as a percentage of revenue (gross margin) was 10.6% for the three months ended December 31, 2013, as compared to 7.7% for the same period last year . The most significant factors affecting the gross margin were higher total HDG production and PPGI production. During the second quarter of fiscal 2014, production was up 9.1% and 83.7%, respectively, for HDG steel and PPGI steel, than the same period last year. Better capacity utilization reduced product unit depreciation and amortization costs and hence improved gross margin.

On a segment basis, gross margin for Changshu Huaye increased to 13.4% in the three months ended December 31, 2013, from 11.7% in the same period last year, mainly because of significantly increased production of high gross margin PPGI steel as mentioned above. Gross margin for Jiangsu Cold-Rolled increased to 9.0% in the three months ended December 31, 2013, from 6.6% in the same period last year, mainly due to the limited sales of low margin AP steel. Gross margin for Ningbo Zhehua decreased to 5.3% in the three months ended December 31, 2013, as compared to 7.0% in the same period in 2012, mainly because of the impact of low margin trading revenue whereas there was no trading revenue in the same period last year. Gross margin for Sutor Technology PRC was 6.3% in the three months ended December 31, 2013, as compared to 7.0% in the same period last year due to reduced sales. As of today, the subsidiary has only limited operations and mainly sells products manufactured by other subsidiaries of the Company. We are evaluating potential business opportunities for Sutor Technology PRC and may engage in M&A transactions through this subsidiary in the future.

	28

Total operating expenses . Our total operating expenses decreased by $0.5 million to $4.0 million in the three months ended December 31, 2013, from $4.5 million in the same period in 2012. As a percentage of revenue, our total operating expenses increased to 3.1% in the three months ended December 31, 2013, from 2.8% in the same period in 2012.

Selling expenses . Our selling expenses decreased by $0.7 million to $1.3 million in the three months ended December 31, 2013, from $2.0 million in the same period in 2012. As a percentage of revenue, our selling expenses decreased to 1.0% for the three months ended December 31, 2013, from 1.2% for the same period last year. The decreased selling expenses were mainly due to significantly reduced international sales. For the second quarter of fiscal quarter 2014, our export revenue was $5.1 million as compared with $18.3 million for the same period last year. Further, we shipped more products through our local harbor in Changshu to save transportation costs while in the past some products were transported through the harbor in Shanghai.

General and administrative expenses . General and administrative expenses increased by $0.07 million to $2.62million, or 2.1% of the total revenue, in the three months ended December 31, 2013, from $2.55 million, or 1.6% of the revenue, in the same period in 2012. The increased general and administrative expenses were primarily due to increased miscellaneous local fees and taxes.

Interest expense . Our interest expense increased by $0.3 million to $2.6 million in the three months ended December 31, 2013, from $2.3 million in the same period in 2012. As a percentage of revenue, our interest expense was2.0% of total revenue in the three months ended December 31, 2013, compared to 1.5% in the same period in 2012. The increase in interest expense was mainly attributable to increased interest expenses on discounted bank notes. The average interest rate on our short-term bank loans was stable during the periods.

Provision for income taxes . Our income tax expense increased to $1.6million in the three months ended December 31, 2013, from $1.4 million of income tax in the same period last year primarily due to increased taxable income.

Net income . Net income, without including the foreign currency translation adjustment, increased by $1.6 million, or 33.3%, to $6.4 million in the three months ended December 31, 2013, from $4.8 million in the same period in 2012, as a cumulative result of the above factors.

Comparison of Six Months Ended December 31, 2013 and December 31, 2012

The following table sets forth key components of our results of operations for the periods indicated, both in dollars and as a percentage of our revenue.

