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TABLE OF CONTENTS
Index to Financial Statements

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K


ý

 

ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 2012

or

o

 

TRANSITION REPORT UNDER 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
(State or other jurisdiction
of incorporation or organization)
  87-0400335
(IRS Employer
Identification Number)

12012 Wickchester Lane, #475
Houston, Texas 77079

(Address of principal executive offices, including zip code)

(713) 353-9400
(Issuer's telephone number, including area code)

        Securities registered under Section 12(b) of the Exchange Act:

Title of Each Class   Name of Each Exchange on Which Registered
Common Stock, $0.001 par value   NYSE

        Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act o Yes    ý No

        Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act o Yes    ý No

        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 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. ý Yes    o No

        Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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). ý Yes    o No

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained in herein, and will not be contained, to the best of the registrant's knowledge , in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    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.

Large accelerated filer o   Accelerated filer ý   Non-accelerated filer o
(Do not check if a
smaller reporting company)
  Smaller reporting company o

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

        As of December 31, 2011, the aggregate market value of the registrant's common stock held by non-affiliates of the registrant was $383,267,850 based on the closing sale price as reported on the NYSE. We had 167,425,232 shares of common stock outstanding on September 6, 2012.

   


Table of Contents


TABLE OF CONTENTS

Part I

  1


Item 1.


 


Business


 


1


Item IA.


 


Risk Factors


 


10


Item 1B.


 


Unresolved Staff Comments


 


22


Item 2.


 


Properties


 


22


Item 3.


 


Legal Proceedings


 


22


Item 4.


 


Mine Safety Disclosures


 


23


Part II


 


24


Item 5.


 


Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities


 


24


Item 6.


 


Selected Financial Data


 


27


Item 7.


 


Management's Discussion and Analysis of Financial Condition and Results of Operations


 


27


Item 7A.


 


Quantitative and Qualitative Disclosures About Market Risk


 


33


Item 8.


 


Financial Statements and Supplementary Data


 


33


Item 9.


 


Changes in and Disagreements With Accountants on Accounting and Financial Disclosures


 


34


Item 9A.


 


Controls and Procedures


 


34


Item 9B.


 


Other Information


 


35


PART III


 


35


Item 10.


 


Directors, Executive Officers and Corporate Governance


 


35


Item 11.


 


Executive Compensation


 


41


Item 12.


 


Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters


 


52


Item 13.


 


Certain Relationships and Related Transactions, and Director Independence


 


55


Item 14.


 


Principal Accounting Fees and Services


 


56


PART IV


 


57


Item 15.


 


Exhibits, Financial Statement Schedules


 


57


SIGNATURES


 


61

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PART I

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.

Item 1.    Business

Overview

        We are an independent oil and gas exploration company that was incorporated in 1996 as a Delaware corporation with large prospects in offshore Republic of Guinea ("Guinea") in Northwest Africa pursuant to rights granted to us by Guinea (the "Concession") under a Hydrocarbon Production Sharing Contract, as amended ("PSC"). 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.

        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 3,600 meters. The well encountered oil shows while drilling the targeted Upper Cretaceous section and our well-log interpretations indicated the presence of residual oil in non-commercial quantities. Subsequent analysis of rock samples from the well has confirmed the presence of hydrocarbons in fluid inclusions in the rock. We believe: (1) the Sabu-1 well was not a commercial success because of the lack of reservoir seal (such as marine shales or reservoir-seal pairs) needed for a commercial accumulation, and (2) that the evidence that hydrocarbon generation has taken place in the basin enhances the prospectivity of our Concession.

        We have conducted 2-dimensional ("2D") and 3-dimensional ("3D") surveys of a portion of the Concession. The acquisition phase of the most recent 3D 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. Processing of the most recent 3D data set is in progress. The first preliminary time section results were received in March 2012. Completion of this processing 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 incurred approximately $26.3 million on a gross basis as of June 30, 2012.

        We seek to sell, or farm-out, a 40% interest in the Concession to an experienced oil and gas company that would also serve as operator of the project going forward. Several companies are reviewing our data, and we expect the farm-out process to be completed by the end of calendar year 2012.

        We intend to continue acquiring, exploring and developing oil and gas properties. At this time, we have no source of operating revenue and there is no assurance when we will, if ever. We have no

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

        Our principal executive offices are located at 12012 Wickchester Lane, Suite 475, Houston, Texas 77079, and our telephone number is (713) 353-9400.

OPERATIONS OFFSHORE GUINEA

The PSC

        We have been conducting exploration work related to offshore Guinea since 2002. On September 22, 2006, we, acting through our wholly owned subsidiary, SCS Corporation Ltd ("SCS"), entered into the PSC with Guinea. Under that agreement, we were granted certain exclusive contractual rights by Guinea to explore and exploit offshore oil and gas reserves, if any, off the coast of Guinea. We refer to the rights granted to us by Guinea as the Concession and to the offshore area subject to the Concession as the "Contract Area."

        On March 25, 2010, we entered into Amendment No. 1 to the PSC with Guinea (the "PSC Amendment"). In May 2010, the government of Guinea issued a Presidential Decree approving the PSC, as amended by the PSC Amendment. The PSC Amendment clarified that we retained a Contract Area of approximately 9,650 square miles, which is approximately equivalent to 30% of the original Contract Area under the PSC, following a December 31, 2009 relinquishment of approximately 70% of the original Contract Area. The PSC Amendment requires that we relinquish an additional 25% of the retained Contract Area by September 30, 2013. Under the terms of the PSC Amendment, the first exploration period ended and the Company entered into the second exploration period on September 21, 2010. The second exploration period runs until September 2013, may be renewed to September 2016 and may be extended for one additional year to allow the completion of a well in process and for two additional years to allow the completion of the appraisal of any discovery made. Under the PSC Amendment, we were required to drill an exploration well, which had to be commenced by year-end 2011, and drilled to a minimum depth of 2,500 meters below seabed. This requirement was satisfied with the drilling of the Sabu-1 well which was commenced during October of 2011 and reached the minimum depth of 2,500 meters below the seabed in February of 2012. We were also required to acquire at least 2,000 square kilometers of 3D seismic data which was satisfied by the 3,600 square kilometer seismic acquisition in 2010-2011. To satisfy the September 2013-2016 work requirement, we are required to drill an additional exploration well, which is to be commenced by the end of September 2016, to a minimum depth of 2,500 meters below seabed. The PSC Amendment requires the expenditure of $15 million on each of the exploration wells ($30 million in the aggregate). We spent greater than $15 million on the first exploration well and we expect the cost of our next exploration well to be significantly greater than $15 million.

        Fulfillment of work obligations exempts us from expenditure obligations, and exploration work in excess of minimum work obligations for each exploration period may be carried forward to the following exploration period.

        Under the PSC Amendment, Guinea may participate in development of any discovery at a participating interest of up to 15% of costs being carried for its share. The cost of that carry is to be recovered out of 62.5% of Guinea's share of cost and profit oil. The PSC Amendment removed the right of first refusal held by us covering the relinquished acreage under the original PSC. The PSC Amendment clarified that only those eligible expenditures, which were made following the date the PSC was signed, on September 22, 2006, are eligible for cost recovery. We are required to establish an annual training budget of $200,000 for the benefit of Guinea's oil industry personnel, and we are also obligated to pay an annual surface tax of $2.00 per square kilometer on our retained Concession acreage. The PSC Amendment also provides that should the Guinea government note material

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differences between provisions of the PSC Amendment and international standards or the Petroleum Code, the parties will renegotiate the relevant articles.

Assignment of Participating Interest to Dana

        On December 4, 2009, we entered into a Sale and Purchase Agreement ("SPA") with Dana for Dana to acquire a 23% participating interest in the PSC. On January 28, 2010, we closed on the transaction with Dana, and we entered into an Assignment of Participating Interest (the "Assignment"), a Deed of Assignment and Joint Operating Agreement ("JOA"). Pursuant to the Assignment, we assigned to Dana an undivided 23% of our participating interest in the contractual interests, rights, obligations and duties under the PSC. As required by the PSC, the Deed of Assignment was delivered as the necessary notice of the Assignment to be given to the Guinean government.

        As part of the obligation to bear the proportionate share of costs, the SPA required Dana to make a cash payment to us upon closing the Assignment to Dana in the amount of $1.7 million for Dana's pro-rata portion of accrued expenditures associated with our marine 2D seismic data acquisition program within the Contract Area. The $1.7 million payment was received by us on February 4, 2010 and was recorded as a reduction in the carrying value of our Concession.

Joint Operating Agreement

        In May 2010, we received an administrative order from the Ministry of Mines and Geology of Guinea, referred to as an arrêté, confirming the Guinea government's approval of the assignment of a 23% participating interest in the PSC to Dana. On May 20, 2010, we received a payment of $19.6 million in cash from Dana as payment for the assigned 23% participating interest in the contractual interests, rights, obligations and duties under the PSC.

        The JOA appoints us as the operator for purposes of conducting oil and gas exploration and production activities within the retained Contract Area. We share operating costs of joint operations with Dana in proportion to the parties' respective participating interests (Hyperdynamics, 77% and Dana, 23%). An operating committee and voting procedures are established in the JOA whereby managerial and technical representatives of Hyperdynamics and Dana make decisions regarding joint operations, exploration and appraisal of commercial discoveries, and the disposition of commercial production. The JOA places restrictions upon the transfer of the parties' respective participating interests in the form of a right of first purchase that is triggered by a proposed transfer.

PGS Geophysical AS, Norway

        On June 11, 2010, we entered into an Agreement for the Supply of Marine Seismic Data ("PGS Seismic Contract") with PGS Geophysical AS, Norway ("PGS"). Under the terms of the PGS Seismic Contract, PGS agreed to conduct the acquisition phase of a 3,635 square kilometer 3D seismic survey of the area that is subject to our rights, or concession, to explore and exploit offshore oil and gas reserves off the coast of Guinea. The intended purpose of the PGS seismic survey was to obtain detailed imaging of the multiple prospects which were identified from our prior 2D seismic data acquisition over the Concession.

        Under the terms of the PGS Seismic Contract, PGS agreed to carry out the survey in two separate portions that commenced in August 2010. The acquisition work was completed in December 2010, with a final cost under the PGS Seismic Contract of approximately $24.7 million, including mobilization and demobilization expenses. Our share of the cost was 77% of that amount, or approximately $19.0 million.

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PGS Americas, Inc.

        We contracted with PGS Americas, Inc. to process the data from the PGS seismic acquisition surveys completed in December 2010. The processing work was completed in June 2011 with a final cost of approximately $3.5 million with our 77% share being approximately $2.7 million.

CGG Veritas

        The acquisition phase of the most recent 3D seismic survey covering approximately 4,000 square kilometers in the deeper water portion of the Concession (referred to as Survey C) was recently completed by the CGG Veritas Ocean Endeavor. Processing of the most recent 3D data set is in progress. Completion of this processing 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 based upon our current 77% interest in the Guinea Concession, of which, we have paid $25.8 million on a gross basis as of June 30, 2012 or $19.9 million based upon our 77% share.

AGR Peak Well Management Limited

        We contracted with AGR Peak Well Management Limited ("AGR") to manage our exploration drilling project in offshore Republic of Guinea and to handle well construction project management services, logistics, tendering and contracting for materials as well as overall management responsibilities for the drilling program. The Sabu-1 well was drilled under this contract. The cost incurred on the Sabu-1 well is approximately $125.9 million, or approximately $96.9 million for our 77% interest which was significantly higher than expected. On June 21, 2012, our wholly-owned subsidiary, SCS, filed suit against AGR following unsuccessful negotiations to address cost overruns associated with the Sabu-1 well.

Exploration Strategies and Work to Date

        Our business plan incorporates a multi-channel approach to exploring and developing our Contract Area under the PSC. We plan to continue to develop and evaluate drilling targets and complete technical work and planning with Dana. We have completed the acquisition phase of the most recent 3D seismic survey covering approximately 4,000 square kilometers on our Contract Area. This most recent 3D survey allows us to study Upper Cretaceous submarine fan structures along the Transform Margin trend of Guinea.

        From the inception of our involvement in Guinea beginning in 2002, we have accomplished critical exploration work including:

    a 1,000 kilometer 2D seismic data shoot, the processing of the seismic data acquired, and the evaluation of that data and data that had been acquired in the past;

    a 4,000 kilometer 2D seismic data shoot, the processing of the seismic data acquired, and the evaluation of that data and data that had been acquired in the past;

    acquisition and geochemical analysis of core samples from the Contract Area and a satellite seeps study;

    third party interpretation and analysis of our seismic data, performed by PGS;

    reconnaissance within Guinea to evaluate drilling infrastructure, support services, and the operating environment;

    a 2,800 kilometer 2D seismic data shoot, the processing of the seismic data acquired, and the evaluation of that data and data that had been acquired in the past;

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    an oil seep study performed by TDI Brooks;

    a 10,400 kilometer 2D seismic data shoot, the processing of the seismic data acquired, and the evaluation of that data;

    a 3,635 square kilometer 3D seismic data shoot, the processing of the seismic data acquired, and the evaluation of that data;

    completion of the drilling of the Sabu-1, an exploratory well and continuing evaluation of core and fluid samples from that well bore; and

    a 4,000 square kilometer 3D seismic data shoot, the continuing processing of the seismic data acquired, and the evaluation of that data.

        We are currently seeking to sell, or farm-out, a 40% interest in the Concession to an experienced oil and gas company that would also serve as operator of the project going forward. Several companies are reviewing our data, and we expect the farm-out process to be completed by the end of calendar year 2012.

Political Climate and Social Responsibility in Guinea

        We established in Guinea, SCS Guinea SARL ("SCSG"), as a wholly owned subsidiary of SCS. SCSG's results are included in SCS. SCSG maintains a visible in-country presence and conducts public relations programs to educate the Guinea people and its government about the importance of their petroleum resources and our role in helping Guinea realize the benefits from exploiting these resources. As part of the public relations program, SCSG makes donations to projects which improve conditions in villages, to non-governmental organizations, to schools, and to religious organizations in order to support these efforts as well as to cultivate positive public sentiment towards us in Guinea. Guinea is an emerging democracy, and it has unique social, political, and economic challenges. Public opinion strongly influences the political decision-making process. Therefore, our public relations and social programs support a strategy to maintain a positive corporate image for us in Guinea.

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DESCRIPTION OF OIL AND GAS PROPERTIES

        The Contract Area is located in the Transform Margin play, offshore Guinea. We have the exclusive exploration and production rights to explore and develop approximately 9,650 square miles in offshore Guinea (see map below).

GRAPHIC

        Our prospects are set in an underexplored basin among multiple highly prospective trends with multiple play types: Turbidite fans, 4-way closures and Neocomian-age Carbonates.

        The concession has had two wells drilled to date: the GU-2B-1 well (1977) and the Sabu-1 well (2012). The GU-2B-1 well was drilled by another company in 100 meters of water reaching a total depth of 3,353 meters below sea level. Drilling of the Sabu-1 well, was finished in February 2012 in 710 meters of water with the Jasper Explorer Drillship, reaching a total depth of 3,601 meters below sea level.

        The GU-2B-1 well drilled in 1977 demonstrated good Upper Cretaceous shelf reservoirs and source rock. The oil seep and oil slick evaluation done by us in 2009 indicated a working petroleum system with mature Upper Cretaceous marine source. Well data from the Sabu-1 well also confirmed to us the presence of a working petroleum system. Hydrocarbons in fluid inclusions in the rock drilled in the well demonstrate that the well was part of an oil-migration pathway, and oil and gas shows during drilling of the well indicate the presence of hydrocarbons in the upper Cretaceous section. Our well-log interpretations indicated residual oil (noncommercial oil saturations) in a 400-meter section of the Upper Cretaceous. The fluid sampling of Upper Cretaceous intervals did not find movable oil. Our interpretation is that the Sabu-1 well was not a commercial success because it lacked a reservoir seal (such as thick marine shales or reservoir-seal pairs) needed for a commercial accumulation.

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        The Concession is covered by approximately 18,200 kilometers of 2D seismic acquired by us and 7,635 square kilometers of 3D seismic (with 4,000 square kilometers acquired during fiscal 2012 in the deepwater portion of the block). The most recent 3D seismic (Survey C), currently being interpreted using an early "fast-track" version of processing, shows thick wedges of sediment that may contain deep water sandstone reservoirs with marine shale seals which can trap significant oil accumulations, similar to recent discoveries on trend. The Sabu-1 well results, demonstrating good reservoir and a working petroleum system, should de-risk the deeper water exploration program and support the possibility of a continuation into Guinea of the oil-prone play along the Equatorial Atlantic margin.

        Multiple recent discoveries have been made by other companies along the Equatorial Atlantic margin (the Transform Margin play), extending from Ghana to Sierra Leone and now possibly into Guinea. In addition, the Central North Atlantic margin of northwest Africa, located to the north, appears to continue southward into offshore Guinea and the northern portion of the PSC. Accordingly, the discoveries and producing fields along the Central North Atlantic margin from Mauritania through Senegal and Guinea Bissau indicate to us additional exploration potential for the northern portion of the Concession.

