UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934:

For the quarterly period ended ~~October~~January 31, ~~2015~~2016

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934:.

For the transition period from _______ to _________

Commission file number: 000-53313

HYDROCARB ENERGY CORP.

(Exact name of registrant as specified in its charter)

NEVADA		30-0420930
Nevada		30-0420930
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

800 Gessner, Suite 375, Houston, Texas 77024

Houston, Texas 77024

(Address of principal executive offices, including zip code)

(713) 970-1590

(Registrant'’s principal executive office telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "“large accelerated filer,"” "“accelerated filer"” and "“smaller reporting company"” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☒ ~~(Do not check if a smaller reporting company)~~

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐ No ☒

AsIndicate the number of ~~December~~shares ~~15,~~outstanding ~~2015,~~of ~~24,334,222~~each ~~shares~~of the registrant’s classes of common stock, ~~$0.001~~as ~~par value,~~ of the ~~registrant~~latest ~~were~~practicable ~~outstanding~~date.

Table of Contents

	Title of each class		Number of shares
	Common Stock, par value $0.001 per share		26,066,191
			(as of March 3, 2016)

Part I. Financial Information

Item 1.	Financial Statements
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	36
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41
Item 4.	Controls and Procedures	41
Part II. Other Information
Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45
Item 3.	Defaults Upon Senior Securities	45
Item 4.	Mine Safety Disclosures	46
Item 5.	Other Information	46
Item 6.	Exhibits	46

Part I - Financial Information

Item 1. Financial Statements

1.	Consolidated Balance Sheets (unaudited)	1
2..	Consolidated Statements of Operations and Comprehensive Loss (unaudited)	2
3.	Consolidated Statements of Cash Flows (unaudited)	3
4.	Notes to Consolidated Financial Statements (unaudited)	4

Table of Contents

HYDROCARB ENERGY CORP.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	October 31, 2015			July 31, 2015
ASSETS
Current assets:
Cash and cash equivalents	$	201,353		$	229,512
Oil and gas revenues receivable		212,177			219,676
Other current assets		366,895			526,056
Other receivables, net		392,825			101,334
Total current assets		1,173,250			1,076,578
Oil and gas properties, accounted for using the full cost method of accounting Evaluated property, net of accumulated depletion of $4,860,218 and $4,381,912, respectively; and accumulated impairment of $373,335 and $373,335, respectively		14,435,774			14,823,669
Unevaluated property		2,260,912			2,260,912
Restricted cash		8,480,160			12,488,755
Other assets		238,146			373,877
Property and equipment, net of accumulated depreciation of $199,909 and $190,971, respectively		101,772			110,710
TOTAL ASSETS	$	26,690,014		$	31,134,501
LIABILITIES AND EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses	$	4,301,767		$	3,732,664
Short term notes payable, net of discount $1,776,093 and $906,981		5,668,832			4,719,284
Convertible short term related party note, net of discount of $1,786 and $198,647		348,215			1,708,637
Asset retirement obligation – short term		25,000			25,000
Derivative Liability		2,833,870			2,001,134
Advances		1,043,945			5,919,932
Due to related parties		156,585			78,585
Total current liabilities		14,378,214			18,185,236
Convertible notes payable, net of discount $1,092,115 and $81,782		442,883			374,053
Convertible notes payable – related party, net of discount $574,966 and $734,024		41,701			2,265,976
Notes Payable - related party		600,000			600,000
Asset retirement obligation – long term		11,046,157			10,797,858
Total liabilities		26,508,955			32,223,123
Stockholders' Equity (Deficit):
Series A Convertible Preferred Stock, 10,000 shares authorized $400 per share, no shares issued and outstanding		-			-
Series B Convertible Preferred Stock, 35,000 shares authorized $1,000 per share, 3,120 shares issued and outstanding as of October 31, 2015		3,120,000			-
Common stock: $0.001 par value; 1,000,000,000 shares authorized; 24,208,742 and 23,001,589 shares issued and outstanding as of October 31, 2015 and July 31, 2015, respectively		24,209			23,002
Receivable for common stock		(413,898	)		(413,898	)
Additional paid-in capital		84,372,369			82,072,483
Accumulated deficit		(86,885,781	)		(82,734,369	)
Total deficit attributable to Hydrocarb Energy Corp.		216,899			(1,052,782	)
Non-controlling interests		(35,840	)		(35,840	)
Total deficit		181,059			(1,088,622	)
TOTAL LIABILITIES AND EQUITY (DEFICIT)	$	26,690,014		$	31,134,501

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Table of Contents

HYDROCARB ENERGY CORP.

PART I.	FINANCIAL INFORMATION		Page No.

	ITEM 1.	Financial Statements (Unaudited)

		Consolidated Statements of Operations - Three Months Ended January 31, 2016 and 2015 and Six Months Ended January 31, 2016 and 2015	3

		Consolidated Balance Sheets – January 31, 2016 and July 31, 2015	4

		Consolidated Statements of Cash Flows - Six Months Ended January 31, 2016 and 2015	5

		Notes to Consolidated Financial Statements	6

	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32

	ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	36

	ITEM 4.	Controls and Procedures	36

PART II.	OTHER INFORMATION

	ITEM 1.	Legal Proceedings	37

	ITEM 1A.	Risk Factors	39

	ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43

	ITEM 3.	Defaults Upon Senior Securities	44

	ITEM 4.	Mine Safety Disclosures	45

	ITEM 5.	Other Events	45

	ITEM 6.	Exhibits	45

SIGNATURES			45

EXHIBIT INDEX			46

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended October 31, 2015			Three Months Ended October 31, 2014
Revenues	$	1,211,406		$	1,205,429
Operating expenses
Lease operating expense		1,164,974			1,297,555
Depreciation, depletion, and amortization		489,404			224,256
Accretion		248,299			302,208
General and administrative expense		2,366,174			943,280
Total operating expenses		4,268,851			2,767,299
Loss from operations		(3,057,445	)		(1,561,870	)
Other income (expense)		(12,114	)		4,042
Interest expense, net		(2,356,493	)		(227,777	)
Gain on derivatives		1,273,926			-
Foreign currency transaction (loss)		714			4,759
Net loss before income taxes		(4,151,412	)		(1,780,846	)
Income tax provision		-			-
Net loss		(4,151,412	)		(1,780,846	)
Less: Net loss attributable to non-controlling interests		-			(1,323	)
Net loss attributable to Hydrocarb Energy Corp.		(4,151,412	)		(1,779,523	)
Basic and diluted loss per common share:	$	(0.18	)	$	(0.08	)
Weighted average shares outstanding (basic and diluted)		23,512,300			21,151,819

The accompanying notes are an integral part of these unaudited consolidated financial statements.

~~Table~~Part I of- ~~Contents~~Financial Information

~~HYDROCARB~~ITEM ~~ENERGY CORP~~1. FINANCIAL STATEMENTS

~~CONSOLIDATED~~HYDROCARB ~~STATEMENTS~~ENERGY ~~OF CASH FLOWS~~CORP.

~~(Unaudited)~~CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended October 31, 2015			Three Months Ended October 31, 2014
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(4,151,412	)	$	(1,780,846	)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation, depletion and amortization		489,404			224,256
Accretion		248,299			302,208
Amortization of debt discount		1,518,758			196,278
Amortization on debt issuance cost		149,254			-
Stock issued for legal service		1,564,000			-
Share based compensation		8,000			280,475
Change in derivative liabilities		(1,273,926	)		-
Changes in operating assets and liabilities:
Accounts receivable		7,499			132,907
Other receivable		(291,491	)		-
Accounts receivable – related party		-			57,957
Other assets		148,475			114,400
Accounts payable and accrued expenses		(210,872)			(554,635	)
Due to related parties		78,000			(66,957	)
Advances		-			30,709
NET CASH USED IN OPERATIONS		(1,716,012	)		(1,063,248	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of oil and gas properties		(90,408	)		(401,831	)
Purchase of property and equipment		-			(3,110	)
CASH USED IN INVESTING ACTIVITIES		(90,408	)		(404,941	)
CASH FLOWS FROM FINANCING ACTIVITES
Payments on notes payable		(954,561	)		(285,983	)
Proceeds from note payable to related party		616,667			-
Proceeds from borrowings		2,116,155			3,452,812
CASH PROVIDED BY FINANCING ACTIVITIES		1,778,261			3,166,829
NET CHANGE IN CASH AND CASH EQUIVALENTS		(28,159	)		1,698,640
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		229,512			144,258
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	201,353		$	1,842,898
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes	$	-		$	-
Interest	$	574,974		$	8,054
NONCASH INVESTING AND FINANCING ACTIVITIES
Note conversion to preferred stock	$	3,120,000		$	-
Discount from derivatives	$	2,818,337		$	-
Stock issued for interest	$	17,419		$	-
Cashless warrant exercise		128			-
Resolution of derivative liability		711,675			-
Advances used for drilling		4,875,987			-
ARO change in estimate		-			(52,431)
Shares issued to tenders for debt		-			247,655

(Unaudited)

The accompanying notes are an integral part of these unaudited consolidated financial statements.

	Three Months Ended						Six Months Ended
	January 31,						January 31,
	2016			2015			2016			2015

Revenues	$	674,816		$	646,348		$	1,886,222		$	1,851,777

Operating Expenses
Lease Operating Expense		898,017			913,290			2,062,991			2,210,845
Depreciation, Depletion and Amortization		391,219			162,166			880,623			386,422
Accretion		246,952			258,782			495,251			560,990
General and Administrative		3,109,081			980,480			5,475,255			1,923,760
Total Operating Expenses		4,645,269			2,314,718			8,914,120			5,082,017

Loss From Operations		(3,970,453	)		(1,668,370	)		(7,027,898	)		(3,230,240	)

Other Income (Expense)		(428,845	)		2,737			(440,959	)		6,779
Gain (Loss) on Debt Settlement		(640,936	)		—			1,121,599			—
Loss on Derivatives		(439,367	)		—			(927,976	)		—
Interest Expense, Net		(1,588,524	)		(279,727	)		(3,945,017	)		(507,504	)
Foreign Currency Transaction (Loss)		(5,275	)		(6,401	)		(4,561	)		(1,642	)

Net Loss Before Income Taxes		(7,073,400	)		(1,951,761	)		(11,224,812	)		(3,732,607	)
Income Tax Provision		—			—			—			—

Net loss		(7,073,400	)		(1,951,761	)		(11,224,812	)		(3,732,607	)
Less: Net Income (Loss) Attributable to Non-Controlling Interests		—			18			—			(1,305	)
Net Loss Attributable to Hydrocarb Energy Corp.		(7,073,400	)		(1,951,779	)		(11,224,812	)		(3,731,302	)
Dividend on Preferred Stock		(54,600	)		—			(72,800	)		—
Net loss Attributable to Hydrocarb Energy Corp after Dividends	$	(7,128,000	)	$	(1,951,779	)	$	(11,297,612	)	$	(3,731,302	)
Basic and Diluted Loss Per Common Share:	$	(0.29	)	$	(0.09	)	$	(0.47	)	$	(0.18	)
Weighted Average Shares Outstanding (Basic and Diluted)		24,513,915			21,203,773			24,019,601			21,178,191

3The accompanying notes are an integral part of these unaudited consolidated financial statements.

~~Table of Contents~~3

HYDROCARB ENERGY CORP.

~~NOTES TO UNAUDITED~~ CONSOLIDATED ~~FINANCIAL~~BALANCE ~~STATEMENTS~~SHEETS

~~Note 1 – Description of Business and Summary of Significant Accounting Policies~~(Unaudited)

Description of business and basis of presentation

	January 31,			July 31,
	2016			2015
ASSETS
Current Assets
Cash and Cash Equivalents	$	88,925		$	229,512
Accounts Receivable		62,359			219,676
Other Current Assets		145,950			526,056
Other Receivables, Net		718,091			101,334
Total		1,015,325			1,076,578
Property and Equipment
Oil and Gas Properties (Full Cost Method)		21,591,213			21,466,493
Other Property, Plant and Equipment		301,681			301,681
Total Property, Plant and Equipment		21,892,894			21,768,174
Less: Accumulated Depletion, Depreciation and Amortization		(5,456,688	)		(4,572,883	)
Total Property, Plant and Equipment, Net		16,436,206			17,195,291
Restricted Cash		7,671,114			12,488,755
Other Assets		269,024			373,877
Total Assets	$	25,391,669		$	31,134,501

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Accounts Payable and Accrued Expenses	$	4,176,412		$	3,732,664
Convertible Related Party Notes, Net of Discount of $0 and $7,262		350,000			342,738
Notes Payable, Net of Discount $0 and $404,873		5,422,774			4,719,284
Convertible Third Party Note, Net of Discount of $445,412 and $191,385		1,963,104			1,365,899
Asset Retirement Obligation		25,000			25,000
Derivative Liability		3,224,331			2,001,134
Advances		863,124			5,919,932
Due to Related Parties		156,585			78,585
Total		16,181,330			18,185,236

Convertible Notes Payable, Net of Discount of $917,065 and $81,782		660,599			374,053
Convertible Notes Payable - Related Party, Net of Discount of $497,335 and $734,024		119,312			2,265,976
Notes Payable - Related Party		600,000			600,000
Asset Retirement Obligations		11,293,109			10,797,858
Commitments and Contingencies		—			—
Total Liability		28,854,350			32,223,123

Stockholders' Equity (Deficit)
Preferred Stock Series A, 10,000 Shares Authorized, $400 Per Share, Zero Share Issued and Outstanding as of January 31, 2016		—			—
Preferred Stock Series B, 35,000 Shares Authorized, $1,000 Per Share, 3,120 Shares Issued and Outstanding as of January 31, 2016		3,120,000			—
Common Stock, $0.001 par value, 1 Billion Shares Authorized, 26,037,928 and 23,001,589 Shares Issued and Outstanding as of January 31, 2016 and July 31, 2015, respectively		26,038			23,002
Common Stock Receivable		—			(413,898	)
Stock Subscription		370,334			—
Additional Paid in Capital		87,015,968			82,072,483
Accumulated Deficit		(93,959,181	)		(82,734,369	)
Total Deficit Attributable to Hydrocarb Energy Corp.		(3,426,841	)		(1,052,782	)
Non-Controlling Interests		(35,840	)		(35,840	)
Total Stockholders' Deficit		(3,462,681	)		(1,088,622	)

Total Liabilities and Stockholders' Equity (Deficit)	$	25,391,669		$	31,134,501

The ~~unaudited~~accompanying consolidated financial statements of Hydrocarb Energy Corp. ("Hydrocarb", "HEC", the "Company", "we", "us", or "our") have been prepared in accordance with accounting principles generally accepted in the United States and the rules of the Securities and Exchange Commission ("SEC"), and should be read in conjunction with the audited financial statements and notes thereto contained in our Annual Report filed with the SEC on Form 10-K for the year ended July 31, 2015, filed with the SEC on November 13, 2015 (the "Annual Report"). In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are ~~not~~an ~~necessarily~~integral ~~indicative~~ part of ~~the~~these ~~results~~unaudited toconsolidated ~~be expected for the full year. Notes to the~~ financial statements which would substantially duplicate the disclosures contained in the audited financial statements for the most recent fiscal year ended July 31, 2015, as reported in the Annual Report, have been omitted.

We are a natural resource exploration and production company engaged in the exploration, acquisition, development, and production of oil and gas properties in the United States and onshore in Namibia, Africa.4

~~Effective~~HYDROCARB ~~September~~ENERGY 28, 2015, the Company filed a Certificate of Amendment to its Articles of Incorporation with the Secretary of State of Nevada, to (1) affect an amendment to the Company's Articles of Incorporation to increase the number of authorized shares of the Company's common stock to 1,000,000,000 shares; (2) affect an amendment to the Company's Articles of Incorporation to authorize 100,000,000 shares of "blank check" preferred stock (the "Blank Check Preferred Amendment"); (3) designate 10,000 shares of Series A 7% Convertible Voting Preferred Stock (the "Series A Amendment"); and (4) designate 35,000 shares of Series B Convertible Preferred Stock (the "Series B Amendment"), each of which amendments were approved by the stockholders of the Company at the Annual Meeting of Shareholders of the Company held on September 28, 2015CORP. Previously, effective on September 21, 2015, the Company filed a Certificate of Correction with the Secretary of State of Nevada, which cancelled and rescinded in its entirety, the previously filed Series A 7% Convertible Voting Preferred Stock designation filed by the Board of Directors without stockholder approval on December 2, 2013.

InCONSOLIDATED ~~August~~STATEMENTS ~~2015,~~OF ~~the~~CASH Company transferred the 39% working interest in certain Namibian oil and gas concessions then held by Namibia Exploration, Inc., the Company's wholly-owned subsidiary to Hydrocarb Namibia Energy (Pty) Limited, also the Company's wholly-owned subsidiary, to consolidate ownership of such working interests in Hydrocarb Namibia Energy (Pty) Limited.FLOWS

~~Our common stock is quoted under the symbol "HECC" on the OTCQB Market.~~(Unaudited)

Reclassifications

	Six Months Ended January 31,
	2016			2015
Cash Flows from Operating Activities
Net Loss	$	(11,224,812	)	$	(3,732,607	)
Adjustments to Reconcile Net Losses to
Net Cash Used in Operating Activities:
Depreciation, Depletion, Amortization and Accretion		880,623			386,422
Accretion		495,251			560,990
Amortization of Debt Discount		2,655,561			352,807
Debt Issuance Cost		201,700			94,626
Share-Based Compensation		3,683,243			388,475
Gain on Debt Settlement		(1,121,599	)		—
Loss on ERG Settlement - Shares Issued		—			65,000
Subscription Write Off		413,898			—
Loss on Dervivatives		927,976			—
Changes in Operating Assets and Liabilities
Accounts Receivable		157,319			290,546
Other Receivables		(616,758	)		(151,564	)
Accounts Receivable - Related Party		—			55,291
Due to Related Parties		78,000			—
Other Assets		321,930			291,021
Accounts Payable and Accrued Expenses		482,040			853,435
Net Cash Used in Operating Activities		(2,665,628	)		(545,558	)

Cash Flows from Investing Activities
Purchases of Oil and Gas Properties		(124,721	)		(2,453,592	)
Proceeds from Sale of Property and Equipment		—			2,366
Change in Restricted Cash		—			20,942
Net Cash Used in Investing Activities		(124,721	)		(2,430,284	)

Cash Flows from Financing Activities
Repayment on Notes Payable		(1,327,894	)		(287,625	)
Repayment on Note Payable to Related Party		—			(66,957	)
Proceeds from Note Payable to Related Party		616,667			—
Proceeds from Common Stock		370,334			—
Proceeds from Borrowings		2,990,655			3,452,812
Net Cash Provided by Financing Activities		2,649,762			3,098,230

Increase (Decrease) in Cash and Cash Equivalents		(140,587	)		122,388
Cash and Cash Equivalents at Beginning of Period		229,512			144,258

Cash and Cash Equivalents at End of Period	$	88,925		$	266,646

~~Certain~~The ~~prior~~accompanying ~~year~~notes ~~amounts~~are ~~have~~an ~~been~~integral ~~reclassified~~part of tothese ~~conform~~unaudited ~~with~~consolidated ~~the~~financial ~~current presentation~~statements.

~~Principles of consolidation~~5

WeHYDROCARB ~~own~~ENERGY ~~100% of the issued and outstanding share capital of (i) Penasco Petroleum Inc~~CORP. ("Penasco"), a Nevada corporation, (ii) Galveston Bay Energy, LLC ("GBE"), a Texas limited liability company, (iii) SPE Navigation I, LLC, a Nevada limited liability company ("SPE"), (iv) Namibia Exploration, Inc. ("NEI"), a Nevada corporation, (v) Hydrocarb Corporation, a Nevada corporation ("HCN"), (vi) Hydrocarb Texas Corporation, a Texas corporation, and (vii) Hydrocarb Namibia Energy (Pty) Limited ("Namibia"), a company chartered in the Republic of Namibia. In addition, we own 95% of the issued and outstanding share capital of Otaiba Hydrocarb LLC ("Otaiba"), a United Arab Emirates (UAE) limited liability corporation. The accompanying consolidated financial statements include the accounts of the entities noted above. All significant intercompany accounts and transactions have been eliminated in consolidation.

~~Other~~NOTES ~~recently~~TO ~~issued~~UNAUDITED orCONSOLIDATED ~~adopted accounting pronouncements are not expected to have, or did not have, a material impact on our financial position or results from operations.~~FINANCIAL STATEMENTS

4Note 1 – Going Concern and Description of Business and Summary of Significant Accounting Policies

~~Table~~Going ~~of Contents~~Concern

~~Additionally,~~The ataccompanying ~~the~~condensed consolidated ~~Company's~~financial ~~Annual~~statements ~~Meeting~~have ofbeen ~~Stockholders~~prepared ~~held~~ on ~~September~~a ~~28,~~going ~~2015~~concern basis, which contemplates the ~~Company's~~realization ~~stockholders~~of ~~ratified~~assets and the ~~designation~~satisfaction of liabilities in the ~~Company's~~normal ~~Series~~course Aof ~~Preferred~~business. ~~and~~The onCompany ~~the~~has ~~same~~not ~~date,~~generated ~~the~~any ~~Company~~significant ~~designated~~revenues ~~Series~~from Aongoing operations ~~Preferred~~and ~~Stock~~incurred ~~with~~net ~~the~~losses ~~Secretary~~since ofinception. ~~State~~These ofmatters ~~Nevada,~~raise ~~provided~~substantial ~~that~~doubt about the ~~approval~~Company’s ofability ~~the~~to continue ~~Series~~as Aa ~~Preferred~~going ~~Stock~~concern. ~~was~~The ~~only~~condensed toconsolidated ~~ratify~~financial ~~the~~statements ~~effect~~do ofnot ~~certain~~include ~~prior~~any ~~transactions,~~adjustments ~~and~~relating to the ~~Company~~recoverability and ~~has~~classification noof ~~outstanding~~asset ~~Series~~amounts Aor ~~Preferred~~the ~~Stock~~classification ~~and~~of noliabilities ~~current~~that ~~plans~~might tobe ~~issue~~necessary ~~Series~~should Athe ~~Preferred~~Company ~~Stock~~be atunable ~~this~~to continue ~~time~~as a going concern.

~~Note 2~~Management’s principal –objective ~~Oil~~is to maximize shareholder value by, among other things, increasing production by developing its acreage, increasing profit margins by evaluating and ~~Gas~~optimizing ~~Properties~~its production, and executing its business plan to increase property values, prove its reserves, and expand its asset base. While management currently has no plans to discontinue or revise its business plan, recent volatility and decrease in crude oil prices may cause management to cut back on its development or acquisition plans, or otherwise revisit its business and/or its capital expenditure plan. Continued volatility and decreases in crude oil prices may accelerate such cut back or revisions. To combat price volatility in crude oil process and further diversify the business, management has increased its focus on the development of the Company.

~~Oil~~Description of business and ~~natural~~basis ~~gas properties consisted~~ of ~~the following:~~presentation

	October 31, 2015			July 31, 2015
Evaluated Properties
Costs subject to depletion	$	19,669,327		$	19,578,916
Accumulated impairment		(373,335	)		(373,335	)
Accumulated depletion		(4,860,218	)		(4,381,912	)
Total evaluated properties		14,435,774			14,823,669
Unevaluated properties		2,260,912			2,260,912
Net oil and gas properties	$	16,696,686		$	17,084,581

The unaudited consolidated financial statements of Hydrocarb Energy Corp. (“Hydrocarb”, “HEC”, the “Company”, “we”, “us”, or “our”) have been prepared in accordance with accounting principles generally accepted in the United States and the rules of the Securities and Exchange Commission (“SEC”), and should be read in conjunction with the audited financial statements and notes thereto contained in our Annual Report filed with the SEC on Form 10-K for the year ended July 31, 2015, filed with the SEC on November 13, 2015 and amended on November 16, 2015 (the “Annual Report”). In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosures contained in the audited financial statements for the most recent fiscal year ended July 31, 2015, as reported in the Annual Report, have been omitted.

~~Evaluated~~We are a natural resource exploration and production company engaged in the exploration, acquisition, development, and production of oil and gas properties in the United States and onshore Namibia, Africa.

~~Additions~~Effective September 28, 2015, the Company filed a Certificate of Amendment to ~~evaluated~~its ~~oil~~Articles ~~and~~of ~~gas~~Incorporation ~~properties~~with ~~during~~the Secretary of State of Nevada, to (1) affect an amendment to the ~~three~~Company’s ~~months~~Articles ~~ended~~of ~~October~~Incorporation 31to increase the number of authorized shares of the Company’s common stock to 1,000,000,000 ~~2015~~shares; (2) affect an amendment to the Company’s Articles of Incorporation to authorize 100,000,000 shares of “blank check” preferred stock; (3) designate 10,000 shares of Series A 7% Convertible Voting Preferred Stock; and ~~during~~(4) designate 35,000 shares of Series B Convertible Preferred Stock, each of which amendments were approved by the ~~year~~stockholders ~~ended~~of ~~July~~the 31Company at the Annual Meeting of Shareholders of the Company held on September 28, 2015. ~~consisted~~Previously, effective ~~mainly~~on ofSeptember ~~exploration~~21, ~~costs~~2015, ~~geological~~the ~~and~~Company ~~geophysical~~filed ~~costs~~a Certificate of ~~$90~~Correction with the Secretary of State of Nevada,~~411~~ which cancelled and $rescinded in its entirety, the previously filed Series A 7% Convertible Voting Preferred Stock designation filed by the Board of Directors without stockholder approval on December 2,~~271,509,~~ ~~respectively~~2013.

5Our common stock is quoted on the OTCQB Market under the symbol: HECC.

~~Table of Contents~~6

~~Unevaluated Properties~~Reclassifications

~~Namibia,~~Certain ~~Africa~~prior year amounts have been reclassified to conform with the current presentation.

WePrinciples ~~own 90% (100% cost responsibility)~~ of ~~our Namibia concession. As of October 31, 2015, approximately $2.3 million has been expended towards the initial exploration period.~~ consolidation

~~Note 3~~We –own ~~Impairment~~100% of the issued and outstanding share capital of (i) Penasco Petroleum Inc. (“Penasco”), a Nevada corporation, (ii) Galveston Bay Energy, LLC (“GBE”), a Texas limited liability company, (iii) SPE Navigation I, LLC, a Nevada limited liability company (“SPE”), (iv) Namibia Exploration, Inc. (“NEI”), a Nevada corporation, (v) Hydrocarb Corporation, a Nevada corporation (“HCN”), (vi) Hydrocarb Texas Corporation, a Texas corporation, and (vii) Hydrocarb Namibia Energy (Pty) Limited (“Namibia”), a company chartered in the Republic of Namibia. The accompanying consolidated financial statements include the accounts of the entities noted above. All significant intercompany accounts and transactions have been eliminated in consolidation.

~~Oil~~Note ~~and~~2 ~~Gas~~– ~~Properties~~Supplemental Cash Flow Informaiton

We account for our oil and natural gas producing activities using the full cost method of accounting as prescribed by the United States Securities and Exchange Commission ("SEC"). Under this method, subject to a limitation based on estimated value, all costs incurred in the acquisition, exploration, and development of proved oil and natural gas properties, including internal costs directly associated with acquisition, exploration, and development activities, the costs of abandoned properties, dry holes, geophysical costs, and annual lease rentals are capitalized within a cost center.

	Six Months Ended January 31,
	2016		2015
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes	$	—	$	—
Interest		854,948		—

NONCASH INVESTING AND FINANCING ACTIVITIES
Note conversion to preferred stock	$	3,120,000	$	—
Note conversion to common stock		117,000		—
Restricted Cash		5,056,808		—
Asset Retirement Obligations - Change in Estimate		—		(52,431	)
Stock issued for warrant cashless exercise		128		—
Shares issued for note amendment		239,249		—
Debt issuance cost capitalization		91,500		—
Discount from derivatives		2,818,337		—
Derivative resolution to additional paid-in captial		760,581		—
Shares issued for interest		146,447		—
Shares Issued to Lenders as Part of Debt Financing		—		247,655

WeNote ~~evaluated~~3 ~~our~~– ~~capitalized~~Oil ~~costs using the full cost ceiling test as prescribed by the Securities~~ and ~~Exchange~~Gas Commission at the end of each reporting period. As of October 31, 2015 and July 31, 2015, the net book value of oil and gas properties did not exceed the ceiling amount and thus, no impairment of the properties was required. Changes in production rates, levels of reserves, future development costs, and other factors will determine our actual ceiling test calculation and impairment analyses in future periods.Properties

~~Note 4~~Oil –and ~~Asset~~natural ~~Retirement~~gas properties ~~Obligation~~consisted of the following:

The following is a reconciliation of our asset retirement obligation (ARO) liability as of October 31, 2015 and July 31, 2015, respectively.


	As Of
	January 31, 2016			July 31, 2015
Evaluated Oil and Gas Properties
Gross Evaluated Properties	$	19,666,636		$	19,578,916
Accumulated Impairment		(373,335	)		(373,335	)
Evaluated Oil and Gas Properties, Net		19,293,301			19,205,581
Unevaluated properties		2,297,912			2,260,912
Oil and Gas Properties		21,591,213			21,466,493
Accumulated Depletion		(5,240,872	)		(4,381,912	)
Net Oil and Gas Properties	$	16,350,341		$	17,084,581

	October 31, 2015		July 31, 2015
Reconciliation of asset retirement obligation balance:
Liability for asset retirement obligation, beginning of period	$	10,822,858	$	11,716,230
Asset retirement obligations sold		-		-
Accretion		248,299		993,579
Revisions in estimated cash flows		-		(1,845,967	)
Costs incurred		-		(40,984	)
Liability for asset retirement obligation, end of period	$	11,071,157	$	10,822,858
Current portion of asset retirement obligation	$	25,000	$	25,000
Noncurrent portion of asset retirement obligation		11,046,157		10,797,858
Total liability for asset retirement obligation	$	11,071,157	$	10,822,858

6Evaluated properties

~~Table~~Additions to evaluated oil and gas properties during the three months ended January 31, 2016 and during the year ended July 31, 2015 consisted mainly of ~~Contents~~exploration costs, geological and geophysical costs of $87,720 and $2,271,509, respectively.

~~Note 5 – Related Party Notes Payable~~Unevaluated Properties

~~Related~~The ~~Party~~unevaluated ~~Installment~~properties in ~~Note~~the ~~Payable~~amount of $2,297,912 and $2,260,912 as of January 31, 2016 and July 31, 2015, respectively, represented expenditures incurred for our 90% ownership (100% cost responsibility) of our Namibia, Africa concession.

InNote ~~November~~4 ~~2013,~~– we issued a promissory note for funds received from Mr. Kent P. Watts, our Chairman, of $100,000. Under the terms of the note, principal on the note was due after one year and incurred interest at 5% per annum payable on a monthly basis. Accrued interest is payable monthly beginning in May 2014, and beginning in August 2014 the principal is due in 36 monthly payments through July 2017. The note is secured by the Company's assets owned by GBE, subject to any other lien holder's superior rights, if any. In April 2014, the Company entered into a new debt agreement whereby Mr. Watts agreed to loan the Company up to $600,000 at an interest rate of 6.25%. The previous debt of $100,000 was rolled into this new note. Additionally, we borrowed $200,000 from Mr. Watts during April 2014 and $300,000 from Mr. Watts in May 2014. The total balance on the note was $600,000 as of October 31, 2015. As part of the financing agreement with Shadow Tree Capital Management, LLC (as discussed below), this note has been subordinated, and no payments will be made until the Shadow Tree debt has been repaid.Impairment

~~Related~~Oil ~~Party~~and ~~Exchange~~Gas ~~Agreement~~Properties

OnWe ~~June~~account ~~10,~~for ~~2015,~~our oil ~~with~~and ~~the~~natural ~~approval~~gas ofproducing ~~the~~activities ~~Board~~using ~~of Directors of~~ the ~~Company~~full ~~(i.e.,~~cost ~~Mr.~~method ~~Watts personally, and Mr. Herndon, our then directors), Mr. Watts exchanged all rights he had to 8,188 shares~~ of ~~Series~~accounting Aas 7%prescribed ~~Convertible~~by ~~Voting Preferred Stock (which were required to have a face value of $3,275,200) pursuant to~~ the ~~terms~~United ofStates ~~the HCN Exchange Agreement,~~ Securities and ~~accrued and unpaid dividends which would have been due thereunder, assuming such Series A 7% Convertible Voting Preferred Stock was correctly designated and issued at the time of the HCN~~ Exchange ~~Agreement,~~Commission ~~totaling, $327,879, into 32 "Units", each consisting of~~ (a“SEC”) ~~25,000 shares of the Company's restricted common stock; and (b) Convertible Promissory Notes with a face amount of $100,000~~. AsUnder ~~such,~~this ~~Mr. Watts received an aggregate of 800~~method,~~000~~ ~~shares~~subject ofto ~~common stock and~~ a ~~Convertible~~limitation ~~Promissory~~based ~~Note~~on ~~with~~estimated ~~an aggregate principal amount of $3.2 million and a maturity date of June 10~~value, ~~2018.~~all ~~The~~costs incurred ~~Convertible~~in ~~Note was convertible into common stock of~~ the ~~Company~~acquisition, ~~at any time at Mr. Watt's option at a conversion price of $4 per share~~exploration, and ~~was~~development ~~automatically convertible into shares~~ of ~~Series~~proved Boil ~~Convertible~~and ~~Preferred~~natural ~~Stock~~gas ofproperties, ~~the~~including ~~Company~~internal ~~upon~~costs ~~designation~~directly associated ~~of such Series B Convertible Preferred Stock~~ with ~~the Secretary of State of Nevada which occurred on September 28~~acquisition, ~~2015. The Convertible Note accrued interest (prior to its automatic conversion into Series B Preferred Stock)~~exploration, ~~quarterly~~and indevelopment ~~arrears~~activities, ~~which accrued interest is added to~~ the ~~principal~~costs ~~balance~~ of ~~the~~abandoned Convertible Note. The interest rate of the Convertible Note was equal to the average of the closing spot prices for West Texas Intermediate crude oil on each trading day during the immediately prior calendar quarter divided by tenproperties, ~~plus~~dry ~~two (the "WTI Interest Rate")~~holes, ~~provided that in the event that the average quarterly closing spot price is $40 or less~~geophysical costs, ~~the~~and ~~WTI~~annual ~~Rate~~lease ~~for~~rentals ~~the~~are ~~applicable~~capitalized ~~following~~within ~~quarter~~a iscost 0%center. ~~Any amounts not paid under the Convertible Note when due accrue interest at the rate of 12% per annum until paid in full.~~

OnWe ~~July~~evaluated ~~21,~~our ~~2015,~~capitalized costs ~~Mr.~~using ~~Watts and~~ the ~~Company~~full ~~agreed~~cost inceiling ~~principle~~test toas ~~reduce~~prescribed by the ~~number~~Securities ofand ~~total~~Exchange ~~Units~~Commission ~~due~~at tothe ~~Mr.~~end ~~Watts~~of toeach 30reporting ~~units~~period. As Onof ~~September~~January 2131, ~~2015,~~2016 ~~Mr.~~and ~~Watts~~July ~~and~~31, 2015, the ~~Company~~net ~~entered~~book ~~into~~value aof ~~First~~oil ~~Amendment~~and togas ~~Exchange~~properties ~~Agreement,~~did ~~which~~not ~~amended~~exceed the ~~Exchange~~ceiling ~~Agreement~~amount ~~dated~~and ~~June 10~~thus, no ~~2015.~~impairment ~~The~~of ~~First Amendment formally reduced~~ the ~~total~~properties ~~Units~~was ~~due to Mr~~required. ~~Watts~~Changes toin 30production ~~units~~rates, ~~and~~levels asof ~~such~~reserves, ~~Mr.~~future ~~Watts~~development ~~received~~costs, ~~Convertible~~and ~~Promissory~~other factors ~~Notes~~will ~~with~~determine aour ~~principal~~actual ~~amount~~ceiling oftest $3calculation ~~million~~ and ~~750,000~~impairment ~~shares~~analyses ~~of common stock~~ in ~~connection~~future ~~with the exchange originally contemplated by the Exchange Agreement, valued at $614,141, which was recorded as a debt discount~~periods.

AsNote 5 of– ~~October~~Asset ~~31,~~Retirement 2015, Convertible Promissory Notes with a principal amount of $3 million and $70,000 accrued interest have been fully converted into 3,070 shares of Series B Convertible Preferred Stock for $1,000 per share. The Company has immediately recognized $734,024 of amortization expense of the note discount upon conversion.Obligation

7The following table presents the reconciliation of the beginning and ending aggregate carrying amounts of short-term and long-term legal obligations associated with the retirement of property, plant and equipment for the six-month periods ended January 31, 2016 and 2015:

Table of Contents

	Six Months Ended
	January 31,
	2016		2015
Carrying Amount at Beginning of Period	$	10,822,858	$	11,716,230
Liabilities Incurred		—		—
Liabilities Settled		—		—
Accretion		495,251		560,990
Revisions		—		(52,431	)
Carrying Amount at End of Period	$	11,318,109	$	12,224,789

~~Duma Holding Convertible Promissory Note- Related Party~~8

~~On July 16, 2015, pursuant to a~~ Note ~~Subscription~~6 ~~Agreement,~~– Related weParty sold a $350,000 Convertible Secured Promissory Note (with a $7,000 original issuance discount) to Duma Holdings, LLC ("Duma Holding" and the "Duma Holdings Note"). The Duma Holdings Note (along with any unpaid interest thereon) is convertible at any time, provided the note is converted in full, into (a) 1.75 units ("Units"), each consisting of 25,000 shares of common stock of the Company and $100,000 in face amount of Convertible Subordinated Promissory Notes in the form currently offered by the Company in its ongoing private offering of Units as previously disclosed in the Current Report on Form 8-K filed by the Company with the Securities and Exchange Commission on June 19, 2015 (which will automatically convert automatically upon their issuance into shares of Series B Convertible Preferred Stock at the rate of $1,000 per share); and (b) 350,000 shares of common stock (393,750 shares of common stock in aggregate when combined with the shares which form part of the Units). The Duma Holdings Note was due and payable by us on November 30, 2015. The Duma Holdings Note accrues interest at the rate of 15% per annum, payable beginning on October 31, 2015, and quarterly thereafter through maturity. The Duma Holdings Note can only be repaid with the prior written approval of Duma Holdings. The Duma Holdings Note contains usual and customary events of default, representations and warranties. The payment of the principal and accrued interest due under the Duma Holdings Note is personally guaranteed by Kent P. Watts, our Chief Executive Officer, and Michael Watts, his brother, pursuant to separate guaranty agreements (the "Guarantee Agreements"), and secured by a first priority security interest on certain real estate owned by Kent P. Watts pursuant to a Deed of Trust, Assignment of Rents and Security Agreement.Payable

AsThe offollowing ~~October~~tabulation summarizes ~~31,~~the ~~2015,~~related ~~the~~party ~~net~~notes payable ~~balance~~as isof ~~$348~~January 31,~~215.~~ ~~During~~2016 ~~the three~~and ~~months ended~~July ~~October~~ 31, 2015, ~~$5,476~~net of ~~amortization of debt~~ discount ~~was expensed. The Company also recognized $17,516 in amortization of debt issue costs.~~:

On or around November 30, 2015, we and Duma Holdings agreed to amend the Duma Holdings Note to provide for an extension in the due date of the note until February 29, 2016, in connection with the payment by the Company of $19,705 of accrued interest on the note through November 30, 2015, and a $3,500 extension fee, and to allow for a subsequent extension in the discretion of the Company through May 31, 2016, with at least ten days’ notice to Duma Holdings before the current extended due date, and the payment to Duma Holdings of accrued interest owed through such extension date, and an extension fee of $3,500.

