Hydrocarb Energy Corp. (fka HECCQ)

[Timothy Smith]

A strong acquisition strategy is something I favor. From the recently quarterly. Go Driver!

Note 2 - Acquisitions

Galveston Bay Energy, LLC

On February 15, 2011 we closed on the acquisition of a private Texas oil and gas company named Galveston Bay Energy, LLC (“GBE”) which owns working interests in and operates producing oil and natural gas properties and its related facilities in four fields located in Galveston Bay, Texas. Immediately following our acquisition of GBE, we sold 15% of our own aggregate working interest in the Galveston Bay fields for $1,400,000 in cash to SPE Navigation 1, LLC (“SPE”), a company controlled by Michael Watts, who is the father-in-law of Jeremy Driver, a Director and our Chief Executive Officer. Our agreement with SPE provided that SPE could acquire an additional 10% working interest in the properties for $1,150,000 paid within 90 days of the acquisition. Effective May 1, 2011, SPE acquired an additional 10% of our aggregate working interest in the Galveston Bay fields for an additional $1,150,000 pursuant to our agreement. During the quarter ended April 30, 2011, we incurred $2,558,580 of acquisition costs, which are more fully described in our annual report for the year ended July 31, 2011, and which consist primarily of stock-based finders fees, in conjunction with this acquisition.

During the nine months ended April 30, 2012, we determined that we could estimate a range of potential loss associated with an environmental liability at one of the properties we acquired when we acquired GBE (See Note 11 – Commitments and Contingencies). We adjusted the purchase price allocation for the purchase by increasing accounts payable acquired and oil and gas properties acquired by the amount that we recognized, $112,500 ($37,500 of the cost was recognized with the acquisition of SPE, thus a total of $150,000 is accrued for this contingency). The adjustment did not change the identifiable net assets acquired.

SPE Navigation I, LLC

On September 23, 2011, Duma acquired SPE, which owned 25% of the working interest in the oil and gas properties originally owned by Galveston Bay Energy, LLC and 1,000,000 shares of Hyperdynamics Corporation, a public company traded on the New York Stock Exchange (NYSE:HDY). The total purchase price consisted of 3,799,998 shares of Duma’s common stock. We acquired 100% of the membership interest in SPE and thus SPE is our wholly owned subsidiary.

As of the acquisition date, the working interests previously owned by SPE were conveyed to GBE. Thus, all oil and gas revenues after the SPE acquisition were attributed to GBE. Our consolidated statements include the results of the 100% acquired working interest.

The transaction was a related party transaction because SPE was owned by companies controlled by our CEO, his brother-in-law, and his sister-in-law, and SPE was managed by our CEO’s father-in-law. The purchase price was calculated as $9,500,000, based on the quoted market price of our stock on the date of the acquisition. The assets and liabilities were recorded at SPE’s carrying value on the date of the acquisition and the excess purchase price over the net assets acquired was $4,367,750, which was recorded as compensation expense because this was a related party transaction. The transaction is intended to be structured, for tax purposes, as a tax-free merger, and as such, Duma would assume a carry-over basis in SPE’s assets. Consequently, a deferred tax liability was established.