        During the remainder of 2012, we intend to continue to process and interpret the 3D seismic survey over the deep water fan trend and analyze the Sabu-1 well data with an intention to initiate a new drilling program. The 3D seismic profile from fast track processing of 2012 survey represents an early view of the most recent 3D survey (Survey C) where deep-water submarine fan geometries can be seen.

Reserves Reported To Other Agencies

        We have not reported any estimates of proved or probable net oil or gas reserves to any federal authority or agency since July 1, 2008, on producing properties owned in the United States at that time, but subsequently sold in 2009.

Production

        As a result of the 2009 sale of our oil and gas operations located in the United States, we currently have no producing properties and have had no production during the years covered by these financial statements.

Delivery Commitments

        We currently have no existing contracts or agreements obligating us to provide a fixed or determinable quantity of oil or gas in the future.

Employees and Independent Contractors

        As of September 6, 2012, we have 35 full time employees based in the United States, 2 full time employees in the United Kingdom and 9 full time employees in Guinea. Additionally, we use independent contractors in the United States and the United Kingdom to help manage fixed overhead expenses. No employees are represented by a union.

Competition

        Many companies and individuals engage in drilling for gas and oil and there is competition for the most desirable prospects. We expect to encounter intense competition from other companies and other entities in the sale of our oil and gas. We could be competing with numerous oil and gas companies which may have financial resources significantly greater than ours.

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Productive Wells and Acreage; Undeveloped Acreage

        We currently do not have any productive oil or gas wells, and do not have any developed acres (i.e. acres spaced or assignable to productive wells). The following table sets forth undeveloped acreage that we held as of June 30, 2012:

 
  Undeveloped
Acreage(1)(2)
 
 
  Gross
Acres
  Net
Acres
 

Foreign

             

Offshore Guinea

    6,176,000     4,755,520  
           

Total(3)

    6,176,000     4,755,520  

(1)
A gross acre is an acre in which a working interest is owned. A net acre is deemed to exist when the sum of fractional ownership working or participation interests in gross acres equals one. The number of net acres is the sum of the fractional working interests owned in gross acres expressed as whole numbers and fractions thereof. Undeveloped acreage is considered to be those leased acres on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of crude oil and natural gas regardless of whether or not such acreage contains proved reserves.

(2)
One square mile equals 640 acres. Our Contract Area is approximately 9,650 square miles. We have a 77% working interest in this contract area.

(3)
The PSC requires that we relinquish 25% of the retained Contract Area by September 2013.

Drilling Activity

        An exploratory well is a well drilled to find and produce crude oil or natural gas in an unproved area, to find a new reservoir in a field previously found to be productive of crude oil or natural gas in another reservoir, or to extend a known reservoir. A development well is a well drilled within the proved area of a crude oil or natural gas reservoir to the depth of a stratigraphic horizon known to be productive. We drilled no development wells for each of the years ended June 30, 2012, 2011 or 2010.

        In October 2011, we commenced drilling operations on the Sabu-1 well. In February 2012, the Sabu-1 exploratory well reached the planned total depth of 3,600 meters. We drilled no exploratory wells for the years ended June 30, 2011 or 2010.

Geographical Information

        The following table sets out long-lived assets associated with Guinea, including our investment in the Concession offshore Guinea as well as fixed assets:

 
  June 30,
2012
  June 30,
2011
  June 30,
2010
 

Long-lived assets related to Guinea

  $ 39,617,000   $ 36,716,000   $ 339,000  

        The seismic data we have collected and our geological and geophysical work product are maintained in our offices in the United States. The June 30, 2012 amount of $39.6 million is net of $116.3 million of costs which were fully amortized though our Full-Cost Ceiling Test as a result of the Sabu-1 exploratory well being non-commercial.

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Cost of Compliance with Environmental Laws

        Environmental laws have not materially hindered nor adversely affected our business. Capital expenditures relating to environmental control facilities have not been prohibitive to our operations. We believe we are in compliance with all applicable environmental laws.

Available Information

        We are currently subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We file periodic reports, proxy materials and other information with the SEC. In addition, we expect to furnish stockholders with annual reports containing audited financial statements certified by our independent registered public accounting firm and interim reports containing unaudited financial information as may be necessary or desirable. We will provide without charge to each person who receives a copy of this report, upon written or oral request, a copy of any information that is incorporated by reference in this report (not including exhibits to the information that is incorporated by reference unless the exhibits are themselves specifically incorporated by reference). Such request should be directed to: Jason Davis, Secretary, Hyperdynamics Corporation, 12012 Wickchester Lane, Suite 475, Houston, Texas 77079, voice: (713) 353-9400, fax: (713) 353-9421. Our website Internet address is www.hyperdynamics.com.

        We provide free of charge on our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable.

        Members of the public may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, and Washington, DC 20549. Members of the public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The Internet address of the Commission is www.sec.gov. That website contains reports, proxy and information statements and other information regarding issuers, like Hyperdynamics, that file electronically with the Commission. Visitors to the Commission's website may access such information by searching the EDGAR database.

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Item 1A.    Risk Factors

        An investment in our common stock involves significant risks. Prior to making a decision about investing in common stock, and in consultation with your own financial and legal advisors, you should carefully consider, among other matters, the following risk factors. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently consider immaterial may also inadvertently affect us. If any of the following risks occur, our business, financial condition or results of operations could be materially harmed.

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. Any adverse development affecting our operations 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 drilled one exploratory well which had non-commercial results. 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, 2D and 3D 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 well encountered oil shows while drilling the targeted Upper Cretaceous section and our well-log interpretations indicated the presence of residual oil in non-commercial quantities. Subsequent analysis of rock samples from the well has confirmed the presence of hydrocarbons in fluid inclusions in the rock. Although there have been significant technological advancements in geophysical and petroleum science since 1977, and we have acquired significant 2D and 3D 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.

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

        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 ownership 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 Merrill Lynch 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," a 40% 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 year 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

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

        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.

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We have claims and lawsuits against us that may result in adverse outcomes.

        We are subject to a variety of claims and lawsuits concerning shareholder claims and other matters. Adverse outcomes in some or all of these claims may result in significant monetary damages or limit our ability to engage in our business activities. While we have director and officer insurance, it may not apply to or fully cover any liabilities we incur as a result of these lawsuits. Although management currently believes resolving all of these matters, individually or in the aggregate, will not have a material adverse impact on our financial statements, the litigation and other claims are subject to inherent uncertainties and management's view of these matters may change in the future. A material adverse impact on our financial statements also could occur for any period it was determined that an unfavorable final outcome is probable and reasonably estimable.

An inability to resolve the legal dispute associated with the cost of drilling the Sabu-1 well could adversely affect our consolidated results of operations and liquidity.

        Our wholly-owned subsidiary, SCS, has a pending lawsuit against AGR following unsuccessful negotiations to address the cost overruns associated with the Sabu-1 well. Although management believes this matter will not have a material adverse impact on our consolidated results of operations, the litigation and other claims are subject to inherent uncertainties and management's view of these matters may change in the future. To date, AGR has not yet filed its defense in this matter; however, we expect AGR to deny liability and to file a counterclaim against SCS. Also, AGR has made claims for additional cost of $8.5 million on a gross basis or $6.5 million based on our 77% share, which we dispute and have not included in our cost recorded to date. Resolution of this dispute may result in the recovery by us of a portion of the costs incurred to date, but an adverse outcome in this dispute may result in significant additional liability and may negatively impact our consolidated results of operations and liquidity.

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 well and moved $116.3 million to proved properties and fully amortized the $116.3 million in proved properties on our Statements of Operations for the year ended June 30, 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;

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    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.

        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 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 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 Sabu-1 well drilling costs, to complete the processing of the most recent 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 may continue to incur significant expenses over the next several years with our operations, including further 3D 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;

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    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;

    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,

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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;

    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. Accordingly, there may be limited or no value derived from any natural gas produced from our Guinea Concession.

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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.

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.

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        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.

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.

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.

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

        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 dependent 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.

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        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 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 $0.59 on May 14, 2012 for the fiscal year ended June 30, 2012. On September 6, 2012, the closing price of our common stock was $0.75. 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.

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We received a continued listing standards notice from the New York Stock Exchange and may be delisted if we do not regain compliance within the six months following the receipt of the notification.

        Our common stock has traded recently below $1.00 per share. As a result, we received a continued listing standards notice from the New York Stock Exchange (the "NYSE") on May 14, 2012. 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. 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 a material weakness in our internal controls for the year ended June 30, 2012, 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, 2012, have identified a control deficiency resulting from the lack of effective detective and monitoring controls being designed within internal control over financial reporting. This deficiency related to oversight and review of financial information in the area of income taxes. We plan to take measures to remedy this weakness in internal controls. 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.

        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

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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 1B.    Unresolved Staff Comments

        None.

Item 2.    Properties

        Information on Oil and Gas Properties is included in Item 1. Business above in this Annual Report on Form 10-K.

        Our executive and administrative offices are located at 12012 Wickchester Lane, Suite 475, Houston, Texas 77079 where we lease 14,673 square feet of space pursuant to a lease agreement with a 60 month term.

        The lease agreement is for 60 months beginning on March 1, 2010, the date we took possession of the property. We are obligated to make the following base rental payments: (i) $0.00 per month during months 1 - 9; (ii) $17,472 per month during months 10 - 12; (iii) $17,957 per month during months 13 - 24; (iv) $19,413 per month during months 25 - 36; (v) $21,354 per month during months 37 - 48; and (vi) $24,266 per month during months 49 - 60.

        During the fourth quarter of fiscal 2011, the lease was amended to include additional square footage. Under the amended lease agreement, we are obligated to make the following additional rental payments: (i) $4,537.50 per month from the date the expansion is complete through January 31, 2012; (ii) $4,663.54 per month from February 1, 2012 through January 31, 2013; (iii) $4,789.58 per month from February 1, 2013 through January 31, 2014; and (iv) $4,915.63 per month from February 1, 2015 through January 31, 2016. We completed the expansion and began making lease payments during the first quarter of fiscal 2012.

        In addition to the base rent, we are also responsible for the pro-rata share (10.664%) of excess operating expenses in connection with the property which amounted to $9,800 for fiscal year 2012. We also paid a security deposit of $50,000 at the time of execution of the lease agreement of which $35,000 was refunded based on the lease agreement during the fourth quarter of 2012.

Item 3.    Legal Proceedings

        From time to time, we and our subsidiaries are involved in business disputes. We are unable to predict the outcome of such matters when they arise. Currently pending proceedings, in our opinion, will not have a material adverse effect upon our consolidated financial statements. The following is a description of certain disputes involving us.

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. The lawsuit alleges, among other things, that we misrepresented the prospects and progress of our drilling operations, including our drilling of the Sabu-1 well and plans to drill the Baraka-1 well off the coast of the Republic of Guinea. The lawsuit seeks damages based on Sections 10(b) and 20 of the Securities Exchange Act of 1934, although the specific amount of damages is not specified. On June 1 and June 4, 2012, a number of parties made application to the Court to be appointed as lead plaintiff for this action, but a lead plaintiff has

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not yet been selected by the Court. We anticipate a consolidated amended complaint will be filed in the matter once a lead plaintiff is appointed.

        On April 5, 2012, a purported derivative action was filed in the District Court of Harris County, Texas, against all of our directors. The petition alleges that the directors breached their fiduciary duties in connection with positive statements about our drilling operations and the Guinea Concession and disclosures related to material weaknesses that we identified in our financial controls. The plaintiff seeks unspecified damages against our directors including restitution and disgorgement of profits and advances based on asserted causes of action for breach of fiduciary duties, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets. On July 12, 2012, we and our directors filed special exceptions to the derivative lawsuit on the basis that the plaintiff failed to plead demand futility. The plaintiff did not make a demand on the Hyperdynamics Board prior to filing the derivative suit; therefore the lawsuit would be subject to dismissal unless the plaintiffs' pleadings sufficiently demonstrated that demand would be futile. In response, the plaintiff amended his petition on August 13, 2012.

Iroquois Lawsuit

        On May 9, 2012, a lawsuit was filed in the Supreme Court of the State of New York against us and all of our directors. The plaintiffs, five hedge funds that invested in us in early 2012, allege that we breached an agreement with the plaintiffs, and that we and the directors made certain negligent misrepresentations relating to the company's drilling operations. Among other claims, the plaintiffs allege that we misrepresented the status of our drilling operations and the speed with which the drilling would be completed. The plaintiffs advance claims for breach of contract and negligent misrepresentation and seek damages in the amount of $18.5 million plus pre-judgment interest. The plaintiffs also seek indemnity for their legal expense. On July 12, 2012, we and the directors moved to dismiss the suit for failure to state a claim as to all defendants and for lack of personal jurisdiction over the director defendants. The parties are currently briefing the motion.

AGR Lawsuit

        On June 21, 2012, our wholly-owned subsidiary, SCS, filed suit against AGR following unsuccessful negotiations to address the cost overruns associated with the Sabu-1 well drilled off the coast of the Republic of Guinea. The suit was filed in London, England in the High Court of Justice, Queen's Bench Division, Technology and Construction Court. SCS is seeking to recover damages and other relief from AGR for claims of mismanagement of the drilling of the Sabu-1 well and various breaches of contract that resulted in the cost overruns. Among other things, the lawsuit alleges that AGR mismanaged the selection, reconditioning and crew staffing for the Jasper Explorer drilling rig used to drill the Sabu-1 well, mismanaged other subcontractor relationships, failed to seek cost relief from its subcontractors, and failed to return to SCS inventory purchased by SCS but not used in the drilling of Sabu-1 well. AGR has not yet filed its defense in that matter, but has indicated it expects to file a counterclaim.

Item 4.    Mine Safety Disclosures

        None.

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PART II

Item 5.    Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

Price Range of Common Stock

        Shares of our common stock, for the periods presented below, were traded on the NYSE. The following table sets forth the quarterly high and low sales prices per share for our common stock, as reported by the NYSE.

 
  High   Low  

Fiscal 2012:

             

Fourth Quarter

  $ 1.30   $ 0.59  

Third Quarter

    3.43     1.18  

Second Quarter

    5.39     2.04  

First Quarter

    5.58     3.24  

Fiscal 2011:

             

Fourth Quarter

  $ 4.75   $ 3.18  

Third Quarter

    7.40     3.91  

Second Quarter

    5.21     2.26  

First Quarter

    2.49     0.99  

        On September 6, 2012, the last price for our common stock as reported by the NYSE was $0.75 per share and there were approximately 180 stockholders of record of the common stock.

Dividends

        We have not paid, and we do not currently intend to pay in the foreseeable future, cash dividends on our common stock. The current policy of our Board of Directors is to retain all earnings, if any, to provide funds for operation and expansion of our business. The declaration of dividends, if any, will be subject to the discretion of the Board of Directors, which may consider such factors as our results of operations, financial condition, capital needs and acquisition strategy, among others.

Equity Compensation Plan Information

        The following table gives aggregate information under all equity compensation plans of Hyperdynamics as of June 30, 2012.


Equity Compensation Plan Information

Plan Category
  Number of Securities
to be Issued Upon
Exercise of
Outstanding Options,
Warrants, and Rights
  Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
  Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
(Excluding Securities
Reflected in Column
(A)
 
 
  A
  B
  C
 

Equity compensation plans approved by security holders

    12,495,316   $ 2.09     2,044,019  

Equity compensation plans not approved by security holders

    N/A     N/A     N/A  
               

Total

    12,495,316   $ 2.09     2,044,019  
               

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        The Stock and Stock Option Plan (the "1997 Plan") of Hyperdynamics was adopted May 7, 1997 and amended on December 3, 2001, on January 21, 2005, and on February 20, 2008. The total number of shares authorized under the Plan, as amended, was 14,000,000. The Board terminated the 1997 Plan effective upon stockholder approval of the 2010 Equity Incentive Plan (the "2010 Plan").

        Our 2008 Restricted Stock Award Plan (the "2008 Plan") was adopted on February 20, 2008. The total number of shares authorized under the 2008 Plan was 3,000,000. The Board terminated the 2008 Plan effective upon stockholder approval of the 2010 Plan.

        On February 18, 2010, at our annual meeting of stockholders, the stockholders approved the 2010 Plan. 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. Shares of common stock, options, or restricted stock can only be granted under the Plan within 10 years from the effective date of February 18, 2010. A maximum of 10,000,000 shares are issuable under the 2010 Plan.

        The purpose of the Plan is to further our interest, and the interest of our subsidiaries and our stockholders by providing incentives in the form of stock or stock options to key employees, consultants, directors, and vendors who contribute materially to our success and profitability. We believe that our future success will depend in part on our continued ability to attract and retain highly qualified personnel as employees, independent consultants, and directors. The issuance of stock and grants of options will recognize and reward outstanding individual performances and contributions and will give such persons a proprietary interest in us, thus enhancing their personal interest in our continued success and progress. We pay wages, salaries, and consulting rates that we believe are competitive. We use the 2010 Plan to augment our compensation packages.