	At		At
	January 31, 2016		July 31, 2015
Short-Term
Convertible Related Party Note
Convertible Secured Promissory
Note - Duma Holdings, LLC (1)	$	350,000	$	342,738

Long-Term
Convertible Notes Payable - Related Party
June 2015 Convertible Promissory Note - K. Watts (3)	$	—	$	2,265,976
September 2015 Convertible Promissory Note - K. Watts (4)		97,560		—
August 2015 Convertible Promissory Note - C. Herndon (5)		21,752		—
	$	119,312	$	2,265,976
Notes Payable - Related Party
May 2014 Promissory Note - K. Watts (2)	$	600,000	$	600,000

Series B Preferred Stock - K. Watts (3)	$	3,070,000

~~Kent~~(1) ~~P. Watts and S. Chris Herndon~~ Convertible Secured ~~Subordinated~~ Promissory Note ~~Subscription~~– Duma Holdings, LLC

On ~~September~~July 1416, 2015, pursuant ~~Kent~~to P.a ~~Watts,~~Note ~~the~~Subscription ~~Chief~~Agreement, ~~Executive~~we ~~Officer~~sold ~~and~~a ~~Chairman of the Company subscribed for~~ $350,000 in Convertible ~~Subordinated~~Secured Promissory ~~Notes~~Note ~~and~~(with ona ~~September 17~~$7,000 ~~2015~~original heissuance discount) ~~subscribed~~to ~~for~~Duma ~~an additional $166~~Holdings,~~667~~ inLLC ~~Convertible~~(“Duma ~~Promissory~~Holding” ~~Notes~~and ~~(collectively,~~ the ~~"Watts~~“Duma ~~Notes"~~Holdings Note”). The ~~Watts~~Duma ~~Notes~~Holdings Note ~~are due two years from their issuance date, accrue interest which is payable quarterly in arrears, at either a cash interest rate~~ (~~equal~~along towith ~~the~~any ~~WTI~~unpaid ~~Rate described below) or a stock~~ interest ~~rate (12% per annum~~thereon)~~(at~~ ~~the~~is ~~option~~convertible ~~of the holder~~ at ~~the~~any ~~beginning of each quarter)~~time, provided ~~no principal or interest on~~ the ~~Watts~~note ~~Notes can be paid in cash until all amounts owed by the Company to its senior lender~~ is ~~paid~~converted in full., Ininto ~~the~~(a) ~~event~~1.75 units, ~~the~~each ~~stock~~consisting ~~interest~~of ~~rate is chosen by Mr. Watts~~25,000 ~~restricted~~ shares of common stock ~~equal~~of to the ~~total~~Company ~~accrued~~and ~~dividend~~10 ~~divided~~shares ~~by the average~~ of the ~~closing sales prices of the~~ Company'’s ~~common~~Series ~~stock~~B ~~for~~Convertible Preferred ~~the~~Stock; ~~applicable~~and ~~quarter~~(b) ~~are~~350,000 ~~required~~shares ~~to be issued in satisfaction~~ of ~~amounts~~common ~~owed on a quarterly basis~~stock. InThe ~~the~~Duma ~~event~~Holdings ~~the~~Note ~~cash~~was ~~interest~~due ~~rate~~on isNovember ~~chosen~~30, ~~interest~~2015, ~~accrues~~but ~~until~~has ~~converted~~since ~~into~~been extended ~~common stock (~~as ~~discussed~~described below). orThe ~~until~~Duma ~~the~~Holdings ~~Company~~Note iscan ~~able~~only tobe ~~pay~~repaid ~~such~~with ~~accrued~~the ~~interest~~prior inwritten ~~cash~~approval ~~pursuant to the terms~~ of ~~the~~Duma ~~Watts Notes~~Holdings. The ~~"WTI~~Duma Holdings ~~Rate"~~Note ~~equals~~contains anusual ~~annualized~~and ~~percentage~~customary ~~interest~~events ~~rate equal to the average~~ of ~~the closing spot prices for West Texas Intermediate crude oil on each trading day during the immediately prior calendar quarter divided by ten~~default, ~~plus~~representations ~~two~~and ~~(the "WTI Interest Rate")~~warranties. ~~For~~The ~~example,~~payment ifof the ~~average~~principal ~~quarterly~~and accrued ~~closing spot Price was $60 for the prior quarter, the applicable~~ interest ~~rate~~due ~~for~~under the ~~next~~Duma ~~quarter~~Holdings ~~would~~Note beis 8%personally ~~per~~guaranteed ~~annum~~by ~~($60~~Kent ~~/ 10 = 6 + 2 = 8%)~~P. ~~Notwithstanding the above~~Watts, inour ~~the~~Chief ~~event~~Executive ~~that the average quarterly closing spot price is $40 or less~~Officer, ~~the WTI Rate for the applicable following quarter is 0%. All principal~~ and ~~accrued interest on the~~ Michael Watts, ~~Notes~~his isbrother, ~~convertible~~pursuant ~~into~~to ~~common~~separate ~~stock~~guaranty ~~at a conversion price of $0.75 per share at any time. Additionally~~agreements, ~~the~~and ~~Company~~secured ~~may~~by ~~force~~a ~~the~~first ~~conversion~~priority ofsecurity ~~the~~interest ~~Watts~~on ~~Notes~~certain ~~into~~real estate ~~common~~owned ~~stock~~by inKent ~~the event the trading price of the Company's common stock is equal to at least $5~~P.00 ~~per share for at least 20 out of any 30 consecutive trading days. Any shares of common stock issuable upon conversion of the~~ Watts ~~Notes~~pursuant ~~are subject~~ to a ~~lock-up~~Deed ~~whereby no shares~~ of ~~common stock can be sold until January 1~~Trust, ~~2016,~~Assignment ~~and no more than 2,500 shares~~ of ~~common~~Rents stock can be sold per day thereafter until the Company's common stock is listed on the NASDAQ or NYSE market or the trading volume of the Company's common stock is in excess of 100,000 shares per day. The Watts Notes have standard and ~~customary~~Security ~~events of default~~Agreement.

~~Previously,~~On or onaround ~~August~~November 2630, 2015, ~~Mr.~~we S.and ~~Chris~~Duma ~~Herndon,~~Holdings agreed to amend the ~~Company's~~Duma ~~director~~Holdings ~~purchased~~Note ato ~~Convertible~~provide ~~Promissory~~for ~~Note~~an extension in the ~~amount~~due date of ~~$100~~the note until February 29,~~000~~ 2016, in connection with ~~substantially~~the ~~similar~~payment ~~terms~~by asthe Company of $19,705 of accrued interest on the ~~Watts~~note through ~~Notes~~November (30, 2015, and a $3,500 extension fee which was paid in shares of the ~~"Herndon~~Company’s ~~Note")~~stock. We and Duma Holdings are currently in discussion regarding further extension of the due date.

~~As of October 31, 2015, the Watts Notes payable balance is $32,535.~~ During the ~~three~~ ~~months~~ six-month period ended ~~October~~January 31, ~~2015~~2016, $327,~~535~~262 of amortization of debt discount was expensed.

As(2) ofMay ~~October~~2014 ~~31, 2015, the Herdon~~ Promissory Note ~~payable~~– ~~balance is $9,166~~K. ~~During the three months ended October 31, 2015, $9,166 of amortization of debt discount was expensed.~~Watts

8Between November 2013 and May 2014, the Company received a total of $600,000 from Mr. Kent P. Watts and issued Mr. Watts a promissory note to evidence such amounts. The note is secured by the Company’s assets owned by GBE, and accrues interest at an annual rate of 6.25%. As part of the financing agreement with Shadow Tree (as described below), this note has been subordinated, and no payments will be made until the Shadow Tree debt has been repaid.

~~Table of Contents~~9

(3) June 2015 Promissory Note 6/Series –B ~~Notes~~Preferred ~~Payable~~Stock ~~and~~– ~~Convertible~~K. ~~Notes~~Watts

~~Credit~~On June 10, 2015, with the approval of the Board of Directors of the Company (i.e., Mr. Watts personally, and Mr. Herndon, our directors), Mr. Watts exchanged all rights he had to 8,188 shares of Series A 7% Convertible Voting Preferred Stock (which were required to have a face value of $3,275,200) pursuant to the terms of a prior exchange agreement, and accrued and unpaid dividends which would have been due thereunder, assuming such Series A 7% Convertible Voting Preferred Stock was correctly designated and issued at the time of the HCN Exchange Agreement, totaling, $327,879, into 32 units, each consisting of (a) 25,000 shares of the Company’s restricted common stock; and (b) Convertible Promissory Notes with a face amount of $100,000.

~~Effective~~As ~~August 15~~such, ~~2014, we entered into a Credit Agreement (the "Credit Agreement") as borrower, along with Shadow Tree Capital Management, LLC, as agent (the "Agent"), and certain lenders party thereto (the "Lenders")~~Mr. ~~Pursuant~~Watts received ~~to the Credit Agreement, the Lenders loaned us $4 million, which was represented by Term Loan Notes in~~ an aggregate ~~amount~~ of $4800,~~545,454~~000 ~~(the~~shares ~~"Notes"), representing an original issue discount~~ of ~~12%.~~common Westock ~~also~~and ~~paid the Lenders~~ a ~~structuring~~Convertible ~~fee~~Promissory ofNote ~~$90,909~~with ~~equal~~an toaggregate ~~2% of the~~ principal amount of ~~the Notes (the "Structuring Fee") and agreed to reimburse the Lenders for all reasonable and documented fees, costs and expenses associated with the Credit Agreement, which totaled~~ $~~172,824 in aggregate~~3.2 ~~Finally,~~million ~~we paid ROTH Capital Partners, LLC, a placement fee of 5% of the total value of the Loans ($227,273), as placement agent~~ and ~~Gary W. Vick,~~ a ~~consulting~~maturity ~~fee~~date of 1%June ~~of the face value of the Loans ($45~~10,~~455)~~ ~~for consulting services rendered~~2018. ~~As a result of the payments above, the net amount of funding received from the Loans was $3,463,539.~~

~~Pursuant~~On toJuly ~~the~~21, ~~Credit Agreement~~2015, Mr. weWatts ~~had~~and the ~~right,~~Company atagreed ~~any~~in ~~time~~principle ~~prior~~ to reduce the ~~one~~number ~~year anniversary~~ of ~~the~~total ~~Credit~~units ~~Agreement,~~due to ~~borrow~~Mr. upWatts to an30 ~~additional~~units. $1On September 21,~~000,000~~ ~~under the Credit Agreement (the "Additional Loan")~~2015, ~~subject~~Mr. toWatts ~~certain pre-requisites~~ and ~~requirements as set forth in~~ the ~~Credit~~Company ~~Agreement,~~entered ~~including,~~into ~~but~~a ~~not~~First ~~limited~~Amendment to usExchange ~~raising $750~~Agreement,~~000~~ ~~through~~which amended the ~~sale~~Exchange ofAgreement dated ~~equity~~June ~~subsequent~~10, to2015. ~~the~~The ~~closing~~First ofAmendment ~~the~~formally ~~transactions~~reduced ~~contemplated by~~ the ~~Credit~~total ~~Agreement~~units ~~(which~~due ~~we agreed~~ to ~~obtain~~Mr. ~~within~~Watts ~~150~~to ~~days~~30 ofunits, ~~the~~and ~~date~~as ofsuch, ~~the Credit Agreement)~~Mr. WeWatts received ~~also~~Convertible ~~agreed~~Promissory toNotes ~~pay~~with a 2%principal ~~Structuring~~amount ~~Fee~~of on$3 ~~the~~million ~~Additional~~and ~~Loan.~~750,000 ~~The~~shares ~~proceeds~~ of ~~the~~common ~~Additional~~stock ~~Loan~~in ~~could~~connection ~~only be used for~~ with the ~~Oil~~exchange ~~and~~originally ~~Gas~~contemplated ~~Activities.~~by ~~No Additional Loan was made under~~ the ~~terms~~Exchange ~~of the Credit~~ Agreement, ~~prior~~valued toat ~~the~~$614,141, ~~date~~which ofwas ~~the~~recorded ~~Restated Credit Agreement (~~as ~~described~~a ~~below)~~debt discount.

~~The~~Effective ~~amount~~on ~~owed~~September 28, ~~pursuant~~2015, towith the ~~Notes~~Company’s ~~(and~~designation ~~any~~of ~~amount~~its ~~borrowed~~Series ~~pursuant~~B toConvertible ~~the~~Preferred ~~Additional Loan) is guaranteed by our wholly-owned subsidiary~~Stock, ~~Hydrocarb~~the ~~Corporation~~$3 ~~("HCN")~~million Convertible ~~and~~Promissory Notes ~~its~~received ~~subsidiaries, and our other wholly-owned subsidiaries and is secured~~ by aMr. ~~first~~Watts ~~priority security interest~~ in ~~substantially~~connection ~~all~~with ~~of our assets (including, but not limited to~~ the ~~securities~~Exchange ~~of our subsidiaries and HCN and its subsidiaries) evidenced by a Guarantee and Collateral~~ Agreement, ~~various pledge agreements~~ and ~~a deed of trust providing~~ the ~~Agent~~Notes’ $70,000 asaccrued ~~agent~~interest ~~for~~automatically converted ~~the~~into ~~Lenders~~3,070 ashares ~~security~~of ~~interest~~Series ~~over~~B ~~our~~Convertible ~~oil~~Preferred ~~and gas assets and rights~~Stock. The Company ~~has~~recognized ~~no independent assets or operations~~$734,024 ~~the~~of ~~guarantees~~amortization ~~are~~expense ~~full and unconditional, and joint and several, and any subsidiaries~~ of the ~~company~~note ~~other~~discount ~~than~~upon ~~the subsidiary guarantors are minor~~conversion.

~~The Notes did not accrue any interest for the first nine months after their issuance date~~ (~~August 15, 2014~~4), ~~provided~~September ~~thereafter~~2015 Promissory ~~they~~Note ~~were~~– to accrue interest at the rate of (a) 16% per annum where the average net monthly oil and gas production revenues of Galveston Bay Energy LLC, our wholly-owned subsidiary, for the trailing three month period (the "Trailing Three Month Revenues") was less than $900,000; or (b) 14% per annum, where the Trailing Three Month Revenues were equal to or greater than $900,000, payable monthly in arrears through the maturity date of such Notes, August 15, 2016K. Watts

9On September 14, 2015, Kent P. Watts, the Chief Executive Officer and Chairman of the Company subscribed for $350,000 in Convertible Subordinated Promissory Notes and on September 17, 2015 he subscribed for an additional $166,667 in Convertible Promissory Notes (collectively, the “Watts Notes”). The Watts Notes are due two years from their issuance date, accrue interest which is payable quarterly in arrears, at either a cash interest rate (equal to the WTI Rate described below) or a stock interest rate (12% per annum)(at the option of the holder at the beginning of each quarter), provided no principal or interest on the Watts Notes can be paid in cash until all amounts owed by the Company to its senior lender is paid in full. In the event the stock interest rate is chosen by Mr. Watts, restricted shares of common stock equal to the total accrued dividend divided by the average of the closing sales prices of the Company’s common stock for the applicable quarter are required to be issued in satisfaction of amounts owed on a quarterly basis. In the event the cash interest rate is chosen, interest accrues until converted into common stock (as discussed below) or until the Company is able to pay such accrued interest in cash pursuant to the terms of the Watts Notes. The “WTI Rate” equals an annualized percentage interest rate equal to the average of the closing spot prices for West Texas Intermediate crude oil on each trading day during the immediately prior calendar quarter divided by ten, plus two (the “WTI Interest Rate”). Notwithstanding the above, in the event that the average quarterly closing spot price is $40 or less, the WTI Rate for the applicable following quarter is 0%. All principal and accrued interest on the Watts Notes is convertible into common stock at a conversion price of $0.75 per share at any time. Additionally, the Company may force the conversion of the Watts Notes into common stock in the event the trading price of the Company’s common stock is equal to at least $5.00 per share for at least 20 out of any 30 consecutive trading days. Any shares of common stock issuable upon conversion of the Watts Notes are subject to a lock-up whereby no more than 2,500 shares of common stock can be sold per day thereafter until the Company’s common stock is listed on the NASDAQ or NYSE market or the trading volume of the Company’s common stock is in excess of 100,000 shares per day. The Watts Notes have standard and customary events of default.

~~Table~~During the six months ended January 31, 2016, $97,560 of ~~Contents~~amortization of debt discount was expensed.

Pursuant to the Credit Agreement, we agreed to issue the Lenders their pro rata share of (a) 60,000 restricted shares of common stock on the effective date of the Credit Agreement, August 15, 2014 (the "Effective Date"); (b) 32,500 restricted shares in the event any amount of the Loans (or other obligations outstanding under agreements entered into in connection with the Loans, the "Loan Documents") were outstanding on the 12 month anniversary of the Effective Date; (c) 32,500 restricted shares in the event any amount was outstanding under the Loan Documents on the 18 month anniversary of the Effective Date; and (d) 25,000 restricted shares in the event any amount was outstanding under the Loan Documents on the 21 month anniversary of the Effective Date. The shares were to be issued pursuant to the terms and conditions of a Stock Grant Agreement, pursuant to which each of the Lenders made certain representations to the Company regarding their financial condition and other items in order for the Company to confirm that an exemption from registration existed and will exist for such issuances.10

~~Effective June 10, 2015, we entered into an Amended and Restated Credit Agreement~~ (~~the "Restated Credit Agreement"~~5) ~~with~~August Agent and Shadow Tree Funding Vehicle A—Hydrocarb LLC and Quintium Private Opportunities Fund, LP, as lenders (collectively, the "Lenders"), which amended and restated in its entirety the Credit Agreement, which was previously amended on February 17, 2015. AsPromissory ~~part~~Note ~~of this agreement, we received an additional loan~~– C. Herndon

~~The Restated Credit Agreement~~Previously, ~~increased the amount of interest due~~ on additional loans made pursuant to the terms of the Restated Credit Agreement (provided that no additional loans were made under the credit agreement prior to the additional loans made in connection with the Restated Credit Agreement as discussed below) to 16% per annum (from 14% per annum pursuant to the prior terms); accelerated the maturity date of amounts borrowed from the Lenders under the credit agreement to November 30August 26, 2015 ~~(previously amounts borrowed were due August 15~~, ~~2016);~~Mr. ~~provided~~S. ~~for~~Chris ~~the Lenders to make additional loans of $475~~Herndon,~~632~~ ~~(less an aggregate of $73,023 in fees and expenses, not including placement and other fees totaling 6% of~~ the ~~amount borrowed) as of the date of the Restated Credit Agreement, which loans have been made to date; removed the right of the~~ Company’s todirector ~~request~~purchased ~~further~~a ~~loans~~Convertible ~~under~~Promissory ~~the~~Note ~~credit agreement; provided for the payment to the Lenders of an exit fee~~ in the amount of ~~4% of the amount repaid under the Restated Credit Agreement~~$100,000 with ifsubstantially ~~repaid~~similar interms ~~full~~as ~~prior to July 31, 2015 (which amount was not repaid in full), and 5% of such repaid amount if repaid after July 31, 2015; provided for~~ the ~~immediate~~Watts ~~issuance~~Notes. ofDuring ~~an aggregate of 32,500 shares of~~ the ~~Company's~~six ~~restricted~~months ~~common~~ended ~~stock~~January ~~to the Lenders and the termination of any other requirements of the Company to issue additional shares to the Lenders pursuant to the terms of the credit agreement (previously 32~~31,~~500~~ ~~shares were due on the 18 month anniversary of the original closing and 25~~2016,~~000~~ ~~shares were due on the~~ $21 month anniversary of the original closing); required us to make all contractually required payments to Linc Energy LLC and make all necessary payments to and take or cause to be taken all other commercially reasonable actions to cause the Redfish Reef field to be both producing and distributing meaningful quantities of oil and gas no later than July 15,752 ~~2015, subject to circumstances beyond our control; modified certain~~ of ~~the~~amortization ~~covenants described in the Credit Agreement; waived, effective as~~ of ~~the~~debt discount ~~date~~was of the Restated Credit Agreement all previous defaults which the Lenders had notice of under the original Credit Agreement; and effected various non-material revisions and updates to the original Credit Agreementexpensed.

WeNote 7 ~~have~~– ~~evaluated~~Notes ~~this~~Payable ~~amendment~~ and ~~determined~~Convertible it did not qualify for extinguishment accounting. In connection with the amendments to the original Credit Agreement discussed above, we also entered into a First Amendment to Stock Grant Agreement and additional promissory notes evidencing the additional loan described above in the aggregate amount of $475,632 with the Lenders (the "Additional Notes~~").~~

The ~~Restated~~following ~~Credit~~tabulation summarizes ~~Agreement, contains customary representations, warranties, covenants and requirements for~~ the ~~Company~~Notes toPayable ~~indemnify the Lenders, Agent~~ and ~~their~~Convertible ~~affiliates.~~Notes ~~The~~as ~~Restated~~of ~~Credit~~January ~~Agreement also includes various covenants (positive and negative) binding upon the Company (and its subsidiaries)~~31, ~~including~~2016 ~~but not limited to, requiring that the Company comply with certain reporting requirements,~~ and ~~provide~~July ~~notices of material corporate events and forecasts to Agent~~31, and prohibiting us from (i) incurring any additional debt; (ii) creating any liens; (iii) making any investments; (iv) materially changing our business; (v) repaying outstanding debt; (vi) affecting a business combination2015, ~~sale~~net ~~or transfer; (vii) undertaking transactions with affiliates; (viii) amending our organizational documents; (ix) forming subsidiaries; or (x) taking any action not in the usual course~~ of ~~business, in each case except as set forth in the Restated Credit Agreement.~~discount:

The Restated Credit Agreement includes customary events of default for facilities of a similar nature and size as the Credit Agreement, including, but not limited to, if any breach or default occurs under the Loan Documents, the failure of the Company to pay any amount when due under the Loan Documents, if the Company (or its subsidiaries) is subject to any judgment in excess of $250,000 which is not discharged or stayed within 30 days, or if a change in control of the Company, any subsidiary or any guarantor should occur, defined for purposes of the Restated Credit Agreement as any transfer of 25% or more of the voting stock of such entity.

	At		At
	Jan 31, 2016		Jul 31, 2015
Short-Term
Notes Payable
Shadow Tree Credit Agreement (1)	$	5,422,774	$	4,616,213
Insurance Premium Notes Payable (2)		—		103,071
	$	5,422,774	$	4,719,284
Convertible Third Party Notes
KBM Worldwide, Inc. Convertible Note (3)	$	—	$	335,619
Vis Vires Group Convertible Promissory Note (4)		—		408,149
Christian Smith & Jewell Convertible Note (5)		325,784		414,296
Typenex Co-Investment, LLC Convertible Note (6)		1,087,320		207,835
JSJ Investments Inc. Convertible Note (7)		350,000		—
Darling Capital, LLC Convertible Note (8)		200,000		—
	$	1,963,104	$	1,365,899
Long-Term
Convertible Notes Payable
JMJ Convertible Promissory Convertible Note (9)	$	—	$	341,200
David Gillespie Unit Convertible Note (10)		—		32,718
Brian Kenny Convertible Promissory Note (11)		8,279		135
Convertible Subordinated Promissory Note Offering (12)		236,320		—
Adar Bays, LLC and Union Capital, LLC Convertible Notes (13)		416,000		—
	$	660,599	$	374,053

Series B Preferred Stock - David Gillespie (10)	$	50,000

10(1) Shadow Tree Credit Agreement

~~Table~~Effective August 15, 2014, we entered into a Credit Agreement (the “Credit Agreement”) as borrower, along with Shadow Tree Capital Management, LLC, as agent (the “Agent”), and certain lenders party thereto (the “Creditors”). Pursuant to the Credit Agreement, the Lenders loaned us $4 million, which was represented by Term Loan Notes in an aggregate amount of ~~Contents~~$4,545,454 (the “Notes”), representing an original issue discount of 12%. We also paid the Creditors a structuring fee of $90,909 equal to 2% of the principal amount of the Notes and agreed to reimburse the Creditors for all reasonable and documented fees, costs and expenses associated with the Credit Agreement, which totaled $172,824 in aggregate. We paid a placement fee of 5% of the total value of the Notes ($227,273) and a consulting fee of 1% of the face value of the Notes ($45,455). As a result of the payments above, the net amount of funding received from the Loans was $3,463,539.

~~For~~The ~~the~~amount ~~term~~owed ~~loan,~~pursuant to the ~~Company~~Notes ~~has~~(and ~~recognized~~any ~~$254,809~~amount ofborrowed ~~amortization~~pursuant ~~expense~~to of the ~~original~~Additional ~~issuance~~Loan) ~~discount,~~is ~~with~~guaranteed aby ~~net~~our ~~payable~~wholly-owned ~~balance~~subsidiary, ofHydrocarb Corporation ~~$4,467,712~~(“HCN”) and ~~unamortized~~its ~~original~~subsidiaries, ~~issuance~~and ~~discount~~our ofother ~~$77,743~~wholly-owned assubsidiaries ofand ~~October~~is ~~31,~~secured ~~2015.~~by Ina ~~addition,~~first priority wesecurity ~~have~~interest ~~recognized~~in ~~$283,455~~substantially all of ~~debt~~our ~~issuance~~assets ~~cost~~(including, ~~related~~but not limited to ~~professional~~the ~~fees~~securities of our subsidiaries and ~~expenses,~~HCN ~~which~~and weits ~~have~~subsidiaries) ~~classified~~evidenced ~~within~~by ~~other~~a ~~non-current~~Guarantee ~~assets~~and Collateral Agreement, ~~related~~various topledge ~~the~~agreements ~~issuance~~and a deed of ~~this~~trust providing ~~debt.~~the WeAgent, ~~are~~as ~~amortizing~~agent ~~these~~for ~~costs~~the Lenders, a security interest over ~~the~~our ~~term~~oil ofand ~~the~~gas ~~loan~~assets and rights. ~~During~~The ~~the~~Company ~~year~~has ~~ended~~no ~~October~~independent assets ~~31,~~or ~~2015~~operations, wethe ~~recognized~~guarantees ~~$68,342~~are offull ~~amortization~~and ~~expense~~unconditional, and ~~have~~joint ~~$24~~and several,~~626~~ inand ~~unamortized~~any ~~debt~~subsidiaries ~~issuance~~of ~~cost~~the asCompany ofother than ~~October~~the ~~31,~~subsidiary ~~2015~~guarantors are minor.

For the additional loan, the Company has recognized $45,686 of amortization expense of the original issuance discount, with a net payable balance of $448,997 and unamortized original issuance discount of $26,635 as of October 31, 2015. In addition, we have recognized $23,782 of debt issuance cost related to professional fees and expenses, which we have classified within other non-current assets, related to the issuance of this debt. We are amortizing these costs over the term of the loan. During the three months ended October 31, 2015, we recognized $13,113 of amortization expense and have $4,930 in unamortized debt issuance cost as of October 31, 2015.11

~~Installment~~The Notes ~~Payable~~did not accrue any interest for the first nine months after their issuance date (August 15, 2014), provided thereafter they were to accrue interest at the rate of (a) 16% per annum where the average net monthly oil and gas production revenues of Galveston Bay Energy LLC, our wholly-owned subsidiary, for the trailing three month period (the “Trailing Three Month Revenues”) was less than $900,000; or (b) 14% per annum, where the Trailing Three Month Revenues were equal to or greater than $900,000, payable monthly in arrears through the maturity date of such Notes, August 15, 2016.

InPursuant ~~February~~to ~~2015~~the Credit Agreement, we ~~financed~~agreed ~~our~~to ~~commercial~~issue ~~insurance~~the ~~program~~Creditors ~~using~~their apro ~~note~~rata ~~payable~~share ~~for~~of ~~$414~~(a) 60,~~384.~~000 ~~Under~~restricted shares of common stock on the ~~note~~effective date of the Credit Agreement, weAugust ~~are~~15, ~~obligated~~2014 to(the ~~make~~“Effective ~~eight~~Date”); ~~payments~~(b) 32,500 restricted shares in the event any amount of ~~$52~~the Loans (or other obligations outstanding under agreements entered into in connection with the Loans,~~586~~ ~~per~~the “Loan Documents”) were outstanding on the 12 month, ~~which~~anniversary ~~include~~of ~~principal~~the ~~and~~Effective ~~interest~~Date; (c) 32,500 ~~beginning~~restricted shares in ~~March~~the ~~2015.~~event any Asamount was outstanding under the Loan Documents on the 18 month anniversary of ~~October~~the ~~31,~~Effective ~~2015~~Date; and (d) 25,000 restricted shares in the ~~note~~event ~~payable~~any ~~has~~amount ~~been~~was ~~paid~~outstanding ~~off~~under the Loan Documents on the 21 month anniversary of the Effective Date.

~~Convertible~~Effective ~~Notes~~June ~~Payable~~10, 2015, we entered into an Amended and Restated Credit Agreement (the “Restated Credit Agreement”) with Agent and Shadow Tree Funding Vehicle A—Hydrocarb LLC and Quintium Private Opportunities Fund, LP, as lenders (collectively, the “Lenders”), which amended and restated in its entirety the Credit Agreement, which was previously amended on February 17, 2015. As part of this agreement, we received an additional loan.

~~KBM~~The ~~Worldwide~~Restated Credit Agreement, ~~Inc.~~increased ~~Convertible~~the ~~Note~~amount of interest due on additional loans made pursuant to the terms of the Restated Credit Agreement (provided that no additional loans were made under the credit agreement prior to the additional loans made in connection with the Restated Credit Agreement as discussed below) to 16% per annum (from 14% per annum pursuant to the prior terms); accelerated the maturity date of amounts borrowed from the Lenders under the credit agreement to November 30, 2015 (previously amounts borrowed were due August 15, 2016); provided for the Lenders to make additional loans of $475,632 (less an aggregate of $73,023 in fees and expenses, not including placement and other fees totaling 6% of the amount borrowed) as of the date of the Restated Credit Agreement, which loans have been made to date; removed the right of the Company to request further loans under the credit agreement; provided for the payment to the Lenders of an exit fee in the amount of 4% of the amount repaid under the Restated Credit Agreement, if repaid in full prior to July 31, 2015 (which amount was not repaid in full), and 5% of such repaid amount if repaid after July 31, 2015; provided for the immediate issuance of an aggregate of 32,500 shares of the Company’s restricted common stock to the Lenders and the termination of any other requirements of the Company to issue additional shares to the Lenders pursuant to the terms of the credit agreement (previously 32,500 shares were due on the 18 month anniversary of the original closing and 25,000 shares were due on the 21 month anniversary of the original closing); required us to make all contractually required payments to Linc Energy LLC and make all necessary payments to and take or cause to be taken all other commercially reasonable actions to cause the Redfish Reef field to be both producing and distributing meaningful quantities of oil and gas no later than July 15, 2015, subject to circumstances beyond our control; modified certain of the covenants described in the Credit Agreement; waived, effective as of the date of the Restated Credit Agreement all previous defaults which the Lenders had notice of under the original Credit Agreement; and effected various non-material revisions and updates to the original Credit Agreement.

OnWe ~~February~~have ~~19,~~evaluated this ~~2015,~~amendment weand ~~sold~~determined ~~KBM~~it ~~Worldwide,~~did ~~Inc.~~not ~~("KBM")~~qualify afor ~~Convertible~~extinguishment ~~Promissory~~accounting. ~~Note~~In inconnection ~~the~~with ~~principal amount of $350,000 (~~the ~~"KBM~~amendments ~~Convertible Note"), pursuant~~ to athe ~~Securities~~original Credit ~~Purchase~~ Agreement discussed above, ~~dated~~we ~~and~~also entered into ona ~~February~~First ~~17,~~Amendment ~~2015.~~to ~~The~~Stock ~~KBM~~Grant ~~Convertible~~Agreement ~~Note bears interest at the rate of 8% per annum (22% upon an event of default)~~ and isadditional ~~due~~promissory ~~and~~notes evidencing ~~payable on February 19, 2016. The KBM Convertible Note provides for customary events of default such as failing to timely make payments under~~ the ~~KBM~~additional ~~Convertible~~loan ~~Note~~described ~~when~~above ~~due.~~in ~~Additionally, upon~~ the ~~occurrence~~aggregate amount of ~~certain fundamental defaults~~$475,632 aswith ~~described in~~ the ~~KBM~~Lenders ~~Convertible Note, we are required to repay KBM liquidated damages in addition to~~ (the ~~amount~~“Additional ~~owed under the KBM Convertible Note~~Notes”).

The ~~principal~~Restated ~~amount~~Credit Agreement ofcontains ~~the~~customary ~~KBM~~representations, ~~Convertible~~warranties, ~~Note~~covenants and ~~all~~requirements ~~accrued~~for ~~interest~~the isCompany ~~convertible~~to atindemnify the ~~option~~Lenders, Agent ofand ~~the~~their ~~holder~~affiliates. ~~thereof~~The ~~into~~Restated ~~our~~Credit ~~common~~Agreement ~~stock~~also atincludes ~~any~~various ~~time~~covenants ~~following~~(positive and negative) binding upon the ~~180th~~Company ~~day~~(and ~~after~~its subsidiaries), including but not limited to, requiring that the ~~KBM~~Company ~~Convertible~~comply ~~Note~~with ~~was~~certain ~~issued.~~reporting ~~The~~requirements, and ~~conversion~~provide ~~price~~notices of ~~the~~material ~~KBM~~corporate ~~Convertible~~events ~~Note~~and isforecasts ~~equal~~ to ~~50%~~Agent, ~~multiplied~~and byprohibiting ~~the~~us ~~average~~from of(i) ~~the~~incurring ~~lowest~~any ~~five~~additional ~~closing~~debt; (ii) ~~bid~~creating ~~prices~~any ofliens; (iii) making any investments; (iv) materially changing our ~~common~~business; ~~stock~~(v) ~~during~~repaying ~~the~~outstanding ~~fifteen~~debt; ~~trading~~(vi) affecting ~~days~~a ~~immediately~~business ~~prior~~combination, tosale or transfer; (vii) undertaking transactions with affiliates; (viii) amending our organizational documents; (ix) forming subsidiaries; or (x) taking any action not in the ~~date~~usual course of ~~any~~business, ~~conversion~~in each case except as set forth in the Restated Credit Agreement.

The KBM Convertible Note included a $26,000 original issue discount and we paid $4,000 of KBM's attorney's fees in connection with the sale of the KBM Convertible Note and as such, the net amount, before our expenses, that we received upon sale of the KBM Convertible Note was $320,000.12

WeThe ~~are~~Restated ~~required~~Credit Agreement toincludes ~~keep~~customary ~~reserved~~events ~~from~~of ~~our~~default ~~authorized~~for ~~but~~facilities ~~unissued~~of ~~shares~~a ofsimilar ~~common~~nature ~~stock~~and ~~eight~~size ~~times~~as the ~~number~~Credit ofAgreement, ~~shares~~including, but ofnot ~~common~~limited ~~stock~~to, ~~issuable~~if ~~upon~~any ~~conversion~~breach or default occurs under the Loan Documents, the failure of the ~~KBM~~Company ~~Convertible~~to ~~Note~~pay atany ~~all~~amount ~~times~~when due ~~and~~under the Loan Documents, if wethe ~~fail~~Company (or its subsidiaries) is subject to ~~keep~~any ~~such~~judgment ~~amount~~in ~~reserved~~excess itof $250,000 which is ~~considered~~not discharged anor ~~event~~stayed within 30 days, or if a change in control of ~~default~~the ~~under~~Company, any subsidiary or any guarantor should occur, defined for purposes of the ~~KBM~~Restated ~~Convertible~~Credit ~~Note~~Agreement as any transfer of 25% or more of the voting stock of such entity.

AtEffective noNovember 30, ~~time~~2015, ~~may~~we ~~the~~entered ~~KBM~~into ~~Convertible~~(i) ~~Note~~a beFirst ~~converted~~Amendment ~~into~~to ~~shares~~Amended and Restated Credit Agreement, by and between the Company, as borrower, the Agent, and each of ~~our~~the ~~common~~Lenders, ~~stock~~as iflenders ~~such~~(the ~~conversion~~“First ~~would~~Amendment”), ~~result~~which inamended ~~KBM~~the Restated Credit Agreement; and ~~its~~(ii) ~~affiliates~~a ~~owning~~Second anAmendment ~~aggregate~~to ofStock inGrant ~~excess~~Agreement, ofby ~~9.99%~~and ofbetween the ~~then~~Company ~~outstanding~~and ~~shares~~the ofLenders ~~our~~(the ~~common~~“Stock ~~stock~~Agreement”).

WeThe ~~may~~First ~~prepay~~Amendment amended inthe ~~full~~Restated Credit Agreement to extend the ~~unpaid~~maturity ~~principal~~date ~~and~~of ~~interest~~the onamount due thereunder (the ~~KBM~~“Loans”), which ~~Convertible~~totaled ~~Note~~$5.02 million as of the date of the parties entry into the agreement, ~~upon~~from ~~notice~~November 30, 2015 to May 31, 2016; provided for the payment to the Lenders by the Company of an exit fee upon repayment of the Loans of 8% of any ~~time~~amounts repaid prior to ~~the~~March 31, ~~180th~~2016 ~~day~~and 10% of any amounts repaid after March 31, 2016; provided for the ~~issuance~~future ~~date.~~release ~~Any~~by ~~prepayment~~the isLenders ~~subject~~of tothe ~~payment~~pledge of shares of Hydrocarb Namibia Energy Corporation (Pty) Limited, the Company’s wholly-owned Namibia subsidiary, in connection with a ~~prepayment~~subordinated debt financing by the Company in an amount ~~ranging~~of ~~from~~not ~~110%~~less tothan ~~135~~$4 million, or not less than $2 million in the event that at least 40% of the ~~then~~proceeds ~~outstanding~~from ~~balance~~such onfunding go to repay amounts owed under the ~~KBM~~Loans, ~~Convertible~~together ~~Note~~with ~~(inclusive~~the approval of ~~accrued~~a lien on such shares in connection with a subordinated funding meeting the requirements above and ~~unpaid~~the ~~interest~~sale of such shares, in the event the proceeds of such sale go to the repayment of amounts owed under the Loans; and the Company agreed to provide 35% of any ~~default~~future subordinated debt financing to the Lenders to repay amounts ~~then~~owed ~~owing~~under the Loans. Additionally, the parties agreed that an event of default under the Restated Credit Agreement would be triggered in the event the Company failed to repay at least $2 million of the Loans before March 31, 2016; in the event the close-of-trading price of West Texas Intermediate Crude Oil (“WTI”) closes below $35 per barrel for a period of ten consecutive trading days, ~~depending~~provided onthat ~~when~~at the end of such ~~prepayment~~ten isday ~~made~~period the outstanding principal amount of the Loans exceeds $2,021,086, or WTI closes below $30 per barrel for a period of ten consecutive trading days regardless of the amount then outstanding under the Loans (the “WTI Events of Default”).

11Notwithstanding the above, in January 2016, the Agent agreed, on behalf of the Lenders, to prospectively waive any and all Events of Default that may arise as a result of the WTI Events of Default, with the waiver continuing in effect, as an effective waiver of any and all WTI Events of Default that may arise in the future, until such time as the Agent delivers a written notice to the Company withdrawing the waiver. Additionally, during the period that the waiver is in effect, in the event that a WTI Event of Default arises and thereafter the close-of-trading price of WTI for any trading day, equals or exceeds $35 or $30, based on the applicable WTI Event of Default, such event shall serve to make the waiver permanent (i.e., not capable of being withdrawn) with respect to any WTI Event of Default that existed for the period prior to such trading day. The Company is currently confirming with Lenders whether the recent fluctuation in the close-of-trading price of WTI has made the waiver permanent.

~~Table~~Factored in both amendments within one year period, the Company determined the present value of ~~Contents~~the cash flows under amended loan is 10% different from the present value of the cash flows under the original loan. Therefore, the company considered the modification was substantial and accounted amendments as an extinguishment of the original loan. Extinguishment loss is recognized for the amount of $640,936.

WeFor ~~also~~the ~~deposited~~term ~~750~~loan and the additional loan,~~000~~ ~~shares~~the Company has recognized $404,873 of ~~our~~amortization ~~common~~expense ~~stock~~of ~~into~~the ~~escrow~~original issuance discount, with ~~KBM's~~a net ~~counsel~~payable tobalance ~~secure~~of ~~the~~$5,422,774 ~~repayment~~and unamortized original issuance discount of ~~the~~$0 ~~KBM~~as ~~Convertible~~of ~~Note~~January 31, ~~which~~2016. ~~shares~~We ~~are~~also tohave berecognized $307,237 ~~held~~of indebt ~~escrow~~issuance ~~and~~cost ~~released~~related to ~~KBM~~professional ~~only~~fees ~~upon~~and ~~the~~expenses, ~~occurrence~~which ofwe anhave ~~event~~classified ofwithin ~~default~~other ~~under~~non-current assets, related to the ~~KBM~~issuance ~~Convertible~~of ~~Note~~this debt. ~~These~~For ~~shares~~six ~~have~~months ~~been~~ended ~~returned~~January to31, ~~the~~2016, ~~Company~~amortization asexpense of ~~October~~debt ~~28,~~issuance ~~2015~~cost is $111,011. We ~~and~~are ~~cancelled~~amortizing these costs over the term of the loan.

As of October 31, 2015, we had repaid the note and all accrued interest. As of October 31, 2015, the Company had recognized the remaining discount of $14,381 into amortization expense of the note discount. The Company also recognized amortization of debt issue costs of $11,063.13

~~Typenex~~(2) ~~Co-Investment,~~Installment ~~LLC Convertible Note~~Notes Payable

OnIn ~~March~~February 5, 2015, we ~~sold~~financed aour ~~Secured~~commercial ~~Convertible~~insurance ~~Promissory~~program ~~Note~~using ~~(the~~a ~~"Typenex~~note ~~Convertible~~payable ~~Note")~~for ~~to Typenex Co-Investment~~$414,384. ~~LLC~~Under ~~("Typenex") in~~ the ~~amount of $350~~note,~~000.~~ ~~The~~we ~~Typenex~~are ~~Convertible~~obligated ~~Note was issued pursuant~~ to ~~the~~make eight payments ~~terms~~ of a$52,586 ~~Securities Purchase Agreement dated as of the same date. The Typenex Convertible Note bears interest at the rate of 10%~~ per ~~annum~~month, ~~(22%~~which ~~upon~~include ~~the~~principal ~~occurrence of an event of default)~~ and isinterest, ~~due~~beginning ~~and payable~~ in ~~full~~March ~~on January 5, 2016~~2015. ~~The~~As ~~Typenex Convertible Note provides for customary events~~ of ~~default~~January ~~such as failing to timely make payments under the Typenex Convertible Note when due. Additionally~~31, ~~upon the occurrence of certain fundamental defaults~~2016, ~~as described in~~ the ~~Typenex~~note payable ~~Convertible~~has ~~Note,~~been wepaid ~~are required to repay Typenex liquidated damages in addition to the amount owed under the Typenex Convertible Note~~off.

We have the right to prepay the Typenex Convertible Note, pursuant to the terms thereof, at any time, provided we pay a prepayment amount of 125% of the then outstanding balance. The principal amount of the Typenex Convertible Note and all accrued interest is convertible at the option of the holder thereof into our common stock at any time. The conversion price of the Typenex Convertible Note is initially $2.25 per share, provided that if our market capitalization falls below $20 million (~~provided further that our current market capitalization is below $20 million~~3), ~~the~~KBM ~~conversion price becomes the lower of $2~~Worldwide, Inc.25 per share and the average of the five lowest closing bid prices of our common stock on the twenty trading days immediately prior to such conversion date (the "Market Price") multiplied by 80% (provided such percentage is subject to automatic reduction upon the occurrence of certain events, including among other things described in the Convertible ~~Secured~~ Note~~, a reduction by 5% in the event the Market Price is less than $0.75).~~

~~The~~On ~~Typenex~~February 19, 2015, we sold KBM Worldwide, Inc. (“KBM”) a Convertible Promissory Note ~~included~~in athe principal amount of $45350,000 ~~original~~(the ~~issuance~~“KBM Convertible ~~discount~~Note”), ~~and~~pursuant weto ~~agreed~~a toSecurities ~~pay~~Purchase $5Agreement,~~000~~ ofdated ~~Typenex's~~and ~~legal~~entered ~~fees~~into inon ~~connection~~February ~~with~~17, ~~the transaction~~2015. AsThe aKBM Convertible ~~result,~~Note bears interest at the ~~net~~rate ~~amount~~of ~~received~~8% inper ~~connection~~annum ~~with~~(22% ~~the~~upon ~~sale~~an event of ~~the~~default) ~~Typenex~~and ~~Convertible~~is ~~Note,~~due ~~before~~and ~~our~~payable ~~expenses,~~on ~~was~~February ~~$300~~19,~~000~~ 2016.

