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Table of Contents

 

 

 

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 March 31, 2012

 

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: 001-32490

 

HYPERDYNAMICS CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

 

87-0400335

(State or other jurisdiction of incorporation or organization)

 

(IRS Employer Identification No.)

 

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 x  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):

 

Large accelerated filer  o

 

Accelerated filer  x

 

 

 

Non-accelerated filer  o

 

Smaller reporting company  o

 

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 May 3, 2012, 166,816,065 shares of common stock, $0.001 par value, were outstanding.

 

 

 



Table of Contents

 

Table of Contents

 

Part I. Financial Information

 

 

 

Item 1.      Financial Statements

 

 

 

Condensed Consolidated Balance Sheets at March 31, 2012 and June 30, 2011

3

 

 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended March 31, 2012 and 2011, respectively

4

 

 

Condensed Consolidated Statement of Shareholders’ Equity for the period from July 1, 2010 to March 31, 2012

5

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2012 and 2011

6

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

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

18

 

 

Item 3.     Quantitative and Qualitative Disclosures about Market Risks

21

 

 

Item 4.     Controls and Procedures

21

 

 

Part II. Other Information

 

 

 

Item 1.     Legal Proceedings

22

 

 

Item 1A.  Risk Factors

22

 

 

Item 6.     Exhibits

31

 

 

Signatures

34

 

2



Table of Contents

 

HYPERDYNAMICS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

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

(Unaudited)

 

 

 

March 31,
2012

 

June 30,
2011

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

44,197

 

$

79,889

 

Available-for-sale securities

 

 

55,368

 

Accounts receivable — joint interest

 

1,915

 

708

 

Prepaid expenses

 

416

 

702

 

Other current assets

 

185

 

149

 

Total current assets

 

46,713

 

136,816

 

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation of $1,266 and $798

 

1,726

 

1,336

 

Oil and gas properties, using full-cost accounting:

 

 

 

 

 

Proved properties

 

112,145

 

 

Unevaluated properties excluded from amortization

 

37,590

 

36,200

 

 

 

149,735

 

36,200

 

Less- accumulated depreciation, depletion and amortization

 

(112,145

)

 

 

 

37,590

 

36,200

 

Other Assets:

 

 

 

 

 

Restricted cash

 

19,178

 

18,300

 

Deposits

 

31

 

31

 

Total assets

 

$

105,238

 

$

192,683

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

19,320

 

$

3,116

 

Total current liabilities

 

19,320

 

3,116

 

 

 

 

 

 

 

Other non-current liabilities

 

131

 

138

 

Total liabilities

 

19,451

 

3,254

 

 

 

 

 

 

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Preferred stock, $0.001 par value; 20,000,000 authorized, 0 shares issued and outstanding

 

 

 

Common stock, $0.001 par value, 350,000,000 and 250,000,000 shares authorized; 166,816,065 and 155,792,524 shares issued and outstanding, respectively

 

167

 

156

 

Additional paid-in capital

 

310,380

 

276,484

 

Accumulated other comprehensive loss

 

 

(349

)

Accumulated deficit

 

(224,760

)

(86,862

)

Total shareholders’ equity

 

85,787

 

189,429

 

Total liabilities and shareholders’ equity

 

$

105,238

 

$

192,683

 

 

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

 

3



Table of Contents

 

HYPERDYNAMICS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

(Unaudited)

 

 

 

Three Months Ended
March 31,

 

Nine Months Ended
March 31,

 

 

 

2012

 

2011

 

2012

 

2011

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Depreciation

 

$

230

 

$

100

 

$

650

 

$

241

 

Selling, general and administrative

 

4,893

 

2,571

 

14,971

 

7,838

 

Full amortization of proved oil and gas properties

 

112,145

 

 

112,145

 

 

Write-off of prospective investment deposit

 

10,000

 

 

10,000

 

 

Loss from operations

 

(127,268

)

(2,671

)

(137,766

)

(8,079

)

Other income (expense):

 

 

 

 

 

 

 

 

 

Loss on warrant derivative liability

 

 

 

 

(771

)

Other than temporary impairment of securities

 

 

 

(472

)

 

Realized gain on sale of securities

 

59

 

 

59

 

 

Interest income

 

11

 

33

 

281

 

47

 

Total other income (expense)

 

70

 

33

 

(132

)

(724

)

Loss before income tax

 

(127,198

)

(2,638

)

(137,898

)

(8,803

)

Income tax

 

 

 

 

 

Net loss

 

$

(127,198

)

$

(2,638

)

$

(137,898

)

$

(8,803

)

 

 

 

 

 

 

 

 

 

 

Basic and diluted loss per share

 

$

(0.78

)

$

(0.02

)

$

(0.87

)

$

(0.08

)

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding — basic and diluted

 

163,116,280

 

126,350,059

 

158,649,617

 

116,170,158

 

 

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

 

4



Table of Contents

 

HYPERDYNAMICS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

(In Thousands, Except Number of Shares)

(Unaudited)

 

 

 

Series A Preferred

 

Common Stock

 

Additional Paid-in

 

Accumulated

 

Accumulated Other
Comprehensive 

 

 

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Deficit

 

Income

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, July 1, 2010

 

1,945

 

$

 

104,227,199

 

$

104

 

$

97,046

 

$

(75,624

)

$

 

$

21,526

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

(11,238

)

 

(11,238

)

Unrealized gain (loss) on available-for-sale securities

 

 

 

 

 

 

 

(349

)

(349

)

Total comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11,587

)

Common stock issued for:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

 

 

43,750,000

 

44

 

165,955

 

 

 

165,999

 

Exercise of warrants

 

 

 

6,339,927

 

6

 

7,703

 

 

 

7,709

 

Exercise of options

 

 

 

858,613

 

1

 

905

 

 

 

906

 

Cashless exercise of warrants classified as a derivative

 

 

 

384,848

 

1

 

1,353

 

 

 

1,354

 

Series A settlement

 

(1,945

)

 

231,937

 

 

1,183

 

 

 

1,183

 

Settlement charge

 

 

 

 

 

(811

)

 

 

(811

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of fair value of stock options

 

 

 

 

 

3,150

 

 

 

3,150

 

Balance, June 30, 2011

 

 

$

 

155,792,524

 

$

156

 

$

276,484

 

$

(86,862

)

$

(349

)

$

189,429

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

(137,898

)

 

(137,898

)

Net realized gain on sale of available for sale securities

 

 

 

 

 

 

 

349

 

349

 

Total comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(137,549

)

Common stock issued for:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

 

 

10,000,000

 

10

 

28,163

 

 

 

 

 

28,173

 

Exercise of options

 

 

 

683,333

 

1

 

607

 

 

 

608

 

Exercise of warrants

 

 

 

340,208

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of fair value of stock options

 

 

 

 

 

5,126

 

 

 

5,126

 

Balance, March 31, 2012

 

 

$

 

166,816,065

 

$

167

 

$

310,380

 

$

(224,760

)

$

 

$

85,787

 

 

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

 

5



Table of Contents

 

HYPERDYNAMICS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

 

 

 

Nine Months Ended March 31,

 

 

 

2012

 

2011

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net loss

 

$

(137,898

)

$

(8,803

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

Depreciation, depletion and amortization

 

650

 

241

 

Full amortization of proved oil and gas properties

 

112,145

 

 

Write-off of prospective investment deposit

 

10,000

 

 

Stock based compensation

 

3,682

 

1,812

 

Loss on warrant derivative liability

 

 

771

 

Amortization of premium on short term investments

 

1,562

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

Joint interest accounts receivable

 

(1,207

)

(2,661

)

Prepaid expenses and other current assets

 

286

 

31

 

Other assets

 

(43

)

62

 

Accounts payable and accrued expenses

 

5,081

 

(1,152

)

Net cash used in operating activities

 

(5,742

)

(9,699

)

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Purchase of property and equipment

 

(1,040

)

(731

)

Investment in oil and gas properties

 

(100,968

)

(31,540

)

Prospective investment deposit

 

(10,000

)

 

Sale of short term investments

 

54,155

 

 

Increase in restricted cash

 

(878

)

(200

)

Net cash used by investing activities

 

(58,731

)

(32,471

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from issuance of stock, net of offering costs of $1,827 and $7,688

 

28,173

 

166,062

 

Proceeds from exercise of options

 

608

 

562

 

Proceeds from exercise of warrants

 

 

7,709

 

Payments on notes payable and installment debt

 

 

(160

)

Net cash provided by financing activities

 

28,781

 

174,173

 

 

 

 

 

 

 

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

(35,692

)

132,003

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

79,889

 

26,040

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

44,197

 

$

158,043

 

 

 

 

 

 

 

 SUPPLEMENTAL DISCLOSURES:

 

 

 

 

 

Interest paid in cash, net of amounts capitalized

 

$

 

$

3

 

Income taxes paid in cash

 

 

 

 

 

 

 

 

 

NON-CASH INVESTING AND FINANCING TRANSACTIONS:

 

 

 

 

 

Accounts payable for unevaluated oil and gas property

 

$

11,123

 

$

491

 

Exercise of warrants classified as a derivative

 

 

1,354

 

Common stock issued for Series A settlement

 

 

372

 

 

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

 

6



Table of Contents

 

HYPERDYNAMICS CORPORATION

NOTES TO CONDENSED 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 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 March 31, 2012, we had approximately $42,474,000 in excess of FDIC limits.  We have not experienced any losses in such accounts.

 

Restricted cash

 

Included in restricted cash is $19,178,000 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

 

We establish provisions for losses on accounts receivable if we determine that we 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 March 31, 2012 or June 30, 2011. At March 31, 2012, 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.

 

7



Table of Contents

 

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 trading or 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. In periods 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 and nine month periods ended March 31, 2012 and 2011, respectively, as their effects are antidilutive due to our net loss for those periods.

 

Stock options to purchase approximately 10.7 million common shares at an average exercise price of $2.29 and warrants to purchase approximately 13.4 million shares of common stock at an average exercise price of $2.94 were outstanding at March 31, 2012. Using the treasury stock method, had we had net income, approximately 3.4 million common shares attributable to our outstanding stock options and 2.3 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 nine-month period ended March 31, 2012, while approximately 2.6 million common shares attributable to our outstanding stock options and 1.6 million common shares attributable to our outstanding warrants would have been included for the three month period ended March 31, 2012.

 

Stock options to purchase approximately 8.3 million common shares at an average exercise price of $1.49 and warrants to purchase approximately 4.1 million shares of common stock at an average exercise price of $1.24 were outstanding at March 31, 2011. Using the treasury stock method, had we had net income, approximately 3.4 million common shares attributable to our outstanding stock options and 2.7 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 nine-month period ended March 31, 2011, while approximately 5.0 million common shares attributable to our outstanding stock options and 3.2 million common shares attributable to our outstanding warrants would have been included for the three month period ended March 31, 2011.

