On February 8, 2012, the Company issued two 10% convertible notes in the aggregate principal amount of $2,750,000. The notes accrue interest at the rate of 10% per annum on the unpaid principal balance and could be repaid by the Company at any time. The notes were originally due and payable on February 8, 2013 or at the election of the applicable holder on the earlier of: (i) the closing of a financing transaction by the Company for aggregate proceeds in excess of $5,000,000; (ii) the sale or partial sale of JHE Holdings LLC ("JHE"); (iii) the sale of all or substantially all of the assets of JHE; or (iv) an Event of Default. The 10% Notes were convertible at the option of the holders into common shares at the Maturity Date or upon the occurrence of one or more of the triggering events set forth above, at a conversion price of $1.50 per share. The notes were discounted by $1,008,333 to reflect the beneficial conversion feature that existed on the date of issuance. On October 9, 2012 the terms of the note were modified whereby interest payments were delayed through February 2013. In exchange for these modifications the Company issued the noteholders 250,000 common shares. In connection with the issuance of these common shares we recognized a discount to the notes in the amount of $57,500. The discount related to these shares is being amortized over the remaining term of the notes. 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 convertible into shares of the Company's common stock at $0.75. The new notes are collateralized by a security interest in the crude oil and natural 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 which extend the term of the notes through December 2014 and increased the interest rate on the notes to 12%, we agreed to issue 5,000,000 shares of our common stock to the noteholders and in connection therewith we recorded a debt discount of $50,000. 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 issued to each of 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 repay a minimum of $500,000 in principal on each note. In connection with the issuance of the warrants we recorded a discount of $38,294. The discount related to the issuance of these warrants is being amortized over the remaining term of the notes. In evaluating whether this transaction should be accounted for as a debt modification or extinguishment the Company performed the two step evaluation prescribed in ASC 470-50 and concluded that the transaction should be accounted for as a modification as: (1) the present value of cash flows including non-cash consideration paid did not change by greater than 10% of the carrying amount of the original debt instrument immediately prior to the modification or exchange; and (2) the fair value of the embedded conversion option did not change by greater than 10% of the carrying amount of the original debt instrument immediately prior to the modification or exchange.As of July 31, 2014, the remaining unamortized portion of the debt discount related to the amended notes amounted to $41,920. Accrued interest as of July 31, 2014 and April 30, 2014 was $134,750 and $65,450, respectively.

[2]

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 price that existed on that date. This discount is being accreted over the term of the note payable utilizing the effective interest method. As of July 31, 2014 the remaining unamortized discount related to the notes was $14,868. Interest is payable with the principal on September 14, 2014. Accrued interest as of July 31, 2014 and April 30, 2014 was $274,575 and $251,890, respectively. On August 12, 2014 the holders of $500,000 in principal of these September 14, 2011 6% notes payable due September 14, 2014 extended the maturity date of the note through November 13, 2014. All other terms of the note remained the same.

CIRCLE STAR ENERGY CORP. 10-Q