        The following table provides a reconciliation of the securities remaining available for issuance as of June 30, 2012 under the 2010 Plan:

 
  2010 Plan  

Shares available for issuance, June 30, 2011

    1,069,480  

Increase in shares available for issuance

    5,000,000  

Stock options granted

    (4,273,461 )

Previously issued options cancelled or expired

    248,000  
       

Shares available for issuance, June 30, 2012

    2,044,019  
       

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Stock Performance Chart

        The following chart compares the yearly percentage change in the cumulative stockholder return on our common stock from July 1, 2007 to the end of the fiscal year ended June 30, 2012 with the cumulative total return on the (i) NYSE ARCA Oil & Gas Index and (ii) Russell 2000. The comparison assumes $100 was invested on July 1, 2007 in our common stock and in each of the foregoing indices and assumes reinvestment of dividends.

Performance Graph

GRAPHIC

        In accordance with the rules and regulations of the SEC, the above stock performance chart shall not be deemed to be "soliciting material" or to be "filed" with the SEC or subject to Regulations 14A or 14C of the Securities Exchange Act of 1934 (the "Exchange Act") or to the liabilities of Section 18 of the Exchange Act and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except to the extent we specifically incorporate it by reference into such filing.

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Item 6.    Selected Financial Data

 
  Year ended June 30,  
(In thousands, except earnings per share data)
  2012   2011   2010   2009   2008  

Revenue

  $   $   $   $   $  

Full amortization of proved oil and gas properties(1)

  $ (116,312 ) $   $   $   $  

Loss from operations

  $ (149,201 ) $ (10,869 ) $ (8,048 ) $ (6,083 ) $ (7,971 )

Net loss

  $ (149,313 ) $ (11,238 ) $ (8,009 ) $ (8,883 ) $ (9,505 )

Basic loss per common share

  $ (0.93 ) $ (0.09 ) $ (0.09 ) $ (0.15 ) $ (0.17 )

Diluted loss per common share

  $ (0.93 ) $ (0.09 ) $ (0.09 ) $ (0.15 ) $ (0.17 )

Weighted Average Shares Outstanding

    160,687     125,998     85,914     61,845     56,331  

Cash

 
$

37,148
 
$

79,889
 
$

26,040
 
$

1,360
 
$

1,480
 

Oil and Gas Properties

  $ 39,278   $ 36,200   $ 92   $ 7,663   $ 7,314  

Total Assets

  $ 102,796   $ 192,683   $ 27,220   $ 9,440   $ 12,950  

Long-Term Liabilities

  $ 125   $ 138   $ 653   $ 1,735   $ 2,019  

Shareholder's Equity

  $ 76,067   $ 189,429   $ 21,526   $ 2,669   $ 6,673  

(1)
During the year ended June 30, 2012 we completed the drilling of the Sabu-1 well, our first exploratory well in our Guinea Concession, which was non-commercial. As a result, we evaluated certain geological and geophysical related costs in unproved properties along with the drilling costs of the Sabu-1 well and moved $116,312,000 to proved properties. Since we have no proved reserves to include in the Full-Cost Ceiling Test, the entire $116,312,000 resulted in the full amortization of our proved oil and gas properties.

Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

        Our corporate mission is to provide energy for the future by exploring for, developing new, and re-establishing pre-existing sources of energy. We are currently exploring for oil and gas offshore Guinea, which will be our primary focus for the remainder of calendar year 2012. We intend to continue acquiring, exploring and developing oil and gas properties. At this time, we have no source of operating revenue and there is no assurance when we will, if ever. We have no operating cash flows and require substantial additional funds, through additional participants, securities offerings, or through other means, to fulfill our long-term business plans.

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

    Evaluating the data from the Sabu-1 exploratory well drilled in our Concession offshore Guinea during fiscal 2012.

    Process and interpret the most recent 3D seismic survey covering approximately 4,000 square kilometers on our Contract Area. The new deep water survey acquired during fiscal 2012 is adjacent to our Survey A, where we acquired our initial 3,635 square kilometer 3D seismic survey in 2010. The most recent 3D survey allows us to study Upper Cretaceous submarine fan structures along the Transform Margin trend of Guinea in Northwest Africa.

    We seek to sell, or farm-out, a 40% 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 year 2012.

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Analysis of changes in financial position

        Our current assets decreased by $94,093,000 from $136,816,000 on June 30, 2011 to $42,723,000 on June 30, 2012. The decrease in current assets is due to our fiscal 2012 capital expenditures, which lead to a decrease in cash from $79,889,000 at June 30, 2011, to $37,148,000 at June 30, 2012, and a decrease in short term investments from $55,368,000 at June 30, 2011 to zero at June 30, 2012.

        Our long-term assets increased $4,206,000, from $55,867,000 on June 30, 2011, to $60,073,000 on June 30, 2012. This increase was primarily due to our drilling activity related to the Sabu-1 exploratory well and our 4,000 square kilometer 3D seismic acquisition and processing, partially offset by our Full-Cost Ceiling Test amortization of $116,312,000 million resulting from the non-commercial drilling outcome, as required by Full-Cost Accounting rules. Additionally, the increase can be attributed to an increase in long term restricted cash from $18,300,000 at June 30, 2011 to $19,180,000 at June 30, 2012. Restricted cash as of June 30, 2011 and 2012 consists of cash held in escrow relating to our drilling contract with AGR. Under the terms of the drilling contract, we funded the escrow account for the sole purpose of funding our drilling project as overseen by AGR.

        Our current liabilities increased $23,488,000, from $3,116,000 on June 30, 2011 to $26,604,000 on June 30, 2012. Accounts payable at June 30, 2011, included amounts payable related primarily to our investments in our Concession and corporate activities, whereas accounts payable at June 30, 2012 includes costs associated with the drilling of our first well as well as seismic processing. Additionally, the increase in current liabilities can be attributed in part to an increase in accrued employee bonus expense resulting from the timing of bonus payments and increase in staff.

        Our long-term liabilities decreased from $138,000 at June 30, 2011, to $125,000 at June 30, 2012, due to the amortization of deferred rent during the year.

Results of Operations

        Based on the factors discussed below the net loss attributable to common shareholders for the year ended June 30, 2012, increased $138,075,000, to a net loss of $149,313,000, or $ 0.93 per share in the 2012 period from a net loss of $11,238,000, or $0.09 per share in the 2011 period, primarily relating to the amortization and write off of costs.

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

Comparison for Fiscal Year 2012 and 2011

        Revenues.    There were no revenues for the years ended June 30, 2012 and 2011.

        Depreciation.    Depreciation increased 134%, or $474,000 due to additional depreciation associated with assets placed in service in 2012 which relate primarily to assets put in place to drill our first exploratory well. Depreciation expense was $827,000 and $353,000 in the years ended June 30, 2012 and 2011, respectively.

        Selling, General and Administrative Expenses.    Our selling, general and administrative expenses were $22,062,000 and $10,516,000 for the years ended June 30, 2012 and 2011, respectively. This represents an increase of 110%, or $11,546,000 from the fiscal 2011 period to the fiscal 2012 period. The increase in expense was primarily attributable to a $6,716,000 increase in employee-related costs, of which approximately $2,849,000 was non-cash stock-based compensation related to options granted to employees and others. This was driven by an increase in our full time staff from 28 employees as of July 1, 2010 to 53 employees as of June 30, 2012. The staffing increase primarily related to personnel required for our activities in Guinea and our support staff. Additionally, we incurred approximately $3,747,000 in costs with respect to several prospective oil and gas investment opportunities in the current fiscal period.

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        Amortization and Write off of Costs.    We fully amortized our proved oil and gas properties of $116,312,000. As a result of the non-commercial Sabu-1 well drilling outcome, as required by Full-Cost Accounting rules, we evaluated and moved to proved properties $116,312,000 of costs which were then fully amortized though our Full-Cost Ceiling Test. Additionally we have written off a prospective investment deposit of $10,000,000.

        Other income (expense).    Other income (expense) totaled $(112,000) and $(369,000) for the years ended June 30, 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. However, we recognized an other than temporary impairment of available for sale securities of $472,000 during fiscal 2012.

        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 $126,312,000, and the increase in selling, general and administrative expenses of $11,546,000 our loss from continuing operations increased by $138,075,000, from $11,238,000 in the year ended June 30, 2011 to $149,313,000 for the year ended June 30, 2012.

        Discontinued Operations.    There were no discontinued operations for the 2012 or 2011 periods.

Comparison for Fiscal Year 2011 and 2010

        Revenues.    There were no revenues for the years ended June 30, 2011 and 2010.

        Depreciation.    Depreciation increased 126%, or $197,000 due to additional depreciation associated with assets placed in service in 2011. Depreciation expense was $353,000 and $156,000 in the years ended June 30, 2011 and 2010, respectively.

        Selling, General and Administrative Expenses.    Our selling, general and administrative expenses were $10,516,000 and $10,847,000 for the years ended June 30, 2011 and 2010, respectively. This represents a decrease of 3%, or $331,000.

        Loss from Operations.    Our loss from operations increased $2,821,000 from $8,048,000 in 2010 to $10,869,000 in 2011. During the 2010 period, we recognized a $2,955,000 gain on sale of a participation interest in unevaluated oil and gas properties resulting from the 23% participation interest in our Concession being assigned to Dana. This gain was recognized in May 2010 and represented the excess of the $19.6 million proceeds received over the amount of our investment in the Concession as of that date.

        Other income (expense).    Other income (expense) totaled $(369,000) and $(726,000) for the years ended June 30, 2011 and 2010, respectively. In 2011, we recognized a non-cash loss on the derivative liability related to the YA Global warrants of $771,000, all of which related to the exercise of warrants classified as derivative liabilities. In 2010, we recognized a non-cash gain on the derivative liability of $279,000, $327,000 of which was unrealized gain on the change in fair value of the liability and $48,000 loss which was related to the exercise of warrants classified as derivative liabilities. Interest income (expense) was $402,000 for the 2011 period, versus ($707,000) for the 2010 period. The higher interest income in 2011 was primarily attributable to the interest income on short term investments on hand during the fourth quarter. The lower interest expense in 2011 is primarily due to the early conversion of convertible debentures outstanding during the fiscal 2010 period and the expensing of the associated debt discount and we recognized a loss on extinguishment of the remaining convertible debenture balance of ($298,000), primarily attributable to the expensing of the remaining discount associated with these debentures.

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        Loss from Continuing Operations.    Based on the items discussed above, our loss from continuing operations increased by 28%, or $2,464,000, from $8,774,000 in the year ended June 30, 2010 to $11,238,000 for the year ended June 30, 2011.

        Discontinued Operations.    There were no discontinued operations for the 2011 period, while there was a gain of $765,000 for the 2010 period.

Liquidity and Capital Resources

Capital Resource Considerations

        We completed drilling of our first exploration well, the Sabu-1 well in February 2012. The cost incurred on the Sabu-1 well is $125.9 million, or approximately $96.9 million for our 77% interest. The high cost of the Sabu-1 well 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 $28,162,000. 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 farm-out additional interests in the Concession, our percentage will decrease. Although we have been successful in raising capital and in 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 Merrill Lynch as an advisor to assist us in connection with the potential sale of an interest in the Concession. We seek to sell, or farm-out, a 40% interest in the Concession to an experienced oil and gas company that would also serve as operator of the project going forward. Several companies are reviewing data, and we expect the farm-out process to be completed by the end of calendar year 2012.

Liquidity

        On June 30, 2012, we had $37,148,000 in cash and $19,180,000 in restricted cash, which is held in escrow in connection with our drilling contract with AGR. We had $26,729,000 in liabilities, which are comprised of current liabilities of $26,604,000 and noncurrent liabilities of $125,000.

        We plan to use our existing cash to fund our portion of the remaining expenditures related to the Sabu-1 well. The cost incurred on the Sabu-1 well is $125.9 million, or $96.9 million for our 77% interest. We have paid approximately $113.6 million of the well costs on a gross basis, or approximately $87.5 million based on our current 77% interest, as of June 30, 2012. As described in Legal Proceedings, we have filed suit against AGR following unsuccessful negotiations to address the cost overruns associated with the Sabu-1 well. Payment of the remaining drilling costs is pending resolution of this dispute. To date, AGR has not yet filed its defense in this matter; however, AGR has made claims for additional cost of $8.5 million on a gross basis or $6.5 million based on our 77% share which we dispute and have excluded from cost incurred to date. Resolution of this dispute may result is the recovery of a portion of the costs incurred to date, however, it is possible that the resolution of this dispute may result in additional liability associated with disputed costs.

        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 paid $25.8 million on a gross basis as of June 30, 2012 or $19.9 million based upon our 77% share. We plan to use our existing cash to fund these remaining expenditures.

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        After giving effect for the remaining liabilities and excess supplies associated with the Sabu-1 well and for the remaining costs associated with the 3D seismic survey, our cash would be in the range of $35 - 40 million.

        We are currently involved in various legal proceedings. We are unable to predict the outcome of such matters; however, an adverse development could have an impact on liquidity.

        Net cash used in operating activities for continuing operations for the year ended June 30, 2012 was $12,438,000 compared to $11,782,000 for the year ended June 30, 2011. Cash used in investing activities for continuing operations for the year ended June 30, 2012 was $59,135,000 compared to $108,823,000 in the year ended June 30, 2011. This decrease was primarily due to proceeds from the sale of available for sale securities in the current year as compared to the purchase of available for sale securities in the prior year. This was offset by an increase in expenditures associated with the drilling of our first well. There was net cash provided by financing activities for the year ended June 30, 2012 of $28,832,000 compared to $174,454,000 during the year ended June 30, 2011. We received approximately $165,999,000 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 $28,162,000 from the issuance of stock.

Contractual Commitments and Obligations

        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.


Disclosure of Contractual Obligations as of June 30, 2012

 
  Payments due by period ($thousands)  
Contractual Obligations
  Total   Less than
1 year
  1 - 3 years   3 - 5 years   More than
5 years
 

Installment Obligations

  $ 143   $ 143   $   $   $  

Operating Lease Obligations

    852     297     555          
                       

Total(1)

  $ 995   $ 440   $ 555   $   $  
                       

(1)
We are subject to certain commitments under the PSC as discussed in Item 1 above.

CRITICAL ACCOUNTING POLICIES

        Our Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those estimates that may have a significant effect on our financial condition and results of operations. Our significant accounting policies are disclosed in Note 1 to our Consolidated Financial Statements. The following discussion of critical accounting policies addresses those policies that are both important to the portrayal of our financial condition and results of operations and require significant judgment and estimates. We base our estimates and judgment on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

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Oil and Gas Properties

        We account for oil and natural gas producing activities using the full cost method of accounting as prescribed by the United States Securities and Exchange Commission (SEC). Accordingly, all costs incurred in the acquisition, exploration, and development of proved oil and natural gas properties, including the costs of abandoned properties, dry holes, geophysical costs, and annual lease rentals are capitalized. All selling, general and administrative corporate costs unrelated to drilling activities are expensed as incurred. Sales or other dispositions of oil and natural gas properties are accounted for as adjustments to capitalized costs, with no gain or loss recorded unless the ratio of cost to proved reserves would significantly change, or to the extent that the sale proceeds exceed our capitalized costs. Depletion of evaluated oil and natural gas properties is computed on the units of production method based on proved reserves. The net capitalized costs of proved oil and natural gas properties are subject to a full cost ceiling limitation in which the costs are not allowed to exceed their related estimated future net revenues discounted at 10%, net of tax considerations. In accordance with SEC release 33-8995, prices based on the preceding 12-months' average price based on closing prices on the first day of each month, or prices defined by existing contractual arrangements, are used in deriving future net revenues discounted at 10%, net of tax. The application of the full cost method of accounting for oil and gas properties generally results in higher capitalized costs and higher depreciation, depletion and amortization rates compared to the successful efforts method of accounting for oil and gas properties.

Costs Excluded

        Costs associated with unevaluated properties are excluded from the full cost pool until we have made a determination as to the existence of proved reserves. We review our unevaluated properties at the end of each quarter to determine whether the costs incurred should be transferred to the full cost pool and thereby subject to amortization.

        We assess all items classified as unevaluated property on a quarterly basis for possible impairment or reduction in value. We assess properties on an individual basis or as a group if properties are individually insignificant. The assessment includes consideration of the following factors, among others: intent to drill; remaining lease term; geological and geophysical evaluations; drilling results and activity; the assignment of proved reserves; and the economic viability of development if proved reserves are assigned. We assess our unevaluated properties on a country-by-country basis. During any period in which these factors indicate an impairment, the cumulative drilling costs incurred to date for such property and all or a portion of the associated leasehold costs are transferred to the full cost pool and are then subject to amortization. However, if proved reserves have not yet been established in a full cost pool, these costs are charged against earnings. For international operations where a reserve base has not yet been established, an impairment requiring a charge to earnings may be indicated through evaluation of drilling results, relinquishing drilling rights or other information. At June, 30, 2012, we had $39,278,000 of capitalized costs associated with our Guinea operations, which is net of $116,312,000 in current period amortization as a result of moving costs incurred on previously unevaluated properties to proved properties during the period.