(All amounts, other than percentages, in thousands of U.S. dollars)

	Six Months Ended				Six Months Ended
	December 31, 2013				December 31, 2012
			% of				% of
	Amount		Revenue		Amount		Revenue
Revenue
Revenue from unrelated parties	$	204,412	76.4	%	$	191,073	69.5	%
Revenue from related parties		63,013	23.6	%		83,981	30.5	%
Total		267,425	100.0	%		275,054	100.0	%
Cost of Revenue
Cost of revenue from unrelated parties		183,572	68.6	%		174,321	63.4	%
Cost of revenue from related parties		58,025	21.7	%		79,976	29.0	%
Total		241,597	90.3	%		254,297	92.4	%
Gross Profit		25,828	9.7	%		20,757	7.6	%
Operating Expenses
Selling expense		3,333	1.3	%		4,292	1.6	%
General and administrative expense		5,529	2.0	%		4,680	1.7	%
Total Operating Expenses		8,862	3.3	%		8,972	3.3	%
Income from Operations		16,966	6.4	%		11,785	4.3	%
Other Income (Expense)
Interest income		1,837	0.7	%		2,022	0.7	%
Other income		219	0.1	%		159	-
Interest expense		(4,378)	(1.7)	%		(5,874)	(2.1)	%
Other expense		(220)	(0.1)	%		(668)	(0.2)	%
Changes in fair value of warrant liabilities		(67)	-			15	-
Income from equity method investments		266	0.1	%		174	0.1	%
Total Other Income (Expense)		(2,343)	(0.9)	%		(4,172)	(1.8)	%
Income Before Taxes		14,623	5.5	%		7,613	2.8	%
Income tax (expense)/benefit		(3,040)	(1.2)	%		(1,005)	(0.4)	%
Net Income	$	11,583	4.3	%	$	6,608	2.4	%

	29

Revenue . For the six months ended December 31, 2013, revenue was $267.4 million, compared to $275.1 million for the same period last year, a decrease of $7.7 million, or 2.8%. The decrease was mainly attributable to reduced revenue of approximately $33.4 million from our AP products partially offset by the increased revenue of approximately $24.7 million from our HDG products. During the first two quarters of fiscal 2014, most of our AP steel was used internally for further processing, instead of being sold to the customers. We did so to better schedule our production lines, meet product requirements or take advantage of the opportunities in the market.

We sold more HDG steel during the first six months of fiscal 2014 than the same period in fiscal 2013. Total sales volume of HDG steel in tonnage increased by approximately 15.8% and the revenue increased by approximately 14.7%, or $24.6 million. We achieved the result by adjusting our product specifications to meet the market demand. During the first six months of fiscal 2014, we produced more HDG steel with thicker zinc coatings than the same period last year. Further, our new Galvalume product, i.e. zinc and aluminum compound galvanization, began to gain momentum. Commercial production of Galvalume steel started in the fourth quarter of fiscal 2013 and we produced 173 tons of Galvalume steel during the quarter. During the second quarter of fiscal 2014, we produced and sold approximately 6,044 tons of Galvalume steel. Finally, we enhanced our efforts to provide value-added customized products and services to our customers in an effort to maintain customer loyalty and to gain new customers. We have extended our one-stop solution services to certain customers to cover further down-stream steel processing businesses.

The following table sets forth revenue by geography and by business segments for the six months ended December 31, 2013 and 2012.

(All amounts, other than percentages, in thousands of U.S. dollars)

	Six Months Ended				Six Months Ended
	December 31, 2013				December 31, 2012
			% of				% of
	Amount		Revenue		Amount		Revenue
Geographic Data
China	$	244,227	91.3	%	$	246,266	89.5	%
Other Countries		23,198	8.7	%		28,788	10.5	%

Segment Data
Changshu Huaye	$	118,488	44.3	%	$	75,951	27.6	%
Jiangsu Cold-Rolled		111,120	41.5	%		182,206	66.2	%
Ningbo Zhehua		31,228	11.7	%		12,985	4.8	%
Sutor TechnologyPRC		6,589	2.5	%		3,912	1.4	%

On a geographic basis, revenue generated from outside of China was $23.2 million, or 8.7% of the total revenue, for the six months ended December 31, 2013, as compared to $28.8 million, or 10.5% of the total revenue, for the same period in 2012. The decrease was mainly resulted from the timing of contract delivery for certain contracts signed during the second quarter of fiscal 2014.

