11. SHORT-TERM LOANS

3 Months Ended

Mar. 31, 2014

11. SHORT-TERM LOANS

On September 13, 2010, the Company borrowed $1,827,050, $953,243 and $556,059 from three different credit unions. Each loan bore interest of 7.2% and was to mature on September 12, 2011. The Company extended the maturity date of the loans through an agreement with one of the credit unions. Pursuant to this agreement, the Company was required to pay $317,415 (RMB 2,000,000) by October 2011, with the remaining balance to be paid by June 2012. However, the Company did not make the payment of $317,415 (RMB 2,000,000), as per the agreement and, as such, the extension of maturity date was not granted. As of March 31, 2014, the Company repaid all three loans.

On December 13, 2010, the Company entered into a loan with a lender for $10 million. At the Lender’s option, the principal amount of the note and all interest thereon shall be paid in either USD or RMB at an exchange rate of RMB 6.90 to USD 1.00 if paid on or before March 1, 2012, and thereafter at an exchange rate of RMB 6.30 to USD 1.00 to the Lender or any designee of Lender as provided to the Company in writing by Lender. The loan bore interest of 10% payable in advance at the beginning of each quarter with a maturity of March 1, 2012. The loan was amended to mature on March 1, 2013, and to decrease the interest rate to 8.5%, effective March 1, 2012, which interest shall be payable quarterly in advance. From March 1, 2012 through August 13, 2013, the Company was in default on interest payment that was required to pay in advance; the Company was also in default in payment of $10 million loan due on March 1, 2013. Therefore the interest, from the date of the Default, was at the lesser of 24% or the maximum applicable legal rate. The Company used 24% as default interest rate from March 1, 2012 through August 13, 2013. After August 13, 2013, the interest rate on the $10 million loan was 8.5% according to the Line of Credit Agreement descried below. The Company had interest payable of $3.84 million as of March 31, 2014.

Through a new Line of Credit Agreement entered with the same lender on August 17, 2013, this default loan became payable upon Note-holder’s request and the interest rate at 8.5% after August 13, 2013. The Promissory Note entered on August 17, 2013 along with an Escrow Agreement was for a Line of Credit available to the Company of up to $10 million. The lender deposits the required amount into an escrow account each time before disbursement, and the escrow agent disburses some or all of the deposit from time to time as directed in writing by the lender for advancing the Company to pay expenses that are approved by the lender. The applicable interest rate for the amount borrowed under this line of credit is 3% during the first six months following each advance, and 0% thereafter, to be paid on the first day of each month, with maturity upon Note-holder’s request. The promissory note has a default rate of 24%. As of March 31, 2014, the Company borrowed $0.65 million from the credit line and accrued interest of $8,939.

On December 14, 2011, the Company entered into a 3% promissory note with a lender for $50,000, maturing on February 1, 2012, for the payment of its legal expenses. As of March 31, 2014, the Company had accrued interest of $6,690 on this note. The note is past due with default interest at 6% accrued subsequent to February 1, 2012.

At March 31, 2014 and December 31, 2013, the short-term loans consisted of the following:

	2014		2013
Promissory Note of US parent		50,000		50,000
Loan of U.S. Parent		10,000,000		10,000,000
Credit line payable of U.S. Parent		638,951		638,951
Credit union loan, Chinese subsidiary		-		2,263,445
Total short term loan	$	10,688,951	$	12,952,396

- Definition

The entire disclosure for short-term debt.

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