Environmental Obligations and Other Contingencies

        Management makes judgments and estimates in accordance with applicable accounting rules when it establishes reserves for environmental remediation, litigation and other contingent matters. Provisions for such matters are charged to expense when it is probable that a liability has been incurred and reasonable estimates of the liability can be made. Estimates of environmental liabilities are based on a variety of matters, including, but not limited to, the stage of investigation, the stage of the remedial design, evaluation of existing remediation technologies, and presently enacted laws and regulations. In future periods, a number of factors could significantly change our estimate of environmental

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remediation costs, such as changes in laws and regulations, or changes in their interpretation or administration, revisions to the remedial design, unanticipated construction problems, identification of additional areas or volumes of contaminated soil and groundwater, and changes in costs of labor, equipment and technology. Consequently, it is not possible for management to reliably estimate the amount and timing of all future expenditures related to environmental or other contingent matters and actual costs may vary significantly from our estimates.

Fair Value of our debt and equity transactions

        Many of our various debt and equity transactions require us to determine the fair value of a debt or equity instrument in order to properly record the transaction in our financial statements. Fair value is generally determined by applying widely acceptable valuation models, (e.g., the Black Scholes and binomial lattice valuation models) using the trading price of the underlying instrument or by comparison to instruments with comparable maturities and terms.

Share-Based Compensation

        We follow ASC 718 which requires recognition in the financial statements of the cost of employee services received in exchange for an award of equity instruments over the period the employee is required to perform the services in exchange for the award (presumptively the vesting period). ASC 718 also requires measurement of the cost of employee services received in exchange for an award based on the grant-date fair value of the award. We account for non-employee share-based awards based upon the provisions of ASC 505-50, "Equity-Based Payments to Non-Employees."

Item 7A.    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 offices in Guinea and the United Kingdom. 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. However, our costs for labor, supplies, and fuel could increase if the Guinea Franc or the Pound Sterling significantly appreciates against the US dollar. We do not hedge the exposure to currency rate changes. We do not believe our exposure to market risk to be material.

Item 8.    Financial Statements and Supplementary Data

        The Financial Statements and Supplementary Data information required hereunder is included in this report as set forth in the "Index to Financial Statements" on page F-1.

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HYPERDYNAMICS CORPORATION

Index to Financial Statements

TABLE OF CONTENTS

Report of Management on Internal control Over Financial Reporting

    F-2  

Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting

   
F-3
 

Report of Independent Registered Public Accounting Firm—Deloitte & Touche LLP

   
F-5
 

Report of Independent Registered Public Accounting Firm—GBH CPAs, PC

   
F-6
 

Consolidated Balance Sheets as of June 30, 2012 and 2011

   
F-7
 

Consolidated Statements of Operations for the fiscal years ended June 30, 2012, 2011 and 2010

   
F-8
 

Consolidated Statements of Shareholders' Equity and Comprehensive Income for the fiscal years ended June 30, 2012, 2011 and 2010

   
F-9
 

Consolidated Statements of Cash Flows for the fiscal years ended June 30, 2012, 2011 and 2010

   
F-10
 

Notes to Consolidated Financial Statements

   
F-12
 

Quarterly Results (Unaudited)

   
F-44
 

Supplemental Oil and Gas Information (Unaudited)

   
F-46
 

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REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

        Management of Hyperdynamics Corporation (the "Company" or "our"), including the Company's Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting for the Company as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company's internal control system was designed to provide reasonable assurance to the Company's management and board of directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.

        Internal control over financial reporting includes the controls themselves, monitoring (including internal auditing practices), and actions taken to correct deficiencies as identified.

        Internal control over financial reporting has inherent limitations and may not prevent or detect misstatements. The design of an internal control system is also based in part upon assumptions and judgments made by management about the likelihood of future events, and there can be no assurance that an internal control will be effective under all potential future conditions. Therefore, even those systems determined to be effective can provide only reasonable, not absolute, assurance with respect to the financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time.

        Management assessed the effectiveness of the Company's internal control over financial reporting as of June 30, 2012. In making this assessment, management used the criteria for internal control over financial reporting described in Internal Control—Integrated Framework by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Management's assessment included an evaluation of the design of the Company's internal control over financial reporting and testing of the operating effectiveness of its internal control over financial reporting. Management reviewed the results of its assessment with the Audit Committee of the Company's Board of Directors.

        We 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 financial information in the area of income taxes. This condition manifested in 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.

        As a result of this material weakness, we concluded that our internal controls over financial reporting were not effective as of June 30, 2012. 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.

        Deloitte & Touche LLP, the Company's independent registered public accounting firm, has issued an attestation report on the effectiveness on the Company's internal control over financial reporting as of June 30, 2012 which is included in Item 8. Consolidated Financial Statements and Supplementary Data.

/s/ RAY LEONARD

Ray Leonard
Chief Executive Officer
  /s/ PAUL REINBOLT

Paul Reinbolt
Chief Financial Officer

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL
CONTROL OVER FINANCIAL REPORTING

To the Board of Directors and Shareholders of
Hyperdynamics Corporation
Houston, Texas

        We have audited Hyperdynamics Corporation's (the "Company's") internal control over financial reporting as of June 30, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

        We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on that risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

        A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

        Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

        A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. Management's assessment identified a control deficiency related to oversight and review of financial information in the area of income taxes. This condition manifested in 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 noted deficiency represents a material weakness in the Company's internal controls over financial reporting.

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This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements as of and for the year ended June 30, 2012 of the Company and this report does not affect our report on such financial statements.

        In our opinion, because of the effect of the material weakness identified above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of June 30, 2012, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

        We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended June 30, 2012, of the Company and our report dated September 12, 2012 expressed an unqualified opinion on those financial statements.

/s/ Deloitte & Touche LLP
Houston, Texas
September 12, 2012

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
Hyperdynamics Corporation
Houston, Texas

        We have audited the accompanying consolidated balance sheets of Hyperdynamics Corporation (the "Company") as of June 30, 2012 and 2011, and the related consolidated statements of operations, shareholders' equity and comprehensive income, and cash flows for each of the two years in the period ended June 30, 2012. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. The financial statements of the Company for the year ended June 30, 2010 were audited by other auditors whose report, dated September 28, 2010, expressed an unqualified opinion on those statements.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Hyperdynamics Corporation as of June 30, 2012 and 2011, and the results of their operations and their cash flows for each of the two years in the period ended June 30, 2012, in conformity with accounting principles generally accepted in the United States of America.

        We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of June 30, 2012, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 12, 2012 expressed an adverse opinion on the Company's internal control over financial reporting because of a material weakness.

/s/ Deloitte & Touche LLP
Houston, Texas
September 12, 2012

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders
Hyperdynamics Corporation
Houston, Texas

        We have audited the accompanying consolidated statements of operations, shareholders' equity and cash flows for the year ended June 30, 2010. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

        We conducted our audit in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting for the year ended June 30, 2010. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of their operations and their cash flows for the year ended June 30, 2010, in conformity with accounting principles generally accepted in the United States of America.

/s/ GBH CPAs, PC

GBH CPAs, PC
www.gbhcpas.com
Houston, Texas

September 28, 2010

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HYPERDYNAMICS CORPORATION

CONSOLIDATED BALANCE SHEETS

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

 
  June 30,
2012
  June 30,
2011
 

ASSETS

             

Current assets:

             

Cash and cash equivalents

  $ 37,148   $ 79,889  

Available-for-sale securities

        55,368  

Accounts receivable—joint interest

    1,263     708  

Prepaid expenses

    753     702  

Other current assets

    3,559     149  
           

Total current assets

    42,723     136,816  

Property and equipment, net of accumulated depreciation of $1,443 and $798

    1,584     1,336  

Oil and gas properties, using full-cost accounting:

             

Proved properties

    116,312      

Unevaluated properties excluded from amortization

    39,278     36,200  
           

    155,590     36,200  

Less-accumulated depreciation, depletion and amortization

    (116,312 )    
           

    39,278     36,200  

Other Assets:

             

Restricted cash

    19,180     18,300  

Deposits

    31     31  
           

Total assets

  $ 102,796   $ 192,683  
           

LIABILITIES AND SHAREHOLDERS' EQUITY

             

Current liabilities:

             

Accounts payable and accrued expenses

  $ 26,604   $ 3,116  
           

Total current liabilities

    26,604     3,116  

Other non-current liabilities

    125     138  
           

Total liabilities

    26,729     3,254  
           

Commitments and contingencies (Note 11)

         

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; 166,937,731 and 155,792,524 shares issued and outstanding, respectively          

    167     156  

Additional paid-in capital

    312,075     276,484  

Accumulated other comprehensive loss

        (349 )

Accumulated deficit

    (236,175 )   (86,862 )
           

Total shareholders' equity

    76,067     189,429  
           

Total liabilities and shareholders' equity

  $ 102,796   $ 192,683  
           

   

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

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HYPERDYNAMICS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

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

 
  Year Ended June 30,  
 
  2012   2011   2010  

Costs and expenses:

                   

Depreciation

  $ 827   $ 353   $ 156  

Selling, general and administrative

    22,062     10,516     10,847  

Full amortization of proved oil and gas properties

    116,312          

Write-off of prospective investment deposit

    10,000          
               

Total costs and expenses

    149,201     10,869     11,003  
               

Gain on sale of interest in unevaluated oil and gas properties

            2,955  
               

Loss from operations

    (149,201 )   (10,869 )   (8,048 )
               

Other income (expense):

                   

Gain (Loss) on warrant derivative liability

        (771 )   279  

Other than temporary impairment of securities

    (472 )        

Realized gain on sale of securities

    59          

Interest income (expense), net

    301     402     (707 )

Loss on settlement of debt

            (298 )
               

Total other income (expense)

    (112 )   (369 )   (726 )
               

Loss from continuing operations before income tax

    (149,313 )   (11,238 )   (8,774 )

Income tax

             

Income from discontinued operations, net of tax (including gain on sale of $765 in 2010)

            765  
               

Net loss

  $ (149,313 ) $ (11,238 ) $ (8,009 )
               

Basic and diluted income (loss) per common share

                   

From continuing operations

  $ (0.93 ) $ (0.09 ) $ (0.10 )

From discontinued operations

  $ 0.00   $ 0.00   $ 0.01  
               

Net loss attributable to common shareholders

  $ (0.93 ) $ (0.09 ) $ (0.09 )
               

Weighted average shares outstanding—basic and diluted

    160,687,318     125,997,638     85,913,956  

   

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

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HYPERDYNAMICS CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND
COMPREHENSIVE INCOME

(In Thousands, Except Number of Shares)

 
  Series A
Preferred
  Series B
Preferred
   
   
   
   
   
   
 
 
  Common Stock    
   
  Accumulated
Other
Comprehensive
Income (Loss)
   
 
 
  Additional Paid-
in Capital
  Accumulated
Deficit
   
 
 
  Shares   Amount   Shares   Amount   Shares   Amount   Total  

Balance at July 1, 2009

    1,945   $     2,406   $     64,162,813   $ 64   $ 70,220   $ (67,615 ) $   $ 2,669  
                                           

Common stock issued for:

                                                             

Services

                    442,049         324             324  

Conversion of Series B Preferred Stock

            (2,406 )       15,822,222     16     (16 )            

Conversion of debentures

                    1,949,411     2     1,294             1,296  

Cash

                    16,878,096     17     17,183             17,200  

Exercise of warrants

                    4,646,465     5     4,409             4,414  

Cashless Exercise of options

                    124,653                      

Cashless Exercise of warrants classified as a derivative

                    201,490         723             723  

Amortization of fair value of stock options

                              1,579             1,579  

Discount related to modification of convertible debt

                            1,172             1,172  

Warrant repricing charged to interest expense

                            158             158  

Warrant repricing

                                                             

Deemed dividend

                            322             322  

Deemed dividend

                            (322 )           (322 )

Net loss

                                (8,009 )       (8,009 )
                                           

Balance, June 30, 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

                                (149,313 )       (149,313 )

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

                                                    472     472  

Unrealized Gain (Loss) on available-for-sale securities

                                    (123 )   (123 )
                                                             

Total Comprehensive (Loss)

                                                          (148,964 )

Common stock issued for:

                                                             

Cash

                    10,000,000     10     28,152             28,162  

Exercise of warrants

                    340,208                      

Exercise of options

                    804,999     1     669             670  

Amortization of fair value of stock options

                            6,770             6,770  
                                           

Balance, June 30, 2012

      $       $     166,937,731   $ 167   $ 312,075   $ (236,175 ) $   $ 76,067  
                                           

   

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

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HYPERDYNAMICS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

 
  Years Ended June 30,  
 
  2012   2011   2010  

CASH FLOWS FROM OPERATING ACTIVITIES:

                   

Net loss

  $ (149,313 ) $ (11,238 ) $ (8,009 )

Income from discontinued operations

            (765 )

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

                   

Depreciation

    827     353     156  

Full amortization of proved oil and gas properties

    116,312          

Write-off of prospective investment deposit

    10,000          

Common stock issued for services

            143  

Stock based compensation

    5,025     2,176     1,579  

Variable share issuance obligation

            (374 )

Loss on settlement of debt

            298  

Gain on sale of oil and gas properties

            (2,955 )

Gain (Loss) on warrant derivative liability

        771     (279 )

Interest accreted to debt principal

            342  

Repricing of warrants

            158  

(Gain) loss on disposition of assets

            32  

Amortization of discount and financing costs on debt

            144  

Amortization of premium on short term investments

    1,562          

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

    472          

Unrealized gain on available-for-sale securities

    (123 )        

Changes in operating assets and liabilities:

                   

Advances to Joint Interest Partner

    (555 )   (558 )    

Accounts receivable

            (150 )

Prepaid expenses

    (51 )   (497 )   122  

Other current assets

    (3,410 )   (111 )   (58 )

Accounts payable and accrued expenses

    6,829     (2,746 )   2,714  

Other liabilities

    (13 )   68     14  
               

Cash used in operating activities—continuing operations

    (12,438 )   (11,782 )   (6,888 )

Cash used in operating activities—discontinued operations

            (76 )
               

Net cash used in operating activities

    (12,438 )   (11,782 )   (6,964 )
               

CASH FLOWS FROM INVESTING ACTIVITIES:

                   

Purchase of property and equipment

    (1,075 )   (1,025 )   (651 )

Investment in unevaluated oil and gas properties

    (100,986 )   (33,781 )   (14,041 )

Prospective investment deposit

    (10,000 )        

Increase in restricted cash

    (880 )   (18,300 )    

Proceeds from sale of interest in unevaluated oil and gas properties

            25,001  

Proceeds from sale (purchase) of short-term investments

    53,806     (55,717 )    
               

Cash provided by (used in) investing activities—continuing operations

    (59,135 )   (108,823 )   10,309  

Cash provided by investing activities—discontinued operations

            881  
               

Net cash provided by (used in) investing activities

    (59,135 )   (108,823 )   11,190  
               

CASH FLOWS FROM FINANCING ACTIVITIES:

                   

Proceeds from issuance of stock and warrants, net of offering costs of $1,838, $7,751 and $1,285

    28,162     165,999     17,200  

Proceeds from exercise of options

    670     906      

Proceeds from exercise of warrants

        7,709     4,414  

Payments of dividends payable—related party

            (430 )

Payments on notes payable and installment debt

        (160 )   (730 )
               

Net cash provided by financing activities

    28,832     174,454     20,454  
               

(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

    (42,741 )   53,849     24,680  

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR

    79,889     26,040     1,360  
               

CASH AND CASH EQUIVALENTS AT END OF YEAR

  $ 37,148   $ 79,889   $ 26,040  
               

   

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

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HYPERDYNAMICS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(In Thousands)

 
  Years Ended June 30,  
 
  2012   2011   2010  

SUPPLEMENTAL DISCLOSURES:

                   

Interest paid in cash

  $   $ 10   $ 69  

Income taxes paid in cash

  $   $   $  

NON-CASH INVESTING and FINANCING TRANSACTIONS

                   

Common stock issued to settle variable share obligation

   
   
   
181
 

Deemed dividend attributable to repriced warrants originally issued with purchase of common stock

            322  

Asset retirement obligation transferred as part of sale of assets

            18  

Accounts payable for oil and gas property

    16,659     1,353     434  

Note payable for prepaid insurance

            275  

Conversion of Series B Preferred Stock into Common Stock

            16  

Fair value of warrant modifications

            480  

Relative fair value of warrants issued in connection with equity offerings

            3,839  

Conversion of debt, net of discount of $1,116

            1,294  

Discount of convertible debt modification

            1,172  

Exercise of warrants classified as a derivative

        1,354     723  

Reclassification of warrants as a derivative under ASC 815

            1,585  

Common stock issued for Series A settlement

        372      

   

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

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HYPERDYNAMICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 Ltd (SCS), a Cayman corporation, HYD Resources Corporation (HYD), a Texas corporation, and Hyperdynamics Oil & Gas Limited, incorporated in the United Kingdom. During fiscal year 2012 SCS entered into a "Corporate Continuation" from Delaware to the Cayman Islands. Through SCS and its wholly-owned subsidiary, SCS 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.

