SECURED CONVERTIBLE NOTES

6 Months Ended

Sep. 30, 2012

9. SECURED CONVERTIBLE NOTES

$3,135,000 Face Value Secured Convertible Notes

On May 8, 2012, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain accredited investors (the “Investors”), pursuant to which the Company agreed to issue and sell to the Investors (i) up to $3.5 million of eleven percent ( 11%) secured convertible notes (the “Notes”) and warrants to purchase the Company’s common stock. The Notes and warrants were issued in two tranches. The first tranche issued on May 8, 2012 contained (i) Notes in the aggregate original principal amount of $2,120,000 and (ii) Investor Warrants to purchase an aggregate of 530,000 shares of Common Stock, for aggregate gross proceeds of $2,120,000. The second tranche issued on June 7, 2012 contained (i) Notes in the aggregate original principal amount of $1,015,000 and (ii) Investor Warrants to purchase an aggregate of 507,500 shares of Common Stock, for aggregate gross proceeds of $1,015,000. The notes are payable quarterly in arrears on March 31, June 30, September 30 and December 31, with the initial payment due on September 30, 2012. The Notes mature on May 8, 2017. The notes are convertible at the option of the holder at any time on or prior to the Maturity Date into shares of Common Stock at a conversion price of $2.00 per share (subject to appropriate adjustments for any stock dividend, stock split, stock combination, reclassification or similar transaction after the issuance date). The Investor Warrants have a strike price of $2.00 per share (subject to appropriate adjustments for any stock dividend, stock split, stock combination, reclassification or similar transaction after the issuance date). The Investor Warrants are immediately exercisable, on a net exercise or cashless basis, and have a term of five years.

Accounting for the Financing:

The Company has evaluated the terms and conditions of the convertible notes and warrants under the guidance of ASC 815, Derivatives and Hedging. The conversion features meet the definition of conventional convertible for purposes of applying the conventional convertible exemption. The definition of conventional contemplates a limitation on the number of shares issuable under the arrangement. The notes are convertible into a fixed number of shares and there are no down round protection features contained in the contracts. Since the convertible notes achieved the conventional convertible exemption, the Company was required to consider whether the hybrid contracts embody a beneficial conversion feature. The calculation of the effective conversion amount did not result in a beneficial conversion feature. Additionally, the warrants did not contain any terms or feature that would preclude equity classification.

The purchase price allocation for the convertible notes resulted in a debt discount of $1,143,154. The discount on the notes will be amortized through periodic charges to interest expense over the term of the debenture using the effective interest method. Imputed interest expense amounted to $75,446 during the six month period ended September 30, 2012. In addition, amortization of deferred finance charges amounted to $48,788 for the six month period ended September 30, 2012. The purchase price allocation is as follows:

		Inception
Net proceeds	$	2,520,606
Carrying value (fair value of debt component)		(1,991,846	)
Paid in capital (warrants)		(1,143,154	)
Financing fees		614,394

Significant assumptions included in the MSC valuation technique to determine the fair value of the debt component were as follows:

		Assumption
Linked common shares		1,037,500
Stock price	$	2.20
Expected life (years)		5.00
Volatility (based on peers)		58.43%- 83.82%
Risk adjusted interest rate		0.15%- 0.77%

Chile Mining Technologies Inc. 10-Q