Note 9. Related Party Secured Convertible Debenture Agreement
On November 5, 2009, the Company issued a 13.5% Secured Convertible Debenture (the “Debenture”) to Rupes Futura AB (“RF”), an investment company controlled by Henrik Sellmann, a director of the Company, providing for a loan to the Company of $500,000. The Debenture is due November 2014. Additionally, the Company issued to RF 500,000 shares of Common Stock of the Company as a Commitment Fee. The value of the Common Stock at the time of issuance was $30,000 and is recorded as debt discount. The Commitment Fee will be amortized over five years, the term of the Debenture, using the effective interest method.
Interest is payable at an annual rate of 13.5%, payable annually in arrears in shares of Common Stock of the Company, valued at the Conversion Price (defined below) as of the due date of the interest payment or the Company, at its sole option, may elect to pay any interest payment on the Debenture in cash, such cash interest payment to be payable no later than one hundred eighty (180) days from the original interest payment due date. The Debenture is convertible in whole or in part into Common Stock at the option of RF at the Conversion Price at any time following the date that is two years from the Closing Date. If RF elects to convert any unpaid principal amount of the Debenture it shall be entitled to receive shares of Common Stock on conversion equal in value, at the Conversion Price, to 115% of the unpaid principal amount of the Debenture. The conversion feature has intrinsic value of $75,000 that is recorded as debt discount and amortized over two years, the required holding period for RF, using the effective interest method. The effective interest rate on the Debenture as a result of the debt discounts noted above was 15.19% and 24.37 % which resulted in interest expense of $37,582 and $57,167 for the six months ended October 31, 2012 and 2011, respectively.
As of April 30, 2012, the Company transferred six ARG debt obligation bonds and the rights to the conversion shares for six ARG convertible share bonds to RF in satisfaction of $60,000 of the $67,500 annual interest payment due RF under the terms of the Company’s outstanding $500,000 debenture held by RF. As of October 31, 2012, the Company had not paid the $7,500 balance owing of the annual interest payment, which default has been waived by RF. (See Note 5)