7. NOTES PAYABLE (Tables)

9 Months Ended

Jan. 31, 2014

As of January 31, 2014 and April 30, 2013, notes payable consisted of the following:

	January 31, 2014			April 30, 2013
Current Portion
(a) Convertible notes payable 10% – February 8, 2013	$	2,235,000		$	2,750,000
(b) Convertible notes payable 10% – August 15, 2014		32,925			67,713
(c) Convertible notes payable 6% – September 14, 2014		1,500,000			-
Less discount on convertible notes payable		(104,672	)		(64,913	)
Total current portion	$	3,663,253		$	2,752,800

Long Term Portion
(c) Convertible notes payable 6% – September 14, 2014	$	-		$	1,500,000
Less discount on convertible notes payable		-			(169,288	)
Total long term portion	$	-		$	1,330,712
Total Notes Payable	$	3,663,253		$	4,083,512

(a)

The 10% convertible notes became due on February 8, 2013 in the principal amount of $2,750,000. In January 2014 the Company paid a total of $1,000,000 cash, each of the two noteholders receiving $500,000. Of the total amount paid $515,000 was allocated to principal on the notes $257,500 for each note and $485,000 was allocated to interest $242,500 for each note. On February 28, 2014, the Company entered into new note agreements with the two noteholders. The amended and restated note agreements, each in the amount of $1,155,000, accrue interest at 12% per annum and mature on December 31, 2014. The new notes are collateralized by a security interest in the oil and gas properties held by JHE. The Company has maintained the right to continue selling interests in assets held by JHE provided that 70% of the proceeds from any sale by JHE be applied to the outstanding principal and accrued interest related to the amended and restated notes. In connection with the new note agreements we have agreed to issue 5,000,000 shares of our common stock to the noteholders. The Company at the election of the Chief Executive Officer has retained the right to vote these shares and we have retained the right to re-purchase any or all of these shares at a price of $0.15 per share for six months from the date of grant. In addition we have issued to the noteholders 2,500,000 warrants to purchase our common shares at $0.05 per share beginning on February 15, 2015. The Company has retained the right to call the warrants any time within the first six months from the date of issuance at $0.10 provided that we re-pay a minimum of $500,000 in principal on each note.

(b)

On August 15, 2012, the Company entered into a convertible note agreement which allows the Company to borrow up to $555,000. The note matures on August 15, 2014. The terms of the note contain a 10% or $55,000 original issuance discount, to be pro-rated based on actual cash drawn in connection with the instrument. The note is convertible into common shares at the lesser of $0.55 or at a share value of 75% of the lowest closing share price for the 25 days preceding a conversion.

During the nine months ended January 31, 2014, we received net cash proceeds of $50,000 related to borrowings under the terms of the initial note agreement. As of January 31, 2014, we had an outstanding balance of $32,925 under the terms of the note and recorded a discount in the amount of $28,803 to be amortized over the term of the note. The note bore no interest for the first 90 days and at 10% thereafter. The terms of the note indicate that if any principal were not repaid within 90 days of the initial funding, the 10% interest charge on all outstanding principal was to accrue immediately. Therefore we have accrued $5,000 as a component of the principal balance as of January 31, 2014. In addition we have recorded $5,000 in original issuance discount and $1,050 in fees as components of the principal balance.

In connection with this conversion feature, we have recorded a derivative liability totaling $83,185 for the $50,000 draw related to the Level III fair value measurement of the conversion feature on the day one issuance of the debt. The value of the associated conversion liability will be re-valued at the end of each fiscal period with changes recorded as charges to our profit and loss. As of January 31, 2014, we have recorded a liability of $29,292 related to the embedded conversion feature and recorded gains of $67,840 during the nine months ended January 31, 2014, related to the change in its fair value. We used the Black-Scholes model in establishing the date of issuance fair value and end of reporting period fair value of the conversion liability. Key assumptions included in the fair value measurement of this liability included: volatility ranging from 199.51% on the date of issuance, to 280.44% as of the end of the reporting period; risk free interest rates ranging from 0.13% on the date of issuance, to 0.10% at the end of the reporting period; and an assumed dividend rate of 0%.

In May, June and July 2013, the Company received conversion notices from the holders of the $555,000 convertible note. The conversion notices indicated the conversion of $82,838 in principal, accrued interest and original issuance discount into 2,296,749 common shares at conversion prices of $0.053, $0.053, $0.023 and $0.023 per share respectively (Note 8).

In December 2013 and January 2014, the Company received conversion notices from the holders of the $555,000 convertible note. The conversion notices indicated the conversion of $28,125 in principal, accrued interest and original issuance discount into 2,700,000 shares of common stock at conversion prices of $0.01875 and $0.075 per share respectively (Note 8).

Subsequent to January 31, 2014, an additional $23,880 in principal, accrued interest and original issuance discount was converted into 4,000,000 shares of our common stock at prices ranging from $0.006 to $0.005925 per share.

(c)

On September 14, 2011, the Company issued 6% convertible notes in the total amount of $1,500,000. The notes are due and payable on September 14, 2014 and bear interest at the rate of 6% per annum. The notes are convertible at the option of the holder into common shares at a conversion price of $1.50 per share. The notes are redeemable prior to maturity at the option of the Company and can be repaid in whole or in part at any time without a premium or penalty. Upon issuance, the notes were discounted by $370,000 to reflect the beneficial conversion value that existed on that date. This discount is being amortized over the term of the note payable utilizing the effective interest method. As of January 31, 2014, the remaining unamortized discount related to the notes was $76,027. Interest is payable with the principal on September 14, 2014.

CIRCLE STAR ENERGY CORP. 10-Q/A