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: September 30, 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 (IRS Employer of incorporation or organization) Identification No.) 9700 Bissonnet, Suite 1700 Houston, Texas 77036 (Address of principal executive offices, including zip code) 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 September 30, 2001 15,712,194 shares of common stock, $0.001 par value, were outstanding. Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] TABLE OF CONTENTS Part I Financial Information ITEM 1 Financial Statements 3 Consolidated Balance Sheet at September 30, 2001 (unaudited) 3 Consolidated Statements of Income for the three months ended September 30, 2001 and 2000 (both unaudited) 4 Consolidated Statements of Cash Flows for the three months ended September 30, 2001 and 2000 (both unaudited) 5 Notes to Consolidated Financial Statements 6 ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Part II Other Information ITEM 1 Legal Proceedings 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 CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 2001 ASSETS Current Assets Cash $ 37,117 Restricted certificate of deposit 65,445 Accounts receivable, net of allowance for doubtful accounts of $3,000 32,645 Inventory 37,155 Advances to officers and directors 26,233 Other current assets 14,201 ------------ TOTAL CURRENT ASSETS 212,796 ------------ Property and Equipment, net of accumulated depreciation of $158,920 791,890 Other Assets Restricted certificate of deposit 370,855 Deposits and other 23,432 Total other assets 410,904 ------------ TOTAL ASSETS $ 1,415,590 ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Current portion of installment debt $ 17,855 Accounts payable and accrued expenses 319,269 Accrued rent 124,432 Lawsuit costs payable in stock 74,240 Dividends payable 150,668 Dividends payable to related party 36,333 ------------ TOTAL CURRENT LIABILITIES 722,797 ------------ LONG-TERM PORTION OF INSTALLMENT DEBT 77,100 ------------ Stockholders' Equity Preferred stock, par value $0.001; 20,000,000 shares authorized Series A - 1,945 shares issued and outstanding 2 Series B - 2,725 shares issued and outstanding 3 Common stock, par value $0.001; 50,000,000 shares authorized; 15,712 15,712,194 shares issued and outstanding. Additional paid-in capital 6,054,543 Retained deficit (5,454,567) ------------ Total stockholders' equity 615,693 ------------ Total Liabilities and Stockholders' Equity $ 1,415,590 ============
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HYPERDYNAMICS CORPORATION CONSOLIDATED INCOME STATEMENTS 3 MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 2001 2000 ------------- ------------ Revenues $ 83,069 $ 130,789 Cost of Revenues 158,982 241,686 ------------- ------------ GROSS MARGIN (75,913) (110,897) ------------- ------------ Operating Expenses Selling 51,545 53,037 General and Administrative 269,454 338,318 Depreciation 47,788 8,340 ------------- ------------ TOTAL OPERATING EXPENSES 368,787 399,695 ------------- ------------ OPERATING LOSS (444,700) (510,592) Other Income (Expense) Gain on sale of Revenue Sharing Agreement 3,500 Interest income 4,073 32,583 Interest expense (2,980) NET LOSS $ (443,607) $ (474,509) ------------- ------------ PREFERRED DIVIDEND REQUIREMENT (47,118) (26,330) ------------- ------------ NET LOSS CHARGEABLE TO COMMON SHAREHOLDERS $ (490,725) $ (500,839) ============= ============ NET LOSS PER COMMON SHARE $ (0.03) $ (0.04) Weighted average shares outstanding 14,816,944 13,263,803
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HYPERDYNAMICS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS 3 MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 2001 2000 ---------- ----------- Cash flows from operating activities Net loss $(443,607) $ (474,509) Adjustments to reconcile net income to cash provided from operating activities Depreciation and amortization 47,788 8,340 (Gain) on sale of revenue sharing agreement (3,500) Options and warrants issued 9,883 70,777 Common stock issued for services 13,000 Changes in: Accounts receivable (1,957) 361,889 Inventory 9,023 (8,314) Other assets 7,792 18,034 Accounts payable and accrued expenses 84,597 (94,286) ---------- ----------- NET CASH USED FOR OPERATING ACTIVITIES (286,481) (108,569) ---------- ----------- Cash flows from investing activities Construction in progress (47,685) Purchase of equipment (1,445) (692) ---------- ----------- NET CASH USED FOR INVESTING ACTIVITIES (1,445) (48,377) ---------- ----------- Cash flows from financing activities Purchases of common stock (2,602) Collection of stock subscription receivable 95,000 Payments on installment debt (4,022) Proceeds from sale of common stock 199,800 18,819 ---------- ----------- NET CASH PROVIDED FROM FINANCING ACTIVITIES 290,778 16,217 ---------- ----------- Net increase (decrease) in cash 2,852 (140,729) CASH AT BEGINNING OF PERIOD 34,265 1,033.435 ---------- ----------- CASH AT END OF PERIOD $ 37,117 $ 892,706 ========== ===========