 

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 March 31, 2012, we had a balance in “Accumulated other comprehensive loss, net of income tax” on the accompanying balance sheet of zero. The components of accumulated other comprehensive loss and related tax effects were as follows (in thousands):

 

8



Table of Contents

 

 

 

Gross
Value

 

Tax Effect

 

Net of Tax
Value

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive loss at June 30, 2011

 

$

349

 

$

 

$

349

 

Change in fair value of available for sale securities

 

123

 

 

123

 

Reclassification of other than temporary impairment of securities included in net income

 

(472

)

 

(472

)

Accumulated other comprehensive gain (loss) at March 31, 2012

 

$

 

$

 

$

 

 

There is no tax effect of the unrealized gain (loss) in other comprehensive income given our full valuation allowance against deferred tax assets. There was no comparable balance in accumulated other comprehensive income at March 31, 2011.

 

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 June 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 consisted entirely of publicly traded Corporate Debt securities, were valued at the closing price reported in the active market in which the debt was traded. As of March 31, 2012, there were no remaining investments on hand.

 

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 issued 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 were 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 included 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 nine months ended March 31, 2011, 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 March 31, 2012 and June 30, 2011, there was no remaining derivative liability balance.

 

No financial instruments were on hand as of March, 31, 2012. 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 June 30, 2011:

 

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Carrying
Value at

 

Fair Value Measurement at June 30, 2011

 

 

 

June 30, 2011

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

55,368

 

$

55,368

 

$

 

$

 

 

See discussion of available-for-sale securities within Note 4.

 

Subsequent events

 

We evaluated all subsequent events from March 31, 2012 through the date of the issuance of the consolidated financial statements.

 

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.  Subsequently, in December 2011, the SEC issued ASU 2011-12 which deferred the requirements to 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 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 and nine month periods ended March 31, 2012, we capitalized $1,969,000 and $5,487,000 of such costs, respectively, as compared to $750,000 and $1,833,000 for the three and nine month periods ended March 31, 2011. Geological and geophysical costs incurred that are directly associated with specific unproved properties are capitalized in “Unproved properties” and evaluated as part of the total capitalized costs associated with a prospect. The cost of unproved properties not being amortized is assessed to determine whether such properties have been impaired. In determining whether such costs should be impaired, we evaluate current drilling results and available geological and geophysical information. Any impairment assessed to unproved properties is added to the cost of proved properties.

 

The unamortized cost of proved oil and gas properties is limited to the sum of the estimated future net revenues from proved properties (including future development and abandonment costs of wells to be drilled, using period-end prices, discounted at 10%, and the lower of cost or fair value of unproved properties) adjusted for related income tax effects (“Full-Cost Ceiling Test”).

 

In February 2012, we completed the drilling of the Sabu 1, our first exploratory well in our Guinea Concession, which had hydrocarbon shows and contained indications of trace hydrocarbons, but not in commercial quantities. As a result, we evaluated certain geological and geophysical related costs in unproved properties along with the drilling costs of the Sabu 1 and moved $112,145,000 to proved properties. Since we have no proved reserves to include in the Full-Cost Ceiling Test, the entire $112,145,000 resulted in the full amortization of our proved oil and gas properties.

 

The following table provides detail of total capitalized costs (in thousands) for our Guinea Concession as of March 31, 2012 and  June 30, 2011:

 

 

 

March 31,
2012

 

June 30,
2011

 

 

 

 

 

 

 

Proved oil and gas Properties

 

$

112,145

 

$

 

Unproved oil and gas Properties

 

37,590

 

36,200

 

Geological and geophysical cost

 

149,735

 

36,200

 

Accumulated depreciation, depletion and amortization costs

 

(112,145

)

 

Unevaluated properties not subject to amortization 

 

$

37,590

 

$

36,200

 

 

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We exclude capitalized costs of unevaluated oil and gas properties from amortization. Currently, geological and geophysical information pertaining to the Guinea Concession continues being collected and evaluated and no proved reserves have been attributed to this concession and as a result, net costs associated with such remaining unproved properties of $37,590,000 and $36,200,000 as of March 31, 2012 and June 30, 2011, respectively, are excluded from amounts subject to amortization. Evaluation activities of these unproved properties are expected to be completed within the next one to three years. As of March 31, 2012, based on our impairment review, we fully amortized $112,145,000 of our proved oil and gas properties as a result of the evaluation of our first well drilled.

 

During the three and nine month periods ended March 31, 2012, we incurred $7,023,000 and $26,731,000 respectively of geological and geophysical costs, primarily related to our second 3-D seismic survey covering approximately 4,000 square kilometers offshore Guinea. The new deep water survey is adjacent to our initial 3,635-square-kilometer 3-D seismic survey (Survey A) acquired in 2010.  We incurred $36,498,000 and $86,803,000 respectively of other exploration costs during the three and nine month periods ended March 31, 2012, primarily related to the drilling of our first well which commenced in October 2011.

 

Prospective Investment

 

We made payments of $5,000,000 each in connection with a prospective oil and gas investment on September 20, 2011 and November 15, 2011.  The $10,000,000 in payments were previously classified as a long-term deposit on our balance sheet at December 31, 2011 and were written off during the third quarter as a result of a termination notice by the prospective seller.  The $10,000,000 in deposits were to have been credited on the purchase price of the prospective investment.  As negotiations terminated without an agreement, we have written off this deposit.  The $10,000,000 write off has been included in income from operations within the current period in our Statement of Operations.

 

3. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses (in thousands) as of March 31, 2012 and June 30, 2011 include the following:

 

 

 

March 31,
2012

 

June 30,
2011

 

Accounts payable — oil and gas exploration activities

 

$

16,536

 

$

2,228

 

Accrued payroll and bonus

 

2,406

 

364

 

Accrued — Other

 

378

 

524

 

 

 

$

19,320

 

$

3,116

 

 

4. INVESTMENTS

 

In January 2012, we sold all remaining securities classified as available-for-sale. As of December 31, 2011, we had the intent to sell all remaining corporate debt securities prior to their maturities. In accordance with ASC 320, we recognized the unrealized losses of approximately $472,000 in earnings as an other than temporary impairment during the second quarter of fiscal 2012, which was the period in which the decision to sell was made. Subsequent to the recorded other than temporary impairment of $472,000, the investments were sold in January 2012 and we realized a gain of approximately $59,000 as a result of the liquidation of these investments.

 

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

 

 

 

Amortized Cost

 

Unrealized gains
(losses)

 

Fair Value
(net)

 

US corporate debt securities

 

$

55,717

 

$

(349

)

$

55,368

 

Total available-for-sale

 

$

55,717

 

$

(349

)

$

55,368

 

 

We had no securities classified as held-to-maturity as of June 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

 

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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 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 Investments, LP (“YA Global”) 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, 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 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 six months ended December 31, 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 March 31, 2012 or June 30, 2011.

 

6. SHAREHOLDERS’ EQUITY

 

Common Stock Issuances

 

Nine months ended March 31, 2012

 

For Cash:

 

On February 2, 2012, we closed the sale of 10,000,000 shares of our common stock and warrants to purchase 10,000,000 shares of our common stock in a registered direct public offering. The net proceeds to us from the offering were approximately $28,173,000. The warrants have an exercise price of $3.50 per share, become exercisable in August 2012, and expire in April 2013.

 

For exercise of options:

 

During the nine months ended March 31, 2012, 683,333 options were exercised for cash at exercise prices ranging from $0.31 to $2.00 for total gross proceeds of $608,000.

 

For exercise of warrants:

 

During the nine months ended March 31, 2012, we issued 340,208 shares of common stock upon the cashless exercise of warrants to purchase 430,000 shares of common stock.

 

Employee stock options

 

During the nine months ended March 31, 2012, we granted options to purchase 2,350,000 shares under our 2010 Equity Incentive Plan (the “2010 Plan”).  In July 2011, our Board of Directors approved an increase in the shares authorized under the 2010 Plan from 5,000,000 to 10,000,000, which was approved by stockholders in February 2012. We incurred $5,126,000 in compensation expense associated with employee stock options classified as equity awards during the nine months ended March 31, 2012 of which

 

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$3,682,000 was recorded as general and administrative expense in the current period and $1,444,000 was capitalized in the full cost pool.

 

Nine months ended March 31, 2011

 

For cash:

 

On November 3, 2010, we entered into a Stock Purchase Agreement with two institutional funds under management of affiliates of BlackRock (collectively, the “Investors”) pursuant to which the Investors agreed to purchase an aggregate of 15,000,000 shares of our common stock at a purchase price of $2.00 per share in a private placement. At closing, we received approximately $29.9 million, net of offering costs. On March 25, 2011, we entered into an underwriting agreement providing for the offer and sale in a firm commitment underwritten offering of 25,000,000 shares of our common stock at a price to the public of $5.00 per share ($4.75 per share net of underwriting discount but before deducting transaction expenses). In addition, we granted to the Underwriter a 45-day option to purchase up to 3,750,000 additional shares of common stock from us at the offering price, less underwriting discounts and commissions. On March 25, 2011, the Underwriter exercised its option with respect to all 3,750,000 shares.

 

Closing of the sale of the shares of common stock, including the 3,750,000 shares purchased pursuant to exercise of the option by the Underwriter, was held on March 30, 2011.  The Company received net proceeds, after underwriting discounts and commissions, and other transaction expenses, of approximately $136.2 million.

 

For exercise of options:

 

During the nine months ended March 31, 2011, 603,613 options were exercised for total gross proceeds of $561,681. The options were exercised at prices ranging from $0.24 to $2.00.

 

For exercise of warrants:

 

During the nine months ended March 31, 2011, 6,164,213 warrants were exercised for total gross proceeds of $7,709,290. The warrants were exercised at prices ranging from $0.98 to $1.58. Additionally, during the nine months ended March 31, 2011, we issued 384,848 shares of common stock to YA Global upon the cashless exercise of warrants to purchase 702,222 shares of common stock.

 

Issuance of common stock in Series A settlement:

 

On December 30, 2010, we entered into a litigation settlement whereby we issued 239,437 shares of our common stock.

 

Employee stock options

 

During the nine months ended March 31, 2011, we granted options to purchase 1,691,000 shares of common stock to our employees and directors. The compensation expense associated with employee stock options during the nine months ended March 31, 2011 was $1,812,000.

 

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 was amended to increase issuable shares from 5,000,000 to 10,000,000 on February 17, 2012.

 

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. At March 31, 2012, 3,967,480 shares remained issuable under the 2010 Plan.

 

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

 

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The fair value of options or warrants that do not contain market conditions is estimated using the Black-Scholes valuation model. For options containing market conditions, the fair value was estimated using an 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 Topic 14, Share Based Payments. 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 classified as equity awards during the nine months ended March 31, 2012 and 2011:

 

 

 

2012

 

2011

 

Number of options granted

 

2,350,000

 

1,691,000

 

Amortized compensation expense recognized as general and administrative expense

 

$

3,682,000

 

$

1,812,000

 

Amortized compensation cost capitalized in full cost pool

 

1,444,000

 

 

Weighted average fair value of options

 

$

1.51

 

$

3.01

 

 

The following table details the significant assumptions used to compute the fair market values of employee stock options granted during the nine months ended March 31, 2012 and 2011:

 

 

 

2012

 

2011

 

Risk-free interest rate

 

0.11-1.44

%

1.14-2.68

%

Dividend yield

 

0

%

0

%

Volatility factor

 

110-129

%

95-146

%

Expected life (years)

 

0.25-3.00

 

0.9-5.0

 

 

At March 31, 2012, there was $10,650,784 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.

