10QSB 1 doc1.txt UNITED STATES SECURITY 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: December 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 (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 December 31, 2001, 18,481,654 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 December 31, 2001 (unaudited) 3 Consolidated Statements of Income for the three and six months ended December 31, 2001 and 2000 (both unaudited) 4 Consolidated Statements of Cash Flows for the six months ended December 31, 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 10 ITEM 1 Legal Proceedings 10 ITEM 2 Changes in Securities 10 ITEM 6 Exhibits and Reports on Form 8-K 10 (a) Exhibits (b) Reports on Form 8-K SIGNATURES 11 2
PART 1 FINANCIAL INFORMATION Item 1 FINANCIAL STATEMENTS HYPERDYNAMICS CORPORATION Consolidated Balance Sheet December 31, 2001 ASSETS Current Assets Cash $ 39,719 Restricted certificate of deposit 87,260 Accounts receivable, net of allowance for doubtful accounts of $7,290 12,566 Inventory 51,363 Advances to officers and directors 17,700 Other current assets 4,725 ------------ TOTAL CURRENT ASSETS 213,333 ------------ Property and Equipment, net of accumulated depreciation of $194,361 758,614 Other Assets Restricted certificate of deposit 283,595 Customer list, net of accumulated amortization of $36,933 14,067 Deposits 23,432 ------------ Total other assets 321,094 ------------ TOTAL ASSETS $ 1,293,041 ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Current portion of installment debt $ 18,357 Accounts payable and accrued expenses 341,632 Accrued rent 141,248 Dividends payable 158,827 Dividends payable to related party 63,583 ------------ TOTAL CURRENT LIABILITIES 723,647 ------------ LONG-TERM PORTION OF INSTALLMENT DEBT 72,329 ------------ 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; 18,481,654 shares issued and outstanding. 18,482 Additional paid-in capital 7,382,074 Retained deficit (6,903,496) ------------ Total stockholders' equity 497,065 ------------ Total Liabilities and Stockholders' Equity $ 1,293,041 ============
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HYPERDYNAMICS CORPORATION Consolidated Income Statements 3 Months and 6 Months ended December 31, 2001 and 2000 3 MONTHS ENDED 6 MONTHS ENDED 2001 2000 2001 2000 ----------------- ----------------- ---------------- ----------------- Revenues $ 126,740 $ 135,341 $ 209,809 $ 266,130 Cost of Revenues 152,959 360,067 311,941 601,753 ----------------- ----------------- ---------------- ----------------- GROSS MARGIN (26,219) (224,726) (102,132) (335,623) ----------------- ----------------- ---------------- ----------------- Operating Expenses Selling 14,916 41,071 66,461 94,108 General and Administrative 1,338,493 239,069 1,607,947 577,387 Depreciation 37,991 43,916 85,779 52,256 ----------------- ----------------- ---------------- ----------------- TOTAL OPERATING EXPENSES 1,391,400 324,056 1,760,187 723,751 ----------------- ----------------- ---------------- ----------------- OPERATING LOSS (1,417,619) (548,782) (1,862,319) (1,059,374) Other Income (Expense) (Loss) on retirement of assets (15,610) (15,610) Impairment (loss) (25,057) (21,557) Other 2,874 978 2,874 978 Interest income 3,963 20,551 8,036 53,134 Interest expense (2,739) (693) (5,719) (693) ----------------- ----------------- ---------------- ----------------- NET LOSS (1,413,521) (568,613) $ (1,857,128) $ (1,043,122) PREFERRED DIVIDEND REQUIREMENT (35,409) (30,027) (82,527) (56,357) NET LOSS ----------------- ----------------- ---------------- ----------------- CHARGEABLE TO COMMON SHAREHOLDERS $ (1,448,930) $ (598,640) $ (1,939,655) $ (1,099,479) ================= ================= ================ ================= NET LOSS PER COMMON SHARE $ (.09) $ (.04) $ (.13) $ (.08) Weighted average shares outstanding 16,123,351 13,597,070 15,470,148 13,345,360
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HYPERDYNAMICS CORPORATION Consolidated Statements of Cash Flows 6 Months Ended December 31, 2001 and 2000 2001 2000 ------------ ------------ Cash flows from operating activities Net loss $(1,857,128) $(1,043,122) Adjustments to reconcile net income to cash provided from operating activities Depreciation and amortization 85,779 52,256 Impairment 21,557 Loss on retirement of assets 15,610 Options and warrants issued 21,910 70,777 Common stock issued for services 1,075,000 110,375 Changes in: Accounts receivable 18,122 372,683 Inventory (5,185) (4,322) Other assets 25,802 9,137 Accounts payable and accrued expenses 142,811 386,047 ------------ ------------ NET CASH USED FOR OPERATING ACTIVITIES (492,888) ( 9,002) ------------ ------------ Cash flows from investing activities Construction in progress (501,739) Purchase of equipment (3,611) ( 81,084) ------------ ------------ NET CASH USED FOR INVESTING ACTIVITIES (3,611) ( 582,823) ------------ ------------ Cash flows from financing activities Purchases of common stock ( 2,602) Collection of stock subscription receivable 95,000 Release of restricted certificate of deposit 65,445 Proceeds from installment debt 78,698 Payments on installment debt (8,291) (1,001) Proceeds from sale of common stock 349,800 18,819 ------------ ------------ NET CASH PROVIDED FROM FINANCING ACTIVITIES 501,954 93,914 ------------ ------------ Net increase (decrease) in cash 5,454 (497,911) CASH AT BEGINNING OF PERIOD 34,265 1,033.435 ------------ ------------ CASH AT END OF PERIOD $ 39,719 $ 535,524 ============ ============