5 HYPERDYNAMICS CORPORATION NOTES TO FINANCIAL STATEMENTS 1. The unaudited 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 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 presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosures contained in the audited financial statements for the most recent fiscal year, 2001, as reported in the Form 10-KSB, have been omitted. 2. During the quarter 325,250 options were exercised for $199,800 and 1,015,000 shares were issued to professionals in payment of legal costs accrued in the prior year of $812,000. Also during this quarter, we extended the expiration date of warrants issued to a consultant to purchase 100,000 shares of common stock at an exercise price of $1.50 resulting in compensation expense of $9,883, which is reflected as an increase in additional paid-in capital. 3. Segment information. During the quarter ended September 30, 2000, the company had no reportable segments. During the quarter ended September 30, 2001, the company had two reportable segments, seismic data services (SCS) and information technology segment (HYPD). The following table summarizes certain balance sheet and income statement data as required by SFAS 131: HYPD SCS Totals ----------- --------- ----------- Revenues $ 42,673 $ 40,396 $ 83,069 Cost of sales (113,668) (45,314) (158,982) Selling, general and administrative (273,292) (47,707) (320,999) Depreciation and amortization (46,844) (944) (47,788) Interest income 4,073 4,073 Interest expense (2,980) (2,980) ----------- --------- ----------- Net loss $ (390,038) $(53,569) $ (443,607) =========== ========= =========== Segment assets $1,347,384 $ 63,206 $1,415,590 Expenditures for long-lived assets 1,445 1,445 CAUTIONARY STATEMENT ON FORWARD-LOOKING 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 10QSB 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 6 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. Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Information Technology Segment Sales decreased to $ 42,673 for the three (3) months ended September 30, 2001. This compared to $130,789 for the same period in 2000. The decrease in revenue is a result of a slow of ITC revenues. Cost of Revenues decreased to $113,668 for the three (3) months ended September 30, 2001. This compared to $241,686 for the same period in 2000. The reduction is due to the drop in revenues and also due to the one-time inventory charges that were taken last year. The drop in costs of revenues is not proportional due to our migration to the ITC business model, which has a higher fixed component than our then-core value-added reselling and consulting business. Our costs now consist mainly of operational salaries and the cost for our point of presence. For the three (3) month period ended September 30, 2001, gross margin decreased to (166)% compared to (85)% for the same period in 2000. The decrease is due to the overall drop in service revenues resulting from the slow ramp-up of the new facility. As we ramp up the incremental costs are few, so we expect to achieve much better margins once we book additional ITC business. Selling, General and Administrative expenses decreased to $ 320,136 in the three (3) month period ending September 30, 2001, as compared to $399,696 for the same period in 2000. The September 2000 results have been restated from the amounts previously reported to reflect the fair value of warrants issued to consultants of $70,777 and other minor expenses. The net decrease is a reflection of a decrease in salary and consulting expense countered with increased rent and depreciation expense. Net Loss. Our net loss was ($390,038) for the three (3) month period ended September 30, 2001. This compares to a loss of ($474,509) for the same period in 2000. As discussed above this is due to significant reductions in inventory, salaries, and consulting costs counterbalanced by reductions in revenue and increases in rent, utilities, and depreciation expense. Seismic Data Services Segment In our first full quarter operating the Seismic Data Services Segment, we generated revenues of $40,396 and a gross margin of $($4,918) or (12%). Net loss attributable to this segment was $(53,569). Liquidity and Capital Resources At September 30, 2001 our current ratio of current assets to current liabilities was 0.30. This compares to 4.70 for 2000. This reflects the funding of cash deficits which resulted from operating losses during the year. Although management has prospects for additional equity funding, it is management's priority to generate positive cash flows from operations as soon as possible. We received the first release of $65,225 from the CD securing our letter of credit in favor of our landlord during November 2001. The next release of $87,260 will occur next November. We may obtain additional capital upon the exercise of previously-issued warrants and outstanding options for common stock. 