The ~~Typenex~~KBM Convertible Note ~~also~~included ~~includes~~a ~~anti-dilution~~$26,000 ~~rights~~original inissue ~~the~~discount ~~event~~and we ~~sell~~paid or$4,000 ~~issue~~of ~~any~~KBM’s ~~securities~~attorney’s ~~with~~fees ain ~~price~~connection ~~less~~with ~~than~~ the sale ~~applicable~~of ~~conversion~~the ~~price,~~KBM ~~subject to certain exceptions. The Typenex~~ Convertible Note ~~also~~and ~~includes~~as ~~various~~such, ~~restrictions~~the onnet ~~our~~amount, ~~ability~~before toour ~~enter~~expenses, ~~into~~that ~~subsequent~~we ~~variable~~received ~~rate~~upon ~~security~~sale ~~transactions~~of ~~following~~ the ~~date~~KBM ~~thereof~~Convertible Note was $320,000.

OnAs ~~the~~of ~~date~~January ~~that is six months after March 5~~31, ~~2015~~ 2016, ~~and continuing each month thereafter until maturity,~~ we ~~are~~had ~~required~~repaid ~~to prepay~~ the ~~Convertible~~note ~~Secured~~and ~~Note~~all inaccrued ~~cash~~interest. orAs ~~shares~~ of ~~our~~January ~~common~~31, ~~stock~~2016, ~~(provided that upon~~ the ~~occurrence~~Company ofhad ~~certain~~recognized ~~defaults described in~~ the ~~Typenex~~full ~~Convertible~~discount ~~Note we are only able to pay this amount in cash), an amount equal to the greater~~ of ~~(i)~~ $7014,~~000~~381 ~~and~~into ~~(ii)~~amortization ~~the~~expense ~~outstanding balance~~ of the ~~Convertible~~note ~~Secured Note divided by the number of such required installment payments prior to the maturity date~~discount. ~~Additionally,~~The onCompany ~~the~~also ~~twentieth~~recognized ~~trading~~amortization ~~day following the date each tranche~~ of ~~installment~~debt ~~shares becomes free trading we are required to~~ issue ~~Typenex~~costs ~~additional shares~~ of ~~common stock if the applicable conversion price calculated on the true-up date is less than the original conversion price~~$11,063.

We(4) ~~are~~Vis ~~subject~~Vires ~~to various fees and penalties under the Typenex~~ Group Convertible ~~Note~~Promissory ~~for our failure to timely deliver shares due upon any conversion or installment payment.~~Note

12On March 31, 2015, we sold Vis Vires Group, Inc. a Convertible Promissory Note in the principal amount of $414,500 (the “Vis Vires Convertible Note”), pursuant to a Securities Purchase Agreement, dated and entered into on March 31, 2015. The Vis Vires Convertible Note bears interest at the rate of 8% per annum (22% upon an event of default) and is due and payable on April 2, 2016. The Vis Vires Convertible Note included a $9,500 original issue discount and we paid $5,000 of Vis Vires’s attorney’s fees in connection with the sale of the Vis Vires Convertible Note and as such, the net amount, before our expenses, that we received upon sale of the Vis Vires Convertible Note was $400,000.

~~Table~~We extinguished the entire Vis Vires Convertible Note by repaying the outstanding balance and all accrued interest during the quarter ended October 31, 2015. As part of ~~Contents~~the extinguishment of the Note, during the same period, the Company recognized the remaining discount balance of $6,351 and remaining debt issue costs of $16,712 into amortization expense.

At(5) noChristian ~~time~~Smith & ~~may~~Jewell ~~the Typenex~~ Convertible Note be converted into shares of our common stock if such conversion would result in Typenex and its affiliates owning an aggregate of in excess of 4.99% of the then outstanding shares of our common stock, provided such percentage increases to 9.99% if our market capitalization is less than $10 million, and provided further that Typenex may change such percentage from time to time upon not less than 61 days prior written notice to us.

AsOn ~~additional~~May ~~consideration~~29, ~~for~~2015, the Company ~~loan~~entered ~~evidenced~~into bya ~~the~~revolving ~~Typenex~~line ~~Convertible~~of ~~Note~~credit agreement with Christian Smith & Jewell, the Company’s ~~granted~~legal ~~Typenex~~counsel. The line of credit established a ~~five~~revolving ~~year~~line ~~warrant~~of credit in the amount of up to ~~purchase~~$350,000 38for legal fees due to the law firm,~~889~~ including $200,000 previously accrued. Advances of credit under the line of credit are in the discretion of the law firm. Amounts subject to the line of credit are evidenced by individual convertible promissory notes, which have customary events of default, accrue interest at the rate of 3% per annum (12% upon an event of default), are due on demand, and are convertible (along with accrued and unpaid interest) into shares of ~~our~~the Company’s common stock at ana ~~exercise~~conversion price of $21.2517 per share. (Amounts due can be paid at any time without penalty, provided the ~~"Warrant")~~Company ~~which~~gives ~~number~~at ofleast ~~shares~~30 ~~and~~days’ ~~exercise~~prior ~~price~~notice ~~are~~of ~~subject~~its intention to ~~adjustment~~repay amounts owed. The ~~Warrant~~notes ~~includes~~each ~~the~~contain ~~same~~a 4.99% ownership limitation. ~~described~~In ~~above in~~ connection with the ~~Typenex~~entry ~~Convertible~~into ~~Note.~~the ~~The~~line ~~Warrant~~of ~~includes~~credit, ~~cashless~~the ~~exercise~~Company issued ~~rights~~the law firm a convertible promissory note in the amount of $200,000.

~~The~~In ~~Warrant~~addition, ~~contains~~the ~~anti-dilution~~Company ~~rights~~also ~~such~~accrued ~~that~~the legal iffees ~~we issue or sell or are deemed to issue or sell securities~~ for ~~less~~total ~~than~~amount ~~the then applicable exercise price~~ of ~~the Warrant~~$242,784 ~~subject~~in toaccordance ~~certain~~with ~~exceptions,~~ the ~~exercise~~attorney ~~price~~letter ofuntil the ~~Warrant~~Company is ~~reduced~~certain ~~to such lower price and the number of shares of common stock issuable upon exercise of the Warrant increases, such~~ that ~~the aggregate exercise price payable upon exercise of the Warrant remains the same upon~~ such ~~anti-dilutive~~fee ~~adjustment,~~can upbe collected tofrom a maximum of three times the current number of shares issuable upon exercise of the Warrant, subject to certain exceptions upon which there is no cap on the number of shares issuable upon exercise of the Warrantinsurance.

~~The~~On ~~amounts~~January ~~owed~~12, ~~under~~2016, ~~the~~Christian ~~Typenex~~Smith & ~~Convertible~~Jewell ~~Note~~exercised ~~were secured by a Stock Pledge Agreement (~~the ~~"Pledge~~conversion ~~Agreement") whereby CW Navigation~~option, ~~Inc.,~~in aconnection ~~Texas~~with ~~corporation~~$117,000 ~~a significant shareholder~~ of the ~~Company,~~amount ~~which~~owed isunder ~~beneficially owned by Christopher Watts,~~ the ~~nephew~~note ~~of Kent P. Watts, our Chief Executive Officer~~ and ~~Chairman~~was ~~("CW Navigation"), pledged one million one hundred thousand (1,~~issued 100,000) shares of ~~our~~ common stock ~~held by CW Navigation as security for our obligations under the Typenex Convertible Note and related documents~~. Pursuant to the Stock Pledge Agreement, in the event the value (determined based on the average closing trade price for our common stock) of the pledged shares, for the immediately preceding three trading days as of any applicable date of determination, declines below $900,000 it constitutes a default of the Typenex Convertible Note and CW Navigation is required to pledge additional shares to bring the total value of such pledged shares (as calculated above) to $900,000. Typenex also entered into a subordination agreement in favor our senior lender, Shadow Tree Capital Management, LLC ("Shadow Tree"), to subordinate the repayment of the Typenex Convertible Note to amounts owed by us to Shadow Tree.

As of October 31, 2015, we had repaid the note and all accrued interest. As of October 31, 2015, the Company had recognized the remaining discount of $142,165 into amortization expense of the note discount. The Company also recognized amortization of debt issue costs of $22,099.14

~~Vis~~For ~~Vires~~the ~~Group~~term ~~Convertible~~loan, the ~~Promissory~~Company ~~Note~~has fully recognized $28,488 of amortization expense of the note discount, with a net payable balance of $325,784, including the unamortized original issuance discount as of January 31, 2016.

~~On March 31, 2015, we sold Vis Vires Group, Inc.~~ (~~"Vis Vires"~~6) aTypenex ~~Convertible Promissory Note in the principal amount of $414~~Co-Investment,~~500~~ ~~(the~~LLC ~~"Vis Vires~~ Convertible Note"), pursuant to a Securities Purchase Agreement, dated and entered into on March 31, 2015. The Vis Vires Convertible Note bears interest at the rate of 8% per annum (22% upon an event of default) and is due and payable on April 2, 2016. The Vis Vires Convertible Note provides for customary events of default such as failing to timely make payments under the Vis Vires Convertible Note when due. Additionally, upon the occurrence of certain fundamental defaults, as described in the Vis Vires Convertible Note, we are required to repay Vis Vires liquidated damages in addition to the amount owed under the Vis Vires Convertible Note.

~~The~~On ~~principal~~March ~~amount~~5, of2015, we ~~the~~sold ~~Vis~~a ~~Vires~~Secured Convertible Promissory Note ~~and~~(the ~~all~~“Typenex ~~accrued~~March ~~interest~~2015 isConvertible ~~convertible~~Note”) atto Typenex Co-Investment, LLC (“Typenex”) in the ~~option~~amount of $350,000 pursuant to the ~~holder~~terms ~~thereof~~of ~~into~~a ~~our~~Securities ~~common~~Purchase ~~stock~~Agreement. atThe ~~any~~Typenex March ~~time~~2015 ~~following~~Convertible Note accrued interest at the ~~180th~~rate ~~day~~of ~~after~~10% per annum (22% upon the ~~Vis~~occurrence ~~Vires~~of ~~Convertible~~an ~~Note~~event of default) and was ~~issued.~~due ~~The~~and ~~conversion~~payable ~~price~~in offull ~~the~~on ~~Vis~~January ~~Vires~~5, 2016. The Typenex March 2015 Convertible Note isprovides ~~equal~~for tocustomary ~~the~~events ~~greater~~ of ~~(a)~~default. The ~~50%~~Typenex ~~multiplied~~March 2015 Convertible Note was forgiven by ~~the~~Typenex ~~average~~in connection with our sale of the ~~lowest~~Typenex ~~five~~Note ~~closing~~(described ~~bid~~below) on ~~prices~~October of16, ~~our~~2015. ~~common~~During ~~stock~~October, ~~during~~2015, the ~~fifteen~~Company ~~trading~~had ~~days~~recognized ~~immediately~~the ~~prior~~full todiscount ~~the~~of ~~date~~$142,165 ofinto ~~any~~amortization ~~conversion;~~expense ~~and~~of the ~~(b)~~note $0discount.~~00005.~~

~~The~~On ~~Vis~~October ~~Vires~~19, 2015, and effective October 16, 2015, we sold a Secured Convertible Promissory Note (the “Typenex Note”) to Typenex in the amount of $1,730,000 pursuant to the terms of a Securities Purchase Agreement. The Typenex Note included a $9475,~~500~~000 original ~~issue~~issuance discount and wealso ~~paid~~included $5,000 ofwhich ~~Vis~~went ~~Vires's~~to ~~attorney'~~pay Typenex’s legal fees in connection with the ~~sale~~transaction. Additionally, a total of $263,011 of the ~~Vis~~purchase ~~Vires~~price ~~Convertible~~of the Typenex Note ~~and~~was paid asby ~~such,~~way of the ~~net~~forgiveness ~~amount,~~by ~~before~~Typenex ~~our~~of ~~expenses,~~amounts ~~that~~owed weby ~~received~~us ~~upon~~to ~~sale~~Typenex ofunder the ~~Vis~~Typenex ~~Vires~~March 2015 Convertible Note ~~was~~in the original principal amount of $~~400~~350,000. As a result, we received a total of $986,990 in cash in connection with the sale of the Typenex Note.

13The Typenex Note is due on April 19, 2016 and no interest accrues on the Typenex Note unless an event of default occurs thereunder. The note is convertible into common stock, as discussed below, only if an event of default under the note occurs and is not cured pursuant to the terms of the note. Following an event of default, the note accrues interest at the rate of 22% per annum (subject to applicable usury laws) until paid in full. We have the right to pre-pay the Typenex Convertible Note prior to maturity, provided that we pay $1,492,500 on or before 90 days after the date the note is issued; $1,611,250 after 90 days, but before 135 days, after the note is issued; and the full amount of the note, $1,730,000, between the date that is 135 days after the note is issued and maturity.

~~Table~~The amounts owed under the Typenex Note were secured by a Stock Pledge Agreement (the “Pledge Agreement”) whereby CW Navigation, Inc., a Texas corporation, a significant shareholder of ~~Contents~~the Company, which is beneficially owned by Christopher Watts, the nephew of Kent P. Watts, our Chief Executive Officer and Chairman (“CW Navigation”), pledged two million one hundred thousand (2,100,000) shares of our common stock held by CW Navigation as security for our obligations under the Typenex Note and related documents. Pursuant to the Stock Pledge Agreement, in the event the value (determined based on the average closing trade price for our common stock) of the pledged shares, for the immediately preceding three trading days as of any applicable date of determination, declines below 1.5 times the then balance of the note (initially $2,595,000), at any time after November 1, 2015, it constitutes a default of the Typenex Note. From the date of funding until November 1, 2015 (and at any time thereafter at the request of Typenex), CW Navigation or its affiliates can pledge additional shares to bring the required value of the shares pledged above the minimum collateral value threshold or to over-collateralize the note. Subsequent to the closing, KW Navigation pledged an additional one million (1,000,000) collateral shares to Typenex under the Pledge Agreement to bring the required value of the shares pledged above the required minimum collateral value threshold. (See below for the release of the Pledged Shares to Typenex by the Company’s transfer agent, Fidelity Transfer Company on or about March 9, 2016.)

WeThe ~~are~~Typenex ~~required~~Note provides for customary events of default such as failing to ~~keep~~timely ~~reserved~~make ~~from~~payments under the Typenex Note when due, and including our ~~authorized~~failure to ~~but~~maintain ~~unissued~~a reserve of shares in connection with the conversion of ~~common~~the ~~stock~~Typenex 8Note ~~million~~equal to at least three times the number of shares of common stock that could be issuable ~~upon~~thereunder ~~conversion~~at any time (initially 3 million shares), failing to repay our senior creditor (Shadow Tree, as defined below) by the maturity date of the ~~Vis~~Typenex ~~Vires~~Note ~~Convertible~~or alternatively, failing to receive Shadow Tree’s consent to repay the Typenex Note at ~~all~~maturity ~~times~~in cash, and ifin wethe ~~fail~~event the value of the securities pledged pursuant to ~~keep~~the ~~such~~Pledge Agreement ~~amount~~(as ~~reserved~~discussed above) falls below the required value after November 1, 2015, subject where applicable to our ability to cure certain defaults. Additionally, it is ~~considered~~ an event of default under the ~~Vis~~note ~~Vires~~in ~~Convertible~~the ~~Note~~event we fail to repay all of our outstanding variable securities within 30 days of the date of the note (the “Variable Security Payment Date”) or in the event we have any outstanding variable securities after such Variable Security Payment Date.

At no time may the Vis Vires Convertible Note be converted into shares of our common stock if such conversion would result in Vis Vires and its affiliates owning an aggregate of in excess of 9.99% of the then outstanding shares of our common stock.15

WeAt ~~may~~any ~~prepay~~time infollowing an ~~full~~uncured event of default, Typenex has the ~~unpaid~~right to convert any or all of the outstanding principal ~~and~~amount ~~interest~~of the note into our common stock. The conversion price of the Typenex Note is 80% of the five lowest closing bid prices of our common stock on the 20 ~~Vis~~trading ~~Vires~~days ~~Convertible~~prior ~~Note~~to any conversion, ~~upon~~provided ~~notice~~that if the average of such closing bid prices is below $0.75 per share, the conversion rate is decreased by 5% (to 75%), and provided further that the conversion rate is decreased by an additional 5% if we are not DWAC eligible at any time ~~prior~~or DTC eligible at any time (for up to an aggregate of an additional 10% decrease in the ~~180th~~conversion rate). ~~day~~Finally, ~~after~~in the ~~issuance~~event ~~date.~~certain ~~Any~~defaults ~~prepayment~~(defined isas ~~subject~~major todefaults ~~payment~~under ofthe anote) ~~prepayment~~occur, ~~amount~~the ~~ranging~~conversion ~~from~~rate ~~110%~~may be decreased by up to ~~135~~an additional 15% (an additional 5% decrease in the conversion rate per the occurrence of the ~~then~~first ~~outstanding~~three ~~balance~~major ondefaults). Typenex also has the ~~Vis~~right ~~Vires~~upon ~~Convertible~~the ~~Note~~occurrence ~~(inclusive~~of an event of ~~accrued~~default ~~and~~to ~~unpaid~~require ~~interest~~us ~~and~~to ~~any~~repay in full the amount owed under the note by providing us written notice, subject to the terms of a subordination agreement entered into by Typenex in favor of our senior lender. Additionally, upon the occurrence of certain events of default ~~amounts~~as ~~then~~described ~~owing)~~in the Typenex Note, ~~depending~~we onare ~~when~~required to ~~such~~repay ~~prepayment~~Typenex isliquidated ~~made~~damages in addition to the amount owed under the Typenex Note.

AsAt no time may the Typenex Note be converted into shares of ~~October~~our ~~31,~~common ~~2015,~~stock weif ~~had~~such ~~repaid~~conversion ~~the~~would ~~note~~result in Typenex and ~~all~~its ~~accrued~~affiliates ~~interest~~owning an aggregate of in excess of 4.99% Asof the then outstanding shares of ~~October~~our ~~31,~~common ~~2015~~stock, ~~the~~provided ~~Company~~such ~~had~~percentage ~~recognized~~increases ~~the~~to ~~remaining~~9.99% if ~~discount~~our ofmarket capitalization is less than $610 million,~~351~~ ~~into~~and ~~amortization~~provided ~~expense~~further that Typenex may change such percentage from time to time upon not less than 61 days prior written notice to us. Additionally, and at no time may pledged shares be received by Typenex pursuant to the terms of the ~~note~~Pledge ~~discount.~~Agreement, ~~The~~which ~~Company~~would ~~also~~result ~~recognized~~in ~~amortization~~Typenex and its affiliates owning an aggregate of ~~debt~~in ~~issue~~excess of ~~costs~~9.99% of ~~$16,712~~the then outstanding shares of our common stock.

~~JMJ~~We ~~Convertible~~are ~~Promissory~~subject to various fees and penalties under the Typenex Note for our failure to timely deliver shares due upon any conversion. The Typenex Note also includes various restrictions on our ability to enter into subsequent variable rate security transactions following the date thereof.

OnTypenex ~~July~~also ~~28,~~entered into ~~2015, the Company sold JMJ Financial ("JMJ")~~ a ~~Convertible~~Subordination ~~Promissory~~Agreement ~~Note~~ in ~~the~~favor ~~principal amount~~ of upour tosenior $1lender,~~000,000~~ ~~(the~~Shadow ~~"JMJ~~Tree ~~Convertible~~Capital ~~Note"). The initial amount received in connection with the sale of the JMJ Convertible Note was $300~~Management,~~000,~~ ~~and~~LLC ~~the JMJ Convertible Note currently has a face amount of $373,333, as all amounts borrowed under the note include a 10% original issue discount. Moving forward, JMJ may loan us additional funds~~ (up“Shadow ~~to $900,000 in aggregate~~Tree”) ~~at our request~~, to ~~provided~~subordinate ~~that JMJ has~~ the ~~right~~repayment inof ~~its sole discretion to approve any future request for additional funding. Each advance under~~ the ~~JMJ~~Typenex ~~Convertible~~ Note isto ~~due~~amounts ~~two years from the date of such advance, with the $373,333 initially~~ owed ~~under~~by ~~the~~us ~~note~~to ~~due~~Shadow ~~on July 28, 2017~~Tree.

~~The~~On ~~JMJ~~November ~~Convertible~~25, ~~Note~~2015, ~~(including~~we ~~principal~~received ~~and~~a ~~accrued~~notice of ~~interest~~default ~~and~~from ~~where~~Typenex ~~applicable~~(the ~~other~~“Default ~~fees~~Notice”), iswhich ~~convertible~~we ~~into~~vehemently ~~our~~disagree ~~common~~with ~~stock,~~in ~~beginning~~every ~~180~~regard. ~~days~~The ~~after~~Default Notice ~~the~~alleged ~~date~~ the ~~note~~occurrence ~~was~~of ~~sold~~an ~~(January~~event ~~24,~~of ~~2016),~~default atunder the ~~lesser~~terms of ~~$1.23~~the ~~per~~Securities ~~share~~Purchase orAgreement ~~60%~~(the of“SPA”) and Typenex Note. Specifically, the ~~lowest~~Default ~~trading~~Notice ~~price~~alleged ofthat ~~our~~the ~~common~~Company’s ~~stock~~November in17, ~~the~~2015 25sale ~~trading~~of ~~days~~an ~~prior~~8% Short Term Cash Redeemable Note to ~~the~~Darling ~~date~~Capital, ofLLC ~~any~~(the ~~conversion~~“Darling Note”), ~~provided~~constituted ~~that~~a if‘variable wesecurity’ which ~~are~~therefore ~~not~~resulted ~~DWAC~~in ~~eligible~~a atbreach of the ~~time~~provisions of ~~any~~the ~~conversion~~SPA anand ~~additional~~Typenex ~~10%~~Note ~~discount~~because ~~applies,~~the ~~and~~Company indid not first receive the approval ~~event~~of ~~our~~Typenex ~~common~~for ~~stock~~such issale ~~not~~as ~~DTC~~required ~~eligible~~thereby atfor the ~~time~~Company’s sale of ~~any~~a ~~conversion,~~‘variable ansecurity’. ~~additional~~The 5%Default Notice ~~discount~~also ~~applies.~~seeks ~~The~~to ~~JMJ~~enforce ~~Convertible~~default interest on the Note ~~provides~~(22% ~~that~~per ~~unless~~annum); weto ~~and~~increase ~~JMJ~~the ~~agree~~balance inof ~~writing~~the Note by 15% (i.e., ~~JMJ~~by $259,500 isto ~~not~~a ~~eligible~~balance of $2,006,429) due to ~~convert~~the ~~any~~alleged ~~amount~~occurrence of the ~~note~~default; ~~into~~and further seeks to foreclose on 3.1 million shares of common stock ~~which~~of ~~would~~the ~~result~~Company inpledged ~~JMJ~~by ~~owning~~related ~~more~~parties ~~than~~to ~~4.99%~~secure ofamounts ~~our~~owed ~~common~~under ~~stock~~the Note (the “Pledged Shares”).

~~JMJ~~On ~~agreed~~November to30, ~~subordinate~~2015, ~~all~~the ~~amounts~~Company ~~owed~~received a todemand itnotice ~~under~~ (the ~~JMJ~~“Demand ~~Convertible~~Notice”) ~~Note~~from toTypenex formally requesting and demanding the ~~amounts~~payment weof ~~owe~~the to$2,006,429 alleged ~~our~~due ~~senior~~under ~~lender~~the Note by December 2, 2015.

AThe ~~one-time~~Company ~~interest~~disputes ~~charge~~the claim that an event of ~~12%~~default ~~was~~has ~~applied~~occurred under the SPA or the Note and further disputes and fails to acknowledge the ~~principal~~claims ~~amount~~and ofdemands made by Typenex in the Default Notice and Demand Notice. The Darling Note was not a ‘Variable Security’ as such security is not convertible unless or until such note is not repaid by the 180th day after the sale of such note and the Company therefore believes that the claims made by Typenex are invalid. Additionally, ~~which~~pursuant ~~remains~~to ~~payable~~a ~~regardless~~subordination agreement entered into between Typenex and the Agent, Typenex agreed not to make any demand for payment of amounts owed under the Note, commence any action to enforce the repayment of the Note (except pursuant to the terms of the subordination agreement, which requires among other things, 60 days prior notice by Typenex to the Agent), collect any collateral (other than pledged shares), or ~~conversion~~accept any payment of amounts owed under the Note (including principal, interest and other amounts due) ~~date~~unless in the form of common stock of the ~~note~~Company, until or unless amounts owed to the Creditors under the Credit Agreement are first satisfied in full.

As of October 31, 2015, the Company had recognized $3,268 of amortization expense of the note discount, with a net payable balance of $344,468 and unamortized debt discount of $28,865. We are amortizing these discounts over the term of the note using effective interest method.16

14On or about January 21, 2016, we and CW Navigation, Inc., which is controlled by Christopher Watts, one of our largest stockholders and the nephew of our Chief Executive Officer, Kent P. Watts, filed a Complaint and Demand for Arbitration in the state of Utah against Typenex and naming the escrow agent which holds the Pledged Shares, as well as our transfer agent, as parties thereto, seeking a temporary restraining order and preliminary injunction restraining the escrow agent from delivering the Pledged Shares to Typenex and our transfer agent from transferring the shares to Typenex, declaratory relief and damages for breach of contract as a result of Typenex’s assertion that an event of default occurred under the terms of the Typenex Note. We also alleged that Typenex’s claim for the Pledged Shares is inappropriate and without merit, and we intend to vigorously pursue this matter. Typenex has filed an answer to our complaint, alleging that our complaint fails to state a claim upon which relief may be granted, that the Darling Note constitutes a ‘variable security’, denying our other claims, raising various affirmative defenses, including alleging fraud, and raising counterclaims in the Arbitration Proceeding, alleging our breach (and various other parties’ breaches) of the various transaction documents, alleging our breach of implied covenant of good faith and fair dealing, seeking declaratory relief, an injunction and attorneys’ fees and court costs, all of which defenses and counterclaims the Company vehemently denies.

~~Table~~On March 9, 2016, the Company received correspondence from the Company’s transfer agent, Fidelity Transfer Company, regarding the release of ~~Contents~~the Pledged Shares to Typenex pursuant to the terms of the Pledge Agreement. Once released, such shares will be eligible to be freely sold in the marketplace pursuant to Rule 144. Notwithstanding the release of the shares by our transfer agent, we plan to continue to litigate the action with Typenex. The Company and CW Navigation, Inc. are currently in discussion with respect to the reimbursement obligations the Company has towards CW Navigation, Inc. in connection with the release of the Pledged Shares.

~~Christian~~The ~~Smith~~Company &currently ~~Jewell~~has ~~Convertible~~no intention of paying Typenex pursuant to the Demand Notice or otherwise or acknowledging that a default has occurred under the SPA or Note. Notwithstanding the above, the existence of the alleged defaults, and/or resources the Company may be forced to expend in connection with the Arbitration Proceeding, or defending itself against the allegations made by Typenex may negatively affect the Company or its cash flow, which may ultimately result in a decline in the value of the Company’s common stock.

OnAs ~~May 29, 2015, the Company entered into a revolving line~~ of ~~credit~~January ~~agreement with Christian Smith & Jewell~~31, 2016, the Company's ~~legal~~has ~~counsel.~~recognized ~~The line of credit established a revolving line of credit in the amount of up to~~ $~~350~~904,~~000~~825 ~~for legal fees due to the law firm, including $200,000 previously accrued. Advances~~ of ~~credit~~amortization ~~under~~expense ~~the line~~ of ~~credit are in~~ the ~~discretion~~note ~~of the law firm. Amounts subject to the line of credit are evidenced by individual convertible promissory notes~~discount, ~~which~~with ~~have~~a ~~customary~~net ~~events~~payable ofbalance ~~default, accrue interest at the rate~~ of ~~3% per annum (12% upon an event of default)~~$1, ~~are due on demand~~087, 320 and ~~are~~unamortized ~~convertible~~debt ~~(along~~discount ~~with accrued and unpaid interest) into shares~~ of ~~the Company's common stock at a conversion price of~~ $1642,680.17 ~~per~~We ~~share.~~are ~~Amounts~~amortizing ~~due~~these ~~can~~discounts beover ~~paid at any time without penalty, provided~~ the ~~Company~~term ~~gives at least 30 days prior notice~~ of ~~its~~the ~~intention~~note tousing ~~repay~~the ~~amounts~~effective ~~owed~~interest method. The ~~notes~~Company ~~each~~also ~~contain~~recognized ~~a 4.99% ownership limitation. In connection with the entry into the line of credit~~$3,333 ~~the Company issued the law firm a convertible promissory note~~ in ~~the~~amortization ~~amount~~ of ~~$200,000~~debt issue costs.

~~For~~(7) ~~the~~JSJ term loan, the Company has recognized $28,488 of amortization expense of the note discount, with a net payable balance of $442,784, including the unamortized original issuance discount as of October 31, 2015Investments Inc. ~~We are amortizing these discounts over the term of the note.~~Note

~~David~~On LNovember 9, 2015, we sold JSJ Investments Inc. ~~Gillespie~~(“JSJ”) ~~Unit~~an 8% Short Term Cash Redeemable Note (the “JSJ Note”) in the principal amount of $350,000. The JSJ Note accrues interest at the rate of 8% per annum and is payable on demand by JSJ at any time after November 9, 2016. We may prepay the JSJ note, together with accrued and unpaid interest, at any time prior to the 180th day after the issuance date (the “JSJ Pre-Payment Date”). Along with any prepayment, we are required to pay the following pre-payment penalties in addition to the principal amount then outstanding under the JSJ Note: until the 60th day after the issuance date, a premium of 25% of the principal amount of the note, in addition to outstanding interest; from the 61st day to the 120th day after the issuance date, premium of 35% of the principal amount of the note, in addition to outstanding interest; from the 121st day to the JSJ Pre-Payment Date, a premium of 45% of the principal amount of the note, in addition to outstanding interest; and after the JSJ Pre-Payment Date, a premium of 50% of the then outstanding principal amount of the note, plus accrued interest (provided that after the JSJ Pre-Payment Date the JSJ Note can only be prepaid with the written consent of JSJ). Upon the occurrence of any event of default under the JSJ Note the amounts due thereunder accrue interest at the rate of 18% per annum. JSJ agreed not to sell short any shares of our common stock so long as the JSJ Note is outstanding.

~~Effective~~If onwe ~~July~~fail ~~15,~~to ~~2015,~~ prepay the ~~Company~~JSJ ~~sold~~Note ~~David~~prior ~~Gillespie,~~to ~~0.5~~the ~~Unit~~JSJ ~~for~~Pre-Payment anDate, ~~aggregate~~JSJ ~~purchase~~has ~~price~~the ofright ~~$50,000,~~to ~~with~~convert ~~each~~the ~~Unit~~principal ~~consisting~~and ofaccrued ~~(a)~~interest ~~25,000~~owed ~~shares~~under ofsuch note ~~the~~into ~~restricted~~our common stock ofat ~~the~~a ~~Company~~40% ~~(the~~discount ~~"Shares");~~to ~~and~~the ~~(b)~~lowest ~~$100,000~~trading inprice ~~face~~of ~~amount~~our ofcommon ~~Convertible~~stock ~~Subordinated~~during ~~Promissory~~the ~~Notes~~15 ~~(each~~trading adays ~~"Note")~~prior to conversion. ~~The~~Notwithstanding ~~Note~~the ~~was~~foregoing, ~~convertible~~there ~~into~~is ~~common~~an ~~stock~~initial soft floor of ~~the~~$0.30 ~~Company~~per atshare ~~any~~on ~~time~~conversions, atwhich ~~Mr.~~means ~~Gillespie's~~that ~~option~~in the atevent aour ~~conversion~~common ~~price~~stock ofcloses below $40.30 per share, ~~and~~then ~~was~~the ~~automatically~~holder ~~convertible~~may ~~into~~not ~~shares~~convert ofits ~~Series~~note Bfor ~~Convertible~~the ~~Preferred~~10 ~~Stock~~trading ofdays immediately preceding the ~~Company~~first ~~upon~~time ~~designation~~the ofprice ~~such~~closes ~~Series~~below B$0.30 ~~Convertible~~per ~~Preferred~~share. ~~Stock~~However, ~~with~~in the ~~Secretary~~event ofthe ~~State~~price of ~~Nevada~~our ~~which~~common ~~occurred~~stock oncloses ~~September~~above $0.30 ~~28,~~per ~~2015.~~share ~~The~~in ~~Note~~that ~~accrued~~10 ~~interest~~day ~~(prior~~period, tothe ~~its~~holder ~~automatic~~may ~~conversion~~convert, ~~into~~without ~~Series~~waiting Bthe ~~Preferred~~balance ~~Stock),~~of ~~quarterly~~the in10 ~~arrears~~days. Additionally, ~~which~~following the ~~accrued~~10 ~~interest~~day isperiod, ~~added~~the toholder ~~the~~has ~~principal~~a ~~balance~~three ofday ~~the~~grace ~~Note.~~period ~~The~~to ~~interest~~convert, ~~rate~~even ofif the ~~Note~~common ~~was~~stock ~~equal~~closes tobelow the ~~average~~next oflower ~~the~~soft floor ~~closing~~level ~~spot~~(as ~~prices~~described ~~for~~in ~~West~~the ~~Texas~~following ~~Intermediate~~sentence). ~~crude~~This ~~oil~~process onis ~~each~~repeated ~~trading~~with ~~day~~soft ~~during~~floors ~~the~~of ~~immediately~~$0.15 ~~prior~~per ~~calendar~~share ~~quarter~~and ~~divided~~$0.075 byper share. ~~ten,~~At ~~plus~~no ~~two~~time (may the ~~"WTI~~JSJ ~~Interest~~Note ~~Rate"),~~be ~~provided~~converted ~~that~~into inshares ~~the~~of ~~event~~our ~~that~~common ~~the~~stock ~~average~~if ~~quarterly~~such ~~closing~~conversion ~~spot~~would ~~price~~result isin ~~$40~~JSJ orand ~~less,~~its affiliates ~~the~~owning ~~WTI~~an ~~Rate~~aggregate ~~for~~of ~~the~~in ~~applicable~~excess ~~following~~of ~~quarter~~4.9% is(which 0%may be increased to 9.99% ~~Any~~with ~~amounts~~written ~~not~~notice ~~paid~~from ~~under~~JSJ, ~~the~~provided ~~Note~~such increase ~~when~~will ~~due~~not ~~accrue~~take ~~interest~~effect for at ~~the~~least ~~rate~~61 days) of ~~12%~~the ~~per~~then ~~annum~~outstanding ~~until~~shares ~~paid~~of inour ~~full~~common stock.

As of October 31, 2015, Convertible Promissory Notes with a principal amount of $50,000 have been fully converted into 50 shares of Series B Convertible Preferred Stock for $1,000 per share. The Company has immediately recognized $17~~,282 of amortization expense of the note discount upon conversion.~~

~~Typenex~~We ~~Co-Investment~~are subject to fees, ~~LLC~~penalties ~~Convertible~~and in some cases liquidated damages for our failure to comply with the terms of the JSJ Note. The JSJ Note provides for customary events of default such as failing to timely make payments under the JSJ Note when due, and including our failure to maintain a reserve of shares in connection with the conversion of the JSJ Note as provided in the JSJ Note, us becoming delinquent in our periodic filings with the SEC, and if OTC Markets changes our designation to ‘No Information’ (Stop Sign), ‘Caveat Emptor’ (Skull and Crossbones), or ‘OTC’, ‘Other OTC’ or ‘Grey Market’ (Exclamation Mark Sign). Upon the occurrence of an event of default, JSJ can declare the entire amount of the JSJ Note immediately due and payable, together in the event of certain defaults, with additional penalties or liquidated damages.

OnPursuant ~~October~~to ~~19,~~a ~~2015,~~side letter ~~and~~entered ~~effective~~into ~~October~~with 16JSJ, ~~2015,~~JSJ weagreed ~~sold~~to agrant ~~Secured~~us ~~Convertible~~an ~~Promissory~~option ~~Note~~for ~~(the~~three ~~"Typenex~~30 ~~Note")~~day toconversion ~~Typenex~~moratorium ~~Co-Investment~~periods, ~~LLC~~with ~~("Typenex")~~the infirst period beginning on the ~~amount~~JSJ ofPre-Payment $1Date,~~730,000.~~ ~~The~~and ~~Typenex~~the ~~Note~~next ~~was~~two ~~issued~~beginning ~~pursuant~~30 todays ~~the~~and ~~terms~~60 ofdays, arespectively, ~~Securities~~after ~~Purchase~~the ~~Agreement~~end ~~dated as~~ of ~~the~~such ~~same date~~first period. ~~The~~We ~~Typenex~~are ~~Note~~able ~~included~~to aexercise ~~$475,000~~the ~~original~~options ~~issuance~~for ~~discount~~conversion ~~and~~moratoriums ~~also~~by ~~included~~notifying ~~$5,000~~JSJ ~~which~~no ~~went~~later tothan ~~pay~~10 ~~Typenex's~~trading ~~legal~~days ~~fees~~prior ~~in connection with~~ to the ~~transaction.~~JSJ ~~Additionally,~~Pre-Payment aDate ~~total~~(or ~~of $263~~thereafter,~~011~~ of the ~~purchase~~end ~~price~~ of the ~~Typenex~~next ~~Note~~applicable ~~was~~conversion ~~paid~~moratorium byperiod) ~~way~~and ~~of the forgiveness~~ by ~~Typenex~~paying ~~of amounts owed by us to Typenex under a Secured Convertible Promissory Note in~~ the ~~original~~applicable investor(s) between ~~principal~~$25,000 ~~amount~~and of $~~350~~35,000 ~~which~~(depending weon ~~sold~~the toapplicable ~~Typenex~~extension inperiod) prior ~~March~~to ~~2015~~five ~~(provided~~trading days before the ~~warrants~~end ~~granted~~of tothe ~~Typenex~~then incurrent ~~connection~~period (with the ~~prior~~first ~~March~~such ~~2015~~payment ~~transaction~~due ~~remain~~at ~~outstanding).~~least Asfive atrading ~~result,~~days weprior ~~received~~to ~~a total of $986,990 in cash in connection with~~ the ~~sale~~Pre-Payment ~~of the Typenex Note~~Date).

~~The~~JSJ ~~Typenex~~also ~~Note~~entered isinto a ~~due~~Subordination onAgreement ~~April~~in ~~19,~~favor ~~2016 and no interest accrues on the Typenex Note unless an event~~ of ~~default~~our ~~occurs~~senior ~~thereunder.~~lender, ~~The~~Shadow ~~note~~Tree isCapital ~~convertible into common stock~~Management, ~~as discussed below~~LLC, ~~only if an event of default under the note occurs and is not cured pursuant~~ to ~~the~~subordinate ~~terms of~~ the ~~note.~~repayment ~~Following an event~~ of ~~default,~~ the JSJ ~~note~~Note ~~accrues interest at the rate of 22% per annum (subject~~ to ~~applicable~~amounts ~~usury~~owed ~~laws)~~by ~~until~~us ~~paid in full. We have the right~~ to ~~pre-pay~~Shadow the Typenex Convertible Note prior to maturity, provided that we pay $1,492,500 on or before 90 days after the date the note is issued; $1,611,250 after 90 days, but before 135 days, after the note is issued; and the full amount of the note, $1,730,000, between the date that is 135 days after the note is issued and maturityTree.

15The Company also recognized $7,143 in amortization of debt issue costs. We are amortizing it over the term of the note.

