10KSB 1 doc1.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB [X] Annual Report Pursuant To Section 13 Or 15(D) Of The Securities Exchange Act Of 1934; For The Fiscal Year Ended: June 30, 2002 or [ ] Transition Report Pursuant To Section 13 Or 15(D) Of The Exchange Act of 1934 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) (713) 353-9400 (Registrant's telephone number, including area code) Securities registered under Section 12(b) of the Exchange Act: Name of Each Exchange Title of Each Class on which Registered ---------------------- ------------------- N/A N/A Securities registered pursuant to 12(g) of the Exchange Act: Title of Each Class Common Stock, $.001 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] Issuer's revenues for the year ended June 30, 2002 were $355,628. The aggregate market value of Common Stock held by non-affiliates of the registrant at September 27, 2002, based upon the last reported sales prices on the OTCBB of $0.28 was $5,204,208. As of September 27, 2002, there were 21,231,971 Shares of Common Stock outstanding. 1
TABLE OF CONTENTS PART I Item 1 Business 3 Item 2 Properties 8 Item 3 Legal Proceedings 9 Item 4 Submission of Matters to a Vote of Security Holders 9 PART II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 10 Item 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 7 Financial Statements 18 Item 8 Changes in and Disagreements With Accountants in Accounting and Financial Disclosure 18 PART III Item 9 Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of The Exchange Act 19 Item 10 Executive Compensation 21 Item 11 Security Ownership of Certain Beneficial Owners and Management 24 Item 12 Certain Relationships and Related Transactions 26 Item 13 Exhibits and Reports on Form 8-K 27
2 PART I ITEM 1 Business Focus Shift to Seismic Data Management, and Oil and Gas Exploration Out of necessity resulting from a dramatic downturn in the IT services and related communications industries, and the design of a basic diversification strategy, we transitioned our focus this year. In the most general sense, the company leveraged its resources away from a troubled IT services market and diversified to a more clear cut vertical focus in the arena of seismic data management within the oil and gas exploration industry. This shift of focus began after the acquisition of SCS Corporation in May of 2001. This resulted in the addition of Oil and Gas industry based service revenues associated with seismic data management to our revenue base. The necessity to vertically focus and diversify began when we experienced serious problems in the transition regarding the time it took for our mission critical fiber to be installed at the new facility in 2001. The Company encountered unforeseen delays in moving into its new facility while the entire ITSP industry was encountering major difficulties. The need for vertical diversification away from general ITSP services was accented dramatically during the year with the literal downfall of so many once viable communications companies including such name brands as Worldcom, as one example. ITSP business model re-prioritized and placed on hold As required by the companies ITSP business plan, in January 2000 the Company raised approximately $3,000,000 in capital from preferred stock series A holders with a commitment to raise eight million dollars ($8,000,000) altogether. According to the plan a substantial portion of this initial $3,000,000 was immediately allocated for required ITC infrastructure. Following the initial receipt of the three million dollars that netted the Company approximately $2,600,000 in cash, it was subsequently determined that the additional commitment for the required five million in additional equity financing was part of a sham. Based on allegations brought forth and additional information discovered after the litigation was filed, it is now clear to management that the Company never had a chance to raise sufficient capital and was in essence prevented from raising the capital necessary to properly implement the ITSP business model in 2000 and 2001. These and other serious issues resulted in the Company's counter lawsuit (Item 3 Legal Proceedings) filed during the fiscal year. The Company believes that the Preferred Stock, series A shareholders prevented us from raising the additionally required capital necessary to make our Hypersource service model operationally viable. The lack of that planned-for capital resulted in no funds available for product and service development or marketing and sales. As a result, the Company failed to obtain minimally required core ITSP business at the Company's new facility in 2000 and 2001. The original plan was to raise a minimum of eight million dollars ($8,000,000) necessary to build and sustain a reasonable core block of operational service business for its new Integrated Technology Center (ITC). Obtaining this core block of business was to be accomplished while reflecting a reasonably liquid balance sheet necessary to exude the appropriate level of confidence to our potential customers and giving them a comfort level to enter into long-term service contracts with us. Since the ITSP business model included a basic strategy to become the entire IT service arm for its customers, it was imperative that Hyperdynamics financials showed this serious financial stability and it was always an integral part of our plan to be able to do so. During the fiscal year several potential contracts were lost and never came to fruition as a result of the cash position and stability reflected in its financial position and result of operations. Consequently, we were not seriously considered for 3 significant service business as a direct result of being prevented from raising the additional required capital pursuant to the business plan. In addition to the lack of capital required for the successful ramp up of the ITSP business model a dramatic downturn in the communications and IT services industry made it almost impossible to close significantly more business and increase revenues for this targeted sector of the Company's business. The dramatic curtailment of required capital as discussed above and the faltering of the ITSP industry, including communication and technology companies as a whole made it clear to management that we must try to position ourselves to obtain core business in other creative ways. A plan was born to leverage our infrastructure and shift our service focus towards vertical industries. Thus, after the acquisition of SCS, a natural vertical focus was placed on the tape transcription business being developed by the newly acquired SCS Corporation and ultimately the ITSP business model, although still believed to have future potential, has been placed on hold and de-emphasized. Instead, the ITC infrastructure has now been redirected to support the developing tape transcription and seismic data management business of SCS Corporation, our wholly owned subsidiary. Acquisition of SCS Corporation and Leveraging of ITC Infrastructure The Company implemented a significant diversification strategy on May 31, 2001 by closing its acquisition of SCS Corporation. This acquisition was a critical and strategic transaction that has significantly strengthened us, giving us substantial vertical industry expertise in the area of Geophysical Data Management. Neil Moore, President for SCS Corporation and Robert Bearnth, Vice President, have many years of experience in the Oil and Gas Exploration industry. Robert Bearnth is both a Geologist and Geophysicist and has worked for major oil companies including Exxon and Saudi-Aramco. The acquisition of SCS Corporation also allowed us to justify and leverage our investment in our Integrated Technology Center (ITC). It is important to note that, although the ITSP business model has been put on hold, the same infrastructure planned to support that business model is ideal for supporting many others including our diversification into geophysical data management. Indeed we believe that without the ITC, that we would not have been able to attract the acquisition of SCS Corporation at all. Neil Moore viewed the ITC and its capabilities as a major reason to be acquired based on the capabilities and ability to fulfill service contracts in the geophysical data management industry. Tape transcription business and related marketing strategies During the year SCS Corporation closed its first major tape transcription contract to transcribe the seismic data located in Houston, Texas for the country of Trinidad and Tobago. Beginning operationally in April, the company has increased its production on this contract and other smaller jobs every month through the month of August 2002. In September, revenue numbers dropped temporarily as a result of a logistical problem that was solved in early October. However, the missed revenue for the dip in September will be recovered in future periods going forward. Additionally, through the work of Geoserv Marketing as a consultant, Harry Briers, the Company's Executive Vice President, and Neil Moore, SCS's President, new marketing materials and strategies to provide turnkey solutions for maximizing oil company investments in their seismic data have emerged. This long-term, turnkey service is marketed as its NuDataTM services. As a result we are seeing a growing forecast trend for significant long-term transcription, conversion, and data management projects with several major oil companies. We 4 are actively customizing programs for these potential customers and continually moving towards closing more significant contracts in the near future partly resulting from smaller projects that we have already successfully performed. Development of SCS NuDataTM Management System On September 13, 2002 we acquired the copyrights and all rights to the source code of the ONYX and ONYXII related conversion and transcription software. The software is instrumental in providing the technical capabilities to handle virtually any type of tape transcription and data conversion service. The ONYX software establishes a major competitive advantage for us as a primary component for our SCS NuDataTM Management System. The ONYX software has been developed by us over the last five years and the Company is in the process of completing its latest version of the software to more fully take advantage of Microsoft's 32 bit Operating Systems such as Windows 2000 and Windows XP and future 64 bit operating systems as technology advances. As the primary cornerstone of our NuData Management System, ONYX facilitates over 120 different tape formats including such common formats like SEG A,B,C, or D, Western Code 4.2 and 1, Geocore 4, and Tempest, to name a few. These formats are converted to the more standard SEG-Y format and then consolidated to DVD. Features of the NuData(TM)Management System in addition to the ONYX based conversion capabilities include: - A custom and unique tape tracking system tightly monitoring and managing the transcription process and database to organize and keep track of all the data associated with a particular line or area of seismic data. - Bundled services to scan well logs, maps and other related information to PDF format and consolidate such related data on the same disk or DVD as the converted seismic data. - Quality assurance is assured. Data sets are catalogued in the NuDataTM database and then compared to client's database and reconciled to NuDataTM database. - Once consolidated on DVD, there are many different data management and backup solutions available for online virtual private network (VPN) access established privately for a client, to high speed transmission from Hyperdynamics transcription facility to the customer across high bandwidth capacity connection. The Company plans to continue to develop new features to maximize the value of our NuDataTM Management System. When coupled with our extensive industry experience, the NuDataTM Management System allows us to consolidate and organize our client's seismic data in ways to save them substantial amounts in future data maintenance expenses. We can dramatically enhance our customer's accessibility and utility of their seismic data thereby enhancing their ability to find new O&G reserves faster and at a lower cost. In Summary, the NuDataTM Management System makes our clients data much more secure, accessible, manageable, and portable all while saving them significant time and money. Guinea Hydrocarbon Resource Corporation In March 2002 SCS Corporation (SCS), our wholly owned subsidiary, entered into an agreement with USOil Corporation (USOil). USOil approached SCS with a request for assistance in meeting the requirements for oil and gas exploration that it had regarding a 1995 Revenue and Production Sharing Agreement (1995 RPSA) that they had signed with The Republic of Guinea (Guinea) in West Africa. Mr. Neil Moore, President for SCS, had years of geological and geophysical experience in exploring and studying offshore territories including West Africa, in years past. Upon a cursory review of older seismic data originally acquired by USOil, 5 Mr. Moore rapidly concluded that the 65,000 square kilometer area offshore Guinea warranted much more extensive investigation. This was accomplished by establishing Guinea Hydrocarbon Resource Corporation (GHRC) pursuant to the March agreement between USOil and SCS, with Mr. Neil Moore as President of GHRC, and pursuant to that same agreement, by USOil assigning 100% of its rights in the 1995 RPSA currently and in the future to GHRC. Based on Mr. Moore's work, GHRC was able to obtain a contract with a seismic acquisition vessel in the region and thus commenced to fulfill the exploration requirements set forth in the 1995 RPSA and immediately obtained approval from the government of Guinea for new seismic data to be acquired. At the time of formation of GHRC and assignment of the 1995 RPSA pursuant to the March agreement, it was reported by GHRC that the 65,000 square kilometer area was the "entire area" offshore the Republic of Guinea. We have since been informed that this is not the "entire area" but that it is the lion's share of the entire offshore territory. Our understanding now is that there is additional area in deeper water that is not covered by the 1995 RPSA. GHRC went to Guinea and visited top officials in July 2002 and again in September 2002. In September, GHRC reported on a significant portion of the data acquired in April. GHRC has fulfilled the requirements of the initial exploration period and has an approved work program for the first additional exploration period. GHRC is now working to fulfill the September approved work program under the 1995 RPSA. SCS, in addition to being a 50% shareholder in GHRC is continuing to manage the exploration activities of GHRC in accordance with the requirements of the 1995 RPSA and the Company is extremely pleased with GHRC's progress thus far. Current Focus and Direction of Business Plan With our emphasis on SCS Corporation's operations and focus on technology-based services for the Oil and Gas exploration industry, we realigned our services into the following three areas of services: - GEOPHYSICAL DATA TRANSCRIPTION, MIGRATION, PROTECTION, AND RESURRECTION SERVICES - Our proprietary ONYX Software, the core of our NuDataTM Management System services, gives us advanced capabilities to efficiently transcribe seismic data off old tape media onto any other newer tape or disk media. We can perform transcription on a batch job by batch job basis or a production total migration of database basis. By transcribing and copying on a total data migration and production basis, old 2d and 3d seismic data stored on old outdated tape media can be copied off the old media, and printed well log data and associated maps and reports can be digitized and copied over to any other tape media or disk such as DVD-RAM. This migration and organization of data allows all associated data with specified lines of seismic information in a given area to be stored in an organized retrievable fashion and easily queried and quickly accessed for reference and further analysis in the future. - MANAGEMENT OF OIL AND GAS EXPLORATION AND EXPLOITATION OPERATIONS -Including the outsource of Oil and Gas Technology services associated primarily with geophysical data management including seismic data acquisition, seismic data processing including specialties in the area of data transcription, data brokerage, geophysical interpretation and analysis. While the Company has no intention of entering the seismic data acquisition business it now has a need, through GHRC for these services and is establishing significant strategic alliances with seismic acquisition companies. Additionally, the requirement for seismic processing and interpretation of newly acquired data is quite extensive. 