7 On September 28, 2001, the Company signed a stock subscription agreement to sell up to $750,000 on a best efforts basis, of our restricted 144 common stock to IC Investments LTD at $.50 per share. As of November 14, 2001, we have received $50,000 in connection with this agreement. General Discussion and Prospective Information We have experienced difficulty in generating revenues and profitability in both our operating segments. We believe this is due mainly to the general business downturn and to the long educational and sales cycles required to get our target customers to understand the cost/benefits of our product and service offerings which is necessary to close new business. The industry has been so unstable that it is more difficult today to convince customers to entrust their mission-critical data to an outside vendor. This is somewhat of a chicken or the egg scenario. As we get more business, new customers become easier and easier to close, the better we do operationally. The complete outsourcing of the technology needs of mid-sized businesses is the niche our IT services segment seeks to occupy, and we have not pursued and do not plan to pursue conventional IT business. Our marketing approach focuses on relationships - we differentiate ourselves by offering comprehensive business solutions tailored to our customers and we have built synergetic relationships with business partners such as CalSoft, Premiere Media Group, MaxVu, and others, which expands both our contact base and our potential offerings to our customers. In essence our personnel resources through our strategic alliances are 600 to 800 strong, while our own payroll is currently at 12 people. We believe the value of this approach is that we can compete on quality bundled services that have superior cost/benefit and not on price alone. Thus, we can participate in higher margin business that is much more beneficial to our clients and ourselves. This is a difficult business strategy to take, particularly during a business downturn, because customers become more price-sensitive. However, we believe that providing a complete, customized business solution rather than competing based only on price is key to long-term success in this industry. We currently have a number of contracts under negotiation and plan to continue to aggressively market our capabilities. The activities of the seismic data segment were concentrated significantly on a significant contract to convert 70,000 tapes to DVD, as discussed our latest Annual Report on Form 10-KSB. The contract which is signed with our customer is currently in the final stages of putting the detailed specifications into a written contract with a major oil company. Based on verbal representations, we expect this core project to come online by January, 2002 at the latest. This contract will provide significant cash flow. We also have new service offerings together with our strategic partner, PrimeView, such as an application that enables remote seismic data processing that will be available on a subscription basis. There now at least 1/2 dozen customers asking for SCS to provide a processing center to process geophysical data on a per diem basis. The opportunity is substantial and together with the ITC infrastructure, we can provide benefits such as worldwide collaboration on interpretive output from our hosting center. Also, with the economy in its present condition, it is an advantage to be able to analyze data daily and only pay for when you use it. Based on our five year plan, and during this process of contractually filling up our initial ITC space, we plan to raise additional capital for expansion of our facility at its first ITC and to initiate ITCs number 2 and 3 in a 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. 8 PART II OTHER INFORMATION ITEM 1. Legal Proceedings On November 4, 2001, the Company filed a lawsuit styled Hyperdynamics Corporation v. J.P. Carey Securities, et. al, Cause No. 2001CV44988, Superior Court of Fulton County, Georgia. The suit alleges breach of contract, fraud, constructive fraud, breach of fiduciary duties, failure to indemnify, unlawful conversion, violation of Georgia Securities Act of 1973, and violation of the Georgia Racketeer Influenced and Corrupt Organizations (RICO) Act. The Company seeks actual damages and punitive damages. ITEM 2. Changes in Securities In addition to the transactions occurring during the quarter ended September 30, 2001, which were reported in our Annual Report on Form 10-KSB, we have effected the following transactions in reliance upon exemptions from registration under the Securities Act of 1933 as amended (the "Act") as provided in Section 4(2) thereof. Each certificate issued for 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. No underwriter participated in, nor did we pay any commissions or fees to any underwriter in connection with any of these transactions. None of the transactions involved a public offering. We believe that each person had knowledge and experience in financial and business matters which allowed them to evaluate the merits and risks of our securities. We believe that each person was knowledgeable about our operations and financial condition. In October 2001, options to purchase 50,000 shares at $1.25 per share were granted to Tarrant Hancock for consulting services. The expiration date of these warrants is October 18, 2002. This was a private placement made in reliance on Section 4(2) of the Act. In November 2001, we issued 100,000 shares to IC Investments, LTD pursuant to a $50,000 cash payment which was a partial payment on a subscription agreement to purchase up to 1,500,000 shares of common stock. This was a private placement made in reliance on Section 4(2) of the Act. Item 6 Exhibits and Reports on Form 8-K (a) EXHIBITS None (b) REPORTS ON FORM 8-K On September 04, 2001 the Company filed Form 8K reporting the resignation of a director. 9 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 (Registrant) By: /s/ Kent Watts -------------------- Kent Watts, Chairman of the Board, Chief Executive Officer, and Chief Accounting Officer Dated: November 15, 2001 10