15. NOTE PAYABLE

Loan Agreement with Cinda HK and its Affiliate

On August 18, 2010, the Company and its wholly-owned subsidiaries Sifang Holdings, Shanghai TCH and Xi’an TCH entered into a Notes Purchase Agreement (the “Cinda HK Note Agreement”) with Cinda HK. Under the terms of the Cinda HK Note Agreement, the Company issued Cinda HK two tranches of convertible notes (the “Cinda HK Notes”), each having a principal amount equal to the US Dollar equivalent of RMB 50 million.

Under the Cinda HK Note Agreement, the Cinda HK Notes shall be issued before August 18, 2011. The Cinda HK Notes mature three (3) years from the date of the issuance of the first tranche. Each Cinda HK Note bears interest at a rate equal to that of PBOC base interest rate for the relevant interest period (the period commencing on and including January 1 of each year and ending on and including December 31 of such year) plus 2%. If Cinda HK does not convert or fully convert the Cinda HK Notes to shares prior to maturity, the Company will pay the difference between the interest rate described above and 18% on the outstanding amount. As collateral for the notes, Mr. Ku, CEO of the Company entered into a Share Pledge Agreement with Cinda HK dated as of August 18, 2010, to pledge each 4,500,000 shares of the Company’s common stock held by him to secure the first Cinda HK Note and the second note before its issuance, respectively.

Each Cinda HK Note had a conversion price at the lower of (i) $2.46 per share or (ii) an amount equal to the Company’s EPS based upon the consolidated earnings of the Company for 2010 on a weighted average fully diluted basis, multiplied by seven. The Cinda HK Notes had a contingent BCF which will be recorded when the contingency is resolved.

Also on August 18, 2010, Xi’an TCH and China Jingu International Trust Co. Ltd. (“Jingu”), an affiliate of Cinda entered into a Capital Trust Loan Agreement (the “Trust Loan Agreement”), whereby Jingu would raise 100 million RMB ($16 million) under a Jingu CREG Recycling Economy No. 1 Collective Fund Trust Plan (the “Trust Plan”) and lend such amount under the Trust Plan to Xi’an TCH (the “Jingu Loans”). If the Jingu Loans under the Trust Loan Agreement did not occur, then the principal amount of the Cinda HK Notes to be issued in each tranche would be the US dollar equivalent of RMB 100 million. In connection with the Trust Loan Agreement, the Company also entered into an Exchange Rights Agreement pursuant to which the Jingu Loans could be exchanged (on the same terms as the Cinda HK Notes can be converted) for shares of the Company’s common stock which can in turn be registered under the Registration Rights Agreement. All proceeds from the Cinda HK Notes and the Jingu Loans were to be used to complete the Phases IV and V of the Erdos TCH Energy Saving Development Co., Ltd. (“Erdos TCH”) project.

The term of the Jingu Loans was for three (3) years from the date of the first draw. The interest rate for the Jingu Loans was the PBOC three (3) year loan base interest rate plus two percent (2%). If the Jingu Loans were not exchanged for shares of the common stock of the Company as described below prior to maturity, Xi’an TCH agreed to pay the difference between the interest rate described above and 18% on the outstanding amount. Under the Trust Loan Agreement and separate agreements entered into by Jingu, Erdos TCH, Shanghai TCH, Xi’an TCH and Mr. Guohua Ku on August 18, 2010, (a) Erdos TCH pledged the accounts receivable, equipment and assets of its Phases IV and V projects to Jingu as a guarantee to the Jingu Loans, (b) Xi’an TCH pledged its 80% equity in Erdos TCH to Jingu as a guarantee to the Jingu Loans, (c) Shanghai TCH provided a joint liability guarantee to Jingu for the Jingu Loans, and (d) Mr. Guohua Ku provided his personal joint liability as security for the Jingu Loans.

On December 30, 2010, the Company received $7,533,391 (RMB 50,000,000) from the first tranche of the Jingu Loans. On January 30, 2011, the Company received another $7,533,391 (RMB 50,000,000) from the first tranche convertible Note. Under ASC 815 – Derivatives and Hedging, the FV of the conversion option was a derivative that was bifurcated and treated as liability at the date of inception. The conversion feature was accounted for at December 31, 2011 and 2010 using the conversion price of $2.46. The conversion feature was akin to a call option, therefore, the Black-Scholes option pricing model was used by using the maximum conversion price of $2.46 as the strike price. Since the conversion option was an embedded derivative and was bifurcated from the host contact, BCF analysis was not required. The FV of the conversion feature was recorded as a liability and was marked to market until the conversion rate was set. As the loan had a reset clause in the event the Company issued shares below the conversion price, it was to be treated as a liability as long as the loan was outstanding. The unamortized discount due to conversion feature continued to be amortized over the term of the loan.

On December 9, 2011, the Company, Cinda and Mr. Guohua Ku, the Chairman, CEO and a major shareholder of the Company entered into a Supplemental Agreement (the “Supplemental Agreement”) to the Notes Purchase Agreement which was dated August 18, 2010. Pursuant to the terms of the Supplemental Agreement, the Company and Cinda terminated the transaction of the second tranche of RMB 50 million of the convertible note under the Note Agreement. The Company and Cinda also agreed that the Company redeem the outstanding convertible note at the U.S. Dollar amount equivalent to RMB 25 million each on December 30, 2011 and November 30, 2012, respectively, plus accrued interest at 18% (the “Redemption Interest Rate”) up to the applicable Redemption Date, minus any interest already accrued and paid (together with the Redemption Principal Amount, the “Redemption Price”). There was an additional 5% interest rate on any default in payment of the Redemption Price and due on demand. The interest on the Redemption Principal Amount due on November 30, 2012 (the “Second Redemption Principal Amount”) accrued at 18%. On December 9, 2011, Mr. Ku executed a Certificate for additional collateral to pledge an additional 1.5 million shares of common stock of the Company that he owns as collateral to Cinda to secure the unpaid note.

Xi’an TCH redeemed $3.97 million (RMB 25 million) and interest of $1.13 million (RMB 7.14 million) for the Cinda HK Notes on December 30, 2011 per the Supplemental Agreement described above. Xi’an TCH redeemed 1^st 50% of remaining RMB 25 million on June 20, 2012, and the other 50% of remaining RMB 25 million was due on November 30, 2012; however, upon request from Cinda, the November 30, 2012 date was extended and repaid in full in August 2013.

During 2012, the Company amortized $2,140,050 from the unamortized discount due to the conversion feature of the remaining RMB 25 million. As of December 31, 2012, there was no derivative liability as the Company redeemed half of the outstanding convertible notes at December 30, 2011 and redeemed the remaining half at a future date, plus accrued interest at 18%. During the year ended December 31, 2013, the Company recorded interest expense of $487,080 on the $3.76 million (the remaining RMB 25 million) of Cinda HK Note at 18%.

In addition, on December 9, 2011, Xi’an TCH and Jingu, an affiliate of Cinda also entered into a Supplemental Agreement (the “Jingu Agreement”) to the Capital Trust Loan Agreement. Pursuant to the terms of the Jingu Agreement, Xi’an TCH repaid $7.94 million (RMB 50 million) and interest of $1.00 million (RMB 6.45 million) to Jingu on December 16, 2011.

As of December 31, 2013, the Cinda HK Note including interest was repaid in full.