10QSB 1 doc1.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended: March 31, 2001 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______ to _______ Commission file number: 000-25496 HYPERDYNAMICS CORPORATION (Exact name of registrant as specified in its charter) Delaware 87-0400335 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 9700 Bissonnet, Suite 1700 Houston, Texas 77036 (Address of principal executive offices, including zip code) Registrant's Telephone No. (713) 353-9400 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS As of May 11, 2001 13,966,982 of common stock, $0.001 par value, were outstanding. Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] HYPERDYNAMICS CORPORATION Table of Contents ----------------- Part I Financial Information Item 1. Financial Statements Consolidated Balance Sheet at March 31, 2001 (unaudited) Consolidated Statements of Income for the nine months ended March 31, 2001 and 2000 (both unaudited) Consolidated Statements of Cash Flows for the nine months ended March 31, 2001 and 2000 (both unaudited) Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Part II Other Information Item 1. Legal Proceedings Item 2. Changes in Securities Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (b) Reports on Form 8-K Signatures 2
PART 1 FINANCIAL INFORMATION ITEM 1. Financial Statements HYPERDYNAMICS CORPORATION AND SUBSIDIARIES Consolidated Balance Sheet March 31, 2001 ASSETS Current Assets Cash $ 262,314 Certificate of deposit, restricted 65,445 Accounts receivable, net of allowance for doubtful accounts of $18,068 70,002 Inventory 193,795 Revenue interest 2,631 Prepaid services to related party 50,000 Other current assets 78,913 ------------------ Total Current Assets 723,100 Property and Equipment, net of 791,190 depreciation of $55,920 Other Assets Certificate of deposit, restricted 370,855 Intangible assets - net 22,100 Deposits 22,432 ------------------ Total other assets 416,387 ------------------ Total Assets $ 1,930,677 ================== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable - trade $ 363,982 Current portion of installment debt 16,676 Accrued expenses 22,168 Dividends payable 104,892 ------------------ Total Current Liabilities 507,718 Long Term Debt 84,591 Stockholders' Equity Preferred stock, par value $0.001; 20,000,000 shares authorized; 1,948 shares issued and outstanding. 2 Common stock, par value $0.001; 50,000,000 shares authorized; 13,943,643 shares issued and outstanding. 13,944 Additional paid-in capital 4,655,388 Stock subscription receivable (5,000) Retained (deficit) (3,325,966) ------------------ Total Stockholders' Equity 1,338,368 ------------------ Total Liabilities and Stockholders Equity $ 1,930,677 ==================
See notes to financial statements. 3
HYPERDYNAMICS CORPORATION AND SUBSIDIARIES Consolidated Income Statements 3 Months and 9 Months Ended March 31, 2001 and 2000 3 MONTHS ENDED MARCH 31 9 MONTHS ENDED MARCH 31 2001 2000 2001 2000 Revenues $ 98,597 $ 486,014 $ 382,432 $ 1,427,064 Cost of Revenues 162,225 545,199 716,455 1,203,726 ------------ ------------ ------------ ------------ Gross Margin (63,628) (59,185) (334,023) 223,338 Operating Expenses Selling 50,622 43,919 119,450 104,113 General and Administrative 205,255 345,799 743,576 450,244 Depreciation 17,034 12,250 44,290 24,750 ------------ ------------ ------------ ------------ Total Operating Expenses 272,911 401,968 907,316 579,107 ------------ ------------ ------------ ------------ Operating Income/(Loss) (336,539) (461,153) (1,241,339) (355,769) Other Income (Expense) Loss on disposal of equipment (4,539) (4,539) Revenue sharing income 18,161 18,161 Gain on sale of revenue interest 12,000 3,500 12,000 Interest (expense) (2,799) (3,491) Writedown of carrying value of receivable from sale of subsidiary (50,000) (50,000) Interest income 16,534 51,480 69,669 21,507 Impairment loss (4,677) (29,735) Other 6,704 7,682 ------------ ------------ ------------ ------------ Loss From Continuing Operations (325,316) (459,512) (1,198,253) (354,101) ------------ ------------ ------------ ------------ Loss from Discontinued Operations, net of income tax benefit of $0 and $0, respectively (568) Gain on Sale of Discontinued Operations net of income tax benefit of $0 and $0, respectively 127,065 ------------ ------------ ------------ ------------ Net Loss (325,316) (459,512) $(1,198,253) (227,604) ------------ ------------ ------------ ------------ Preferred dividends (19,487) (16,000) (75,844) (16,000) Net loss available to common Shareholders $ (344,803) $ (475,512) $(1,274,097) $ (243,604) ============ ============ ============ ============ Net Income/(Loss) per Common Share $ (.02) $ (.04) $ (.09) $ (.02) Weighted average share outstanding 13,860,189 12,688,041 13,516,970 12,520,292
See notes to financial statements. 4
