Loans Payable

6 Months Ended

Jun. 30, 2013

(8) Loans Payable

Short-term bank loans

		June 30, 2013		December 31, 2012
Industrial & Commercial Bank of China	(a)	$	809,953	$	792,568
Industrial & Commercial Bank of China	(b)		1,619,905		1,585,138
Bank of Hebei	(c)		1,619,905		1,585,138
Total short-term bank loans		$	4,049,763	$	3,962,844

(a)

On August 18, 2011, the Company obtained from the Industrial & Commercial Bank of China an accounts receivable factoring facility with a maximum credit limit of $787,116 as of December 31, 2011. Under the factoring agreement, the bank has recourse against the Company if the receivables, which remain in the Company’s books at all times, are not fully collected. The term of the factoring facility expired on August 15, 2012 and carried an interest rate of 8.528% per annum. The Company paid off the 2011 factoring outstanding balance on August 15, 2012 and subsequently refinanced with the Industrial & Commercial Bank of China on September 4, 2012 under similar terms, except carries an interest rate of 6.6% per annum. The unpaid balance of the factoring facility was $809,953 and $792,568 as of June 30, 2013 and December 31, 2012, respectively. This new factoring facility will expire on August 28, 2013.

(b)

On November 9, 2012, the Company obtained from the Industrial & Commercial Bank of China another accounts receivable factoring facility with a maximum credit limit of $1,619,905 and $1,585,138 as of June 30, 2013 and December 31, 2012, respectively. Under the factoring agreement, the bank has recourse against the Company if the receivables, which remain in the Company’s books at all times, are not fully collected. The term of the factoring facility expires on November 8, 2013 and carries an interest rate of 6.6% per annum, or 1.0% plus the prime rate for the loan set forth by the People’s Bank of China at the time of funding. The unpaid balance of the loan was in the amount of $1,619,905 and $1,585,138 as of June 30, 2013 and December 31, 2012, respectively.

(c)

On September 19, 2012, the Company obtained from the Bank of Hebei a new banking facility with maximum credit limit on bank loans of $1,619,905 and on notes payable of $1,619,905 as of June 30, 2013. The facility is guaranteed by an independent third party. On the same day, the Company drew down from this banking facility a new working capital loan of $1,619,905 and $1,585,138 as of June 30, 2013 and December 31, 2012. The loan bears interest at the rate of 6.6% per annum. Both the term of the banking facility and loan are for one year and expire on September 19, 2013.

As of June 30, 2013 and December 31, 2012, there were secured short-term borrowings in the amounts of $2,429,858 and $2,377,706, respectively, and unsecured bank loans in the amount of 1,619,905 and $1,585,138, respectively. The factoring facility was secured by the Company’s accounts receivable in the amount of $2,955,039 and $2,836,335 as of June 30, 2013 and December 31, 2012, respectively.

As of June 30, 2013 and December 31, 2012, the Company had no unutilized credit facility with the banks. The average short-term borrowing rates for the six months ended June 30, 2013 and 2012 were approximately 6.60% and 8.15%, respectively. The average short-term borrowing rate for the three months ended June 30, 2013 and 2012 were approximately 6.60% and 8.76%, respectively.

Long-term loans from credit union

As of June 30, 2013 and December 31, 2012, loan payable to Rural Credit Union of Xushui County, amounted to $5,855,958 and $5,730,273.

On March 31, 2011, the Company entered into a three-year term loan agreement with Rural Credit Union of Xushui County for an amount that is $1,595,607 as of June 30, 2013 and $1,561,361 as of December 31, 2012. The loan is guaranteed by an independent third party. Interest payment is due quarterly and bears the rate of 0.72% per month. As of June 30, 2013, the entire balance of the loan in the amount of $1,595,607 has been presented as current portion of loan-term loan from credit union in the condensed consolidated balance sheet.