~~Table~~(8) ofDarling ~~Contents~~Capital, LLC Note

~~The~~On ~~amounts~~November ~~owed~~17, ~~under~~2015, the Company sold Darling Capital, LLC (“Darling”) an 8% Short Term Cash Redeemable Note (the ~~Typenex~~“Darling Note”) in the principal amount of $200,000. The Darling Note ~~were~~accrues ~~secured~~interest byat athe ~~Stock~~rate ~~Pledge~~of ~~Agreement~~8% per annum (22% upon the occurrence ~~"Pledge~~of ~~Agreement"~~an event of default) ~~whereby~~and CWis ~~Navigation~~payable on September 12, ~~Inc.~~2016, aprovided ~~Texas~~that ~~corporation,~~we ahave ~~significant~~the ~~shareholder~~option ofto extend the ~~Company,~~maturity date ~~which~~of isthe ~~beneficially~~note ~~owned~~for byan ~~Christopher~~additional ~~Watts,~~nine months in the ~~nephew~~event we provide Darling at least 30 days’ notice of ~~Kent~~our Pintention to extend such maturity date. ~~Watts,~~In ~~our~~the ~~Chief~~event ~~Executive~~we ~~Officer~~do not prepay the Darling note, together with accrued and ~~Chairman~~unpaid interest, on or prior to the 180th day after the issuance date (~~"CW~~the ~~Navigation"~~“Darling Pre-Payment Date”), ~~pledged~~together ~~two~~with ~~million~~the ~~one~~pre-payment penalties ~~hundred~~described ~~thousand (2~~below,~~100,000)~~ ~~shares~~Darling ofhas ~~our~~the ~~common~~right ~~stock~~to ~~held~~convert bythe CWprincipal ~~Navigation~~and asaccrued ~~security~~interest ~~for~~owed under such note into our ~~obligations~~common stock. ~~under~~The conversion price for such conversions is the ~~Typenex~~greater ~~Note~~of ~~and~~a ~~related~~40% ~~documents.~~discount ~~Pursuant~~(subject to ~~the~~additional ~~Stock~~10% ~~Pledge~~discounts ~~Agreement,~~ in the event we ~~the~~become ~~value~~subject ~~(determined~~to ~~based~~a DTC “chill” or there is not current available information regarding the Company on OTC Markets and further adjustments during the ~~average~~occurrence of certain major announcements), to the lowest closing ~~trade~~bid price for our common stock) ofduring the ~~pledged~~15 ~~shares,~~trading ~~for~~days ~~the~~ immediately preceding ~~three~~a ~~trading~~conversion ~~days~~request as(the of“Market ~~any~~Price”) ~~applicable~~and $0.001 ~~date~~per ofshare. ~~determination,~~Notwithstanding ~~declines~~the ~~below~~above, ~~1.5~~in ~~times~~the event the ~~then~~Market ~~balance~~Price ofon the ~~note~~date (~~initially $2,595,000~~i), atthe ~~any~~conversion ~~time~~shares ~~after~~are ~~November~~transferred to 1,and ~~2015,~~deposited into Darling’s brokerage account and (ii) Darling’s broker has confirmed that it ~~constitutes~~can aexecute ~~default~~trades, is oflower than the ~~Typenex~~Market ~~Note.~~Price ~~From~~on the date of ~~funding~~conversion, ~~until~~the ~~November~~conversion 1,price ~~2015~~is (adjusted to such lower price and atadditional ~~any~~shares are ~~time~~required ~~thereafter~~to atbe issued to the ~~request~~holder. Notwithstanding the foregoing, there is an initial soft floor of ~~Typenex)~~$0.30 per share on conversions, which CWmeans ~~Navigation~~that orin the event our common stock closes below $0.30 per share, then the holder may not convert its ~~affiliates~~note ~~can~~for ~~pledge~~the ~~additional~~10 trading ~~shares~~days toimmediately ~~bring~~preceding the ~~required~~first ~~value~~time ofthe price closes below $0.30 per share. However, in the ~~shares~~event ~~pledged~~the price of our common stock closes above $0.30 per share in that 10 day period, the ~~minimum~~holder ~~collateral~~may ~~value~~convert, ~~threshold~~without orwaiting tothe ~~over-collateralize~~balance of the ~~note~~10 days. ~~Subsequent~~Additionally, tofollowing the ~~closing~~10 day period, KWthe ~~Navigation~~holder has ~~pledged~~a anthree ~~additional~~day ~~one~~grace ~~million~~period (1to convert,~~000,000)~~ ~~collateral~~even ~~shares~~if tothe ~~Typenex~~common ~~under~~stock closes below the ~~Pledge~~next ~~Agreement~~lower tosoft ~~bring~~floor level (as described in the ~~required~~following ~~value~~sentence). This process is repeated with soft floors of $0.15 per share and $0.075 per share. At no time may the Darling Note be converted into shares ~~pledged~~of ~~above~~our common stock if such conversion would result in Darling and its affiliates owning an aggregate of in excess of 9.9% of the ~~required~~then ~~minimum~~outstanding ~~collateral~~shares ~~value~~of ~~threshold~~our common stock.

The Typenex Note provides for customary events of default such as failing to timely make payments under the Typenex Note when due, and including our failure to maintain a reserve of shares in connection with the conversion of the Typenex Note equal to at least three times the number of shares of common stock that could be issuable thereunder at any time (initially 3 million shares), failing to repay all of our currently outstanding variable rate convertible securities within thirty days of the date of the note, failing to repay our senior creditor (Shadow Tree, as defined below) by the maturity date of the Typenex Note or alternatively, failing to receive Shadow Tree's consent to repay the Typenex Note at maturity in cash, and in the event the value of the securities pledged pursuant to the Pledge Agreement (as discussed above) falls below the required value after November 1, 2015, subject where applicable to our ability to cure certain defaults. Additionally, it is an event of default under the note in the event we fail to repay all of our outstanding variable securities within 30 days of the date of the note (the "Variable Security Payment Date") or in the event we have any outstanding variable securities after such Variable Security Payment Date.18

AtAlong with any ~~time~~prepayment, we ~~following~~are anrequired ~~uncured~~to ~~event~~pay ofthe ~~default,~~following ~~Typenex~~pre-payment ~~has~~penalties ~~the~~in ~~right~~addition to ~~convert any or all of~~ the ~~outstanding~~ principal amount ofand ~~the~~interest ~~note~~then ~~into~~outstanding ~~our common stock. The conversion price of~~ under the ~~Typenex~~Darling Note: isuntil ~~80% of~~ the ~~five~~60th ~~lowest~~day ~~closing~~after ~~bid prices of our common stock on~~ the 20issuance ~~trading days prior to any conversion~~date, ~~provided~~a ~~that~~premium ifof ~~the~~15% ~~average~~ of ~~such~~the ~~closing~~principal ~~bid~~amount ~~prices~~and isinterest ~~below~~owed ~~$0.75~~on ~~per~~the note; ~~share,~~from the ~~conversion~~61st ~~rate~~day ~~is decreased by 5% (~~to ~~75%),~~the ~~and~~120th ~~provided~~day ~~further~~after ~~that~~ the ~~conversion~~issuance ~~rate~~date, isa ~~decreased~~premium byof ~~an additional 5~~35% ~~if we are not DWAC eligible at any time or DTC eligible at any time (for up to an aggregate~~ of ~~an additional 10% decrease in~~ the ~~conversion~~principal ~~rate).~~amount ~~Finally,~~and ininterest ~~the~~owed ~~event certain defaults (defined as major defaults under~~ on the note); ~~occur,~~from the ~~conversion~~121st ~~rate~~day ~~may~~to bethe ~~decreased~~Darling byPre-Payment upDate, toa anpremium ~~additional~~of 1545% ~~(an additional 5% decrease in the conversion rate per the occurrence~~ of the ~~first~~principal ~~three~~amount ~~major~~and ~~defaults).~~interest ~~Typenex~~owed ~~also~~on ~~has~~ the note; ~~right~~and ~~upon~~after the ~~occurrence~~Darling ofPre-Payment anDate, ~~event~~no ofprepayment ~~default~~can tobe ~~require~~made usof ~~to repay in full~~ the ~~amount~~Darling ~~owed~~Note ~~under~~without the ~~note~~prior ~~by providing us~~ written ~~notice, subject to the terms~~ approval of aDarling. ~~subordination~~Darling ~~agreement~~agreed ~~entered~~not ~~into~~to bysell ~~Typenex~~short inany ~~favor~~shares of our ~~senior~~common ~~lender.~~stock ~~Additionally,~~so ~~upon~~long ~~the occurrence of certain events of default~~ as ~~described in~~ the ~~Typenex~~Darling Note, weis ~~are required to repay Typenex liquidated damages in addition to the amount owed under the Typenex Note~~outstanding.

AtWe noare ~~time~~subject ~~may~~to fees, ~~the~~penalties ~~Typenex~~and ~~Note~~in besome ~~converted~~cases ~~into~~liquidated ~~shares~~damages offor our ~~common~~failure ~~stock~~to ifcomply ~~such~~with ~~conversion~~the ~~would~~terms ~~result~~of inthe ~~Typenex~~Darling ~~and~~Note. ~~its~~The ~~affiliates~~Darling Note ~~owning~~provides anfor ~~aggregate~~customary events of indefault ~~excess~~such ofas ~~4.99%~~failing ofto ~~the~~timely ~~then~~make ~~outstanding~~payments ~~shares~~under ofthe ~~our~~Darling ~~common~~Note ~~stock~~when due, ~~provided~~and ~~such~~including our ~~percentage~~failure ~~increases~~ to ~~9.99%~~maintain ifa ~~our~~reserve ~~market~~of ~~capitalization~~shares isin ~~less~~connection ~~than~~with ~~$10~~the ~~million,~~conversion ~~and~~of the Darling Note as provided ~~further~~in ~~that~~the ~~Typenex~~Darling ~~may~~Note, us ~~change~~becoming ~~such~~delinquent ~~percentage~~in ~~from~~our ~~time~~periodic tofilings ~~time~~with ~~upon~~the ~~not~~SEC, ~~less~~and ~~than~~if 61OTC ~~days~~Markets ~~prior~~changes ~~written~~our ~~notice~~designation to ~~us.~~‘No ~~Additionally~~Information’ (Stop Sign), ~~and~~or atyield. noUpon ~~time~~the ~~may~~occurrence ~~pledged~~of ~~shares~~an beevent ~~received~~of bydefault, ~~Typenex~~Darling ~~pursuant~~can todeclare the ~~terms~~entire amount of the ~~Pledge~~Darling ~~Agreement,~~Note ~~which~~immediately due ~~would~~and ~~result~~payable, intogether ~~Typenex~~with ~~and~~additional ~~its~~penalties ~~affiliates~~and ~~owning~~liquidated andamages ~~aggregate~~as ofdescribed in ~~excess~~further ofdetail ~~9.99%~~in of the ~~then~~Darling ~~outstanding shares of our common stock~~Note.

WePursuant ~~are~~to ~~subject~~a side letter entered into with Darling, Darling agreed to ~~various~~grant ~~fees~~us an option for three 30 day conversion moratorium periods, with the first period beginning on the Darling Pre-Payment Date, and ~~penalties~~the ~~under~~next two beginning 30 days and 60 days, respectively, after the end ~~Typenex~~of ~~Note~~such first period. We are able to exercise the options for ~~our~~conversion ~~failure~~moratoriums by notifying Darling no later than 10 trading days prior to ~~timely~~the ~~deliver~~Darling ~~shares~~Pre-Payment ~~due~~Date ~~upon~~(or ~~any~~thereafter, ~~conversion.~~the ~~The~~end ~~Typenex~~of ~~Note~~the ~~also~~next ~~includes~~applicable ~~various~~conversion ~~restrictions~~moratorium onperiod) and ~~our~~by ~~ability~~paying Darling $20,000 prior to ~~enter~~five ~~into~~trading ~~subsequent~~days ~~variable~~before ~~rate~~the ~~security~~end ~~transactions~~of ~~following~~the then current period (with the ~~date~~first ~~thereof~~such payment due at least five trading days prior to the Pre-Payment Date).

16Darling also entered into a Subordination Agreement in favor of our senior lender, Shadow Tree, to subordinate the repayment of the Darling Note to amounts owed by us to Shadow Tree.

~~Table~~The Company also recognized $3,672 in amortization of ~~Contents~~debt issue costs. We are amortizing it over the term of the note.

~~Typenex also entered into a Subordination Agreement in favor of our senior lender, Shadow Tree Capital Management, LLC~~ (~~"Shadow Tree"~~9), toJMJ ~~subordinate~~Convertible ~~the~~Promissory ~~repayment of the Typenex~~ Note ~~to amounts owed by us to Shadow Tree.~~

AsOn ofJuly ~~October 31~~28, 2015, the Company ~~has~~sold ~~recognized~~JMJ ~~$126,844~~Financial of(“JMJ”) ~~amortization~~a ~~expense~~Convertible ofPromissory ~~the~~Note ~~note~~in ~~discount,~~the ~~with~~principal aamount ~~net payable balance~~ of ~~$309,339~~up ~~and~~to ~~unamortized debt discount of~~ $1,~~420~~000,~~661~~000 (the “JMJ Convertible Note”). WeThe ~~are~~initial ~~amortizing~~amount ~~these~~received ~~discounts~~in ~~over~~connection with the ~~term~~sale of the ~~note~~JMJ ~~using~~Convertible Note was $300,000, and the ~~effective~~JMJ ~~interest~~Convertible ~~method.~~Note ~~The~~currently ~~Company~~has ~~also~~a ~~recognized~~face amount of $17373,~~516~~333, inas ~~amortization~~all ofamounts ~~debt~~borrowed under the note include a 10% original issue ~~costs~~discount.

~~Brian~~During ~~Kenny Convertible~~the ~~Promissory~~quarter ended ~~Note~~January 31, 2016, we repaid the note and all accrued interest. As of January 31, 2016, the Company had recognized the full discount of $32,133 into amortization expense and full amortization of debt issue costs for $30,000.

Effective on July 28, 2015, the Company owed Brian Kenny, the aggregate principal amount of $32,500, which accrued interest at 12% per annum. The maturity date of this convertible note is July 31, 2017. At any time prior to the earlier of the payment in full by the Company and the conversion in full, the outstanding amount of this convertible note can be converted into restricted shares of common stock of the Company at the conversion price of $0.75 per share. The outstanding amount of this convertible note will be converted automatically on the condition that the closing sales price of the Company’s common stock is equal to at least the trading price for a period of at least twenty (2010) ~~days~~David ~~out~~L. ofGillespie Unit ~~any consecutive thirty (30) trading days.~~Note

~~For~~Effective ~~the~~on ~~term~~July 15, ~~loan~~2015, the Company ~~has~~sold ~~recognized~~David Gillespie, 0.5 Unit for an aggregate purchase price of $450,~~074~~000, with each Unit consisting of ~~amortization~~(a) ~~expense~~25,000 shares of the ~~debt~~restricted ~~discount~~common stock of the Company (the “Shares”); and (b) $100,000 ~~with~~in face amount of Convertible Subordinated Promissory Notes (each a ~~net~~“Note”). ~~payable~~Effective ~~balance~~on September 28, 2015, with the Company’s designation of $4its Series B Convertible Preferred Stock,~~206~~ ~~and~~the Notes ~~unamortized~~received ~~debt~~by ~~discount~~David L. Gillespie were converted into 50 shares of Series B Convertible Preferred Stock. The Company recognized $2817,~~294~~282 asof amortization expense of ~~October~~the ~~31,~~note ~~2015~~discount upon conversion.

~~Convertible Subordinated Promissory Note Offering~~19

~~From~~(11) ~~August~~Brian ~~to September 2015, the Company sold $1,745,832 in~~ Kenny Convertible ~~Subordinated~~ Promissory Notes (including $83,333 in notes sold to Clint Summers who was a director of the Company from September 7, 2015 until his untimely death shortly thereafter; $100,000 to the Company's director, S. Chris Herndon; and $516,667 to entities owned or controlled by Kent P. Watts, the Company's Chief Executive Officer and Chairman). The notes are due two years from their issuance date, accrue interest which is payable quarterly in arrears, at either a cash interest rate (equal to the WTI Rate described below) or a stock interest rate (12% per annum)(at the option of each holder at the beginning of each quarter), provided no principal or interest can be paid in cash until all amounts owed by the Company to its senior lender is paid in full. In the event the stock interest rate is chosen by the holder, restricted shares of common stock equal to the total accrued dividend divided by the average of the closing sales prices of the Company's common stock for the applicable quarter are required to be issued in satisfaction of amounts owed on a quarterly basis. In the event the cash interest rate is chosen, interest accrues until converted into common stock (as discussed below) or until the Company is able to pay such accrued interest in cash pursuant to the terms of the note. The "WTI Rate" equals an annualized percentage interest rate equal to the average of the closing spot prices for West Texas Intermediate crude oil on each trading day during the immediately prior calendar quarter divided by ten, plus two (the "WTI Interest Rate"). For example, if the average quarterly closing spot Price was $60 for the prior quarter, the applicable interest rate for the next quarter would be 8% per annum ($60 / 10 = 6 + 2 = 8%). Notwithstanding the above, in the event that the average quarterly closing spot price is $40 or less, the WTI Rate for the applicable following quarter is 0%. All principal and accrued interest on the notes are convertible into common stock at a conversion price of $0.75 per share at any time. Additionally, the Company may force the conversion of the notes into common stock in the event the trading price of the Company's common stock is equal to at least $5.00 per share for at least 20 out of any 30 consecutive trading days. Any shares of common stock issuable upon conversion of the notes are subject to a lock-up whereby no shares of common stock can be sold until January 1, 2016, and no more than 2,500 shares of common stock can be sold per day thereafter until the Company's common stock is listed on the NASDAQ or NYSE market or the trading volume of the Company's common stock is in excess of 100,000 shares per day. The notes have standard and customary events of default.Note

AsEffective ofon ~~October 31~~July 28, 2015, the Company ~~has~~owed ~~recognized~~Brian ~~$135~~Kenny,~~910~~ the aggregate principal amount of ~~amortization~~$32,500, ~~expense~~which accrued interest at 12% per annum. The maturity date of ~~the~~this convertible note ~~discount~~is July 31, ~~with~~2017. aAt ~~net~~any ~~payable~~time ~~balance~~prior to the earlier of ~~$135,910~~the payment in full by the Company and ~~unamortized~~the ~~debt~~conversion ~~discount~~in full, the outstanding amount of this convertible note can be converted into restricted shares of common stock of the Company at the conversion price of $~~1,487,716~~0.75 Weper ~~are~~share. ~~amortizing~~The ~~these~~outstanding ~~discounts~~amount ~~over~~of this convertible note will be converted automatically on the ~~term~~condition that the closing sales price of the ~~note~~Company’s ~~using~~common stock is equal to at least the ~~effective~~trading ~~interest~~price ~~method~~for a period of at least twenty (20) days out of any consecutive thirty (30) trading days.

~~Note 7~~For –the ~~Fair~~term ~~Value~~loan, the Company has recognized $8,074 of amortization expense of the debt discount, with a net payable balance of $8,280 and unamortized debt discount of $24,220 as of January 31, 2016.

As(12) ~~defined~~Convertible inSubordinated ~~FASB~~Promissory Note ASC Topic 820, fair value is the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This Topic requires disclosure that establishes a framework for measuring fair value and expands disclosure about fair value measurements. The statement requires fair value measurements be classified and disclosed in one of the following categories:Offering

~~Level~~From August to September 2015, the Company sold $1:,745,832 ~~Unadjusted~~in ~~quoted~~Convertible ~~prices~~Subordinated Promissory Notes (including $83,333 in ~~active~~notes ~~markets~~sold ~~that~~to Clint Summers who was a director of the Company from September 7, 2015 until his untimely death shortly thereafter; $100,000 to the Company’s director, S. Chris Herndon; and $516,667 to entities owned or controlled by Kent P. Watts, the Company’s Chief Executive Officer and Chairman). The notes are ~~accessible~~due two years from their issuance date, accrue interest which is payable quarterly in arrears, at either a cash interest rate (equal to the ~~measurement~~WTI ~~date~~Rate ~~for~~described ~~identical~~below) or a stock interest rate (12% per annum)(at the option of each holder at the beginning of each quarter), ~~unrestricted~~provided ~~assets~~no principal or ~~liabilities~~interest can be paid in cash until all amounts owed by the Company to its senior lender are paid in full. ~~The~~In the event the stock interest rate is chosen by the holder, restricted shares of common stock equal to the total accrued dividend divided by the average of the closing sales prices of the Company’s ~~considers~~common stock ~~active~~for ~~markets~~the applicable quarter are required to be issued in satisfaction of amounts owed on a quarterly basis. In the event the cash interest rate is chosen, interest accrues until converted into common stock (as ~~those~~discussed below) or until the Company is able to pay such accrued interest in ~~which~~cash ~~transactions~~pursuant to the terms of the note. The “WTI Rate” equals an annualized percentage interest rate equal to the average of the closing spot prices for West Texas Intermediate crude oil on each trading day during the ~~assets~~immediately orprior ~~liabilities~~calendar ~~occur~~quarter divided by ten, plus two (the “WTI Interest Rate”). For example, if the average quarterly closing spot Price was $60 for the prior quarter, the applicable interest rate for the next quarter would be 8% per annum ($60 / 10 = 6 + 2 = 8%). Notwithstanding the above, in ~~sufficient~~the ~~frequency~~event that the average quarterly closing spot price is $40 or less, the WTI Rate for the applicable following quarter is 0%. All principal and ~~volume~~accrued interest on the notes are convertible into common stock at a conversion price of $0.75 per share at any time. Additionally, the Company may force the conversion of the notes into common stock in the event the trading price of the Company’s common stock is equal to ~~provide~~at ~~pricing~~least ~~information~~$5.00 per share for at least 20 out of any 30 consecutive trading days. Any shares of common stock issuable upon conversion of the notes are subject to a lock-up whereby no shares of common stock could be sold until January 1, 2016, and no more than 2,500 shares of common stock can be sold per day thereafter until the Company’s common stock is listed on anthe ~~ongoing~~NASDAQ ~~basis~~or NYSE market or the trading volume of the Company’s common stock is in excess of 100,000 shares per day. The notes have standard and customary events of default.

~~Level~~As 2:of ~~Pricing~~January ~~inputs~~31, 2016, ~~other~~the ~~than~~Company ~~quoted~~has ~~market~~recognized ~~prices~~$355,632 ~~included~~of inamortization ~~Level~~expense ~~1 that are based on observable market data and are directly or indirectly observable for substantially the full term~~ of the ~~asset~~note ordiscount, ~~liability.~~with ~~These~~a ~~include~~net ~~quoted~~payable ~~market~~balance ~~prices~~of ~~for similar assets or liabilities~~$355,631 and ~~quoted~~unamortized ~~market~~debt ~~prices~~discount ~~for~~of ~~identical or similar assets in markets that are not active~~$1, ~~adjusted quoted market prices~~390,201. ~~inputs~~We ~~from~~are ~~observable~~amortizing ~~data~~these ~~such~~discounts asover ~~interest~~the ~~rate~~term ~~and~~of ~~yield~~the ~~curves,~~note ~~volatilities~~using orthe ~~default~~effective ~~rates observable at commonly quoted intervals, or inputs derived from observable market data by correlation or other means~~interest method.

17(13) Adar Bays, LLC and Union Capital, LLC Notes

~~Table~~On November 9, 2015, we sold each of ~~Contents~~Adar Bays, LLC (“Adar”) and Union Capital, LLC (“Union”), identical 8% Short Term Cash Redeemable Notes (collectively, the “Initial Notes”) in the amount of $208,000 ($416,000 in aggregate) pursuant to the terms of Securities Purchase Agreements. In addition to the Initial Notes, we sold Adar and Union each another secured note in the amount of $208,000 each ($416,000 in aggregate)(the “Second Notes”). The purchase price of the Initial Notes was paid in cash at closing (November 10, 2015), and the purchase price of the Second Notes was each paid by way of the issuance of an offsetting $208,000 secured note issued to us by each of Adar and Union (the “Buyer Notes”). Pursuant to the Securities Purchase Agreements, Adar and Union each agreed not to sell short any shares of our common stock so long as each purchaser’s Initial Note or Second Note is outstanding. In connection with the sale of the Initial Notes, we paid $16,000 in legal fees ($8,000 to each investor) and paid $30,000 in due diligence fees ($15,000 per Initial Note), provided that substantially similar fees are payable in connection with the Second Notes in the event such Second Notes are paid by Adar and Union as described in greater detail below.

Level 3: Pricing inputs that are unobservable or less observable from objective sources. Unobservable inputs should only be used to the extent observable inputs are not available. These inputs maintain the concept of an exit price from the perspective of a market participant and should reflect assumptions of other market participants. An entity should consider all market participant assumptions that are available without unreasonable cost and effort. These are given the lowest priority and are generally used in internally developed methodologies to generate management's best estimate of the fair value when no observable market data is available.20

~~Financial~~The ~~assets~~Initial Notes accrue interest at the rate of 8% per annum and ~~liabilities~~have a two year term. We are ~~classified~~required ~~based~~to pre-pay the Initial Notes 180 days after the issuance date (the “Pre-Payment Date”), provided that if we fail to prepay such notes in full on the Pre-Payment Date (or before), the holders thereof have the right to convert the principal and accrued interest owed under such Initial Notes into our common stock at a 40% discount (increasing to 50% if we receive a DTC “Chill” on our common stock or upon the occurrence of certain events of default) to the lowest ~~level~~trading price of ~~input~~our ~~that~~common isstock ~~significant~~during the 15 trading days prior to conversion. Notwithstanding the ~~fair~~foregoing, ~~value~~there ~~measurement~~is an initial soft floor of $0.30 ~~The~~per ~~Company's~~share ~~assessment~~on conversions, which means that in the event our common stock closes below $0.30 per share, then the applicable holder may not convert its notes for the 10 trading days immediately preceding the first time the price closes below $0.30 per share. However, in the event the price of our common stock closes above $0.30 per share in that 10 day period, the ~~significance~~holder may again convert, without waiting the balance of the 10 days. Additionally, following the 10 day period, the applicable holder has a ~~particular~~three ~~input~~day grace period to convert, even if the ~~fair~~common ~~value~~stock closes ~~measurement~~below ~~requires~~the ~~judgment,~~next ~~and~~lower ~~may~~soft ~~affect~~floor level (as described in the ~~valuation~~following sentence). This process is repeated with soft floors of $0.15 per share and $0.075 per share. At no time may the ~~fair~~Initial ~~value~~Notes be converted into shares of ~~assets~~our ~~and~~common ~~liabilities~~stock if such conversion would result in the applicable holder and ~~their~~its ~~placement~~affiliates ~~within~~owning an aggregate of in excess of 9.9% of the ~~fair~~then ~~value~~outstanding shares ~~hierarchy~~of ~~levels~~our common stock.

~~Certain~~The ~~assets~~Initial ~~and~~Notes may ~~liabilities~~be prepaid, including in connection with any pre-payment on or prior to the Pre-Payment Date, with the following penalties: (i) if the Initial Notes are ~~reported~~prepaid within 60 days of the issuance date, then at ~~fair~~115% ~~value~~of onthe aface ~~recurring~~amount plus any accrued interest; (ii) if the Initial Notes are prepaid after 60 days after the issuance date but less than 121 days after the issuance date, then at 135% of the face amount plus any accrued interest and (iii) if the Initial Notes are prepaid after 120 days after the issuance date but on or ~~nonrecurring~~before ~~basis~~the inPre-Payment Date, then at 145% of the ~~Company's~~face ~~consolidated~~amount ~~balance~~plus ~~sheets~~any accrued interest. ~~These~~The ~~methods~~Initial Notes may not be prepaid after the Pre-Payment Date, except with the approval of the applicable holders. Additionally, upon the occurrence of certain fundamental transactions involving the Company and ~~assumptions~~its common stock, the Initial Notes are ~~discribed~~required to be redeemed in ~~Note~~cash for 8150% -of ~~Derivative~~the ~~Liabilities~~principal amount then outstanding, plus accrued and unpaid interest (provided upon the occurrence of such event, such Initial Notes may also be converted into common stock at the option of the holders).

The Initial Notes provide for customary events of default such as failing to timely make payments under the Initial Notes when due, and including our failure to maintain a reserve of shares in connection with the conversion of the Initial Notes equal to at least four times the number of shares of common stock that could be issuable thereunder at any time (initially 1.1 million shares per Initial Note 8), any –judgment ~~Derivative~~existing ~~Liabilities~~against us in excess of $250,000, our common stock being delisted from an exchange (including any OTC Markets exchange), a change in the majority of our Board of Directors, us becoming delinquent in our periodic filings with the SEC, or us losing our “bid” price for our common stock, subject where applicable to our ability to cure certain defaults. Upon the occurrence of an event of default, the holders of the Initial Notes can declare the entire amount of the Initial Notes immediately due and payable, together in the event of certain defaults, additional penalties or liquidated damages totaling between an additional 10% and 50% of the outstanding principal amount of the Initial Notes, together in some cases with make-whole payments for delivery delays and other penalties. Additionally, upon the occurrence of an event of default, the interest rate of the Initial Notes increases to 24% per annum.

~~Derivative~~The ~~Liabilities~~Second Notes accrue interest at the rate of 8% per annum, are due on November 9, 2017 and have substantially similar terms and conditions as the Initial Notes described above (except that they include additional events of default such as us having a closing bid price less than $0.50 per share and/or having an aggregate trading value of our common stock of less than $50,000 in any five consecutive trading day period), provided that there are no prepayment penalties associated with the Second Notes, and provided further that no amounts are due under the Second Note (including interest thereon) and the Second Notes are not convertible, unless or until each investor’s applicable Buyer Note is paid in full in cash. In the event we repay a holder’s Initial Note by the Pre-Payment Date, the applicable Second Note and Buyer Note are automatically cancelled.

The ~~following~~Buyer ~~table~~Notes ~~sets~~accrue interest ~~forth~~at the rate of 8% per annum (which until the Buyer Notes are paid in full in cash, byoffset ~~level~~amounts ~~within~~due under the ~~fair~~Second Notes) ~~value~~and ~~hierarchy~~are due on July 9, 2016, unless (a) we do not meet the ~~Company's~~current ~~financial~~information ~~assets~~requirements ~~and~~required ~~liabilities~~under ~~that~~Rule ~~were~~144 ~~accounted~~of ~~for~~the Securities Act of 1933, as amended; or (b) we provide the applicable investor at ~~fair~~least ~~value~~30 ondays’ anotice ~~recurring~~prior ~~basis~~to the six month anniversary of the issuance date of the Buyer Note of our intention to reject the payment of the Buyer Note, in which case the applicable holder may cross cancel its payment obligations under the applicable Buyer Note as well as our payment obligations under the offsetting Second Note. The holders may only prepay the Buyer Note with our written approval. In March 2016, we provided notice to the holders of ~~October~~the 31Buyer Notes that we rejected the payment of the Buyer Notes and as such, ~~2015:~~the Buyers Notes and Second Notes were automatically cancelled and terminated.

Description	(Level 1)		(Level 2)		(Level 3)		Total Carrying Value
Convertible Notes	$	-	$	-	$	1,067,414	$	1,067,414
Tainted Conversion Notes (Note 6)	$	-	$	-	$	1,766,456		1,766,456
Total	$	-	$	-	$	2,833,870	$	2,833,870

~~Embedded~~Pursuant ~~Derivative~~to ~~Instruments~~a side letter entered into with each of Adar and Union, each investor agreed to grant us an option for three 30 day conversion moratorium periods, with the first period beginning on the Pre-Payment Date, and the next two beginning 30 days and 60 days, respectively, after the end of such first period. We are able to exercise the conversion moratorium period options by notifying the applicable investor no later than 10 trading days prior to the Pre-Payment Date (or thereafter, the end of the next applicable conversion moratorium period) and by paying the applicable investor(s) $20,000 prior to five trading days before the end of the then current period (with the first such payment due at least five trading days prior to the Pre-Payment Date).

~~The~~Each ~~Company~~of ~~determined~~Adar ~~that~~and ~~the~~Union also ~~following~~entered ~~convertible~~into ~~notes~~a ~~(collectively~~Subordination ~~"Convertible~~Agreement ~~Notes")~~in ~~issued~~favor ~~during~~of ~~the~~our ~~year~~senior ~~ended October 31~~lender, ~~2015,~~Shadow ~~contained~~Tree anCapital ~~embedded~~Management, ~~derivative~~LLC, ~~instrument as the conversion price was based on a variable that was not an input~~ to subordinate the ~~fair~~repayment ~~value~~ of athe ~~"fixed-for-fixed"~~Initial ~~option~~Notes as(and ~~defined~~if ~~under~~applicable, ~~FASB~~the ~~ASC~~Second ~~Topic~~Notes) ~~No.~~to ~~815~~amounts -owed 40by ~~(refer~~us to ~~Note~~Shadow ~~7 for further information regarding the Convertible Notes):~~Tree.

* TypenexThe ~~Co-Investment~~Company also recognized $3,439 ~~LLC~~in ~~Convertible~~amortization ~~Note~~of debt issue costs. We are amortizing it over the term of the note using the effective interest.

* DumaNote ~~Holdings~~8 ~~Convertible~~– ~~Note~~Fair Value

~~Tainted~~As ~~Convertible~~defined ~~Notes~~in FASB ASC Topic 820, fair value is the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This Topic requires disclosure that establishes a framework for measuring fair value and expands disclosure about fair value measurements. The statement requires fair value measurements be classified and disclosed in one of the following categories:

~~For~~Level ~~the~~1: ~~year~~Unadjusted quoted ~~ended~~prices ~~October~~in ~~31,~~active ~~2015,~~markets ~~newly~~that ~~issued~~are ~~convertible~~accessible ~~notes~~at ~~were considered tainted derivative instruments due to~~ the ~~issuances~~measurement ofdate ~~various~~for ~~convertibles notes issued. Those convertible notes contain a variable conversion price and therefore~~identical, weunrestricted ~~cannot~~assets ~~conclude~~or ~~that~~liabilities. The weCompany ~~will~~considers ~~have~~active ~~sufficient~~markets ~~authorized~~as ~~unissued~~those ~~shares~~in towhich ~~settle~~transactions ~~all the warrants and convertible notes. Accordingly, the Company recorded a derivative liability~~ for the ~~aggregate~~assets ~~fair~~or ~~value~~liabilities ofoccur ~~the~~in ~~tainted~~sufficient ~~convertible~~frequency and ~~notes.~~volume ~~(Refer~~ to ~~Note~~provide 7pricing ~~for further~~ information ~~regarding~~on ~~the~~an ~~convertible~~ongoing ~~notes):~~basis.

~~● Tainted~~Level ~~Kent~~2: PPricing inputs other than quoted market prices included in Level 1 that are based on observable market data and are directly or indirectly observable for substantially the full term of the asset or liability. ~~Watts~~These ~~Convertible~~include ~~Note~~quoted market prices for similar assets or liabilities, quoted market prices for identical or similar assets in markets that are not active, adjusted quoted market prices, inputs from observable data such as interest rate and yield curves, volatilities or default rates observable at commonly quoted intervals, or inputs derived from observable market data by correlation or other means.

~~● Tainted~~Level ~~Christian~~3: ~~Smith~~Pricing &inputs that ~~Jewell~~are ~~Law~~unobservable ~~Note~~or less observable from objective sources. Unobservable inputs should only be used to the extent observable inputs are not available. These inputs maintain the concept of an exit price from the perspective of a market participant and should reflect assumptions of other market participants. An entity should consider all market participant assumptions that are available without unreasonable cost and effort. These are given the lowest priority and are generally used in internally developed methodologies to generate management’s best estimate of the fair value when no observable market data is available.

~~● Tainted~~Financial ~~David~~assets Land liabilities are classified based on the lowest level of input that is significant to the fair value measurement. ~~Gillespie~~The ~~Convertible~~Company’s assessment ~~Note~~of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.

18Certain assets and liabilities are reported at fair value on a recurring or nonrecurring basis in the Company’s consolidated balance sheets. These methods and assumptions are described in Note 9 – Derivative Liabilities.

~~Table of Contents~~22

~~● Tainted~~Note 9 – ~~Brian~~Derivative ~~Kenny Convertible Note~~Liabilities

~~● Tainted~~Derivative ~~Farid Barkhorder Convertible Note~~Liabilities

~~● Tainted~~As ~~Robert~~of ~~Klinek~~January 31, 2016, the Company did not have any Level 1 or Level 2 financial assets and ~~Susan~~liabilities ~~Pack~~or any Level 3 financial assets. The Company’s Level 3 liabilities consisted of Convertible ~~Note~~Notes and Tainted Conversion Notes and their fair values were $1,740,079 and $1,484,252, respectively, for a total carrying value of $3,224,331.

~~● Tainted~~Embedded ~~Lee~~Derivative ~~Walinsky Convertible Note~~Instruments

~~● Tainted~~The S.Company ~~Chris~~determined that ~~Herndon~~the following convertible notes (collectively “Convertible Notes”) issued during the six months ended January 31, 2016, contained an embedded derivative instrument as the conversion price was based on a variable that was not an input to the fair value of a “fixed-for-fixed” option as defined under FASB ASC Topic No. 815 - 40 (refer to Note 7 for further information regarding the Convertible Notes):

~~● Tainted~~* ~~Robert~~Typenex B.Co-Investment, ~~Kahw~~LLC Convertible Note * Duma Holdings Convertible Note * Adar Bays, LLC Convertible Note * Union Capital, LLC Convertible Note * JSJ Investment LLC Convertible Note * Darling Capital, LLC Convertible Note

● Tainted ~~Donald P. Clary~~ Convertible ~~Note~~ Notes

~~● Tainted~~For ~~Jay~~the ~~Fishman~~six ~~Convertible~~months ended January 31, 2016, the Company issued convertible notes each with a fixed conversion price. However, prior to the issuance of these new convertible notes, the Company has also issued convertible notes with variable conversion prices which were still outstanding as of January 31, 2016, hence the Company cannot conclude that it has sufficient authorized share if all outstanding convertible notes were converted. Therefore, the convertible notes with fixed conversion price that were subsequently issued were considered tainted derivative instruments. Accordingly, the Company recorded a derivative liability for the aggregate fair value of the tainted convertible notes as follows. (See Note 7 for further information regarding the convertible notes):

● Tainted Christian Smith & Jewell Law Note ● Tainted Brian Kenny Convertible Note ● Tainted Farid Barkhorder Convertible Note ● Tainted Robert Klinek and Susan Pack Convertible Note ● Tainted Lee Walinsky Convertible Note ● Tainted S. Chris Herndon Convertible Note ● Tainted Robert B. Kahw Convertible Note ● Tainted Donald P. Clary Convertible Note ● Tainted Jay Fishman Convertible Note ● Tainted Carl Miller and Deanna Miller Convertible Note ● Tainted Barry Robbins Convertible Note ● Tainted Brent & Silvia Sagissor Convertible Note ● Tainted David and Ginger Levy Trust Convertible Note ● Tainted Kevin R. Minor Convertible Note ● Tainted Timothy Hoke Smith Convertible Note ● Tainted Clint D. Summers Convertible Note ● Tainted Sean M. Crowley Trust Convertible Note

~~● Tainted Barry Robbins Convertible Note~~23

~~● Tainted~~The ~~Brent~~Company &determined the ~~Silvia~~fair ~~Sagissor~~values ~~Convertible~~of ~~Note~~the embedded convertible notes derivatives and tainted convertible notes using the lattice valuation model with the following assumptions:

● Tainted David and Ginger Levy Trust Convertible Note

	Initial			January 31, 2016
Common stock issuable		4,326,942			4,674,564
Market value of common stock on measurement date (1)		$0.91 - $1.50			$0.97 - $1.28
Adjusted exercise price		$0.52 - $4.00			$0.57 - $4.00
Risk free interest rate (2)		0.06%-0.25	%		0.22%-0.89	%
Instrument lives in years		0.17 – 2.00			0.08 – 0.25
Expected volatility (3)		82%-119	%		94%-155	%
Expected dividend yields (4)		None			None

~~● Tainted~~(1) ~~Kevin~~The R.market ~~Minor~~value ~~Convertible~~of ~~Note~~common stock is the stock price at the close of trading on the date of issuance or at period-end, as applicable.

~~● Tainted~~(2) ~~Timothy~~The ~~Hoke~~risk-free ~~Smith~~interest ~~Convertible~~rate ~~Note~~was determined by management using between the 0.17 and 3-year Treasury Bill as of the respective offering or measurement date.

~~● Tainted~~(3) ~~Clint~~The D.historical ~~Summers~~trading ~~Convertible~~volatility ~~Note~~was determined by the Company’s trading history.

~~● Tainted~~(4) ~~Sean~~Management M.determined ~~Crowley~~the ~~Trust~~dividend ~~Convertible~~yield ~~Note~~to be -0-% based upon its expectation that it will not pay dividends for the foreseeable future.

~~The~~Activity ~~Company~~for ~~determined~~embedded derivative ~~the~~instruments ~~fair~~during ~~values of~~ the ~~embedded~~six-month ~~convertible~~period ~~notes~~ended ~~derivatives~~January ~~and~~31, ~~tainted~~2016, ~~convertible~~was ~~notes~~as ~~using the lattice valuation model with the following assumptions~~follows:

	Initial			October 31, 2015
	Balance at July 31, 2015			Initial Valuation of Embedded Derivative Instruments Issued During the Period			Initial Valuation Day 1 Loss		Increase (Decrease) in Fair Value of Derivative Liabilities			Fair Value of Derivative Liabilities on Repayment of Debt (1)			Change of Derivative Liabilities Upon Conversion			Balance at January 31, 2016
Common stock issuable		5,884,277			5,949,825
Embedded Convertible Note
Market value of common stock on measurement date (1)	$	0.91 – 1.50		$	1.17
Typenex Co-Investment	$	1,212,688		$	1,072,506		$	—	$	(11,903	)	$	(789,040	)	$	—		$	1,484,251
Adjusted exercise price	$	0.52 – 4.00		$	0.28-4.00
Duma Holdings		546			—			—		(546	)		—			—			—
Risk free interest rate (2)		0.06% - 0.25	%		0.01%-1.00	%
KBM Worldwide, Inc.		—			—			—		469,272			(469,272	)		—			—
Instrument lives in years		0.17 – 2.00			0.17 – 1.90
VIS VIRES Group, Inc		—			—			—		504,222			(504,222	)		—			—
Expected volatility (3)		82%-115	%		85%-119	%
Subtotal:		1,213,234			1,072,506			—		961,045			(1,762,534	)		—			1,484,251
Expected dividend yields (4)	None			None
Tainted Note
Tainted Kent P. Watts		319,960			516,667			176,051		(152,811	)		—			(363,659	)		496,208
Tainted Christian Smith & Jewell		167,077			—			—		(94,080	)		—			(48,907	)		24,090
Tainted David L. Gillespie		4,956			—			—		824			—			(5,780	)		—
Tainted Brian Kenny		34,330			—			—		(3,316	)		—			—			31,014
Farid Barkhorder		—			50,000			28,685		(30,234	)		—			—			48,451
Robert Klinek and Susan Pack		—			300,000			119,467		(127,885	)		—			—			291,582
Lee Walinsky		—			25,000			9,074		(9,996	)		—			—			24,078
S. Chris Herndon		—			100,000			44,336		(47,434	)		—			—			96,902
Robert B. Kahw		—			75,000			45,023		(47,502	)		—			—			72,521
Donald P. Clary		—			50,000			18,148		(19,992	)		—			—			48,156
Jay Fishman		—			75,000			27,222		(29,988	)		—			—			72,234
Carl Miller and Deanna Miller		—			33,333			12,098		(13,328	)		—			—			32,103
Barry Robbins		—			37,500			13,246		(14,757	)		—			—			35,989
Brent & Silvia Sagissor		—			33,332			12,099		(13,328	)		—			—			32,103
David and Ginger Levy Trust		—			150,000			62,393		(66,579	)		—			—			145,814
Kevin R. Minor		—			33,333			12,098		(13,328	)		—			—			32,103
Timothy Hoke Smith		—			33,333			12,098		(13,328	)		—			—			32,103
Clint D. Summers		—			83,333			30,247		(33,321	)		—			—			80,259
Sean M. Crowley Trust		—			150,000			39,971		(45,601	)		—			—			144,370
Subtotal:		526,323			1,745,831			662,256		(775,984	)		—			(418,346	)		1,740,080
Note Derivatives - Total	$	1,739,557		$	2,818,337		$	662,256	$	185,061		$	(1,762,534	)	$	(418,346	)	$	3,224,331

(1) ~~The~~ ~~market~~Upon ~~value~~extinguishment of ~~common~~the ~~stock~~Embedded isConvertible Notes, the ~~stock~~Company ~~price~~recognized ata ~~the~~total ~~close~~gain ofon ~~trading~~debt onrepayment in the ~~date~~amount of ~~issuance~~$1,762,534 ordue atto ~~period-end,~~releases asof ~~applicable~~the corresponding derivative liabilities.