 

Summary information regarding employee and director stock options issued and outstanding as of March 31, 2012 is as follows:

 

 

 

Options

 

Weighted
Average
Exercise Price

 

Weighted
average
remaining
contractual
term (years)

 

Aggregate
intrinsic value

 

Outstanding at year ended June 30, 2011

 

9,274,854

 

$

1.85

 

5.65

 

$

23,558,086

 

Granted

 

2,350,000

 

3.97

 

 

 

 

 

Exercised

 

(683,333

)

0.89

 

 

 

 

 

Forfeited

 

(248,000

)

5.51

 

 

 

 

 

Expired

 

 

 

 

 

 

 

 

Outstanding at March 31, 2012

 

10,693,521

 

$

2.29

 

4.77

 

$

3,031,550

 

 

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Options outstanding and exercisable as of March 31, 2012

 

Exercise Price

 

Outstanding
Number of
Shares

 

Remaining Life

 

Exercisable
Number of Shares

 

$

0.01 — 1.00

 

105,000

 

1 year

 

105,000

 

$

0.01 — 1.00

 

3,633,334

 

2 years

 

1,589,166

 

$

1.00 — 2.00

 

1,271,000

 

2 years

 

1,150,667

 

$

1.00 — 2.00

 

750,667

 

8 years

 

213,667

 

$

2.00 — 3.00

 

77,000

 

5 years

 

 

$

2.00 — 3.00

 

280,000

 

9 years

 

195,000

 

$

3.00 — 4.00

 

990,000

 

4 years

 

 

$

3.00 — 4.00

 

511,000

 

9 years

 

281,333

 

$

4.00 — 5.00

 

1,183,000

 

4 years

 

 

$

4.00 — 5.00

 

1,562,520

 

9 years

 

125,000

 

$

5.00 — 6.00

 

100,000

 

1 year

 

100,000

 

$

5.00 — 6.00

 

110,000

 

9 years

 

50,000

 

$

6.00 — 7.00

 

30,000

 

9 years

 

15,000

 

$

7.00 — 8.00

 

90,000

 

9 years

 

30,000

 

 

 

10,693,521

 

 

 

3,854,833

 

 

Options exercisable had an intrinsic value of $1,323,817 at March 31, 2012.

 

Liability Awards

 

During the first quarter of 2012, our Board of Directors approved an increase in authorized shares under the 2010 Plan from 5,000,000 to 10,000,000 subject to shareholder approval. Prior to receiving shareholder approval, we  reached the limit of shares available under the 2010 Plan during the first quarter of fiscal 2012, at which point we concluded that all additional awards granted should be classified as liabilities until shareholders approved the increase in the maximum shares issuable under the 2010 plan. Pending shareholder approval of the amended 2010 Plan, we granted options to purchase 1,180,520 shares of our common stock to employees. The 2010 Plan was amended by a shareholder vote to increase issuable shares from 5,000,000 to 10,000,000 on February 17, 2012. The fair value on the date of modification was reclassified from a liability classification to equity. As of the modification date, we have recalculated the fair value of the awards and will amortize the unrecognized expense over the remaining vesting period.

 

The following table details the significant assumptions used to compute the fair market value of awards modified as of February 17, 2012:

 

 

 

2012

 

Risk-free interest rate

 

0.42

%

Dividend yield

 

0

%

Volatility factor

 

129

%

Expected life (years)

 

2.5-3.2

 

 

Warrants

 

As a result of the equity transaction in February 2012, the Company issued warrants to purchase a total of 10,000,000 shares of its common stock to institutional investors. The warrants have an exercise price of $3.50 per share, a term of 14 month from the date they were granted, and are exercisable 6 months following the close of the transaction. The exercise price of the warrants may be adjusted in the case of stock splits, stock dividends or combinations of shares, or in the event the Company issues rights, options or warrants to all holders of the Company’s common stock with an exercise or purchase price less than the volume weighted average price of the Company’s shares on the record date. The warrants issued to the investors had a fair value of $7,820,000. The fair value of the 10,000,000 shares issued in the transaction was $22,180,000 based upon the market price on the transaction date. The fair value of the warrants was determined using the Black-Scholes option pricing model. The following table details the significant assumptions used to compute the fair market value of the warrants:

 

 

 

2012 

 

Risk-free interest rate

 

0.15

%

Dividend yield

 

0

%

Volatility factor

 

105

%

Expected life (months)

 

14

 

 

Summary information regarding common stock warrants issued and outstanding as of March 31, 2012 is as follows:

 

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Warrants

 

Weighted
Average
Exercise Price

 

Weighted
average
remaining
contractual
term (years)

 

Aggregate
intrinsic value

 

Outstanding at year ended June 30, 2011

 

3,858,693

 

$

1.26

 

3.03

 

$

11,737,345

 

Granted

 

10,000,000

 

3.50

 

 

 

 

 

Exercised

 

(430,000

)

0.90

 

 

 

 

 

Forfeited

 

 

 

 

 

 

 

Expired

 

 

 

 

 

 

 

Outstanding at March 31, 2012

 

13,428,693

 

$

2.94

 

1.33

 

$

1,099,258

 

 

Warrants outstanding and exercisable as of March 31, 2012

 

Exercise Price

 

Outstanding
Number of
Shares

 

Remaining
Life

 

Exercisable
Number of
Shares

 

$

0.90

 

2,810,000

 

2 years

 

2,810,000

 

$

0.98

 

10,833

 

2 years

 

10,833

 

$

1.58

 

207,860

 

4 years

 

207,860

 

$

3.50

 

10,000,000

 

1 year

 

 

$

4.00

 

400,000

 

2 years

 

400,000

 

 

 

13,428,693

 

 

 

3,428,693

 

 

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 nine months ended March 31, 2012 and 2011 (in thousands) is as follows:

 

 

 

March 31, 2012

 

March 31, 2011

 

Income tax benefit at the statutory federal rate (35%)

 

$

(48,264

)

$

(3,081

)

(Increase) decrease resulting from nondeductible stock compensation

 

1,777

 

(257

)

Decrease resulting from nontaxable loss on derivative liability

 

 

270

 

Other, net

 

18

 

9

 

Change in valuation allowance

 

46,469

 

3,059

 

Net

 

$

 

$

 

 

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.

 

COMMITMENTS AND CONTINGENCIES

 

Shareholder Lawsuits

 

On April 2, 2012, a lawsuit styled as a class action was filed in the U.S. District Court for the Southern District of Texas against us and our chief executive officer alleging that we made false and misleading statements that artificially inflated our stock prices.  On April 5, 2012, a purported derivative action was filed in the District Court of Harris County, Texas, against all of our directors alleging

 

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that the directors breached their fiduciary duties in connection with positive statements about our drilling operations and the Guinea Concession.

 

We review the status of on-going proceedings and other contingent matters with legal counsel.  Liabilities for such items are recorded if and when it is probable that a liability has been incurred and when the amount of the liability can be reasonably estimated.  Liabilities are periodically reviewed for adjustments based on additional information.

 

Contingent notes payable

 

Our subsidiary, SCS, has $350,000 remaining of a contingent note payable due 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 contingency is satisfied.

 

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 offshore 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 commenced in November 2011, using the survey vessel Oceanic Endeavour.  The cost for the survey, processing and other services is expected to total approximately $30.0 million gross, with our 77% share being $23.1 million. The costs incurred as of March 31, 2012 amount to $25.8 million with our 77% share being $19.9 million which is capitalized in unevaluated oil and gas properties.

 

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 early calendar 2013.

 

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 March 31, 2012:

 

Years ending June 30:
(in thousands)

 

 

 

2012

 

$

101

 

2013

 

316

 

2014

 

326

 

2015

 

229

 

2016

 

 

Total minimum payments required

 

$

972

 

 

Rent expense included in net loss from operations for the three and nine month periods ended March 31, 2012 was $128,000 and $337,000 respectively, compared to $93,000 and $205,000 for the three and nine month periods ended March 31, 2011.

 

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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

 

We are an independent oil and gas exploration company with large prospects in offshore Republic of Guinea (“Guinea”) in Northwest Africa pursuant to rights granted to us by Guinea under a Hydrocarbon Production Sharing Contract, as amended (the “Concession”).  We are the operator and hold a 77% interest.  Our participant, Dana Petroleum, PLC (“Dana”), which is a subsidiary of the Korean National Oil Corporation, holds the remaining 23% interest in the Concession.  We have conducted 2-dimensional (“2-D”) and 3-dimensional (“3-D”) surveys of a portion of the Concession. The acquisition phase of a new 3-D seismic survey covering approximately 4,000 square kilometers in the deeper water portion of the Concession was recently completed by the CGG Veritas Ocean Endeavor.

 

In October 2011 we commenced drilling operations on the Sabu-1 well.  In February 2012, the Sabu-1 well reached the planned total depth of 11,844 feet. The well encountered oil shows while drilling the targeted Upper Cretaceous section, and subsequent analyses of samples from the well indicate the presence of residual oil, in non-commercial quantities. As a result of this drilling outcome, as required by Full-Cost Accounting rules, we evaluated and moved to proved properties $112.1 million of costs which were then fully amortized though our Full-Cost Ceiling Test. The Sabu-1 results provide evidence that hydrocarbon generation has taken place in the basin, which we believe enhances the prospectivity of our Concession.

 

Processing of the new deeper water 3-D data set is in progress. The first preliminary time section results were received in March 2012.  Completion of that work is expected in early calendar year 2013. The cost for acquiring the survey, processing and other services is expected to total approximately $30.0 million gross, or $23.1 million for our 77% interest. Of these estimated costs, we have paid approximately $25.8 million on a gross basis as of March 31, 2012.

 

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 will require substantial additional funds, through additional participants, securities offerings, or through other means, to fulfill our business plans.

 

In April 2012 we announced the engagement of Bank of America as an investment advisor to assist us in connection with the potential sale of an interest in the Concession.  We seek to sell, or “farm-out,” approximately half of our interest in the Concession to an experienced oil and gas company that would also serve as operator of the project going forward.  The farm-out process is expected to be completed by the end of calendar 2012.

 

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 nine months ended March 31, 2012 increased $129,095,000, from a net loss of $8,803,000, or $0.08 per share in the fiscal 2011 period to a net loss of $137,898,000 or $0.87 per share in the fiscal 2012 period primarily as a result of the full amortization of proved oil and gas properties and the write off of the prospective investment deposit discussed above in Note 2, Investment in Oil and Gas Properties, which together total $122,145,000.

 

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Three months ended March 31, 2012 Compared to Three Months Ended March 31, 2011

 

Revenues.  There were no revenues for the three months ended March 31, 2012 or 2011.

 

Depreciation.   Depreciation on property and equipment increased 130%, or $130,000 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 as well as infrastructure required for initiation of our drilling program.

