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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x      Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934:

For the quarterly period ended September 30, 2011

or

o         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: 000-32490

HYPERDYNAMICS CORPORATION

(Exact name of registrant as specified in its charter)

12012 Wickchester Lane, # 475

Houston, Texas 77079

(Address of principal executive offices, including zip code)

713-353-9400

(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 x  No o

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 (§ 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  o No  o

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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)  YES o  NO x

As of November 3, 2011, 156,443,358 shares of common stock, $0.001 par value, were outstanding..

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HYPERDYNAMICS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Number of Shares and Per Share Amounts)

(Unaudited)

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

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HYPERDYNAMICS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Number of Shares and Per Share Amounts)

(Unaudited)

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

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HYPERDYNAMICS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

(In Thousands, Except Number of Shares)

(Unaudited)

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

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HYPERDYNAMICS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

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

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HYPERDYNAMICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Nature of business

Hyperdynamics Corporation (“Hyperdynamics,” the “Company,” “we,” and “our”) is a Delaware corporation formed in March 1996. Hyperdynamics has three wholly-owned subsidiaries, SCS Corporation (SCS), HYD Resources Corporation (HYD) and Hyperdynamics Oil & Gas Limited. Through SCS and its wholly-owned subsidiary, SCS Corporation Guinea SARL (SCSG), which is a Guinea limited liability company formed under the laws of the Republic of Guinea (“Guinea”) located in Conakry, Guinea, Hyperdynamics focuses on oil and gas exploration offshore the coast of West Africa. Our exploration efforts are pursuant to a Hydrocarbon Production Sharing Contract, as amended (the “PSC”).  We refer to the rights granted under the PSC as the “Concession.” SCS began operations in oil and gas exploration, seismic data acquisition, processing, and interpretation in late fiscal 2002. In April 2004, Hyperdynamics acquired HYD. Hyperdynamics Oil & Gas Limited was formed in February 2011 in the United Kingdom to support business development activities.

Principles of consolidation

The accompanying unaudited consolidated financial statements include the accounts of Hyperdynamics and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The financial statements 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 June 30, 2011. 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 June 30, 2011, as reported in the Form 10-K, have been omitted.

Use of estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and expenses at the balance sheet date and for the period then ended. Actual results could differ from these estimates.

Cash and cash equivalents

Cash equivalents are highly liquid investments with an original maturity of three months or less.  We maintain our cash in bank deposit accounts which, at times, exceed the federally insured limits.  At September 30, 2011, we had approximately $36,139,000 in excess of FDIC limits.  We have not experienced any losses in such accounts.

Restricted cash

Included in restricted cash is $34,670,000 held in escrow which relates to our drilling contract with AGR Peak Well Management Ltd (“AGR”). Under the terms of the drilling contract, we will fund the escrow account for the sole purpose of funding our drilling project as overseen by AGR. As work is performed and invoiced, AGR will submit draw documents to us and funds will be released under the terms of the agreement.

Joint interest receivable and allowance for doubtful accounts

The Company establishes provisions for losses on accounts receivable if it determines that it will not collect all or part of the outstanding balance. Accounts receivable are written down to reflect management’s best estimate or realizability based upon known specific analysis, historical experience, and other currently available evidence of the net collectible amount. There is no allowance for doubtful accounts as of September 30, 2011 or June 30, 2010. At September 30, 2011, all of our accounts receivable balance was related to joint interest billings to Dana Petroleum (E&P) Limited (“Dana”), which owns a 23% participating interest in our Guinea Concession.

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Securities classified as available-for-sale

Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Marketable equity securities and debt securities not classified as held-to maturity are classified as available-for-sale. Available-for-sale securities are carried at fair value, with unrealized gains and losses, net of tax (if any), reported in other comprehensive income. Realized gains and losses, and declines in value deemed to be other-than-temporary, are included in earnings.

The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in earnings.

Earnings per share

Basic loss per common share has been computed by dividing net loss by the weighted average number of shares of common stock outstanding during each period and after any preferred stock dividend requirements. In period of earnings, diluted earnings per common share are calculated by dividing net income available to common shareholders by weighted-average common shares outstanding during the period plus weighted-average dilutive potential common shares.  Diluted earnings per share calculations assume, as of the beginning of the period, exercise of stock options and warrants using the treasury stock method.  Convertible securities are included in the calculation during the time period they are outstanding using the if-converted method.

All potential dilutive securities, including potentially dilutive options, warrants and convertible securities, if any, were excluded from the computation of dilutive net loss per common share for the three months ended September 30, 2011 and 2010, respectively, as their effects are antidilutive due to our net loss for those periods.