6 - ACQUISITION OF ADDITIONAL SEISMIC DATA MANAGEMENT RELATED COMPANIES. The Company is evaluating whether to establish a processing center at its integrated technology center or the possibility of acquiring a seismic processing company as a wholly owned subsidiary. Other acquisition targets that could help us increase our profits would be companies in the seismic tape transcription business and seismic data interpretation business. The Company is evaluating the possibility of acquisitions of small service companies to give the company expanded capabilities to service larger and larger projects. Mission Statement To be the premier integrated technology service provider (ITSP(SM)) facilitating the most cost effective operations for clients within vertical industries of our core competence and significant experience Hyperdynamics has a mission to be a premier integrated technology services provider (ITSP(SM)). Through its initial strategies, Hyperdynamics has begun to build its core ITSP infrastructure capability necessary to be a leader in the ITSP service industry of the future. The acquisition of SCS Corporation in 2001 has initiated the vertical industry strategy of the company with increasing revenues and growing expertise for technology based services in the vertical oil and gas industry. Employees and Independent Contractors The Company has ten full time employees. The Company uses independent contractors to minimize fixed overhead. While utilization of independent contractors reduces the Company's gross profits in the interim, management believes that it ultimately minimizes its risk during our transition period and diversification strategy implementation. Direct employment is expected to increase gradually, matching revenues with expenditures. No employees are represented by a union and the Company believes that its labor relations are good. Alliance Partnerships, Key Vendors and Technical Certifications In the past three years Hyperdynamics has positioned itself to successfully shift its primary revenue base more clearly to IT services while maintaining technical expertise to continue selling hardware and software components on a convention basis. To support this strategy we have enhanced or maintained certifications with Microsoft as a Microsoft Solution Provider, Great Plains Software as eEnterprise reseller, Intel Premier Partner, and Citrix Systems Certified reseller to name a few. The actual technical certifications have now taken a back seat to our vertical software development regarding our new version of ONYX software that is the cornerstone of our NuDataSM end-to-end seismic data services. As such, our technical capabilities are much more focused now into our vertical expertise in seismic data management. In conjunction with its plans to establish its first ITC at the Westwood Technology Center as discussed below, the Company negotiated with major International Exchange Carriers to decide on its key Internet backbone partner for its redundant and scalable bandwidth requirements. Based on their ability and commitment to deliver a redundant fiber based On-Net solution AT&T became that partner in 2001. Based on the significant downturn in the IT services and communications industries, we are currently negotiating to maintain some degree of On-Net capability under a business downturn negotiation with AT&T. Several of the oil companies we have marketed the NuDataTM Management System to, for example, have expressed the desire to have a significant data circuit into our Integrated Technology Center so that we can more easily service their seismic data management needs. Whether with AT&T or other vendors it negotiates with, the Company will maintain grade A communications as required to deliver the top level of services. 7 Other alliance partners established by us this fiscal year include an offshore seismic acquisition company and a supercomputer seismic data processing company. ITEM 2 Properties In 2000 the Company signed a 10-year lease with AGB Westwood, LTD to lease its new facilities at the Westwood Technology Center, a 540,000 square foot development in Houston, Texas. After tremendous design efforts were put forth working with Moody Rambin Interests, Lamereaux and Associates-Architects, Day Brown Rice Engineering, and Smith Commercial Construction, build-out for Hyperdynamics first Integrated Technology Center (ITC) initiated on September 12, 2000. AGB Westwood, LTD is one of the largest Real Estate development partnerships that focus on picking selected properties around the country and retrofitting them into technology centers. Basic features expected upon the completion of Westwood Technology Center are redundant power sources from Reliant Energy with an Automatic Transfer Over (ATO) switching capability in case of a power outage. Additionally, power available to the facility is expected to hit 100 watts per square foot so as to support rapid growth for companies like Hyperdynamics. The build-out by Smith Commercial Contracting was completed in December 2000. After undue delays in having our fiber installed, finally in March 2001, we began a major transition in our business model. This transition included the physical move from the old office, where the Company leased approximately 3,000 sq. ft. of commercial office space, to its new location of 17,807 sq. ft. of net rentable area (NRA). We built our first Integrated Technology Center (ITC) around a tier-1 data center with an AT&T point of presence located physically inside it. With this new facility, the Company now has the ability to provide class A bundled IT services that include hosting mission critical applications in its data center and can support high level redundancy with extensive bandwidth scalability. Under the lease the company leased approximately 17,807 square feet NRA of space to be used initially for corporate offices, data center and integration center operations as well as marketing and sales for the NuData Management System. In addition to this space we also have a right of first offer on an adjacent 15,000 sq. ft. In our facility, the data center component provides the significant capabilities to service our clients. It is the focal point for AT&T's redundant fiber co-location and has features such as FM200 fire suppression, N+1 redundant power with battery backups, backup electric generator, redundant air conditioning, 24 inch raised flooring, leak detection, and security system. Hyperdynamics paid the first and last months rent of the 60-month lease upon signing. Upon commencement of the lease the Company received a 6 month free rent period and then on the 7th month after commencement began paying $20,774 per month or $14 per square foot. Should the Company not elect to cancel the lease, as is its right, beginning the 55th month of the lease the rate will change to $24,114 per month or $16.25 per square foot. 8 Item 3 LEGAL PROCEEDINGS In 2001, we were named as a defendant in a lawsuit styled Dixon Financial Services, Ltd. v. Fidelity Transfer Company, Erin 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; Cause No. 2001-06263; In the 215th Judicial District Court of Harris County, Texas This is a suit alleges breach of contract by failure to deliver share certificates in the name of Dixon Financial Services. Investors' claims against third parties have been denied by summary judgment leaving Hyperdynamics and Fidelity Transfer as defendants. Both rely on Fidelity Transfer's refusal to deliver certificates when a court injunction remained outstanding. The Investor asserts damages in excess of $5,000.00. The Company has and intends to continue to vigorously defend itself and denies liability. Discovery is at a standstill while the Court has considered various motions of the parties. On April 9, 2001, we were named as a defendant in a lawsuit styled Wellington, LLC vs. Hyperdynamics Corporation et al. Civil Action# 18811-NC, The Court of Chancery of Delaware. The Plaintiff claims that we did not carry out conversion of series A preferred stock to common stock. On August 9, 2002 an "Agreement for Transfer of Claims in Delaware Action to Georgia" was executed by the Plaintiff, Defendant, and their respective counsels. Subsequently, the lawsuit was moved in its entirety to the Atlanta, Georgia to be litigated under the lawsuit discussed BELOW. It was agreed that the Plaintiff in the Delaware action, Wellington, LLC. would become the Defendant in Atlanta. On November 5, 2001, we filed a lawsuit styled Hyperdynamics Corporation, Plaintiff v. J.P. Carey Securities, Inc., J.P. Carey Asset Management LLC, Joseph C. Canouse, James P. Canouse, Jeffrey Canouse, Southridge Capital Management LLC, Stephen Hicks a/k/a Steve Hicks, Thomson Kernaghan & Co., Limited, Talya Davies, Cache Capital (USA), L.P., Carpe Diem, Carpe Diem LTD., and Navigator Management LTD., Defendants, Civil Action File No. 2001CV44988, In The Superior Court of Fulton County, State of Georgia. Mark Valentine was added as a defendant in the case on September 12, 2002. We filed our First Amended Complaint against Defendants on September 12, 2002 in which WE presented thirteen counts for Causes of Action against defendants including "Violations of Georgia Racketeer Influenced and Corrupt Organizations (RICO) Act (O.C.G.A. SS 16-14-1, ET SEO). We believe that more than one of the Defendants worked together and operated a contrived conspiracy to create the appearance of providing initial long-term financing ($3,000,000) and additional financing commitments (up to additional $5,000,000), all from reputable sources, while the Defendants real plan was to manipulate our stock through contractually prohibited short selling and multiple breaches of the contractually agreed to selling covenants. We intend to continue to vigorously pursue damages. The case is still in discovery at this time. 9 ITEM 4 Submission of Matters to a Vote of Security Holders None PART II ITEM 5 Market for Registrant's Common Equity and Related Stockholder Matters Price Range Of Common Stock The Company's Common Stock is traded on the OTCBB under the symbol "HYPD." The following table sets forth the quarterly high and low bid prices per share for the Common Stock, as reported by the OTCBB. The bid prices reflect inter-dealer quotations, do not include retail markup, markdown, or commission and do not necessarily reflect actual transactions. High Bid Low Bid FISCAL 2001 First Quarter 3.1875 0.8125 Second Quarter 1.9375 0.6250 Third Quarter 1.0000 0.4375 Fourth Quarter 0.8800 0.2500 FISCAL 2002 First Quarter 1.3400 0.6500 Second Quarter 1.0000 0.4000 Third Quarter 0.9000 0.4300 Fourth Quarter 0.6500 0.2300 On September 30, 2002, the last bid for the Common Stock as reported by the OTCBB was $0.26 per share. On September 2, 2002, there were 177 stockholders of record of the Common Stock. The Company has not paid, and the Company does not currently intend to pay cash dividends on its common stock in the foreseeable future. The current policy of the Company's Board of Directors is to retain all earnings, if any, to provide funds for operation and expansion of the Company's business. The declaration of dividends, if any, will be subject to the discretion of the Board of Directors, which may consider such factors as the Company's results of operations, financial condition, capital needs and acquisition strategy, among others. 10
Securities authorized for issuance under equity compensation plans. EQUITY COMPENSATION PLAN INFORMATION NUMBER OF SECURITIES REMAINING AVAILABLE NUMBER OF SECURITIES FOR FUTURE ISSUANCE TO BE ISSUED UPON WEIGHTED-AVERAGE UNDER EQUITY EXERCISE OF EXERCISE PRICE OF COMPENSATION PLANS OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (A)) PLAN CATEGORY (a) (b) (c) --------------------- --------------------- ---------------------- ------------------------- Equity compensation plans approved by security holders 0 0 0 --------------------- --------------------- ---------------------- ------------------------- Equity compensation plans not approved by security holders 5,189,334 $ 0.36 233,764 --------------------- --------------------- ---------------------- ------------------------- TOTAL 5,189,334 $ 0.36 233,764