 

General and Administrative Expenses. Our general and administrative expenses were $4,893,000 and $2,571,000 for the three months ended March 31, 2012 and 2011, respectively. This represents an increase of 90% or, $2,322,000 from the fiscal 2011 period to the fiscal 2012 period. The increase in expense was attributable in part to a $1,313,000 increase in employee-related costs, of which approximately $398,000 was non-cash stock-based compensation related to options granted to employees and others. This was driven by an increase in our staff from 35 employees as of March 31, 2011 to 53 employees as of March 31, 2012. The staffing increase primarily related to personnel required for the initiation of our drilling program and growth in our business. Additionally, we have incurred approximately $809,000 in costs with respect to several prospective oil and gas investment opportunities in the current period.

 

Amortization and Write off of Costs. We fully amortized our proved oil and gas properties of $112,145,000 and have written off a prospective investment deposit of $10,000,000, as discussed above.

 

Other income (expense). Other income totaled $70,000 and $33,000 for the three months ended March 31, 2012 and 2011, respectively. The increase can be attributed to the realized current quarter gain on available-for-sale securities sold during the period.

 

Loss from Continuing Operations. Primarily as a result of the full amortization of proved oil and gas properties and the write off of the prospective investment deposit discussed above, which together total $122,145,000, our loss from operations increased by $124,560,000, from $2,638,000 in the three months ended March 31, 2011 to $127,198,000 for the three months ended March 31, 2012.

 

Nine months ended March 31, 2012 Compared to nine Months Ended March 31, 2011

 

Revenues.  There were no revenues for the nine months ended March 31, 2012 or 2011.

 

Depreciation.  Depreciation on property and equipment increased 169%, or $409,000 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.

 

General and Administrative Expenses. Our general and administrative expenses were $14,971,000 and $7,838,000 for the nine months ended March 31, 2012 and 2011, respectively. This represents an increase of 91% or, $7,133,000 from the fiscal 2011 period to the fiscal 2012 period. The increase in expense was primarily attributable to a $3,488,000 increase in employee-related costs, of which approximately $1,870,000 was non-cash stock-based compensation related to options granted to employees and others. This was driven by an increase in our staff from 28 employees as of July 1, 2010 to 53 employees as of March 31, 2012. The staffing increase primarily related to personnel required for the initiation of our drilling program and growth in our business. Additionally, we have incurred approximately $3,325,000 in costs with respect to several prospective oil and gas investment opportunities in the current period.

 

Amortization and Write off of Costs. We fully amortized our proved oil and gas properties of $112,145,000 and have written off a prospective investment deposit of $10,000,000, as discussed above.

 

Other income (expense). Other income (expense) totaled expense of ($132,000) and ($724,000) for the nine months ended March 31, 2012 and 2011, respectively. The decrease is primarily the result of a loss on the warrant derivative liability in the prior fiscal period. 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.

 

Loss from Continuing Operations. Primarily as a result of the full amortization of proved oil and gas properties and the write off of the prospective investment deposit discussed above, which together total $122,145,000, our loss from operations increased by $129,095,000, from $8,803,000 in the nine months ended March 31, 2011 to $137,898,000 for the nine months ended March 31, 2012.

 

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Liquidity and Capital Resources

 

Capital Resource Considerations

 

We completed drilling of our first exploration well, the Sabu-1 in February 2012.  Our current estimate of the cost of the Sabu-1 well, including demobilization costs which were in progress as of March 31, 2012, is approximately $120.9 million, or approximately $93.1 million for our 77% interest.  The high cost of the Sabu-1 adversely affected our cash position and liquidity.

 

On February 2, 2012, we closed the sale of 10,000,000 shares of our common stock and warrants to purchase 10,000,000 of our common shares in a registered direct public offering.  The net proceeds to us from the offering were approximately $28,173,000.  The February 2012 offering improved our cash position and liquidity, and we have adequate funds to conduct our current operations.  However, our ability to drill additional wells will depend on obtaining additional resources through sales of additional interests in the Concession, equity or debt financings, or through other means.  If we sell additional interests in the Concession, our percentage will decrease.  Although we have been successful in raising capital and entering into a key participation arrangement with Dana, we have no firm commitments for additional capital resources.  The terms of any such arrangements, if made, are unknown, and may not be advantageous.

 

In April 2012 we announced the engagement of Bank of America as an investment advisor to assist us in connection with the potential sale of an interest in the Concession.  We seek to sell, or “farm-out,” approximately half of our interest in the Concession to an experienced oil and gas company that would also serve as operator of the project going forward.  The farm-out process is expected to be completed by the end of calendar 2012.

 

Liquidity

 

On March 31, 2012, we had $44,197,000 in cash and $19,178,000 in restricted cash and we had $19,451,000 in liabilities. The liabilities are comprised of current liabilities of $19,320,000 and noncurrent liabilities of $131,000.

 

We were committed under the PSC to spud our first well by December 31, 2011, which we did on October 13, 2011, and to reach a specified minimum total depth, which we reached in February 2012.  We plan to use our existing cash to fund our portion of the remaining expenditures including demobilization costs related to the Sabu-1 well.  Of these estimated well costs, we have paid approximately $106.6 million on a gross basis, or approximately $82.1 million based on our current 77% interest, as of March 31, 2012.

 

Additionally, we entered into an Agreement for the Supply of Marine Seismic Data with CGG Veritas.  The cost for acquiring the survey, processing and other services is expected to total approximately $30.0 million gross, or $23.1 million based upon our current 77% interest in the Guinea Concession, of which, we have incurred $25.8 million on a gross basis as of March 31, 2012 or 19.9 million based upon our 77% share. We plan to use a portion of our existing cash to fund these remaining expenditures.

 

After giving effect for the remaining liabilities and excess supplies associated with the Sabu-1 well and for the remaining costs associated with the 3-D seismic survey, our cash would be in the range of $45-$50 million.

 

Net cash used in operating activities for continuing operations for the nine months ended March 31, 2012 was $5,742,000 compared to $9,699,000 for the nine months ended March 31, 2011. The decrease in cash used in operating activities is primarily a result of an increase in stock based compensation and in accounts payable. Cash used in investing activities for continuing operations for the nine months ended March 31, 2012 was $58,731,000 compared to $32,471,000 in the nine months ended March 31, 2011. This increase was primarily due to an increase in expenditures associated with the drilling of our first well, offset by proceeds from the sale of available for sale securities. There was net cash provided by financing activities for the nine months ended March 31, 2012 of $28,781,000 compared to $174,173,000 during the nine months ended March 31, 2011. We received approximately $166,062,000 in proceeds from the issuance of stock during fiscal 2011. Additionally, we received approximately $7,709,000 in proceeds from the exercise of warrants during the prior year period. This compares to the current period where we received $28,173,000 from the issuance of stock.

 

Capital Expenditures

 

During the first nine months of fiscal 2012, $100,968,000 was expended on oil and gas properties and $1,040,000 was expended on property plant and equipment, compared to $31,540,000 and $731,000 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 and our second 3-D survey which commenced in November 2011, while fiscal 2011 expenditures primarily related to the acquisition of our first 3-D seismic data on our Concession. These 2012 expenditures were primarily funded by $136 million of cash provided by the March 2011 equity offering.

 

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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.

 

While we have instituted controls which we feel will address our previously identified control weaknesses, testing of the effectiveness of those controls is currently taking place, and therefore our principal executive and principal financial officers concluded that our disclosure controls and procedures were not yet effective at March 31, 2012. 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 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.

 

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 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 1. Legal Proceedings.

 

On April 2, 2012, a lawsuit styled as a class action was filed in the U.S. District Court for the Southern District of Texas against us and our chief executive officer alleging that we made false and misleading statements that artificially inflated our stock prices.  On April 5, 2012, a purported derivative action was filed in the District Court of Harris County, Texas, against all of our directors alleging that the directors breached their fiduciary duties in connection with positive statements about our drilling operations and the Guinea Concession.

 

Item 1A. Risk Factors

 

Set forth below are updated risk factors, which supersede the risk factors previously set forth in our periodic reports, including those set forth in our Annual Report on Form 10-K for the year ended June 30, 2011.

 

Risks Relating to Our Business and the Industry in Which We Operate.

 

We depend on a single exploration asset.

 

The Concession is currently our single most important asset and constitutes our greatest potential for the future generation of revenue.  In addition to the exploratory well, the Sabu-1, that we recently drilled, we are required under the PSC to drill a minimum of one additional exploration well to a minimum depth of 2,500 meters below the seabed at a minimum cost of $15 million by September 21, 2016.  The PSC has other work and additional obligations that we will need to perform to maintain compliance with the PSC.  Failure to comply could subject us to risk of loss of the Concession.  In addition, oil and natural gas operations in Africa may be subject to higher political and security risks than operations in the United States.  Upon commencing operations at the Concession, any adverse development affecting our progress such as, but not limited to, the drilling and operational hazards described below, could result in damage to, or destruction of, any wells and producing facilities constructed on the Concession as well as damage to life.  Although we may acquire producing assets to diversify our asset base, given that the Concession is currently our only major asset, any adverse development affecting it could have a material adverse effect on our financial position and results of operations.

 

We have no proved reserves and our exploration program may not yield oil in commercial quantities or quality, or at all.

 

We have no proved reserves.  We have identified leads based on seismic and geological information that indicates the potential presence of oil.  However, the areas we decide to drill may not yield oil in commercial quantities or quality, or at all.  Even when properly used and interpreted, 2-D and 3-D seismic data and visualization techniques are only tools used to assist geoscientists in identifying subsurface structures and hydrocarbon indicators and do not enable the interpreter to know whether hydrocarbons are, in fact, present in those structures.  Accordingly, we do not know if any of our prospects will contain oil in sufficient quantities or quality to recover drilling and completion costs or to be economically viable.  Even if oil is found in commercial quantities, construction costs of oil pipelines or floating production systems, as applicable, and transportation costs may prevent such leads from being economically viable.  If our exploration efforts do not prove to be successful, our business, financial condition and results of operations will be materially adversely affected.

 

Offshore Guinea, the area of all of our exploration, appraisal and development efforts, has not yet proved to be an economically viable production area.  We know of only one exploration well drilled in the area of our Concession, a dry hole in 1977, prior to the recent drilling of our Sabu-1 well.  The Sabu-1 had hydrocarbon shows and contained indications of trace hydrocarbons, but not in commercial quantities. Although there have been significant technological advancements in geophysical and petroleum science since 1977, and we have acquired significant 2-D and 3-D seismic data, exploration activities are subject to a high degree of risk, and there is no assurance of a commercially successful discovery or production in this region.

 

We do not have reserve reports for the Concession and our expectations as to oil and gas reserves are uncertain and may vary substantially from any actual production.

 

We do not have any reserve reports for the Concession.  A reserve report is the estimated quantities of oil and gas based on reports prepared by third party reserve engineers.  Reserve reporting is a subjective process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact manner.  Expectations as to oil and gas reserves are uncertain and may vary substantially from any actual production.

 

The PSC is subject to renegotiation under certain conditions, which may have an adverse impact upon our operations and profitability.

 

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The PSC provides that should the Guinea government note material differences between provisions of the PSC and international standards or the Guinea Petroleum Code, the parties will renegotiate the relevant articles of the PSC.  If the Guinea government identifies material differences between the PSC’s provisions and international standards or the Guinea Petroleum Code, there is no assurance that we will be able to negotiate an acceptable modification to the PSC.  If the parties are not successful in renegotiating the relevant articles of the PSC, the parties may be required to submit the matter to international arbitration.  There is no assurance that any arbitration would be successful or otherwise lead to articles that are more favorable to us than the present articles.  Therefore, the results of such negotiations or arbitration could be unfavorable to us and, as a result, could have a material adverse effect on our business, financial position, results of operation and future cash flows.

