10QSB 1 doc1.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934: For the quarterly period ended: September 30, 2002 ------------------ or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934: For the transition period from _______ to _________ Commission file number: 000-25496 HYPERDYNAMICS CORPORATION (Exact name of registrant as specified in its charter) Delaware 87-0400335 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 9700 Bissonnet, Suite 1700 Houston, Texas 77036 (Address of principal executive offices, including zip code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- APPLICABLE ONLY TO CORPORATE ISSUERS As of September 30, 2002 21,275,449 shares of common stock, $0.001 par value, were outstanding. Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] Table of Contents PART I FINANCIAL INFORMATION ITEM 1 Financial Statements 3 Consolidated Balance Sheet at September 30, 2002 (unaudited) 3 Consolidated Statements of Income for the three months ended September 30, 2002 and 2001 (both unaudited) 4 Consolidated Statements of Cash Flows for the three months ended September 30, 2002 and 2001 (both unaudited) 5 Notes to Consolidated Financial Statements 6 ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 7 PART II OTHER INFORMATION ITEM 6 Exhibits and Reports on Form 8-K 9 (a) Exhibits (b) Reports on Form 8-K SIGNATURES 9 2
Part 1 Financial Information ITEM 1 Financial Statements HYPERDYNAMICS CORPORATION Consolidated Balance Sheet As of September 30, 2002 ASSETS Current Assets Cash $ 4,056 Restricted certificate of deposit 80,715 Accounts receivable, net of allowance for doubtful accounts of $9,000 57,091 Inventory 8,655 Other current assets 7,171 ------------ TOTAL CURRENT ASSETS 157,688 ------------ Property and Equipment, net of accumulated depreciation of $309,204 545,725 ------------ Other Assets Restricted certificate of deposit 283,595 Goodwill 350,000 Deposits 23,432 ------------ Total other assets 657,027 ------------ TOTAL ASSETS $ 1,360,440 ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Current portion of installment debt $ 20,467 Accounts payable and accrued expenses 431,967 Short-Term Note Payable 42,080 Deposits 23,218 Accrued salary payable to officers 191,344 Dividends payable 217,001 Dividends payable to related party 145,333 ------------ TOTAL CURRENT LIABILITIES 1,071,410 DEFERRED RENT 124,724 LONG-TERM PORTION OF INSTALLMENT DEBT 55,676 ------------ TOTAL LIABILITIES 1,251,810 ------------ Stockholders' Equity Preferred stock, par value $0.001; 20,000,000 shares authorized Series A -1,945 shares issued and outstanding 2 Series B -2,725 shares issued and outstanding 3 Common stock, par value $0.001; 50,000,000 shares authorized; 21,275,449 shares issued and outstanding. 21,275 Additional paid-in capital 8,553,159 Retained deficit (8,465,809) (8,465,809) ------------ Total stockholders' equity 108,630 ------------ Total Liabilities and Stockholders' Equity $ 1,360,440 ============
3
HYPERDYNAMICS CORPORATION Consolidated Income Statements Three Months Ended September 30, 2002 and 2001 2002 2001 ------------ ------------ Revenues $ 131,755 $ 83,069 Cost of Revenues 82,793 158,982 ------------ ------------ GROSS MARGIN 48,962 ( 75,913) ------------ ------------ Operating Expenses Selling 3,273 51,545 General and Administrative 274,319 269,454 Gain on Sale of Equipment ( 7,514) Depreciation 47,986 47,788 ------------ ------------ TOTAL OPERATING EXPENSES 318,064 368,787 ------------ ------------ OPERATING LOSS (269,102) (444,700) Other Income (Expense) Interest income 1,445 4,073 Interest expense ( 6,590) ( 2,980) ------------ ------------ NET LOSS (274,247) (443,607) PREFERRED DIVIDEND REQUIREMENT ( 46,855) ( 47,118) ------------ ------------ NET LOSS CHARGEABLE TO COMMON SHAREHOLDERS $ (321,102) $ (490,725) ============ ============ NET LOSS PER COMMON SHARE $ ( 0.02) $ (0.03) Weighted average shares outstanding 21,093,248 14,816,944
4
HYPERDYNAMICS CORPORATION Consolidated Statements of Cash Flows Three Months Ended September 30, 2002 and 2001 2002 2001 ------------ ------------ Cash flows from operating activities Net loss $ (274,247) $ (443,607) Adjustments to reconcile net loss to cash used by operating activities: Depreciation and amortization 47,986 47,788 Gain on sale of equipment ( 7,514) Options and warrants issued 9,883 Common stock issued for services 2,800 Changes in: Accounts receivable ( 29,299) ( 1,957) Inventory ( 1,629) 9,023 Other assets ( 1,445) 7,792 Accounts payable and accrued expenses 93,401 84,597 Accrued salary payable to officers 66,541 Deposits from customers ( 17,107) Change in deferred rent 2,394 ------------ ------------ NET CASH USED BY OPERATING ACTIVITIES (118,119) (286,481) ------------ ------------ Cash flows from investing activities Proceeds from sale of equipment 39,356 Purchase of equipment ( 7,888) ( 1,445) ------------ ------------ NET CASH USED FOR INVESTING ACTIVITIES 31,468 ( 1,445) ------------ ------------ Cash flows from financing activities Collection of stock subscription receivable 95,000 Payments on installment debt ( 4,763) ( 4,022) Proceeds from Short-term Debt 42,080 Proceeds from sale of common stock 24,375 199,800 ------------ ------------ NET CASH PROVIDED FROM FINANCING ACTIVITIES 61,692 290,778 ------------ ------------ Net change in cash ( 24,959) 2,852 CASH AT BEGINNING OF PERIOD 29,015 34,265 ------------ ------------ CASH AT END OF PERIOD $ 4,056 $ 37,117 ============ ============