The above table reflects all equity compensation plans to date that have not been approved specifically by security holders. The Company has a Stock and Stock Option Plan and several Individual Compensation Arrangements established by the board of directors. The Stock Option Plan of Hyperdynamics dated effective May 7, 1997 initiated by the Board of Directors authorized 1,620,000 shares. The Board of Directors amended this plan on December 3, 2001 as the "Stock and Stock Option Plan" and increased the total shares available under the plan by 3,500,000 additional shares. This brought the total shares that could be issued under the plan to 5,120,000. The Company has been successful in attracting and retaining qualified personnel and specialized consultants. The Company believes that its future success will depend in part on its continued ability to attract and retain highly qualified personnel as employees, independent consultants, and attorneys. The Company pays wages, salaries, and consulting rates that it believes are competitive. Under the Stock and Stock Option plan, options will vest over a five-year or other negotiated period and will have a strike at a price set at the time of grant and based on the then current market value of the stock. The President of the Company has the authority as given by the Board of Directors to negotiate stock option agreements with corporate consultants as well. As of September 30, 2002, options to purchase 1,619,560 shares have been granted under this plan and of those, 1,422,545 (1,331,295 at beginning of year + 91,250 this year) have been exercised and 32,681 have expired or been forfeited and made available for reissue. Also, 3,208,107 shares have been issued directly as compensation during the year. This leaves 164,334 options granted under employment or consulting agreements but not yet exercised and 233,764 shares left to be issued or granted pursuant to employment or consulting agreements or other determination by the board of directors. 11 The purpose of the stock option program will be to further the interest of the Company, its subsidiaries and its stockholders by providing incentives in the form of stock or stock options to key employees, consultants, and directors who contribute materially to the success and profitability of the Company. The issuance of stock and grants of options and warrants will recognize and reward outstanding individual performances and contributions and will give such persons a proprietary interest in the Company, thus enhancing their personal interest in the Company's continued success and progress. This program will also assist the Company and its subsidiaries in attracting and retaining key employees and directors. On April 1, 1999 the Company approved an individual compensation arrangement for a consultant who provided various management consulting services. The compensation was 150,000 2-year warrants for unregistered 144 restricted common stock with a strike price of $0.50. The warrants were extended on the original expiration date of April 1, 2001 and the warrants were outstanding as of the fiscal year end June 30, 2002 On October 1, 1999 the Company approved an individual compensation arrangement for a consultant who provided assistant in locating financing and related public relations. The compensation was 275,000 3-year warrants for unregistered 144 restricted common stock with a strike price of $1.50 each. These warrants were outstanding as of the fiscal year end June 30, 2002. On August 3, 2000, the Company approved an individual compensation arrangement for a consultant who provided public relation services. The compensation was 100,000 3-year warrants for unregistered 144 restricted common stock with a strike price of $1.50 each. The warrants were extended for another year on their expiration date of August , 3, 2001. These warrants were outstanding as of the fiscal year end June 30, 2002. On July 25, 2001 the Company approved a individual compensation arrangement for each of its four officers whereby 1,500,000 warrants for restricted common stock were granted with an annual vesting for each officer with required continued employment, scheduled as follows: Immediate vesting 300,000 July 26, 2002 400,000 July 26, 2003 400,000 July 26, 2004 400,000 The warrants are for 3 years from the date of vesting at a price of $0.40 per share with a cashless exercise provision. On August 26, 2002 the strike price was reduced from $0.40 to $0.23 per share. On November 9, 2001, one officer exercised his 300,000 warrants through a cashless exercise with a closing price of $0.60 per share on November 8, 2001 and he was issued 100,000 shares of restricted common stock. This officer is no longer employed by the Company so the remaining 1,200,000 warrants allocated to him have been forfeited. Therefore, the outstanding warrants as of September 30, 2002 are 2,100,000 (3 remaining officers x 700,000 vested warrants each), to be added to column (a) above. Under this compensation arrangement, an additional 1,200,000 will vest if all three officers are still employed (400,000 less for any officer still not employed) on July 26, 2003 and an additional 1,200,000 will vest (400,000 less for any officer still not employed) if all three officers are still employed on July 26, 2004. Thus, there are 2,400,000 warrants available to be issued in the future to be added to column (c) above. 12 On September 24, 2001 the Company approved an individual compensation arrangement with its attorney, James W. Christian. Under the plan 1,015,000 shares of S-8 registered stock was issued to pay attorneys for litigation support services and other various legal fees associated with its litigation in Delaware. All of these shares were issued immediately for services rendered. Thus there are no outstanding warrants or options under this plan and all shares have been issued according to this individual compensation arrangement. Recent Sales of Unregistered Securities since July 2001 through September 2002 The following transactions were effected by the Company 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 the Company pay any commissions or fees to any underwriter in connection with any of these transactions. None of the transactions involved a public offering. The Company believes that each person had knowledge and experience in financial and business matters, which allowed them to evaluate the merits and risk of the receipt of these securities of the Company. The Company believes that each person was knowledgeable about the Company's operations and financial condition. In April 2002, we issued 47,000 shares of section 144 restricted common stock pursuant to a Subscription Agreement, to IC Investments for $23,500 cash or $0.50 per share. This was a private placement made in reliance on Section 4(2) of the Act. In April 2002, we issued 700,000 shares of section 144 restricted common stock in payment of the cash portion of 50% of an outstanding contingent note payable to Seacon Computer Systems, Inc. Thus, the shares paid off $350,000 cash portion of the $700,000 note at the rate of $0.50 per share. This was a private placement made in reliance on Section 4(2) of the Act. In May 2002, we issued 50,000 shares of section 144 restricted common stock to Ben Smith pursuant to a Subscription Agreement for a $10,000 cash capital contribution at $0.20 per share. This was a private placement made in reliance on Section 4(2) of the Act. In May 2002, we issued 100,000 shares of section 144 restricted common stock to Stanley Briers pursuant to a Subscription Agreement for a $20,000 cash capital contribution at $0.20 per share. This was a private placement made in reliance on Section 4(2) of the Act. In May 2002, we issued 150,000 shares of section 144 restricted common stock to David Lindskog pursuant to a Subscription Agreement for a $30,000 cash capital contribution at $0.20 per share. This was a private placement made in reliance on Section 4(2) of the Act. In May 2002, we issued 250,000 shares of section 144 restricted common stock to Jack Manning pursuant to a Subscription Agreement for a $50,000 cash capital contribution at $0.20 per share. This was a private placement made in reliance on Section 4(2) of the Act. 13 ITEM 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 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 Annual Report on Form 10-KSB 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. The Company has no obligations to update or revise these forward-looking statements to reflect future events. The following discussion should be read in conjunction with the financial statements and notes thereto for the fiscal years ended June 30, 2002 and 2001. General The fiscal year ended June 30, 2002 reflects the culmination of a major transition for us. As discussed in Item 1, Nature of Business, we have placed the ITSP business model on hold and our future operations are focused on the pursuit of opportunities in the oil and gas industry as discussed in Item 1, Nature of Business. Results of Operations Revenues decreased to $355,628 for the year ended 2002, from $426,601 for 2001. The 16.7 % decrease was due to the transitioning from the ITSP services and refocusing and starting up new contracts in the area of the Company's current focus of seismic data management services. Revenues for general IT services were significantly reduced during the year because of difficulties related to the implementation of the ITSP business model. Additionally, new business contracts in the oil and gas industry were slow to begin. However, we expect to deepen our revenue base with the creation and marketing of the NuData (TM) Management System, which began in early fiscal 2003, and with seismic data transcription services. Cost of revenues decreased to $466,765 (131% of revenue) for the year ended 2002, from $919,538 (215% of revenue) for 2001. The reason for the significant decrease cost of sales is related directly to the decrease in related revenues and the reason cost of revenues is more than revenues reflects management's decision to keep core operational infrastructure in place and personnel on staff during the downturn of the IT services business and ramp up of our seismic data 14 management services in transition. The cost of revenues is beginning to decrease as a percentage of revenues compared to 2001 based on gradually increased service revenues with higher contribution margins in 2002. Selling, General and Administrative expenses increased to $2,559,069 (719% of revenue) for the year ended 2002, as compared to $2,315,421 (543% of revenue) for 2001. The most significant expenses in 2002 were legal, accounting, and consulting expenses of $1,627,660 and rent expense of $286,701. This compares with $1,401,527 of legal, accounting, and consulting in 2001 and rent of $184,567 in 2001. The relative increase in Selling, General, and Administrative as compared with revenues is attributable to the decline in revenues during 2002. Net Loss. The net loss of the Company was $(2,915,057) for the year ended 2002, or ($0.17) per share, compared to $(2,809,183) or ($0.21) per share for 2001. The net loss available to shareholders was $(3,090,652). This amount includes the deduction for preferred stock dividends. The negative results are due to the factors discussed above. Critical Accounting Policies With respect to the Statement of Financial Accounting Standards No. 142, we prepared forecasts and analysis to test the need for possible impairment of the carrying value we have for certain assets with an indeterminable asset life. The projections we performed to calculate projected discounted net cash flows expected from the assets with a discount rate of 20%, which reflects the risk-free interest rate adjusted for our estimate of the risks associated with the cash flows, and with the following cash flow assumptions: Increase SCS's production by 200% for 2003 and 2004 Increase SCS's production by 50% for 2005 through 2006 Increase SCS's production by 25% for 2007 Projections include actual experience from existing project including forecasted amounts on that Project plus projections for at least one major contract added each year for the SCS NuData Management System. Current SCS NuData Management System sales in the sales cycle include four different major oil companies that we have already performed a varying degree of work for and in which they are actively working with us on significantly more business including the potential for significantly large long-term contracts. We have placed a 90% probability on forecasted business from our existing major project and a 50% probability of closing other significant business from other customers that we don't yet have a major contract with. There is a huge demand for the SCS NuData Management System with an estimated 2 billion 2D tapes in the world to manage. SCS owns the transcription software copyright, and has and is developing database applications to integrate with the ONYX software, giving SCS a serious competitive advantage. Most of SCS's competitors actually use older versions of our ONYX software to fulfill requirements for clients. If tape transcriptions are done on personal computers it is highly probable that it is being done on an ONYX software based system. Any one additional customer signing a long-term contract can yield or exceed the nominal results estimated in our projections. 15 The projection model does not anticipate the likelihood of additional clients coming on board that we have not even met yet. The projected revenues do not consider potential seismic processing and interpretation revenues that could add significantly to the actual results of operations. The projected revenues do not consider other online services, data backups, and high bandwidth access revenues expressed as a requirement by all of these companies. We have done highly touted and successful work already for three of the major oil companies in our sales forecast and projections, so they are already customers. Our first quote with another company for transcribing for approximately fifty thousand dollars of transcription work is already quoted and awaiting an order. This customer has expressed four different projects they need us to help them on. One of the projects carries the possibility of a five year in-depth contract. SCS has also developed an integrated tracking software and is continuing to develop a catalog database application to control and manage the complete seismic data management including associated maps, well logs, etc. into a completely integrated NuData Management System providing a turn-key service for our clients. We could have taken the approach not to substantiate the carrying value of the goodwill in which case we would have written off up to 100% of our goodwill. Thus, the difference of our decision to record our goodwill without impairment is simply that, if our estimates and assumptions are wrong, the goodwill could be worth nothing and on that basis we could have shown an approximately $350,000 additional loss as the effect of writing the assets down. With respect to the Statement of Financial Accounting Standards No. 144 we prepared forecasts and analysis to test the need for possible impairment of the carrying value we have for certain long-lived assets. We used the same cash flow assumptions for SCS as stated above. Additionally, we added out corporate overhead to the projection, where appropriate. Consistent with the methodology prescribed by FAS 144, we did not apply a discount rate and we used only the cash flows for the number of years corresponding with the remaining life of the asset group being tested. We tested an asset group consisting of our investment in computer and electrical equipment for recoverability over two years and we tested the investment in our headquarters at the entity level over four years. Based on our analyses, we concluded that the assets are recoverable. An integral part of the SCS NuData System includes having all the integrated capabilities provide by the Integrated Technology Center regarding its data center infrastructure. Every company we are working with for the NuData Management System wants to be able to store their converted and consolidated seismic database online in our data center and their requirements are met minimally with the design of our data center including the FM200 fire suppression, electrical UPS, raised flooring, backup Generator, and access to high bandwidth communications. Thus, our assumption is that our data center is used heavily and is substantiated at least its book value and should not be impaired and hasn't been. We could have taken the approach not to substantiate the carrying value of our assets in which case we would have written off up to 100% of our fixed assets. 