 

We are highly dependent on our management team and consultants, and any failure to retain the services of such parties could adversely affect our ability to effectively manage our operations or successfully execute our business plan.

 

Our business is dependent on retaining the services of a small number of key personnel of the appropriate caliber as the business develops.  Our success is, and will continue to be to a significant extent, dependent upon the expertise and experience of the directors, senior management and certain key geoscientists, geologists, engineers and other professionals we engage.  While we have entered into contractual arrangements with the aim of securing the services of the key management team, the retention of their services cannot be guaranteed.  The loss of key members of our management team or other highly qualified technical professionals could adversely affect our ability to effectively manage our overall operations or successfully execute current or future business strategies.  If any member of management or director were to leave our company, it may have a material adverse effect on our business, financial condition, results of operations and/or growth prospects.

 

Drilling wells is speculative and potentially hazardous.  Actual costs may be more than our estimates, and may not result in any discoveries. The cost of our recently drilled exploratory well was significantly higher than expected.

 

Exploring for and developing oil reserves involves a high degree of operational and financial risk, which precludes definitive statements as to the time required and costs involved in reaching certain objectives.  The budgeted costs of drilling, completing and operating wells are often exceeded.  The cost of our recently drilled exploratory well, the Sabu-1, was higher than we initially expected, primarily due to numerous 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.  In addition, oil was not discovered in commercial quantities.  Based on the drilling outcome and accounting rules, we evaluated certain geological and geophysical related costs in unproved properties along with the drilling costs of the Sabu 1 and moved $112 million to proved properties and fully amortized the $112 million in proved properties on our Statements of Operations for the three months ended March 31, 2012.  Unexpected delays and increases in costs associated with wells drilled in the future, could adversely affect our results of operation, financial position, liquidity and business plans.

 

Drilling may be unsuccessful for many reasons, including geological conditions, weather, cost overruns, equipment shortages and mechanical difficulties.  Exploratory wells bear a much greater risk of loss than development wells.  The successful drilling of an oil well may not be indicative of the potential for the development of a commercially viable field and will not necessarily result in a profit on investment.  A variety of factors, both geological and market-related, can cause a well to become uneconomic or only marginally economic.

 

·                 There are a variety of operating risks, including:

 

·                 blowouts, cratering and explosions;

 

·                 mechanical and equipment problems;

 

·                 uncontrolled flows of oil and gas or well fluids;

 

·                 fires;

 

·                 marine hazards with respect to offshore operations;

 

·                 formations with abnormal pressures;

 

·                 pollution and other environmental risks; and

 

·                 weather conditions and natural disasters.

 

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Offshore operations are subject to a variety of operating risks particular to the marine environment, such as capsizing and collisions.  Also, offshore operations are subject to damage or loss from adverse weather conditions.  Any of these events could result in loss of human life, significant damage to property, environmental pollution, impairment of our operations and substantial losses.

 

Deepwater drilling generally requires more time and more advanced drilling technologies than exploration in shallower waters, involving a higher risk of equipment failure and usually higher drilling costs.  In addition, there may be production risks of which we are currently unaware.  If we participate in the development of new subsea infrastructure and use floating production systems to transport oil from producing wells, these operations may require substantial time for installation or encounter mechanical difficulties and equipment failures that could result in significant liabilities, cost overruns or delays.  Furthermore, deepwater operations generally, and operations in West Africa in particular, lack the physical and oilfield service infrastructure present in other regions.  As a result, a significant amount of time may elapse between a deepwater discovery and the marketing of the associated oil and natural gas, increasing both the financial and operational risks involved with these operations.  Because of the lack and high cost of this infrastructure, further discoveries we may make in Guinea may never be economically producible.

 

We will need additional funding to drill additional exploratory wells, and such funding, if available, may not be on terms advantageous to us.

 

Our exploration plan in 2011 contemplated a two well exploration program using the same drilling rig, beginning with the Sabu-1 well, and continuing soon thereafter with a second well.  After consideration of the suitability and cost performance of that rig and the effect of the delays and increased cost on our liquidity and capital resources, we have deferred the commencement of our next exploration well.  Our ability to drill additional wells will depend on obtaining additional cash resources through sales of additional interests in the Concession, equity or debt financings, or through other means.  If we sell additional interests in the Concession, our percentage interest will decrease.  The terms of any capital raising arrangements may not be advantageous for us.

 

Our efforts to attract commercial partners may not be successful and any arrangements made may not be advantageous to us.

 

In April 2012 we announced the engagement of Bank of America as an investment advisor to assist us in connection with the potential sale of an interest in the Concession.  We seek to sell, or “farm-out,” approximately half of our interest in the Concession to an experienced oil and gas company that would also serve as operator of the project going forward.  Government of the Republic of Guinea approval will be sought for the formal transfer of a portion of our concession interest to a new party. The farm-out process is expected to be completed by the end of calendar 2012.  We may not be successful in attracting a commercial partner, or the commercial partner may not have the capital and operational resources, operations experience or familiarity with areas near or similar to the Concession, or other attributes that are deemed desirable by us.  If we enter into an arrangement, the terms may not be advantageous to us.  Any such arrangement will likely involve the transfer of a negotiated interest in the Concession, which could reduce the potential profitability of our interest in the Concession.  Because it is likely that we will provide for the new entity to become the operator, our ability to control and manage operations in the Concession will be diminished.

 

We may not be able to meet our substantial capital requirements to conduct our operations or achieve our business plan.

 

Our business is capital intensive, and we must invest a significant amount in our activities.  We intend to make substantial capital expenditures to find, develop and produce natural gas and oil reserves.

 

Additional capital could be obtained from a combination of funding sources.  The current potential funding sources, and the potential adverse effects attributable thereto, include:

 

·                  offerings of equity, equity-linked and convertible debt securities, which would dilute the equity interests of our stockholders;

 

·                  sales or assignments of interests in the Concession and exploration program, which would reduce any future revenues from that program while at the same time offsetting potential expenditures;

 

·                  debt and convertible debt offerings, which would increase our leverage and add to our need for cash to service such debt and which could result in assets being pledged as collateral; and

 

·                  borrowings from financial institutions, which may subject us to certain restrictive covenants, including covenants restricting our ability to raise additional capital or pay dividends.

 

It is difficult to quantify the amount of financing we may need to fund our business plan in the longer term.  The amount of funding we may need in the future depends on various factors such as:

 

·                  our financial position;

 

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·                  the cost of exploration and drilling;

 

·                  the prevailing market price of natural gas and oil; and

 

·                  the lead time required to bring any discoveries to production.

 

Our ability to raise additional capital will depend on the results of operations and the status of various capital and industry markets at the time such additional capital is sought.  Historically, we have been able to raise capital from equity sources to finance our activities, but there is no assurance that we will be able to do so in the future or on acceptable terms, if at all.  Further, we currently have no operating revenue.  While we believe we have sufficient resources to fund the remaining drilling costs, to complete the processing of the new deeper water 3D seismic survey and working capital for at least the next 12 months, additional capital will likely be required beyond this period.  If we do not obtain capital resources in the future, we may not be able to meet the obligations under the PSC and thereby could be required to surrender the Concession.  The Concession is our single most important asset and, although we are considering other opportunities, the loss of the Concession would significantly reduce our ability to eventually become a profit-generating company.

 

We also expect to continue to incur significant expenses over the next several years with our operations, including further 3-D seismic studies and exploratory drilling.  We may not be able to raise or expend the capital necessary to undertake or complete future drilling programs or acquisition opportunities unless we raise additional funds through debt or equity financings, which may not be available on acceptable terms to us or at all.  We may not be able to obtain debt or equity financing or enter into and complete additional strategic relationships with an industry partner to meet our capital requirements on acceptable terms, if at all.  Further, our future cash flow from operations may not be sufficient for continued exploration, development or acquisition activities, and we may not be able to obtain the necessary funds from other sources.

 

We have no ability to control the prices that we may receive for oil or gas.  Oil and gas prices are volatile, and a substantial or extended decline in prices could adversely affect our financial condition, liquidity, ability to obtain financing and future operating results.

 

We currently have no source of revenue.  Our financial condition is based solely on our ability to sell equity or debt securities to investors, enter into an additional joint operating or similar strategic relationship with an industry partner, sell interests related to the Concession or borrow funds.  We expect that entering into these joint operating or similar relationships would entail transferring a portion of our interest in the Concession to such partner.  Such investors would consider the price of oil and gas in making an investment decision.  Declines in oil and gas prices may adversely affect our financial condition, liquidity, ability to obtain financing and operating results.  Low oil and gas prices also may reduce the amount of oil and gas that we could produce economically.  Low oil and gas prices in the future could have a negative effect on our future financial results.  Historically, oil and gas prices and markets have been volatile, with prices fluctuating widely, and they are likely to continue to be volatile.  Prices for oil and gas are subject to wide fluctuations in response to relatively minor changes in supply and demand, market uncertainty and a variety of additional factors that are beyond our control.  These factors include:

 

·                  the level of domestic and foreign supplies of oil;

 

·                  the level of consumer product demand;

 

·                  weather conditions and natural disasters;

 

·                  political conditions in oil producing regions throughout the world;

 

·                  the ability of the members of the Organization of Petroleum Exporting Countries to agree to and maintain oil production;

 

·                  speculation as to the future price of oil and natural gas and the speculative trading of oil and natural gas futures contracts;

 

·                  price and production controls;

 

·                  political and economic conditions, including embargoes in oil-producing countries or affecting other oil-producing activities, particularly in the Middle East, Africa, Russia and South America;

 

·                  continued threat of terrorism and the impact of military and other action, including U.S. military operations in the Middle East;

 

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·                  the level of global oil and natural gas exploration and production activity;

 

·                  the price of foreign oil imports;

 

·                  actions of governments;

 

·                  domestic and foreign governmental regulations;

 

·                  the price, availability and acceptance of alternative fuels;

 

·                  technological advances affecting energy consumption;

 

·                  global economic conditions; and

 

·                  the value of the U.S. dollar, the Euro and fluctuations in exchange rates generally.

 

These factors and the volatile nature of the energy markets make it impossible to predict oil and gas prices.  Our inability to respond appropriately to changes in these factors could have a material adverse effect on our business plan, financial position, results of operations and future cash flows.

 

The unavailability or high cost of drilling rigs, equipment, supplies, personnel and oilfield services, as well as gathering systems and processing facilities, and our dependence on industry contractors generally, could adversely impact us.