On June 10, 2011, the Company entered into a new term loan agreement with the Rural Credit Union of Xushui County for an amount that is $4,260,351 as of June 30, 2013 and $4,168,912 as of December 31, 2012. The loan is secured by its manufacturing equipment of $8,803,929 and $9,316,645 as of June 30, 2013 and December 31, 2012, respectively, and has become matured on June 9, 2013. Because of the ongoing negotiation for renewing the loan, the Company was technically in default with respect to the loan as of June 30, 2013. However, the credit union has indicated that it will waive the default until the loan renewal is completed. Interest payment is due quarterly and bears the rate of 0.72% per month. As of June 30, 2013 and December 31, 2012, the entire balance of the loan in the amount of $4,260,351 and $4,168,912 has been presented as current portion of loan-term loan from credit union in the consolidated balance sheet. On July 15, 2013, the Company entered into an agreement with the credit union and extended the loan by 5 years. It would be repayable by installment through December 21, 2013 to July 14, 2018. Interest payment is due quarterly and bears the rate of 0.72% per month.

Total interest expenses for the short-term and long-term loans for the three months ended June 30, 2013 and 2012 were $193,829 and $186,959, respectively.

Total interest expenses for the short-term and long-term loans for the six months ended June 30, 2013 and 2012 were $384,377 and $357,973, respectively.

Financing with Sale-Leaseback

The company entered into a sale-leaseback arrangement (the “Lease Financing Agreement”) with China National Foreign Trade Financial & Leasing Co., Ltd ("CNFTFL") on June 16, 2013, for a total financing proceeds in the amount of RMB150 million (approximately US$24 million). Under the sale-leaseback arrangement, Orient Paper HB sold certain of its paper manufacturing equipment (the “Leased Equipment”) to CNFTFL for an amount of RMB 150 million. Concurrent with the sale of equipment, Orient Paper HB leases back all of the equipment sold to CNFTFL for a lease term of three years. At the end of the lease term, Orient Paper HB will pay a nominal purchase price of RMB 15,000 (approximately $2,400) to CNFTFL and buy back all of the Leased Equipment. The sale-leaseback is treated by the Company as a mere financing and capital lease transaction, rather than a sale of assets (under which gain or loss is immediately recognized) under ASC 840-40-25-4. All of the Leased Equipment are included as part of the property, plant and equipment of the Company’s as of June 30, 2013; while the net present value of the minimum lease payment (including a lease service charge equal to 5.55% of the amount financed) was recorded as obligations under capital lease and was calculated with CNFTFL’s implicit interest rate of 6.15% per annum and stated at $25,750,170 at the inception of the lease on June 16, 2013. The balance of the long-term obligations under capital lease was $16,243,120, which is net of its current portion in the amount of $8,206,234.

As a result of the sale, a deferred gain on sale of leased equipment in the amount of $758,257 was created and presented as a non-current liability. The deferred gain will be amortized by the Company during the lease term and will be used to offset the depreciation of the Leased Equipment, which are recorded at the new cost of $25,736,822 as of June 30, 2013.

As part of the sale-leaseback transaction, Orient Paper HB entered into a Collateral Agreement with CNFTFL and pledged the land use rights in the amount of approximately $7,505,504 on some 58,566 square meters of land as collateral for the lease. In addition to Orient Paper HB’s collateral, Orient Paper Shengde also entered into a Guarantee Contract with CNFTFL on June 16, 2013. Under the Guarantee Contract, Orient Paper Shengde agrees to guarantee Orient Paper HB’s performance under the lease and agrees to pledge all of its production equipment as additional collateral. Net book value of Orient Paper Shengde’s asset guarantee was $37,157,082 as of June 30, 2013.

The future minimum lease payments of the capital lease as of June 30, 2013 were as follow:

Year Ending June 30,	Amount
2014	$	9,488,731
2015		8,983,692
2016		8,479,344
	$	26,951,767

- Definition

The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants.

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