Stock options to purchase approximately 10.1 million common shares at an average exercise price of $2.18 and warrants to purchase approximately 3.9 million shares of common stock at an average exercise price of $1.26 were outstanding at September 30, 2011. Using the treasury stock method, had we had net income, approximately 4.0 million common shares attributable to our outstanding stock options and 2.8 million common shares attributable to our outstanding warrants to purchase common shares would have been included in the fully diluted earnings per share calculation for the quarter ended September 30, 2011.

Stock options to purchase approximately 7.6 million common shares at an average exercise price of $0.85 and warrants to purchase approximately 10.0 million shares of common stock at an average exercise price of $1.28 were outstanding at September 30, 2010. Using the treasury stock method, had we had net income, approximately 1.1 million common shares attributable to our outstanding stock options and 1.9 million common shares attributable to our outstanding warrants to purchase common shares would have been included in the fully diluted earnings per share calculation for the quarter ended September 30, 2010.

Contingencies

We are subject to legal proceedings, claims and liabilities which arise in the ordinary course of 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.  See Note 9, Commitments and Contingencies, for more information on legal proceedings.

Accumulated Other Comprehensive Income, net of tax

We follow the provisions of ASC 220, Comprehensive Income, which establishes standards for reporting comprehensive income. In addition to net income, comprehensive income or loss includes all changes to equity during a period, except those resulting from investments and distributions to the owners of the Company. At September 30, 2011, we had a balance in “Accumulated other comprehensive loss, net of income tax” on the accompanying balance sheet of $648,000. The components of accumulated other comprehensive loss and related tax effects for 2011 were as follows (in thousands):

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There is no tax effect of the unrealized loss in other comprehensive loss given our full valuation allowance against deferred tax assets. There was no comparable balance in accumulated other comprehensive loss at September 30, 2010.

Financial instruments

The accounting standards (ASC 820, Fair Value Measurements and Disclosures) regarding fair value of financial instruments and related fair value measurements define fair value, establish a three-level valuation hierarchy for disclosures of fair value measurement, and enhance disclosure requirements for fair value measures.

The three levels are defined as follows:

·        Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

·        Level 2 - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

·        Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value measurement.

Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. As of September 30, 2011, we held investments which were classified as available for sale securities and therefore must be recorded at their fair value at each reporting date. Available-for-sale investments, which consist entirely of publicly traded Corporate Debt securities, are valued at the closing price reported in the active market in which the debt is traded.

Additionally, we have determined that certain warrants outstanding during the periods covered by these financial statements qualified as derivative financial instruments under the provisions of FASB ASC Topic No. 815-40, Derivatives and Hedging — Contracts in an Entity’s Own Stock. These warrant agreements included provisions designed to protect holders from a decline in the stock price (‘down-round’ provision) by reducing the exercise price in the event we issue equity shares at a price lower than the exercise price of the warrants.  As a result of this down-round provision, the exercise price of these warrants could be modified based upon 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 and consequently, these warrants must be treated as a liability and recorded at fair value at each reporting date.

The fair value of these warrants was determined using a lattice model, with any change in fair value during the period recorded in earnings as “Other income (expense) — Gain (loss) on warrant derivative liability.” As a result, the derivative warrant liability was carried on the balance sheet at its fair value.

Significant Level 3 inputs used to calculate the fair value of the warrants include the stock price on the valuation date, expected volatility, risk-free interest rate and management’s assumptions regarding the likelihood of a future repricing of these warrants pursuant to the down-round provision.

The $771,000 change in fair value during the quarter ended September 30, 2010, was recorded as an increase to the derivative liability and as a non-cash loss in our statement of operations. All of the remaining warrants underlying this derivative liability were exercised in October 2010. At September 30, 2011 and June 30, 2011, there was no remaining derivative liability balance.

The following table sets forth by level within the fair value hierarchy, our financial assets and liabilities (in thousands) that were accounted for at fair value on a recurring basis as of September 30, 2011:

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See discussion of changes in the fair value of available-for-sale securities within Note 4.

Subsequent events

We evaluated all subsequent events from September 30, 2011 through the date of the issuance of the consolidated financial statements. See Note 10.

Recently issued or adopted accounting pronouncements

In June 2011, the FASB issued an update to ASC 220, Comprehensive Income. This ASU requires entities to present components of comprehensive income in either a continuous statement of comprehensive income or two separate but consecutive statements that would include reclassification adjustments for items that are reclassified from other comprehensive income to net income on the face of the financial statements. The amendments in this update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.  The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, which will be fiscal 2013 for Hyperdynamics. The amendments in this update should be applied retrospectively and early application is permitted. We are currently evaluating which presentation option we will utilize for comprehensive income in our consolidated financial statements.