HYPERDYNAMICS CORPORATION AND SUBSIDIARIES Consolidated Statement of Cash Flows 9 Months Ended March 31, 2001 and 2000 2001 2000 Cash flows from operating activities Net Loss $ (1,198,253) $ (227,604) Adjustments to reconcile net income to cash provided from operating activities Depreciation and amortization 44,290 24,750 Stock and warrants issued for services 190,795 Gain on sale of discontinued operations (127,065) Gain on sale of revenue interest (3,500) (12,000) Loss from discontinued operations 568 Writedown of carrying value of receivable from sale of Subsidiary 50,000 Loss on disposal of equipment 4,539 Impairment loss 29,735 Writedown of capitalized intangible assets 4,757 Changes in: Accounts receivable - trade 467,189 (239,626) Other 1,500 Inventory 31,852 (65,968) Other current assets (40,016) (58,046) Collection of revenue interest 1,263 Accounts payable (112,520) 64,627 Accrued expenses 80,184 90,121 ---------------- ----------- Net cash (used) by operating activities (505,705) (492,723) Cash flows from investing activities Purchase of property and equipment (780,101) (101,939) Increase in deposit (2,800) Collection of note receivable 400,000 Proceeds from sale of revenue interest 85,500 ---------------- ----------- Net cash provided (used) for investing activities (332,385) (16,439) Cash flows from financing activities Proceeds from new installment notes payable 105,598 Payments on installment notes payable (4,331) Sale of preferred stock 2,604,190 Sale of common stock, net of subscription receivable of $5,000 18,819 228,500 Purchases of common stock (2,601) ---------------- ----------- Net cash provided from financing activities 117,485 2,832,690 ---------------- ----------- Net increase (decrease) in cash (771,121) 2,323,528 Cash at beginning of period 1,033,435 56,200 ---------------- ----------- Cash and cash equivalents at end of period $ 262,314 2,379,728 Supplemental Information Interest paid $ 3,491 0
See notes to financial statements. 5 HYPERDYNAMICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The unaudited condensed consolidated financial statements of Hyperdynamics Corporation have been prepared in accordance with generally accepted accounting principles and the rules of the Securities and Exchange Commission ("SEC") and should be read in conjunction with the audited financial statements and the notes thereto contained in the Company's latest Annual Report filed with the SEC on Form 10-KSB. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair financial presentation of financial position and the results of operations for the interim periods have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited financial statements for the most recent fiscal year 2000 as reported in the Form 10-KSB have been omitted. 2. Common Stock. During the nine months ended March 31, 2001, 47,638 options for free trading shares were exercised for $23,819 and 50,000 warrants were issued to former consultants of the Company. The warrants were immediately exercised as a cashless exercise, resulting in 37,500 shares issued. The warrants were issued at $.75 at a time when the market value of the Company's stock was $2.875; accordingly, compensation expense of $96,375 has been recorded. Additionally, 123,538 shares valued at $93,912 were issued to employees, to a consultant, and as payment to vendors for construction of the Information Technology Center. 3. Preferred Stock. During the nine months ended March 31, 2001, $1,052,219 worth or 1,052 shares of Series A Preferred Stock was converted at 80% of the previous 5 day average trading days upon the conversion date. The Company issued 697,639 shares upon these conversions and an additional 18,008 shares to pay for accrued dividends on converted preferred stock. 4. Impairment loss is recognized on the amounts due from the gain on the sale of Sierra Net that had been effected in the fiscal year ended June 30, 2000. The impairment loss arises because the Company will be paid in 29,230 shares of MAWI, the new parent company of Sierra Net, or in cash upon the exercise of a put option on behalf of the Company. MAWI has experienced a significant decline in value and is currently trading at close to $.09. Accordingly, the Company has written down the value of the amounts receivable from the sale of the revenue interest to $2,631, or the current value of the shares that it is expected to receive. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations FORWARD LOOKING STATEMENT AND INFORMATION The Company is including the following cautionary statement to make applicable and take advantage of the safe harbor provision of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements made by, or on behalf of, the Company. This quarterly report on form 10-QSB contains forward-looking statements. 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. Certain statements contained herein are forward-looking statements and, accordingly, involve risks and uncertainties which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. The Company's expectations, beliefs and projections are expressed in good faith and are believed by the Company to have a reasonable basis, including without limitations, management's examination of historical operating trends, data contained in the Company's records and other data available from third parties, but there can be no assurance that management's expectations, beliefs or projections will result or be achieved or accomplished. In addition to other factors and matters discussed elsewhere herein, the following are important factors that, in the view of the Company, could cause actual results to differ materially from those discussed in the forward-looking statements: the ability of the Company to respond to changes in the information system environment, competition, the availability of financing, and, if available, on terms and conditions acceptable to the Company, and the availability of personnel in the future. General Discussion As reported in last quarters 10QSB the Company had reported serious and undue delays in the completion of