~~(2) The risk-free interest rate was determined by management using between the 0.17 and 2 - year Treasury Bill as of the respective offering or measurement date.~~24

~~(3) The historical trading volatility was determined by the Company's trading history.~~Warrants

As additional consideration for the loan evidenced by the Typenex Convertible Note, we granted Typenex a five year warrant (4the “Typenex Warrants”) ~~Management~~ to ~~determined~~purchase ~~the~~shares ~~dividend~~of ~~yield~~our common stock equal to be$87,500 divided by the Market Price. The Market Price is defined as a Conversion Factor (70%-0-80%) ~~based~~multiplied ~~upon~~by ~~its~~the ~~expectation~~average ~~that~~of itthe ~~will~~five ~~not~~(5) ~~pay~~lowest ~~dividends~~Closing ~~for~~Bid Prices in the ~~foreseeable~~twenty ~~future~~(20) Trading Days immediately preceding the applicable Conversion. The warrants had an initial exercise price of $2.25 per share, and were initially exercisable for 38,889 shares of common stock.

19 In addition, the Typenex Warrants contained anti-dilution provisions that provide for a reduction in the exercise price of such warrants in the event that future common stock (or securities convertible into or exercisable for common stock) is issued (or becomes contractually issuable) at a price per share (a “Lower Price”) that is less than the exercise price of such warrant at the relevant time. The amount of any such adjustment is determined in accordance with the provisions of the relevant warrant agreement and depends upon the number of shares of common stock issued (or deemed issued) at the Lower Price and the extent to which the Lower Price is less than the exercise price of the warrant at the relevant time. In addition, the number of shares issuable upon exercise of these warrants will be increased inversely proportional to any decrease in the exercise price, thus preserving the aggregate exercise price of the warrants both before and after any such adjustment. We have determined that these provisions could result in modification of the warrants exercise price based on a variable that is not an input to the fair value of a “fixed-for-fixed” option as defined under FASB ASC Topic No. 815-40.

~~Table~~Effective September 8, 2015, Typenex exercised warrants to purchase 260,788 shares of ~~Contents~~our common stock which it held (at an exercise price of $1.17 per share). The warrants originally had (a) an exercise price of $2.25 per share, but were subsequently reduced in connection with Typenex’s anti-dilution rights to $1.17 per share and (b) provided Typenex the right to acquire 38,889 shares of common stock, but were subsequently increased to 260,788 shares of common stock in connection with Typenex’s anti-dilution rights, in a net cashless transaction. On September 18, 2015, in connection with such exercise, we issued 128,048 net shares of common stock to Typenex.

~~Activity~~Tainted ~~for embedded derivative instruments during the year ended October 31, 2015 was as follows:~~Warrants

	Balance at July 31, 2015		Initial Valuation of Embedded Derivative Instruments Issued During the Period		Increase (Decrease) in Fair Value of Derivative Liabilities			Fair Value of Derivative Liabilities on Repayment of Debt			Change of Derivative Liabilities upon Conversion			Balance at October 31, 2015
Typenex Co-Investment	$	1,212,688	$	1,072,506	$	(428,740	)	$	(789,040	)	$			$	1,067,414
Duma Holdings		546		-		(546	)		-						-
KBM Worldwide, Inc.		-		-		469,272			(469,272	)					--
VIS VIRES Group, Inc		-		-		504,222			(504,222	)					--
Embedded Convertible Note-Subtotal		1,213,234		1,072,506		544,208			(1,762,534	)					1,067,414
Tainted Kent P. Watts		319,960		692,719		(138,202	)		-			(363,659	)		510,818
Tainted Christian Smith & Jewell		167,077		-		(132,130	)		-						34,947
Tainted David L. Gillespie		4,956		-		824			-			(5,780	)		-
Tainted Brian Kenny		34,330		-		(3,540	)		-						30,790
Farid Barkhorder		-		78,685		(29,016	)		-						49,669
Robert Klinek and Susan Pack		-		389,566		(120,800	)		-						268,766
Lee Walinsky		-		34,074		(9,326	)		-						24,748
S. Chris Herndon		-		144,336		(44,997	)		-						99,339
Robert B. Kahw		-		120,023		(45,660	)		-						74,363
Donald P. Clary		-		68,148		(18,652	)		-						49,496
Jay Fishman		-		102,222		(27,978	)		-						74,244
Carl Miller and Deanna Miller		-		45,431		(12,434	)		-						32,997
Barry Robbins		-		50,746		(13,761	)		-						36,985
Brent & Silvia Sagissor		-		45,431		(12,435	)		-						32,996
David and Ginger Levy Trust		-		212,393		(63,114	)		-						149,279
Kevin R. Minor		-		45,431		(12,434	)		-						32,997
Timothy Hoke Smith		-		45,431		(12,434	)		-						32,997
Clint D. Summers		-		113,579		(31,087	)		-						82,492
Sean M. Crowley Trust		-		189,971		(41,438	)		-						148,533
Tainted Note - Subtotal		526,323		2,378,186		(768,614	)		-						1,766,456
Note Derivatives - Total	$	1,739,557	$	3,450,692	$	(224,406	)	$	(1,762,534	)	$	(369,439	)	$	2,833,870

During the year ended July 31, 2011, we entered into a consulting agreement with Geoserve Marketing, LLC (“Geoserve”). Under the terms of the agreement, the Company granted warrants to purchase 400,000 shares of common stock that have a market condition. If the Company’s common stock attains a five day average closing price of $22.50 per share, 200,000 warrants with an exercise price of $7.50 and an expiration date of February 15, 2016 shall be exercisable (“Warrant B”). If the Company’s common stock attains a five day average closing price of $45.00 per share, 200,000 warrants with an exercise price of $7.50 and an expiration date of February 15, 2016 shall be exercisable (“Warrant C”).

~~Warrants~~On February 17, 2015, the Warrant B and Warrant C that were previously issued to Geoserve were considered tainted derivative instruments due to the issuances of various convertibles notes during the three months ended April 30, 2014. Those convertible notes contain variable conversion prices and therefore, we cannot conclude that we will have sufficient authorized unissued shares to settle all the warrants and convertible notes. Accordingly, the Company recorded a derivative liability for the aggregate fair value of the Warrant B and Warrant C.

AsThe ~~additional~~fair ~~consideration~~values ~~for~~of these ~~the~~warrants ~~loan~~were ~~evidenced~~recognized byas ~~the~~derivative ~~Typenex Convertible Note, we granted Typenex a five year~~ warrant ~~(the~~instruments ~~"Typenex~~at ~~Warrants")~~issuance toor ~~purchase~~when ~~shares~~they ofbecome ~~our~~issuable ~~common~~and ~~stock~~are ~~equal~~measured toat ~~$87,500~~fair value ~~divided~~at byeach ~~the~~reporting ~~Market Price~~period. The ~~Market~~Company ~~Price~~determined ~~is defined as a Conversion Factor (70%-80%) multiplied by~~ the ~~average~~fair values of ~~the~~these ~~five (5) lowest Closing Bid Prices in the twenty (20) Trading Days immediately preceding the applicable Conversion. The~~ warrants ~~have~~using ana ~~initial~~lattice ~~exercise~~valuation ~~price of $2~~model.~~25 per share, and are initially exercisable for 38,889 shares of common stock.~~

In addition, the Typenex Warrants contain anti-dilution provisions that provide for a reduction in the exercise price of such warrants in the event that future common stock (or securities convertible into or exercisable for common stock) is issued (or becomes contractually issuable) at a price per share (a "Lower Price") that is less than the exercise price of such warrant at the relevant time. The amount of any such adjustment is determined in accordance with the provisions of the relevant warrant agreement and depends upon the number of shares of common stock issued (or deemed issued) at the Lower Price and the extent to which the Lower Price is less than the exercise price of the warrant at the relevant time. In addition, the number of shares issuable upon exercise of some of these warrants will be increased inversely proportional to any decrease in the exercise price, thus preserving the aggregate exercise price of the warrants both before and after any such adjustment. We have determined that these provisions could result in modification of the warrants exercise price based on a variable that is not an input to the fair value of a "fixed-for-fixed" option as defined under FASB ASC Topic No. 815 - 40.25

~~Tainted~~Activity ~~Warrants~~for derivative warrant instruments during the six months ended January 31, 2016, was as follows:

During the year ended July 31, 2011, we entered into a consulting agreement with Geoserve Marketing, LLC ("Geoserve"). Under the terms of the agreement, the Company granted warrants to purchase 400,000 shares of common stock that have a market condition. If the Company's common stock attains a five day average closing price of $22.50 per share, 200,000 warrants with an exercise price of $7.50 and an expiration date of February 15, 2016 shall be exercisable ("Warrant B"). If the Company's common stock attains a five day average closing price of $45.00 per share, 200,000 warrants with an exercise price of $7.50 and an expiration date of February 15, 2016 shall be exercisable ("Warrant C").

Description	Balance At July 31, 2015		Initial Valuation		Incr(Decr) in Fair Value of Derivative Liabilities			Change of Derviative Liabilities Upon Conversion			Balance At January 31, 2016
Tainted Warrant-Geoserve	$	8,722	$	—	$	(8,722	)	$	—		$	—
Typenex Co - Warrants		252,854		—		89,381			(342,235	)		—
Total	$	261,576	$	—	$	80,659		$	(342,235	)	$	—

OnThe ~~February~~Company ~~17, 2015,~~ determined the ~~Warrant~~fair Bvalues ~~and Warrant C that were previously issued to Geoserve were considered tainted derivative instruments due to the issuances~~ of ~~various convertibles notes during~~ the ~~three~~warrant ~~months~~derivatives ~~ended~~using ~~April 30, 2014. Those convertible notes contain variable conversion price and therefore, we cannot conclude that we will have sufficient authorized unissued shares to settle all~~ the ~~warrants~~lattice ~~and~~valuation ~~convertible~~model ~~notes.~~with ~~Accordingly,~~ the ~~Company~~following ~~recorded a derivative liability for the aggregate fair value of the Warrant B and Warrant C.~~assumptions:

	Initial			January 31, 2016
Common stock issuable		705,556			666,667
Market value of common stock on measurement date (1)		$0.92 - $1.07			$1.17
Adjusted exercise price		$2.25 - $7.50			7.50
Risk free interest rate (2)		0.25%-5.00	%		0.08	%
Instrument lives in years		1.00 – 5.00			0.29
Expected volatility		112	%		84	%
Expected dividend yields (3)		None			None

Table of Contents

(1)	The market value of common stock is the stock price at the close of trading on the date of issuance or at period-end, as applicable.

(2)	The risk-free interest rate was determined by management using between 0.14 and 5 - year Treasury Bill as of the respective offering or measurement date.

(3)	Management determined the dividend yield to be -0-% based upon its expectation that it will not pay dividends for the foreseeable future.

~~The~~As ~~fair~~of ~~values~~January of31, ~~these~~2016, ~~warrants~~the ~~were~~aggregated ~~recognized~~balance asof derivative ~~warrant~~liability was ~~instruments~~$3,224,330 ~~at issuance or when they become issuable~~ and ~~are~~the ~~measured~~unamortized atdiscount ~~fair~~was ~~value~~$1,859,832. atDuring ~~each~~the ~~reporting~~six ~~period.~~months ~~The~~ended ~~Company~~January ~~determined~~31, ~~the~~2016, ~~fair~~$1,351,451 ~~values~~ of ~~these~~the ~~warrants~~derivative discount ~~using~~has abeen ~~lattice~~amortized ~~valuation~~to ~~model~~interest expense.

~~Activity~~Note ~~for~~10 ~~derivative~~– ~~warrant~~Capital ~~instruments during the three months ended October 31, 2015 was as follows:~~Stock

	Balance at July 31, 2015		Initial Valuation		Increase (Decrease) in Fair Value of Derivative Liabilities			Change of Derivative Liabilities upon Conversion			Balance at October 31, 2015
Tainted Warrant-Geoserve (Note 7)	$	8,722	$	-	$	(8,722	)	$	-		$	-
Typenex Co-Warrants	$	252,855	$	-	$	89,381		$	(342,236	)	$	-
	$	261,577	$	-	$	80,659		$	(342,236	)	$	-

Series B Preferred Stock

~~The~~Effective ~~Company~~on ~~determined~~September 28, 2015, with the ~~fair~~Company’s ~~values~~designation of ~~the~~its ~~warrant~~Series ~~derivatives~~B ~~using~~Convertible Preferred Stock, the Convertible ~~lattice~~Promissory ~~valuation~~Notes received ~~model~~by Mr. Watts in connection with a prior exchange agreement automatically converted into 3,070 shares of Series B Convertible Preferred Stock at the ~~following~~rate ~~assumptions:~~of $1,000 per share.

	Initial			October 31, 2015
Common stock issuable		705,556			666,667
Market value of common stock on measurement date (1)	$	0.92-1.07		$	1.17
Adjusted exercise price	$	2.25-7.50		$	7.50
Risk free interest rate (3)		0.25-1.57	%		0.08	%
Instrument lives in years		1.00-5.00			0.29
Expected volatility		112	%		84	%
Expected dividend yields (4)	None			None

Also on September 28, 2015, the Convertible Promissory Notes received by David L. Gillespie automatically converted into 50 shares of Series B Convertible Preferred Stock at the rate of $1,000 per share.

~~(1) The~~As ~~market value~~ of ~~common~~January ~~stock~~31, is2016, the ~~stock~~amount ~~price at the close~~ of ~~trading on the date~~ $369,439 of ~~issuance~~derivative orhas atbeen ~~period-end,~~resolved asupon ~~applicable~~conversion.

~~(3) The risk-free interest rate was determined by management using 0.29 - year Treasury Bill as of the respective offering or measurement date.~~26

~~(4) Management~~Preferred ~~determined the dividend yield to be -0-% based upon its expectation that it will not pay dividends for the foreseeable future.~~Stock Dividend

As of ~~October~~January 31, ~~2015~~ 2016, the ~~aggregated~~Company ~~balance~~had ofundeclared ~~derivative~~accumulative ~~liability~~dividend ~~was~~to ~~$2,833,870~~Preferred ~~and~~Stock ~~the~~holders ~~unamortized~~for ~~discount~~amount ~~was~~of $272,~~835,198. During the year ended October 31, 2015, $376,085 of the derivative discount has been amortized to interest expense.~~800

~~Note 9~~Common ~~– Capital~~ Stock Issuances

~~Series~~During Bthe ~~Preferred~~six ~~Stock~~months ended January 31, 2016, 12,276 shares of restricted common stock valued at $14,576 were issued to directors of the Company as director compensation.

~~Effective~~During onthe ~~September~~six 28months ended January 31, ~~2015~~2016, ~~with~~we ~~the~~issued ~~designation~~a total of ~~its Series B Convertible Preferred Stock~~87,623 ~~the~~shares ~~Convertible~~of ~~Promissory~~restricted ~~Notes~~common ~~received~~stock byto ~~Mr.~~settle ~~Watts~~stock ininterest ~~connection~~for ~~with~~Convertible Subordinated ~~the~~Promissory ~~Exchange~~Notes. ~~Agreement~~The ~~automatically~~value ~~converted~~of ~~into~~these ~~3,070~~ shares ofis ~~Series B Convertible Preferred Stock for~~ $192,~~000 per share~~733.

~~Also~~In onAugust ~~September 28,~~ 2015, the Company ~~Convertible~~issued ~~Promissory~~60,000 ~~Notes~~Form ~~received~~S-8 byregistered ~~David~~shares Lto James W. ~~Gillespie~~Christian, ~~automatically~~a ~~converted~~partner ~~into~~at 50Christian ~~shares~~Smith of& ~~Series~~Jewell, Bthe ~~Convertible~~Company’s legal ~~Preferred~~counsel, ~~Stock~~in consideration for $1legal fees owed. The fair value of the 60,000 ~~per~~shares ~~share~~issued for services is $84,000.

21On September 8, 2015, 128,408 shares of restricted common stock were issued in connection with Typenex’s cashless warrant exercise. According to the Lattice valuation model, derivative liabilities amount of $342,235 has been resolved to additional paid in capital and par value of common stock for $0.001 per share

~~Table~~In September 2015, the Company issued 1,000,000 shares of ~~Contents~~restricted common stock to Snap or Tap Productions, LLC in consideration for agreeing to provide two years of public relations and investor awareness services to the Company. The shares are fully vested upon issuance. The fair value of the shares was $1,480,000.

~~Common~~In ~~Stock~~December ~~Issuances~~2015, the Company issued 100,000 shares of common stock to Shadow Tree and Quintium, our lenders, in consideration of ur entry into the first amendment to the Credit Agreement, as described in greater detail above under Note 6 – (1) Shadow Tree Credit Agreement. The fair value of the 100,000 shares issued for debt discount is $239,249.

~~During~~In ~~the~~January ~~three~~2016, ~~months~~the Company ~~ended~~issued ~~October 31~~1, ~~2015~~500,000 ~~6,796~~ shares of ~~restricted~~ common stock ~~valued~~to atConsultant ~~$8,000 were~~in ~~issued~~consideration for agreeing to ~~directors~~provide one years of consulting services to the Company. asThe ~~director~~shares ~~compensation~~are fully vested upon issuance. The fair value of the shares was $2,100,000.

~~During~~In January 2016, the Company ~~three~~issued ~~months~~100,000 ~~ended~~shares ~~October~~of 31common stock to Christian Smith & Jewell, ~~2015~~the Company’s legal counsel, wein ~~issued~~connection with athe ~~total~~conversion of 12$117,~~309~~000 ~~shares~~of toamounts ~~settle~~owed ~~stock~~under ~~interest~~a ~~for~~convertible ~~Convertible~~note. According ~~Subordinated~~to ~~Promissory~~the ~~Notes.~~Lattice ~~The~~valuation ~~value~~model, ofa ~~these~~derivative liabilities ~~shares~~amount isof $1723,~~419~~994 has been resolved to additional paid in capital upon release of the derivative liability.

OnIn ~~September~~January 82016, ~~2015,~~we ~~128~~issued 48,~~048~~392 restricted shares of common stock ~~were~~to ~~issued~~Duma ~~for~~Holdings, ~~Typenex~~LLC ~~cashless~~in ~~warrant~~consideration for ~~exercise.~~the ~~According~~payment to ~~Lattice~~Duma ~~valuation model~~Holdings of accrued interest owed through February 29, ~~derivative~~2016 ~~liabilities~~and ~~amount~~the extension fee of $~~342~~3,~~236~~500 ~~have~~to ~~been~~postpone the ~~resolved~~due todate ~~additional~~of ~~paid~~the inDuma ~~capital.~~Holdings ~~Shares~~Note ~~were~~to ~~issued~~February at29, ~~par~~2016. The fair value of ~~Common~~the ~~Stock~~48,392 shares issued for ~~0.001~~note ~~per~~extension ~~share.~~is $53,715.

~~In August 2015, the Company issued 60,000 Form S-8 registered shares to James W. Christian, a partner at Christian Smith & Jewell, the Company's legal counsel, in consideration~~ Receivables for ~~legal~~Common ~~fees owed. The fair value of the 60,000 shares issued for services is $84,000.~~Stock

InOn September ~~2015~~6, 2013, HCN sold 191,667 shares of HEC common stock to an employee of HCN (the ~~Company~~nephew ~~issued~~of our Chairman and Chief Executive Officer) in exchange for a note receivable in the amount of $1,000,000. ~~shares~~HEC acquired this receivable upon its acquisition of ~~restricted~~HCN. The note is non-interest bearing and is payable only upon the sale of the common stock to ~~Snap~~a third party or ~~Tap~~HEC ~~Productions~~stock being listed on either the NASDAQ or NYSE stock exchanges. We will receive 95% of the proceeds up to $1,000,000 ~~LLC~~if inthe ~~consideration~~underlying ~~for~~stock ~~agreeing~~is sold to ~~provide~~a ~~two~~third ~~years~~party. Within 90 days of ~~public~~HEC ~~relations~~stock ~~and~~being ~~investor~~listed ~~awareness~~on ~~services~~a major stock exchange, we will receive up to $1,000,000, or the ~~Company~~note can be paid earlier at the discretion of the other party. ~~The~~These shares ~~are~~of ~~fully~~common ~~vested~~stock ~~upon~~are ~~issuance.~~held ~~The~~in ~~fair~~the ~~value~~name of the investors and are beneficially owned by the investors and the shares ~~was~~are $1not retrievable by the Company. At January 31,~~480~~ 2016, we have written off $325,000 of remaining outstanding on this receivable due to issues on collectability.

~~Receivables~~In December 2013, HCN sold 619,960 shares of unregistered and restricted Company common stock in return for ~~Common~~a ~~Stock~~$1,859,879 non-interest bearing note receivable from SMDRE LLC. At July 31, 2015, we had $88,898 outstanding on this receivable. In January 2016, the Company determined that this outstanding amount was uncollectible and wrote off the amount to Other Income (Expense).

On September 6, 2013, HCN sold 191,667 shares of HEC common stock to an employee of HCN (the nephew of our Chairman and Chief Executive Officer) in exchange for a note receivable in the amount of $1,000,000. HEC acquired this receivable upon its acquisition of HCN. The note is non-interest bearing and is payable only upon the sale of the common stock to a third party or HEC stock being listed on either the NASDAQ or NYSE stock exchanges. We will receive 95% of the proceeds up to $1,000,000 if the underlying stock is sold to a third party. Within 90 days of HEC stock being listed on a major stock exchange, we will receive up to $1,000,000, or the note can be paid earlier at the discretion of the other party. These shares of common stock are held in the name of the investors and are beneficially owned by the investors and the shares are not retrievable by the Company. At October 31, 2015, we have $325,000 outstanding on this receivable.27

OnSubscribed December 4, 2013, HCN sold 619,960 shares of unregistered and restricted Company common stock in return for a $1,859,879 non-interest bearing note receivable from SMDRE LLC ("SMDRE"), an entity in which Michael Watts, the brother of our Chief Executive Officer, has a minority interest. The Company acquired this receivable upon its acquisition of HCN. The 619,960 shares of Company common stock were previously issued by the Company to HCN to settle liabilities due by the Company related to the consulting services agreement described above in Note 7 – Notes Payable. The receivable from the individual is due to the Company upon the following conditions: 1) 100% of the proceeds payable from the sale of all or part of the shares by the owner of the shares to a third party; 2) within sixty days of the six month anniversary of the December 4, 2013 stock sale or within sixty days from the date that the shares become unrestricted (whichever comes first); or 3) 100% of any remaining balance due within 90 days of the Company being listed on a major stock exchange and at such time as the share price is above $6.00 per share. As with the above receivable for common stock, this receivable for the sale of the Company common stock is classified as a receivable for common stock within equity. These shares of common stock are held in the name of the investors and are beneficially owned by the investors and the shares are not retrievable by the Company.Common Stock

22In January 2016, the Company received $367,000 in cash from Michael Watts and other related parties to subscribe 489,334 shares of the common stock. See also Note 11 – Related Party Transactions.

~~Table~~Stock ofCompensation ~~Contents~~Plans

OnAs ~~April~~of ~~27,~~January ~~2015~~31, 2016, the ~~Board~~Company ofcould ~~Directors~~grant ~~agreed~~up to ~~offer SMDRE the option~~267,744 ~~for~~shares 90of ~~days,~~common ~~for~~stock ~~the~~under ~~SMDRE note to be paid in full for a 67% discount (i.e.,~~ the ~~offer~~2013 toStock beIncentive ~~paid~~Plan ~~$619,898 immediately)~~ (~~the~~ “~~Pre-Payment~~2013 ~~Option~~Plan”). ~~Between~~ The ~~April~~2013 ~~27,~~Plan ~~2015~~is ~~and~~administered ~~July~~by ~~9, 2015,~~ the ~~Company~~Compensation ~~received~~Committee ~~payments~~of on the ~~SMDRE~~Board ~~LLC~~of ~~note~~Directors, or in the ~~amount~~absence of ~~$531,000.~~a ~~The~~Compensation ~~balance of~~ Committee, the ~~discounted~~full ~~note~~Board of ~~$88~~Directors,~~898~~ which has ~~been~~substantial ~~extended~~discretion ~~until~~to ~~the~~determine ~~end~~persons, ofamounts, ~~calendar~~time, ~~year 2015. During fiscal year 2015~~price, weexercise ~~have written off $1~~terms,~~239,981~~ ~~related~~and torestrictions of the ~~discount~~grants, onif ~~this receivable~~any.

As of January 31, 2016, the Company could grant up to 1,000,000 shares of common stock under the 2015 Stock Incentive Plan (the “2015 Plan”). The 2015 Plan is administered by the Compensation ~~Plans~~Committee of the Board of Directors, or in the absence of a Compensation Committee, the full Board of Directors, which has substantial discretion to determine persons, amounts, time, price, exercise terms, and restrictions of the grants, if any. The 2015 Plan was approved by the Board of Directors on August 17, 2015 and approved by the stockholders on September 28, 2015.

AsOptions ofgranted ~~October 31, 2015, the Company could grant up~~ to 267,744 shares of common stock under the 2013 Stock Incentive Plan (“2013 Plan”). The 2013 Plan is administered by the Compensation Committee of the Board of Directors, or in the absence of a Compensation Committee, the full Board of Directors, which has substantial discretion to determine persons, amounts, time, price, exercise terms, and restrictions of the grants, if any.non-employees

AsWe ofaccount ~~October~~for ~~31,~~options granted ~~2015,~~to ~~the~~non-employees ~~Company~~under ~~could~~the ~~grant~~provisions upof toASC 1505-50,~~000,000~~ ~~shares~~Equity-Based ofPayments ~~common~~to ~~stock~~Non-employees, ~~under~~and record the ~~2015~~associated expense ~~Stock~~at ~~Incentive~~fair ~~Plan~~value (on the ~~“2015~~final ~~Plan”)~~measurement date. ~~The~~Because ~~2015~~there ~~Plan~~ is ~~administered~~no bydisincentive for nonperformance for these awards, the final ~~Compensation~~measurement ~~Committee~~date ofoccurs when the ~~Board~~services ofare ~~Directors~~complete, orwhich inis the ~~absence~~vesting ofdate. For the options granted to non-employees on a ~~Compensation~~graded ~~Committee~~vesting schedule, we estimate the ~~full~~fair ~~Board~~value of ~~Directors,~~the ~~which~~award ~~has~~as ~~substantial~~of ~~discretion~~the toend ~~determine~~of ~~persons,~~each ~~amounts,~~reporting ~~time,~~period ~~price,~~and ~~exercise~~recognize ~~terms,~~an ~~and~~appropriate portion ~~restrictions~~ of the ~~grants,~~cost ifbased ~~any~~on the fair value on that date. ~~The~~When ~~2015~~the ~~Plan~~award ~~was~~vests, ~~approved~~we byadjust the ~~Board~~cost ofpreviously ~~Directors~~recognized onso ~~August~~that the ~~17,~~cost ~~2015~~ultimately ~~and~~recognized ~~approved~~is byequivalent to the ~~stockholders~~fair value on ~~September~~the ~~28,~~date ~~2015~~the performance is complete.

~~Options~~The following table provides information about options granted to ~~non-~~employees under our stock incentive plans during the periods indicated:

We account for options granted to non-employees under the provisions of ASC 505-50, Equity-Based Payments to Non-employees, and record the associated expense at fair value on the final measurement date. Because there is no disincentive for nonperformance for these awards, the final measurement date occurs when the services are complete, which is the vesting date. For the options granted to non-employees on a graded vesting schedule, we estimate the fair value of the award as of the end of each reporting period and recognize an appropriate portion of the cost based on the fair value on that date. When the award vests, we adjust the cost previously recognized so that the cost ultimately recognized is equivalent to the fair value on the date the performance is complete.

	Three Months Ended				Six Months Ended
	January 31				January 31,
	2016		2015		2016		2015

Number of Options Granted		10,000		—		10,000		25,000
Number of Options Vested		3,334		—		3,334		25,000
Compensation Expense Recognized	$	4,601	$	—		4,601	$	112,500
Weighted Average Exercise
Price of Options Granted	$	1.38	$	—		1.38	$	4.50

~~The following table provides information about options granted to non-employees under our stock incentive plans during the years ended as follows:~~28

As of October 31,	2015		2014
Number of options granted		-		25,000
Compensation expense recognized	$	-	$	112,500
Weighted average exercise price of options granted	$	-	$	4.50

Summary information regarding stock options issued and outstanding as follows:

	Options		Weighted Average Strike Price		Aggregate Intrinsic Value		Weighted Average Remaining Contractual Life (in Years)
Outstanding at July 31, 2015		198,333	$	6.63	$	—		6.23
Granted		10,000		1.40		—		4.94
Exercised		—		—		—		—
Expired or Forfeited		—		—		—		—
Outstanding at January 31, 2016		208,333		6.57	$	—		6.17

	Options		Weighted average share price		Aggregate intrinsic value		Weighted average remaining contractual life (in years)
Outstanding at July 31, 2015	$	198,333	$	6.52	$	-		4.06
Granted		-		-		-		-
Exercised		-		-		-		-
Expired or forfeited		-		-		-		-
Exercisable at October 31, 2015	$	198,333	$	6.63	$	-		6.48

At January 31, 2016, the number of non-vested stock options was 6,667.

23Warrants

~~Table~~Effective September 8, 2015, Typenex, exercised warrants to purchase 260,788 shares of ~~Contents~~our common stock which it held (at an exercise price of $1.17 per share. The warrants originally had (a) an exercise price of $2.25 per share, but were subsequently reduced in connection with Typenex’s anti-dilution rights to $1.17 per share and (b) provided Typenex the right to acquire 38,889 shares of common stock, but were subsequently increased to 260,788 shares of common stock in connection with Typenex’s anti-dilution rights, in a net cashless transaction. On September 18, 2015, in connection with such exercise, we issued 128,048 net shares of common stock to Typenex.

NoSummary ~~non-vested~~information regarding common stock ~~options~~warrants ~~existed~~issued and outstanding as of ~~October~~January 31, ~~2015~~2016, is as follows:

Warrants

	Warrants		Weighted Average Strike Price		Aggregate Intrinsic Value		Weighted Average Remaining Contractual Life (in Years)
Outstanding at July 31, 2015		978,299	$	5.20	$	302,283		1.84
Granted		—		—		—		—
Exercised		311,632		0.28		302,283		—
Expired or Forfeited		—		—		—		—
Outstanding at January 31, 2016		666,667		7.50	$	—		0.04

~~Effective~~At ~~September~~January 831, ~~2015~~2016, ~~Typenex~~the ~~Co-Investment,~~number ~~LLC~~of warrants ~~(“Typenex”),~~outstanding ~~exercised~~and ~~warrants~~exercisable towas ~~purchase 260~~666,~~788~~667 ~~shares~~with ~~of our common stock which it held (at~~ an exercise price of $17.1750 per ~~share).~~warrant ~~The~~and ~~warrants originally had (~~a) anremaining ~~exercise~~life ~~price~~ of ~~$2.25~~less than ~~per~~one ~~share, but were subsequently reduced in connection with Typenex’s anti-dilution rights to $1~~year.17 ~~per~~These ~~share and (b) provided Typenex the right to acquire 38~~warrants,~~889~~ ~~shares~~which ofremained ~~common stock~~unexercised, ~~but~~have ~~were~~all ~~subsequently~~expired ~~increased~~before tofiling ~~260,788 shares~~ of ~~common~~this ~~stock in connection with Typenex’s anti-dilution rights, in a net cashless transaction~~report. ~~On September 18, 2015, in connection with such exercise, we issued 128,048 net shares of common stock to Typenex.~~

~~Summary~~Note ~~information~~11 ~~regarding~~– ~~common~~Related ~~stock~~Party ~~warrants issued and outstanding as of October 31, 2015, is as follows:~~Transactions

	Warrants		Weighted average share price		Aggregate intrinsic value		Weighted average remaining contractual life (in years)
Outstanding at year ended July 31, 2015		978,299	$	5.20	$	302,283		1.84
Granted
Exercised		311,632		0.28		302,283
Expired
Outstanding at year ended October 31, 2015		666,667		7.5		-		0.29

During the reporting period we have had transactions as described below with entities controlled by Michael Watts. Michael Watts is the father-in-law of Jeremy Driver, who served as a director and Chief Executive Officer of the Company through November, 2013. Additionally, Michael Watts is the brother of Kent P. Watts, who became the Company’s Chairman of the Board of Directors in October 2013. Michael Watts is a related party to the Company by virtue of his relationships with Mr. Driver and with Mr. Watts. Further, one of Michael Watts’ adult children is a significant shareholder of the Company’s common stock. Between them, they are beneficial owners of approximately 55% of the Company’s outstanding common stock.

~~Warrants outstanding and exercisable as of October 31, 2015:~~29

Exercise Price		Outstanding Number of Shares		Remaining Life	Exercisable Number of Shares
$	7.50		666,667	1 year or less		666,667
			666,667			666,667

A company controlled by Michael Watts purchased a 5% working interest in one of our wells in Galveston Bay. During the year ended as of July 31, 2015, the Company received approximately $58,000 from Mr. Michael Watts for this related party receivable previously outstanding for approximately the same amount as of July 31, 2014. As of January 31, 2016 and July 31, 2015, this company owed us $72 and $186, respectively, in joint interest billings.

~~Note~~In 10January –2016, ~~Related~~the ~~Party~~Company ~~Transactions~~received $367,000 in cash from Michael Watts and other related parties to subscribe 489,334 shares of the common stock at $0.75 per share.

~~During~~See ~~the~~also ~~reporting~~Note ~~period~~6 we– Related ~~have~~Party ~~had~~Notes ~~transactions as described below with entities controlled by Michael Watts~~Payable. Michael Watts is the father-in-law of Jeremy Driver, who served as a director and Chief Executive Officer of the Company through November, 2013. Additionally, Michael Watts is the brother of Kent P. Watts, who became the Company’s Chairman of the Board of Directors in October 2013. Michael Watts is a related party to the Company by virtue of his relationships with Mr. Driver and with Mr. Watts. Further, one of Michael Watts’ adult children is a significant shareholder of the Company’s common stock. Between them, they are beneficial owners of approximately 55% of the Company’s outstanding common stock.

ANote ~~company~~12 ~~controlled~~– byCommitments ~~Michael~~and Watts purchased a 5% working interest in one of our wells in Galveston Bay. During the year ended as of July 31, 2015, the Company received approximately $58,000 from Mr. Michael Watts for this related party receivable previously outstanding for approximately the same amount as of July 31, 2014.Contingencies

~~As of October 31, 2015 and July 31, 2015, this company owed us $72 and $186, respectively, in joint interest billings.~~Contingencies

24Legal

~~Table~~We are subject to legal proceedings, claims and liabilities which arise in the ordinary course of ~~Contents~~business. We accrue for losses associated with legal claims when such losses are probable and can be reasonably estimated. These accruals are adjusted as additional information becomes available or circumstances change. Legal fees are charged to expense as they are incurred.

InAlthough ~~October~~we ~~2013~~may, ~~prior~~from time to ~~our acquisition of HCN~~time, we settled our obligations to HCN under the HCN Consulting Agreement through the issuance of 619,960 shares of common stock of the Company. The HCN Consulting Agreement was between HCN and NEI and provided for HCN to be ~~the~~involved ~~primary~~in ~~negotiator~~litigation and ~~operator~~claims ofarising ~~the~~out ~~Namibian concession. These obligations consisted~~ of ~~the~~our ~~then-outstanding~~operations ~~$2,400,000 Fee and $533,630 of interest and late fees associated with the Fee. Further, $25,000 of the related interest and fees was settled~~ in ~~cash. Prior to~~ the ~~Company’s~~normal ~~acquisition~~course of HCN, HCN sold these shares to an entity, in which Michael Watts has a minority interest, for a note receivable of $1,859,879. The Company arranged the sales of these shares in anticipation of a possible business ~~combination~~, inwe anare ~~effort~~not ~~to ensure that the shares would remain as part of public float and therefore continue to be properly included in calculations for exchange-listing criteria and provide~~ currently a ~~source~~party ~~of funding for Company operations. It is anticipated that these shares will eventually be sold and the proceeds of their sales used~~ to ~~pay~~any ~~the~~material ~~receivable.~~legal ~~As HCN is now our wholly-owned subsidiary, this receivable for the sale of the Company common stock is classified as receivable for common stock within equity~~proceeding. ~~See discussion of this receivable in Note 10 – Capital Stock – Receivables for Common Stock.~~

OnThe ~~September~~General 6,Land ~~2013, HCN sold 191,667 shares~~ Office of ~~HEC common stock to an employee of HCN (~~the ~~nephew~~State of ~~our~~Texas ~~Chairman and Chief Executive Officer~~(“GLO”) inhas ~~exchange~~asserted ~~for~~claims aagainst ~~note receivable in~~ the ~~amount~~Company ofunder ~~$1,000,000.~~various ~~HEC~~Miscellaneous ~~acquired this receivable upon its acquisition of HCN~~Easements. The ~~note~~GLO isclaims ~~non-interest~~that ~~bearing~~the ~~and~~Company is ~~payable~~obligated ~~only~~to ~~upon~~either renew the ~~sale~~various ofMiscellaneous ~~the~~Easements ~~common~~by ~~stock~~paying to a ~~third~~renewal ~~party~~fee to the GLO, or ~~HEC~~to ~~stock~~remove ~~being~~any ~~listed~~pipeline onlaid ~~either~~in the ~~NASDAQ~~various orMiscellaneous ~~NYSE~~Easements. ~~stock~~The ~~exchanges.~~GLO Wehas ~~will~~asserted ~~receive~~its ~~95%~~claims, ofand the ~~proceeds~~Company uphas disclaimed toany ~~$1,000,000~~obligations ifunder the ~~underlying~~various ~~stock~~Miscellaneous isEasements. ~~sold~~On toAugust a29, ~~third~~2014, ~~party.~~the ~~Within~~Company 90filed ~~days~~a oflawsuit ~~HEC~~in ~~stock~~state district ~~being~~court ~~listed~~in onChambers ~~a major stock exchange~~County, weTexas ~~will~~asking ~~receive~~the upcourt to ~~$1,000,000,~~reform oran ~~the~~assignment ~~note~~and ~~can~~assumption beagreement ~~paid~~in ~~earlier at~~ the ~~discretion~~property records of ~~the~~Chambers ~~other party~~County. ~~These~~The ~~shares~~Company ofhas ~~common~~been ~~stock~~in ~~are~~discussions ~~held~~with in the ~~name~~GLO ofin ~~the~~an ~~investors~~attempt ~~and~~to ~~are~~resolve ~~beneficially~~the ~~owned~~dispute. byAt ~~the~~this ~~investors~~time, ~~and~~there is ~~the~~no ~~shares~~estimate ~~are~~of ~~not~~loss ~~retrievable~~with byrespect ~~the~~to ~~Company~~this lawsuit. AtSee ~~October~~Note ~~31,~~6 ~~2015,~~- we(6) ~~have~~Typenex ~~$325~~Co-Investment,~~000~~ ~~outstanding~~LLC onConvertible ~~this~~Note ~~receivable~~for lawsuit with Typenex.

On December 4, 2013, HCN sold 619,960 shares of unregistered and restricted Company common stock in return for a $1,859,879 non-interest bearing note receivable from SMDRE LLC (“SMDRE”), an entity in which Michael Watts, the brother of our Chief Executive Officer, has a minority interest. The Company acquired this receivable upon its acquisition of HCN. The 619,960 shares of Company common stock were previously issued by the Company to HCN to settle liabilities due by the Company related to the consulting services agreement described below in Note 7 – Notes Payable. The receivable from the individual is due to the Company upon the following conditions: 1) 100% of the proceeds payable from the sale of all or part of the shares by the owner of the shares to a third party; 2) within sixty days of the six month anniversary of the December 4, 2013 stock sale or within sixty days from the date that the shares become unrestricted (whichever comes first); or 3) 100% of any remaining balance due within 90 days of the Company being listed on a major stock exchange and at such time as the share price is above $6.00 per share. As with the above receivable for common stock, this receivable for the sale of the Company common stock is classified as a receivable for common stock within equity. These shares of common stock are held in the name of the investors and are beneficially owned by the investors and the shares are not retrievable by the Company.Environmental

25We accrue for losses associated with environmental remediation obligations when such losses are probable and can be reasonably estimated. These accruals are adjusted as additional information becomes available or circumstances change. Costs of future expenditures for environmental remediation obligations are not discounted to their present value. Recoveries of environmental remediation costs from other parties are recorded at their undiscounted value as assets when their receipt is deemed probable.

~~Table~~There is soil contamination at a tank facility owned by GBE. Depending on the technique used to perform the remediation, we estimate the cost range to be between $150,000 and $900,000. We cannot determine a most likely scenario, thus we have recognized the lower end of ~~Contents~~the range. We have submitted a remediation plan to the appropriate authorities and have not yet received a response. As of July 31, 2015, $150,000 has been recognized and is included in the balance sheet under the caption “Accounts payable and accrued expenses.”