Status of our Business

        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 3,600 meters. The cost incurred on the Sabu-1 well was $125.9 million, or $96.9 million for our 77% interest, which assumes proceeds from the sale of remaining materials on hand. We have paid approximately $113.6 million of the well costs on a gross basis, or approximately $87.5 million based on our current 77% interest, as of June 30, 2012. We determined the well to be non-commercial. As a result, we evaluated the costs associated with the well, moved these costs to proved properties and fully amortized the costs in fiscal year 2012. See additional discussion in Note 3. As described in Note 11 to the consolidated financial statements, we have filed suit against AGR following unsuccessful negotiations to address the cost overruns associated with the Sabu-1 well. Payment of the remaining drilling costs is pending resolution of this dispute. To date, AGR has not yet filed its defense in this matter; however, AGR has made claims for additional cost of $8.5 million on a gross basis or $6.5 million based on our 77% share which we dispute and have excluded from cost incurred to date. Resolution of this dispute may result in the recovery of a portion of the costs incurred to date, however, it is possible that the resolution of this dispute may result in additional liability associated with disputed costs.

        We have conducted 2-dimensional ("2D") and 3-dimensional ("3D") surveys of a portion of the Concession. The acquisition phase of the most recent 3D 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. Processing of the most recent 3-D data set is in progress. Completion of this processing 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 based upon our current 77% interest in the Guinea Concession, of which, we have paid $25.8 million on a gross basis as of June 30, 2012 or $19.9 million based upon our 77% share.

        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. We seek to sell, or farm-out, a 40% interest in the Concession to an experienced oil and gas company that

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HYPERDYNAMICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

would also serve as operator of the project going forward. Several companies are reviewing our data, and we expect the farm-out process to be completed by the end of calendar year 2012.

        At this time, we have no source of operating revenue and there is no assurance when we will, if ever. On June 30, 2012, we had $37,148,000 in cash and $19,180,000 in restricted cash, which is held in escrow in connection with our drilling contract with AGR. We had $26,729,000 in liabilities, which are comprised of current liabilities of $26,604,000 and noncurrent liabilities of $125,000. We have no other material commitments. We plan to use our existing cash to fund these remaining drilling and seismic capital expenditures along with our general corporate needs.

        We are currently involved in various legal proceedings. We are unable to predict the outcome of such matters. These proceedings may have a negative impact on our liquidity, financial condition and results of operations; however, currently pending proceedings, in our opinion, will not have a material adverse effect upon our consolidated financial statements. See additional discussion in Note 11.

Principles of Consolidation

        The accompanying 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).

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 June 30, 2012, we had approximately $35,728,000 in excess of FDIC limits. We have not experienced any losses in such accounts.

Restricted cash

        Included in restricted cash as of June 30, 2012 is $19,180,000 held in escrow which relates to our drilling contract with AGR Peak Well Management Ltd ("AGR"). Under the terms of the drilling contract, we funded the escrow account for the sole purpose of funding our drilling project as overseen by AGR.

Joint interest receivable and allowance for doubtful accounts

        The Company establishes provisions for losses on accounts receivable if it determines that it will not collect all or part of the outstanding balance. Accounts receivable are written down to reflect management's best estimate of realizability based upon known specific analysis, historical experience,

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HYPERDYNAMICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

and other currently available evidence of the net collectible amount. There is no allowance for doubtful accounts as of June 30, 2012 or 2011. At June 30, 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.

Securities classified as available-for-sale and held to maturity

        Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Marketable equity securities and debt securities not classified as held-to maturity are classified as available-for-sale. Available-for-sale securities are carried at fair value, with unrealized gains and losses, net of tax, 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.

Oil and Gas Properties

Full Cost Method

        We account for oil and natural gas producing activities using the full cost method of accounting as prescribed by the United States Securities and Exchange Commission (SEC). Accordingly, all costs incurred in the acquisition, exploration, and development of proved oil and natural gas properties, including the costs of abandoned properties, dry holes, geophysical costs and annual lease rentals are capitalized. All selling, general and administrative corporate costs unrelated to drilling activities are expensed as incurred. Sales or other dispositions of oil and natural gas properties are accounted for as adjustments to capitalized costs, with no gain or loss recorded unless the ratio of capitalized costs to proved reserves would significantly change, or to the extent that the sale proceeds exceed our capitalized costs. Depletion of evaluated oil and natural gas properties would be computed on the units of production method based on proved reserves. The net capitalized costs of proved oil and natural gas properties are subject to quarterly impairment tests.

Costs Excluded

        Costs associated with unevaluated properties are excluded from the full cost pool until we have made a determination as to the existence of proved reserves. We review our unevaluated properties at the end of each quarter to determine whether the costs incurred should be transferred to the full cost pool and thereby subject to amortization.

        We assess all items classified as unevaluated property on a quarterly basis for possible impairment or reduction in value. We assess properties on an individual basis or as a group if properties are individually insignificant. The assessment includes consideration of the following factors, among others: intent to drill; remaining lease term under our concession; geological and geophysical evaluations; drilling results and activity; the assignment of proved reserves; and the economic viability of development if proved reserves are assigned. We assess our unevaluated properties on a country-by-country basis. During any period in which these factors indicate an impairment, the adjustment is recorded through earnings of the period.

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HYPERDYNAMICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

Full-Cost Ceiling Test

        At the end of each quarterly reporting period, the unamortized cost of oil and natural 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 prices based on the preceding 12-months' average price based on closing prices on the first day of each month, or prices defined by existing contractual arrangements, are used in deriving future net revenues discounted at 10%) adjusted for related income tax effects ("Full-Cost Ceiling Test").

        The calculation of the Full-Cost Ceiling Test is based on estimates of proved reserves. There are numerous uncertainties inherent in estimating quantities of proved reserves and in projecting the future rates of production, timing, and plan of development. The accuracy of any reserves estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. Results of drilling, testing, and production subsequent to the date of the estimate may justify revision of such estimates. Accordingly, reserves estimates are often different from the quantities of oil and natural gas that are ultimately recovered.

        During the year ended June 30, 2012 we fully amortized $116,312,000 in proved properties subject to the Full-Cost Ceiling Test. We recognized no impairment charges in the years ended June 30, 2011 or 2010, respectively.

Sales of Oil and Gas Properties and Discontinued Operations

        On April 1, 2009, management executed a contract to sell the working interest in all of its domestic oil and gas properties in a transaction that was accounted for as three sales. The liabilities associated with the working interest in the oil and gas properties, asset retirement obligations were transferred with the assets. The transaction was completed during August 2009. The Company received scheduled payments of $1,030,000 and $820,000 during May 2009. The final payment of $820,000 was received in August 2009.

        These assets, which were associated with HYD, our domestic business segment, were a disposal group and constituted a component of the entity with distinguishable cash flows. Accordingly, these assets and cash flows and results of operations associated with these assets were classified as discontinued operations in the consolidated statements of operations and consolidated statements of cash flows for 2010.

Property and Equipment, other than Oil and Gas

        Property and equipment are stated on the basis of historical cost less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, generally three to five years.

Provision for Impairments of Long-lived Assets

        Long-lived assets are reviewed for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment loss recognized is the excess of the carrying amount over the fair value of the asset. Any impairment charge is recorded through current period earnings. We recognized no impairment charges in the years ended June 30, 2012, 2011 or 2010, respectively.

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HYPERDYNAMICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

Deferred Rent

        Accounting principles generally accepted in the United States require rent expense to be recognized on a straight-line basis over the lease term. Rent holidays, rent concessions, rent escalation clauses and certain other lease provisions are recorded on a straight-line basis over the lease term (including one renewal option period if renewal is reasonably assured based on the imposition of an economic penalty for failure to exercise the renewal option). The difference between the rent due under the stated lease agreement compared to that of the straight-line basis is recorded as deferred rent. The short-term portion is the portion which is scheduled to reverse within twelve months of the balance sheet date and it is included in accounts payable and accrued expenses. At the beginning of our office lease, we received a free rent period, which began in March 2010 and ended in November 2010. During the free rent period from March 2010 to November 30, 2010, we recorded $140,000 of deferred rent, which is being amortized over the term of the lease.

Income Taxes

        We account for income taxes in accordance with FASB Accounting Standards Codification ("ASC") 740, "Income Taxes," which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the tax and financial reporting basis of assets and liabilities and for loss and credit carryforwards. Valuation allowances are provided when recovery of deferred tax assets is not considered likely.

        Tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in our tax returns that do not meet these recognition and measurement standards. For the year ended June, 30, 2012 the Company has no unrecognized tax benefits.

        Our policy is to recognize potential interest and penalties accrued related to unrecognized tax benefits within income tax expense. For the years ended June 30, 2012, 2011 and 2010, we did not recognize any interest or penalties in our consolidated statement of operations, nor did we have any interest or penalties accrued on our consolidated balance sheet at June 30, 2012 and 2011 relating to unrecognized benefits.

        The tax years 2007-2011 remain open to examination for federal income tax purposes and by the other major taxing jurisdictions to which we are subject.

Stock-Based Compensation

        ASC 718, "Compensation-Stock Compensation" requires recognition in the financial statements of the cost of employee services received in exchange for an award of equity instruments over the period the employee is required to perform the services in exchange for the award (presumptively the vesting period). We measure the cost of employee services received in exchange for an award based on the grant-date fair value of the award. We account for non-employee share-based awards based upon ASC 505-50, "Equity-Based Payments to Non-Employees."

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HYPERDYNAMICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

Earnings Per Share

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

        All potential dilutive securities, including potentially dilutive options, warrants and convertible securities, if any, were excluded from the computation of dilutive net loss per common share for the years ended June 30, 2012, 2011 and 2010, respectively, as their effects are antidilutive due to our net loss for those periods.

        Stock options to purchase approximately 12.5 million common shares at an average exercise price of $2.09 and warrants to purchase approximately 13.4 million shares of common stock at an average exercise price of $2.94 were outstanding at June 30, 2012. Using the treasury stock method, had we had net income, approximately 2.8 million common shares attributable to our outstanding stock options and 1.7 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 year ended June 30, 2012.

        Stock options to purchase approximately 9.3 million common shares at an average exercise price of $1.85 and warrants to purchase approximately 3.9 million shares of common stock at an average exercise price of $1.26 were outstanding at June 30, 2011. Using the treasury stock method, had we had net income, approximately 3.7 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 year ended June 30, 2011.

        Stock options to purchase approximately 8.0 million common shares at an average exercise price of $0.91 and warrants to purchase approximately 11.1 million common shares at an average exercise price of $1.25 were outstanding at June 30, 2010. Using the treasury stock method, had we had net income, approximately 0.9 million common shares attributable to our then outstanding stock options and 0.6 million common shares attributable to our then outstanding warrants would have been included in the fully diluted earnings per share calculation for the year ended June 30, 2010.

Contingencies

        We are subject to legal proceedings, claims and liabilities which arise in the ordinary course of business. We accrue for losses associated with legal claims when such losses are probable and can be reasonably estimated. These accruals are adjusted as additional information becomes available or circumstances change. Legal fees are charged to expense as they are incurred. See Note 11, Commitments and Contingencies, for more information on legal proceedings.

Accumulated Other Comprehensive Income (Loss), net of tax

        We follow the provisions of ASC 220, "Comprehensive Income", which establishes standards for reporting comprehensive income. In addition to net income (loss), comprehensive income (loss)

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HYPERDYNAMICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

includes all changes to equity during a period, except those resulting from investments and distributions to the owners of the Company. At June 30, 2012, we had a balance in "Accumulated other comprehensive loss, net of income tax" on the consolidated balance sheet of zero. The components of accumulated other comprehensive loss and related tax effects were as follows (in thousands):

 
  Gross
Value
  Tax
Effect
  Net of
Tax Value
 

Accumulated other comprehensive loss at June 30, 2010

  $   $   $  

Change in fair value of available-for-sale securities

    349         349  
               

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 loss at June 30, 2012

  $   $   $  
               

        There is no tax effect of the unrealized gain (loss) in other comprehensive income given our full valuation allowance against deferred tax assets. Total comprehensive loss was $149.0 million and $11.6 million in fiscal year 2012 and 2011, respectively.

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. The carrying values of cash and cash equivalents, accounts receivable—joint interest and accounts payable approximate fair value. During fiscal 2012, we held investments which were classified as available-for-sale securities and therefore were recorded at their fair value at each reporting date. Available-for-sale investments, which consisted entirely of Corporate Debt securities, were valued at the closing price reported in the active market in which the security was traded. These securities were sold during the third quarter of fiscal 2012.

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HYPERDYNAMICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

 
   
  Fair Value Measurement at
June 30, 2011
 
 
  Carrying
Value at
June 30, 2011
 
 
  Level 1   Level 2   Level 3  

Assets:

                         

Available-for-sale securities

  $ 55,368   $ 55,368   $   $  

Liabilities:

                         

Warrant derivative liability

  $   $   $   $  

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

        Additionally, we determined that certain warrants outstanding during the fiscal years 2011 and 2010 qualified as derivative financial instruments under the provisions of ASC 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 ASC 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 following table sets forth the changes in the fair value measurement of our Level 3 warrant derivative liability:

Beginning balance—July 1, 2010

  $ 583  

Change in fair value of derivative liability

    771  

Warrants exercised and reclassified to additional paid-in capital

    (1,354 )
       

Balance at June 30, 2011

  $  
       

        The $771,000 change in fair value during the year ended June 30, 2011, was recorded as an increase to the derivative liability and as a non-cash loss in our statement of operations. For the year ended June 30, 2010, we incurred a $279,000 non-cash gain. All of the remaining warrants underlying this derivative liability were exercised in October 2010. At June 30, 2012 and June 30, 2011, there was no remaining derivative liability balance.

        As of June 30, 2012, we had no financial assets or liabilities measured at fair value on a recurring basis.

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HYPERDYNAMICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recently issued or adopted accounting pronouncements

        In June 2011, the FASB issued an update to ASC 220, Comprehensive Income. This FASB Accounting Standards Update ("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 FASB 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 us. 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.

Subsequent Events

        The Company evaluated all subsequent events from June 30, 2012 through the date of issuance of these financial statements.

2. PROPERTY AND EQUIPMENT

        A summary of property and equipment as of June 30, 2012 and 2011 is as follows:

 
   
  June 30,  
(in thousands)
  Useful Life   2012   2011  

Computer equipment and software

    3 years   $ 1,655   $ 1,092  

Office equipment and furniture

    5 years     563     455  

Vehicles

    3 years     284     282  

Leasehold improvements

    3 years     525     305  
                 

Total Cost

          3,027     2,134  

Less—Accumulated depreciation

          (1,443 )   (798 )
                 

        $ 1,584   $ 1,336  
                 

        We review assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. As of June 30, 2012 and 2011, there were no impairments of property and equipment.

3. 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.

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HYPERDYNAMICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. INVESTMENT IN OIL AND GAS PROPERTIES (Continued)

Guinea Concession

        We have been conducting exploration work related to the area off the coast of Guinea since 2002. On September 22, 2006, we, acting through SCS, entered into the PSC with Guinea. Under that agreement, we were granted certain exclusive contractual rights by Guinea to explore and exploit offshore oil and gas reserves, if any, off the coast of Guinea. We are conducting our current work in Guinea under the PSC, as amended on March 25, 2010.

        The PSC Amendment clarified that we retained a Contract Area of approximately 9,650 square miles, which is approximately equivalent to 30% of the original Contract Area under the PSC, following a December 31, 2009 relinquishment of approximately 70% of the original Contract Area. The PSC Amendment requires that we relinquish an additional 25% of the retained Contract Area by September 30, 2013. Under the terms of the PSC Amendment, the first exploration period ended and the Company entered into the second exploration period on September 21, 2010. The second exploration period runs until September 2013, may be renewed to September 2016 and may be extended for one (1) additional year to allow the completion of a well in process and for two (2) additional years to allow the completion of the appraisal of any discovery made. Under the PSC Amendment, we were required to drill an exploration well, which had to be commenced by the year-end 2011, to a minimum depth of 2,500 meters below seabed. This requirement was satisfied with the drilling of the Sabu-1 well which was commenced during October of 2011 and reached the minimum depth of 2,500 meters below the seabed in February of 2012. We are required to drill an additional exploration well, which is to be commenced by the end of September 2016, to a minimum depth of 2,500 meters below seabed. The PSC Amendment requires the expenditure of $15 million on each of the exploration wells ($30 million in the aggregate). We were also required to acquire a minimum of 2,000 square kilometers of 3D seismic by September 2013 with a minimum expenditure of $12 million. This requirement was satisfied with the first 3D seismic survey acquired in 2010. Fulfillment of work obligations exempts us from expenditure obligations and exploration work in excess of minimum work obligations for each exploration period may be carried forward to the following exploration period.

        Under the PSC Amendment, Guinea may participate in development of any discovery at a participating interest of up to 15% of costs being carried for its share. The cost of that carry is to be recovered out of 62.5% of Guinea's share of cost and profit oil. The PSC Amendment removed the right of first refusal held by us covering the relinquished acreage under the original PSC. The PSC Amendment clarified that only those eligible expenditures, which were made following the date the PSC was signed, on September 22, 2006, are eligible for cost recovery. We are required to establish an annual training budget of $200,000 for the benefit of Guinea's oil industry personnel, and we are also obligated to pay an annual surface tax of $2.00 per square kilometer on our retained Concession acreage. The PSC Amendment also provides that should the Guinea government note material differences between provisions of the PSC Amendment and international standards or the Petroleum Code, the parties will renegotiate the relevant articles.