16 Thus, the difference of our decision to substantiate our long-lived assets without impairment is simply that, if our estimates and assumptions are wrong, our leasehold improvements could be worth nothing and on that basis we could have shown an approximately $586,000 additional loss as the effect of writing the assets down. Also, if our assumptions are mostly incorrect, our business will ultimately die, our assets would be worth nothing and the company could be forced to reorganize or liquidate. Controls and Procedures We have evaluated our disclosure controls and procedures within the last ninety days. The top Officer, Kent Watts who is both the CEO and CFO for the Company has concluded that the disclosure controls are highly effective and he believes the disclosures are accurate and complete. There have been no changes to the Company's Controls and Procedures subsequent to the evaluation date. Liquidity and Capital Resources At June 30, 2002 the Company's current ratio of current assets to current liabilities was .20. This compares to .20 for 2001. It remains management's priority to cash flow the company from operations as quickly as possible. It is critical as discussed hereunder that the Company obtain additional working capital so that it can continue to meet current cash obligations as it continues to generate more and more cash from operations. It is important to note however, that deeper analysis of the current ratio reveals several current obligations that while they reduce the current ratio, there is no requirement to use cash to satisfy the obligation. These items include Accrued salaries payable to officers, Deposits, Dividends Payable, and Dividends payable to related party. Adjusting these amounts not requiring cash would calculate an adjusted current ratio of .61. We have been operating with a cash deficit this entire last year. The Company has taken steps to minimize cash requirements including the officer's agreement to accept notes from the Company in lieu of cash payments for their salaries. With cash conservation steps put in place by management and increasing contribution margins beginning in April 2002, the Company has made significant progress in especially the latter part of the fiscal year in reducing and ultimately eradicating its negative cash flow from operations. As a public company, the health of our market is paramount to be able to raise critical working capital and bridge capital. During continued tough times such as this year, our only source for obtaining critical capital historically has been through the Company's ability to place private investments with accredited investors, for restricted stock from several of our significant long-term shareholders. This last fiscal year $643,500 was raised from private accredited investors for the purchase of restricted common stock. Other funds in the amount of $222,183 were also paid into the company upon the exercise of outstanding options. Without these funds paid in, the Company would have not been able to reasonably meet its current obligations this last fiscal year. Now, based on the progress of the Company's most significant tape conversion contract implemented in April 2002, SCS Corporation, and other sales forecasted, the Company has made significant progress towards cash flowing from operations. Based on contracts in hand, being currently performed, and forecasted sales for significant projects associated with the Company's NuDataTM Management System, we expect to cash flow our operations for the second quarter of fiscal year end June 30, 2003. 17 In order to bridge ourselves to a new level of operational success, management is planning for creatively raising another $250,000. On September 12, 2002, the Company signed a stock subscription agreement to sell up to $250,000 on a best efforts basis, of our restricted 144 common stock to IC Investments LTD at $.23 per share. As of October 10, 2002 the Company has raised $10,000 from this agreement. The Company could obtain additional capital upon the exercise of previously issued in the money outstanding warrants and options for common stock. The Company has long-term debt of $61,015 financing certain electrical equipment in its data center. We also have a contingent $350,000 note payable that is only payable with 50% of the profits of SCS Corporation. We have the right to pay this note off using common stock. The Company does not plan on using significant debt financing except for the possibility of financing income-producing assets in the future. The Company originally purchased a CD in the amount of $436,300, which secured the lease at Westwood with a Letter of Credit arrangement. This CD and letter of credit is now $370,855 of which $87,260 ($436,300 x 20%) is due to be released to the Company on November 1, 2002. Thereafter, $87,260 will be released on November 1, 2003 and also another $87,260 on November 1, 2004. The remaining $109,075 will be released on November 1, 2005. ITEM 7 Financial Statements The information required hereunder is included in this report as set forth in the "Index to Financial Statements on page F-1. ITEM 8 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None 18 PART III ITEM 9 Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(A) of the Exchange Act Executive Officers and Directors The following table sets forth the names and positions of each of the executive officers and directors of the Company. Name Position Age Kent Watts Director, Chief Executive Officer, 44 and Chief Financial Officer Robert J. Hill Director, Senior Vice President 48 Harry J. Briers Director, Executive Vice President 39 Lewis Ball Secretary 71 Directors are elected annually and hold office until the next annual meeting of the stockholders of the Company or until their successors are elected and qualified. Officers are elected annually and serve at the discretion of the Board of Directors. There is no family relationship between or among any of the directors and executive officers of the Company. Board vacancies are filled by a majority vote of the Board. Kent Watts, age 44, became Chairman of the Board of Directors and was named the Company's President and Chief Executive Officer on June 4, 1997. He has served as a Director and in the dual role of Chief Financial Officer since January 17, 1997. Formerly, Mr. Watts worked as an auditor for Peat, Marwick, Mitchell, and Company. He founded MicroData Systems, Inc., a former subsidiary of Hyperdynamics, in 1988. He operated as a private technology company until he became President and Chief Executive Officer of Hyperdynamics Corporation. He has extensive experience working with management information systems. Through the years Mr. Watts has been involved in the design, implementation and management of heterogeneous, multi-protocol communication networks and he has a substantial background working with a variety of operating systems, relational databases, and client-server based software applications. He brings to the Company a relatively unique blend of business, technical, and entrepreneurial experience. Mr. Watts has been a certified public accountant in Texas since 1985 and a licensed real estate broker since 1979. He received a Bachelor of Business Administration Degree from the University of Houston in 1983. Robert J. Hill, age 48, served as the Chief Operating Officer of the Company from June 1996 until June 1997. In July, 1997, Mr. Hill was appointed vice-president of the Company. Mr. Hill currently serves the Company in the capacity as a Director and Senior Vice President. Before joining the Company, Mr. Hill served for two years as vice president of Hudson Trinity Incorporated, a privately held Internet Service Provider and network engineering company that also contracted senior network engineers to Loral Space Systems, Inc., the principal civilian contractor for the design, development and installation of NASA's new manned space flight control center. Previously, Mr. Hill served for three years as Acquisition Manager for Loral Space Systems, Inc. Mr. Hill has earned an MBA degree from South Eastern Institute of Technology and a BA degree from the State University of New York at Potsdam. 19 Harry James Briers, age 39, has been a Director since March 2, 2000. Mr. Briers was also elected as Vice President of Operations for Hyperdynamics Corporation. He served as the Director of Integrated Information Systems when he joined the company in May of 1998 and named the Chief Operating Officer in July 1998. He was named President of Ithost.net Corporation (wholly owned subsidiary) in May of 1999. He is now serving in the capacity as a Vice President and is the Company's Chief Technology Officer (CTO). From 1988 until May of 1998, Mr. Briers owned and operated Perfect Solutions, a software consulting firm in Houston, Texas. Prior to that, he founded and operated Perfect Solutions, an office automation systems provider, for over ten years. He has extensive experience in the selling and implementation of mission critical software applications. Prior work experience included consulting for Ernst and Young in their Entrepreneurial Services Group. During 2002, Mr. Briers worked directly with the Company's marketing consultant and he was instrumental in negotiating and closing the first core tape transcription contract for SCS Corporation. Harry has BS in Accounting and a MBA from the University of Houston - Clear Lake. Lewis E. Ball, age 71, has served as the secretary of the Company since 1997 and as the Chief Financial Officer from June 1996 to January 1997. Mr. Lewis has been a financial consultant to a number of companies since 1993. Mr. Ball has served as a director of JVWeb, Inc. since 1997 and as secretary and treasurer of JVWeb, Inc. since 1998. Mr. Ball has many years of industry experience as a Chief Financial Officer with Stevenson Services, Inc. and Richmond Tank Car Company (from 1983 to 1993). Mr. Ball is a Certified Public Accountant and a Certified Management Accountant. Mr. Ball has a B.B.A. in Finance from the University of Texas, and he did post-graduate work in accounting at the University of Houston. 20 ITEM 10 Executive Compensation The following table reflects all forms of compensation for services to the Company for the fiscal years ended June 30, 2000, 2001 and 2002 of the executive officers of the Company. No executive officer of the Company received compensation that exceeded $100,000 during 2002.
SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION LONG TERM COMPENSATION AWARDS Payouts OTHER SECURITIES ALL ANNUAL RESTRICTED UNDERLYING LTIP OTHER COMPE- STOCK OPTIONS PAYOUTS COMPEN NAME AND PRINCIPLE SALARY BONUS NSATION AWARDS SARS SATION POSITION YEAR $ $ $ $ # $ Kent Watts (1) 2002 $100,000 $ -0- $ -0- $ -0- 1,515,000 $ -0- $ -0- Chief 2001 100,000 -0- -0- -0- -0- -0- -0- Executive 2000 100,000 -0- -0- -0- 15,000 -0- -0- Officer and Chief Financial Officer
Chief Executive Officer Compensation (1) On July 21, 1999, the Board of Directors of Hyperdynamics Corp. unanimously agreed to the terms of a "Executive Employment Agreement" for Kent Watts. The Agreement was duly executed on July 21, 1999 which establishes Mr. Watts as the Company's President, Chief Executive Officer (CEO), and Chief Financial Officer (CFO). In the agreement it is noted that the Company intends to hire a new CFO at the time the board deems it to be beneficial to the Company. At that time, Mr. Watts will continue his responsibilities as President and CEO while relinquishing his duty as CFO. As of September 30, 2002 Mr. Watts is still acting as the CFO for the Company. The contract allows for a base salary of $100,000 annually with a performance based incentive salary based on 5% of adjusted net income, up to an additional $100,000 in salary. Therefore, maximum salary under the Agreement is $200,000 annually. This agreement has been informally renewed on a year by year basis under the same terms. Additionally, Mr. Watts has voluntarily accepted a convertible note payable for compensation accrued between December 2001 and June 30, 2002. On July 25, 2001 the Company approved a warrant package for its officers. Mr. Watts obtained 1,500,000 3-year warrants for restricted common stock with a strike price of $0.23, of which 700,000 are vested and 800,000 vest at a rate of 400,000 each on July 25, 2003 and July 25, 2004. 21
OPTION/SAR GRANTS TABLE OPTION/SAR GRANTS IN LAST FISCAL YEAR [Individual Grants] NUMBER OF PERCENT OF TOTAL SECURITIES OPTIONS/SARS NAME UNDERLYING GRANTED TO EXERCISE OR BASE EXPIRATION DATE OPTIONS/SARS EMPLOYEES IN PRICE ($/SH) GRANTED (#) FISCAL YEAR (a) (b) (c) (d) (e) ------------------------ ------------- ----------------- ------------------ --------------- Kent P. Watts (1) CEO and Chief Financal Officer 1,500,000 25% $ 0.26 Various (1) 1) On July 25, 2001 the Company approved a warrant package for its officers where 6,000,000 warrants for restricted common stock were granted. No other options or warrants were granted during the fiscal year. Mr. Watts obtained 1,500,000 3-year warrants for restricted common stock with a strike price of $0.23, of which 700,000 are vested and 800,000 vest at a rate of 400,000 each on July 25, 2003 and July 25, 2004. The vesting schedule for the outstanding warrants are three years from the date of vesting. Thus, 300,000 warrants expire July 25, 2004, 400,000 expire on July 25, 2005, and the remaining expiration dates on the remaining unvested 800,000 warrants is undetermined at this time.