In November 2013, we issued a promissory note for funds received from Mr. Kent P. Watts, our Chairman, of $100,000. Under the terms of the note, principal on the note was due after one year and incurred interest at 5% per annum payable on a monthly basis. In April 2014, the Company entered into a new debt agreement whereby Mr. Watts agreed to loan the Company up to $600,000 at an interest rate of 6.25%. The previous debt of $100,000 was rolled into this new note. Additionally, we borrowed $200,000 from Mr. Watts during April 2014 and $300,000 from Mr. Watts in May 2014. The total balance on the note was $600,000 as of October 31, 2015. Accrued interest is payable monthly beginning in May 2014, and beginning in August 2014 the principal is due in 36 monthly payments through July 2017. The note is secured by the Company’s assets owned by GBE, subject to any other lien holder’s superior rights, if any. As part of the financing agreement with Shadow Tree, this note has been subordinated, and no payments will be made until the Shadow Tree debt has been repaid.Commitments

OnIn ~~April~~February 272014, we ~~2015,~~agreed ~~the~~to ~~Board~~sublease of4,915 ~~Directors~~square ~~agreed~~feet toof ~~offer~~office ~~SMDRE~~space ~~the~~from ~~option~~Greenshale Energy, ~~for~~LLC 90located ~~days,~~at ~~for~~800 ~~the~~Gessner ~~SMDRE~~Rd., ~~note~~Houston, toTexas 77024. beThe ~~paid~~lease inhas ~~full~~a ~~for~~term athrough ~~67%~~December ~~discount~~31, (i2017.~~e.,~~ ~~the~~Monthly ~~offer~~rent toof ~~be paid~~ $~~619~~10,~~898~~650 ~~immediately)~~is (due under the ~~“Pre-Payment~~lease ~~Option”). Between~~from ~~April~~March 271, ~~2015~~2014 ~~and~~through December ~~July 9~~31, ~~2015~~2014; ~~the~~$10,854 ~~Company~~is ~~received~~due ~~payments~~under on the ~~SMDRE~~lease ~~LLC~~from ~~note~~January in1, ~~the~~2015 ~~amount~~through ofDecember 31, 2015; $~~531~~11,~~000.~~059 ~~The~~is ~~balance~~due ofunder the ~~discounted~~lease from ~~note~~January ~~of $88~~1,~~898~~ ~~has~~2016 ~~been~~through ~~extended~~December ~~until~~31, ~~the~~2016; ~~end~~and of$11,264 ~~calendar~~is ~~year~~due ~~2015.~~under ~~During~~the ~~fiscal~~lease ~~year~~from ~~2015,~~January ~~we have written off $~~1,~~239,981~~ ~~related~~2017 tothrough ~~the~~December ~~discount~~31, ~~on this receivable~~2017.

~~As of October 31, 2015, the Company had current liabilities owed to Mr. Watts of approximately $156,585.~~30

OnIn ~~July~~April 162012, ~~2015, pursuant to a Note Subscription Agreement,~~ we executed ~~sold~~ a ~~$350,000~~Compression ~~Convertible~~and ~~Secured~~Handling ~~Promissory~~Agreement ~~Note~~ (~~with a $7,000 original issuance discount) to Duma Holdings, LLC (“Duma Holding” and~~ the “~~Duma Holdings Note~~PHA”). ~~The Duma Holdings Note (along~~ with ~~any~~another ~~unpaid~~operator. ~~interest~~Under ~~thereon)~~the isterms ~~convertible~~of ~~at any time, provided~~ the ~~note is converted in full~~PHA, ~~into (a) 1.75 units (“Units” )~~ oil, ~~each~~natural ~~consisting of 25~~gas,~~000~~ ~~shares of common stock of the Company~~ and ~~$100,000~~salt inwater ~~face~~from ~~amount~~one of ~~Convertible~~our ~~Subordinated~~fields ~~Promissory~~would ~~Notes~~be indisposed ~~the form currently offered by the Company in its ongoing private offering~~ of ~~Units~~through ~~as previously disclosed in~~ the ~~Current~~operator’s ~~Report~~facility. onUnder ~~Form 8-K filed by~~ the ~~Company with the Securities and Exchange Commission on June 19~~agreement, we ~~2015~~are ~~(which~~responsible ~~convert~~for ~~automatically~~approximately ~~upon~~a ~~their~~flat ~~issuance~~fee ~~into shares~~ of ~~Series B Convertible Preferred Stock at the rate of~~ $1,000 per ~~share);~~month ~~and~~as ~~(b)~~a ~~350,000~~gauging ~~shares of common stock (393~~fee,~~750~~ ~~shares~~our ofpro-rata ~~common~~share ~~stock in aggregate when combined with the shares which form part~~ of ~~the~~repairs ~~Units). The Duma Holdings Note is due and payable by us on November 30, 2015. The Duma Holdings Note accrues interest~~ at the ~~rate of 15% per annum~~facility, ~~payable beginning on October 31, 2015,~~ and ~~quarterly thereafter through maturity. The Duma Holdings Note can only be repaid with the prior written approval of Duma Holdings. The Duma Holdings Note contains usual and customary events of default~~compression, ~~representations~~salt ~~and~~water ~~warranties. The payment of tile principal and accrued interest due under the Duma Holdings Note is personally guaranteed by Kent P. Watts~~disposal, ~~our Chief Executive Officer~~ and ~~Michael~~other ~~Watts,~~charges ~~his~~based ~~brother,~~on ~~pursuant to separate guaranty agreements (~~the ~~“Guarantee~~volumes ~~Agreements”),~~disposed ~~and secured by a first priority security interest on certain real estate owned by Kent P. Watts pursuant to a Deed~~ of ~~Trust,~~through ~~Assignment~~the ~~of Rents and Security Agreement~~facility.

~~Note~~In 11April –2015, ~~Commitments~~this agreement was amended, as the Company will be handling the compression and ~~Contingencies~~dehydration of the gas with its own equipment. The agreement calls for ground lease, services fees, and other costs. The agreement is to continue until terminated by either party.

~~Contingencies~~Letters of Credit

~~Legal~~Oil and gas operators in the State of Texas are required to obtain a letter of credit in favor of the Railroad Commission of Texas as security that they will meet their obligations to plug and abandon the wells they operate. We have two letters of credit in the amount of $6,610,000 and $120,000 issued by Green Bank. These letters of credit are collateralized by a certificate of deposit held with the bank for the same amount. We pay a 1.5% per annum fee in conjunction with these letters of credit. The amount held at the bank was recorded as Restricted Cash on the Company’s Consolidated Balance Sheets.

WeDuring ~~are~~the ~~subject~~three-month and tosix-month ~~legal~~periods ~~proceedings~~ended January 31, ~~claims~~2016 and ~~liabilities~~2015, ~~which~~we ~~arise~~prepaid inthe fees associated with the ~~ordinary~~Greenbank ~~course~~letters of ~~business.~~credit Wefor the ~~accrue~~respective ~~for~~year’s ~~losses~~interest ~~associated~~upfront ~~with~~and ~~legal~~amortized ~~claims~~these ~~when~~fees ~~such~~on ~~losses~~a ~~are~~straight-line ~~probable~~basis ~~and~~over ~~can~~their berespective ~~reasonably~~annual ~~estimated~~periods. The ~~These~~net ~~accruals~~prepaid ~~are~~fees ~~adjusted~~were asincluded ~~additional~~in ~~information~~Other ~~becomes~~Assets ~~available~~on orthe ~~circumstances~~Company’s ~~change~~Consolidated Balance Sheets. ~~Legal~~The ~~fees~~following ~~are~~table ~~charged~~reflects the toprepaid ~~expense~~balances as ~~they are incurred.~~follows:

	Three Months Ended						Six Months Ended
	January 31						January 31,
	2016			2015			2016			2015
Prepaid Letter of Credit Fees	$	74,475		$	67,300		$	99,300		$	101,250
Amortization		(24,825	)		(25,462	)		(49,650	)		(59,412	)
Net Prepaid Letter of Credit Fees	$	49,650		$	41,838		$	49,650		$	41,838

~~Table~~Note of13 ~~Contents~~– Subsequent Events

~~Although~~In weFebruary ~~may~~2016, ~~from~~we ~~time~~issued toan ~~time~~aggregate of 8,697 berestricted ~~involved~~shares ~~in litigation and claims arising out~~ of our ~~operations~~common instock ~~the~~to ~~normal~~our ~~course~~three ofdirectors ~~business~~(2,899 weshares ~~are~~each) ~~not~~in ~~currently~~consideration afor ~~party~~services ~~to any material legal proceeding~~rendered.

~~Previously,~~On weMarch ~~were~~9, ~~subject~~2016, tothe ~~Civ.~~Company ~~Action~~entered ~~No.~~into a ~~4:15-cv-00727,~~Special ~~Hydrocarb~~Private ~~Energy~~Placement ~~Corp.,~~Agreement etwith ~~al.~~Infinity v.Fund ~~Vincent~~LLC ~~Pasquale~~(“Infinity” ~~Scaturro;~~and In the ~~United~~“SPPA”). ~~States~~Pursuant ~~District~~to ~~Court for~~ the SPPA, ~~Southern~~Infinity ~~District~~agreed ofto ~~Texas~~pay ~~Houston~~the ~~Division.~~Company ~~Hydrocarb~~$2 ~~Energy Corp. was Plaintiff in this action~~million, ~~and~~within ~~had~~45 adays ~~claim~~ of ~~breach~~the ofeffective ~~contract~~date ~~against~~of ~~Mr.~~the ~~Scaturro~~SPPA, ~~and an application~~ for ~~preliminary and permanent injunction as~~ a ~~result~~to-be-designated series of ~~Mr.~~convertible ~~Scaturro’s~~preferred ~~violation~~stock of ~~a Lock Up Leak-Out Agreement executed by~~ the ~~parties on or about December 20, 2014~~Company. ~~Specifically,~~Such inpreferred ~~November~~stock ~~2014,~~will ~~Pasquale~~be V.convertible ~~Scaturro,~~into ~~the~~common ~~Company’s~~stock ~~former~~of ~~Chief Executive Officer and Kent P. Watts,~~ the Company’s ~~current~~on ~~Chief~~a ~~Executive~~one for ~~Officer and Chairman~~1,000 ~~entered~~basis; ~~into~~will ahave ~~stock~~no ~~purchase~~redemption ~~agreement~~rights, ~~which~~no ~~was~~voting ~~amended in December 2014~~rights, atno ~~which~~dividend ~~time~~rights; ~~certain~~will ofbe ~~the~~subject ~~adult children of Mr. Watts became party~~ to ~~the~~a ~~agreement~~9.99% ~~Pursuant~~ownership tolimitation; and ~~the~~have ~~agreement,~~such ~~Mr.~~other ~~Watts~~terms and ~~his~~conditions ~~children~~as are agreed toby ~~sell~~the Mrparties. ~~Scaturro~~The ~~the~~preferred ~~outstanding capital~~ stock ofwill abe ~~company~~convertible ~~which~~into ~~they owned which is located in Namibia which owns real estate, in consideration for 475,000 shares of~~ common stock ~~held by Mr. Scaturro (deliverable in tranches between December 2014 and April 2015,~~ of ~~which an aggregate of 75,000 had been delivered as of~~ the ~~date~~Company ofbased ~~the~~at ~~lawsuit below) to be transferred to Mr. Watts’ children and~~ a ~~promissory~~10% ~~note~~discount ~~in the amount of $475,000 payable~~ to Mrmarket. ~~Watts.~~ Additionally, ~~Mr.~~pursuant ~~Scaturro~~to ~~also~~the ~~entered into a lock-up agreement~~SPPA, ~~whereby~~Infinity he agreed to ~~sell~~subscribe afor ~~maximum~~up ofto ~~500~~$25 million in shares of ~~the Company’s~~ common stock ~~which~~of ~~he holds or may hold in~~ the ~~future~~Company, ~~per~~at ~~day, until the listing by the Company on~~ a ~~national~~10% ~~exchange~~discount ~~or NASDAQ, and thereafter~~ to ~~sell 5% of~~ the ~~ten~~then ~~day~~trading ~~moving~~price ~~volume weighted average~~ of ~~shares per day, during~~ the ~~24 months following the date of the December agreement. Subsequently, Kent P. Watts assigned his rights under the lock-up agreement to the~~ Company ~~and the lawsuit was filed by the Company seeking damages for Mr. Scaturro~~’s ~~breach~~common ~~of contract. In July 2015~~stock, from ~~the~~time ~~parties entered into a settlement agreement whereby Mr. Scaturro agreed~~ to ~~transfer an aggregate of 2~~time,~~237,500~~ ~~shares~~subject ~~of our common stock~~ to ~~Kent~~certain ~~P. Watts~~limitations, ~~(of~~rights ~~which 300,000 shares will be transferred~~ to ~~Mr.~~terminate ~~Watts’ legal counsel as part of a contingent settlement of amounts owed to such legal counsel)~~purchases, and anvolume ~~aggregate of 162~~restrictions,~~500~~ ~~shares of our common stock to two children of Mr. Watts; Mr. Scaturro retained 307,058 shares (the “Remaining Shares”), all interests held by Mr. Watts’ children~~ in the ~~Namibia~~form ~~company~~of ~~were~~an ~~transferred~~equity line toof ~~Mr. Scaturro~~credit, ~~and~~at ~~the~~such ~~consulting~~time ~~agreement~~as ~~which was previously in place between~~ the Company ~~and~~has ~~Mr.~~filed ~~Scaturro was terminated. The parties also agreed to dismiss the lawsuit~~ and ~~cross~~obtained ~~and~~effectiveness ~~counter claims with prejudice and release each other from outstanding claims and causes~~ of ~~actions.~~a ~~Finally,~~registration ~~Mr.~~on ~~Scaturro~~Form ~~agreed~~S-1 to ~~sell~~register ~~no more than 500 of~~ the shares ~~Remaining~~issuable ~~Shares~~to ~~per~~Infinity ~~day~~under ~~until~~such ~~December 18, 2016~~arrangement. ~~The lawsuit has been settled in July 2015.~~

~~The~~On ~~General~~March ~~Land~~9, ~~Office~~2016, of the ~~State~~Company ofreceived ~~Texas~~correspondence from ~~(“GLO”) has asserted claims against~~ the Company’s ~~under~~transfer ~~various~~agent, ~~Miscellaneous~~Fidelity ~~Easements.~~Transfer ~~The~~Company, ~~GLO~~regarding ~~claims~~the ~~that~~release of the ~~Company~~Pledged isShares ~~obligated~~ to ~~either~~Typenex ~~renew~~pursuant to the ~~various~~terms ~~Miscellaneous~~of ~~Easements~~the byPledge ~~paying~~Agreement. aOnce ~~renewal~~released, ~~fee~~such toshares ~~the~~will ~~GLO,~~be oreligible to ~~remove~~be ~~any~~freely ~~pipeline~~sold ~~laid~~ in the ~~various~~marketplace ~~Miscellaneous~~pursuant to ~~Easements~~Rule 144. ~~The~~Notwithstanding ~~GLO~~the ~~has~~release ~~asserted~~of ~~its claims, and~~ the ~~Company~~shares ~~has~~by ~~disclaimed~~our ~~any~~transfer ~~obligations~~agent, ~~under~~we ~~the~~plan ~~various~~to ~~Miscellaneous~~continue ~~Easements.~~to Onlitigate ~~August~~the ~~29,~~action ~~2014,~~with ~~the~~Typenex. The Company ~~filed~~and aCW ~~lawsuit~~Navigation, inInc. ~~state~~are ~~district~~currently ~~court~~ in ~~Chambers~~discussion ~~County,~~with ~~Texas~~respect ~~asking~~to the ~~court~~reimbursement toobligations ~~reform an assignment and assumption agreement in~~ the ~~property~~Company ~~records~~has oftowards CW ~~Chambers~~Navigation, ~~County~~Inc. ~~The Company has been~~ in ~~discussions~~connection with the ~~GLO~~release inof ~~an attempt to resolve~~ the ~~dispute~~Pledged Shares. AtSee ~~this~~also ~~time,~~Note ~~there~~7- isNotes noPayable ~~estimate~~and ofConvertible ~~loss~~Notes - ~~with~~(6) ~~respect~~Typenex toCo-Investment, ~~this~~LLC ~~lawsuit~~Convertible Note.

~~Environmental~~31

WeItem ~~accrue~~2. ~~for~~Management’s ~~losses~~Discussion ~~associated with environmental remediation obligations when such losses are probable~~ and ~~can~~Analysis ~~be reasonably estimated. These accruals are adjusted as additional information becomes available or circumstances change. Costs~~ of ~~future~~Financial ~~expenditures~~Condition ~~for~~and ~~environmental~~Results ~~remediation obligations are not discounted to their present value. Recoveries~~ of ~~environmental remediation costs from other parties are recorded at their undiscounted value as assets when their receipt is deemed probable.~~Operations

~~There~~CAUTIONARY isSTATEMENT ~~soil~~ON ~~contamination~~FORWARD-LOOKING at a tank facility owned by GBE. Depending on the technique used to perform the remediation, we estimate the cost range to be between $150,000 and $900,000. We cannot determine a most likely scenario, thus we have recognized the lower end of the range. We have submitted a remediation plan to the appropriate authorities and have not yet received a response. As of July 31, 2015, $150,000 has been recognized and is included in the consolidated balance sheets under the caption “Accounts payable and accrued expenses.”INFORMATION

27The Company is including the following cautionary statement for any forward-looking statements made by, or on behalf of, the Company. This quarterly report on Form 10-Q contains “forward looking statements” (as that term is defined in Section 27A(i)(1) of the Securities Act of 1933), including statements concerning plans, objectives, goals, strategies, expectations, future events or performance and underlying assumptions and other statements which are other than statements of historical facts. In some cases, you can identify forward-looking statements by terminology such as “may”, “should”, “expect”, “plan”, “intend”, “anticipate”, “believe”, “estimate”, “predict”, “potential” or “continue”, the negative of such terms or other comparable terminology. In evaluating these statements, you should consider various factors, including the assumptions, risks and uncertainties outlined in this report, if any, and our Annual Report on Form 10-K for the year ended July 31, 2015, filed with the Securities and Exchange Commission (the “SEC”) on November 13, 2015 (the “Annual Report”), under “Risk Factors”. These factors or any of them may cause our actual results to differ materially from any forward-looking statement made in this report. Forward-looking statements in this report include, among others, statements regarding our capital needs, business plans, and expectations.

~~Table~~While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding future events, our actual results will likely vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested herein. Some of ~~Contents~~the risks and assumptions include, but are not limited to: our need for additional financing; our exploration activities may not result in commercially exploitable quantities of oil and gas on our properties; the risks inherent in the exploration for oil and gas such as weather, accidents, equipment failures and governmental restrictions; our limited operating history; our history of operating losses; the potential for environmental damage; the competitive environment in which we operate; the level of government regulation, including environmental regulation; changes in governmental regulation and administrative practices; our dependence on key personnel; conflicts of interest of our directors and officers; our ability to fully implement our business plan; our ability to effectively manage our growth; and other regulatory, legislative and judicial developments.

~~Commitments~~We advise the reader that these cautionary remarks expressly qualify in their entirety all forward-looking statements attributable to us or persons acting on our behalf. Important factors that you should also consider, include, but are not limited to, the factors discussed under “Risk Factors” in this report, if any, and our Annual Report.

InThe forward-looking ~~March~~statements ~~2011,~~in wethis ~~executed~~report aare ~~lease~~made ~~for~~as ~~office~~of ~~space~~the indate ~~Houston,~~of ~~Texas.~~this ~~The~~report ~~lease term was three years~~ and we ~~had~~do annot ~~option~~intend toor ~~extend~~undertake ~~the~~to ~~lease~~update ~~for~~any of anthe ~~additional~~forward-looking ~~three~~statements ~~years.~~to ~~Our~~conform ~~scheduled~~these ~~rent~~statements ~~was~~to ~~$6,406~~actual ~~per month plus common area maintenance cost for the first year~~results, ~~$6,673~~except ~~plus~~as ~~common~~required ~~area~~by ~~maintenance~~applicable ~~cost for the second year~~law, ~~and $6,940 per month plus common area maintenance cost for~~ including the ~~third~~securities ~~year.~~laws Weof ~~did not extend this lease, but entered into a sublease arrangement with Greenshale LLC for office space in~~ the ~~same~~United ~~building~~States. ~~During September 2013, we terminated our lease for office space in Corpus Christi, Texas.~~

InCertain ~~February~~capitalized terms ~~2014,~~used webelow ~~agreed~~and tootherwise ~~sublease~~defined 4below,~~915~~ ~~square~~have ~~feet of office space from Greenshale Energy, LLC located at 800 Gessner Rd., Houston, Texas 77024. The lease has a term through December 31, 2017. Monthly rent of $10,650 is due under~~ the ~~lease~~meanings ~~from~~given ~~March~~to 1,such ~~2014~~terms ~~through~~in ~~December 31, 2014; $10,854 is due under~~ the ~~lease~~footnotes ~~from~~to ~~January~~our 1,consolidated ~~2015~~financial statements ~~through~~included ~~December~~above ~~31, 2015; $11,059 is due~~ under ~~the~~“Part ~~lease~~I ~~from~~- ~~January~~Financial 1,Information” ~~2016~~- ~~through~~“Item ~~December 31, 2016; and $11,264 is due under the lease from January~~ 1,. ~~2017~~Financial ~~through December 31, 2017~~Statements”.

InCertain ~~April~~abbreviations and ~~2012,~~oil ~~we executed a Compression~~ and ~~Handling~~gas ~~Agreement~~industry ~~(the “PHA”) with another operator. Under the~~ terms ofused ~~the~~throughout ~~PHA,~~this ~~oil,~~report ~~natural~~are ~~gas,~~described and ~~salt~~defined ~~water~~in ~~from~~greater ~~one~~detail ofunder ~~our fields would be disposed~~ “Glossary of ~~through~~Oil ~~the~~and ~~operator’s~~Natural ~~facility.~~Gas ~~Under~~Terms” ~~the~~beginning ~~agreement,~~on wepage ~~are~~13 ~~responsible for approximately a flat fee~~ of ~~$1,000 per month as a gauging fee, our pro-rata share of repairs at~~ the ~~facility,~~Annual ~~and compression~~Report, ~~salt water disposal,~~ and ~~other~~readers ~~charges~~are ~~based~~encouraged onto ~~the~~review ~~volumes~~that ~~disposed~~ section of ~~through~~ the ~~facility~~Annual Report.

In April 2015, this agreement was amended, as the Company will be handling the compression and dehydration of the gas with its own equipment. The agreement calls for ground lease, services fees, and other costs. The agreement is to continue until terminated by either party. Overview

~~Letters~~As used in this Quarterly Report: (i) the terms “we”, “us”, “our”, “Hydrocarb”, “HEC”, “Penasco”, “Galveston Bay”, “SPE”, “NEI” and the “Company” mean Hydrocarb Energy Corp and its wholly owned subsidiaries Penasco Petroleum Inc., Galveston Bay, LLC, SPE Navigation I, LLC, and Namibia Exploration, Inc. Hydrocarb Corporation (“HCN”), Hydrocarb Texas Corporation, Hydrocarb Energy DRC Corporation, Hydrocarb Namibia Energy (Pty) Limited and Hydrocarb Guinea SARL plus our 95% ownership interest of ~~Credit~~Otaiba Hydrocarb LLC, unless the context otherwise requires; (ii) “SEC” refers to the Securities and Exchange Commission; (iii) “Securities Act” refers to the Securities Act of 1933, as amended; (iv) “Exchange Act” refers to the Securities Exchange Act of 1934, as amended; and (v) all dollar amounts refer to United States dollars unless otherwise indicated.

Oil and gas operators in the State of Texas are required to obtain a letter of credit in favor of the Railroad Commission of Texas as security that they will meet their obligations to plug and abandon the wells they operate. We have two letters of credit in the amount of $6,610,000 and $120,000 issued by Green Bank. These letters of credit are collateralized by a certificate of deposit held with the bank for the same amount. We pay a 1.5% per annum fee in conjunction with these letters of credit.32

~~During~~The following discussion of our plan of operations, results of operations and financial condition as at and for the ~~quarters~~ three months ended ~~October~~January 31, ~~2015~~ 2016 and ~~2014~~the six months ended January 31, we2016 ~~prepaid~~should ~~the~~be ~~fees~~read ~~associated~~in conjunction with ~~the~~our ~~Greenbank~~unaudited ~~letters~~consolidated ofinterim ~~credit~~financial statements and related notes for the ~~respective~~six ~~year’s~~months ~~interest~~ended ~~upfront~~January ~~and~~31, ~~amortized~~2016, ~~these~~included ~~fees~~in onthis aQuarterly ~~straight-line~~Report, ~~basis~~as ~~over~~well ~~their~~as ~~respective~~our ~~annual~~Annual ~~periods.~~Report ~~The~~on Form ~~following~~10-K ~~table~~for ~~reflects~~ the ~~prepaid~~year ~~balances~~ended asJuly ~~follows:~~31, 2015.

October 31,		2015			2014
Prepaid letter of credit fees	$	99,300		$	101,251
Amortization		(24,825	)		(33,950	)
Net prepaid letter of credit fees	$	74,475		$	67,301

Plan of Operations

~~Note~~During both 12of –the ~~Going~~reporting ~~Concern~~periods contained herein, there has been a significant decrease in the commodity price of oil and a smaller decrease in the commodity price of gas. This has affected the Company’s revenue materially.

~~The~~In Galveston ~~accompanying~~Bay, ~~condensed~~Texas ~~consolidated~~we ~~financial~~plan ~~statements~~to ~~have~~continue ~~been~~enhancing ~~prepared~~the onproduction afrom ~~going~~our ~~concern~~four ~~basis,~~productive ~~which~~fields. ~~contemplates~~Our ~~the~~development ~~realization~~program ofincludes primarily ~~assets~~reworking, infrastructure improvements, and ~~the~~recompletions, ~~satisfaction~~as ofwell ~~liabilities~~as indrilling, as to exploit the ~~normal~~known ~~course~~reserves ofin ~~business.~~at least ~~The~~18 ~~Company~~wells. ~~has~~Internal ~~not~~estimates ~~generated~~show ~~any~~the ~~significant~~projects, ~~revenues~~if ~~from~~successful, ~~ongoing~~can ~~operations~~almost ~~and~~quadruple ~~incurred~~current ~~net~~production ~~losses~~enhancing ~~since~~cash ~~inception~~flow significantly. ~~These~~Due ~~matters~~to ~~raise~~the ~~substantial~~fact ~~doubt~~that ~~about~~a ~~the~~large ~~Company’s~~proportion ~~ability~~of tocurrent ~~continue~~operating costs in Galveston Bay are fixed it is expected that as aproduction ~~going~~grows ~~concern.~~an ~~The~~increasing ~~condensed~~percentage ~~consolidated~~of ~~financial~~the ~~statements~~revenue dowill ~~not~~contribute ~~include~~to ~~any~~positive ~~adjustments~~cash ~~relating~~flow. We plan to ~~the~~fund ~~recoverability~~these projects as long as working capital and ~~classification~~cash-flow permits and pending success of ~~asset~~previous ~~amounts~~projects. orIf ~~the~~we ~~classification~~are ofable ~~liabilities~~to ~~that~~secure ~~might~~either bebank or ~~necessary~~equity ~~should~~financing in the ~~Company~~near befuture, ~~unable~~this todevelopment ~~continue~~plan ascan abe ~~going concern~~accelerated.

28In Namibia, Africa, we plan to interpret the newly acquired aerial gravity magnetic survey data and develop the acquisition plan for new 2-D seismic data over the concession. This will include seeking a new partner that will, at least partially, carry us through the seismic acquisition program. 3-D seismic will later be utilized for those identified structures which appear most prospective. Drilling of the first well is several years away. In the meanwhile, our goals are to increase the value and decrease the risk profile of our concession acreage in Namibia.

~~Table~~Our plan of ~~Contents~~operations over the next twelve months is to increase cash flow upon one or more of the following occurring:

Management’s principal objective is to maximize shareholder value by, among other things, increasing production by developing its acreage, increasing profit margins by evaluating and optimizing its production, and executing its business plan to increase property values, prove its reserves, and expand its asset base1. ~~While~~Continue ~~management currently has no plans~~ to ~~discontinue~~receive orpayments ~~revise its business plan, recent volatility and decrease in crude oil prices may cause management to cut back~~ on its development or acquisition plans, or otherwise revisit its business and/or its capital expenditure plan. Continued volatility and decreases in crude oil prices may accelerate such cut back or revisions. To combat price volatility in crude oil process and further diversify the ~~business,~~receivable ~~management~~for ~~has~~Company ~~increased~~common ~~its focus on the development of the Company.~~stock;

~~Note~~2. 13Raise –capital ~~Subsequent~~by ~~Events~~farming down a portion of our Owambo Basin concession in Namibia to an industry partner;

~~Adar~~3. ~~Bays~~Release restricted cash from the State Bonding requirement, ~~LLC~~as shut-in wells are brought back into production and/or ~~Union~~as ~~Capital,~~wells ~~LLC~~are ~~Notes~~plugged;

On November 9, 2015, we sold each of Adar Bays, LLC (“Adar”) and Union Capital, LLC (“Union”), identical 8% Short Term Cash Redeemable Notes (collectively, the “Initial Notes”) in the amount of $208,000 ($416,000 in aggregate)4. ~~The~~Continue ~~Initial Notes were issued pursuant~~ to ~~the~~enhance ~~terms~~production offrom Securities Purchase Agreements dated as of the same date. In addition to the Initial Notes, we sold Adar and Union each another secured note in the amount of $208,000 each ($416,000 in aggregate)(the “Second Notes”). The purchase price of the Initial Notes was paid in cash at closing (November 10, 2015), and the purchase price of the Second Notes was each paid by way of the issuance of an offsetting $208,000 secured note issued to us by each of Adar and Union (the “Buyer Notes”). Pursuant to the Securities Purchase Agreements, Adar and Union each agreed not to sell short any shares of our ~~common~~four ~~stock~~production sooil ~~long as each purchaser’s Initial Note or Second Note is outstanding. In connection with the sale of the Initial Notes, we paid $16,000 in legal fees ($8,000 to each investor)~~ and ~~paid~~gas ~~$30,000~~fields in ~~due~~Galveston ~~diligence~~Bay; ~~fees ($15,000 per Initial Note), provided that substantially similar fees are payable in connection with the Second Notes in the event such Second Notes are paid by Adar~~ and ~~Union as described in greater detail below.~~

~~The Initial Notes accrue interest at the rate of 8% per annum and have a two year term~~5. WeRaising ~~are~~capital ~~required~~through ~~to pre-pay~~ the ~~Initial Notes 180 days after the~~ issuance ~~date~~of ~~(the~~additional ~~“Pre-Payment~~equity ~~Date”), provided that if we fail to prepay such notes in full on the Pre-Payment Date (~~or ~~before),~~debt the holders thereof have the right to convert the principal and accrued interest owed under such Initial Notes into our common stock at a 40% discount (increasing to 50% if we receive a DTC “Chill” on our common stock or upon the occurrence of certain events of default) to the lowest trading price of our common stock during the 15 trading days prior to conversionsecurities. Notwithstanding the foregoing, there is an initial soft floor of $0.30 per share on conversions, which means that in the event our common stock closes below $0.30 per share, then the applicable holder may not convert its notes for the 10 trading days immediately preceding the first time the price closes below $0.30 per share. However, in the event the price of our common stock closes above $0.30 per share in that 10 day period, the holder may again convert, without waiting the balance of the 10 days. Additionally, following the 10 day period, the applicable holder has a three day grace period to convert, even if the common stock closes below the next lower soft floor level (as described in the following sentence). This process is repeated with soft floors of $0.15 per share and $0.075 per share. At no time may the Initial Notes be converted into shares of our common stock if such conversion would result in the applicable holder and its affiliates owning an aggregate of in excess of 9.9% of the then outstanding shares of our common stock.

~~The~~Our plan ~~Initial Notes may be prepaid, including in connection with any pre-payment on or prior to the Pre-Payment Date, with the following penalties: (i) if the Initial Notes are prepaid within 60 days~~ of ~~the~~operations ~~issuance~~over ~~date, then at 115% of~~ the ~~face~~next ~~amount~~twelve ~~plus~~months ~~any~~will ~~accrued~~always ~~interest;~~be ~~(ii)~~subject ifto ~~the~~available ~~Initial~~capital ~~Notes~~which ~~are~~will ~~prepaid~~be ~~after~~determined 60by ~~days after~~ the ~~issuance date but less than 121 days after the issuance date, then at 135%~~ success of ~~the~~projects ~~face~~that ~~amount plus any accrued interest and (iii) if the Initial Notes~~ are ~~prepaid~~currently ~~after~~in ~~120~~progress ~~days after the issuance date but on~~ or ~~before~~will ~~the~~begin ~~Pre-Payment Date, then at 145% of the face amount plus any accrued interest~~soon. ~~The~~As ~~Initial Notes may not be prepaid after the Pre-Payment Date~~management, ~~except~~we ~~with~~will ~~the~~determine ~~approval of~~ the ~~applicable~~best ~~holders.~~use ~~Additionally, upon the occurrence~~ of ~~certain~~our ~~fundamental~~capital ~~transactions involving~~ given the ~~Company~~circumstances and its common stock, the Initial Notes are required to be redeemed in cash for 150% of the principal amount then outstanding, plus accrued and unpaid interest (provided upon the occurrence of such event, such Initial Notes may also be converted into common stock at the ~~option of the holders)~~time.

29Various conditions outside of our control may detract from our ability to raise the capital needed to execute our plan of operations, including the price of oil as well as the overall market conditions in the international and domestic economies. Any of these factors could have a material adverse impact upon our ability to raise capital or obtain financing and, as a result, upon our short-term or long-term liquidity.

~~Table of Contents~~33

~~The~~Results ~~Initial Notes provide for customary events~~ of default such as failing to timely make payments under the Initial Notes when due, and including our failure to maintain a reserve of shares in connection with the conversion of the Initial Notes equal to at least four times the number of shares of common stock that could be issuable thereunder at any time (initially 1.1 million shares per Initial Note), any judgment existing against us in excess of $250,000, our common stock being delisted from an exchange (including any OTC Markets exchange), a change in the majority of our Board of Directors, us becoming delinquent in our periodic filings with the SEC, or us losing our “bid” price for our common stock, subject where applicable to our ability to cure certain defaults. Upon the occurrence of an event of default, the holders of the Initial Notes can declare the entire amount of the Initial Notes immediately due and payable, together in the event of certain defaults, additional penalties or liquidated damages totaling between an additional 10% and 50% of the outstanding principal amount of the Initial Notes, together in some cases with make-whole payments for delivery delays and other penalties. Additionally, upon the occurrence of an event of default, the interest rate of the Initial Notes increases to 24% per annum.Operations

The ~~Second~~following ~~Notes~~table ~~accrue~~sets out ~~interest~~consolidated atdata ~~the~~for ~~rate of 8% per annum, are due on November 9, 2017 and have substantially similar terms and conditions as~~ the ~~Initial~~periods Notes described above (except that they include additional events of default such as us having a closing bid price less than $0.50 per share and/or having an aggregate trading value of our common stock of less than $50,000 in any five consecutive trading day period), provided that there are no prepayment penalties associated with the Second Notes, and provided further that no amounts are due under the Second Note (including interest thereon) and the Second Notes are not convertible, unless or until each investor’s applicable Buyer Note is paid in full in cash. In the event we repay a holder’s Initial Note by the Pre-Payment Date, the applicable Second Note and Buyer Note are automatically cancelled.indicated:

~~The~~Three ~~Buyer~~months ~~Notes~~ended ~~accrue~~January ~~interest at the rate of 8% per annum (which until the Buyer Notes are paid in full in cash~~31, ~~offset amounts due under the Second Notes) and are due on July 9,~~ 2016, unless (a) we do not meet the “current information requirements” required under Rule 144 of the Securities Act of 1933, as amended; or (b) we provide the applicable investor at least 30 days’ notice prior compared to the ~~six~~three ~~month~~months ~~anniversary~~ended ofJanuary ~~the issuance date of the Buyer Note of our intention to reject the payment of the Buyer Note~~31, in which case the applicable holder may cross cancel its payment obligations under the applicable Buyer Note as well as our payment obligations under the offsetting Second Note. The holders may only prepay the Buyer Note with our written approval.2015:

Pursuant to a side letter entered into with each of Adar and Union, each investor agreed to grant us an option for three 30 day conversion moratorium periods, with the first period beginning on the Pre-Payment Date, and the next two beginning 30 days and 60 days, respectively, after the end of such first period. We are able to exercise the conversion moratorium period options by notifying the applicable investor no later than 10 trading days prior to the Pre-Payment Date (or thereafter, the end of the next applicable conversion moratorium period) and by paying the applicable investor(s) $20,000 prior to five trading days before the end of the then current period (with the first such payment due at least five trading days prior to the Pre-Payment Date).

	Three Months Ended
	January 31									%
	2016			2015			Incr(Decr)			Change

Revenues	$	674,816		$	646,348		$	28,468			4	%

Operating Expenses
Lease Operating Expense		898,017			913,290			(15,273	)		-2	%
Depreciation, Depletion and Amortization		391,219			162,166			229,053			141	%
Accretion		246,952			258,782			(11,830	)		-5	%
General and Administrative		3,109,081			980,480			2,128,601			217	%
Total Operating Expenses		4,645,269			2,314,718			2,330,551			101	%

Loss From Operations		(3,970,453	)		(1,668,370	)		(2,302,083	)		-138	%

Other Income (Expense)		(428,845	)		2,737			(431,582	)		-15,768	%
Gain (Loss) on Debt Settlement		(640,936	)		—			(640,936	)		-100	%
Gain or Loss on Derivatives		(439,367	)		—			(439,367	)		-100	%
Interest Expense, Net		(1,588,524	)		(279,727	)		(1,308,797	)		468	%
Foreign Currency Transaction (Loss)		(5,275	)		(6,401	)		1,126			-18	%

Net Loss Before Income Taxes	$	(7,073,400	)	$	(1,951,761	)	$	(5,121,639	)		-262	%

~~Each~~We ofrecorded ~~Adar~~net ~~and~~loss ~~Union~~of ~~also~~$7,073,400, ~~entered~~or ~~into~~$0.29 per abasic ~~Subordination~~and ~~Agreement~~diluted incommon ~~favor~~share, ofduring ~~our~~the ~~senior~~three ~~lender,~~months ~~Shadow~~ended ~~Tree~~January ~~Capital Management~~31, ~~LLC~~2016, as compared to ~~subordinate~~a ~~the~~net ~~repayment~~loss of ~~the~~$1,951,761, ~~Initial~~or $0.09 ~~Notes~~per (basic and ifdiluted ~~applicable~~common share, during the ~~Second~~three ~~Notes)~~months toended ~~amounts~~January ~~owed~~31, ~~by us to Shadow Tree~~2015.

30The changes in results of operations shown in the table above were predominantly due to the factors below:

~~Table~~Revenues increased from $646,348 in the prior three-month period ended January 31, 2015 to $674,816 in the current three month period ended January 31, 2016. Of the total revenue increase $323,341 was due to higher volume in both oil (4,596 Bbls) and gas (110,856 Mcf) offset by a decrease of ~~Contents~~$297,576 in revenue due to decreases in oil and gas prices. Oil price decreased by 75% to an average $34.08 per barrel while gas price decreased by 178% to an average $1.50 per thousand cubic feet (Mcf). Lease operating expenses decreased due to lower cost of operation period over period. Depreciation, depletion, and amortization increased because of higher production in the current year versus production in the same quarter of the comparable period prior year.

~~JSJ Investments Inc. Note~~34

OnGeneral ~~November~~and 9,administrative ~~2015,~~expenses weincreased primarily ~~sold~~as ~~JSJ~~a ~~Investments~~result ~~Inc.~~of ~~(“JSJ”)~~increased aninvestor 8%relation ~~Short~~expenses. ~~Term~~Interest ~~Cash~~income ~~Redeemable Note~~ (~~the “JSJ Note”~~expense) infor the ~~principal~~three ~~amount~~months ofended ~~$350,000.~~January ~~The JSJ Note accrues interest at the rate of 8% per annum and is payable on demand by JSJ at any time after November 9~~31, 2016. Weincreased ~~may~~primarily ~~prepay~~as the JSJ note, together with accrued and unpaid interest, at any time prior to the 180th day after the issuance date (the “JSJ Pre-Payment Date”). Along with any prepayment, we are required to pay the following pre-payment penalties in addition to the principal amount then outstanding under the JSJ Note: until the 60th day after the issuance date, a ~~premium~~result of ~~25%~~debt ofrelated ~~the~~expense ~~principal~~such ~~amount~~as ofinterest ~~the note~~expense, indebt ~~addition to outstanding interest; from the 61st day to the 120th day after the~~ issuance ~~date,~~cost ~~premium~~amortization of 35% of the principal amount of the note, in addition to outstanding interest; from the 121st day to the JSJ Pre-Payment Date, a premium of 45% of the principal amount of the note, in addition to outstanding interest; and ~~after~~original issue ~~the~~discount JSJ Pre-Payment Date, a premium of 50% of the then outstanding principal amount of the note, plus accrued interest (provided that after the JSJ Pre-Payment Date the JSJ Note can only be prepaid with the written consent of JSJ)amortization. Upon the occurrence of any event of default under the JSJ Note the amounts due thereunder accrue interest at the rate of 18% per annum. JSJ agreed not to sell short any shares of our common stock so long as the JSJ Note is outstanding.