2. INVESTMENT IN OIL AND GAS PROPERTIES

Investment in oil and gas properties consists entirely of our Guinea Concession in offshore West Africa. We own a 77% participating interest in our Guinea Concession.

We follow the “full-cost” method of accounting for oil and natural gas property and equipment costs. Under this method, internal costs incurred that are directly identified with exploration, development, and acquisition activities undertaken by us for our own account, and which are not related to production, general corporate overhead, or similar activities, are capitalized. For the three month periods ended September 30, 2011 and 2010, we capitalized $1,470,000 and $460,000 of such costs, respectively.

The following table provides detail of total capitalized costs (in thousands) for our Guinea Concession as of September 30, 2011 and June 30, 2011:

We exclude capitalized costs of unevaluated oil and gas properties from amortization. Currently, geological and geophysical information pertaining to the Guinea Concession is being collected and evaluated and no proved reserves have been attributed to this concession and as a result, net costs associated with such unproved properties of $53,135,000 and $36,200,000 as of September 30, 2011 and June 30, 2011, respectively, are excluded from amounts subject to amortization. The majority of the evaluation activities are expected to be completed within the next year. As of September 30, 2011, based on our impairment review and our intent to continue evaluation activities, there was no impairment indicated for our excluded costs.

During the three months ended September 30, 2011, we incurred $1,819,000 of geological and geophysical costs, and we incurred $15,116,000 of other exploration costs for our Guinea Concession during the three months ended September 30, 2011, primarily related to the purchase of long lead tangible drilling items such as wellheads and tubular items to prepare for the drilling of our first well which commenced in October of this year.

On September 20, 2011, we made a payment of $5,000,000 in connection with a prospective oil and gas investment. We have classified this payment as a long-term deposit on our balance sheet as of September 30, 2011.

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3. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses (in thousands) as of September 30, 2011 and June 30, 2011 include the following:

4. INVESTMENTS

The following is a summary of available-for-sale securities (in thousands) as of September 30, 2011:

The following is a summary of available-for-sale securities (in thousands) as of June 30, 2011:

The Company had no securities classified as held-to-maturity as of September 30, 2011 or June 30, 2011. All $54.4 million in debt securities on hand as of September 30, 2011 will mature within one year or less. The securities were purchased at a premium with a yield to maturity of approximately 0.5%. If held to their maturity in second half of fiscal 2012 the interest income over the period held will exceed the mark-to-market loss reported for the period held.

At each reporting date, the Company performs an evaluation of debt and equity securities to determine if the unrealized losses are other-than-temporary. As of September 30, 2011 no other-than-temporary impairment losses have been recorded with regard to securities on hand as of September 30, 2011.

5. WARRANT DERIVATIVE LIABILITY

Effective July 1, 2009, we adopted FASB ASC Topic No. 815-40 (formerly EITF 07-05) which defines determining whether an instrument (or embedded feature) is indexed to an entity’s own stock.  This guidance specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to our own stock and (b) classified in stockholders’ equity in the statement of financial position, would not be considered a derivative financial instrument and provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the scope exception.

As a result of this adoption, certain warrants previously treated as equity pursuant to the derivative treatment exemption are no longer afforded equity treatment because these warrants have an adjustment provision applicable to the exercise price that adjusted the exercise price downward in the event we subsequently issued common stock, stock warrants, stock options or convertible debt with a stock price, exercise price or conversion price lower than YA Global’s exercise price, originally $2.00 per share. As a result, the warrants are not considered indexed to our stock, and as such, all future changes in the fair value of these warrants were recognized currently in earnings in our consolidated statement of operations under the caption “Other income (expense) — Gain (loss) on warrant derivative liability” until such time as the warrants were exercised.

The exercise price of certain warrants issued to YA Global Investments, LP (“YA Global”), which were completely exercised prior to December 31, 2010, were subject to adjustment in the event we subsequently issue common stock, stock warrants, stock options or convertible debt with a stock price, exercise price or conversion price lower than YA Global’s exercise price, originally $2.00 per

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share. If these provisions had triggered, YA Global would have received warrants to purchase additional shares of common stock and a reduction in the exercise price of all their warrants.

As such, effective July 1, 2009, we reclassified from additional paid-in capital, as a cumulative effect adjustment, $1,585,000 to Warrant Derivative Liability to recognize the fair value of the YA Global Warrants as if these warrants had been treated as a derivative liability since their issuance in February 2008.

In September 2010, YA Global exercised 468,611 of these warrants on a cashless basis. This reduced the derivative liability by $705,000 and increased additional paid-in capital by the same amount. During the three months ended September 30, 2010, we recognized a $771,000 non-cash loss related to the remaining YA Global warrants.