On a segment basis, after eliminating intercompany sales and adjusting reconciliation items, revenue contributed by Changshu Huaye was $118.5million for the six months ended December 31, 2013, an increase of $42.5million, or 55.9%, from $76.0 million for the same period last year. The increase mainly resulted from higher revenue from sales of our HDG products in the first six months of fiscal 2014 than the same period last year. It was largely due to the shift of certain HDG production from Jiangsu Cold-Rolled to Changsu Huaye. Revenue from our PPGI products decreased by approximately $1.8 million, or 8.1%, due to lower ASP of approximately 11.1%, and partially offset by higher sales volume of approximately 2.3%.

	30

After eliminating the inter-company sales and adjusting reconciliation items, revenue contributed by Jiangsu Cold-Rolled was $111.1 million for the six months ended December 31, 2013, as compared at $182.2 million for the same period last year. As discussed above, both the shift of certain production of HDG steel from Jiangsu Cold-Rolled to Changshu Huaye and significantly reduced sales of AP steel led to the declined segment revenue.

Revenue contributed by Ningbo Zhehua was $31.2 million for the six months ended December 31, 2013, an increase of $18.2 million, or 140.0%, from $13.0 million for the same period in 2012. Approximately $5 million of the increased revenue was due to increased welded pipe manufacturing business and the rest resulted from a number of one-time trading transactions. To take advantage of the economy of scale, from time to time, we purchase a large amount of raw materials and then re-sell the extra ones.

Revenues contributed by Sutor Technology PRC were $6.6 million for the six months ended December 31, 2013, an increase of approximately $2.7 million from $3.9 million for the same period in 2012. Currently Sutor Technology PRC primarily sells products manufactured by other subsidiaries of the Company. In terms of related party sales as compared with sales to unrelated parties, our direct sales to unrelated parties in the six months ended December 31, 2013 decreased by $21.0 million, to $63.0 million, from $84.0 million in the same period in 2012. The percentage of related parties revenue to the total revenue was 23.6% for the six months ended on December 31, 2013 as compared to 30.5% for the same period last year.

Cost of revenue . Cost of revenue decreased by $12.7 million, or 5.0%, to $241.6 million in the six months ended December 31, 2013, from $254.3 million in the same period in 2012. As a percentage of revenue, cost of revenue decreased to 90.3% in the six months ended December 31, 2013, as compared to 92.4% in the same period last year. The decreased amount of the cost of revenue was primarily due to reduced product sales.

Gross profit and gross margin . Gross profit increased by $5.0 million to $25.8 million in the six months ended December 31, 2013, from $20.8 million in the same period in 2012. Gross margin was 9.7% for the six months ended December 31, 2013, as compared to 7.6% for the same period last year . Reduced sales of low gross margin product like AP steel and increased sales of high margin PPGI steel led to overall higher margin of the Company for the period.

On a segment basis, gross margin for Changshu Huaye decreased to 12.2% in the six months ended December 31, 2013, from 12.4% in the same period last year, mainly because of reduced export sales. Exported products historically had the highest gross margin. Gross margin for Jiangsu Cold-Rolled increased to 8.9% in the six months ended December 31, 2013, from 6.2% in the same period last year, mainly due to reduced sales of low margin AP products. Gross margin for Ningbo Zhehua increased to 4.1% in the six months ended December 31, 2013, as compared to 3.6% in the same period in 2012, mainly because increased sales of welded steel pipes. Gross margin for Sutor Technology PRC was 4.2% in the six months ended December 31, 2013, as compared to 3.6% in the same period last year due to increased sales.

Total operating expenses . Our total operating expenses decreased by $0.1 million to $8.9 million in the six months ended December 31, 2013, from $9.0 million in the same period in 2012. As a percentage of revenue, our total operating expenses was 3.3% in the six months ended December 31, 2013, as compared with 3.3% in the same period in 2012.

Selling expenses . Our selling expenses decreased by $1.0 million to $3.3 million in the six months ended December 31, 2013, from $4.3 million in the same period in 2012. As a percentage of revenue, our selling expenses decreased to 1.3% for the six months ended December 31, 2013, from 1.6% for the same period last year. The reduced selling expenses were due to reduced shipping, handling and miscellaneous expenses of approximately $0.9 million. During the second quarter of fiscal 2014, we had less international sales and more products were transported through our local harbor in Changshu.