        Under the PSC and PSC Amendment our Guinea Concession is subject to a 10% royalty interest to Guinea. Of the remaining 90% of the first production, we will receive 75% of the revenue for recovery of the cost of operations, and Guinea will receive 25%.

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HYPERDYNAMICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. INVESTMENT IN OIL AND GAS PROPERTIES (Continued)

        After recovery cost of operations, revenue will be split as outlined in the table below:

Daily production (b/d)
  Guinea
Share
  Contractor
Share
 

From 0 to 2,000

    25 %   75 %

From 2,001 to 5,000

    30 %   70 %

From 5,001 to 100,000

    41 %   59 %

Over 100,001

    60 %   40 %

        The Guinea Government may elect to take a 15% working interest in any exploitation area.

        In May 2010, the government of Guinea issued a Presidential Decree approving the PSC, as amended.

Assignment of Participating Interest

        On December 4, 2009, we entered into a Sale and Purchase Agreement ("SPA") with Dana Petroleum (E&P) Limited ("Dana") for Dana to acquire a 23% participating interest in the PSC. On January 28, 2010, the Company closed on the transaction with Dana assigning it a working interest in our Concession offshore Guinea. In connection with the closing of the transaction, we entered into an Assignment of Participating Interest (the "Assignment") with Dana, a Deed of Assignment and Joint Operating Agreement ("JOA"). Pursuant to the Assignment, we assigned to Dana an undivided 23% of our participating interest in the contractual interests, rights, obligations and duties under the PSC. As required by the PSC, the Deed of Assignment was delivered as the necessary notice of the Assignment to be given to the Ministry of Mines, Energy and Hydraulics of Guinea.

        As part of the obligation to bear the proportionate share of costs, the SPA required Dana to make a cash payment to us upon closing the assignment of the 23% participating interest to Dana in the amount of $ 1.7 million for Dana's pro-rata portion of accrued expenditures associated with our marine 2D seismic data acquisition program within the Contract Area. The $1.7 million payment was received by us on February 4, 2010 and was recorded as a reduction in the carrying value of our Concession.

        The Operating Agreement appoints us as the operator for purposes of conducting oil and gas exploration and production activities within the retained Contract Area. We share operating costs of joint operations with Dana in proportion to the parties' respective participating interests (Hyperdynamics, 77% and Dana, 23%). An operating committee and voting procedures are established in the JOA whereby managerial and technical representatives of the Company and Dana make decisions regarding joint operations, exploration and appraisal of commercial discoveries, and the disposition of commercial production. The JOA places restrictions upon the transfer of the parties' respective participating interests in the form of a right of first purchase that is triggered by a proposed transfer or certain changes in control of us or Dana.

        In May 2010, we received an administrative order from the Ministry of Mines and Geology of Guinea, referred to as an arrêté, confirming the Guinea government's approval of the assignment of a 23% participating interest in the PSC, as amended, to Dana. On May 20, 2010, we received a payment of $19.6 million in cash from Dana as payment for the assigned 23% participating interest in the contractual interests, rights, obligations and duties under the PSC, as amended.

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HYPERDYNAMICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. INVESTMENT IN OIL AND GAS PROPERTIES (Continued)

Accounting for oil and gas property and equipment costs

        We follow the "full-cost" method of accounting for oil and natural gas property and equipment costs. Geological and geophysical costs incurred that are directly associated with specific unproved properties are capitalized in "Unevaluated properties excluded from amortization" 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 by the Full-Cost Ceiling Test.

        We exclude capitalized costs of unevaluated oil and gas properties from amortization. Geological and geophysical information pertaining to the Guinea concession was collected and evaluated and no reserves have been attributed to this concession. In February 2012, we completed the drilling of the Sabu-1 well, which was determined to be non-commercial. As a result, we evaluated certain geological and geophysical related costs in unproved properties along with the drilling costs of the Sabu-1 well and moved $116,312,000 to proved properties. Since we have no proved reserves to include in the Full-Cost Ceiling Test, the entire $116,312,000 resulted in the full amortization of our proved oil and gas properties. The net costs associated with properties which remain unevaluated were $39,278,000 and $36,200,000 as of June 30, 2012 and 2011, respectively. These costs are excluded from amounts subject to amortization.

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

 
  June 30,
2012
  June 30,
2011
 

Oil and Gas Properties:

             

Proved oil and gas Properties

  $ 116,312   $  

Unproved oil and gas Properties

    32,469     36,200  

Other Equipment Costs

    6,809      
           

Less—Accumulated depreciation, depletion and amortization costs

    (116,312 )    
           

Unevaluated properties not subject to amortization

  $ 39,278   $ 36,200  
           

        During the year ended June 30, 2012, we incurred $28,556,000 of geological and geophysical costs, primarily related to our 3D seismic acquisition and processing work which commenced in November 2011, and we incurred $90,834,000 of other exploration costs for our Guinea Concession during the year ended June 30, 2012, primarily related to the drilling of our first well which commenced in October 2011. Internal costs incurred that are directly identified with exploration, development, and acquisition activities undertaken by us, and which are not related to production, general corporate overhead, or similar activities, are capitalized. For the year ended June 30, 2012, we capitalized $6,613,000 of such costs.

        During the year ended June 30, 2011, we incurred $26,882,000 of geological and geophysical costs, primarily related to our 3D seismic acquisition and processing work which commenced in August 2010,

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HYPERDYNAMICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. INVESTMENT IN OIL AND GAS PROPERTIES (Continued)

and we incurred $9,226,000 of other exploration costs for our Guinea Concession during the year ended June 30, 2011, primarily related to the purchase of long lead tangible drilling items such as wellheads and tubular items to prepare for the drilling of our first well which commenced during the second quarter of fiscal 2012. Internal costs incurred that are directly identified with exploration, development, and acquisition activities undertaken by us, and which are not related to production, general corporate overhead, or similar activities, are capitalized. For the year ended June 30, 2011, we capitalized $4,001,000 of such costs.

PGS Geophysical AS, Norway

        On June 11, 2010, we entered into an Agreement for the Supply of Marine Seismic Data ("3D Seismic Contract") with PGS Geophysical AS, Norway ("PGS"). Under the terms of the 3D Seismic Contract, PGS agreed to conduct the acquisition phase of a 3,635 square kilometer 3D seismic survey of the area that is subject to our rights, or concession, to explore and exploit offshore oil and gas reserves off the coast of Guinea. The intended purpose of the 3D seismic survey was to obtain detailed imaging of the multiple prospects which were identified from our prior 2D seismic data acquisition over the concession.

        Under the terms of the 3D Seismic Contract, PGS agreed to carry out the survey in two separate portions that commenced in August 2010. The 3D Seismic Contract was initially for $21.0 million, including mobilization and demobilization expenses. The acquisition work was completed in December 2010, with a final cost under the 3D Seismic Contract of approximately $24.7 million, including mobilization and demobilization expenses. Our share of the cost was 77% of that amount, or approximately $19.0 million.

AGR Peak Well Management Limited

        Effective November 30, 2010, we contracted with AGR to manage our exploration drilling project offshore Republic of Guinea to handle well construction project management services, logistics, tendering and contracting for materials as well as overall management responsibilities for the drilling program. On June 21, 2012, our wholly-owned subsidiary, SCS, filed suit against AGR following unsuccessful negotiations to address the cost overruns associated with the Sabu-1 well drilled off the coast of the Republic of Guinea. See additional discussion within Note 11.

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 Republic of 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 June 30, 2012 amount to $26.3 million with our 77% share being $20.3 million and is capitalized in unevaluated oil and gas properties.

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HYPERDYNAMICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. INVESTMENT IN OIL AND GAS PROPERTIES (Continued)

        The area of the 3D acquisition is just southwest and adjacent to one of the 3D surveys obtained by us in 2010. The most recent survey is expected to use Veritas BroadSeis broadband solution, which is expected to provide a more detailed image of the subsurface. After acquisition, the data will be processed by Veritas, with completion of that work expected in the first half of fiscal 2013.

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 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 in our Statement of Operations for the year ended June 30, 2012.

4. INVESTMENTS

        During the fourth quarter of fiscal 2011, we purchased $55.7 million in debt securities which were classified as available-for-sale. These securities were subsequently sold during the second and third quarters of fiscal 2012, resulting in a realized loss of $0.4 million, compared to interest income earned over the life of the investments of $0.6 million. No investments were held as of June 30, 2012.

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

(in thousands)
  Amortized
Cost
  Unrealized gains
(losses)
  Fair Value
(net)
 

US corporate debt securities

  $ 55,717   $ (349 ) $ 55,368  

Total debt securities

    55,717     (349 )   55,368  

Equity securities

             
               

Total available-for-sale

  $ 55,717   $ (349 ) $ 55,368  
               

        The Company had no securities classified as held-to-maturity as of June 30, 2012 and 2011.

5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

        Accounts payable and accrued expenses as of June 30, 2012 and 2011 include the following:

(in thousands)
  2012   2011  

Accounts payable—Trade

  $ 21,965   $ 2,228  

Accrued payroll and bonus

    4,220     364  

Accrued—Other

    419     524  
           

  $ 26,604   $ 3,116  
           

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HYPERDYNAMICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. OTHER CURRENT ASSETS

        Other current assets as of June 30, 2012 and 2011 include the following:

(in thousands)
  2012   2011  

Cash on deposit with payroll provider

  $ 3,429   $  

Short-term deposits

    25     40  

Other

    105     109  
           

  $ 3,559   $ 149  
           

7. WARRANT DERIVATIVE LIABILITY

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

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HYPERDYNAMICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. WARRANT DERIVATIVE LIABILITY (Continued)

additional paid-in capital by the same amount. No warrant derivative liability exists as of June 30, 2012 or 2011.

8. INCOME TAXES

        Federal Income taxes are not currently due since Hyperdynamics has had losses since inception. Components of deferred tax assets as of June 30, 2012 and 2011 are as follows:

(in thousands)
  2012   2011  

Current deferred tax assets:

             

Other current deferred tax assets

  $ 60   $  
           

Total current temporary differences

    60      

Less: valuation allowance

    (60 )    
           

Net current deferred tax assets

  $   $  
           

Non-current deferred tax assets

             

Stock compensation

  $ 1,999   $ 1,951  

Property and Equipment

    28      

Oil and Gas Properties

    46,194     5,485 (1)

Other non-current deferred tax assets

        12  
           

Total non-current deferred tax assets

  $ 48,221   $ 7,448  
           

Non-current deferred tax liabilities

             

Property and Equipment

  $   $ (165 )
           

Net operating losses

    22,751     15,204 (1)
           

    70,972     22,487  

Less: valuation allowance

    (70,972 )   (22,487 )
           

Net non-current deferred tax assets (liabilities)

  $   $  
           

(1)
During the fourth quarter of fiscal year 2012, we identified certain errors in our previously issued consolidated financial statements within our deferred tax disclosure. The error was the result of an uncertain tax position related to the year ended June 30, 2010 that had not previously been disclosed, which impacted the presentation of our deferred tax balances and related disclosures as of June 30, 2011 and 2010. We have established the tabular roll-forward to disclose this uncertain tax position in this footnote, and the June 30, 2011 deferred tax balances have been corrected. The error in our previously disclosed deferred tax balances did not impact our consolidated balance sheets or statements of operations because the Company was in an overall deferred tax asset position with a full valuation allowance. We evaluated the materiality of the errors from both a qualitative and a quantitative perspective and concluded that these errors are immaterial to our previously issued consolidated financial statements. We have corrected the consolidated financial statements presented herein to reflect the correction of these errors.

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HYPERDYNAMICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. INCOME TAXES (Continued)

        Deferred tax assets have been fully reserved due to determination that it is more likely than not that the Company will not be able to realize the benefit from them.

        Hyperdynamics has U.S. net operating loss carryforwards of approximately $80,884,000 at June 30, 2012. The U.S. net operating losses contains excess tax benefits related to stock compensation in the amount of $2,441,000 which have not been included in the financial statements.

        Internal Revenue Code Section 382 restricts the ability to use these carryforwards whenever an ownership change, as defined, occurs. Hyperdynamics incurred such an ownership change on January 14, 1998 and again on June 30, 2001. As a result of the first ownership change, Hyperdynamics' use of net operating losses as of January 14, 1998, of $949,000, are restricted to $151,000 per year. The availability of losses from that date through June 30, 2001 of $3,313,000 are restricted to $784,000 per year. Currently the Company is analyzing whether the utilization of the net operating loss carryforwards from years subsequent to 2001 may be subject to a significant annual limitation due to ownership changes that have occurred previously under Section 382 of the Internal Revenue Code.

        The Company underwent a restructuring during the current year that removed approximately $13,202,000 of net operating losses from the U.S. consolidated tax return. It is unlikely that the entity where these net operating losses reside will ever generate U.S. taxable income sufficient to utilize any of these losses. Due to the existence of the valuation allowance, it is not expected that any possible limitation will have an impact on the results of operations or financial position of the Company. The U.S. net operating loss carryforwards expire from 2019 to 2032.

        The difference between the statutory tax rates and our effective tax rate is primarily due to the valuation allowance applied against our deferred tax assets generated by net operating losses. A reconciliation of the actual taxes to the U.S. statutory tax rate for the years ended June 30, 2012, 2011 and 2010 is as follows:

(in thousands)
  2012   2011   2010  

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

  $ (52,256 ) $ (3,933 ) $ (2,803 )

Increase (decrease) resulting from nondeductible stock compensation

    1,454     (515 )    

Reduction of net operating losses related to excess tax benefits from non-qualifying stock options

    854          

Increase (decrease) resulting from nontaxable gain on derivative liability

        270     (98 )

Other, net

    1,403     14      

Change in valuation allowance

    48,545     4,164     2,901  
               

Net income tax expense

  $   $   $  
               

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HYPERDYNAMICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. INCOME TAXES (Continued)

        The following table summarizes the activity related to our gross unrecognized tax benefits from July 1, 2009 to June 30, 2012 (in thousands):

 
  Federal, State
and Foreign
Tax
 
 
  (In thousands)
 

Balance at June 30, 2009

  $ 0  

Additions to tax positions related to the current year

    5,485  

Additions to tax positions related to prior years

    0  

Statute expirations

    0  
       

Balance at June 30, 2010

  $ 5,485  
       

Additions to tax positions related to the current year

    0  

Additions to tax positions related to prior years

    0  

Statute expirations

    0  
       

Balance at June 30, 2011

  $ 5,485  
       

Additions to tax positions related to the current year

    0  

Additions to tax positions related to prior years

    0  

Statute expirations

    0  
       

Balance at June 30, 2012

  $ 5,485  
       

        The total unrecognized tax benefits that, if recognized, would affect our effective tax rate was $0 for the years ended June 30, 2012, June 30, 2011, and June 30, 2010.

        During fiscal year 2012, we recorded an increase to the June 30, 2009 balance of $5,485,000 in our liability for unrecognized tax benefits, of which $5,485,000 was an increase related to U.S. tax positions taken on the June 30, 2010 tax return. This liability for unrecognized tax benefits has been netted against the net operating losses disclosed in the consolidated financial statements as of June 30, 2012 and 2011.

        Our policy is to include potential accrued interest and penalties related to unrecognized tax benefits within our income tax provision account. We have no accruals for the payment of interest, net of tax benefits, or penalties as of June 30, 2012, 2011, and 2010, respectively.

        We file income tax returns, including tax returns for our subsidiaries, with federal, state, local, and foreign jurisdictions. Our tax returns are subject to routine compliance review by the taxing authorities in the jurisdictions in which we file tax returns in the ordinary course of business. We consider the United States to be our most significant tax jurisdiction; however, the taxing authorities in Guinea may audit various tax returns. We currently have no ongoing federal or state audits. The normal statute of limitations for tax returns being available for IRS audit is three years from the filing date of the return. However, net operating losses are subject to adjustment upon utilization of the loss to offset taxable income regardless of when the net operating loss was generated. Therefore, all of our historic losses are subject to adjustment until they are utilized or expire.We do not believe there will be any decreases to our unrecognized tax benefits within the next twelve months.

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HYPERDYNAMICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. SHAREHOLDERS' EQUITY

Series A Preferred Stock

        In January 2000, we issued 3,000 shares of Series A Convertible Preferred Stock for net proceeds of $2,604,190. The stated value was $1,000 per share and par value is $0.001. This series was non-voting and had a dividend rate of 4%, payable at conversion in either cash or shares of common stock, at Hyperdynamics' option. During 2000 and 2001, 1,055 shares were converted to common stock. As a result, 1,945 shares remained outstanding at June 30, 2010. By terms of the original agreement, the preferred shares were convertible into Hyperdynamics' common stock at a price equivalent to the lower of the trading price when purchased of $5.25 or 80% of the current 5-day trading average. All or any of the stock could be converted at any time at the holder's option. According to the terms of the agreement, all preferred shares outstanding as of January 30, 2002 were to be automatically converted to common stock. If the Series A stock had been converted at that time, approximately 4,862,000 shares of common stock would have been issued. This conversion did not occur because of legal claims filed by both the Series A shareholders and Hyperdynamics against each other.