In October 2010, YA Global exercised its remaining warrants into 161,608 shares of stock on a cashless basis. As a result, we reduced the remaining derivative liability by $649,000 and increased additional paid-in capital by the same amount.  No warrant derivative liability exists as of September 30, 2011 or June 30, 2011.

6. SHAREHOLDERS’ EQUITY

Common Stock Issuances

Three months ended September 30, 2011

For exercise of options:

During the three months ended September 30, 2011, 643,333 options were exercised for cash at exercise prices ranging from $0.31 to $2.00 for total gross proceeds of $588,000.

For exercise of warrants:

There were no warrants exercised during the three months ended September 30, 2011.

Employee stock options

During the three months ended September 30, 2011, we granted options to purchase 1,069,480 awards under the long term incentive plan.  In July 2011, our Board of Directors approved an increase in the shares authorized under the long-term incentive plan from 5,000,000 to 10,000,000, which increase is subject to stockholder approval. We subsequently granted options to purchase an aggregate of 425,520 additional shares to various employees, with provisions for vesting beginning twelve months after grant.  Because stockholder approval has not been obtained, we have classified these awards as liability awards on our balance sheet.

Three months ended September 30, 2010

For exercise of options:

During the three months ended September 30, 2010, 40,000 options were exercised for cash at exercise prices ranging from $0.31 to $1.13 for total gross proceeds of $27,850.

For exercise of warrants:

During the three months ended September 30, 2010, 575,000 warrants were exercised for cash at an exercise price of $0.98 for total gross proceeds of $563,500. Additionally, during the three months ended September 30, 2010, we issued 223,240 shares of common stock to YA Global upon the cashless exercise of warrants to purchase 468,611 shares of common stock.

Employee stock options

During the three months ended September 30, 2010, we granted options to purchase 75,000 shares of common stock to our employees. The amortized compensation expense associated with these employee stock options during the three months ended September 30, 2010 was $43,000. See Note 7.

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7. STOCK OPTIONS AND WARRANTS

On February 18, 2010, at our annual meeting of stockholders, the stockholders approved the 2010 Equity Incentive Plan (the “2010 Plan”). Prior to the 2010 stockholder meeting, we had two stock award plans: the Stock and Stock Option Plan, which was adopted in 1997 (“1997 Plan”) and the 2008 Restricted Stock Award Plan (“2008 Plan”). In conjunction with the approval of the 2010 Plan, the 1997 Plan and the 2008 Plan were terminated as of February 18, 2010.

The 2010 Plan provides for the grants of shares of common stock, restricted stock units or incentive stock options and/or nonqualified stock options to purchase our common stock to selected employees, directors, officers, agents, consultants, attorneys, vendors and advisors. The 2010 Plan provides a means to attract and retain the services of participants and also to provide added incentive to such persons by encouraging stock ownership in us. Plan grants are administered by the Compensation Committee, which has substantial discretion to determine which persons, amounts, time, price, exercise terms, and restrictions, if any. Shares of common stock, options, or restricted stock units can only be granted under this plan within 10 years from the effective date of February 18, 2010. A maximum of 5,000,000 shares are issuable under the 2010 Plan and at September 30, 2011, no shares remained issuable under the 2010 Plan.

Additionally, from time to time, we issue non-compensatory warrants, such as warrants issued to investors.

The fair value of non-market based options or warrants is estimated using the Black-Scholes valuation model. For market based options, the fair value was estimated using a Black-Scholes option pricing model with inputs adjusted for the probability of the vesting criteria being met and the median expected term for each grant as determined by utilizing a Monte Carlo simulation. Expected volatility is based solely on historical volatility of our common stock over the period commensurate with the expected term of the stock options. We rely solely on historical volatility as we do not have traded options. The expected term calculation for stock options is based on the simplified method as described in the SEC Staff Accounting Bulletin number 107. We use this method because we do not have sufficient historical information on exercise patterns to develop a model for expected term. The risk-free interest rate is based on the U. S. Treasury yield in effect at the time of grant for an instrument with a maturity that is commensurate with the expected term of the stock options. The dividend yield rate of zero is based on the fact that we have never paid cash dividends on our common stock and we do not intend to pay cash dividends on our common stock.

2010 Equity Incentive Plan

The following table provides information about options during the three months ended September 30, 2011 and 2010:

The following table details the significant assumptions used to compute the fair market values of employee stock options granted during the three months ended September 30, 2011 and 2010:

At September 30, 2011, there was $9,293,000 of unrecognized compensation costs related to non-vested share based compensation arrangements granted to employees and directors under the plan. We expect to amortize this cost over the next three to four years.