5 HYPERDYNAMICS CORPORATION NOTES TO FINANCIAL STATEMENTS 1. The unaudited consolidated financial statements of Hyperdynamics Corporation have been prepared in accordance with generally accepted accounting principles and the rules of the Securities and Exchange Commission ("SEC"), and should be read in conjunction with the audited financial statements and notes thereto contained in the Company's latest Annual Report filed with the SEC on Form 10-KSB. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosures contained in the audited financial statements for the most recent fiscal year, 2002, as reported in the Form 10-KSB, have been omitted. 2. Common Stock During the first quarter 2002, 62,500 options were exercised for $14,375 and 43,478 shares were sold for $10,000. Additionally, 125,680 shares and 10,000 shares were issued for accounts payable and for services valued at $35,170 and $2,800, respectively. 3. Subsequent Event. On November 8, 2002, SCS Corporation (SCS), the Company's wholly owned subsidiary entered into a Letter Agreement with US Oil Corporation (USOil). The agreement is contingent upon USOil obtaining a new Production Sharing Agreement (PSA) with the Republic of Guinea (Guinea) for the exploration and exploitation of oil and gas; for an area of approximately 65,000 square kilometers of territory offshore Guinea. The new PSA was executed on October 29, 2002, but is not effective until December 2, 2002. The PSA has a one year term for the first phase, and upon completion of the first phase, allows two years for the second phase with a potential one year extension. The PSA requires SCS to pay Guinea $250,000 within ninety days of the effective date, requires SCS to pay Guinea $1,000,000 when proven reserves are located, gives a 15% royalty to Guinea, provides for production sharing with Guinea of up to 50% after the cost of oil, and provides at least a 15% working interest to Guinea. Pursuant to the November 8th agreement, SCS was required to pay USOil $15,000 upon execution of the PSA, $15,000 in thirty days, and $10,000 in 60 days. The first $15,000 installment has been paid. The November 8th agreement also requires USOil to execute a Farm Out Agreement with SCS under which SCS will receive all benefits of the PSA and will undertake and perform all work and financial obligations, including obligations that may arise from default of any obligations. SCS is required to pay $1,600,000 to USOil when SCS enters into an agreement with a third party (such as an oil company) entity or individual in which such third party acquires, assumes, or finances all or any portion or percentage of SCS's rights, duties or obligations of the Farm-out Agreement. Hyperdynamics has guaranteed the payment of any penalties or expenses that USOil may incur as a result of SCS or any applicable third party's failure or refusal to properly conduct, perform and fulfill any obligations under the PSA. USOil will also receive a 3% overriding royalty interest in the gross proceeds from the sale of oil, natural gas or other hydrocarbons procuced from the concession acreage. The Farm-out Agreement is in review of the parties attorneys and has not been executed as of November 19, 2002. 6 CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION The Company is including the following cautionary statement to make applicable and take advantage of the safe harbor provision of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements made by, or on behalf of, the Company. This quarterly report on form 10QSB contains forward-looking statements. Forward-looking statements include statements concerning plans, objectives, goals, strategies, expectations, future events or performance and underlying assumptions and other statements which are other than statements of historical facts. Certain statements contained herein are forward-looking statements and, accordingly, involve risks and uncertainties which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. The Company's expectations, beliefs and projections are expressed in good faith and are believed by the Company to have a reasonable basis, including without limitations, management's examination of historical operating trends, data contained in the Company's records and other data available from third parties, but there can be no assurance that management's expectations, beliefs or projections will result or be achieved or accomplished. In addition to other factors and matters discussed elsewhere herein, the following are important factors that, in the view of the Company, could cause actual results to differ materially from those discussed in the forward-looking statements: the ability of the Company to respond to changes in the information system environment, competition, the availability of financing, and, if available, on terms and conditions acceptable to the Company, and the availability of personnel in the future. ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations General and Prospective The quarter ended September 30, 2002 included some major accomplishments and problem solving. During the quarter the company acquired 100% of the source code of the Onyx software as a cornerstone to the Company's NuDataTM Management system. Additionally, the Company worked through some significant logistical problems regarding the backlog of tape transcriptions on its transcription contract. As a result, production dropped considerably in September after steady increases in previous months. Prospectively, and based on solving the backlog problems and obtaining new customers for tape transcriptions, management is very pleased with its operational progress and expects to have positive cash flow from operations in the second quarter. Operational revenues and cash flows are forecasted to continue to rise for the foreseeable future. October revenues increased sharply compared to the dip in September as we began solving our production backlog problems. We are establishing targets for significant increases in revenue and cash flows for the second and third quarters of fiscal 2003. These forecasted increases are solely a result of the minimum revenue numbers required by our contract. We would have preferred to front-end load our minimum revenues from our contract sales, but we expect to correct these logistical problems by back-end loading minimum contract revenues. The expected increase in tape transcription revenue, new marketing, sales of our NuData Management System, and new NuData customers, could result in substantial increases in revenues and cash provided from operations. We have a growing number of larger and longer-term contracts for tape transcription that we are working to close and we also expects to renew its our existing contract for next year beginning in March 2003. 7 Results of Operations Our revenues increased 59% from $83,069 in the quarter ended September 30, 2001 to $131,755. in the quarter ended September 30, 2002 due to increased seismic data processing work. Cost of sales decreased 48% from $158,982 in the quarter ended September 30, 2001 to $82,793 in the quarter ended September 30, 2002. This translates to a gross margin of $48,962, or 37% during the quarter ended September 30, 2002 versus $(75,913), or (91%) during the quarter ended September 30, 2001. The change in cost of sales is attributable to lower payroll costs and the discontinuance of certain costs associated with the ITC business. Our selling, general, and administrative expenses decreased 14%, from $320,999 during the quarter ended September 30, 2001 to $277,592 during the quarter ended September 30, 2002. We reduced selling expense from $51,545 to $3,273 by discontinuing the use of a salaried salesperson and by not participating in trade shows this year. We also reduced payroll expenses by $25,194, from $100,707 in 2001 to $75,513 in 2002. Accounting, legal, and consulting increased $37,287, from $47,947 in 2001 to $85,234 in 2002. This change is primarily due to an increase in consulting expense counterbalanced by a decrease in legal expense. Based on the factors discussed above, net loss chargeable to common shareholders reduced $169,623, or 35% from $(490,725) in 2001 to $(321,102) in 2002. Liquidity and Capital Resources At September 30, 2002 our current ratio of current assets to current liabilities was 0.15. This compares to 0.30 for 2001. It remains management's priority to achieve cash flow from operations as quickly as possible. It is critical as discussed hereunder that we obtain additional working capital so that we can continue to meet current cash obligations while we continue to improve cash flow from operations. The "Net cash used for operating activities" was reduced by 59% from ($286,481) in 2001 to ($118,119) for the quarter in 2002. This reflects a significant improving trend and shows a cash deficit from operating activities of an monthly average of $39,373. 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 0.32. Based on the progress of our most significant tape conversion contract implemented in April 2002, SCS Corporation, and other sales forecasts, we are continuing to make significant progress towards cash flowing from operations. Based on current contracts performance and forecasted sales for significant projects associated with our NuDataTM Management System, we expect positive cash flow from operations for the second quarter of fiscal year 2003. In order to bridge ourselves to a new level of operational success, management is planning to raise another $250,000. On September 12, 2002, we signed a stock subscription agreement to sell, on a best efforts basis, up to $250,000 of our restricted 144 common stock to IC Investments LTD