 

We are dependent on industry contractors for the success of our oil and gas exploration projects.  In particular, our drilling activity offshore of Guinea will require that we have access to offshore drilling rigs and contracts with experienced operators of such rigs.  The availability and cost of drilling rigs and other equipment and services, and the skilled personnel required to operate those rigs and equipment is affected by the level and location of drilling activity around the world.  An increase in drilling operations worldwide may reduce the availability and increase the cost to us of drilling rigs, other equipment and services, and appropriately experienced drilling contractors.  The reduced availability of such equipment and services may delay our ability to discover reserves and higher costs for such equipment and services may increase our costs, both of which may have a material adverse effect on our business, results of operations and future cash flow.  If we succeed in constructing oil wells, we may be required to shut them because access to pipelines, gathering systems or processing facilities may be limited or unavailable.  If that were to occur, we would be unable to realize revenue from those wells until arrangements were made to deliver the production to market, which could cause a material adverse effect on our results of operations and financial condition.

 

We are exposed to the failure or non-performance of commercial counterparties.

 

Our operations will be dependent on certain third parties with whom we have commercial agreements (such as drilling project management contractors, drilling contractors and the parties responsible for transporting and/or storing our production) for our future exploration, development, production, sales or other activities.  The efficiency, timeliness and quality of contract performance by third party providers are largely beyond our direct control.  If one or more of these third parties fails to meet its contractual obligations to us, or if such services are temporarily or permanently unavailable (for example, as a result of technical problems or industrial action), or not available on commercially acceptable terms, we may experience a material adverse effect on our business, results of operations, financial condition and future cash flow.  In addition, as a named party under the PSC, we could be held liable for the environmental, health and safety impacts arising out of the activities of our drilling project management contractor or any other third party service provider contracted by us or on our behalf, which could have a material adverse effect on our business, results of operations and future cash flow.

 

Participants in the oil and gas industry are subject to numerous laws that can affect the cost, manner or feasibility of doing business.

 

Exploration and production activities in the oil and gas industry are subject to local laws and regulations.  We may be required to make large expenditures to comply with governmental laws and regulations, particularly in respect of the following matters:

 

·                  licenses for drilling operations;

 

·                  tax increases, including retroactive claims;

 

·                  unitization of oil accumulations;

 

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·                  local content requirements (including the mandatory use of local partners and vendors); and

 

·                  environmental requirements and obligations, including investigation and/or remediation activities.

 

Under these and other laws and regulations, we could be liable for personal injuries, property damage and other types of damages.  Failure to comply with these laws and regulations also may result in the suspension or termination of our operations and subject us to administrative, civil and criminal penalties.  Moreover, new laws and regulations may be enacted, and current laws and regulations could change or their interpretations could change, in ways that could substantially increase our costs.  These risks may be higher in the developing countries in which we conduct our operations, where there could be a lack of clarity or lack of consistency in the application of these laws and regulations.  Any resulting liabilities, penalties, suspensions or terminations could have a material adverse effect on our financial condition and results of operations.

 

Furthermore, the explosion and sinking in April 2010 of the Deepwater Horizon oil rig during operations on the Macondo exploration well in the Gulf of Mexico, and the resulting oil spill, may have increased certain of the risks faced by those drilling for oil in deepwater regions, including increased industry standards, governmental regulation and enforcement, and less favorable investor perception of the risk-adjusted benefits of deepwater offshore drilling.

 

The occurrence of any of these factors, or the continuation thereof, could have a material adverse effect on our business, financial position or future results of operations.

 

We may not be able to commercialize our interests in any natural gas produced from our Guinea Concession

 

The development of the market for natural gas in West Africa is in its early stages.  Currently there is no infrastructure to transport and process natural gas on commercial terms in Guinea, and the expenses associated with constructing such infrastructure ourselves may not be commercially viable given local prices currently paid for natural gas.  We will not receive any payment for this quantity of natural gas.  Accordingly, there may be limited or no value derived from any natural gas produced from our Guinea Concession.

 

Our insurance coverage may be insufficient to cover losses, or we could be subject to uninsured liabilities which could materially affect our business, results of operations or financial condition.

 

There are circumstances where insurance will not cover the consequences of an event, or where we may become liable for costs incurred in events or incidents against which we either cannot insure or may elect not to have insured (whether on account of prohibitive premium costs or for other commercial reasons).  Further, insurance covering certain matters (such as sovereign risk, terrorism and many environmental risks) may not be available to us.  Moreover, we may be subject to large excess payments in the event a third party has a valid claim against us, and therefore may not be entitled to recover the full extent of our loss, or may decide that it is not economical to seek to do so.  The realization of any significant liabilities in connection with our future activities could have a material adverse effect on our business, results of operations, financial condition and future cash flow.

 

There are risks associated with the drilling of oil and natural gas wells which could significantly reduce our revenues or cause substantial losses, impairing our future operating results.  We may become subject to liability for pollution, blow-outs or other hazards, including those arising out of the activities of our third-party contractors.  We intend to obtain insurance with respect to certain of these hazards, but such insurance likely will have limitations that may prevent us from recovering the full extent of such liabilities.  The payment by us of such liabilities could reduce the funds available to us or could, in an extreme case, result in a total loss of our properties and assets.  Moreover, oil and natural gas production operations are also subject to all the risks typically associated with such operations, including premature decline of reservoirs and the invasion of water into producing formations.

 

We have competition from other companies that have larger financial and other resources than we do, which puts us at a competitive disadvantage.

 

A large number of companies and individuals engage in drilling for gas and oil, and there is competition for the most desirable prospects.  We are likely to face competition from international oil and gas companies, which already may have significant operations in a region, together with potential new entrants into such markets, any of which may have greater financial, technological and other resources than us.  There is a high degree of competition for the discovery and acquisition of properties considered to have a commercial potential.  We compete with other companies for the acquisition of oil and gas interests, as well as for the recruitment and retention of qualified employees and other personnel.

 

There can be no assurance that we will be able to continue to compete effectively with other existing oil and gas companies, or any new entrants to the industry.  Any failure by us to compete effectively could have a material adverse effect on our business, results of operations, financial condition and future cash flow.

 

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We may incur a variety of costs to engage in future acquisitions, and the anticipated benefits of those acquisitions may never be realized.

 

As a part of our business strategy, we may make acquisitions of, or significant investments in, other assets, particularly those that would allow us to produce oil and natural gas and generate revenue to fund our exploration activities.  Any future acquisitions would be accompanied by risks such as:

 

·                  diversion of our management’s attention from ongoing business concerns;

 

·                  our potential inability to maximize our financial and strategic position through the successful development of the asset or assets acquired;

 

·                  impairment of our relationship with our existing employees if we cannot hire employees to staff any new operations and our existing employees are required to staff both old and new operations; and

 

·                  maintenance of uniform standards, controls, procedures and policies.

 

We cannot guarantee that we will be able to successfully integrate any business, products, technologies or personnel that we might acquire in the future, and our failure to do so could harm our business.

 

Risks Relating to Operating in Guinea

 

Geopolitical instability where we operate subjects us to political, economic and other uncertainties.

 

We conduct business in Guinea, which is in a region of the world where there have been recent civil wars, revolutions, coup d’etats and internecine conflicts.  There is the risk of political violence and increased social tension in Guinea as a result of the past political upheaval, and there is a risk of civil unrest, crime and labor unrest at times.  For example, in September 2009, the military government intervened to stop pro-democracy rallies, resulting in a number of civilian deaths and casualties.  This led to the African Union, United States and European Union imposing sanctions upon the former government.  A successful mediation organized by the international community (African Union, United States and European Union) between the opposition and the military junta resulted in the appointment of a Prime Minister of Guinea from the opposition.  In 2010 democratic elections were held, and a president was elected and inaugurated.  While these developments indicate that the political situation in Guinea is improving, external or internal political forces potentially could create a political or military climate that might cause a change in political leadership, the outbreak of hostilities, or civil unrest.  Such uncertainties could result in our having to cease our Guinea operations and result in the loss or delay of our rights under the PSC.

 

Further, we face political and economic risks and other uncertainties with respect to our operations, which may include, among other things:

 

·                  loss of future revenue, property and equipment, as a result of hazards such as expropriation, war, acts of terrorism, insurrection and other political risks;

 

·                  increases in taxes and governmental royalties;

 

·                  unilateral renegotiation or cancellation of contracts by governmental entities;

 

·                  difficulties enforcing our rights against a governmental agency because of the doctrine of sovereign immunity and foreign sovereignty over international operations;

 

·                  changes in laws and policies governing operations of foreign-based companies; and

 

·                  currency restrictions and exchange rate fluctuations.

 

Our operations in Guinea also may be adversely affected by laws and policies of the United States affecting foreign trade and taxation.  Realization of any of these factors could have a material adverse effect on our business, financial condition, results of operations and/or growth prospects.

 

Guinea’s political uncertainties could adversely affect our rights under the Concession or obligations under the PSC.

 

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Guinea has faced and continues to face political, economic and social uncertainties which are beyond our control.  Maintaining a good working relationship with the Guinea government is important because the Concession is granted under the terms of the PSC, with the Guinea government.  In June 2010, a democratic election was held that identified two main candidates for a run-off election that was held on November 7, 2010.  On December 21, 2010, President Alpha Conde was inaugurated.  The newly-elected government has replaced the transitional government.  Although we believe that our management has a positive working relationship with the new Guinea government, we cannot predict future political events and changing relationships.  Political instability, substantial changes in government laws, policies or officials, and attitudes of officials toward us could have a material adverse effect on our business, financial position, results of operations and future cash flow.

 

We operate in Guinea, a country where corrupt behavior exists that could impair our ability to do business in the future or result in significant fines or penalties.

 

We operate in Guinea, a country where governmental corruption has been known to exist.  There is a risk of violating either the US Foreign Corrupt Practices Act, laws or legislation promulgated pursuant to the 1997 OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions or other applicable anti-corruption regulations that generally prohibit the making of improper payments to foreign officials for the purpose of obtaining or keeping business.  In addition, the future success of our Guinea operations may be adversely affected by risks associated with international activities, including economic and labor conditions, political instability, risk of war, expropriation, terrorism, renegotiation or modification of existing contracts, tax laws and changes in exchange rates.

 

We are subject to governmental regulations, the cost of compliance with which may have an adverse effect on our financial condition, results of operations and future cash flow.

 

Oil and gas operations in Guinea will be subject to government regulation and to interruption or termination by governmental authorities on account of ecological and other considerations.  It is impossible to predict future government proposals that might be enacted into law, future interpretation of existing laws or future amendments to the Guinea Petroleum Code or any other laws, or the effect those new or amended laws or changes in interpretation of existing laws might have on us.  Restrictions on oil and gas activities, such as production restrictions, price controls, tax increases and pollution and environmental controls may have a material adverse effect on our financial condition, results of operations and future cash flows.

 

Political, social and economic conditions in Guinea may adversely affect our business, results of operation, financial condition and future cash flow.

 

As all of our potential revenue generating assets are currently located in Guinea, our operations are dependant on the economic and political conditions prevailing in Guinea.  Accordingly, we are subject to the risks associated with conducting business in and with a foreign country, including the risks of changes in the country’s laws and policies (including those relating to taxation, royalties, acquisitions, disposals, imports and exports, currency, environmental protection, management of natural resources, exploration and development of mines, labor and safety standards, and historical and cultural preservation).  The costs associated with compliance with these laws and regulations are substantial, and possible future laws and regulations as well as changes to existing laws and regulations could impose additional costs on us, require us to incur additional capital expenditures and/or impose restrictions on or suspensions of our operations and delays in the development of our assets.