General and administrative expenses . General and administrative expenses increased by $0.8 million to $5.5million, or 2.1% of the total revenue, in the six months ended December 31, 2013, from $4.7 million, or 1.7% of the revenue, in the same period in 2012. The increased general and administrative expenses were primarily due to increased employee wages and benefits of approximately $0.3 million and higher professional service fees of approximately $0.2 million for the six months ended December 31, 2013 than in the same period last year.

Interest expense . Our interest expense decreased by $1.5 million to $4.4 million in the six months ended December 31, 2013, from $5.9 million in the same period in 2012. As a percentage of revenue, our interest expense was 1.6% of total revenue in the six months ended December 31, 2013, compared to 2.1% in the same period in 2012. The decrease in interest expense was mainly attributable to reduced interest expenses of approximately $1.2 million on discounted bank notes.

Provision for income taxes . Our income tax expense increased to $3.0 million in the six months ended December 31, 2013, from $1.0 million of income tax in the same period last year, due to the higher taxable income and higher effective tax rate. During the first six months of fiscal 2013, we received refund of income taxes for using certain domestic equipment which lowered the effective income tax rate.

Net income . Net income, without including the foreign currency translation adjustment, increased by $5.0 million, or 75.8%, to $11.6 million in the six months ended December 31, 2013, from $6.6 million in the same period in 2012, as a cumulative result of the above factors.

Liquidity and Capital Resources

Our major sources of liquidity for the periods covered by this quarterly report were mainly borrowings through short-term bank loans. Our operating activities provided approximately $14.9 million of cash in the three months ended December 31, 2013. As of December 31, 2013, our total indebtedness to non-related parties under existing short-term loans was approximately $124.8 million. There was $3.5 million current portion of long-term loans. We had approximately $2.9 million long-term loans to non-related parties. As of December 31, 2013, we had an unused line of credit with banks of approximately $16.0 million (RMB 97.8 million) which entitled us to draw bank loans for general corporate purposes.

Short-term and long-term banks loans are likely to continue to be our key sources of financing for the foreseeable future, although in the future we may raise additional capital by issuing shares of our capital stock in an equity financing. We expect to renew our short term bank loans when they become due.

Our liquidity and working capital may be affected by a material decrease in cash flow due to factors such as the continued use of cash in operating activities resulting from a decrease in sales due to a challenging economic climate, increased competition, decreases in the availability, or increases in the cost of raw materials, unexpected equipment failures, or regulatory changes.

As stated above, a portion of our operations is funded through short-term bank loans and we expect to renew our short term loans when they become due. We are exposed to a variety of risks associated with short-term borrowings including adverse fluctuations in fixed interest rates for short-term borrowings and unfavorable increases in variable interest rates, potential inability to service our short term indebtedness through cash flow from operations and the overall reduction of credit in the current economic environment.

Our liquidity and working capital may also be affected by the substantial amount of our outstanding short-term loans, which represent our primary source of financing in China. Depending on the level of cash used in our operating activities and the level of our indebtedness, (i) it may become more difficult for us to satisfy our existing or future liabilities or obligations, which could in turn result in an event of default on such obligations, (ii) we may have to dedicate a substantial portion of our cash flows from borrowings to our operating activities and to debt service payments, thereby reducing the availability of cash for working capital and capital expenditures, acquisitions, general corporate purposes or other purposes, (iii) our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may become impaired, (iv) our ability to withstand a downturn in our business, the industry in which we operate or the economy generally may be diminished, (v) we may experience limited flexibility in planning for, or reacting to, changes in our business and the industry in which we operate and (vi) we may find ourselves at a competitive disadvantage compared to competitors that have proportionately less debt. If we are unable to meet our debt service obligations, we could be forced to restructure or refinance our indebtedness, seek additional equity capital or sell assets. We may be unable to obtain financing or sell assets on satisfactory terms, or at all, which could cause us to default on our debt service obligations and be subject to foreclosure on such loans. Additionally, we could incur additional indebtedness in the future and, if new debt is added to our current debt levels, the risks above could intensify.