AGGREGATED OPTIONS EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES NUMBER OF VALUE OF UNEXERCISED UNEXERCISED IN SECURITIES THE MONEY SHARES ACQUIRED UNDERLYING OPTIONS AT FISCAL NAME ON EXERCISE VALUE REALIZED OPTIONS AT FYE YEAR END Kent P. Watts (1) 0 0 1,515,000 0 CEO and Chief Financial Officer (1) Mr. Watts did not exercise any options or warrants. None of Mr. Watts's options were in the money at fiscal year end. Of these, 15,000 are options and 1,500,000 are warrants for restricted common stock of which 700,000 are currently vested. Thus, there are another 800,000 that vest 400,000 each in the next two years in July 2003 and July 2004.
Director Compensation There were no options or other compensation granted by the board for services rendered during the FYE 2002. There have been no director meeting expense reimbursements for 2002 and 2001. 22 Employee Stock and Stock Option Plan The Company has been successful in attracting and retaining qualified personnel, the Company believes that its future success will depend in part on its continued ability to attract and retain highly qualified personnel as employees and independent consultants. The Company pays wages, salaries, and consulting rates that it believes are competitive. The Company also believes that equity ownership is an important factor in its ability to attract and retain skilled personnel including consultants, and the Board of Directors of the Company has adopted an employee stock option program. The Stock Option Plan of Hyperdynamics dated effective May 7, 1997 initiated by the Board of Directors authorized 1,620,000 shares. The Board of Directors amended this plan on December 3, 2001 as the "Stock and Stock Option Plan" and increased the total shares available under the plan by 3,500,000 additional shares. This brought the total shares that could be issued under the plan to 5,120,000. The Company has been successful in attracting and retaining qualified personnel, the Company believes that its future success will depend in part on its continued ability to attract and retain highly qualified personnel as employees, independent consultants, and attorneys. The Company pays wages, salaries, and consulting rates that it believes are competitive. The Company also believes that equity ownership is an important factor in its ability to attract and retain skilled personnel including consultants, and the Board of Directors of the Company has adopted an employee stock option program. Stock to issue and/or Options to purchase a total of 5,120,000 shares of S8 registered common stock have been approved under the Plan. Options typically vest over a five-year or other negotiated period and will have a strike at a price set at the time of grant and based on the then current market value of the stock. The President of the Company has the authority as given by the Board of Directors to negotiate stock option agreements with corporate consultants as well. As of September 30, 2002, options to purchase 1,619,560 shares have been granted under this plan and of those, 1,422,545 (1,331,295 at beginning of year + 91,250 this year) have been exercised and 32,681 have expired or been forfeited and made available for reissue. Also, 3,208,107 shares have been issued directly as compensation during the year. This leaves 164,334 options granted under employment or consulting agreements but not yet exercised and 233,764 shares left to be issued or granted pursuant to employment or consulting agreements or other determination by the board of directors. The purpose of the stock option program will be to further the interest of the Company, its subsidiaries and its stockholders by providing incentives in the form of stock or stock options to key employees, consultants, and directors who contribute materially to the success and profitability of the Company. The issuance of stock and grants of options and warrants will recognize and reward outstanding individual performances and contributions and will give such persons a proprietary interest in the Company, thus enhancing their personal interest in the Company's continued success and progress. This program will also assist the Company and its subsidiaries in attracting and retaining key employees and directors. 23 ITEM 11 Security Ownership of Certain Beneficial Owners and Management The following table sets forth certain information at September 30, 2002, with respect to the beneficial ownership of shares of Common Stock by (1) each person who owns beneficially more than 5% of the outstanding shares of Common Stock, (2) each director of the Company, (3) each executive officer of the Company and (4) all executive officers and directors of the Company as a group.
NAME AND ADDRESS OF BENEFICIAL SHARES BENEFICIALLY OWNED OWNER Number Percent KENT WATTS 21,915,185(1) 53.0% 9700 BISSONNET, SUITE 1700 HOUSTON, TEXAS 77036 ROBERT J. HILL 800,455(2) 1.9% 9700 BISSONNET, SUITE 1700 HOUSTON, TEXAS 77036 HARRY JAMES BRIERS 813,000(3) 2.0% 9700 BISSONNET, SUITE 1700 HOUSTON, TEXAS 77036 LEWIS E. BALL 42,060(4) 0.1% 2656 SOUTH LOOP WEST SUITE 103 HOUSTON, TEXAS 77054 ERNEST M. WATTS 20,185,1855) 48.8% 9700 BISSONNET SUITE 1700 HOUSTON, TEXAS 77036 DJX LTD. 20,185,185(6) 48.8% 4438 WEST 10TH AVENUE VANCOUVER, BC V6R4R8 ALL DIRECTORS AND EXECUTIVE 23,570,700(7) 57.0% OFFICERS AS A GROUP (5 PERSONS PLUS DJX SHARES) (1) This amount includes 1,015,000 shares held in certificates, options to purchase 5,000 shares at $2.00 per share and options to purchase 10,000 shares at $3.00 per share, and 700,000 shares at $.23; and 20,185,185 24 shares attributable to Kent P. Watts based on his relationship with his father who votes the shares of DJX Ltd. (2) This amount includes 3-year options to purchase 87,455 shares of the common stock of the company for a strike price of $1.25, 3,000 shares at $2.00, 10,000 shares at $3.00 per share, and 700,000 shares at $.23. (3) This amount includes currently exercisable options to purchase 3,000 shares at $2.00, 10,000 shares at $3.00 per share, and 700,000 shares at $.23. (4) This amount includes currently exercisable options to purchase up to 8,760 shares of common stock of the Company at an exercise price of $.75 per share, currently exercisable options to purchase up to 33,300 shares of common stock of the Company at an exercise price of $1.25 per share. (5) Ernest Watts, the father of Kent P. Watts, Chairman, CEO and President is the control person of DJX Ltd. Thus 20,185,185 shares as discussed below are attributable to him. (6) On May 31, 2001 a stock exchange agreement was completed to acquire SCS Corporation as a wholly owned subsidiary of the Company. The Company issued 2,725 shares of Series B Preferred Stock to pay for the acquisition. Each share of Series B Preferred Stock carries a $1,000 per share face value and is convertible by written request into common stock at the lesser of $0.135 per share or 50% of the closing bid price on conversion. On September 25, 2001 the closing bid price was $.73 per share. Thus if 100% of this series B Preferred was converted at the lesser $.135 amount per share, the shares common stock shares issued would be 20,185,185. This presentation is prepared as if full conversion has occurred. DJX Ltd. is a foreign corporation with the shareholders being the grand children of Ernest M.Watts, the father of Kent P. Watts, the Chairman, CEO, and President for our Company. Two of the grand children are the minor children of Kent P. Watts. Their voting rights in DJX Ltd. stock, are exercised by Ernest M. Watts. (7) Based on 6 above, the shares for DJX Ltd. are a related party to Kent P. Watts, Chairman and thus are added to the total shares for all Directors and Executive Officers as a group.
25 ITEM 12 Certain Relationships and Related Transactions Our Board of Directors has adopted a policy that all of our affairs will be conducted by standards applicable to publicly-held corporations and that we will not enter into any transactions or loans between us and our officers, directors and 5% shareholders, unless the terms are no less favorable than we could obtain from independent, third parties, and that these types of transactions must be approved by our disinterested directors. Michael Watts, the brother of Kent Watts, brother of Kent Watts the Chairman, President and CEO, is our consultant. In April 1999, we granted Michael Watts an additional 350,000 options exercisable at a strike price of $.50 per share that expire in March 2001, pursuant to the consulting agreement. On January 10, 2001 a new consulting agreement was signed with Michael Watts and he was paid a $75,000 retainer to be applied against services to be rendered. On July 25, 2001 the board of directors granted Michael Watts 125,000 options at a price of $.80 cents per share as additional compensation for the consulting agreement. Of all the 850,000 options Michael Watts has received for consulting compensation since April 1996, he has exercised 783,750 options as of September 22, 2001. On that date he held 66,250 options exercisable at a strike price of $.80 per share. On November 30, 2001 the Company contracted with GeoServ Marketing, a company owned by Michael Watts, brother of Kent Watts. Under the Agreement, GeoServ was hired to help implement the complete business development plan for tape transcription revenues of SCS Corporation, the Company's wholly owned subsidiary. The Contract provided for a fixed fee of $375,000. This fee was paid by the issuance of S8 registered stock pursuant to the Company's Stock and Stock Option Plan. On March 1, 2002 the Agreement with GeoServ Marketing was amended to include work associated with the establishment and organization and marketing of Guinea Hydrocarbon Resource Corporation, GHRC, and additional specific fees were approved in the amount of $250,000. The $250,000 was paid by the issuance of S8 registered stock pursuant to the Company's Stock and Stock Option Plan. In September 2000 a non-interest bearing Note was signed with then director, Bobby P. Lewis for fifteen thousand dollars ($15,000). The note was based on advances for expenses to be presented and accepted by management. The Note was originally due on September 21, 2001 but has been extended until March 31, 2002. As of September 30, 2002 the Note has not been repaid. In December 2000 a non-interest bearing Note was signed with the Executive Vice President, Darren-Anthony Lumar for eight thousand dollars ($8,000). The note was originally due on April 15, 2001. It has been extended until March 31, 2002. As of September 30, 2002 the Note has not been repaid. On May 31, 2001 a Stock Exchange Agreement was executed by and among our Company, DJX Ltd., a Belize corporation ("DJX") being the sole stockholder of all capital stock of SCS Corporation, a Delaware corporation ("SCS") and J. Hamilton, being a control person of DJX and SCS. DJX Ltd., a Belize company has now obtained a controlling interest in our Company through the receipt of 2,725 shares of series B preferred stock. Each share of series B preferred stock has the equivalent voting rights of 7,408 shares of common stock and the rights to receive notice and vote on any matters that common stock shareholders can vote on. Thus, DJX, Ltd. has 20,186,800 votes with the total common stock outstanding September 28, 2001 of 15,645,944 shares. This is 56.3% of the outstanding voting rights. DJX Ltd. is a foreign corporation with the shareholders being the grand children of Ernest M. Watts, the father of Kent P. Watts, the Chairman, CEO, and President for our Company. Two of the grand children are the minor children of Kent P. Watts. Their voting rights in DJX Ltd. stock, are exercised by Ernest M. Watts. 