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 six months ended December 31, 2001 324,750 options were exercised for $199,800 and 100,000 shares were issued upon the cashless exercise of 300,000 warrants with an exercise price of $.40 when the market price was $.60. 1,136,588 shares were issued to professionals in payment of legal costs accrued in the prior year or to extinguish accounts payable of $905,274. We issued 2,197,872 valued at $1,075,000 to consultants for services rendered in the quarter ended December 31, 2001. We issued 350,000 shares for $150,000 invested pursuant to private subscription agreements. Also during the six months, we extended the expiration date of warrants issued to consultants to purchase 150,000 shares of common stock at exercise prices ranging from $1.25 to $1.50 resulting in compensation expense of $21,910, which is reflected as an increase in additional paid-in capital. As of February 5, 2002, 75,452 shares were issued to settle accounts payable of $40,745 and 100,000 shares were purchased for cash of $50,000. 3. Segment information. During the six months ended December 31, 2000, the company had no reportable segments. During the six months ended December 31, 2001, the company had two reportable segments, geophysical data services (SCS) and integrated technology segment (HYPD). The following tables summarize certain balance sheet and income statement data as required by SFAS 131:
As of December 31, 2001: HYPD SCS Totals ----------- ------------ ------------ Segment assets $1,243,361 $ 49,680 $ 1,293,041 3 Months Ended December 31, 2001: HYPD SCS Totals ----------- ------------ ------------ Revenues $ 45,526 $ 81,214 $ 126,740 Cost of sales (73,115) ( 79,844) (152,959) Selling, general and administrative (269,951) (1,083,458) (1,353,409) Depreciation and amortization (37,047) (944) (37,991) Interest income 3,963 3,963 Interest expense (2,739) (2,739) Other income 2,874 2,874 ----------- ------------ Net loss $ (330,489) $(1,083,032) $(1,413,521) =========== ============ ============ Expenditures for long-lived assets $ 2,166 $ 2,166 6 6 Months Ended December 31, 2001: HYPD SCS Totals ----------- ------------ ------------ Revenues $ 88,199 $ 121,610 $ 209,809 Cost of sales (186,784) (125,158) (311,942) Selling, general and administrative (543,242) (1,131,165) (1,674,407) Depreciation and amortization (83,891) (1,888) (85,789) Interest income 8,036 8,036 Interest expense (5,719) (5,719) Other income 2,874 2,874 ----------- ------------ ------------ Net loss $ (720,527) $(1,136,601) $(1,857,128) =========== ============ ============ Expenditures for long-lived assets $ 3,611 $ 3,611
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 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 Integrated Technology (IT) Service Segment Integrated technology service sales decreased from $266,130 to $89,199 because during calendar 2001 we effectively ceased our old business of sales and support of computer hardware and software. When we moved to our new facilities in Spring 2001, we began offering our Hypersource integrated technology outsourcing service. We expect this service ultimately to result in a recurring revenue base, but to date the sales of this service offering have been slower than expected. We are also pursuing IT projects and hope to show significant results during fiscal 2002. Cost of Revenues decreased to $186,784 for the six (6) months ended December 31, 2001. This compared to $601,753 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. Additionally, we had staffed up in 2000 in preparation for our migration to the ITC business model, but we later reduced our workforce. Therefore, employee costs are lower in the six months ended December 31, 2001 as compared with the six months ended December 31, 2000. For the six (6) month period ended December 31, 2001, gross margin decreased to (112)% compared to (95)% for the same period in 2000. The 7 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 increased to $ 627,133 in the six (6) month period ending December 31, 2001, as compared to $607,148 for the same period in 2000. The December 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 increase is a reflection of a decrease in salary and consulting expense countered with increased rent and depreciation expense. Net Loss. Our net loss was ($720,527) for the six (6) month period ended December 31, 2001. This compares to a loss of ($872,937) 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. Geophysical Data Services Segment In our first six months operating the Geophysical Data Services Segment, we generated revenues of $121,610 and a gross margin of ($3,548) or (3%). Net loss attributable to this segment was $(1,136,601). The large increase in Selling, General, and Administrative expense is mainly due to $1,075,000 of consulting costs paid during the quarter with stock. This cost is not expected to be recurring. Liquidity and Capital Resources At December 31, 2001 our current ratio of current assets to current liabilities was 0.29. This compares to 1.45 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. See the "General Discussion and Prospective Information" below regarding our plans for significantly improved liquidity. 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. 