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Summary information regarding employee and director stock options issued and outstanding as of September 30, 2011 is as follows:

Options exercisable had an intrinsic value of $7,273,000 at September 30, 2011.

Liability Awards

After reaching the limit of shares available under the 2010 Plan during the first quarter of fiscal 2012, we have concluded that all additional awards granted should be classified as liabilities until approval of additional shares under the 2010 plan are approved. During the first quarter of fiscal 2012, we granted options to purchase 425,520 shares of our common stock to employees after reaching the limit of shares available under the 2010 Plan.

The following table provides information about liability awards during the three months ended September 30, 2011:

The following table details the significant assumptions used to compute the fair market value of liability awards outstanding as of September 30, 2011:

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Warrants

During the three months ended September 30, 2011, we did not grant any warrants and no warrants were exercised.

Summary information regarding common stock warrants issued and outstanding as of September 30, 2011 is as follows:

The outstanding warrants had an intrinsic value of $9,542,000 at September 30, 2011. All of the 3,858,693 warrants outstanding at September 30, 2011, are exercisable.

8. INCOME TAXES

Federal income taxes are not due since we have had losses since inception. The difference between the statutory tax rates and our effective tax rate is due to the valuation allowance applied against our net deferred tax assets. A reconciliation of the actual taxes to the U.S. statutory tax rate for the three months ended September 30, 2011 and 2010 (in thousands) is as follows:

9. COMMITMENTS AND CONTINGENCIES

LITIGATION AND OTHER LEGAL MATTERS

From time to time, we and our subsidiaries are involved in business disputes that may occur in the ordinary course of business. We do not believe the outcome of such disputes or legal actions will have a material effect on our unaudited condensed consolidated financial statements.

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COMMITMENTS AND CONTINGENCIES

Contingent notes payable

Our subsidiary, SCS, has $350,000 committment to the former owners of SCS Corporation’s assets. It is payable in our common stock and it is payable only if SCS has net income in any given quarter. If SCS experiences net income in a quarter, 25% of the income will be paid against the note, until the committment is satisfied. As of September 30, 2011 this committment is not probable of occurence.

AGR Peak Well Management Limited

We have contracted with AGR Peak Well Management Limited (“AGR”) to manage our exploration drilling project in offshore Republic of Guinea. AGR will handle well construction project management services, logistics, and tendering of materials as well as overall management responsibilities for the drilling program. The drilling project management contract, entered into on November 30, 2010, was for an estimated $6.8 million, of which we expect our 77% share to be $5.2 million of that amount.  In the event we terminate this contract, AGR would invoice us for services carried out to date and for any commitments made on behalf of us, including termination fees. In the event we terminate this contract without cause and we enter into direct contracts for the drilling rig, vessels or third party services previously held by AGR, we would then reimburse AGR cancellation fees of $500,000. The costs incurred as of September 30, 2011 amount to $2,953,000 with our 77% share being $2,274,000 and is capitalized in unevaluated oil and gas properties.

CGG Veritas

On September 20, 2011, we entered into an Agreement for the Supply of Marine Seismic Data (“3D Seismic Contract”) with CGG Veritas (“Veritas”).  Under the terms of the 3D Seismic Contract, Veritas agreed to conduct the acquisition phase of a 4,000 square kilometer 3D seismic survey of the area that is subject to our rights, or Concession, to explore off the coast of the Republic of Guinea (“Guinea”).  Our goal in contracting for the 3D seismic survey is to investigate multiple possible deepwater submarine fans seen on 2D seismic data that was previously obtained by us.  The survey is expected to begin in November 2011, using the survey vessel Oceanic Endeavour.  The cost for the survey, processing and other services is expected to total approximately $29.0 million gross, with our 77% share being $22.3 million.

The area of the 3D acquisition is just southwest and adjacent to one of the 3D surveys obtained by us in 2010. The new survey is expected to use Veritas BroadSeis broadband solution, which is expected to provide a more detailed image of the subsurface.  After acquisition, the data will be processed by Veritas, with completion of that work expected in the second half of 2012.

Operating Leases

We lease office space under long-term operating leases with varying terms. Most of the operating leases contain renewal and purchase options. We expect that in the normal course of business, the majority of operating leases will be renewed or replaced by other leases.

The following is a schedule by years of minimum future rental payments required under operating leases that have initial or remaining noncancellable lease terms in excess of one year as of September 30, 2011:

Rent expense included in net loss from operations for the three months ended September 30, 2011 and 2010 was $77,000 and $61,000, respectively.

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10. SUBSEQUENT EVENTS

On October 13, 2011, we commenced drilling operations on our initial exploration well offshore Guinea.