        Since the outcome was not known and no conversion had been effected, Hyperdynamics continued to accrue dividends on the 1,945 shares through September 30, 2004. Management evaluated the accrual as of September 30, 2004 and determined the accrual should be discontinued. Management reevaluated the accrual periodically and considered the accrual to be adequate to cover the liability, if any, pursuant to the lawsuit.

        On December 30, 2010, we entered into a settlement agreement pursuant to which we issued 239,437 shares of our common stock in connection with the conversion of 1,945 outstanding shares of Series A Preferred Stock. As part of the settlement, we were relieved of any Series A Preferred Stock dividend payments, two former officers agreed to the cancellation of an aggregate of 100,000 warrants which had an exercise price of $4.00 and 7,500 shares of our common stock were surrendered to us. As a result of this agreement, we were not required to issue the full amount of convertible securities under the terms of the Series A Preferred and we did not have to pay $372,000 of dividends we previously accrued as payable which represented accruals through September 30, 2004.

Common Stock issuances

Year ended June 30, 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 $28,162,000. 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 year ended June 30, 2012, 804,999 options were exercised for total gross proceeds of $670,000. The options were exercised at prices ranging from $0.31 to $2.00.

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HYPERDYNAMICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. SHAREHOLDERS' EQUITY (Continued)

For exercise of warrants:

        During the year ended June 30, 2012, we issued 340,208 shares of common stock upon the cashless exercise of warrants to purchase 430,000 shares of common stock.

Year ended June 30, 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 $136.1 million.

For exercise of options:

        During the year ended June 30, 2011, 858,613 options were exercised for total gross proceeds of $906,000. The options were exercised at prices ranging from $0.24 to $2.00.

For exercise of warrants:

        During the year ended June 30, 2011, 6,164,213 warrants were exercised for total gross proceeds of $7,709,000. The warrants were exercised at prices ranging from $0.98 to $1.58. Additionally, during the year ended June 30, 2011, we issued 384,848 and 175,714 shares of common stock to YA Global and a prior executive respectively upon the cashless exercise of warrants to purchase 702,222 and 240,000 shares of common stock respectively.

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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. SHAREHOLDERS' EQUITY (Continued)


Year ended June 30, 2010

Common Stock Issuances:

        During year ended June 30, 2010, the Company issued 442,049 shares of common stock from its Stock and Stock Option plan to employees, directors and consultants for services valued at $324,000. The shares were valued using the market close price on the date of grant. On November 12, 2009, we entered into a Shares Purchase Agreement with Enable Growth Partners, L.P. ("Enable"), which held certain securities that were previously issued by us. Pursuant to the Shares Purchase Agreement, we issued to Enable 1,578,948 shares of our common stock, par value $0.001 per share. The aggregate net proceeds from the offering, after deducting offering expenses was approximately $1,485,000. The offering closed on November 17, 2009.

        On December 3, 2009, the Company entered into a Securities Purchase Agreement pursuant to which the Company agreed to sell an aggregate of 7,222,223 shares of its common stock and warrants to purchase a total of 3,250,000 shares of its common stock to institutional investors for gross proceeds of approximately $6.5 million. The net proceeds to the Company from the offering, after deducting placement agent fees and the Company's offering expenses, were approximately $6,045,000. The placement agent also received warrants to purchase 144,444 shares of common stock as additional compensation. The purchase price of a share of common stock and fractional warrant was $0.90 with the warrants priced at $0.98. Subject to certain ownership limitations, the warrants were exercisable 181 days following the closing date of the offering and expire four years following the initial exercise date at an exercise price of $0.98. The offering closed on December 7, 2009.

        On April 20, 2010, the Company entered into a securities purchase agreement pursuant to which the Company agreed to sell an aggregate of 8,076,925 shares of our common stock and warrants to purchase a total of 2,826,923 shares of our common stock to institutional investors for gross proceeds of approximately $10.5 million. The net proceeds to us from the offering, after deducting placement agent fees and our offering expenses, were approximately $9,670,000. The purchase price of a share of common stock and warrant was $1.30. Subject to certain ownership limitations, the warrants are exercisable 181 days following the closing date of the offering. Warrants to purchase 807,692 shares of common stock expire one year following the initial exercise date. Warrants to purchase 2,019,231 shares of common stock expire five years following the initial exercise date. The warrants have an exercise price of $1.58. The exercise price of the warrants is subject to adjustment in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions.

Series B Preferred Stockholders

        Prior to the conversion of our Series B preferred stock on September 29, 2009, the Series B stockholders were entitled to a 4% cumulative dividend on the stated value, which was payable only upon conversion of the preferred stock. Dividends were to be paid in stock or cash at Hyperdynamics' option.

        On September 29, 2009, we entered into the Series B Agreement with the holders of all of our Series B preferred stock in which the Series B holders (i) converted all of their shares of Series B preferred stock into approximately 15,822,222 shares of common stock, (ii) agreed to the cancellation of warrants to purchase 1,000,000 shares of common stock, (iii) agreed to donate, pursuant to a specified schedule, 2,000,000 shares of common stock, issued upon conversion of the Series B preferred

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HYPERDYNAMICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. SHAREHOLDERS' EQUITY (Continued)

stock, and warrants to purchase 1,000,000 shares of common stock, to the American Friends of Guinea, a charitable organization that provides support to the people of Guinea, and (iv) agreed to be subject to a nine month lock-up of the 15,822,222 million shares of common stock received in connection with the conversion of the Series B preferred stock, and any shares that may be received upon exercise of their warrants. The common stock received upon conversion represented a reduction of 2,000,000 shares that otherwise would have been issuable under the original terms of the Series B preferred stock.

        Under the terms of the Series B Agreement, if we completed an equity or debt financing in the future of $10,000,000 or more, we also agreed to (i) pay a previously owed dividend in the aggregate amount of $430,000 to the Series B holders and (ii) subject to market conditions, release from the lock-up provision described above, up to 1,000,000 shares of common stock received in connection with the Series B preferred stock conversion in order to allow for resale by the Series B holders. On April 23, 2010, following our April 20, 2010 registered direct offering, $430,000 was paid to the Series B holders for previously owed dividends.

        The Series B Agreement was terminated as a result of the Letter Agreements discussed above.

For exercise of warrants:

        During the fiscal year ended June 30, 2010, Enable exercised all warrants to purchase 4,646,465 shares of common stock at an exercise price of $0.95 for total gross proceeds of $4,414,142. Additionally, during the year ended June 30, 2010, we issued 201,490 shares of common stock to YA Global upon the cashless exercise of warrants to purchase 520,000 shares of common stock.

For exercise of options:

        During the year ended June 30, 2010, we issued 124,653 shares of common stock upon the cashless exercise of stock options to purchase 220,000 shares of common stock.

For conversion of convertible debenture:

        During the year ended June 30, 2010, based upon the conversion prices of $1.65 and $0.95 per share, the convertible debenture investor converted a total principal amount, including interest accreted to principal, of $1,296,000 (net of a discount of $1,116,000) into 1,949,411 shares of our common stock.

10. STOCK OPTIONS AND WARRANTS

        On February 18, 2010, at our annual meeting of stockholders, the board of directors and 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 at the annual meeting, the 1997 Plan and 2008 Plan were terminated as of February 18, 2010. Subsequently, on February 17, 2012, the 2010 Plan was amended to increase the maximum shares issuable under the 2010 Plan.

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HYPERDYNAMICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. STOCK OPTIONS AND WARRANTS (Continued)

        The 2010 Plan provides for the grants of shares of common stock, restricted stock 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 of ours' or of any parent or subsidiary thereof. Shares of common stock, options, or restricted stock can only be granted under this plan within 10 years from the effective date of February 18, 2010. A maximum of 10,000,000 shares are issuable under the 2010 Plan and at June 30, 2012, 2,044,019 shares remained available for issuance.

        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 the Company. Plan grants are administered by the Compensation Committee, who has substantial discretion to determine which persons, amounts, time, price, exercise terms, and restrictions, if any.

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

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

Stock Options

        The following table provides information about options during the years ended June 30:

 
  2012   2011   2010  

Number of options granted

    4,273,461     2,906,000     7,614,000  

Compensation expense recognized

  $ 5,024,825   $ 2,175,625   $ 1,578,792  

Compensation cost capitalized

    1,745,344     973,730      

Weighted average fair value of options outstanding

  $ 2.09   $ 1.85   $ 0.91  

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HYPERDYNAMICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. STOCK OPTIONS AND WARRANTS (Continued)

        The following table details the significant assumptions used to compute the fair market values of employee and director stock options granted during the years ended June 30:

 
  2012   2011   2010  

Risk-free interest rate

    0.11 - 0.91 %   1.11 - 2.68 %   0.17 - 3.58 %

Dividend yield

    0 %   0 %   0 %

Volatility factor

    105 - 129 %   91 - 146 %   58 - 178 %

Expected life (years)

    0.25 - 3.25     0.9 - 6.0     0.23 - 5.0  

        Summary information regarding employee stock options issued and outstanding under all plans as of June 30, 2012 is as follows:

 
  Options   Weighted
Average Share
Price
  Aggregate
intrinsic
value
  Weighted
average
remaining
contractual life
(years)
 

Outstanding at year ended June 30, 2009

    2,219,707   $ 3.27   $ 45,375     1.76  

Granted

    7,614,000     0.83              

Exercised

    (220,000 )   0.63              

Forfeited

    (130,000 )   2.05              

Expired

    (1,434,947 )   4.10              
                   

Outstanding at year ended June 30, 2010

    8,048,760   $ 0.91   $ 2,589,600     6.20  
                   

Granted

    2,906,520     4.15              

Exercised

    (858,613 )   1.10              

Forfeited

    (438,053 )   0.90              

Expired

    (383,760 )   2.24              
                   

Outstanding at year ended June 30, 2011

    9,274,854   $ 1.85   $ 23,558,086     5.65  
                   

Granted

    4,273,461     2.57              

Exercised

    (804,999 )   0.83              

Forfeited

    (248,000 )   5.51              
                   

Options outstanding at year ended June 30, 2012

    12,495,316   $ 2.09   $ 1,145,800     4.62  
                   

Options exercisable at year ended June 30, 2012

    4,697,261   $ 1.81   $ 498,925     4.47  
                   

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HYPERDYNAMICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. STOCK OPTIONS AND WARRANTS (Continued)


Options outstanding and exercisable as of June 30, 2012

Exercise Price
  Outstanding
Number of
Shares
  Remaining Life   Exercisable
Number of Shares
 

$0.01 - 1.00

    40,000   1 year or less     40,000  

$0.01 - 1.00

    3,626,668   2 years     1,640,834  

$0.01 - 1.00

    1,843,461   5 years      

$1.01 - 2.00

    1,271,000   2 years     1,150,667  

$1.01 - 2.00

    30,000   5 years      

$1.01 - 2.00

    750,667   8 years     540,667  

$2.01 - 3.00

    77,000   5 years      

$2.01 - 3.00

    280,000   8 years     195,000  

$3.01 - 4.00

    990,000   4 years      

$3.01 - 4.00

    511,000   8 years     303,833  

$4.01 - 5.00

    1,183,000   4 years      

$4.01 - 5.00

    1,562,520   9 years     631,260  

$5.01 - 6.00

    100,000   1 year or less     100,000  

$5.01 - 6.00

    110,000   9 years     50,000  

$6.01 - 7.00

    30,000   9 years     15,000  

$7.01 - 8.00

    90,000   9 years     30,000  
               

    12,495,316         4,697,261  
               


Options outstanding and exercisable as of June 30, 2011

Exercise Price
  Outstanding
Number of
Shares
  Remaining Life   Exercisable
Number of Shares
 

$0.01 - 0.49

    85,000   1 year     85,000  

$0.01 - 0.49

    3,550,000   3 years     1,227,500  

$0.50 - 1.00

    60,000   1 year     60,000  

$0.50 - 1.00

    443,334   3 years     216,667  

$1.00 - 1.49

    720,000   3 years     640,000  

$1.00 - 1.49

    914,000   9 years     377,000  

$1.50 - 1.99

    551,000   3 years     260,333  

$2.00 - 3.00

    120,000   1 year or less     120,000  

$2.00 - 3.00

    280,000   9 years     140,000  

$3.00 - 4.00

    536,000   9 years     140,000  

$4.00 - 5.00

    1,585,520   9 years      

$5.00 - 6.00

    310,000   9 years      

$6.00 - 7.00

    30,000   9 years      

$7.00 - 8.00

    90,000   9 years      
               

    9,274,854         3,266,500  
               

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HYPERDYNAMICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. STOCK OPTIONS AND WARRANTS (Continued)

        At June 30, 2012, there was $6,926,000 of unrecognized compensation costs related to non-vested share based compensation arrangements granted to employees under the plans.

        During 2012, a total of 2,235,760 options, with a weighted average grant date fair value of $1.76 per share, vested in accordance with the underlying agreements. Unvested options at June 30, 2012 totaled 7,798,055 with a weighted average grant date fair value of $1.21, an amortization period of two to three years and a weighted average remaining life of 6.31 years.

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

        Warrant activity during the years ended June 30, 2012, 2011 and 2010:

Year ended June 30, 2012:

        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 are considered indexed to our common stock and therefore are not considered a derivative. 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.

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HYPERDYNAMICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. STOCK OPTIONS AND WARRANTS (Continued)

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  

Year ended June 30, 2011:

        During the fiscal year ended June 30, 2011, holders of warrants exercised an aggregate of 7,106,000 warrants with exercise prices ranging from $0.98 to $1.58 per share for total proceeds to us of $7,709,000, and 100,000 warrants held by former executives with a weighted average price of $4.00 were cancelled during the year. Additionally, YA Global exercised the remaining 702,222 of its warrants on a cashless basis and received 384,848 shares of our common stock.

Year ended June 30, 2010:

        The holders of all of our Series B preferred stock agreed to the cancellation of warrants to purchase 1,000,000 shares of the Company's common stock.

        As a result of the offerings in November and December 2009, outstanding YA Global warrants to purchase 666,666 shares of common stock at an exercise price of $1.65 were amended to increase the number of underlying shares of common stock to 1,222,222 and decrease the exercise price to $0.90 per share. These warrants are included in the warrant derivative liability. The change in value of the warrants as a result of the amendment is reflected in the valuation of the derivative as of June 30, 2010.

        As a result of the equity transaction in November 2009, the exercise price of 2,424,243 warrants held by Enable and previously granted as part of an equity purchase, was reduced from $2.00 per share to $0.95 subject to no further adjustment other than for stock splits and stock dividends. The modification resulted in a deemed dividend of $322,000 which was calculated as the difference in the fair value of the warrants immediately before and after the modification using the Black-Scholes option pricing model. The following table details the significant assumptions used to compute the fair market value of the warrant modification:

 
  Before
Modification
  After
Modification
 

Risk-free interest rate

    2.63 %   2.63 %

Dividend yield

    0 %   0 %

Volatility factor

    127 %   127 %

Remaining term (years)

    5.49     5.49  

        As a result of the equity transaction in November 2009, the exercise price of warrants held by Enable and previously granted as part of the convertible debenture transaction, was reduced from $2.50 to $0.95 per share for 1,111,111 warrants, and from $2.25 to $0.95 per share for 1,111,111 warrants,

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HYPERDYNAMICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. STOCK OPTIONS AND WARRANTS (Continued)

subject to no further adjustment other than for stock splits and stock dividends. This modification resulted in an increased fair value of $158,000, which has been treated as additional interest expense and which was calculated as the difference in the fair value of the warrants immediately before and after the modification using the Black-Scholes option pricing model. The following table details the significant assumptions used to compute the fair market value of the warrant modification:

 
  Before
Modification
  After
Modification
 

Risk-free interest rate

    2.63 %   2.63 %

Dividend yield

    0 %   0 %

Volatility factor

    125 %   125 %

Remaining term (years)

    5.80     5.80  

        During the fiscal year ended June 30, 2010, Enable exercised all 4,646,465 warrants for a total $4,414,142.