IfWe wecontinue ~~fail~~ to ~~prepay~~evaluate ~~the~~areas ~~JSJ~~where ~~Note~~we ~~prior~~can reduce tocosts ~~the~~in ~~JSJ~~lease ~~Pre-Payment~~operating ~~Date,~~expense ~~JSJ has the right to convert the principal~~ and ~~accrued interest owed under such note into our common stock at a 40% discount~~ to ~~the~~increase ~~lowest trading price of our common stock during the 15 trading days prior to conversion. Notwithstanding the foregoing~~production, ~~there is an initial soft floor of $0.30 per share on conversions,~~ which means that in the event our common stock closes below $0.30 per share, then the holder may not convert its note for the 10 trading days immediately preceding the first time the price closes below $0.30 per share. However, in the event the price of our common stock closes above $0.30 per share in that 10 day period, the holder may convert, without waiting the balance of the 10 days. Additionally, following the 10 day period, the holder has a three day grace period to convert, even if the common stock closes below the next lower soft floor level (as described in the following sentence). This process is repeated with soft floors of $0.15 per share and $0.075 per share. At no time may the JSJ Note be converted into shares of our common stock if such conversion would ~~result in JSJ and its affiliates owning an aggregate of in excess of 4.9% (which may be increased to 9.99% with written notice from JSJ, provided such~~ increase ~~will not take effect for at least 61 days) of the then outstanding shares of our common stock~~revenues.

WeSix ~~are~~months ~~subject~~ended toJanuary ~~fees~~31, ~~penalties~~2016 ~~and in some cases liquidated damages for our failure~~ compared to ~~comply with~~ the ~~terms~~six ofmonths ~~the~~ended ~~JSJ~~January ~~Note. The JSJ Note provides for customary events of default such as failing to timely make payments under the JSJ Note when due~~31, and including our failure to maintain a reserve of shares in connection with the conversion of the JSJ Note as provided in the JSJ Note, us becoming delinquent in our periodic filings with the SEC, and if OTC Markets changes our designation to ‘No Information’ (Stop Sign), ‘Caveat Emptor’ (Skull and Crossbones), or ‘OTC’, ‘Other OTC’ or ‘Grey Market’ (Exclamation Mark Sign). Upon the occurrence of an event of default, JSJ can declare the entire amount of the JSJ Note immediately due and payable, together in the event of certain defaults, with additional penalties or liquidated damages.2015:

Pursuant to a side letter entered into with JSJ, JSJ agreed to grant us an option for three 30 day conversion moratorium periods, with the first period beginning on the JSJ Pre-Payment Date, and the next two beginning 30 days and 60 days, respectively, after the end of such first period. We are able to exercise the options for conversion moratoriums by notifying JSJ no later than 10 trading days prior to the JSJ Pre-Payment Date (or thereafter, the end of the next applicable conversion moratorium period) and by paying the applicable investor(s) between $25,000 and $35,000 (depending on the applicable extension period) prior to five trading days before the end of the then current period (with the first such payment due at least five trading days prior to the Pre-Payment Date).

	Six Months Ended
	January 31									%
	2016			2015			Incr(Decr)			Change

Revenues	$	1,886,222		$	1,851,777		$	34,445			2	%

Operating Expenses
Lease Operating Expense		2,062,991			2,210,845			(147,854	)		-7	%
Depreciation, Depletion and Amortization		880,623			386,422			494,201			128	%
Accretion		495,251			560,990			(65,739	)		-12	%
General and Administrative		5,475,255			1,923,760			3,551,495			185	%
Total Operating Expenses		8,914,120			5,082,017			3,832,103			75	%

Loss From Operations		(7,027,898	)		(3,230,240	)		(3,797,658	)		118	%

Other Income (Expense)		(440,959	)		6,779			(447,738	)		-6,605	%
Gain (Loss) on Debt Settlement		1,121,599			—			1,121,599			-100	%
Gain (Loss) on Derivatives		(927,976	)		—			(927,976	)		-100	%
Interest Expense, Net		(3,945,017	)		(507,504	)		(3,437,513	)		-677	%
Foreign Currency Transaction (Loss)		(4,561	)		(1,642	)		(2,919	)		178	%
Net Loss Before Income Taxes	$	(11,224,812	)	$	(3,732,607	)	$	(7,492,205	)		-201	%

~~JSJ~~We ~~also~~recorded ~~entered~~a ~~into~~net aloss ~~Subordination~~of ~~Agreement~~$11,224,812, inor ~~favor~~$0.47 per ofbasic ~~our~~and ~~senior~~diluted ~~lender~~common share, ~~Shadow~~during ~~Tree~~the ~~Capital~~six ~~Management~~months ended January 31, ~~LLC~~2016, as compared to ~~subordinate~~a ~~the~~net ~~repayment~~loss of ~~the~~$3,731,302, ~~JSJ~~or ~~Note~~$0.18 per tobasic ~~amounts~~and ~~owed~~diluted bycommon usshare, toduring ~~Shadow~~the ~~Tree~~six months ended January 31, 2015.

31The changes in our results of operations as described in the table above were predominantly due to the factors below:

~~Table~~Revenues increased from 1,851,777 in the prior three six months ended January 31, 2015 to $1,886,222 in the current six months ended January 31, 2016. Of the total revenue increase $939,458 was due to higher volume in both oil (11,740 Bbls) and gas (226,312 Mcf) offset by a decrease of ~~Contents~~$905,122 in revenue due to decreases in oil and gas prices. Oil price decreased by 96% to an average $39.83 per barrel while gas price decreased by 95% to an average $2.08 per thousand cubic feet (Mcf). Lease operating expenses decreased due to lower cost of operation period over period. Depreciation, depletion, and amortization increased because of higher production in the current year versus production in the same quarter of the comparable period prior year.

~~Darling Capital, LLC Note~~35

OnGeneral November 17, 2015, the Company sold Darling Capital, LLC (“Darling”) an 8% Short Term Cash Redeemable Note (the “Darling Note”) in the principal amount of $200,000. The Darling Note accrues interest at the rate of 8% per annum (22% upon the occurrence of an event of default) and isadministrative ~~payable~~expenses ondecreased primarily ~~September~~as ~~12,~~a ~~2016,~~result ~~provided that we have the option to extend the maturity date~~ of ~~the~~decreased ~~note~~compensation ~~for~~expense anrelated ~~additional nine months in the event we provide Darling at least 30 days’ notice of our intention~~ to ~~extend~~consulting ~~such maturity date~~service. InInterest ~~the~~income ~~event we do not prepay the Darling note, together with accrued and unpaid interest, on or prior to the 180th day after the issuance date~~ (~~the “Darling Pre-Payment Date”~~expense), ~~together with the pre-payment penalties described below, Darling has the right to convert the principal and accrued interest owed under such note into our common stock. The conversion price~~ for ~~such conversions is~~ the ~~greater~~six ofmonths ended aJanuary 40% discount (subject to additional 10% discounts in the event we become subject to a DTC “chill” or there is not current available information regarding the Company on OTC Markets and further adjustments during the occurrence of certain major announcements)31, to2016 ~~the~~increased ~~lowest~~primarily ~~closing~~as ~~bid price for our common stock during the 15 trading days immediately preceding~~ a ~~conversion~~result request (the “Market Price”) and $0.001 per share. Notwithstanding the above, in the event the Market Price on the date (i) the conversion shares are transferred to and deposited into Darling’s brokerage account and (ii) Darling’s broker has confirmed that it can execute trades, is lower than the Market Price on the date of ~~conversion,~~debt ~~the~~related ~~conversion~~expense ~~price is adjusted to~~ such ~~lower~~as ~~price~~interest ~~and additional shares are required to be issued to the holder. Notwithstanding the foregoing~~expense, ~~there~~debt isissuance ancost initial soft floor of $0.30 per share on conversions, which means that in the event our common stock closes below $0.30 per share, then the holder may not convert its note for the 10 trading days immediately preceding the first time the price closes below $0.30 per share. However, in the event the price of our common stock closes above $0.30 per share in that 10 day period, the holder may convert, without waiting the balance of the 10 days. Additionally, following the 10 day period, the holder has a three day grace period to convert, even if the common stock closes below the next lower soft floor level (as described in the following sentence). This process is repeated with soft floors of $0.15 per share amortization and ~~$0.075~~original ~~per~~issue ~~share.~~discount ~~At no time may the Darling Note be converted into shares of our common stock if such conversion would result in Darling and its affiliates owning an aggregate of in excess of 9~~amortization.~~9% of the then outstanding shares of our common stock.~~

~~Along~~We ~~with~~continue ~~any prepayment, we are required~~ to ~~pay~~evaluate ~~the~~areas ~~following~~where ~~pre-payment~~we ~~penalties~~can reduce costs in ~~addition~~lease tooperating ~~the~~expense ~~principal amount~~ and ~~interest then outstanding under the Darling Note: until the 60th day after the issuance date, a premium of 15% of the principal amount and interest owed on the note; from the 61st day~~ to ~~the~~increase ~~120th day after the issuance date~~production, awhich ~~premium~~would ofincrease 35% of the principal amount and interest owed on the note; from the 121st day to the Darling Pre-Payment Date, a premium of 45% of the principal amount and interest owed on the note; and after the Darling Pre-Payment Date, no prepayment can be made of the Darling Note without the prior written approval of Darlingrevenues. ~~Darling agreed not to sell short any shares of our common stock so long as the Darling Note is outstanding.~~

~~We are subject to fees~~Liquidity, ~~penalties~~Capital ~~and~~Resources in some cases liquidated damages for our failure to comply with the terms of the Darling Note. The Darling Note provides for customary events of default such as failing to timely make payments under the Darling Note when due, and ~~including~~Going our failure to maintain a reserve of shares in connection with the conversion of the Darling Note as provided in the Darling Note, us becoming delinquent in our periodic filings with the SEC, and if OTC Markets changes our designation to ‘No Information’ (Stop Sign), or yield. Upon the occurrence of an event of default, Darling can declare the entire amount of the Darling Note immediately due and payable, together with additional penalties and liquidated damages as described in further detail in the Darling Note.Concern

~~Pursuant~~The tofollowing atable sets ~~side~~forth ~~letter~~our ~~entered into with Darling~~cash, ~~Darling~~restricted ~~agreed~~cash ~~to grant us an option for three 30 day conversion moratorium periods, with the first period beginning on the Darling Pre-Payment Date,~~ and ~~the~~working ~~next~~capital ~~two~~balances beginning 30 days and 60 days, respectively, after the end of such first period. We are able to exercise the options for conversion moratoriums by notifying Darling no later than 10 trading days prior to the Darling Pre-Payment Date (or thereafter, the end of the next applicable conversion moratorium period) and by paying Darling $20,000 prior to five trading days before the end of the then current period (with the first such payment due at ~~least five trading days prior to~~ the ~~Pre-Payment~~indicated ~~Date).~~dates:

Darling also entered into a Subordination Agreement in favor of our senior lender, Shadow Tree Capital Management, LLC, to subordinate the repayment of the Darling Note to amounts owed by us to Shadow Tree.

	At July 31,			At January 31,
	2016			2015
Cash and Cash Equivalents	$	88,925		$	229,512
Restricted Cash		7,671,114			12,488,755
Working Capital (deficit)		(15,166,005	)		(17,108,658	)

32Our outstanding Credit Agreement with Shadow Tree Capital Management, LLC as agent, and our other outstanding promissory notes, convertible promissory notes and debt obligations are described in greater detail above under “Part I - Financial Information” - “Item 1. Financial Statements” – “Note 6 – Related Party Notes Payable,” “Note 7 – Notes Payable and Convertible Notes,” “Note 9 – Derivative Liabilities,” and “Note 11 – Related Party Transactions,” and our commitments and contingencies are described in greater detail under “Note 12 – Commitments and Contingencies”, and readers are encouraged to review such information, as well as the unaudited consolidated financial statements and footnotes thereto included above.

~~Table~~Net ofCash ~~Contents~~Used in Operating Activities

~~Voting~~During ~~Agreements~~the six months ended January 31, 2016, operating activities used $2,665,628 of cash compared to cash used in operating activities of $545,558 during the six months ended January 31, 2015. The change in the cash used by operating activities is primarily attributable to our net loss of $11,224,812 during the current period, in addition to a decrease of $137,509 in other assets and receivables and an increase of $482,040 in our accounts payable and accrued expenses for the current period compared to the prior period. Partially offsetting our cash flows used in operations were non-cash outflows of $8,136,655. Non-cash items were primarily comprised of share based compensation, representing shares issued for services of $3,683,243, accretion of $495,251, depreciation and depletion of $880,623, Gain on debt settlement of $1,121,599 and amortization of $2,655,561 related to our original issuance discount and debt issuance cost on debt acquired. Change in derivative liabilities had a non-cash outflow of $927,976.

OnNet orCash ~~around~~Used ~~August 25, 2015, Kent P. Watts, our Chief Executive Officer and Chairman, entered into a voting agreement~~ in ~~favor~~Investing of S. Chris Herndon, a member of the Board of Directors of the Company. Pursuant to the voting agreement, Mr. Watts provided Mr. Herndon a voting proxy to vote all of the shares of common stock which Mr. Watts owned (approximately 4,946,955 shares as of his entry into the agreement) or which he may acquire in the future, to vote to elect or remove (as applicable) 66.6% of members of the Company’s Board of Directors on any stockholder vote (i.e., 2 out of 3 directors). The voting agreement was to become effective, only if Mr. Watts had sold $1 million in securities in private transactions on or before September 21, 2015 and was to remain effective from such date, if ever, until the earlier of: (a) August 19, 2017; and (b) the due date of a certain convertible note which a company affiliated with Mr. Herndon (Duma Holdings, LLC) may choose to purchase from the Company in the future as described in greater detail above under Note 7 – Notes Payable - “Convertible Notes Payable” – “Duma Holding Convertible Promissory Note”.Activities

OnDuring orthe ~~around~~six ~~the~~months ~~same~~ended ~~date~~January 31, ~~Christopher Watts~~2016, investing ~~the~~activities ~~nephew~~used cash of ~~Kent P. Watts~~$124,721 ~~and~~compared ~~the~~to ~~largest~~using ~~shareholder~~cash of ~~the Company~~$2,430,284 ~~entered~~during ~~into~~six amonths ~~voting~~ended ~~agreement~~January ~~with~~31, Mr2015. ~~Herndon~~The onchange is ~~substantially~~due ~~similar~~mainly ~~terms~~to asreductions ~~the~~in ~~voting~~purchases ~~agreement~~of ~~with~~oil ~~Kent~~and P.gas ~~Watts described above~~properties.

AsNet aCash ~~result~~Provided ofby ~~Mr.~~Financing Watts not selling $1 million in securities in private transactions on similar terms as described above before September 21, 2015, the voting agreements were never effective and expired. On November 16, 2015, the parties entered into a First Amendment to Voting Agreements to remove the prior condition to effectiveness regarding the required sale of $1 million in securities before September 21, 2015, and as a result the voting agreements are currently in full force and effect and will remain in effect until the Termination Date. As a result of the voting agreements, Mr. Herndon has the right to appoint 66.6% of the members of the Company’s Board of Directors until the Termination Date.Activities

~~Typenex~~During ~~Default~~the ~~Notice~~six months ended January 31, 2016, financing activities provided net cash of $2,649,762 in comparison to using cash of $3,098,230 during the six months ended January 31, 2015. The change in cash provided is primarily a result of our borrowings related to our Convertible Subordinated Promissory Note Offering and ~~Demand~~Convertible ~~Notice~~Note issued to Typenex Co-Investment, LLC, partially offset by the payment of certain of our outstanding notes payable during the period.

~~On November 25, 2015, we received a notice of default from Typenex (the “Default Notice”). The Company vehemently disagrees with the Default Notice in every regard.~~36

~~The~~Item Default Notice alleged the occurrence of an event of default under the terms of that certain Securities Purchase Agreement (the “SPA”) and Secured Convertible Promissory Note (the “Note”) sold by the Company to Typenex on October 16, 2015 as described above under “Note 7 – Notes Payable and Convertible Notes” – “Convertible Notes Payable” – “Typenex Co-Investment, LLC Convertible Note”3. ~~Specifically,~~Quantitative the Default Notice alleged that the Company’s November 17, 2015 sale of an 8% Short Term Cash Redeemable Note to Darling Capital, LLC (the “Darling Note”), as disclosed above under “Darling Capital, LLC Note”, constituted a ‘variable security’ which therefore resulted in a breach of the provisions of the SPA and ~~Note~~Qualitative ~~because~~Disclosures ~~the~~About ~~Company~~Market did not first receive the approval of Typenex for such sale as required thereby for the Company’s sale of a ‘variable security’. The Default Notice also seeks to enforce default interest on the Note (22% per annum); to increase the balance of the Note by 15% (i.e., by $259,500 to a balance of $2,006,429) due to the alleged occurrence of the default; and further seeks to foreclose on 3.1 million shares of common stock of the Company pledged by related parties to secure amounts owed under the Note.Risk

OnPursuant ~~November~~to ~~30,~~Item ~~2015~~305(e) of Regulation S-K (§ 229.305(e)), the Company ~~received~~is anot ~~demand~~required ~~notice~~to (provide the ~~“Demand~~information ~~Notice”)~~required ~~from~~by ~~Typenex~~this ~~formally~~Item ~~requesting~~as ~~and~~it ~~demanding~~is ~~the~~a “smaller ~~payment~~reporting ~~of the $2~~company,~~006,429~~” ~~alleged~~as ~~due~~defined ~~under the Note~~ by ~~December~~Rule ~~2, 2015~~229.10(f)(1).

OnItem December 3, 2015, Typenex provided the Company correspondence pursuant to which Typenex stated that that it agreed with the Company’s contention that the Note required a 15 day cure right (which Typenex failed to provide for or take into account in connection with the Default Notice or Demand Notice), that Typenex was withdrawing the Default Notice and Demand Notice, and that although Typenex still believes an event of default has occurred, it was not currently seeking to enforce its rights4. ~~Additionally,~~Controls Typenex declared that they were forbearing from taking any further actions under the SPA or Note during the following ten days to allow for, among other things, the parties to discuss the various issues raised and that they further reserved all rights and remedies available under the applicable transaction documents and clarified that they did not waive any rights, powers or remedies in connection with the correspondence sent.Procedures

OnEvaluation ~~December 15, 2015, Typenex provided the Company a more detailed response as to why it believes an event~~ of ~~default~~Disclosure ~~occurred~~Controls ~~under the Typenex Note, made certain other allegations against the Company,~~ and ~~reiterated its allegations that a default occurred under the Typenex Note, that default interest is due on the note and that it intends to foreclose on the Pledged Shares.~~Procedures

~~The~~Our ~~Company~~management, ~~disputes~~with the participation ~~claim~~of ~~that~~our anPrincipal ~~event~~Executive ofOfficer ~~default~~ has ~~occurred~~evaluated ~~under~~ the ~~SPA~~effectiveness orof ~~the~~our ~~Note~~disclosure ~~and~~controls ~~further disputes~~ and ~~fails~~procedures to(as such ~~acknowledge~~term ~~the~~is ~~claims~~defined ~~and demands made by Typenex~~ in ~~the~~Rules ~~Default~~13a-15(e) ~~Notice~~ and ~~Demand~~15d-15(e) ~~Notice~~under or the ~~December~~Exchange ~~15,~~Act) ~~2015 letter. The Darling Note was not a ‘Variable Security’~~ as ~~such~~of ~~security is not convertible unless or until such note is not repaid by~~ the ~~180th~~end ~~day after the sale~~ of ~~such note and~~ the ~~Company~~period ~~therefore~~covered ~~believes that the claims made~~ by ~~Typenex~~this ~~are invalid~~report. Based ~~Additionally,~~on ~~pursuant~~such ~~to a subordination agreement entered into between Typenex and the Agent~~evaluation, ~~Typenex~~our ~~agreed~~Principal ~~not~~Executive toOfficer ~~make~~has ~~any~~concluded ~~demand for payment of amounts owed under the Note~~that, ~~commence~~as ~~any action to enforce the repayment~~ of the ~~Note~~end ~~(except pursuant to the terms~~ of the ~~subordination~~period ~~agreement,~~covered ~~which requires among other things, 60 days prior notice~~ by ~~Typenex~~this ~~to the Agent)~~report, our ~~collect~~disclosure ~~any~~controls ~~collateral~~and ~~(other~~procedures ~~than~~were ~~pledged~~not ~~shares)~~effective, ordue ~~accept~~to ~~any payment of amounts owed under~~ the ~~Note~~deficiencies ~~(including~~in ~~principal,~~our ~~interest~~internal ~~and~~control ~~other~~over ~~amounts~~financial ~~due)~~reporting as ~~unless~~described in ~~the~~our ~~form~~Annual ofReport ~~common~~on ~~stock~~Form of10-K ~~the~~for ~~Company,~~our ~~until~~fiscal oryear ~~unless~~ended ~~amounts~~July ~~owed~~31, to2015, ~~the~~which ~~Lenders~~deficiencies ~~under~~have ~~the~~not ~~Credit~~yet ~~Agreement~~been ~~are first satisfied in full~~remedied.

33Changes in Internal Control over Financial Reporting

~~Table~~We regularly review our system of ~~Contents~~internal control over financial reporting to ensure we maintain an effective internal control environment. There were no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

~~The~~Part II ~~Company~~- ~~currently~~Other has no intention of paying Typenex, allowing Typenex to foreclose on the pledged shares or acknowledging that a default has occurred under the SPA or Note and is currently analyzing its options moving forward in regards to the erroneous claims made by Typenex, which may include, but not be limited to filing a lawsuit against Typenex. Notwithstanding the above, the existence of the alleged defaults, and/or resources the Company may be forced to expend in defending itself against the allegations made by Typenex may negatively affect the Company or its cash flow, which may ultimately result in a decline in the value of the Company’s common stock.Information

~~Shadow~~Item ~~Tree~~1. ~~Credit~~Legal ~~Agreement Amendments~~Proceedings

~~Effective~~Although ~~November~~we 30may, ~~2015,~~from time ~~we entered into (i) a First Amendment~~ to ~~Amended~~time, ~~and~~be ~~Restated~~involved ~~Credit~~in ~~Agreement,~~litigation by and ~~between~~claims ~~the~~arising ~~Company,~~out ~~as borrower, the Agent, and each~~ of ~~the~~our ~~Lenders,~~operations asin ~~lenders (~~the ~~“First~~normal ~~Amendment”),~~course ~~which~~of ~~amended that certain June 10~~business, ~~2015~~we ~~Amended~~are ~~and~~not ~~Restated Credit Agreement by and between the Company, the Agent and the Lenders described above under Note 7 – Notes Payable and Convertible Notes – Credit Agreement; and (ii)~~ currently a ~~Second~~party ~~Amendment~~ to ~~Stock~~any ~~Grant~~material ~~Agreement,~~legal ~~by and between the Company and the Lenders (the “Stock Agreement”)~~proceeding.

~~The~~GLO ~~First~~Claims Amendment amended the Restated Credit Agreement to extend the maturity date of the amount due thereunder (the “Loans”), which totaled $5.02 million as of the date of the parties entry into the agreement, from November 30, 2015 to May 31, 2016; provided for the payment to the Lenders by the Company of an exit fee upon repayment of the Loans of 8% of any amounts repaid prior to March 31, 2016 and 10% of any amounts repaid after March 31, 2016; provided for the future release by the Lenders of the pledge of shares of Hydrocarb Namibia Energy Corporation (Pty) Limited, the Company’s wholly-owned Namibia subsidiary, in connection with a subordinated debt financing by the Company in an amount of not less than $4 million, or not less than $2 million in the event that at least 40% of the proceeds from such funding go to repay amounts owed under the Loans, together with the approval of a lien on such shares in connection with a subordinated funding meeting the requirements above and the sale of such shares, in the event the proceeds of such sale go to the repayment of amounts owed under the Loans; and the Company agreed to provide 35% of any future subordinated debt financing to the Lenders to repayment amounts owed under the Loans. Additionally, the parties agreed that an event of default under the Restated Credit Agreement would be triggered in the event the Company failed to repay at least $2 million of the Loans before March 31, 2016; in the event the close-of-trading price of West Texas Intermediate Crude Oil (“WTI”) closes below $35 per barrel for a period of ten consecutive trading days, provided that at the end of such ten day period the outstanding principal amount of the Loans exceeds $2,021,086, or WTI closes below $30 per barrel for a period of ten consecutive trading days regardless of the amount then outstanding under the Loans.

~~Recent~~The General ~~Changes~~Land Office of the State of Texas (“GLO”) has asserted claims against the Company under various Miscellaneous Easements. The GLO claims that the Company is obligated to either renew the various Miscellaneous Easements by paying a renewal fee to the GLO, or to remove any pipeline laid in ~~Officers~~the various Miscellaneous Easements. The GLO has asserted its claims, and ~~Directors~~the company has disclaimed any obligations under the various Miscellaneous Easements. On August 29, 2014, the Company filed a lawsuit in state district court in Chambers County, Texas asking the court to reform an assignment and assumption agreement in the property records of Chambers County. The Company has been in discussions with the GLO in an attempt to resolve the dispute. At this time, there is no estimate of loss with respect to this lawsuit.

~~Effective~~Typenex November 13, 2015, the Board of Directors of the Company increased the number of members of the Company’s Board of Directors from two to three and appointed Robert M. Harrell as a member of the Board of Directors to fill the newly created vacancy, each pursuant to the power provided to the Board of Directors by the Company’s Bylaws and the Nevada Revised Statutes. Mr. Harrell formally accepted the appointment as a member of the Board of Directors on November 23, 2015.Lawsuit

On ~~December~~November 125, 2015, ~~Christine~~we received P.a ~~Spencer,~~notice ~~the~~of ~~Chief~~default ~~Accounting~~from ~~Officer~~Typenex (~~Principal~~the ~~Financial~~“Default ~~Officer~~Notice”), ~~and~~which ~~Principal~~we ~~Accounting~~vehemently ~~Officer)~~disagree ofwith ~~the~~in ~~Company~~every regard. ~~provided~~The ~~notice~~Default toNotice alleged the ~~Board~~occurrence of ~~Directors~~an event of default under the ~~Company~~terms of ~~her~~the ~~resignation~~Securities asPurchase anAgreement ~~officer~~(the “SPA”) and ~~employee~~Typenex ofNote. Specifically, the ~~Company~~Default ~~effective~~Notice ~~December~~alleged 15that the Company’s November 17, 2015, sale inof ~~order~~an to8% ~~return~~Short Term Cash Redeemable Note to ~~work~~Darling ~~with~~Capital, ~~one~~LLC (the “Darling Note”), constituted a ‘variable security’ which therefore resulted in a breach of ~~her~~the ~~former~~provisions ~~employers.~~of ~~The~~the ~~Company~~SPA ~~has~~and ~~begun~~Typenex Note because the ~~search~~Company ~~for~~did anot first ~~new~~receive ~~Chief~~the ~~Accounting~~approval ~~Officer~~of ~~and~~Typenex ~~until~~for such ~~time~~sale as required thereby for the Company’s sale of a ~~replacement~~‘variable ~~can~~security’. The beDefault ~~located,~~Notice ~~Kent~~also Pseeks to enforce default interest on the Note (22% per annum); to increase the balance of the Note by 15% (i.e., ~~Watts~~by $259,500 to a balance of $2,006,429) due to the alleged occurrence of the default; and further seeks to foreclose on 3.1 million shares of common stock of the Company’s ~~Chief~~pledged ~~Executive~~by ~~Officer~~related ~~will~~parties ~~serve~~to assecure ~~interim~~amounts ~~Principal~~owed ~~Financial~~under ~~Officer~~the Note (the “Pledged Shares”).

3437

~~Table~~On November 30, 2015, the Company received a demand notice (the “Demand Notice”) from Typenex formally requesting and demanding the payment of ~~Contents~~the $2,006,429 alleged due under the Note by December 2, 2015.

~~CAUTIONARY~~The ~~STATEMENT~~Company ONdisputes ~~FORWARD-LOOKING~~the ~~INFORMATION~~claim that an event of default has occurred under the SPA or the Note and further disputes and fails to acknowledge the claims and demands made by Typenex in the Default Notice and Demand Notice. The Darling Note was not a ‘Variable Security’ as such security is not convertible unless or until such note is not repaid by the 180th day after the sale of such note and the Company therefore believes that the claims made by Typenex are invalid. Furthermore, pursuant to the terms and conditions of the Typenex Note. Additionally, pursuant to a subordination agreement entered into between Typenex and the Agent, Typenex agreed not to make any demand for payment of amounts owed under the Note, commence any action to enforce the repayment of the Note (except pursuant to the terms of the subordination agreement, which requires among other things, 60 days prior notice by Typenex to the Agent), collect any collateral (other than pledged shares), or accept any payment of amounts owed under the Note (including principal, interest and other amounts due) unless in the form of common stock of the Company, until or unless amounts owed to the Creditors under the Credit Agreement are first satisfied in full.

~~The~~On ~~Company~~or isabout ~~including~~January ~~the~~21, ~~following~~2016, ~~cautionary~~we ~~statement~~and ~~for~~CW ~~any~~Navigation, Inc., ~~forward-looking~~which ~~statements~~is ~~made~~controlled by, orChristopher onWatts, ~~behalf~~one of, ~~the~~our ~~Company.~~largest ~~This~~stockholders ~~quarterly~~and ~~report~~the onnephew ~~Form~~of ~~10-Q~~our ~~contains~~Chief ~~“forward~~Executive ~~looking~~Officer, Kent ~~statements”~~P. ~~(as~~Watts, ~~that~~filed ~~term~~a isComplaint ~~defined~~and Demand for Arbitration in ~~Section~~the ~~27A(i)(1)~~state of Utah against Typenex and naming the ~~Securities~~escrow ~~Act~~agent ofwhich holds ~~1933)~~the Pledged Shares, ~~including~~as ~~statements~~well ~~concerning~~as ~~plans,~~our ~~objectives,~~transfer ~~goals~~agent, ~~strategies,~~as ~~expectations~~parties thereto, ~~future~~seeking ~~events~~a ortemporary ~~performance~~restraining order and ~~underlying~~preliminary injunction ~~assumptions~~restraining ~~and~~the ~~other~~escrow ~~statements~~agent ~~which~~from ~~are~~delivering ~~other~~the ~~than~~Pledged ~~statements~~Shares ofto ~~historical~~Typenex ~~facts.~~and Inour ~~some~~transfer ~~cases,~~agent ~~you~~from ~~can~~transferring the ~~identify~~shares ~~forward-looking~~to ~~statements~~Typenex, bydeclaratory ~~terminology~~relief ~~such~~and asdamages ~~“may”,~~for ~~“should”,~~breach ~~“expect”,~~of ~~“plan”,~~contract ~~“intend”,~~as ~~“anticipate”,~~a ~~“believe”,~~result ~~“estimate”,~~of ~~“predict”,~~Typenex’s ~~“potential”~~assertion orthat ~~“continue”,~~an ~~the~~event of ~~negative~~default ofoccurred ~~such~~under the terms orof ~~other~~the ~~comparable~~Typenex ~~terminology~~Note. InWe ~~evaluating~~also ~~these~~alleged ~~statements,~~that ~~you~~Typenex’s ~~should~~claim ~~consider~~for ~~various~~the ~~factors,~~Pledged ~~including~~Shares ~~the~~is ~~assumptions,~~inappropriate and ~~risks~~without merit, and ~~uncertainties~~we ~~outlined~~intend into vigorously pursue this ~~report,~~ ifmatter. ~~any~~Typenex has filed an answer to our complaint, ~~and~~alleging that our ~~Annual~~complaint ~~Report~~fails onto ~~Form~~state ~~10-K~~a ~~for~~claim upon which relief may be granted, that the ~~year~~Darling ~~ended~~Note ~~July~~constitutes 31a ‘variable security’, denying ~~2015~~our other claims, ~~filed~~raising ~~with~~various ~~the~~affirmative ~~Securities~~defenses, ~~and~~including ~~Exchange~~alleging ~~Commission~~fraud, ~~(the~~and ~~“SEC”)~~raising oncounterclaims ~~November~~in 13the Arbitration Proceeding, ~~2015~~alleging our breach (~~the~~and ~~“Annual~~various ~~Report”~~other parties’ breaches), ~~under~~of ~~“Risk~~the ~~Factors”.~~various ~~These~~transaction ~~factors~~documents, oralleging ~~any~~our breach of ~~them~~implied ~~may~~covenant ~~cause~~of ~~our~~good ~~actual~~faith ~~results~~and tofair ~~differ~~dealing, ~~materially~~seeking ~~from~~declaratory ~~any~~relief, ~~forward-looking~~an ~~statement~~injunction ~~made~~and inattorneys’ ~~this~~fees and ~~report.~~court ~~Forward-looking~~costs, ~~statements~~all inof ~~this~~which ~~report~~defenses ~~include,~~and ~~among~~counterclaims ~~others,~~the ~~statements~~Company ~~regarding:~~vehemently denies.

●On March 9, 2016, the Company received correspondence from the Company’s transfer agent, Fidelity Transfer Company, regarding the release of the Pledged Shares to Typenex pursuant to the terms of the Pledge Agreement. Once released, such shares will be eligible to be freely sold in the marketplace pursuant to Rule 144. Notwithstanding the release of the shares by our ~~capital~~transfer ~~needs;~~agent, we plan to continue to litigate the action with Typenex. The Company and CW Navigation, Inc. are currently in discussion with respect to the reimbursement obligations the Company has towards CW Navigation, Inc. in connection with the release of the Pledged Shares.

●The ~~business~~Company ~~plans;~~currently has no intention of paying Typenex pursuant to the Demand Notice or otherwise or acknowledging that a default has occurred under the SPA or Note. Notwithstanding the above, the existence of the alleged defaults, and/or resources the Company may be forced to expend in connection with the Arbitration Proceeding, or defending itself against the allegations made by Typenex may negatively affect the Company or its cash flow, which may ultimately result in a decline in the value of the Company’s common stock.

~~● expectations.~~Environmental

~~While~~We accrue ~~these~~for ~~forward-looking~~losses ~~statements,~~associated ~~and~~with ~~any~~environmental ~~assumptions~~remediation ~~upon~~obligations ~~which~~when ~~they~~such losses are ~~based,~~probable and can be reasonably estimated. These accruals are ~~made~~adjusted inas ~~good~~additional ~~faith~~information ~~and~~becomes ~~reflect~~available ~~our~~or ~~current~~circumstances ~~judgment~~change. ~~regarding~~Costs of future ~~events,~~expenditures ~~our~~for environmental ~~actual~~remediation ~~results~~obligations ~~will~~are ~~likely~~not ~~vary,~~discounted ~~sometimes~~to ~~materially,~~their ~~from~~present ~~any~~value. ~~estimates,~~Recoveries ~~predictions,~~of ~~projections,~~environmental ~~assumptions~~remediation orcosts from other ~~future~~parties ~~performance~~are ~~suggested~~recorded ~~herein.~~at ~~Some~~their ofundiscounted ~~the~~value ~~risks~~as ~~and~~assets ~~assumptions~~when ~~include,~~their ~~but~~receipt ~~are~~is ~~not~~deemed ~~limited to:~~probable.

●There is ~~our~~soil ~~need~~contamination ~~for~~at ~~additional~~a ~~financing;~~tank facility owned by GBE. Depending on the technique used to perform the remediation, we estimate the cost range to be between $150,000 and $900,000. We cannot determine a most likely scenario, thus we have recognized the lower end of the range. We have submitted a remediation plan to the appropriate authorities and have not yet received a response. As of January 31, 2016, $150,000 has been recognized and is included in the balance sheet under the caption “Accounts payable and accrued expenses.”

~~● our exploration activities may not result in commercially exploitable quantities of oil and gas on our properties;~~38

●Item ~~the~~1A. ~~risks~~Risk ~~inherent in the exploration for oil and gas such as weather, accidents, equipment failures and governmental restrictions;~~Factors

●There have been no material changes from the risk factors previously disclosed in our ~~limited~~Annual ~~operating~~Report ~~history;~~on Form 10-K for the year ended July 31, 2015, filed with the SEC on November 13, 2015, as of the date of this report, other than as set forth below, and investors should review the risks below and in the Form 10-K, prior to making an investment in the Company.

●We may not have sufficient available funding to meet our ~~history~~debt ofservice ~~operating~~and ~~losses;~~other obligations, repay outstanding liabilities, conduct our operations and complete exploration and drilling operations, our ability to obtain the necessary funding is uncertain and in the event we are unable to obtain such funding, we may be forced to seek bankruptcy protection.

●We need ~~the~~to ~~potential~~raise additional funding to meet our debt service obligations, repay outstanding liabilities, conduct our operations and complete exploration and drilling operations. We plan to attempt to raise such funding through debt or equity financing or other similar means. Adequate funds may not be available when needed or may not be available on favorable terms, if at all. Such required funding includes, but is not limited to amounts required to complete our minimum cost responsibilities for ~~environmental~~our ~~damage;~~exploration program in Namibia, amounts required to repay our outstanding convertible promissory notes (which if not repaid prior to the dates they are convertible into common stock will likely result in significant decreases in the value of our common stock and dilution to existing stockholders (as successive conversions and sales are made)), and at least $2 million which has to be paid towards the amount owed on our Credit Agreement before March 31, 2016. Additionally, a significant percentage (35%) of any future subordinated debt financing we raise in the future is required to be paid to our senior lender to pay down amounts owed under the Credit Agreement, which debt is due and payable in full on May 31, 2016. If we raise additional funds in the future by issuing equity securities, dilution to existing stockholders will result, and such securities may have rights, preferences and privileges senior to those of our common stock. If funding is insufficient at any time in the future and we are unable to generate sufficient revenue to meet our debt service obligations, make required payments under our outstanding debt obligations (including, but not limited to the amounts due on our Credit Agreement), repay our outstanding liabilities or complete exploration and drilling operations, our results of operations and the value of our securities could be adversely affected. If we are unable to service our indebtedness or to fund our other liquidity needs, we may be forced to adopt an alternative strategy that may include actions such as reducing or delaying capital expenditures, selling assets, restructuring or refinancing our indebtedness, or any combination of the foregoing. If we raise additional debt, it would increase our interest expense, leverage and our operating and financial costs. We cannot assure you that any of these alternative strategies could be affected on satisfactory terms, if at all, or that they would yield sufficient funds to make required payments on our indebtedness or to fund our other liquidity needs. Reducing or delaying capital expenditures or selling assets could delay future cash flows. In addition, the terms of existing or future debt agreements may restrict us from adopting any of these alternatives. We cannot assure you that our business will generate sufficient cash flows from operations or that future borrowings will be available in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs.

●If ~~the~~for ~~competitive~~any ~~environment~~reason we are unable to meet our debt service and repayment obligations, we would be in default under the terms of the agreements governing our indebtedness, which would allow our creditors at that time to declare all outstanding indebtedness to be due and payable. This would likely in turn trigger cross-acceleration or cross-default rights between our applicable debt agreements. Under these circumstances, our lenders could compel us to apply all of our available cash to repay our borrowings. In addition, the lenders under our credit facility or other secured indebtedness could seek to foreclose on our assets that are their collateral. If the amounts outstanding under our indebtedness were to be accelerated, or were the subject of foreclosure actions, our assets may not be sufficient to repay in full the money owed to the lenders or to our other debt holders. Furthermore, if our assets are foreclosed upon we ~~operate;~~not have any income producing assets left, and as such, may not be able to generate any cash flow in the future. In such event, or prior to the occurrence of such event if we believe such actions are in our best interests, we may be forced to file for bankruptcy protection. In the event we file for bankruptcy protection (or any of our creditors forces us into bankruptcy), the value of our securities may be reduced to zero, our existing stockholders may not receive any distributions or assets in liquidation and/or existing stockholders may be subject to extreme dilution.

●The ~~the~~covenants ~~level~~in our senior credit and loan agreements require us to use significant amounts of ~~government~~future ~~regulation~~borrowings to repay amounts owed under such facilities, ~~including~~restrict our ~~environmental~~ability ~~regulation;~~to operate our business, require us to repay certain material amounts of the credit facilities and might lead to a default under our credit agreements.

●Our ~~changes~~senior indebt ~~governmental~~agreements ~~regulation~~limit, ~~and~~among ~~administrative~~other ~~practices;~~things, our ability to:

●(i) incur additional debt; (ii) create liens; (iii) make investments; (iv) materially change our ~~dependence~~business; on(v) ~~key~~repay ~~personnel~~outstanding debt; (vi) affect a business combination, sale or transfer; (vii) undertake transactions with affiliates; (viii) amend our organizational documents; (ix) form subsidiaries; and (x) take any action not in the usual course of business.

●Our ~~conflicts~~senior credit agreement also requires, among other things, our payment to the Lenders of ~~interest~~an exit fee upon repayment of ~~our~~the ~~directors~~Loans of 8% of any amounts repaid prior to March 31, 2016 and ~~officers~~10% of any amounts repaid after March 31, 2016; provides for the future release by the Lenders of the pledge of shares of Hydrocarb Namibia Energy Corporation (Pty) Limited, the Company’s wholly-owned Namibia subsidiary, in connection with a subordinated debt financing by the Company in an amount of not less than $4 million, or not less than $2 million in the event that at least 40% of the proceeds from such funding goes to repay amounts owed under the Loans, together with the approval of a lien on such shares in connection with a subordinated funding meeting the requirements above and the sale of such shares, in the event the proceeds of such sale go to the repayment of amounts owed under the Loans; and requires the Company to provide 35% of any future subordinated debt financing to the Lenders to repay amounts owed under the Loans.

●As ~~our~~a ~~ability~~result of these covenants and limitations, we may not be able to ~~fully~~respond ~~implement~~to ~~our~~changes in business ~~plan;~~and economic conditions or obtain additional financing, if needed, or we may be forced to pay a significant amount of such additional funding to the repayment of the amounts owed under the credit agreement, and we may be prevented from engaging in transactions that might otherwise be beneficial to us. The breach of any of these covenants could result in a default under our credit agreements or future credit facilities.