26 ITEM 13 Exhibits and Reports on Form 8-K (a) EXHIBITS The following exhibits are filed with this Annual Report or are incorporated herein by reference: None (b) REPORTS ON FORM 8-K None ITEM 14 Evaluation of disclosure controls and procedures Kent Watts, our Chief Executive Officer and our Chief Financial Officer have concluded that that our disclosure controls and procedures are appropriate and effective. Mr. Watts has evaluated these controls and procedures as of a date within 90 days of the filing date of is report on Form 10-KSB. There were no significant changes in the our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Signatures In accordance with the requirements of Section 13 or 15(d) of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 12th day of October 2001. HyperDynamics Corporation By: /s/ Kent Watts -------------------- Kent Watts, Chairman of the Board, Chief Executive Officer, and Chief Financial Officer Pursuant to the requirements of the Exchange Act, this report has been signed below by the following persons in the capacities and on the dates indicated: Signature Title Date /s/ Kent Watts Chairman of the Board, October 11, 2002 --------------------- Chief Executive Officer and Kent Watts Chief Financial Officer /s/ Robert Hill Director October 11, 2002 --------------------- Robert Hill /s/ Harry J. Briers Director October 11, 2002 --------------------- Harry J. Briers 27 CERTIFICATIONS* --------------- I, Kent Watts, certify that: 1. I have reviewed this annual report on Form 10-KSB of HyperDynamics Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: October 11, 2002 /s/ Kent Watts Chief Executive Officer 28 CERTIFICATIONS* --------------- I, Kent Watts, certify that: 1. I have reviewed this annual report on Form 10-KSB of HyperDynamics Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: October 11, 2002 /s/ Kent Watts Chief Executive Officer 29 Certification of Chief Executive Officer of HyperDynamics Corporation pursuant -------------------------------------------------------------------------------- to Section 906 of the Sarbanes-Oxley Act of 2002 and Section 1350 of 18 U.S.C. -------------------------------------------------------------------------------- 63. -- I, Kent Watts, the Chief Executive Officer of HyperDynamics Corporation hereby certify that HyperDynamics, Inc.'s periodic report on Form 10-KSB and the financial statements contained therein, of which this certification is Exhibit Number 99.1, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d) and that information contained in the periodic report on Form 10-KSB and the financial statements contained therein fairly represents, in all material respects, the financial condition and results of the operations of HyperDynamics Corporation. Date: October 11, 2002 /s/ ____________________________ Kent P. Watts Chief Executive Officer of HyperDynamics Corporation Certification of Chief Financial Officer of HyperDynamics Corporation pursuant -------------------------------------------------------------------------------- to Section 906 of the Sarbanes-Oxley Act of 2002 and Section 1350 of 18 U.S.C. -------------------------------------------------------------------------------- 63. -- I, Kent P. Watts, the Chief Financial Officer of HyperDynamics Corporation hereby certify that HyperDynamics, Inc.'s periodic report on Form 10-KSB and the financial statements contained therein, of which this certification is Exhibit Number 99.1, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d) and that information contained in the periodic report on Form 10-KSB and the financial statements contained therein fairly represents, in all material respects, the financial condition and results of the operations of HyperDynamics Corporation. Date: October 11, 2002 /s/ ____________________________ Kent P. Watts Chief Executive Officer of HyperDynamics Corporation 30
HYPERDYNAMICS CORPORATION Audited Financial Statements Index To Financial Statements PAGE Independent Auditor's Report F-2 Consolidated Balance Sheet as of June 30, 2002 F-3 Consolidated Statements of Income for the years ended June 30, 2002 and 2001 F-4 Consolidated Statements of Changes in Stockholders' Equity for the years ended June 30, 2002 and 2001 F-5 Consolidated Statement of Cash Flows for the years ended June 30, 2002 and 2001 F-7 Notes to Financial Statements F-9
F-1 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders HyperDynamics Corporation Houston, Texas We have audited the accompanying consolidated balance sheet of HyperDynamics Corporation and subsidiaries as of June 30, 2002, and the related consolidated statements of income, stockholders' equity, and cash flows for the two years then ended. These financial statements are the responsibility of HyperDynamics' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from 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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of HyperDynamics Corporation as of June 30, 2002, and the results of its operations and its cash flows for the two years then ended, in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that HyperDynamics will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, HyperDynamics has suffered recurring losses from operations which raises substantial doubt about its ability to continue as a going concern. Management's plans regarding those matters also are described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. MALONE AND BAILEY, PLLC www.malone-bailey.com Houston, Texas September 13, 2002
HYPERDYNAMICS CORPORATION CONSOLIDATED BALANCE SHEET As of June 30, 2002 ASSETS Current Assets Cash $ 29,015 Restricted certificate of deposit 80,715 Accounts receivable, net of allowance for doubtful accounts of $5,000 27,792 Inventory 7,027 Other current assets 5,724 ------------ Total Current Assets 150,273 Property and equipment, net of accumulated depreciation of $307,315 617,666 Other Assets Investment in joint venture 550,000 Restricted certificate of deposit 283,595 Goodwill 350,000 Deposits 23,432 ------------ TOTAL ASSETS $ 1,974,966 ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Current portion of installment debt $ 19,891 Accounts payable and accrued expenses 969,106 Accrued officer salaries 133,603 Customer deposits 40,325 Dividends payable 197,396 Dividends payable to related party 118,083 ------------ Total Current Liabilities 1,478,404 Long-term portion of installment debt 61,015 Deferred rent 122,330 ------------ TOTAL LIABILITIES 1,661,749 ------------ Commitments and Contingencies Stockholders' Equity Convertible preferred stock, par value $.001; stated value $1,000; 20,000,000 authorized; Series A - 1,945 shares issued and outstanding 2 Series B - 2,725 shares issued and outstanding 3 Common Stock, par value $.001; 50,000,000 shares authorized; 21,033,791 shares issued and outstanding 21,034 Additional paid in capital 8,491,055 Accumulated deficit (8,198,877) ------------ Total Stockholders' Equity 313,217 ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,974,966 ============ See accompanying summary of accounting policies and notes to financial statements.
F-2
HYPERDYNAMICS CORPORATION CONSOLIDATED INCOME STATEMENTS For the Years Ended June 30, 2002 and 2001 2002 2001 ------------ ------------ Revenues $ 355,628 $ 426,601 Cost of revenues 526,197 919,538 ------------ ------------ GROSS MARGIN DEFICIT (170,569) (492,937) ------------ ------------ Operating Expenses Selling 74,034 126,511 General and administration 2,561,996 1,096,471 Litigation costs payable in stock 994,052 Depreciation and amortization 250,808 122,144 Loss on retirement of assets 9,523 20,149 Impairment loss on revenue interest - Sierra-Net 28,865 ------------ ------------ Total Operating Expenses 2,896,361 2,388,192 ------------ ------------ NET LOSS FROM OPERATIONS (3,066,930) (2,881,129) ------------ ------------ Other Income (Expense) Interest expense (10,595) (3,549) Interest income 18,083 75,495 ------------ ------------ Total Other Income 7,488 71,946 ------------ ------------ NET LOSS (3,059,442) (2,809,183) Preferred dividend requirement (175,595) (102,788) ------------ ------------ NET LOSS CHARGEABLE TO COMMON SHAREHOLDERS $(3,235,037) $(2,911,971) ============ ============ Basic and diluted loss per common share $ (.19) $ (.21) Weighted average shares outstanding 17,426,561 13,655,960 See accompanying summary of accounting policies and notes to financial statements.
F-3
HYPERDYNAMICS CORPORATION CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY For the Years Ended June 30, 2002 and 2001 Preferred Common Shares Amount Shares Amount ---------- -------- ---------- ------- Balances, June 30, 2000 2,560 $ 3 13,021,820 $13,022 Common stock issued for: - cash 175,000 175 - exercise of options 37,638 38 - services 171,038 171 - stock subscription 237,500 238 Issuance of stock options and warrants Repurchase and cancellation of common stock purchased on the open market (2,500) (3) Issuance of convertible Preferred Stock Series B to related party in connection with the acquisition of SCS Corporation 2,725 3 Preferred stock dividends Conversion of preferred stock to common stock (615) (1) 721,449 721 Payment of preferred stock dividends in common shares 10,000 10 Net loss ---------- -------- ---------- ------- Balances, June 30, 2001 4,670 5 14,371,945 14,372 Common stock issued for: - cash 1,349,170 1,349 - exercise of options 445,250 445 - services 2,894,301 2,894 - contingent note payable 700,000 700 - accounts payable 1,273,125 1,274 Issuance of stock options and warrants Preferred stock dividends Net loss ---------- -------- ---------- ------- Balances, June 30, 2002 4,670 $ 5 21,033,791 $21,034 ========== ======== ========== ======= See accompanying summary of accounting policies and notes to financial statements.
F-4
HYPERDYNAMICS CORPORATION CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY For the Years Ended June 30, 2002 and 2001 (Continued) Additional Paid in Accumulated Capital Deficit Totals ------------ ------------ ----------- Balances, June 30, 2000 $ 4,428,527 $(2,051,869) $2,389,683 Common stock issued for: - cash 69,825 70,000 - exercise of options 18,781 18,819 - services 206,547 206,718 - stock subscription 94,762 95,000 Issuance of stock options and warrants 182,359 182,359 Repurchase and cancellation of common stock purchased on the open market (2,599) (2,602) Issuance of convertible Preferred Stock Series B to related party in connection with the acquisition of SCS Corporation 28,997 29,000 Preferred stock dividends (102,788) (102,788) Conversion of preferred stock to common stock (720) Payment of preferred stock dividends in common shares 7,721 7,731 Net loss (2,809,183) (2,809,183) ------------ ------------ ----------- Balances, June 30, 2001 5,034,200 (4,963,840) 84,737 Common stock issued for: - cash 477,151 478,500 - exercise of options 211,855 212,300 - services 1,389,606 1,392,500 - contingent note payable 349,300 350,000 - accounts payable 971,141 972,415 Issuance of stock options and warrants 57,802 57,802 Preferred stock dividends (175,595) (175,595) Net loss (3,059,442) (3,059,442) ------------ ------------ ----------- Balances, June 30, 2002 $ 8,491,055 $(8,198,877) $ 313,217 ============ ============ ========== See accompanying summary of accounting policies and notes to financial statements.
F-5
HYPERDYNAMICS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended June 30, 2002 and 2001 2002 2001 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(3,059,442) $(2,809,183) Adjustments to reconcile net loss to cash used from operating activities: Depreciation and amortization 250,808 122,144 Stock issued for services 1,392,500 1,092,958 Options and warrants issued 57,802 182,359 Loss on disposition of assets 9,523 20,149 Impairment loss 28,865 Changes in assets and liabilities, net of acquisition: Accounts receivable 2,896 506,504 Inventory 39,151 (6,362) Other current assets 16,752 40,670 Accounts payable and accrued expenses 250,742 (181,414) Accrued officer salaries 159,353 Customer deposits 40,325 Change in deferred rent 17,768 122,038 ------------ ------------ NET CASH USED IN OPERATING ACTIVITIES (821,822) (881,272) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment (26,018) (700,292) Decrease in restricted cash 71,990 Proceeds from sale of assets 2,871 Collection of note receivable 400,000 Security deposits paid (2,800) ------------ ------------ NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 48,843 (303,092) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from sale of common stock 690,800 183,819 Change in stock subscription receivable 95,000 (95,000) Payments on installment debt (18,071) (5,468) Proceeds from new installment debt 104,444 Purchases of common stock (2,601) ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 767,729 185,194 ------------ ------------ Net Change In Cash $ (5,250) $ (999,170) ------------ ------------ CASH AT BEGINNING OF PERIOD 34,265 1,033,435 ------------ ------------ CASH AT END OF PERIOD $ 29,015 $ 34,265 ============ ============ See accompanying summary of accounting policies and notes to financial statements.