As some of our loans become due, we may elect to refinance, rather than repay, the indebtedness. However, there is no assurance that additional financing will become available on terms acceptable to us. We believe that we will have the ability to refinance our indebtedness when and if we elect to do so. While we currently are not in a position to know the terms of such refinancing, we expect to refinance our indebtedness at prevailing market rates and on prevailing market terms.

	32

As of December 31, 2013, we had cash and cash equivalents (excluding restricted cash) of $12.5 million and restricted cash of $108.7 million. The following table provides detailed information about our net cash flow for the financial statement period presented in this report.

Cash Flow

(All amounts in thousands of U.S. dollars)

	Six Months Ended December 31,
	2013		2012
Net cash provided by operating activities	$	14,861	$	6,201
Net cash (used in) investing activities		(11,625)		(7,552)
Net cash provided by financing activities		5,601		9,610
Effect of foreign currency translation on cash and cash equivalents		87		9
Net cash flows		8,924		8,268

Operating Activities

Net cash provided by operating activities was $14.9 million for the six months ended December 31, 2013, an increase of $8.7 million from $6.2 million net cash provided by operating activities for the same period last year. The increase in net cash provided by operating activities was primarily due to reduced prepayment of approximately $53.1 million to suppliers, increased account payable of $26.5 million, net income of $11.6 million, increased advances from customers of $10.5 million, and depreciation and amortization of $4.5 million, partially offset by the increased inventory of $61.1 million, increased restricted cash of $20.2 million and increased trade and notes receivable of $7.9 million. We paid more attention to balancing our account payable and receivable in an effort to maintain adequate liquidity. The recent inventory consisted of mostly raw steel materials. From the first quarter to the second quarter of 2014, our inventory of finished goods increased by approximately $5.4 million. We believe that we have adequate liquidity for the foreseeable future.

Investing Activities

Our main uses of cash for investing activities are payments relating to the acquisition of property, plant and equipment and restricted cash pledged as deposits for bankers’ acceptance bills.

Net cash used in investing activities was $11.6 million for the six months ended December 31, 2013, as compared to $7.6 million for the same period in 2012. The increase in net cash used in investing activities was primarily due to the purchase of plant and equipment of $7.8 million and payment for short-term investment of $3.3 million for the six months ended December 31, 2013. As the construction of the new cold-rolling production line of 500,000-ton capacity has been completed, we anticipate a reduced need for capital expenditure for investing activities in the near future.

Financing Activities

Net cash provided by financing activities was $5.6 million for the six months ended December 31, 2013, as compared to $9.6 million provided by financial activities for the same period in 2012. The decrease in cash flow provided by financing activities was mainly due to proceeds from loans of $93.1 million and reduction in restricted cash of $21.5 million. The use of cash was primarily for repayment of loans of $110.5 million. We also conducted a private placement and raised approximately $1.5 million in the first quarter of fiscal 2014 to increase the public float of our common stock and diversify our shareholder base.

	33

As of December 31, 2013, the amount, maturity date and term of each of our loans were as follows:

(All amounts in millions of U.S. dollars)