 

Further, these laws and regulations may allow government authorities and private parties to bring legal claims based on damages to property and injury to persons resulting from the environmental, health and safety impacts of our past and current operations and could lead to the imposition of substantial fines, penalties or other civil or criminal sanctions.  If material, these compliance costs, claims or fines could have a material adverse effect on our business, results of operations, financial condition and/or growth prospects.

 

In addition, Guinea has high levels of unemployment, poverty and crime.  These problems have, in part, hindered investments in Guinea, prompted emigration of skilled workers and affected economic growth negatively.  While it is difficult to predict the effect of these problems on businesses operating in Guinea or the Guinea government’s efforts to solve them, these problems, or the solutions proposed, could have a material adverse effect on our business, results of operations, financial condition and/or growth prospects.

 

The legal and judicial system in Guinea is relatively undeveloped and subject to frequent changes, and we may be exposed to similar risks if we operate in certain other jurisdictions.

 

Guinea has a less developed legal and judicial system than more established economies which could result in risks such as: (i) effective legal redress in the courts of such jurisdictions, whether in respect of a breach of contract, law or regulation, or in an ownership dispute, being more difficult to obtain; (ii) a higher degree of discretion on the part of Governmental authorities who may be susceptible to corruption; (iii) the lack of judicial or administrative guidance on interpreting applicable rules and regulations; (iv) inconsistencies or conflicts between and within various laws, regulations, decrees, orders and resolutions; or (v) relative inexperience

 

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of the judiciary and courts in such matters.  In Guinea and certain other jurisdictions, the commitment of local business people, government officials and agencies and the judicial system to abide by legal requirements and negotiated agreements may be more uncertain, creating particular concerns with respect to the Concession or other licenses, permits or approvals required by us for the operation of our business, which may be susceptible to revision or cancellation, and legal redress may be uncertain or delayed.  There can be no assurance that joint ventures, licenses, license applications or other legal arrangements will not be adversely affected by the actions of government authorities or others, and the effectiveness of and enforcement of such arrangements in these jurisdictions cannot be assured.

 

Risks Relating to Our Common Stock

 

The price of our common stock historically has been volatile.  This volatility may affect the price at which you could sell your common stock, and the sale of substantial amounts of our common stock could adversely affect the price of our common stock.

 

The closing price for our common stock has varied between a high of $5.58 on July 26, 2011 and a low of $0.80 on May 7, 2012 to date for the fiscal year ending on June 30, 2012.  This volatility may affect the price at which an investor could sell the common stock, and the sale of substantial amounts of our common stock could adversely affect the price of our common stock.  Our stock price is likely to continue to be volatile and subject to significant price and volume fluctuations in response to market and other factors, including the other factors discussed in “— Risks Relating to Our Business and the Industry in Which We Operate”; variations in our quarterly operating results from our expectations or those of securities analysts or investors; downward revisions in securities analysts’ estimates; and announcement by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments.

 

We may be subject to a continued listing standards notice from the New York Stock Exchange if the trading price of our common stock remains below $1.00 for thirty consecutive trading days.

 

Our common stock has traded recently below $1.00 per share. If the low trading price of our stock continues, we may be subject to a continued listing standards notice from the New York Stock Exchange (the “NYSE”).  Under NYSE rules, such notices may be issued when the average closing price of a company’s common stock is less than $1.00 per share over a period of 30 consecutive trading days.  If such notice is received, we will have six months following receipt of the notification to regain compliance with the minimum share price requirement.  We can regain compliance at any time during the six-month cure period if our common stock has a closing share price of at least $1.00 on the last trading day of any calendar month during the period and also has an average closing share price of at least $1.00 over the 30 trading-day period ending on the last trading day of that month or on the last day of the cure period. The NYSE rules also provide that, if we choose to take an action to cure the price condition that requires shareholder approval, we must inform the NYSE, obtain such shareholder approval by no later than our next annual meeting, and implement the action promptly thereafter.

 

We may issue additional shares of common stock in the future, which could adversely affect the market price of our shares and cause dilution to existing stockholders.

 

We may issue additional shares of our common stock in the future which could adversely affect the market price of our shares.  Significant sales of shares of our common stock by major stockholders, or the public perception that an offering or sale may occur also could have an adverse effect on the market price of shares of our common stock.  Issuance of additional shares of common stock will dilute the percentage ownership interest of the existing stockholders, and may dilute the book value per share of our shares of common stock held by existing stockholders.

 

Sales of substantial amounts of shares of our common stock in the public market could harm the market price of the shares of common stock.

 

The sale of substantial amounts of shares of our common stock (including shares issuable upon exercise of outstanding options and warrants to purchase shares) may cause substantial fluctuations in the price of shares of our common stock.  Because investors may be more reluctant to purchase shares of our common stock following substantial sales or issuances, the sale of shares in an offering could impair our ability to raise capital in the near term.

 

We have identified material weaknesses in our internal controls for the year ended June 30, 2011, and if we fail to adequately remediate, we may be unable to accurately report our financial results in the future and the market price of our shares may be adversely affected.

 

We and our independent registered public accounting firm, in connection with the audit of our internal control over financial reporting, for the fiscal year ended June 30, 2011, have identified certain control deficiencies 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 the financial statements and the application of certain accounting principles. In addition, we identified certain control deficiencies 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.  While we have instituted controls which we feel will address our previously identified control weaknesses, testing of the effectiveness of those controls is currently taking place, and therefore our principal executive and principal financial officers concluded that our disclosure controls and procedures were not yet effective at March 31, 2012..  A failure to address any control deficiency could result in inaccuracies in our financial statements and could also impair our ability to comply with applicable financial reporting requirements.  As a result, our business and the market price of our shares may be adversely affected.

 

Delaware law and our charter documents may impede or discourage a takeover, which could adversely impact the market price of our shares.

 

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We are a Delaware corporation, and the anti-takeover provisions of Delaware law impose various impediments to the ability of a third party to acquire control of us, even if a change in control would be beneficial to our existing stockholders.  Certain provisions of Delaware law and our certificate of incorporation and bylaws could impede a merger, takeover or other business combination involving us or discourage a potential acquirer from making a tender offer for our common stock, which, under certain circumstances, could reduce the market price of our common stock.

 

Item 6. Exhibits and Reports on Form 8-K

 

(A)
Exhibit
Number

 

Description

 

 

 

3.1.1

 

Certificate of Incorporation (1)

 

 

 

3.1.2

 

Certificate of Amendment of Certificate of Incorporation, dated January 21, 1997 (1)

 

 

 

3.1.3

 

Certificate of Amendment of Certificate of Incorporation, dated September 20, 1999 (1)

 

 

 

3.1.4

 

Certificate of Amendment of Certificate of Incorporation, dated December 22, 2003 (1)

 

 

 

3.1.5

 

Certificate of Amendment of Certificate of Incorporation, dated March 11, 2011 (2)

 

 

 

3.1.6

 

Series B Certificate of Designation (5)

 

 

 

3.2

 

Amended and Restated By-laws (23)

 

 

 

4.1

 

Form of Common Stock Certificate (3)

 

 

 

4.2

 

Warrant issued to Trendsetter Investors, LLC on June 12, 2007 (4)

 

 

 

4.3

 

Form of Common Stock Purchase Warrant issued to investors on February 2, 2012 (26)

 

 

 

10.1

 

Hydrocarbon Production Sharing Contract (PSA) between SCS Corporation and the Republic of Guinea, dated September 22, 2006 (6)

 

 

 

10.2

 

Amendment No. 1 to the Hydrocarbons Production Sharing Contract between SCS Corporation and the Republic of Guinea, dated March 25, 2010 (11)

 

 

 

10.3*

 

Employment Agreement between Hyperdynamics and Jason D. Davis, dated June 17, 2009 (8)

 

 

 

10.4*

 

Amendment No. 1 to the Employment Agreement between Hyperdynamics Corporation and Jason D. Davis, dated October 16, 2009 (20)

 

 

 

10.5*

 

Employment Agreement between Hyperdynamics and Ray Leonard, dated July 22, 2009 (9)

 

 

 

10.6*

 

Amendment No. 1 to Employment Agreement between Hyperdynamics Corporation and Ray Leonard, dated December 11, 2009 (15)

 

 

 

10.7

 

Sale and Purchase Agreement between Hyperdynamics Corporation and Dana Petroleum (E&P) Limited, effective as of December 4, 2009 (12)

 

 

 

10.8

 

Letter Agreement between Hyperdynamics Corporation and Dana Petroleum (E&P) Limited, dated December 2, 2009 (12)

 

 

 

10.9

 

Operating Agreement between SCS Corporation and Dana Petroleum (E&P) Limited, dated January 28, 2010 (16)

 

 

 

10.10

 

Lease Agreement between Hyperdynamics Corporation and Parkway Properties LP, dated December 29, 2009 (17)

 

 

 

10.11

 

Memorandum of Understanding between the Government of the Republic of Guinea and SCS Corporation, dated September 11, 2009 (English translation) (7)

 

 

 

10.14

 

Marine 2D Seismic Data Acquisition Services Agreement between Hyperdynamics Corporation and Bergen Oilfield Services AS of Norway, dated September 29, 2009 (18)

 

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10.15

 

3D Seismic Contract between PGS Geophysical AS, Norway and Hyperdynamics Corporation, dated June 11, 2010 (21)

 

 

 

10.17*

 

2010 Equity Incentive Plan (10)

 

 

 

10.18*

 

Form of Incentive Stock Option Agreement (10)

 

 

 

10.19*

 

Form of Non-Qualified Stock Option Agreement (10)

 

 

 

10.20*

 

Form of Restricted Stock Agreement (10)

 

 

 

10.21

 

Master Service Agreement for Geophysical Data Processing Services between SCS Corporation and PGS Data Processing, Inc., dated July 2, 2010 (21)

 

 

 

10.22

 

Supplemental Agreement No. 1 to Master Service Agreement between SCS Corporation and PGS Data Processing, Inc., dated July 2, 2010 (21)

 

 

 

10.23

 

Form of Stock Purchase Agreement, dated November 3, 2010 among Hyperdynamics Corporation and the Investors (22)

 

 

 

10.24

 

Form of Registration Rights Agreement, dated November 3, 2010 among Hyperdynamics Corporation and the Investors (22)

 

 

 

10.25

 

Contract Number:  AGR/C105/10 between SCS Corporation and AGR Peak Well Management Limited for Provision of Well Construction Management Services, including LOGIC General Conditions as Appendix I (13)

 

 

 

10.26

 

Employment Agreement between Hyperdynamics and Paul C. Reinbolt effective August 8, 2011 (24)

 

 

 

10.27

 

Agreement for the Supply of Marine Seismic Data Application and Processing Services, dated September 20, 2011 between SCS Corporation and CGG Veritas Services SA (25)

 

 

 

10.28

 

Form of Securities Purchase Agreement, dated January 30, 2012, between Hyperdynamics Corporation and investors in the offering (26)

 

 

 

10.29

 

Placement Agency Agreement, dated January 30, 2012, by and between Hyperdynamics Corporation and Rodman & Renshaw, LLC (26)

 

 

 

14.1

 

Code of Ethics (1)

 

 

 

31.1**

 

Certification of Chief Executive Officer of Hyperdynamics Corporation required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

31.2**

 

Certification of Chief Financial Officer of Hyperdynamics Corporation required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

32.1**

 

Certification of Chief Executive Officer of Hyperdynamics Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350)

 

 

 

32.2**

 

Certification of Principal Financial Officer of Hyperdynamics Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350)

 

 

 

101.INS

 

XBRL Instance Document (27)

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document (27)

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document (27)

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definitions Linkbase Document (27)

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document (27)

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document (27)

 

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*

 

Management contracts or compensatory plans or arrangements.