F-6 HYPERDYNAMICS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended June 30, 2002 and 2001 2002 2001 -------- -------- SUPPLEMENTAL DISCLOSURES Interest paid in cash $ 9,801 $ 3,549 NON-CASH TRANSACTIONS Engagement of vendor to produce seismic work as an investment in a joint venture $550,000 Issuance of common stock to cancel contingent liability related to the purchase of assets of Seacon Computer Systems, Inc. 350,000 Issuance of common stock for accounts payable 972,415 Payment of preferred stock dividends in common shares 7,731 See accompanying summary of accounting policies and notes to financial statements. F-7 HYPERDYNAMICS CORPORATION NOTES TO FINANCIAL STATEMENTS NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES Nature of business. HyperDynamics Corporation is a Delaware corporation formed in March 1996. HyperDynamics utilizes its integrated technology infrastructure to provide a variety of general and vertical industry focused services. In its own name, HyperDynamics provides generalized information technology services. Through its wholly-owned subsidiary, SCS Corporation, HyperDynamics focuses on oil and gas company services, such as seismic data management. Through SCS, HyperDynamics currently derives a significant portion of its revenue from the conversion of seismic data from tape media to modern media, such as DVD computer technology. Through SCS's investment in GHRC in late fiscal 2002 (Note 3), HyperDynamics began operations in oil and gas exploration, seismic data acquisition, processing, and interpretation. The fiscal year-end is June 30. Basis of presentation. The consolidated financial statements include the accounts of HyperDynamics and its wholly-owned subsidiary, SCS Corporation. Significant inter-company accounts and transactions have been eliminated. Estimates and assumptions. Preparing financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses at the balance sheet date and for the period then ended. Actual results could differ from these estimates. Cash and cash equivalents include all highly liquid investments purchased with original maturities of three months or less. Restricted cash is a certificate of deposit at a bank to back a letter of credit supporting the construction and the lease commitment for HyperDynamics' new facility. The CD matures on May 9, 2003 and accrues interest at 2% annually. HyperDynamics plans to renew it each year for the next 4 years and the amount will be reduced to coincide with the Letter of Credit in favor of HyperDynamics' Landlord. The restriction on the CD established as security for the Letter of Credit is removed over the next 4 years of the lease. 20% of the remaining $364,310 Letter of Credit may be converted to operating cash in each of the next three years on November 1 in 2002, 2003, and 2004 and the remaining 25% on November 1, 2005. Revenue recognition. Revenue from tape conversions, consulting, and information technology services is recognized when services are rendered. While contracts to perform such services might last multiple years, provisions allow for periodic billing based on what services have been performed during each period. Revenue from hardware and software sales is recognized when goods are shipped. Accounts receivable are written down to reflect management's best estimate based upon known specific analysis, historical experience, and other currently available evidence of the net collectable amount. F-8 Inventory consists of computer hardware, software, and tape media and is stated at the lower of cost or market using the first-in first-out basis (FIFO). Long-lived Assets. 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 of 3 - 5 years. Goodwill was recorded when the additional shares were issued in the current year, modifying last year's purchase price for SCS(see Note 3). There was no goodwill recorded in the original purchase transaction in 2001. HyperDynamics adopted SFAS 141 in the current year, and is not amortizing goodwill. Impairment losses are recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Impairment losses have not been recognized because the estimated revenues of the SCS acquisition in June 2001 were not originally expected to occur for several months and they have started in August 2002. Accounts payable and accrued expenses consist of the following: Accounts payable $903,224 Accrued payroll and payroll tax 22,295 Other taxes payable 26,111 Current portion of deferred rent 17,476 -------- $969,106 ======== Deferred rent represents the difference between the rent expense per month as calculated based on the total contractual payments specified over the 10-year period of the lease and the actual monthly rent paid. It arises because the initial 6 months of the lease were free. The deferral will reverse beginning in the year ended June 30, 2005. Income taxes are computed using the tax liability method of accounting, whereby deferred income taxes are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates that will be in effect when the differences reverse. HyperDynamics accounts for stock options issued to employees under the intrinsic value method. Under this method, no compensation expense is recognized for stock options granted when the number of underlying shares is known and exercise price of the option is greater than or equal to the fair market value of the stock on the date of grant. Fair value is used for options and warrants issued to non-employees as compensation. The basic net loss per common share is computed by dividing the net loss applicable to common stockholders by the weighted average number of common shares outstanding. Diluted net loss per common share is computed by dividing the net loss applicable to common stockholders, adjusted on an "as if converted" basis, by F-9 the weighted average number of common shares outstanding plus potential dilutive securities. For the years ended June 30, 2002 and 2001, potential dilutive securities had an anti-dilutive effect and were not included in the calculation of diluted net loss per common share. Reclassifications of certain prior year amounts were made to conform with the current year presentation. Recently issued accounting pronouncements. HyperDynamics does not expect the adoption of recently issued accounting pronouncements to have a significant impact on HyperDynamics' results of operations, financial position or cash flow. NOTE 2 - GOING CONCERN As shown in the accompanying financial statements, HyperDynamics has incurred recurring net losses of $3,059,442 and $2,809,183 in 2002 and 2001, respectively, and has an accumulated deficit of $8,198,877 as of June 30, 2002. These conditions create an uncertainty as to HyperDynamics' ability to continue as a going concern. Management is trying to raise additional capital through sales of its common stock as well as seeking financing from third parties. The financial statements do not include any adjustments that might be necessary if Hyperdynamics is unable to continue as a going concern. NOTE 3 - GOODWILL On April 23, 2002, HyperDynamics issued 700,000 shares of its common stock valued at $350,000 to Seacon Computer Systems, Inc., the former owners of the assets of SCS, as a partial payment to substitute for $350,000 of the $700,000 contingent note payable pursuant to the acquisition of SCS. Originally, HyperDynamics owed quarterly payments of 25% in cash and another 25% in common stock of SCS's profits. Seacon accepted the 700,000 shares as a single settlement of all future possible cash portions of the note. Therefore, the quarterly payment in the future will be only 25% of SCS's profit, if any, for each quarter, paid in stock. As yet, SCS has not recorded any profits. The 700,000 shares were recorded as an adjustment to the purchase price of SCS as goodwill on the purchase of SCS. Any additional payments will also be recorded as additions to goodwill. Goodwill will be tested as needed for impairment. No impairment was recorded during 2002 or 2001. NOTE 4 - EQUITY INVESTMENT IN GHRC On March 4, 2002, SCS entered into an Agreement with USOil Corporation ("USOil") to form a Belize Corporation, Guinea Hydrocarbon Resource Corporation ("GHRC"), as the entity to perform all requirements under the 1995 Revenue and Production Sharing Agreement ("1995 RPSA") originally between USOil and The Republic of Guinea in Africa. SCS accepted a 50% ownership in GHRC in exchange for promising to pay $1.6 million to USOil, and to provide managerial, geological and geophysical expertise. F-10 USOil accepted the other 50% ownership in exchange for assigning to GHRC the 1995 RPSA, in which USOil is named as the exclusive exploration and exploitation contractor for the Republic of Guinea for an area of approximately 65,000 square kilometers offshore. In conjunction with the assignment of the 1995 RPSA, GHRC has replaced USOil as the government of Guinea's contractor. In connection with the management, SCS and GHRC jointly engaged a third-party seismic services contractor to perform work for SCS for $550,000. The agreement called for timely payment which didn't occur. The stated penalty was that SCS may be required to cede 10% ownership of GHRC to the contractor, thus reducing its own ownership interest to 40%. SCS is in the process of renegotiating this potential obligation. The $550,000 is shown as an investment in the GHRC which is described as a joint venture since the required $1.6 million payment to USOil has not yet been made. The corresponding liability is included in accounts payable. The 1995 RPSA expires in November 2002 and current negotiations are in progress to renew it. This contract provides for a royalty of 15% to the Republic of Guinea of all production for the first seven years of production and a royalty ranging from 25% to 50% of the production, net of costs, thereafter. The 1995 RPSA also provides for the contractor to surrender parts of the area over the term of the agreement if work obligations are not met per a schedule outlined in the agreement. GHRC believes that it has met all requirements for the initial phase of exploration. GHRC met with government representatives in September 2002 to report on the initial 2D seismic survey that GHRC had performed in April 2002. In April 2002, the parties agreed to a specific work program beginning with additional geological and geophysical work in October 2002 and culminating in the drilling of an exploratory well during 2003 and commercial production, if warranted, in 2004. The additional geological and geophysical work is expected to cost $2.5 million and the cost of drilling wells and beginning production has not been determined, but will likely cost in excess of $20 million. The work is expected to be funded by the sale of participation units to a limited number of outside oil company participants. If GHRC is unable to elicit outside participation, it is unlikely to complete this work program and thus may lose its exploration and exploitation rights under the 1995 RPSA. Even if GHRC lost its rights under the 1995 RPSA, it would still retain the right to sell the seismic data it has collected. Financial information for GHRC is as follows: SUMMARY OF OPERATIONS: Company Equity in net loss (a) $(21,043) ======== BALANCE SHEET ACCOUNTS Investment in joint venture $550,000 Accounts payable (b) 550,000 ======== (a) All losses are included in HyperDynamics' general and administrative expenses for 2002, because HyperDynamics pays all GHRC expenses and because their ownership in GHRC is dependent upon the success of GHRC in raising capital to pay the $1.6 million for their ownership and to pursue the drilling program to maintain the leasehold development rights. F-11 (b) Cost of the initial survey performed in April 2002. The contractor who performed this survey is entitled to 90% of the proceeds from data sales or participation fees until the $550,000 is paid. NOTE 5 - PROPERTY AND EQUIPMENT A summary of property and equipment is as follows: Computer equipment and software 3 years $ 210,850 Office equipment and furniture 5 years 94,284 Leasehold improvements 5 years 619,847 --------- Total cost 924,981 Less: accumulated depreciation and amortization (307,315) --------- Net carrying value $ 617,666 ========= During fiscal year 2002, Hyperdynamics changed its estimated life for leasehold improvements from 10 years to 5 years. The change increased current amortization by $57,451 and will result in full amortization of the leasehold improvements by fiscal year 2006. NOTE 6 - INSTALLMENT DEBT HyperDynamics is obligated on three capital leases payable in monthly payments totaling $2,352 including principal and interest ranging from 10 - 21% APR, and secured by electrical equipment, a burglar alarm and a telephone system. Principal maturities are $19,891 in fiscal 2003 and $61,015 due in later years, or $22,304 in 2004, $25,030 in 2005, and $13,681 in 2006. NOTE 7 - LETTER OF CREDIT HyperDynamics renewed its letter of credit for $370,855 with Frost Bank, which now expires on October 31, 2002. The purpose of the letter of credit is to guarantee the lease payments on HyperDynamics' office space. The letter of credit is guaranteed by security interest in a certificate of deposit with Frost Bank that may not be redeemed until the letter of credit expires. There