its new Integrated Technology Center (the "ITC") facility. Operations were seriously slowed as a result of these delays and this operational slow down has extended over into the quarter ended March 31, 2001. The Company is working hard to continue to develop and market its new bundled HypersourceTM services. Again, the unreasonable delays and difficulties in getting our primary data circuits installed have caused us to experience greater losses than expected and an additional drain on cash. However, it is important to point out that building this facility, together with the flexibility and engineering excellence and investment of an AT&T dedicated entrance facility has positioned the Company to provide the best and most cost effective integrated technology services available. This was a mandatory event in order to fulfill our mission to be the premier ITSP. It is important to note that we have also accomplished this in the time frame necessary to be in position to capture our share of what we expect to be the largest recurring revenue base in history of IT services. This is a monumental accomplishment, especially given the resources that we have had to work with and knowing the investment made by Company's like AT&T right in the corner of our initial data center space. The Company's primary focus is now on continuing to develop its bundled IT services while learning how to successfully and cost effectively market and sell them. Management is very confident that the operation can cash flow in a matter of months and there are possibilities of contracts and deals it is pipeline that can accomplish this cash flow milestone very quickly. Now that we have moved into our new facility, with more to work with than ever before, management views this need to cash flow the operation as an essential and imperative focus. Due to the changes in the way that IT services are delivered now and the flux of the IT services market we are in, we believe that it is reasonable to have a six month plan to cash flow the operation. With the new facility we have the ability to offer our customers either the new way of obtaining services or we can 7 perform services in the older integration mode. We can now give our clients first hand education as to the real options for IT hosting. By proceeding and succeeding on a ramp up basis in which the Company will ultimately cash flow itself, we will then be able to concentrate on moving into a mode of positive net income with the goal to never turn back. In the current quarter the Company is building more potential in its pipeline and its recurring revenue base is gradually increasing. The Company's current sales and marketing strategies include an Agency program for IT consulting companies and partners that wish to leverage off or our data center and telecommunications infrastructure. RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 2001 COMPARED TO THE NINE MONTHS ENDED MARCH 31, 2000 Sales decreased to $ 382,432 for the nine months ended March 31, 2001. This compared to $1,450,974 for the same period in 2000. The decrease in revenue is a result of the completion of large projects started in 1999 and continuing into 2000 and also due to significant business disruption and slow down during our transition to the new facility together with the undue delays discussed above. Cost of Revenues decreased only 29.47% to $716,455 compared to a decrease of 73% for sales to $382,432 for the nine months ended March 31, 2001. The reason that Cost of Revenues did not decrease proportionally due primarily to 1) the allocation of operational salaries of $237,733 that have been charged to cost of sales in 2001 compared to$187,866 in 2000. These salaries are a fixed component that has been added to Cost of Revenues during development and preparation for the Company's new business model that it is just now starting to ramp up. Thus, even though the sales dramatically decreased, this fixed portion related to operational employee salaries actually increased. 2) a $91,396 write-off in obsolete inventory and shrinkage; and 3) an additional contract adjustment of $34,689 with Great Plains Software, our primary supplier for the Mattress Firm project completed in June of 2000. These amount to a total of $363,818. Taking this amount into account the decrease of cost of revenues would be proportional to the decrease in sales. Selling, General and Administrative expenses increased to $ 863,026 in the nine months ending March 31, 2001 as compared to $ 766,133 for the same period in 2000. The increase was primarily due to significant increases in employee related costs, warrants issued to settle a dispute, theft loss due to forgery, and the increased rent expense attributable to our new IT center. Our net loss was ($1,198,253) for the nine months ended March 31, 2001. This compares to a loss of ($ 227,604) for the same period in 2000. As discussed above the negative results are due primarily to a sharp decrease in revenues as a result of the company not being able to immediately replace revenues it obtained from a large project (the Mattress Firm) starting in 1999 and finishing in early 2000. This loss is additionally attributable to our ramp up of fixed salaried operational employees in expectation of coming online at least three months sooner than we were able to. These delays in building out and bringing online our new facility including our primary telecommunications circuits remain under scrutiny by management for any possible concessions from the primary vendors responsible. 