●Our ~~our~~credit ~~ability~~agreement includes customary events of default for facilities of a similar nature and size as the credit agreement, including, but not limited to, ~~effectively~~if ~~manage~~any ~~our~~breach ~~growth~~or default occurs under the Loan Documents, the failure of the Company to pay any amount when due under the Loan Documents, if the Company (or its subsidiaries) is subject to any judgment in excess of $250,000 which is not discharged or stayed within 30 days, or if a change in control of the Company, any subsidiary or any guarantor should occur, which is defined for purposes of the credit agreement as any transfer of 25% or more of the voting stock of such entity. Additionally, an event of default under the credit agreement is triggered in the event the Company fails to repay at least $2 million of the Loans before March 31, 2016; ~~and~~in the event the close-of-trading price of West Texas Intermediate Crude Oil (“WTI”) closes below $35 per barrel for a period of ten consecutive trading days, provided that at the end of such ten day period the outstanding principal amount of the Loans exceeds $2,021,086, or WTI closes below $30 per barrel for a period of ten consecutive trading days regardless of the amount then outstanding under the Loans.

~~● other regulatory, legislative and judicial developments.~~39

WeNotwithstanding ~~advise~~the above, in January 2016, the ~~reader~~Agent agreed, on behalf of the Lenders, to prospectively waive any and all Events of Default that ~~these~~may arise ~~cautionary~~as ~~remarks~~a ~~expressly~~result ~~qualify~~of the WTI Events of Default, with the waiver continuing in ~~their~~effect, ~~entirety~~as an effective waiver of any and all ~~forward-looking~~WTI Events ~~statements~~of ~~attributable~~Default tothat usmay orarise ~~persons~~in ~~acting~~the onfuture, ~~our~~until ~~behalf~~such time as the Agent delivers a written notice to the Company withdrawing the waiver. ~~Important~~Additionally, ~~factors~~during the period that ~~you~~the ~~should~~waiver ~~also~~is ~~consider~~in effect, ~~include~~in the event that a WTI Event of Default arises and thereafter the close-of-trading price of WTI for any trading day, ~~but~~equals ~~are~~or ~~not~~exceeds ~~limited~~$35 toor $30, based on the ~~factors~~applicable ~~discussed~~WTI ~~under~~Event ~~“Risk~~of ~~Factors”~~Default, such inevent ~~this~~shall ~~report~~serve to make the waiver permanent (i.e., ifnot capable of being withdrawn) with respect to any, ~~and~~WTI ~~our~~Event ~~Annual~~of ~~Report~~Default that existed for the period prior to such trading day.

The Company ~~forward-looking~~is ~~statements~~currently inconfirming ~~this~~with ~~report~~Lenders ~~are~~whether ~~made as of~~ the ~~date~~recent offluctuation ~~this~~in ~~report and we do not intend or undertake to update any of~~ the ~~forward~~close-~~looking~~of-trading ~~statements~~price toof ~~conform~~WTI ~~these~~has ~~statements~~made ~~to actual results, except as required by applicable law, including~~ the waiver ~~securities laws of the United States~~permanent.

~~Certain~~Upon ~~capitalized~~the ~~terms~~occurrence ~~used~~of ~~below~~an ~~and~~event ~~otherwise~~of ~~defined below~~default, ~~have~~ the ~~meanings~~lenders ~~given~~could elect to declare all amounts outstanding under such ~~terms~~credit inagreements, ~~the~~including ~~footnotes~~accrued interest or other obligations, to ~~our~~be ~~consolidated~~immediately ~~financial~~due ~~statements~~and ~~included~~payable. ~~above~~If amounts outstanding under ~~“Part~~such Icredit -agreements ~~Financial~~were ~~Information”~~to -be ~~“Item~~accelerated, 1.our ~~Financial~~assets ~~Statements”~~might not be sufficient to repay in full that indebtedness and our other indebtedness.

~~The~~Certain ~~information~~of ~~below~~our ~~should~~credit beagreements ~~read~~and inloan ~~conjunction~~agreements also ~~with~~contain ~~the~~cross-default ~~interim~~and ~~unaudited~~cross-acceleration ~~financial~~provisions. ~~statements~~Under these provisions, a default or acceleration under one instrument governing our debt may constitute a default under our other debt instruments that contain cross-default and ~~the~~cross-acceleration provisions, ~~notes~~which ~~thereto~~could ~~included~~result in ~~this~~the ~~Quarterly~~related ~~Report~~debt onand ~~Form~~the ~~10-Q~~debt ~~above~~issued under ~~“Part~~such Iother -instruments ~~Financial~~becoming ~~Information”~~immediately ~~–“Item~~due 1and payable. ~~Financial~~In ~~Statements”~~such event, ~~and~~we ~~“Part~~would ~~II”~~need –to ~~“Item~~raise 7funds from alternative sources, which funds might not be available to us on favorable terms, on a timely basis or at all. ~~Management’s~~Alternatively, ~~Discussion~~such a default could require us to sell assets and ~~Analysis~~otherwise curtail operations to pay our creditors. The proceeds of ~~Financial~~such ~~Condition~~a ~~and~~sale ~~Results~~of assets, or curtailment of ~~Operations”~~operations, ~~contained~~might innot ~~our~~enable ~~Annual~~us ~~Report~~to pay all of our liabilities.

35Typenex has alleged the occurrence of an event of default under its 8% Short Term Cash Redeemable Note and demanded that we repay amounts owed thereunder and we do not have sufficient funds, nor ability under our senior loan agreement, to repay the amounts alleged owed.

~~Table~~On November 25, 2015, we received a notice of ~~Contents~~default from Typenex (the “Default Notice”), which we vehemently disagree with in every regard. The Default Notice alleged the occurrence of an event of default under the terms of the Securities Purchase Agreement (the “SPA”) and Typenex Note. Specifically, the Default Notice alleged that the Company’s November 17, 2015 sale of an 8% Short Term Cash Redeemable Note to Darling Capital, LLC (the “Darling Note”), constituted a ‘variable security’ which therefore resulted in a breach of the provisions of the SPA and Typenex Note because the Company did not first receive the approval of Typenex for such sale as required thereby for the Company’s sale of a ‘variable security’. The Default Notice also seeks to enforce default interest on the Note (22% per annum); to increase the balance of the Note by 15% (i.e., by $259,500 to a balance of $2,006,429) due to the alleged occurrence of the default; and further seeks to foreclose on 3.1 million shares of common stock of the Company pledged by related parties to secure amounts owed under the Note (the “Pledged Shares”).

~~Certain~~On ~~abbreviations~~November ~~and~~30, ~~oil~~2015, ~~and~~the ~~gas~~Company ~~industry~~received a ~~terms~~demand ~~used~~notice ~~throughout~~(the ~~this~~“Demand ~~report~~Notice”) ~~are~~from ~~described~~Typenex ~~and~~formally ~~defined~~requesting ~~in greater detail under “Glossary of Oil~~ and ~~Natural~~demanding ~~Gas~~the ~~Terms”~~payment ~~beginning on page 13~~ of the ~~Annual Report~~$2,006,429 alleged ~~and~~due ~~readers~~under ~~are~~the ~~encouraged~~Note toby ~~review~~December ~~that~~2, ~~section of the Annual Report~~2015.

~~Item~~The 2Company disputes the claim that an event of default has occurred under the SPA or the Note and further disputes and fails to acknowledge the claims and demands made by Typenex in the Default Notice and Demand Notice. ~~Management~~The Darling Note was not a ‘Variable Security’s ~~Discussion~~as such security is not convertible unless or until such note is not repaid by the 180th day after the sale of such note and ~~Analysis~~the Company therefore believes that the claims made by Typenex are invalid. Furthermore, pursuant to the terms and conditions of ~~Financial~~the ~~Condition~~Typenex Note. Additionally, pursuant to a subordination agreement entered into between Typenex and ~~Results~~the Agent, Typenex agreed not to make any demand for payment of ~~Operations~~amounts owed under the Note, commence any action to enforce the repayment of the Note (except pursuant to the terms of the subordination agreement, which requires among other things, 60 days prior notice by Typenex to the Agent), collect any collateral (other than pledged shares), or accept any payment of amounts owed under the Note (including principal, interest and other amounts due) unless in the form of common stock of the Company, until or unless amounts owed to the Creditors under the Credit Agreement are first satisfied in full.

~~Overview~~40

AsOn ~~used~~or inabout ~~this~~January ~~Quarterly~~21, ~~Report:~~2016, ~~(i)~~we ~~the~~and ~~terms~~CW ~~“we”~~Navigation, Inc., ~~“us”~~which is controlled by Christopher Watts, “one of our”, ~~“Hydrocarb”,~~largest ~~“HEC”,~~stockholders ~~“Penasco”,~~and ~~“Galveston~~the ~~Bay”~~nephew of our Chief Executive Officer, Kent ~~“SPE”~~P. Watts, ~~“NEI”~~filed a Complaint and Demand for Arbitration in the ~~“Company”~~state ~~mean~~of ~~Hydrocarb~~Utah ~~Energy~~against ~~Corp~~Typenex and ~~its~~naming ~~wholly~~the ~~owned~~escrow ~~subsidiaries~~agent ~~Penasco~~which holds ~~Petroleum~~the ~~Inc.~~Pledged Shares, ~~Galveston~~as ~~Bay,~~well ~~LLC,~~as ~~SPE~~our ~~Navigation~~transfer Iagent, ~~LLC~~as parties thereto, seeking a temporary restraining order and ~~Namibia~~preliminary injunction ~~Exploration,~~restraining ~~Inc.~~the ~~Hydrocarb~~escrow ~~Corporation~~agent ~~(“HCN”),~~from ~~Hydrocarb~~delivering ~~Texas~~the ~~Corporation,~~Pledged ~~Hydrocarb~~Shares ~~Energy~~to ~~DRC~~Typenex ~~Corporation,~~and ~~Hydrocarb~~our ~~Namibia~~transfer ~~Energy~~agent ~~(Pty)~~from ~~Limited~~transferring the shares to Typenex, declaratory relief and ~~Hydrocarb~~damages ~~Guinea~~for ~~SARL~~breach ~~plus~~of ~~our~~contract ~~95%~~as ~~ownership~~a ~~interest~~result of ~~Otaiba~~Typenex’s ~~Hydrocarb~~assertion ~~LLC,~~that ~~unless~~an event of default occurred under the ~~context~~terms ~~otherwise~~of ~~requires;~~the ~~(ii)~~Typenex ~~“SEC”~~Note. ~~refers~~We toalso alleged that Typenex’s claim for the ~~Securities~~Pledged Shares is inappropriate and ~~Exchange~~without ~~Commission;~~merit, ~~(iii)~~and ~~“Securities~~we ~~Act”~~intend ~~refers~~to vigorously pursue this matter. Typenex has filed an answer to our complaint, alleging that our complaint fails to state a claim upon which relief may be granted, that the ~~Securities~~Darling ~~Act~~Note ofconstitutes ~~1933~~a ‘variable security’, denying asour ~~amended;~~other claims, raising various affirmative defenses, including alleging fraud, and raising counterclaims in the Arbitration Proceeding, alleging our breach (~~iv)~~and ~~“Exchange~~various ~~Act”~~other ~~refers~~parties’ tobreaches) of the ~~Securities~~various ~~Exchange~~transaction ~~Act~~documents, alleging our breach of ~~1934~~implied covenant of good faith and fair dealing, asseeking ~~amended;~~declaratory relief, an injunction and ~~(v)~~attorneys’ ~~all~~fees and ~~dollar~~court ~~amounts~~costs, ~~refer~~all toof ~~United~~which ~~States~~defenses ~~dollars~~and ~~unless~~counterclaims ~~otherwise~~the ~~indicated~~Company vehemently denies.

~~The~~On ~~following~~March ~~discussion~~9, of2016, ~~our~~the ~~plan~~Company ofreceived ~~operations~~correspondence from the Company’s transfer agent, ~~results~~Fidelity ofTransfer ~~operations~~Company, ~~and~~regarding ~~financial~~the ~~condition~~release asof atthe ~~and~~Pledged ~~for~~Shares to Typenex pursuant to the ~~three~~terms ~~months~~of ~~ended~~the ~~October~~Pledge 31Agreement. Once released, ~~2015~~such ~~should~~shares will be ~~read~~eligible into ~~conjunction~~be ~~with~~freely ~~our~~sold ~~unaudited~~in ~~consolidated~~the ~~interim~~marketplace ~~financial~~pursuant to ~~statements~~Rule ~~and~~144. ~~related~~Notwithstanding ~~notes~~the ~~for~~release of the ~~three~~shares ~~months~~by ~~ended~~our ~~October~~transfer 31agent, ~~2015,~~we ~~included~~plan into ~~this~~continue ~~Quarterly~~to ~~Report~~litigate the action with Typenex. The Company and CW Navigation, asInc. ~~well~~are ascurrently ~~our~~in ~~Annual~~discussion ~~Report~~with onrespect ~~Form~~to ~~10-K~~the ~~for~~reimbursement obligations the ~~year~~Company ~~ended~~has ~~July~~towards CW 31Navigation, ~~2015~~Inc. in connection with the release of the Pledged Shares.

~~Plan~~The Company currently has no intention of ~~Operations~~paying Typenex pursuant to the Demand Notice or otherwise or acknowledging that a default has occurred under the SPA or Note. Notwithstanding the above, the existence of the alleged defaults, and/or resources the Company may be forced to expend in connection with the Arbitration Proceeding, or defending itself against the allegations made by Typenex may negatively affect the Company or its cash flow, which may ultimately result in a decline in the value of the Company’s common stock.

~~During~~Notwithstanding ~~both~~the ofabove, we may need to raise additional funding in the ~~reporting~~future ~~periods~~to ~~disclosed~~repay ~~herein~~or refinance the Note, ~~there~~and ~~has~~as ~~been~~such amay ~~significant~~need ~~decrease~~to inseek additional debt or equity financing. Such additional financing may not be available on favorable terms, if at all. If debt financing is available and obtained, our interest expense may increase and we may be subject to the ~~commodity~~risk ~~price~~of default, depending on the terms of ~~oil~~such financing. If equity financing is available and aobtained ~~smaller~~it ~~decrease~~may result in ~~the~~our ~~commodity~~shareholders ~~price~~experiencing significant dilution. If such financing is unavailable, we may be forced to curtail our operations, which may cause the value of ~~gas~~our securities to decline in value and/or become worthless. ~~This~~ Furthermore, the fact that the Note has ~~materially~~been ~~adversely~~alleged ~~affected~~in default (regardless of whether such allegation was valid or not) may negatively affect the perception of the Company’s ~~revenue~~and ~~over~~our ability to pay our debts as they become due in the ~~same~~future ~~period~~and could result in the price of our securities declining in value or being valued at lower levels than companies with similar histories of alleged defaults.

InThe ~~Galveston~~Typenex ~~Bay,~~Note ~~Texas~~is weconvertible ~~plan to continue enhancing the production from~~ into our ~~four~~common ~~productive~~stock ~~fields.~~upon ~~Our development program includes primarily reworking, infrastructure improvements, and recompletions, as well as drilling, as to exploit~~ the ~~known~~occurrence ~~reserves in at least 18 wells. Internal estimates show the projects, if successful, can almost quadruple current production enhancing cash flow significantly. Due to the fact that a large proportion~~ of ~~current operating costs in Galveston Bay are fixed it is expected that as production grows~~ an ~~increasing~~event ~~percentage~~ of ~~the~~default ~~revenue will contribute to positive cash flow. We plan to fund these projects as long as working capital~~ and ~~cash-flow~~an ~~permits~~event ~~and pending success~~ of ~~previous~~default ~~projects.~~has Ifbeen wealleged ~~are~~under ~~able to secure either bank or equity financing in~~ the ~~near~~Typenex ~~future, this development plan can be accelerated~~Note.

InAs ~~Namibia~~described above, ~~Africa~~Typenex has previously alleged that the Note is currently in default, although as described above, we ~~plan~~dispute tosuch ~~interpret~~allegation. ~~the~~At ~~newly~~any ~~acquired~~time ~~aerial~~following ~~gravity~~an uncured ~~magnetic~~event ~~survey~~of ~~data~~default, ~~and~~Typenex ~~develop~~has the ~~acquisition~~right ~~plan~~to ~~for~~convert ~~new~~any ~~2-D~~or ~~seismic~~all ~~data~~of ~~over~~the outstanding principal amount of the ~~concession~~Note into our common stock. ~~This~~The ~~will~~conversion ~~include~~price ~~seeking~~of athe ~~new~~Typenex ~~partner~~Note is 80% of the five lowest closing bid prices of our common stock on the 20 trading days prior to any conversion, provided that ~~will~~if the average of such closing bid prices is below $0.75 per share, atthe conversion ~~least~~rate ~~partially~~is decreased by 5% (to 75%), ~~carry~~and usprovided ~~through~~further that the ~~seismic~~conversion ~~acquisition~~rate ~~program.~~is ~~3-D~~decreased ~~seismic~~by ~~will~~an ~~later~~additional be5% ~~utilized~~if we are not DWAC eligible at any time or DTC eligible at any time (for ~~those~~up ~~identified~~to ~~structures~~an ~~which~~aggregate ~~appear~~of ~~most~~an ~~prospective~~additional 10% decrease in the conversion rate). ~~Drilling~~Finally, in the event certain defaults (defined as major defaults under the note) occur, the conversion rate may be decreased by up to an additional 15% (an additional 5% decrease in the conversion rate per the occurrence of the first ~~well~~three ismajor ~~several~~defaults). Typenex ~~years~~also ~~away.~~has Inthe right upon the ~~meanwhile~~occurrence of an event of default to require us to repay in full the amount owed under the Note by providing us written notice, subject to the terms of the subordination agreement entered into by Typenex in favor of our senior ~~goals~~lender. Additionally, upon the occurrence of certain events of default as described in the Typenex Note, we are required to ~~increase~~repay Typenex liquidated damages in addition to the ~~value~~amount ~~and~~owed ~~decrease~~under the ~~risk~~Typenex ~~profile~~Note. At no time may the Typenex Note be converted into shares of our ~~concession~~common ~~acreage~~stock if such conversion would result in ~~Namibia~~Typenex and its affiliates owning an aggregate of in excess of 4.99% of the then outstanding shares of our common stock, provided such percentage increases to 9.99% if our market capitalization is less than $10 million, and provided further that Typenex may change such percentage from time to time upon not less than 61 days prior written notice to us.

In September 2014 our CEO traveled to Abu Dhabi, United Arab Emirates (“UAE.”) and met with the board of directors of our subsidiary Otaiba Hydrocarb LLC. His goal was to proceed with oil company registration work that would allow the company to receive bids on oilfield services work with the hopes of developing a profitable business as has been the plan since the subsidiary was established. Instead of being able to proceed with the business plan, the partner in the UAE made it clear that they wanted more control over management of the subsidiary while still requiring us to fund ongoing expenses. This created an impasse between our partners and us. Together with consideration for the severe drop in oil prices, the board of directors made the decision to cease operations in the UAE in favor of our focus for oilfield services to be developed domestically. Thus, during the quarter ended April 30, 2015, the decision was made to close the office in the UAE and not to continue its operations, thereby reducing cash expense obligations that we have had in the past but no longer have. All expenses of operating there have been realized on an ongoing basis so the accounting effect of this shutdown is nil and immaterial.41

36If Typenex converts the Note into common stock, the conversion thereof will likely cause the value of our common stock, to decline in value. Additionally, if sequential conversions of the Note and sales of such converted shares take place, the price of our common stock may decline, and as a result, the holder of the Note will be entitled to receive an increasing number of shares in connection with conversions, which shares could then be sold in the market, triggering further price declines and conversions for even larger numbers of shares, to the detriment of our investors. The shares of common stock which the Note is convertible into may be sold without restriction pursuant to Rule 144. Additionally, the shares pledged to secure the repayment of the Note, which Typenex has disclosed its intention to transfer to its name and sell in the public market, may be sold without restriction pursuant to Rule 144. As a result, the sale of these shares may adversely affect the market price, if any, of our common stock. In addition, the common stock issuable upon conversion of the Note or upon sale of the pledged shares may represent overhang that may also adversely affect the market price of our common stock. Overhang occurs when there is a greater supply of a company’s stock in the market than there is demand for that stock. When this happens the price of the company’s stock will decrease, and any additional shares which shareholders attempt to sell in the market will only further decrease the share price. The Typenex Note, upon the occurrence of an event of default, is convertible into common stock at a discount to market as described above, and such discount to market provides the holder with the ability to sell its common stock at or below market and still make a profit. In the event of such overhang, Typenex will have an incentive to sell their common stock as quickly as possible. If the share volume of our common stock cannot absorb the discounted shares, then the value of our common stock will likely decrease. The issuance of common stock upon conversion of the Note will result in immediate and substantial dilution to the interests of other stockholders since Typenex may ultimately receive and sell the full amount of shares issuable in connection with the conversion of such Note. The conversion of the Note and sale of shares by Typenex and/or sale of the pledged shares by Typenex could cause the value our common stock to decline in value or become worthless.

~~Table~~The release and public sale of ~~Contents~~the Pledged Shares may result in the price of our common stock declining in value.

~~Our~~On ~~plan~~March 9, 2016, the Company received correspondence from the Company’s transfer agent, Fidelity Transfer Company, regarding the release of ~~operations~~the ~~over~~Pledged Shares to Typenex pursuant to the ~~next~~terms ~~twelve~~of ~~months~~the isPledge Agreement. Once released, such shares will be eligible to ~~increase~~be ~~cash~~freely ~~flow~~sold ~~upon~~in ~~one~~the ormarketplace ~~more~~pursuant to Rule 144, and we believe that such sales and increased trading volume and pressure associated therewith may lead to a significant decrease in the trading price of our common stock. Notwithstanding the ~~following~~release ~~occurring:~~of the shares by our transfer agent, we plan to continue to litigate the action with Typenex.

1.The ~~Continue~~trading toprices ~~receive~~of ~~payments~~our oncommon ~~the~~stock may ~~two~~be ~~receivables~~adversely ~~for~~affected ~~Company~~by short selling and our stockholders ownership of our common stock; may be in doubt due to possible naked short selling of our common stock.

2.“Short ~~Raise~~selling” ~~capital~~is the sale of a security that the seller does not own, including a sale that is completed by ~~farming~~the ~~down~~seller’s delivery of a ~~portion~~“borrowed” security (i.e. the short seller’s promise to deliver the security). Short sellers make a short sale because they believe that they will be able to buy the stock at a lower price than their sales price. Significant amounts of short selling, or the perception that a significant amount of short sales could occur, could depress the market price of our ~~Owambo~~common ~~Basin~~stock. ~~concession~~The price decline could be exacerbated if sufficient “naked short selling” occurs, which is the practice by which short sellers place short sell orders for shares without first borrowing the shares to be sold, or without having first adequately located such shares and arranged for a firm contract to borrow such shares prior to the delivery date set to close the sale. The result is an artificial deluge into the market of shares for sale – shares that the seller does not own and has not even borrowed. Although there are regulations in ~~Namibia~~the United States designed to address abusive short selling, the regulations may not be adequately structured or enforced. Because naked shorting may result in an ~~industry~~artificial ~~partner;~~depression of our stock price, our stockholders could lose all or part of their investment in our common stock. As a result of this naked short selling, there may be a substantial number of purchasers who believe they are our stockholders, but who in fact would not be stockholders since their brokers may never have received any shares of our common stock for their account. In addition, naked short selling may deprive stockholders of the right to vote some or all of their shares.

3Item 2. ~~Release~~Unregistered ~~restricted~~Sales ~~cash~~of ~~from~~Equity ~~the~~Securities ~~State Bonding requirement, as shut-in wells are brought back into production~~ and~~/or~~ asUse ~~wells~~of ~~are plugged;~~Proceeds

4.We ~~Continue~~have topreviously ~~enhance~~disclosed in ~~production~~our ~~from~~Current ~~our~~Reports ~~four~~on ~~production~~Form ~~oil~~8-K filed during the quarter ended January 31, 2016, or subsequent thereto and ~~gas~~through ~~fields~~the indate of ~~Galveston~~this ~~Bay;~~filing, all unregistered equity securities that we issued and/or sold during the quarter ended January 31, 2016 and through the date of this filing, except for the following:

5.In ~~Raising~~January ~~capital~~2016, we issued 48,392 restricted shares of common stock to Duma Holdings, LLC in consideration for the payment to Duma Holdings of accrued interest owed through February 29, 2016 and the ~~issuance~~extension fee of ~~additional~~$3,500 ~~equity~~to orpostpone the ~~debt~~due ~~securities~~date of the Duma Holdings Note to February 29, 2016. The fair value of the 48,392 shares issued for interest expense is $53,715. The Duma Holdings Note is described in greater detail above under “Part I - Financial Information” - “Item 1. Financial Statements” - “Note 5 – Related Party Notes Payable”.

Our plan of operations over the next twelve months will always be subject to available capital which will be determined by the success of projects that are currently in progress or will begin soon. It is even possible that given a high degree success in recently initiated projects and upcoming projects we could actually exceed our planned operations and have more internally-derived funds available for capital expenditures for the next six months. As management, we will determine the best use of our capital given the circumstances at the time.42

~~Various~~In ~~conditions~~January ~~outside~~2016, we issued 48,392 restricted shares of ~~our~~common ~~control~~stock ~~may~~to ~~detract~~Duma ~~from~~Holdings, ~~our~~LLC ~~ability~~in toconsideration ~~raise~~for the ~~capital~~payment ~~needed~~ to ~~execute~~Duma ~~our~~Holdings ~~plan~~ of ~~operations~~accrued interest owed through February 29, ~~including~~2016 (provided that the ~~price~~extension fee of ~~oil~~$3,500 ashas ~~well~~not asbeen paid to date), which was provided for under the ~~overall~~amended Duma ~~market~~Holdings ~~conditions~~Note, in connection with the ~~international~~extension ~~and~~of ~~domestic~~the ~~economies.~~due ~~Any~~date of ~~these~~such ~~factors~~note ~~could~~to ~~have~~May a31, ~~material~~2016. ~~adverse~~The ~~impact~~fair ~~upon~~value ~~our~~of ~~ability~~the to48,392 shares ~~raise~~issued ~~capital~~for orinterest ~~obtain~~expense ~~financing~~is ~~and~~$53,715. asThe aDuma ~~result,~~Holdings ~~upon~~Note ~~our~~is ~~short~~described in greater detail above under “Part I -~~term~~ orFinancial ~~long~~Information” -~~term~~ ~~liquidity~~“Item 1. Financial Statements” - “Note 5 – Related Party Notes Payable”.

~~Results~~In February 2016, we issued an aggregate of 8,697 ~~Operations~~restricted shares of our common stock to our three directors (2,899 shares each) in consideration for services rendered.

~~The~~In ~~following~~February ~~table~~2016, ~~sets~~we ~~out~~issued 1,500,000 ~~consolidated~~shares ~~data~~of restricted common stock to PowerTradersPress.com (“Powertrader”) in connection with our entry into a one year Consulting Agreement with Powertrader in consideration for ~~the~~investor ~~periods~~relations ~~indicated:~~services.

~~Three~~We ~~months~~believe ~~ended~~that ~~October~~the 31issuances described above were exempt from registration pursuant to (a) Section 4(a)(2) of the Securities Act of 1933, ~~2015~~as ~~compared~~amended (the “Securities Act”); or (b) Rule 506 of the Securities Act, and the regulations promulgated thereunder. With respect to the ~~three~~transactions described ~~months~~above, ~~ended~~no ~~October~~general 31solicitation was made either by us or by any person acting on our behalf. The transactions were all privately negotiated, ~~2014:~~and none involved any kind of public solicitation. No underwriters or agents were involved in the foregoing grants and we paid no underwriting discounts or commissions. The securities sold are subject to transfer restrictions, and the certificates evidencing the securities contain an appropriate legend stating that such securities have not been registered under the Securities Act and may not be offered or sold absent registration or pursuant to an exemption therefrom. All recipients (a) were “accredited investors;” (b) had access to similar documentation and information as would be required in a Registration Statement under the Securities Act of 1933; (c) were non-U.S. persons; and/or (d) were officers and directors of the Company.

	Three Months End Oct 31,						Increase/			%
	2015			2014			(Decrease)			Change
Revenues	$	1,211,406		$	1,205,429			5,977			*
Operating expenses
Lease operating expense		1,164,974			1,297,555			(132,581	)		-10	%
Depreciation, depletion, and amortization		489,404			224,256			265,148			118	%
Accretion		248,299			302,208			(53,909	)		-18	%
General and administrative expense		2,366,174			943,280			(1,422,894	)		151	%
Total operating expenses		4,268,851			2,767,299			1,501,552			54	%
Loss from operations		(3,057,445	)		(1,561,870	)		(1,495,575	)		96	%
Consulting and other income (expense)		(12,114	)		4,042			(16,156	)		-400	%
Gain or Loss on derivatives		1,273,926			-			1,273,926			100	%
Interest income (expense), net		(2,356,493	)		(227,777	)		(2,128,716	)		(935	%)
Foreign currency transaction gain (loss)		714			4,759			(4,045	)		-85	%
Net loss before income taxes		(4,151,412	)		(1,780,846	)		(2,370,566	)		133	%
Net loss		(4,151,412	)		(1,780,846	)		(2,370,566	)		133	%
Less: Net loss attributable to noncontrolling interests		-			(1,323	)		1,323			100	%
Net loss attributable to Hydrocarb Corporation		(4,151,412	)		(1,779,523	)		(2,369,243	)		133	%

Item 3.

Defaults Upon Senior Securities

*On ~~Less~~November ~~than~~25, 12015, we received a notice of default from Typenex (the “Default Notice”), which we vehemently disagree with in every regard. The Default Notice alleged the occurrence of an event of default under the terms of the Securities Purchase Agreement (the “SPA”) and Typenex Note. Specifically, the Default Notice alleged that the Company’s November 17, 2015 sale of an 8% Short Term Cash Redeemable Note to Darling Capital, LLC (the “Darling Note”), constituted a ‘variable security’ which therefore resulted in a breach of the provisions of the SPA and Typenex Note because the Company did not first receive the approval of Typenex for such sale as required thereby for the Company’s sale of a ‘variable security’. The Default Notice also seeks to enforce default interest on the Note (22% per annum); to increase the balance of the Note by 15% (i.e., by $259,500 to a balance of $2,006,429) due to the alleged occurrence of the default; and further seeks to foreclose on 3.1 million shares of common stock of the Company pledged by related parties to secure amounts owed under the Note (the “Pledged Shares”).

37On November 30, 2015, the Company received a demand notice (the “Demand Notice”) from Typenex formally requesting and demanding the payment of the $2,006,429 alleged due under the Note by December 2, 2015.

~~Table~~The Company disputes the claim that an event of ~~Contents~~default has occurred under the SPA or the Note and further disputes and fails to acknowledge the claims and demands made by Typenex in the Default Notice and Demand Notice. The Darling Note was not a ‘Variable Security’ as such security is not convertible unless or until such note is not repaid by the 180th day after the sale of such note and the Company therefore believes that the claims made by Typenex are invalid. Furthermore, pursuant to the terms and conditions of the Typenex Note. Additionally, pursuant to a subordination agreement entered into between Typenex and the Agent, Typenex agreed not to make any demand for payment of amounts owed under the Note, commence any action to enforce the repayment of the Note (except pursuant to the terms of the subordination agreement, which requires among other things, 60 days prior notice by Typenex to the Agent), collect any collateral (other than pledged shares), or accept any payment of amounts owed under the Note (including principal, interest and other amounts due) unless in the form of common stock of the Company, until or unless amounts owed to the Creditors under the Credit Agreement are first satisfied in full.

We recorded net loss of $4,151,412, or (0.18) per basic and diluted common share, during the three months ended October 31, 2015, as compared to a net loss of $1,779,523, or ($0.08) per basic and diluted common share, during the three months ended October 31, 2014.43

~~The~~On ~~changes~~or about January 21, 2016, we and CW Navigation, Inc., which is controlled by Christopher Watts, one of our largest stockholders and the nephew of our Chief Executive Officer, Kent P. Watts, filed a Complaint and Demand for Arbitration in ~~results~~the ~~were~~state ~~predominantly~~of ~~due~~Utah against Typenex and naming the escrow agent which holds the Pledged Shares, as well as our transfer agent, as parties thereto, seeking a temporary restraining order and preliminary injunction restraining the escrow agent from delivering the Pledged Shares to Typenex and our transfer agent from transferring the ~~factors~~shares ~~below:~~to Typenex, declaratory relief and damages for breach of contract as a result of Typenex’s assertion that an event of default occurred under the terms of the Typenex Note. We also alleged that Typenex’s claim for the Pledged Shares is inappropriate and without merit, and we intend to vigorously pursue this matter. Typenex has filed an answer to our complaint, alleging that our complaint fails to state a claim upon which relief may be granted, that the Darling Note constitutes a ‘variable security’, denying our other claims, raising various affirmative defenses, including alleging fraud, and raising counterclaims in the Arbitration Proceeding, alleging our breach (and various other parties’ breaches) of the various transaction documents, alleging our breach of implied covenant of good faith and fair dealing, seeking declaratory relief, an injunction and attorneys’ fees and court costs, all of which defenses and counterclaims the Company vehemently denies.

~~Revenues~~On ~~increased~~March ~~from~~9, $12016,~~205,429~~ in the ~~prior~~Company ~~three~~received ~~month~~correspondence from ~~period~~the ~~ended~~Company’s ~~October~~transfer 31agent, ~~2014~~Fidelity toTransfer $1Company,~~211,406~~ inregarding the ~~current~~release ~~three~~of ~~month~~the ~~period~~Pledged ~~ended~~Shares ~~October~~to ~~31,~~Typenex ~~2015.~~pursuant to Of the ~~total~~terms ~~revenue~~of ~~increase~~the ~~$615,296~~Pledge ~~was~~Agreement. ~~due~~Once toreleased, ~~higher~~such ~~volume~~shares inwill ~~both~~be ~~oil~~eligible ~~and~~to ~~gas~~be ~~offset~~freely bysold ~~a decrease of $606,726~~ in ~~revenue~~the ~~due~~marketplace pursuant to ~~decreases~~Rule in144. ~~oil~~Notwithstanding ~~and~~the ~~gas~~release ~~prices.~~of ~~Oil~~the ~~price~~shares ~~decreased~~ by ~~110%~~our totransfer anagent, ~~average~~we ~~$44.15~~plan ~~per~~to ~~barrel~~continue ~~while~~to ~~gas~~litigate ~~price~~the ~~decreased~~action bywith ~~53% to an average $2~~Typenex.6 The ~~per~~Company ~~thousand~~and ~~cubic~~CW ~~feet~~Navigation, ~~(Mcf)~~Inc. ~~Lease~~are ~~operating~~currently ~~expenses~~in ~~decreased~~discussion ~~due~~with respect to ~~lower~~the ~~cost~~reimbursement ofobligations ~~operation~~the ~~period~~Company ~~over~~has ~~period.~~towards CW ~~Depreciation~~Navigation, ~~depletion,~~Inc. ~~and amortization increased because of higher production~~ in ~~the~~connection ~~current~~with ~~year versus production in~~ the ~~same~~release ~~quarter~~ of the ~~comparable~~Pledged ~~period prior year~~Shares.

~~General~~The ~~and~~Company ~~administrative~~currently ~~expenses~~has ~~decreased~~no ~~primarily~~intention asof apaying Typenex ~~result~~pursuant ofto ~~decreased~~the ~~compensation~~Demand ~~expense~~Notice ~~related~~or tootherwise ~~stock~~or ~~options~~acknowledging that a default has occurred under the SPA or Note. ~~Interest~~Notwithstanding ~~income~~the ~~(expense)~~above, ~~for~~the existence of the ~~three~~alleged ~~months~~defaults, ~~ended~~and/or ~~October~~resources the 31Company may be forced to expend in connection with the Arbitration Proceeding, ~~2015~~or ~~increased~~defending ~~primarily~~itself ~~result~~against ofthe ~~debt~~allegations made ~~related~~by ~~expense~~Typenex ~~such~~may asnegatively ~~interest~~affect ~~expense~~the Company or its cash flow, ~~debt~~which ~~issuance~~may ~~cost~~ultimately ~~amortization~~result ~~and~~in ~~original~~a ~~issue~~decline ~~discount~~in ~~amortization~~the value of the Company’s common stock.

WeItem ~~continue~~4. toMine ~~evaluate~~Safety ~~areas where we can reduce costs in lease operating expense and to increase production, which would increase revenues.~~Disclosures

~~Liquidity,~~Not ~~Capital Resources and Going Concern~~applicable.

~~The~~Item ~~following~~5. ~~table~~Other ~~sets forth our cash and working capital as follows:~~Information

	October 31, 2015			July 31, 2015
Cash and cash equivalents	$	201,353		$	229,512
Restricted cash	$	8,480,160		$	12,488,755
Working capital (deficit)	$	(13,204,964	)	$	(17,108,658	)

In February 2016, we entered into a one year consulting agreement with Powertrader pursuant to which we issued Powertrader 1.5 million shares of restricted common stock in consideration for investor relation services. A copy of the consulting agreement is filed herewith as Exhibit 10.22.

Our outstanding Credit Agreement with Shadow Tree Capital Management, LLC as agent, and our other outstanding promissory notes, convertible promissory notes and debt obligations are described in greater detail above under “Part I - Financial Information” - “Item ~~1. Financial Statements” – “Note~~ 6 – Related Party Notes Payable”, “Note 7 – Notes Payable and Convertible Notes”, “Note 11 – Related Party Transactions”, and “Note 14 – Subsequent Events”, and our commitments and contingencies are described in greater detail under “Note 12 – Commitments and Contingencies”, and readers are encouraged to review such information, as well as the unaudited consolidated financial statements and footnotes thereto included above. Exhibits

38See the Exhibit Index following the signature page to this Quarterly Report on Form 10-Q for a list of exhibits filed or furnished with this report, which Exhibit Index is incorporated herein by reference.

~~Table of Contents~~SIGNATURES

~~Net~~Pursuant ~~Cash~~to ~~Provided~~the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by ~~Operating~~the ~~Activities~~undersigned thereunto duly authorized.

~~During~~HYDROCARB ~~the~~ENERGY ~~three months ended October 31, 2015, operating activities used $1,716,012 of cash compared to providing cash of $1,063,248 during the three months ended October 31, 2014~~CORP. ~~The~~/s/ ~~change~~Kent in the cash used by operating activities is primarily attributable to our net loss of $4,151,412 during the current period, in addition to an increase of $148,475 in other assets and receivables and a decrease of $210,872 in our accounts payable and accrued expenses for the current period compared to the prior periodP. ~~Partially~~Watts ~~offsetting~~Kent ~~our cash flows used in operations were non-cash outflows of $1,223,789~~P. ~~Non-cash~~Watts ~~items~~Chief ~~were~~Executive ~~primarily comprised of share based compensation~~Officer, ~~share~~Executive ~~issued for services $1~~Chairman,~~564,000,~~ ~~accretion of $248,299,~~ and ~~amortization~~Director of(Principal ~~$1,668,012~~Executive ~~related~~Officer) toDate: ~~our~~March ~~original issuance discount and debt issuance cost on debt acquired. Change in derivative liabilities has non-cash inflow of $1~~14,~~273,926.~~ 2016

~~Net Cash Used in Investing Activities~~44

~~During~~EXHIBIT the three months ended October 31, 2015, investing activities used cash of $90,408 compared to using cash of $404,941 during the three months ended October 31, 2014. The change is due mainly to purchases of oil and gas property.INDEX

Net Cash Provided by Financing Activities

Exhibit Number				Description of Exhibit
10.1 (1)				Securities Purchase Agreement dated November 9, 2015 between Hydrocarb Energy Corporation and Adar Bays, LLC
10.2 (1)				Securities Purchase Agreement dated November 9, 2015 between Hydrocarb Energy Corporation and Union Capital, LLC
10.3 (1)				8% Short Term Cash Redeemable Note ($208,000), Due November 9, 2017, dated November 9, 2015, issued by Hydrocarb Energy Corporation to Adar Bays, LLC
10.4 (1)				8% Short Term Cash Redeemable Note ($208,000), Due November 9, 2017, dated November 9, 2015, issued by Hydrocarb Energy Corporation to Union Capital, LLC
10.5 (1)				8% Short Term Cash Redeemable Secured Note ($208,000), Due November 9, 2017, dated November 9, 2015, issued by Hydrocarb Energy Corporation to Adar Bays, LLC
10.6 (1)				8% Short Term Cash Redeemable Secured Note ($208,000), Due November 9, 2017, dated November 9, 2015, issued by Hydrocarb Energy Corporation to Union Capital, LLC
10.7 (1)				Collateralized Secured Promissory Note dated November 9, 2015 ($208,000), issued by Adar Bays, LLC to Hydrocarb Energy Corporation
10.8 (1)				Collateralized Secured Promissory Note dated November 9, 2015 ($208,000), issued by Union Capital, LLC to Hydrocarb Energy Corporation
10.9 (1)				Side Letter Agreement dated November 9, 2015 between Adar Bays, LLC and Hydrocarb Energy Corporation
10.10 (1)				Side Letter Agreement dated November 9, 2015 between Union Capital, LLC and Hydrocarb Energy Corporation
10.11 (1)				8% Short Term Cash Redeemable Note ($350,000), dated November 9, 2015, issued by Hydrocarb Energy Corporation to JSJ Investments Inc.
10.12 (1)				Side Letter Agreement dated November 9, 2015 between JSJ Investments Inc. and Hydrocarb Energy Corporation
10.13 (1)				Financial Consulting Agreement between Hydrocarb Energy Corporation and Geoserve Marketing LLC
10.14 (6)				8% Short Term Cash Redeemable Note ($200,000), Due September 12, 2016, dated November 12, 2015, issued by Hydrocarb Energy Corporation to Darling Capital, LLC
10.15 (2)				Side Letter Agreement dated November 12, 2015 between Darling Capital, LLC and Hydrocarb Energy Corporation
10.16 (2)				First Amendment to Voting Agreements (November 16, 2015) by and between S. Chris Herndon, Kent P. Watts and Christopher Watts
10.17 (3)				First Amendment to Amended and Restated Credit Agreement dated and effective November 30, 2015, by and between Hydrocarb Energy Corporation, Shadow Tree Capital Management, LLC, as agent, and each of Shadow Tree Funding Vehicle A—Hydrocarb LLC and Quintium Private Oppor

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