**

 

Filed herewith.

(1)

 

Incorporated by reference to Form 10-KSB/A filed May 16, 2005.

(2)

 

Incorporated by reference to Schedule 14A filed January 11, 2011 and filed herewith.

(3)

 

Incorporated by reference to Form S-1 filed January 12, 2006, as amended.

(4)

 

Incorporated by reference to Form 8-K filed June 18, 2007.

(5)

 

Incorporated by reference to Form 8-K filed June 15, 2001.

(6)

 

Incorporated by reference to Form 8-K filed September 28, 2006.

(7)

 

Incorporated by reference to Form 8-K filed September 15, 2009.

(8)

 

Incorporated by reference to Form 8-K filed July 6, 2009.

(9)

 

Incorporated by reference to Form 8-K filed July 23, 2009.

(10)

 

Incorporated by reference to Form S-8 filed June 14, 2010.

(11)

 

Incorporated by reference to Form 8-K, dated March 31, 2010.

(12)

 

Incorporated by reference to Form 8-K, filed December 7, 2009.

(13)

 

Incorporated by reference to Form 8-K filed December 6, 2010.

(14)

 

Intentionally omitted.

(15)

 

Incorporated by reference to Form 8-K, dated December 11, 2009.

(16)

 

Incorporated by reference to Form 8-K, dated January 29, 2010.

(17)

 

Incorporated by reference to Form 8-K, dated January 6, 2010.

(18)

 

Incorporated by reference to Form 8-K filed October 2, 2009.

(19)

 

Intentionally omitted.

(20)

 

Incorporated by reference to Form 8-K filed on October 16, 2009.

(21)

 

Incorporated by reference to Form 10-K filed on September 28, 2010.

(22)

 

Incorporated by reference to Form 8-K filed on November 4, 2010.

(23)

 

Incorporated by reference to Form 8-K filed on December 28, 2011.

(24)

 

Incorporated by reference to Form 8-K filed on July 8, 2011.

(25)

 

Incorporated by reference to Form 8-K filed on September 23, 2011

(26)

 

Incorporated by reference to Form 8-K filed on February 1, 2012.

(27)

 

Pursuant to Rule 406T of Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, and is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended and otherwise is not subject to liability under these sections.

 

33



Table of Contents

 

Signatures

 

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

 

Hyperdynamics Corporation

 

(Registrant)

 

 

 

By:

/s/ Ray Leonard

 

 

Ray Leonard

 

 

Chief Executive Officer

 

 

Dated: May 9, 2012

 

By:

/s/ Paul Reinbolt

 

 

Paul Reinbolt

 

 

Chief Financial Officer

 

 

Dated: May 9, 2012

 

By:

/s/ David Wesson

 

 

David Wesson

 

 

Principal Accounting Officer

 

 

Dated: May 9, 2012

 

34



Table of Contents

 

Exhibit Index

 

Exhibit
Number

 

Description

3.1.1

 

Certificate of Incorporation (1)

 

 

 

3.1.2

 

Certificate of Amendment of Certificate of Incorporation, dated January 21, 1997 (1)

 

 

 

3.1.3

 

Certificate of Amendment of Certificate of Incorporation, dated September 20, 1999 (1)

 

 

 

3.1.4

 

Certificate of Amendment of Certificate of Incorporation, dated December 22, 2003 (1)

 

 

 

3.1.5

 

Certificate of Amendment of Certificate of Incorporation, dated March 11, 2011 (2)

 

 

 

3.1.6

 

Series B Certificate of Designation (5)

 

 

 

3.2

 

Amended and Restated By-laws (23)

 

 

 

4.1

 

Form of Common Stock Certificate (3)

 

 

 

4.2

 

Warrant issued to Trendsetter Investors, LLC on June 12, 2007 (4)

 

 

 

4.3

 

Form of Common Stock Purchase Warrant issued to investors on February 2, 2012 (26)

 

 

 

10.1

 

Hydrocarbon Production Sharing Contract (PSA) between SCS Corporation and the Republic of Guinea, dated September 22, 2006 (6)

 

 

 

10.2

 

Amendment No. 1 to the Hydrocarbons Production Sharing Contract between SCS Corporation and the Republic of Guinea, dated March 25, 2010 (11)

 

 

 

10.3*

 

Employment Agreement between Hyperdynamics and Jason D. Davis, dated June 17, 2009 (8)

 

 

 

10.4*

 

Amendment No. 1 to the Employment Agreement between Hyperdynamics Corporation and Jason D. Davis, dated October 16, 2009 (20)

 

 

 

10.5*

 

Employment Agreement between Hyperdynamics and Ray Leonard, dated July 22, 2009 (9)

 

 

 

10.6*

 

Amendment No. 1 to Employment Agreement between Hyperdynamics Corporation and Ray Leonard, dated December 11, 2009 (15)

 

 

 

10.7

 

Sale and Purchase Agreement between Hyperdynamics Corporation and Dana Petroleum (E&P) Limited, effective as of December 4, 2009 (12)

 

 

 

10.8

 

Letter Agreement between Hyperdynamics Corporation and Dana Petroleum (E&P) Limited, dated December 2, 2009 (12)

 

 

 

10.9

 

Operating Agreement between SCS Corporation and Dana Petroleum (E&P) Limited, dated January 28, 2010 (16)

 

 

 

10.10

 

Lease Agreement between Hyperdynamics Corporation and Parkway Properties LP, dated December 29, 2009 (17)

 

 

 

10.11

 

Memorandum of Understanding between the Government of the Republic of Guinea and SCS Corporation, dated September 11, 2009 (English translation) (7)

 

 

 

10.14

 

Marine 2D Seismic Data Acquisition Services Agreement between Hyperdynamics Corporation and Bergen Oilfield Services AS of Norway, dated September 29, 2009 (18)

 

 

 

10.15

 

3D Seismic Contract between PGS Geophysical AS, Norway and Hyperdynamics Corporation, dated June 11, 2010 (21)

 

 

 

10.17*

 

2010 Equity Incentive Plan (10)

 

 

 

10.18*

 

Form of Incentive Stock Option Agreement (10)

 

 

35



Table of Contents

 

10.19*

 

Form of Non-Qualified Stock Option Agreement (10)

 

 

 

10.20*

 

Form of Restricted Stock Agreement (10)

 

 

 

10.21

 

Master Service Agreement for Geophysical Data Processing Services between SCS Corporation and PGS Data Processing, Inc., dated July 2, 2010 (21)

 

 

 

10.22

 

Supplemental Agreement No. 1 to Master Service Agreement between SCS Corporation and PGS Data Processing, Inc., dated July 2, 2010 (21)

 

 

 

10.23

 

Form of Stock Purchase Agreement, dated November 3, 2010 among Hyperdynamics Corporation and the Investors (22)

 

 

 

10.24

 

Form of Registration Rights Agreement, dated November 3, 2010 among Hyperdynamics Corporation and the Investors (22)

 

 

 

10.25

 

Contract Number:  AGR/C105/10 between SCS Corporation and AGR Peak Well Management Limited for Provision of Well Construction Management Services, including LOGIC General Conditions as Appendix I (13)

 

 

 

10.26

 

Employment Agreement between Hyperdynamics and Paul C. Reinbolt effective August 8, 2011 (24)

 

 

 

10.27

 

Agreement for the Supply of Marine Seismic Data Application and Processing Services, dated September 20, 2011 between SCS Corporation and CGG Veritas Services SA (25)

 

 

 

10.28

 

Form of Securities Purchase Agreement, dated January 30, 2012, between Hyperdynamics Corporation and investors in the offering (26)

 

 

 

10.29

 

Placement Agency Agreement, dated January 30, 2012, by and between Hyperdynamics Corporation and Rodman & Renshaw, LLC (26)

 

 

 

14.1

 

Code of Ethics (1)

 

 

 

31.1**

 

Certification of Chief Executive Officer of Hyperdynamics Corporation required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

31.2**

 

Certification of Chief Financial Officer of Hyperdynamics Corporation required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

32.1**

 

Certification of Chief Executive Officer of Hyperdynamics Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350)

 

 

 

32.2**

 

Certification of Principal Financial Officer of Hyperdynamics Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350)

 

 

 

101.INS

 

XBRL Instance Document (27)

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document (27)

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document (27)

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definitions Linkbase Document (27)

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document (27)

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document (27)

 


*

 

Management contracts or compensatory plans or arrangements.

**

 

Filed herewith.

(1)

 

Incorporated by reference to Form 10-KSB/A filed May 16, 2005.

(2)

 

Incorporated by reference to Schedule 14A filed January 11, 2011 and filed herewith.

(3)

 

Incorporated by reference to Form S-1 filed January 12, 2006, as amended.

(4)

 

Incorporated by reference to Form 8-K filed June 18, 2007.

(5)

 

Incorporated by reference to Form 8-K filed June 15, 2001.

(6)

 

Incorporated by reference to Form 8-K filed September 28, 2006.

(7)

 

Incorporated by reference to Form 8-K filed September 15, 2009.

 

36



Table of Contents

 

(8)

 

Incorporated by reference to Form 8-K filed July 6, 2009.

(9)

 

Incorporated by reference to Form 8-K filed July 23, 2009.

(10)

 

Incorporated by reference to Form S-8 filed June 14, 2010.

(11)

 

Incorporated by reference to Form 8-K, dated March 31, 2010.

(12)

 

Incorporated by reference to Form 8-K, filed December 7, 2009.

(13)

 

Incorporated by reference to Form 8-K filed December 6, 2010.

(14)

 

Intentionally omitted.

(15)

 

Incorporated by reference to Form 8-K, dated December 11, 2009.

(16)

 

Incorporated by reference to Form 8-K, dated January 29, 2010.

(17)

 

Incorporated by reference to Form 8-K, dated January 6, 2010.

(18)

 

Incorporated by reference to Form 8-K filed October 2, 2009.

(19)

 

Intentionally Omitted.

(20)

 

Incorporated by reference to Form 8-K filed on October 16, 2009.

(21)

 

Incorporated by reference to Form 10-K filed on September 28, 2010.

(22)

 

Incorporated by reference to Form 8-K filed on November 4, 2010.

(23)

 

Incorporated by reference to Form 8-K filed on December 28, 2011.

(24)

 

Incorporated by reference to Form 8-K filed on July 8, 2011.

(25)

 

Incorporated by reference to Form 8-K filed on September 23, 2011

(26)

 

Incorporated by reference to Form 8-K filed on February 1, 2012.

(27)

 

Pursuant to Rule 406T of Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, and is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended and otherwise is not subject to liability under these sections.

 

37