8 Liquidity and Capital Resources Liquidity and access to capital resources for Hyperdynamics Corporation ties directly to the health of our market for our common stock. Our market has suffered substantially in recent months. There is no question that general market conditions and specifically the market for our own common stock on the OTC/BB:HYPD has made it more difficult for the Company to raise capital. The price of our stock and our average daily volumes are down considerably. We have experienced problems that appear to be caused by some or all of our preferred stock Series A shareholders. This problem is discussed in Part II, Item 1. Legal Proceedings section hereunder. The Company is evaluating in detail how these Preferred Shareholders appear to have created a major downward pressure on our stock price and our market volumes. Management believes that this trend was established by them a year ago, greatly exasperating our market problems to date. Thus, management believes its common stock to be significantly under valued even considering its significant reduction in revenues. Any capital raised now will probably cause a significant dilution of current common stock shareholders. In recent months our largest shareholder, Emerald Bay Interests LTD and related parties have decided they need to divest their investment due to other pressing business matters. The Company has been working, partly through a consulting agreement with Michael Watts, brother of Kent Watts, the Company's Chairman, CEO, and President to facilitate an orderly buy-out of this shareholder on a private basis. Success of this private buy-out can go a long way to eliminating a potentially large seller of our common stock and help maintain a reasonably tight float. Management believes this would be healthy for our market and good for all shareholders. At March 31, 2001. our current ratio of current assets to current liabilities was 1.42. This compares to a current ration of 6.1 at June 30, 2000. We have $84,591 of long-term debt associated with operating equipment leases. At March 31, 2001, we had unrestricted cash on hand in the amount of $ 262,314. Management believes the Company needs between $500,000 and $750,000 in additional working capital in order to successfully cash flow its new facility, building a strong recurring revenue base. Without additional working capital, some large contract business, other expense cutting measures taken by the Company, or a combination thereof, the Company's current cash resources could deplete to critical levels over the next few quarters. Thus, management has made it a priority and is working to obtain additional working capital it needs. The Company has inventory it can liquidate and management will work to make this happen as the Company no longer has a need to maintain the levels of inventory it has in the past. The Company has new fixed assets with a book value in the amount of $791,190. This is actually made up of assets that cost $999,662 for the new facility build-out. The difference is part of the amount paid by our landlord for our build-out allowance. We believe part of these hard assets can be used to secure additional short term financing. Management will work to secure this financing. 9 The Company maintains a CD in the amount of $436,000 which secures the Lease with a Letter of Credit arrangement. This CD is released at a rate of approximately 20% per year. The first release of this collateral will occur in November of this year. Prospective Information We have undergone a significant transition and reached a major critical milestone on our road to becoming the premier integrated technology service provider (ITSP). We now have our new facility online. Management's intense focus is now shifted to cash flow the operation. With a significant demand in Houston for tier-1 data center facilities as well as integrated technology services, we are extremely optimistic that we can meet or beat our six-month goal. While continuing to develop new, more flexible, and cost effective Hypersource services, management's primary goal is to fill up the initial data center space with recurring revenue based contracts over the next six months. The Company's strategies for ramping up its sales volume include its new Hyperdynamics Partner Program (HPP). This program was designed to make our new infrastructure available to information technology consultants in the Houston area. This program is being developed by Robert J. Hill, the Company's Senior Vice President. The program establishes IT consultants as Agents for Hyperdynamics IT hosting services. One of the first Agents to sign up under this program was Gulf Coast Business Systems, Inc. As announced by the Company on March 28, 2001 the Company had obtained approximately 150 new customers by a business arrangement with Gulf Coast Business Systems and we hired their two top people. Subsequently, this new Agency program was established and Mr. Hill offered it to Gulf Coast. Gulf Coast decided to become the second of three companies to sign up to date for the program in lieu of its agreement to become employees signed on February 27, 2001. A key positive feature of this HPP relationship is that the Company does not have to take on the overhead of other companies to access their establish customer accounts. These consulting firms like Gulf Coast Business Systems, Inc. can