In November of 2011 we agreed to make an additional payment of $5 million in connection with the prospective oil and gas investment for which we have a long term deposit of $5 million as of September 30, 2011. The additional payment will be recorded as an additional deposit during the second quarter of fiscal 2012.

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

CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION

This Report contains “forward-looking statements” within the meaning of Section 27 A of the Securities Act of 1933, as amended, and Section 21 E of the Securities Exchange Act of 1934, as amended.  Forward-looking statements include 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.  Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “plan,” “project,” “anticipate,” “estimate,” “believe,” or “think.” Forward-looking statements involve risks and uncertainties which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements.  We assume no duty to update or revise our forward-looking statements based on changes in plans or expectations or otherwise.

As used herein, references to “Hyperdynamics,” “Company,” “we,” “us,” and “our” refer to Hyperdynamics Corporation and our subsidiaries.

Overview

Our corporate mission is to provide energy for the future by exploring for, developing new, and re-establishing pre-existing sources of energy worldwide.  We are currently exploring for oil and gas offshore Guinea, Northwest Africa. We intend to continue acquiring, exploring and developing oil and gas properties on a global basis.  At this time, we have no source of operating revenue and there is no assurance when we will, if ever.  We have no operating cash flows and require substantial additional funds, through additional participants, securities offerings, or through other means, to fulfill our long-term business plans.

In October of 2011, we commenced drilling operations on the first well of a two well exploration program offshore Guinea. The estimated cost for our first well is higher than we expected primarily due to certain delays and issues related to mechanical and operational matters on the rig, logistical delays resulting from limited port facilities in Guinea, and an expanded well logging program. Our current estimate of the cost of our two well program is $135 million on a gross basis, or approximately $104 million based on our current 77% interest.  As of November 1, we have incurred costs on our two well program of approximately $44 million on a gross basis, $27.6 million of which we had paid as of September 30, 2011.  We are currently reevaluating the timing of the commencement of the second exploration well. We expect our decision to depend on numerous factors and considerations including, the suitability and cost performance of the drilling rig. Our current cost estimate of our two well program may change based on new developments, including our decision on the timing of the commencement of the second well.

Our operating plan within the next 12 months includes the following:

·      Drilling and evaluating the data from the two well exploratory program in our Contract Area offshore Guinea, the first of which commenced in October of 2011.  If we add other PSC participants, we would expect to include the assignment of a portion of our interest in the Contract Area to such participants.

·      Acquire, process, and interpret a new 3-D seismic survey covering approximately 4,000 square kilometers on our Contract Area. The new deep water survey will be adjacent to our Survey A, which is part of our initial 3,635-square-kilometer 3-D seismic survey in 2010.  The new deep water 3-D survey will allow us to study Upper Cretaceous submarine fan structures along the Transform Margin trend of Guinea in Northwest Africa. On September 20, 2011, we entered into an Agreement for the Supply of Marine Seismic Data with CGG Veritas. We expect that the survey will begin in November 2011.

Reportable segments

We have one reportable segment: our international operations in Guinea conducted through our subsidiary SCS. SCS is engaged in oil and gas exploration activities pertaining to offshore Guinea.

Results of Operations

Based on the factors discussed below the net loss for the three months ended September 30, 2011 increased $1,493,000, or 52%, from a net loss of $2,883,000, or $0.03 per share in the 2011 period to a net loss of $4,376,000, or $0.03 per share in the 2012 period.

Three months ended September 30, 2011 Compared to Three Months Ended September 30, 2010

Revenues.  There were no revenues for the three months ended September 30, 2011 or 2010.

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Depreciation.  Depreciation increased 156%, or $109,000 from the fiscal 2011 period to the fiscal 2012 period due to additional depreciation associated with assets placed in service over this period of time, which relate primarily to increases in office space and staffing as well as infrastructure required for initiation of our drilling program. Depreciation expense was $179,000 and $70,000 in the three months ended September 30, 2011 and 2010, respectively.

General and Administrative Expenses. Our general and administrative expenses were $4,352,000 and $2,049,000 for the three months ended September 30, 2011 and 2010, respectively. This represents an increase of 112% or, $2,303,000 from the fiscal 2011 period to the fiscal 2012 period. The increase in expense was primarily attributable to a $1,181,000 increase in employee-related costs, of which approximately $997,000 was non-cash stock-based compensation related to options granted to employees and others. Additionally, we have incurred approximately $867,000 in costs with respect to several prospective oil and gas investment opportunities in the current period.