at $.23 per share. As of October 10, 2002 we have raised $10,000 from this agreement. We may obtain additional capital upon the exercise of previously-issued warrants and outstanding options for common stock. We have a CD securing our letter of credit in favor of our landlord. This CD is released partly on an annual basis. The next release of $87,260 will occur next November 2003. ITEM 3 Evaluation of disclosure controls and procedures Kent P. Watts, our Chief Executive Officer and Chief Financial Officer, has concluded that our disclosure controls and procedures are appropriate and effective. They have evaluated these controls and procedures as of a date within 90 days of the filing date of this report on Form 10-QSB. There were no significant changes in 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. 8 PART II OTHER INFORMATION ITEM 1 Legal Proceedings None ITEM 2 Changes in Securities In addition to the transactions occurring during the quarter ended September 30, 2002, which were reported in our Annual Report on Form 10-KSB, we have effected the following transactions in reliance upon exemptions from registration under the Securities Act of 1933 as amended (the "Act") as provided in Section 4(2) thereof. Each certificate issued for unregistered securities contained a legend stating that the securities have not been registered under the Act and setting forth the restrictions on the transferability and the sale of the securities. No underwriter participated in, nor did we pay any commissions or fees to any underwriter in connection with any of these transactions. None of the transactions involved a public offering. We believe that each person had knowledge and experience in financial and business matters which allowed them to evaluate the merits and risks of our securities. We believe that each person was knowledgeable about our operations and financial condition. In September 2002, we issued 62,500 shares of section 144 stock to Ben Smith for the exercise of 62,500 options at $.23 per share. This was a private placement made in reliance on Section 4(2) of the Act. In September 2002, we issued 43,478 shares to IC Investments, LTD pursuant to a $10,000 cash payment which was a partial payment on a subscription agreement to purchase up to 1,086,957 shares of common stock. This was a private placement made in reliance on Section 4(2) of the Act. ITEM 6 Exhibits and Reports on Form 8-K (a) EXHIBITS None (b) REPORTS ON FORM 8-K None Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly HyperDynamics Corporation (Registrant) By: /s/ Kent Watts ------------------ Kent Watts, Chairman of the Board, Chief Executive Officer, and Chief Accounting Officer Dated: November 15, 2002 9 CERTIFICATIONS -------------- I, Kent P. Watts, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Hyperdynamics Corporation; 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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 quarterly 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 quarterly report (the "Evaluation Date"); and c) presented in this quarterly 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 quarterly 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: November 15, 2002 ------------------------------ [Signature] /s/ Chief Executive Officer 10 CERTIFICATIONS -------------- I, Kent P. Watts, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Hyperdynamics Corporation; 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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 quarterly 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 quarterly report (the "Evaluation Date"); and c) presented in this quarterly 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 quarterly 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: November 15, 2002 -------------------------- [Signature] /s/ Chief Financial Officer 11 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 P. Watts, the Chief Executive Officer of Hyperdynamics Corporation hereby certify that Hyperdynamics Corporation's periodic report on Form 10QSB and the financial statements contained therein 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 10QSB and the financial statements contained therein fairly represents, in all material respects, the financial condition and results of the operations of Hyperdynamics Corporation. Date: November 15, 2002 /s/ ------------------------------------- Kent P. Watts Chief Executive Officer of -------------------------- Hyperdynamics Corporation ------------------------- 12 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 Corporation's periodic report on Form 10QSB and the financial statements contained therein 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 10QSB and the financial statements contained therein fairly represents, in all material respects, the financial condition and results of the operations of Hyperdynamics Corporation. Date: November 15, 2002 /s/ -------------------------------- Kent P. Watts Chief Financial Officer of -------------------------- 13