        As a result of the equity transaction in December 2009, the Company issued warrants to purchase a total of 3,250,000 shares of its common stock to institutional investors. The placement agent in the transaction received 144,444 warrants. The warrants have an exercise price of $0.98 per share a term of four years from the date they become exercisable and are exercisable 181 days 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 and the placement agent had a relative fair value of $1,572,000 and $70,000, respectively. The relative fair value of the 7,222,223 shares issued in the transaction was $4,403,000 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 warrant modification:

Risk-free interest rate

    2.14 %

Dividend yield

    0 %

Volatility factor

    118 %

Expected term (years)

    4.5  

        On April 20, 2010, the Company entered into a securities purchase agreement pursuant to which the Company agreed to sell an aggregate of 8,076,925 shares of its common stock and warrants to purchase a total of 2,826,923 shares of its common stock to institutional investors for gross proceeds of approximately $10.5 million. The placement agent in the transaction received 161,539 warrants. The purchase price of a share of common stock and warrant was $1.30. Subject to certain ownership limitations, the warrants are exercisable 181 days following the closing date of the offering. Warrants to purchase 807,692 shares of common stock expire one year following the initial exercise date. Warrants to purchase 2,019,231 shares of common stock expire five years following the initial exercise date. The warrants will have an exercise price of $1.58. The exercise price of the warrants is subject to adjustment in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions. The warrants issued to the investors and the placement agent had a relative fair value of $442,000 and $1,755,000, respectively. The relative fair value of the 8,076,925 shares issued in the

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HYPERDYNAMICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. STOCK OPTIONS AND WARRANTS (Continued)

transaction was $8,303,000 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 warrant modification:

Risk-free interest rate

    0.41 %   2.49 %

Dividend yield

    0 %   0 %

Volatility factor

    118 %   118 %

Remaining term

    1.5     5.5  

        Summary information regarding common stock warrants issued and outstanding as of June 30, 2012 is as follows:

 
  Warrants   Weighted
Average
Share Price
  Aggregate
intrinsic
value
  Weighted
average
remaining
contractual
life(years)
 

Outstanding at year ended June 30, 2009

    10,343,131   $ 1.99   $ 45,375     5.59  

Granted

    6,938,462     1.16              

Exercised

    (5,166,465 )   0.94              

Expired

    (1,050,000 )   4.05              
                   

Outstanding at year ended June 30, 2010

    11,065,128   $ 1.25   $ 1,168,000     3.93  
                   

Granted

                     

Exercised

    (7,106,435 )   1.20              

Expired

    (100,000 )   4.00              
                   

Outstanding at year ended June 30, 2011

    3,858,693   $ 1.26   $ 11,737,345     3.03  
                   

Granted

    10,000,000     3.50              

Exercised

    (430,000 )   0.90              

Expired

                     
                   

Outstanding at year ended June 30, 2012

    13,428,693   $ 2.94         1.08  
                   


Warrants outstanding and exercisable as of June 30, 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     3 years     207,860  

$3.50

    10,000,000     Less than1 year      

$4.00

    400,000     2 years     400,000  
                 

    13,428,693           3,428,693  
                 

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HYPERDYNAMICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. STOCK OPTIONS AND WARRANTS (Continued)

Warrants outstanding and exercisable as of June 30, 2011

Exercise Price
  Outstanding
Number of
Shares
  Remaining
Life
  Exercisable
Number of
Shares
 

$0.90

    3,240,000     3 years     3,240,000  

$0.98

    10,833     3 years     10,833  

$1.58

    207,860     4 years     207,860  

$4.00

    400,000     3 years     400,000  
                 

    3,858,693           3,858,693  
                 

11. 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 are unable to predict the outcome of such matters when they arise. Other than disputes currently disclosed under litigation, we are unaware of any other disputes that exist and do not believe that the ultimate resolution of such matters would have a material adverse effect on our financial statements. 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. If we are able to reasonably estimate a range of possible losses, an estimated range of possible loss is disclosed for such matters in excess of the accrued liability, if any. Liabilities are periodically reviewed for adjustments based on additional information.

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. The lawsuit alleges, among other things, that we misrepresented the prospects and progress of our drilling operations, including our drilling of the Sabu-1 well and plans to drill the Baraka-1 well off the coast of the Republic of Guinea. The lawsuit seeks damages based on Sections 10(b) and 20 of the Securities Exchange Act of 1934, although the specific amount of damages is not specified. On June 1 and June 4, 2012, a number of parties made application to the Court to be appointed as lead plaintiff for this action, but a lead plaintiff has not yet been selected by the Court. We anticipate a consolidated amended complaint will be filed in the matter once a lead plaintiff is appointed. We have assessed the status of this matter and have concluded that although an adverse judgment is reasonably possible, it is not probable. As a result, no provision has been made in the consolidated financial statements. Given the early stage of this dispute, we are unable to estimate a range of possible loss; however, in our opinion, the outcome of this dispute will not have a material effect on our financial condition and results of operations.

        On April 5, 2012, a purported derivative action was filed in the District Court of Harris County, Texas, against all of our directors. The petition alleges that the directors breached their fiduciary duties in connection with positive statements about our drilling operations and the Guinea Concession and disclosures related to material weaknesses that we identified in our financial controls. The plaintiff

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HYPERDYNAMICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. COMMITMENTS AND CONTINGENCIES (Continued)

seeks unspecified damages against our directors including restitution and disgorgement of profits and advances based on asserted causes of action for breach of fiduciary duties, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets. On July 12, 2012, we and our directors filed special exceptions to the derivative lawsuit on the basis that the plaintiff failed to plead demand futility. The plaintiff did not make a demand on the Hyperdynamics Board prior to filing the derivative suit; therefore the lawsuit would be subject to dismissal unless the plaintiffs' pleadings sufficiently demonstrated that demand would be futile. In response, the plaintiff amended his petition on August 13, 2012. We have assessed the status of this matter and have concluded that although an adverse judgment is reasonably possible, it is not probable. As a result, no provision has been made in the consolidated financial statements. Given the early stage of this dispute, we are unable to estimate a range of possible loss; however, in our opinion, the outcome of this dispute will not have a material effect on our financial condition and results of operations.

Iroquois Lawsuit

        On May 9, 2012, a lawsuit was filed in the Supreme Court of the State of New York against us and all of our directors. The plaintiffs, five hedge funds that invested in us in early 2012, allege that we breached an agreement with the plaintiffs, and that we and the directors made certain negligent misrepresentations relating to the company's drilling operations. Among other claims, the plaintiffs allege that we misrepresented the status of our drilling operations and the speed with which the drilling would be completed. The plaintiffs advance claims for breach of contract and negligent misrepresentation and seek damages in the amount of $18.5 million plus pre-judgment interest. The plaintiffs also seek indemnity for their legal expenses On July 12, 2012, we and the directors moved to dismiss the suit for failure to state a claim as to all defendants and for lack of personal jurisdiction over the director defendants. The maximum possible loss is the full amount of $18.5 million plus interest accrued thereon until judgment. We, however, have assessed the status of this matter and have concluded that although an adverse judgment is reasonably possible, it is not probable. As a result, no provision has been made in the consolidated financial statements. In our opinion, the outcome of this dispute will not have a material effect on our financial condition and results of operations.

AGR Lawsuit

        On June 21, 2012, our wholly-owned subsidiary, SCS, filed suit against AGR following unsuccessful negotiations to address the cost overruns associated with the Sabu-1 well drilled off the coast of the Republic of Guinea. The suit was filed in London, England in the High Court of Justice, Queen's Bench Division, Technology and Construction Court. SCS is seeking to recover damages and other relief from AGR for claims of mismanagement of the drilling of the Sabu-1 well and various breaches of contract that resulted in the cost overruns. Among other things, the lawsuit alleges that AGR mismanaged the selection, reconditioning and crew staffing for the Jasper Explorer drilling rig used to drill the Sabu-1 well, mismanaged other subcontractor relationships, failed to seek cost relief from its subcontractors, and failed to return to SCS inventory purchased by SCS but not used in the drilling of Sabu-1 well. AGR has not yet filed its defense in that matter, but has indicated it expects to file a counterclaim.

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HYPERDYNAMICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. COMMITMENTS AND CONTINGENCIES (Continued)

Wellington Lawsuit

        On April 9, 2001, we were named as a defendant in a lawsuit in Delaware styled Wellington, LLC vs. Hyperdynamics Corporation. The Plaintiff claimed that we did not carry out conversion of Series A preferred stock to common stock. The Delaware lawsuit was dismissed and similar litigation ensued in Georgia.

        On December 30, 2010, we entered into a settlement agreement pursuant to which we issued 239,437 shares of our common stock in connection with the conversion of 1,945 outstanding shares of Series A Preferred Stock. As part of the settlement, we were relieved of any Series A Preferred Stock dividend payments and two former officers agreed to the cancellation of an aggregate of 100,000 warrants which had an exercise price of $4.00. As a result of this agreement, we were not required to issue the full amount of convertible securities under the terms of the Series A Preferred and we did not have to pay $372,000 of dividends we previously accrued as payable. The common shares, based upon the stock price at the settlement date, had a fair market value of $1,183,000. The exchange of those common shares for the conversion of the Series A Preferred Stock, the elimination of the corresponding dividend payable, and the cancellation of 100,000 warrants was a capital transaction and no gain or loss was recorded. We recorded $1,183,000 to additional paid-in capital, with a corresponding charge to additional paid-in capital of $811,000, which represented the difference between the fair market value of the common shares issued for settlement and the elimination of the accrued dividend payable related to the Series A Preferred Stock, resulting in a net credit to additional paid-in capital of $372,000.

Ashley and Wilburn Lawsuits

        Trendsetter Production Company was named in two separate lawsuits, Raymond Thomas et al v. Ashley Investment et al and Wilburn L. Atkins and Malcolm L. Mason Jr. vs. BP America Production et al, Nos. 38,839 and 41,913-B, respectively, "C", 5th Judicial District Court, Parish of Richland, State of Louisiana. These cases were environmental cleanup cases involving wells operated by Trendsetter prior to our acquisition of Trendsetter. In May 2011, we entered into a settlement agreement to which we paid $20,000 to settle this claim and received a court order dismissing the case. On June 30, 2011, we sold Trendsetter Production Company to Good Day Production, LLC for $20,000. The Company does not anticipate any additional liabilities relating to Trendsetter Production Company due to this sale.

COMMITMENTS AND CONTINGENCIES

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.

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HYPERDYNAMICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. COMMITMENTS AND CONTINGENCIES (Continued)

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 June 30, 2012:

Years ending June 30:
(in thousands)

   
 

2013

    297  

2014

    326  

2015

    229  

2016

     

2017

     
       

Total minimum payments required

  $ 852  
       

        Rent expense included in net loss from operations for the years ended June 30, 2012, 2011, and 2010 was $483,000, $295,000 and $154,000, respectively.

12. QUARTERLY RESULTS (UNAUDITED)

        Shown below are selected unaudited quarter data for the years ended June 30, 2012 and 2011 (in thousands, except per share data):

 
  First
Quarter
  Second
Quarter
  Third
Quarter
  Fourth
Quarter
 

2012:

                         

Depreciation

  $ 179   $ 241   $ 230   $ 177  

Selling, general and administrative

    4,352     5,726     4,893     7,091  

Full amortization of proved oil and gas properties

            112,145     4,167  

Write-off of prospective investment deposit

            10,000      

Loss from operations

    (4,531 )   (5,967 )   (127,268 )   (11,435 )

Net loss

    (4,376 )   (6,323 )   (127,198 )   (11,416 )

Basic and diluted loss per common share:

  $ (0.03 ) $ (0.04 ) $ (0.78 ) $ (0.07 )

 

 
  First
Quarter
  Second
Quarter
  Third
Quarter
  Fourth
Quarter
 

2011:

                         

Depreciation

  $ 70   $ 71   $ 100   $ 112  

Selling, general and administrative

    2,049     3,218     2,571     2,678  

Loss from operations

    (2,119 )   (3,289 )   (2,671 )   (2,790 )

Net loss

    (2,883 )   (3,282 )   (2,638 )   (2,435 )

Basic and diluted loss per common share:

  $ (0.03 ) $ (0.03 ) $ (0.02 ) $ (0.02 )

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HYPERDYNAMICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. QUARTERLY RESULTS (UNAUDITED) (Continued)

        The sum of the individual quarterly net loss per share amounts may not agree with year-to-date net loss per share as each quarterly computation is based on the weighted average number of common shares outstanding during that period. In addition, certain potentially dilutive securities were not included in any of the quarterly computations of diluted net loss per share because to do so would have been antidilutive.

13. SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED)

        In December 2008 the SEC announced revisions to its regulations on oil and gas reporting. In January 2010, the Financial Accounting Standards Board issued an accounting standards update which was intended to harmonize the accounting literature with the SEC's new regulations.

        Future cash flows beginning in for 2010 would be computed by applying average price for the year to the year-end quantities of proved reserves. The average price for the year would be calculated using the twelve month period prior to the ending date of the period covered by the report, determined as an unweighted arithmetic average of the first day of the month price for each month within such period. The Company had no proved reserves in 2012, 2011, and 2010.

        Estimates of reserve quantities and related standardized measure of discounted net cash flows are estimates only, and are not intended to reflect realizable values or fair market values of reserves. Reserve estimates are inherently imprecise and estimates of new discoveries are more imprecise than producing oil and gas properties. Additionally, the price of oil has been very volatile and downward changes in prices can significantly affect quantities that are economically recoverable. Accordingly, estimates are expected to change as future information becomes available and these changes may be significant.

        Proved reserves are estimated reserves of crude oil and natural gas that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are those expected to be recovered through existing wells, equipment and operating methods.

        The standardized measure of discounted future net cash flows are computed by applying average price for the year (with consideration of price changes only to the extent provided by contractual arrangements) to the estimated future production of proved oil and gas reserves, less estimated future expenditures (based on year-end costs) to be incurred in developing and producing the proved reserves, less estimated future income tax expenses. The estimated future net cash flows are then discounted using a rate of 10% per year to reflect the estimated timing of the future cash flows.

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HYPERDYNAMICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13. SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED) (Continued)

Capitalized Costs Related to Oil and Gas Activities

        Aggregate capitalized costs relating to the Hyperdynamics' crude oil and natural gas producing activities, including asset retirement costs and related accumulated depreciation, depletion & amortization are shown below:

(in thousands)
  United
States
  Republic of
Guinea
  Total  

June 30, 2012

                   

Unproved properties

  $   $ 39,278   $ 39,278  

Proved properties

        116,312     116,312  

Oilfield equipment

             
               

        155,590     155,590  

Less accumulated DD&A

        (116,312 )   (116,312  
               

Net capitalized costs

  $   $ 39,278     39,278  
               

June 30, 2011

                   

Unproved properties

  $   $ 36,200   $ 36,200  

Proved properties

             

Oilfield equipment

             
               

        36,200     36,200  

Less accumulated DD&A

             
               

Net capitalized costs

  $   $ 36,200   $ 36,200  
               

June 30, 2010

                   

Unproved properties

  $   $ 92   $ 92  

Proved properties

             

Oilfield equipment

             
               

        92     92  

Less accumulated DD&A

             
               

Net capitalized costs

  $   $ 92   $ 92  
               

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HYPERDYNAMICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13. SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED) (Continued)

Costs Incurred in Oil and Gas Activities

        Costs incurred in connection with Hyperdynamics' crude oil and natural gas acquisition, exploration and development activities are shown below:

(in thousands)
  United
States
  Republic of
Guinea
  Total  

June 30, 2012

                   

Property acquisition:

                   

Unproved

  $   $   $  

Proved

        90,834     90,834  

Exploration

        28,556     28,556  

Development

             
               

Total costs incurred

  $     $ 119,390   $ 119,390  
               

June 30, 2011

                   

Property acquisition:

                   

Unproved

  $   $ 9,226   $ 9,226  

Proved

             

Exploration

        26,882     26,882  

Development

             
               

Total costs incurred

  $   $ 36,108   $ 36,108  
               

June 30, 2010

                   

Property acquisition:

                   

Unproved

  $   $ 185   $ 185  

Proved

             

Exploration

        15,232     15,232  

Development

             
               

Total costs incurred

  $   $ 15,417   $ 15,417  
               

Proved Reserves

        We do not hold any proved reserves as of June 30, 2012 and 2011.

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Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

        On June 15, 2011, we discharged our former certifying accountant, GBH CPAs, PC. During the past two fiscal years, there were no adverse opinions or disclaimers of opinion, or qualifications or modifications as to uncertainty, audit scope, or accounting principles by GBH CPAs, PC in those reports. The decision to change accountants was approved by our audit committee of the board of directors. During the two fiscal years and during the interim period commencing on July 1, 2010 and ending on June 15, 2011, preceding the discharge of GBH CPAs, PC as our principal accountants, there were no disagreements with GBH CPAs, PC, whether or not resolved, on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to GBH CPAs, PC's satisfaction, would have caused it to make reference to the subject matter of the disagreement(s) in connection with its report. GBH CPAs, PC did not advise us: (A) that internal controls necessary to develop reliable financial statements did not exist; or (B) that information had come to its attention which made it unwilling to rely on management's representations, or unwilling to be associated with the financial statements prepared by management; or (C) that the scope of the audit should have been expanded significantly, or that information had come to its that it concluded would, or if further investigated might, (i) materially impact the fairness or reliability of a previously issued audit report or the underlying financial statements, or the financial statements issued or to be issued covering the fiscal period(s) subsequent to the date of the most recent audited financial statements (including information that might prevent the issuance of an unqualified audit report), and (ii) cause it to be unwilling to rely on management's representations or be associated with our financial statements; or (D)(1) that information had come to its attention that it had concluded materially impacts the fairness or reliability of either: (i) a previously issued audit report or the underling financial statements, or (ii) the financial statements issued or to