were no draws against this letter of credit as of June 30, 2002, nor as of September 12, 2002. The letter is expected to be renewed and reduced to $283,595 in October 2003 in accordance with our lease. NOTE 8 - INCOME TAXES Income taxes are not due since HyperDynamics has had losses since inception. HyperDynamics has deductible net operating losses of approximately $2,300,000 in each of 2002 and 2001, which each can be carried forward for 20 years. Deferred tax assets $ 2,230,000 Less: valuation allowance (2,230,000) ----------- Net deferred taxes $ 0 =========== F-12 Internal Revenue 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 since that date is restricted to $784,000 per year. Losses in 2002 are not restricted. NOTE 8 - COMMITMENTS AND CONTINGENCIES HyperDynamics and its subsidiaries are involved in a number of routine business disputes that have arisen in the ordinary course of business. HyperDynamics is unable to predict the outcome of these matters, but does not believe that the ultimate resolution of these matters will have a material adverse effect on the financial statements of HyperDynamics. The amounts in dispute total approximately $135,000, which is not accrued. HyperDynamics leases its office space from AT&T over a 10-year period. The base monthly rent is $0 for months 1-6, $20,774 for months 7-54, and $24,114 for months 55-120, beginning November 1, 2000. Additional common area maintenance charges will be assessed. At June 30, 2002, future minimum payments are $249,288 per year in fiscal years 2003-2004, $252,328 in year 2005, $289,364 per year in years 2006-2010, and 120,568 in 2011. Rent expense for the years ended June 30, 2002 and 2001 totaled $286,701 and $184,567, respectively. HyperDynamics has a termination option that may be exercised after 60 months of the lease. If the termination option is exercised HyperDynamics will be released from the lease after 69 months. Due to a severe downturn in the IT services and communications industry, HyperDynamics is in the process of renegotiating its lease agreement with AT&T. In addition, HyperDynamics is involved in a dispute with its preferred shareholders over conversion rights to common and if monetary damages are for various claims against the preferred shareholders. The effect of this outcome is not known. NOTE 9 - PREFERRED STOCK Series A Convertible Preferred Stock was issued in January 2000 for net proceeds of $2,604,190. The stated value is $1,000 per share and par value is $.001. It is convertible into HyperDynamics' common stock at a price of the lower of the trading price when purchased at $5.25 or 80% of the current 5-day trading average. All or any of the stock may be converted at any time at the holder's option, and all shares outstanding as of January 30, 2002 were to be automatically converted. This series is non-voting and pays dividends of 4%, payable at conversion in either cash or shares of common stock, at HyperDynamics' option. 1,055 shares were converted to common in 2000 and 2001. HyperDynamics has not converted any of the Series A shares since fiscal 2001 because of claims filed in November 2001 in our lawsuit with the Series A shareholders. Since the outcome is not known and no conversion has been effected, HyperDynamics is continuing to accrue the dividend. F-13 In 2001, $93,705 in dividends were earned, of which $7,731 were paid with the issuance of 10,000 shares of common stock in conjunction with the conversion of 615 shares of the preferred stock to 721,449 shares of common stock. The remaining dividends earned, $85,974, were accrued. 2002 dividends of $66,597 have been accrued, resulting in total accrued dividends of $197,396. 2,725 shares of Series B Convertible Preferred Stock were issued for the acquisition of SCS Corporation on May 31, 2001. The stated value is $1,000 per share and the par value is $.001. Each Series B share may vote 7,408 common shares for a total of 20,186,800 votes. The shares are convertible to common stock at the lesser of $.135 or 50% of the current 5-day average trading price. Series B stockholders are entitled to a 4% cumulative dividend on the stated value, which is payable only upon conversion of the preferred stock. Dividends may be paid in stock or cash at HyperDynamics' option. Dividends accrued during 2002 and 2001 were $175,595 and $102,788, respectively, for a total of $315,479 as of June 30, 2002. If all Preferred Series A and B shares were converted as of June 30, 2002 at the current market price, total common shares outstanding would be about 45,387,000 shares. NOTE 10 - COMMON STOCK During the year ended June 30, 2002, 349,750 options were exercised for $212,300 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. 1,273,170 shares were issued in payment of 2001 legal costs of $972,414. 2,894,301 shares valued at $1,392,500 were issued to consultants for services in 2002. 1,349,170 shares were issued for $478,500 pursuant to private subscription agreements. Additionally, on April 23, 2002, 700,000 shares were issued as a payment for the acquisition of SCS Corporation (see Note 3). Also during the year, the expiration date was extended for certain warrants issued to consultants to purchase 321,181 shares of common stock at exercise prices ranging from $0.50 to $1.50 resulting in additional compensation expense of $57,802. NOTE 11 - STOCK OPTIONS AND WARRANTS HyperDynamics' Stock Option Plan provides for the grant of non-qualified options to directors, employees and consultants, and opportunities for directors, officers, employees and consultants to make purchases of stock in HyperDynamics. In addition, HyperDynamics issues stock warrants from time to time to employees, consultants, stockholders and creditors as additional financial incentives. The plans and warrants issuance are administered by the Board of Directors, who have substantial discretion to determine which persons, amounts, time, price, exercise terms, and restrictions, if any. Options differ from warrants in that the options awards are immediately exercisable and are assignable. In contrast, warrants have employment termination restrictions, vesting periods and are non-transferable. HyperDynamics uses the intrinsic value method of calculating compensation expense for employees. During 2002 and 2001, no compensation expense was recognized for the issuance of options and warrants issued to employees, because no option prices were below market prices at the date of grant. F-14 During 2002 and 2001, HyperDynamics issued 421,181 and 581,181 options and warrants, respectively, to consultants whose stock-based compensation is recorded at fair value. The compensation cost recorded for these options and warrants was $57,802 and $182,359 based on the Black-Scholes option pricing model. Had compensation cost for HyperDynamics' stock-based compensation plan for employees been determined based on the fair value at the grant dates for awards under those plans consistent with the Black-Scholes option-pricing model suggested by FASB Statement 123, HyperDynamics' net losses and loss per share would have been increased to the pro forma amount indicated below: 2002 2001 ----------- ----------- Net loss chargeable to common shareholders - As reported $(3,235,037) $(2,911,971) - Pro forma (3,805,932) (3,728,073) Net loss per share - As reported $( 0.19) $( 0.21) - Pro forma ( 0.22) ( 0.27) The weighted average fair value of the stock options granted during 2002 and 2001 was $.46 and $.58, respectively. Variables used in the Black-Scholes option-pricing model include (1) 5.0% risk-free interest rate, (2) expected option life is the actual remaining life of the options as of each year end, (3) expected volatility is the actual historical stock price fluctuation volatility and (4) zero expected dividends. Summary information regarding options and warrants is as follows:
Weighted Weighted Average Average Share Share Options Price Warrants Price ----------- ----------- ----------- ------ Year ended June 30, 2001: Outstanding, 2000 630,834 $ .47 1,270,850 $ .57 Granted 346,181 .61 6,722,500 .52 Exercised ( 47,638) .60 Expired (308,241) .60 ( 145,850) .66 Forfeited (115,000) 4.72 ----------- ----------- ----------- ------ Outstanding, year ended June 30, 2001 506,136 .76 7,847,500 1.01 Year ended June 30, 2002: Granted 158,636 .76 350,000 .93 Exercised (350,000) .61 ( 300,000) .40 Expired (150,136) 1.10 ( 425,000) .91 Forfeited (1,200,000) .40 ----------- ----------- ----------- ------ Outstanding, year ended June 30, 2002 164,636 $ 1.15 6,272,500 $ 1.16 =========== ============ ========== ======
F-15 Options outstanding and exercisable as of June 30, 2002: - - Outstanding - - Exercisable No. of Remaining Number of Exercise Price Shares life Shares --------- -------- ------- .50 21,181 1 years 21,181 1.25 143,455 0 years 143,455 --------- ------- 164,636 164,636 ========= ======= Warrants outstanding and exercisable as of June 30, 2002: - - Outstanding - - Exercisable No. of Remaining Number of Exercise Price Shares life Shares --------- --------- ---------- .40 1,200,000 2 years 900,000 .40 1,200,000 3 years 1,200,000 .40 1,200,000 4 years .40 1,200,000 5 years .50 150,000 1 years 150,000 1.00 306,250 1 years 306,250 1.50 75,000 1 years 75,000 1.50 375,000 0 years 375,000 1.50 60,000 2 years 30,000 2.00 206,250 2 years 206,250 5.91 300,000 4 years 300,000 7.09 300,000 4 years 300,000 --------- --------- 6,572,500 3,842,500 ========= ========= NOTE 12 - SEGMENT DISCLOSURES SFAS No. 131. "Disclosures about Segments of an Enterprise", requires disclosures of information about operating segments. Beginning with the acquisition of SCS, HyperDynamics was operating in two reportable segments: the Information Technology segment ("HYPD") and the Seismic Data Conversion segment ("SCS"). Corporate assets are included in the HYPD segment. HyperDynamics evaluates performance based on profit or loss from operations before income taxes. There are no intersegment sales and transfers. The following table summarizes certain balance sheet and income statement data as required by SFAS 131:
HYPD SCS Totals ------------- ------------- ------------ Segment assets $ 1,016,728 $ 958,238 $ 1,974,966 Expenditures for long-lived assets 2001 903,793 1,185 700,292 2002 5,654 20,364 26,018 F-16 Income Statement Data, Year Ended June 30, 2002: Revenues $ 147,586 $ 208,042 $ 355,628 Cost of sales ( 304,291) ( 221,906) ( 526,197) Selling, general and administrative (1,144,319) (1,491,711) (2,636,030) Depreciation & amortization ( 243,955) ( 6,853) ( 250,808) Loss on equipment retirement ( 8,341) ( 1,182) ( 9,523) Interest expense ( 10,386) ( 209) ( 10,595) Interest income 18,083 18,083 ------------- ------------- ------------ Net loss $ (1,545,623) $ (1,513,819) $(3,059,442) ============= ============= ============ Income Statement Data, Year Ended June 30, 2001: Revenues $ 374,683 $ 51,918 $ 426,601 Cost of sales ( 873,878) (45,660) ( 919,538) Selling, general and administrative (2,142,762) (50,515) (2,193,277) Depreciation & amortization ( 122,094) ( 50) ( 122,144) Loss on equipment retirement ( 20,149) ( 20,149) Interest income 75,495 75,495 Interest expense (3,549) ( 3,549) Other expense (52,622) ( 52,622) ------------- ------------- ------------ Net loss $ (2,764,876) $ (44,307) $(2,809,183) ============= ============= ============
HyperDynamics had one customer with revenues that comprised 19% of total revenues and one vendor with purchases comprising 16% of total purchases. Concentrations. The seismic data media conversion segment operates exclusively in the oil and gas industry. NOTE 13 - RELATED PARTY TRANSACTIONS Related party transactions include payments to the CEO's brother for consulting services as follows: issuance of 1,474,301 shares of stock valued at $692,500. Additionally, a former director of HyperDynamics exercised 300,000 warrants at $.40 per share as a cashless warrant when the market price was $.60 per share, resulting in a net issuance of 100,000 shares. NOTE 14 - SUBSEQUENT EVENTS On August 1, 2002, HyperDynamics entered into a financing arrangement which provides for approximately $21,000 to be paid to HyperDynamics during each of the three months of August, September, and October. The proceeds of the financing arrangement accrue interest at 28% and are payable on demand. Demand is expected to be made in November 2002. On August 26, 2002, HyperDynamics' officers agreed to convert their accrued salaries payable as of June 30, 2002 into unsecured convertible notes payable totaling $138,450. The interest rate on the notes payable is 12% per annum. The notes are convertible at the option of the officer into restricted common stock at 60% of the lowest closing bid price during the six months preceding the officer's letter notifying HyperDynamics that he wishes to convert the note into shares. If the accrued salaries were converted on June 30, 2002, the additional expense resulting from issuing the additional shares would have been $92,300. F-17 On August 26, 2002, HyperDynamics entered into a contract to issue stock valued at up to $150,000 between August 26, 2002 and November 26, 2002 at $.27 per share, which approximates current market price, to a company owned by the CEO's brother, which is assisting in marketing efforts associated with SCS. F-18