leverage off of our infrastructure to provide bundled services for their clients and they don't have to invest in the infrastructure. The Company is currently evaluating five additional applications for this program. Darren-Anthony Lumar, the Company's Executive Vice President is focusing on continuing to develop the close relationship with AT&T. Recently, the Company signed a new AT&T Agency Agreement. This Agreement makes Hyperdynamics one of approximately 17 companies in the country that have joined this program. It allows us to offer AT&T Business IP Services, AT&T Business Dial-Up Internet Access Services, AT&T Web Site Services, and AT&T Core Data Services. The Company now can add services at its new facility under its existing contract with AT&T or it can sell any service that AT&T provides as its own and/or augmented service offering. Thus, for example Hyperdynamics can service IT projects that require very large and extensive data centers around the country because in essence, AT&T's infrastructure is extended to us. We even have access to the same web pricing tools as AT&T employees under this agreement. For services sold by Hyperdynamics we receive a bonus up front on each contract and a monthly recurring residual. Also, AT&T sales representatives can bring us business surrounding our core competency to provide end-to-end IT services and we can provide a bundled total solution to our mutual customer. Under that scenario we can be the company selling the project or AT&T could be depending on the details of each deal. Management is very excited about the potential this program is providing for meeting its goals to build its recurring revenue base as the Company continues to grow. 10 Harry Briers the Company's CIO has been focused on continuing to build a pipeline for Great Plains based platform business. The Company currently has a few larger deals at different stages of the sales cycle process and is working diligently on closing this business. Now with the new facility, we can implement complete Great Plains (now Microsoft) eEnterprise solutions for companies and then host them with recurring revenue based contracts, after the implementation is complete. With the AT&T alliance we can establish a nationwide wide area network or use the Internet for our IT hosting clients to access their mission critical servers that are managed in our data center facility. Another opportunity that has been presented in recent months to the Company is to become a vertical market Application Service Provider (ASP) for the seismic data storage, conversion, and interpretation industry. This market is closely related to the booming oil industry. One of the opportunities that we hope to release more detailed information about in the near future has to do with projects to convert 2D and 3D seismic data from old tape media over to DVD and transmission of the converted data around the world. There are hundreds of millions of old data tapes that have a limited storage capacity and shelf life. We believe that these tapes will need conversion to save the invaluable data captured on them. Hyperdynamics new facility is a perfect fit to provide custom seismic data conversion services. The Company expects to release more detailed information on this business as it develops. While we are in the process of reaching this milestone, we expect cash flow the operations in the second quarter of FYE June 30, 2002 and to become profitable by the third quarter of FYE 2002. Based on our five-year plan, and during this process of contractually filling up our initial space, we plan to raise additional capital for expansion of our facility at Westwood Technology Center and to initiate second and third ITC's in different parts of the country. While these facilities are coming online, cash flowing, and becoming profitable, we will be looking to contract with the appropriate underwriter to put together a major secondary offering to expand our business model nationally and internationally. 11 Part II Other Information Item 1. Legal Proceedings A. During the quarter a lawsuit was filed against the Company and is described as follows: Court & #: District Court of Harris County, Texas the 215th Judicial District No. 2001-06263 Date Filed: February 2, 2001 Parties: Plantiff: Dixon Financial Services, Ltd. Vs. Defendants: Fidelity Transfer Company, Enrin Oil Exploration, Inc., Bill Knollenberg, Ron Bearden, R.F. Bearden Associates, Inc., James Chang, Nick H. Johnson, Riley L. Burnett, Jr., Johnson, Burnett & Chang, L. L. P., Greenberg, Peden, Siegmyer & Oshman, P.C., George Siegmyer and Hyperdynamics Corporation The $3,000,000 suit stems from the fact that in January of 2000, Dixon Financial Services, Ltd. requested Fidelity Transfer, the Company's transfer agent, to transfer stock in restricted and certificate form under rule 144k and to send them unrestricted certificates that they could deposit into their account as free trading shares. Fidelity Transfer refused to transfer the shares even after Hyperdynamics directed them to. Fidelity transfer had been faxed a temporary restraining order which others claimed prevented Hyperdynamics from transferring the shares. Hyperydnamics hired legal counsel who expeditiously and forcefully showed the court that it should not be part of the TRO at all. Hyperdynamics was immediately released from the TRO. Kent Watts, President for Hyperdynamics, its corporate counsel, and additional counsel