Lender	Amount*		Starting Date	Maturity Date	Guarantor**
Industrial and Commercial Bank of China, Changshu Branch	$	3.27	2013-06-07	2014-06-03	None
Industrial and Commercial Bank of China, Changshu Branch		1.31	2013-06-20	2014-06-16	None
Industrial and Commercial Bank of China, Changshu Branch		3.60	2013-06-25	2014-06-24	Shanghai Huaye
The Agricultural Bank of China, Changshu Branch		6.22	2013-10-25	2014-04-23	Jiangsu Cold-Rolled, Shanghai Huaye
Construction Bank of China, Changshu Branch		6.54	2013-10-16	2014-10-15	None
Communications Bank of China, Changshu Branch		3.27	2013-11-04	2014-11-01	Shanghai Huaye
Industrial and Commercial Bank of China, Changshu Branch		1.47	2013-11-18	2014-05-07	Shanghai Huaye
The Agricultural Bank of China, Changshu Branch		4.09	2013-12-16	2014-06-13	Jiangsu Cold-Rolled, Shanghai Huaye
Industrial and Commercial Bank of China, Changshu Branch		1.31	2013-12-13	2014-06-10	Shanghai Huaye
Construction Bank of China, Changshu Branch		0.02	2013-08-07	2014-01-02	Shanghai Huaye
The Agricultural Bank of China, Changshu Branch		1.28	2013-09-30	2014-03-26	None
The Agricultural Bank of China, Changshu Branch		0.70	2013-09-30	2014-01-20	None
The Agricultural Bank of China, Changshu Branch		0.54	2013-09-30	2014-02-23	None
The Agricultural Bank of China, Changshu Branch		1.13	2013-09-30	2014-01-26	None
The Agricultural Bank of China, Changshu Branch		1.54	2013-09-30	2014-03-13	None
The Agricultural Bank of China, Changshu Branch		1.32	2013-09-30	2014-03-15	None
The Agricultural Bank of China, Changshu Branch		0.41	2013-09-30	2014-02-09	None
The Agricultural Bank of China, Changshu Branch		0.99	2013-12-27	2014-05-02	None
The Agricultural Bank of China, Changshu Branch		0.95	2013-12-27	2014-05-22	None
The Agricultural Bank of China, Changshu Branch		0.66	2013-12-27	2014-05-22	None
Communications Bank of China, Changshu Branch		3.54	2011-09-27	2014-09-11	Changshu Huaye
Industrial and Commercial Bank of China, Changshu Branch		0.65	2013-04-15	2014-04-11	Changshu Huaye
Industrial and Commercial Bank of China, Changshu Branch		2.62	2013-04-15	2014-04-11	Sutor Technology PRC
The Agricultural Bank of China, Changshu Branch		7.53	2013-07-24	2014-01-23	Changshu Huaye, Shanghai Huaye
Industrial and Commercial Bank of China, Changshu Branch		3.27	2013-08-13	2014-08-07	Changshu Huaye
The Agricultural Bank of China, Changshu Branch		6.54	2013-08-14	2014-02-12	Changshu Huaye, Shanghai Huaye
The Agricultural Bank of China, Changshu Branch		4.25	2013-08-29	2014-02-25	Changshu Huaye, Shanghai Huaye
The Agricultural Bank of China, Changshu Branch		4.25	2013-10-12	2014-04-11	Changshu Huaye, Shanghai Huaye
The Agricultural Bank of China, Changshu Branch		8.83	2013-10-15	2014-04-14	Changshu Huaye, Shanghai Huaye
The Agricultural Bank of China, Changshu Branch		5.56	2013-11-04	2014-04-24	Changshu Huaye, Shanghai Huaye
The Agricultural Bank of China, Changshu Branch		1.64	2013-11-19	2014-05-16	Changshu Huaye, Shanghai Huaye
The Agricultural Bank of China, Changshu Branch		2.45	2013-11-22	2014-05-20	Changshu Huaye, Shanghai Huaye
Industrial and Commercial Bank of China, Changshu Branch		1.64	2013-12-19	2014-12-18	Changshu Huaye, Shanghai Huaye
The Agricultural Bank of China, Changshu Branch		7.36	2013-12-03	2014-06-02	Changshu Huaye, Shanghai Huaye
The Agricultural Bank of China, Changshu Branch		3.27	2013-12-03	2014-06-02	Changshu Huaye, Shanghai Huaye
Lin, Guihua		2.86	2008-11-20	2016-12-31	None
Macao International Bank Co., LTD		7.44	2013-02-20	2014-02-12	Shanghai Huaye
Macao International Bank Co., LTD		5.26	2013-03-11	2014-03-02	Shanghai Huaye
Macao International Bank Co., LTD		4.80	2013-03-25	2014-03-24	Shanghai Huaye
Macao International Bank Co., LTD		5.11	2013-04-03	2014-03-24	Shanghai Huaye
Macao International Bank Co., LTD		1.73	2013-04-11	2014-04-03	Shanghai Huaye
Total	$	131.2

	34

* Calculated on the basis that $1 = RMB6.11

** We do not pay any consideration to Shanghai Huaye or its affiliated companies, which are controlled by our CEO and her spouse, for the guarantees of our loans.