Other income (expense). Other income (expense) totaled income of $155,000 and expense of ($764,000) for the three months ended September 30, 2011 and 2010, respectively. The increase was primarily the result of a decline in the loss on the warrant derivative liability. In the fiscal 2011 period, we recognized a non-cash loss on the warrant derivative liability of $771,000. No such gain or loss was incurred on the warrant derivative liability in fiscal 2012 as the remaining warrants underlying the derivative were exercised during the second quarter of fiscal 2011. The income in the current period represents our interest income on available for sale securities, net of amortization of the premium on available for sale securities.

Loss from Continuing Operations. Based on that discussed above, our loss from operations increased by 52%, or $1,493,000, from $2,883,000 in the three months ended September 30, 2010 to $4,376,000 for the three months ended September 30, 2011.

Liquidity and Capital Resources

Capital Resource Considerations

We did not have revenues from operations in the three months ended September 30, 2011 or 2010.  Since September 30, 2010, we have raised (i) $8.6 million from warrant and stock option exercises, (ii) $29.9 million from the sale of common stock to funds managed by BlackRock on November 3, 2010, and (iii) $136.1 million from the sale of common stock in a public offering completed on March 30, 2011.

We are currently drilling the first of a planned two well exploration program offshore Guinea, and we have recently contracted for a new 3D seismic survey expected to cost approximately $29 million gross, with our 77% share being $22.3 million.  Our current estimate of the cost of our two well exploration program is $135 million on a gross basis, or approximately $104 million based on our 77% interest.  Based on our available cash resources and our current cost estimates, we believe we have the capital resources for our two well program and 3D seismic survey.

The cost estimates associated with our first well are greater than we expected, and there may be additional delays and problems associated with our first well.  Accordingly, our cost estimates could increase, which could affect adversely our financial position, liquidity, results of operations and business plans.  Moreover, irrespective of whether our cost estimates change, we expect to continue to reevaluate the timing of the commencement of the second exploration well.

You should carefully consider the risks described in this Report and in our Annual Report on Form 10-K for the fiscal year ended June 30, 2011 in evaluating our company.  We will require substantial additional funding to drill additional wells in offshore Guinea, either from capital raised, sales of participation interests, or through other means.  The timing of our funding requirements could change based on continuing developments and cost estimates with respect to our first exploration well and our reevaluation of the timing of the commencement of the second well.  Although we have been successful in raising capital and in entering into a key participation arrangement, we have no firm commitments for additional capital resources.  The terms of any such arrangements, if made, are unknown and may not be advantageous to us.

Liquidity

On September 30, 2011, we had $74,155,000 in cash and restricted cash and we had $54,383,000 in available-for-sale securities.  On September 30, 2011, we had $6,056,000 in liabilities. The liabilities are comprised of current liabilities of $5,890,000 and noncurrent liabilities of $166,000.

We are committed under the PSC to spud our first well by December 31, 2011, which we did on October 13, 2011.  We plan to use our existing cash and proceeds from available-for-sale securities to fund our portion of the expenditures related to our two well exploration program.  To date, of these estimated well costs, we have already paid approximately $27.6 million on a gross basis, or approximately $21.2 million based on our current 77% interest, primarily for the purchase of long lead items such as wellhead and drilling pipe.

Additionally, we entered into an Agreement for the Supply of Marine Seismic Data with CGG Veritas.  The cost for the survey, processing and other services is expected to total approximately $29.0 million gross, or $22.3 million based upon our current 77% interest in the Guinea Concession. We plan to use a portion of our existing cash and cash from maturing available-for-sale securities to fund these expenditures.

Net cash used in operating activities for continuing operations for the three months ended September 30, 2011 was $4,114,000 compared to $3,687,000 for the three months ended September 30, 2010. This increase was primarily due to the increase in our accounts receivable — joint interest. Cash used in investing activities for continuing operations for the three months ended September 30, 2011 was $36,878,000 compared to $21,692,000 in the three months ended September 30, 2010. This increase was primarily due to an increase in expenditures for long lead items necessary to prepare for drilling our first well. There was net cash provided by

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financing activities for the three months ended September 30, 2011 of $588,000 compared to $539,000 during the three months ended September 30, 2010. This increase resulted from proceeds from stock option exercises.