clearly directed Fidelity to transfer the shares. Other claims of the suit claims that other defendants acted as conspirator's who falsified documents and fraudulently obtained the temporary restraining order that initially caused the problem. Hyperdynamics has filed a cross-claim in this suit claiming that Fidelity acted willfully in their failure to transfer the stock when directed to do so and thus the Company's position is that because of their willful action, we will not indemnify them whatsoever. Counsel believes that the Company has done everything proper and prudent in this matter and believes its exposure should be minimal if any. 12 B. During the quarter a lawsuit was filed against the Company and is described as follows: Court & #: The Court of Chancery of the State of Delaware Civil Action# 18811-NC Date Filed: April 9, 2001 Parties: Plantiff: Wellington, LLC. Vs. Hyperdynamics Corporation, Kent Watts, and Michael Watts Wellington LLC sued Hyperdynamics to make the Company start converting their preferred stock again after the Company stopped converting due to a breach of the selling provision as amended in the subscription document. On December 4, 2000 a letter was written by Kent Watts, President for the Company to Wellington LLC informing them that for the second time within a six month time frame that we believe that they had breached the selling provision contained in the subscription agreement documents. After the first breach the President wrote a similar letter and then negotiated an amendment to the selling provision dated September 25, 2000. The selling provision was placed in the document to protect the Company's market from being dumped on indiscriminately by the preferred shareholder, thereby protecting the value for all shareholders. The December 2000 letter further stated that "Under the circumstances, in order to protect all shareholder interests, it will not be possible for the Company to convert any more Series A Preferred stock for Wellington LLC until this supporting evidence can be provided and we can become reasonably comfortable that this breach has not occurred as it appears". Further investigation and information provided by Wellington clearly substantiated their second breach. At that time, two conversions had been sent in by Wellington, LLC. One on December 4, 2000 was a $35,000 conversion for 59,905 shares of HYPD common stock and another conversion for $40,000 for 63,000 shares. Based on the breach the Company started negotiations in good faith with Wellington LLC to try and determine a basis that the Company could protect the interests of all shareholders and again start converting again in the future. In that spirit of good faith, Wellington asked us to at least deliver 37,076 shares of the 122,905 shares converted in December. The Company delivered 37,076 shares at their request with the understanding that no additional shares would be delivered until a new arrangement securing the accountability of how they sell the shares could be reached. It appears now that the 37,076 delivered was to cover their short sale in the market. Further investigation of their trading practices back to the original dates that Wellington LLC started converting reveals that Wellington LLC was heavily shorting our stock possibly even before the financing deal was signed, as it appears. We are concerned that they have consequentially been selling unregistered securities since they were sold prior to being converted under the Company's SB2 registration and resulting in a scenario whereby they have driven our price down illegally and thus have already received more shares than they had coming to them for their investment. Hyperdynamics is in the process of either responding to their lawsuit or to work out a mutually agreeable arrangement to go forward. Depending on the further response of Wellington LLC, the Company is also investigating other options including the possibility of filing its own lawsuit against them. Depending on their response, this may be the only alternative the Company is reasonably left with. 13 Item 2. Changes in Securities The following transactions were effected by us in reliance upon exemptions from registration under the Securities Act of 1933 as amended under Section 4(2). We believe that these investors had knowledge and experience in financial and business matters that allowed them to evaluate the merits and risk of the receipt of these securities, and that they were knowledgeable about our operations and financial condition. No underwriter participated in, nor did we pay any commissions or fees to any underwriter in connection with this transaction. This transaction did not involve a public offerings. Each certificate issued for these unregistered securities contained a legend stating that the securities have not been registered under the Act and setting forth the restrictions on the transferability and the sale of the securities. In March of 2001 we issued 100,000 shares of restricted common stock to Smith Commercial Contracting, Inc. in payment of the general contracting fee for the build-out at our new facility. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None. (b) Reports on Form 8-K None. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly HyperDynamics Corporation ---------------------------------- Dated: May 19, 2001 By: /s/ Kent Watts Kent Watts, Chairman of the Board, Chief Executive Officer, and Chief Accounting Officer 14