The loan agreements with banks generally contain debt covenants that require us to maintain certain financial and operating condition, among other things. We believe that we were in compliance with these debt covenants as of December 31, 2013.

In the coming twelve months, we will have approximately $128.4 million in bank loans that will mature. We plan to replace these loans with new bank loans in approximately the same aggregate amounts.

We believe that our currently available working capital, credit facilities referred to above and the expected additional credit facility should be adequate to sustain our operations at the current level for at least the next twelve months. However, depending on our future needs and changes and trends in the capital markets affecting our shares and the Company, we may determine to seek additional equity or debt financing in the private or public markets.

Critical Accounting Policies

Critical accounting policies are those we believe are most important to portraying our financial conditions and results of operations and also require the greatest amount of subjective or complex judgments by management. Judgments and uncertainties regarding the application of these policies may result in materially different amounts being reported under various conditions or using different assumptions. There have been no material changes to the critical accounting policies previously disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2013.

Recent Accounting Pronouncements

See Note 2, Significant Accounting Policies, to our unaudited condensed consolidated financial statements included elsewhere in this report

Seasonality

Our operating results and operating cash flows historically have not been subject to significant seasonal variations. This pattern may change, however, as a result of new market opportunities or new product introductions.

Off Balance Sheet Arrangements

We do not have any off-balance arrangements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

	35

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, Mr. Zhuo Wang and Mr. Naijiang Zhou, respectively, evaluated the effectiveness of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports, such as this report, that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, Mr. Wang and Mr. Zhou concluded that as of December 31, 2013, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal controls over financial reporting during the second quarter of fiscal year 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

	36

PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

From time to time, we may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these, or other matters, may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse affect on our business, financial condition or operating results.

ITEM 1A.RISK FACTORS.

Not applicable.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

We have not sold any equity securities during the second quarter of fiscal year 2014 that were not previously disclosed in a quarterly report on Form 10-Q or a current report on Form 8-K that was filed during the quarter.

During the three-month period ended December 31, 2013, we did not repurchase any shares of our common stock.

No repurchase plans expired or were terminated during the second quarter of fiscal year 2014, nor do any plans exist under which we do not intend to make further purchases.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5. OTHER INFORMATION.

We have no information to disclose that was required to be in a report on Form 8-K during the second quarter of fiscal year 2014, but was not reported. There have been no material changes to the procedures by which security holders may recommend nominees to our board of directors.

ITEM 6. EXHIBITS.

The list of exhibits in the Exhibit Index to this report is incorporated herein by reference.

SIGNATURES

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

Date: February 13, 2014	SUTOR TECHNOLOGY GROUP LIMITED


	By:	/s/ Zhuo Wang
		Zhuo Wang, Chief Executive Officer
		(Principal Executive Officer)

	By:	/s/ Naijiang Zhou
		Naijiang Zhou, Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

	38

EXHIBIT INDEX

Exhibit No.		Description
31.1		Certifications of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certifications of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certifications of Principal Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certifications of Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101		Interactive data files pursuant to Rule 405 of Regulation S-T (furnished herewith).

	39

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PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

ITEM 4. CONTROLS AND PROCEDURES.

PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

ITEM 1A.RISK FACTORS.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

ITEM 4. MINE SAFETY DISCLOSURES.

ITEM 5. OTHER INFORMATION.

ITEM 6. EXHIBITS.

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SUTR (MM)

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

ITEM 4. CONTROLS AND PROCEDURES.

PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

ITEM 1A.RISK FACTORS.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

ITEM 4. MINE SAFETY DISCLOSURES.

ITEM 5. OTHER INFORMATION.

ITEM 6. EXHIBITS.

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