INCOME TAXES

12 Months Ended

Jun. 30, 2012

INCOME TAXES

INCOME TAXES

8. INCOME TAXES

        Federal Income taxes are not currently due since Hyperdynamics has had losses since inception. Components of deferred tax assets as of June 30, 2012 and 2011 are as follows:

(in thousands)	2012			2011
Current deferred tax assets:
Other current deferred tax assets	$	60		$	—
Total current temporary differences		60			—
Less: valuation allowance		(60	)		—
Net current deferred tax assets	$	—		$	—
Non-current deferred tax assets
Stock compensation	$	1,999		$	1,951
Property and Equipment		28			—
Oil and Gas Properties		46,194			5,485	(1)
Other non-current deferred tax assets		—			12
Total non-current deferred tax assets	$	48,221		$	7,448
Non-current deferred tax liabilities
Property and Equipment	$	—		$	(165	)
Net operating losses		22,751			15,204	(1)
		70,972			22,487
Less: valuation allowance		(70,972	)		(22,487	)
Net non-current deferred tax assets (liabilities)	$	—		$	—

(1)

During the fourth quarter of fiscal year 2012, we identified certain errors in our previously issued consolidated financial statements within our deferred tax disclosure. The error was the result of an uncertain tax position related to the year ended June 30, 2010 that had not previously been disclosed, which impacted the presentation of our deferred tax balances and related disclosures as of June 30, 2011 and 2010. We have established the tabular roll-forward to disclose this uncertain tax position in this footnote, and the June 30, 2011 deferred tax balances have been corrected. The error in our previously disclosed deferred tax balances did not impact our consolidated balance sheets or statements of operations because the Company was in an overall deferred tax asset position with a full valuation allowance. We evaluated the materiality of the errors from both a qualitative and a quantitative perspective and concluded that these errors are immaterial to our previously issued consolidated financial statements. We have corrected the consolidated financial statements presented herein to reflect the correction of these errors.

        Deferred tax assets have been fully reserved due to determination that it is more likely than not that the Company will not be able to realize the benefit from them.

        Hyperdynamics has U.S. net operating loss carryforwards of approximately $80,884,000 at June 30, 2012. The U.S. net operating losses contains excess tax benefits related to stock compensation in the amount of $2,441,000 which have not been included in the financial statements.

        Internal Revenue Code 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 are restricted to $784,000 per year. Currently the Company is analyzing whether the utilization of the net operating loss carryforwards from years subsequent to 2001 may be subject to a significant annual limitation due to ownership changes that have occurred previously under Section 382 of the Internal Revenue Code.

        The Company underwent a restructuring during the current year that removed approximately $13,202,000 of net operating losses from the U.S. consolidated tax return. It is unlikely that the entity where these net operating losses reside will ever generate U.S. taxable income sufficient to utilize any of these losses. Due to the existence of the valuation allowance, it is not expected that any possible limitation will have an impact on the results of operations or financial position of the Company. The U.S. net operating loss carryforwards expire from 2019 to 2032.

        The difference between the statutory tax rates and our effective tax rate is primarily due to the valuation allowance applied against our deferred tax assets generated by net operating losses. A reconciliation of the actual taxes to the U.S. statutory tax rate for the years ended June 30, 2012, 2011 and 2010 is as follows:

(in thousands)	2012			2011			2010
Income tax benefit at the statutory federal rate (35%)	$	(52,256	)	$	(3,933	)	$	(2,803	)
Increase (decrease) resulting from nondeductible stock compensation		1,454			(515	)		—
Reduction of net operating losses related to excess tax benefits from non-qualifying stock options		854			—			—
Increase (decrease) resulting from nontaxable gain on derivative liability		—			270			(98	)
Other, net		1,403			14			—
Change in valuation allowance		48,545			4,164			2,901
Net income tax expense	$	—		$	—		$	—

        The following table summarizes the activity related to our gross unrecognized tax benefits from July 1, 2009 to June 30, 2012 (in thousands):

	Federal, State and Foreign Tax
	(In thousands)
Balance at June 30, 2009	$	0
Additions to tax positions related to the current year		5,485
Additions to tax positions related to prior years		0
Statute expirations		0
Balance at June 30, 2010	$	5,485
Additions to tax positions related to the current year		0
Additions to tax positions related to prior years		0
Statute expirations		0
Balance at June 30, 2011	$	5,485
Additions to tax positions related to the current year		0
Additions to tax positions related to prior years		0
Statute expirations		0
Balance at June 30, 2012	$	5,485

        The total unrecognized tax benefits that, if recognized, would affect our effective tax rate was $0 for the years ended June 30, 2012, June 30, 2011, and June 30, 2010.

        During fiscal year 2012, we recorded an increase to the June 30, 2009 balance of $5,485,000 in our liability for unrecognized tax benefits, of which $5,485,000 was an increase related to U.S. tax positions taken on the June 30, 2010 tax return. This liability for unrecognized tax benefits has been netted against the net operating losses disclosed in the consolidated financial statements as of June 30, 2012 and 2011.

        Our policy is to include potential accrued interest and penalties related to unrecognized tax benefits within our income tax provision account. We have no accruals for the payment of interest, net of tax benefits, or penalties as of June 30, 2012, 2011, and 2010, respectively.

        We file income tax returns, including tax returns for our subsidiaries, with federal, state, local, and foreign jurisdictions. Our tax returns are subject to routine compliance review by the taxing authorities in the jurisdictions in which we file tax returns in the ordinary course of business. We consider the United States to be our most significant tax jurisdiction; however, the taxing authorities in Guinea may audit various tax returns. We currently have no ongoing federal or state audits. The normal statute of limitations for tax returns being available for IRS audit is three years from the filing date of the return. However, net operating losses are subject to adjustment upon utilization of the loss to offset taxable income regardless of when the net operating loss was generated. Therefore, all of our historic losses are subject to adjustment until they are utilized or expire.We do not believe there will be any decreases to our unrecognized tax benefits within the next twelve months.