Capital Expenditures

During the first three months of fiscal 2012, $16,438,000 was expended on oil and gas properties and $395,000 was expended on property plant and equipment, compared to $14,454,000 and $129,000 spent in the same period of fiscal 2011 on oil and gas properties and property, plant and equipment respectively.  Fiscal 2012 expenditures mostly pertained to costs associated with our drilling activity which commenced in October 2011, while fiscal 2011 expenditures primarily related to the acquisition of 3D seismic data on our Concession. These 2012 expenditures were primarily funded by $136 million of cash provided by the March 2011 equity offering.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our functional currency is the US dollar. We have some foreign currency exchange rate risk resulting from our in-country office in Guinea, the United Kingdom, and from certain costs in our drilling program. US dollars are accepted in Guinea and many of our purchases and purchase obligations, such as our office lease in Guinea, are denominated in US dollars. The majority of our Drilling program is also denominated in US dollars. However, our non US denominated costs could increase if the Guinea Franc, the Euro, or the Pound Sterling significantly appreciates against the US dollar. We do not hedge the exposure to currency rate changes.

Item 4. Controls and Procedures

We conducted an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act means controls and other procedures of a company that are designed to ensure that information required to be disclosed by us in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.  Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

We identified certain control deficiencies as of June 30, 2011 resulting from the lack of effective detective and monitoring controls being designed within internal control over financial reporting. Such deficiencies related to oversight and review of information as prepared or received from external service providers covering marketable securities, income taxes and equity awards and over the presentation of certain accounting principles. These conditions were manifested in a number of adjustments to the financial statements and related disclosures, and there is more than a remote likelihood that a material misstatement of the financial statements would not have been prevented or detected. The combination of these deficiencies represents a material weakness in our internal controls over financial reporting.

In addition we identified certain control deficiencies as of June 30, 2011 in our general computer control environment, resulting from the lack of effective controls around the areas of approval and review of information technology changes and system security, including the enforcement of segregation of duties and appropriate user access restrictions. The combination of these deficiencies represented a material weakness in our internal controls over financial reporting as of June 30, 2011.

As a result of these material weaknesses, we concluded that our disclosure controls and procedures were not effective as of June 30, 2011. A material weakness is a deficiency or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected and corrected on a timely basis.

Our principal executive and principal financial officers concluded that our disclosure controls and procedures were not yet effective at September 30, 2011. To address the issues associated with our material weaknesses as described in our Annual Report on form 10-K, we have made changes in our internal controls over financial reporting in the quarter ended September 30, 2011 through the date of this report, to improve our control environment; including our implementation of enhanced compliance policies and procedures. We have taken steps in an effort to ensure our consolidated financial statements included in this quarterly report have been prepared in accordance with accounting principles generally accepted in the United States. Accordingly, management believes that the financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.

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We have been implementing and will aggressively continue to implement changes that are both organizational and process-focused to improve the control environment. The changes made through the date of this quarterly report include, among others:

We have engaged Ernst & Young, LLP to assist management in conducting a review of our internal control environment and to advise us on remediating certain control deficiencies identified as of June 30, 2011 as well as in any area identified in this internal control review.

As it pertains to our accounting software system security and user access, we initiated enhanced password protection requiring passwords to meet certain minimum characteristics and now force such passwords to be changed on a recurring periodic time table.

We independently access quoted market prices on our available-for-sale securities in order to verify the value we receive on the monthly statement from our investment broker.

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Part II Other Information

Item 1A. Risk Factors

The following risk factors are in addition to the risk factors previously disclosed under Item 1A. of our Annual Report on Form 10-K for the fiscal year ended June 30, 2011 previously filed with the SEC.

Actual costs associated with our first exploratory well are greater than we expected, and estimated costs of wells in the future may be greater than estimated..

As discussed in Part I, Item 2. Management’s Discussion and Analysis of this Quarterly Report on Form 10-Q, the costs associated with our first exploratory well (of our two well exploration program offshore Guinea) are greater than we expected due to  mechanical and operational issues on the drilling rig, logistical delays resulting from limited port facilities in Guinea, and an expanded well logging program.  There may be additional delays and problems associated with our first exploratory well that we cannot predict with certainty at this time and that may ultimately exceed our current cost estimates for the remaining work to be completed on our first exploratory well.  Offshore operations are subject to a variety of operating risks and subject to loss from such risks resulting in, among others, drilling delays, significant damage to the rig and higher drilling costs.  Unexpected delays and increases in costs associated with our first exploratory well or with wells drilled in the future, could adversely affect our results of operations, financial position, liquidity and business plans.

We have deposited $10,000,000 in connection with a prospective investment in oil and gas properties that may be lost if the transaction is not completed.

We have made payments of $10,000,000 in connection with a prospective investment in oil and gas properties.  We have not entered into a binding purchase agreement, and there are significant contingencies to completion of the transaction.  There can be no assurance that these contingencies will be satisfied.  If the transaction is completed, the $10,000,000 payments will be credited to the purchase price.  However, if the transaction is not completed, these payments may not be recovered, which could adversely affect our results of operations, financial position and liquidity.

Item 6. Exhibits