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 February 15, 2002, we have received $265,000 in connection with this agreement. General Discussion and Prospective Information This year has been a continuation of our pursuit to ramp up our new facility and close and implement new recurring revenues under our ITSP business model and a diversification into the more vertical focused geophysical data services industry. Both segments of business utilize the same integrated technology center (ITC) infrastructure built and initiated last year. The integrated technology (IT) services industry, since the demise of the dot-coms has been in major flux over the last few years. As a result, the development of our IT services segment of business has proven to come much slower than originally expected. We believe this is due mainly to the general business downturn and to the long educational and sales cycles required to get our target IT customers to understand the cost/benefits of our product and service offerings which is necessary to close new business. The IT 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 a success breeds success scenario. As we 8 get more business, new customers become easier and easier to close. 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, except for larger core IT infrastructure opportunities we have been developing with international partners whereby we will design, implement and manage IT systems that communicate via our ITC infrastructure. We expect to announce more about these core infrastructure deals in the coming weeks. Our marketing approach focuses on relationships - we differentiate ourselves by offering comprehensive integrated business solutions tailored to our customers and we have built synergetic relationships with business partners such as AT&T, Lightspeed Systems, 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 in the hundreds and even thousands, 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 overall and not on price alone for one particular piece. 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 initially, particularly during a business downturn, because customers become more price-sensitive. However, we believe that educating our customers regarding concepts like total cost-of-ownership, and 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 IT contracts and projects under negotiation and plan to continue to aggressively market our capabilities. We have experienced difficulty in generating revenues and profitability in both our operating segments so far this year, however we are extremely encouraged with the work starting up for the Geophysical Data Services segment. Although we do have significant (IT) business that we have been working on and expect to close in the near future, management made a significant decision last year to diversify and acquire SCS Corporation. The activities of the geophysical data segment have been concentrated significantly on a significant contract to convert thousands of geophysical data tapes to DVD, as discussed our latest Annual Report on Form 10-KSB. The expectation from the acquisition was to close this currently available business that could significantly enhance our cash flow from operations first and ultimately our profitability in the future. We completed the acquisition with the expectation that we would close the tape transcription project in October of 2001 and startup work in November. Based on a reorganization of the client, this time frame was pushed back until our most recent announcement on February 14, 2002. The SCS Acquisition is now beginning to meet our original expectations and based on this contract coming completely online operationally and other business for SCS such as PrimeView seismic interpretation subscription operations and data brokerage, we expect SCS will substantially exceed those expectations before the end of this fiscal year. Since management's priority focus is on increasing recurring service revenues as quickly as possible so that the Company cash flows itself from its operations, the officers for the Company have voluntarily given a moratorium on receiving their salaries since December 1, 2001. Although it does not appear that we will cash flow from operations during the 3rd quarter to end March 31, 2002, with the tape transcription project now coming online, the company expects substantial improvement by significantly increasing cash from operations without increasing overhead burdens. This transcription project, together with the moratorium on officer salaries, will give us a real chance to completely cash flow from operations in the fourth quarter of fiscal year end June 30, 2002. This is expected to be a major milestone and will put the company into a significant growth mode for the future. 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 and/or in foreign countries. 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. 9 PART II OTHER INFORMATION ITEM 1. Legal Proceedings The lawsuit styled Cherie Dunn v. Hyperdynamics Corporation, Cause No. 2000-27220, 80th Judicial District Court, Harris County, Texas was settled during the quarter. ITEM 2. Changes in Securities 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, warrants to purchase 50,000 shares at $1.25 per share were granted to Tarrant Hancock for consulting services. We valued these options at $1,000. 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. Between September 2001 and January 31, 2002, we issued 400,000 shares to IC Investments, LTD pursuant to $200,000 cash payments which have been made 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. In November 2001, Darren-Anthony Lumar, a former officer of the Company, received 100,000 shares of restricted stock in connection with the cashless exercise of 300,000 warrants which had been issued to him on July 25, 2001. This was a private placement made in reliance on Section 4(2) of the Act. In December 2001, Earl Norwood purchased 100,000 shares of restricted stock for $25,000 and received warrants to purchase an additional 100,000 shares at an exercise price of $1.00 pursuant to a subscription agreement. 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 None. 10 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: February 18, 2002 11