ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Policies)

12 Months Ended

Jun. 30, 2012

ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation

Principles of Consolidation

        The accompanying consolidated financial statements include the accounts of Hyperdynamics and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States and the rules of the Securities and Exchange Commission (SEC).

Use of estimates

Use of Estimates

        The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and expenses at the balance sheet date and for the period then ended. Actual results could differ from these estimates.

Cash and cash equivalents

Cash and cash equivalents

        Cash equivalents are highly liquid investments with an original maturity of three months or less. We maintain our cash in bank deposit accounts which, at times, exceed the federally insured limits. At June 30, 2012, we had approximately $35,728,000 in excess of FDIC limits. We have not experienced any losses in such accounts.

Restricted cash

Restricted cash

        Included in restricted cash as of June 30, 2012 is $19,180,000 held in escrow which relates to our drilling contract with AGR Peak Well Management Ltd ("AGR"). Under the terms of the drilling contract, we funded the escrow account for the sole purpose of funding our drilling project as overseen by AGR.

Joint interest receivable and allowance for doubtful accounts

Joint interest receivable and allowance for doubtful accounts

        The Company establishes provisions for losses on accounts receivable if it determines that it will not collect all or part of the outstanding balance. Accounts receivable are written down to reflect management's best estimate of realizability based upon known specific analysis, historical experience, and other currently available evidence of the net collectible amount. There is no allowance for doubtful accounts as of June 30, 2012 or 2011. At June 30, 2012, all of our accounts receivable balance was related to joint interest billings to Dana Petroleum (E&P) Limited ("Dana"), which owns a 23% participating interest in our Guinea Concession.

Securities classified as available-for-sale and held to maturity

Securities classified as available-for-sale and held to maturity

        Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Marketable equity securities and debt securities not classified as held-to maturity are classified as available-for-sale. Available-for-sale securities are carried at fair value, with unrealized gains and losses, net of tax, reported in other comprehensive income. Realized gains and losses, and declines in value deemed to be other-than-temporary, are included in earnings.

        The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in earnings.

Oil and Gas Properties

Oil and Gas Properties

Full Cost Method

        We account for oil and natural gas producing activities using the full cost method of accounting as prescribed by the United States Securities and Exchange Commission (SEC). Accordingly, all costs incurred in the acquisition, exploration, and development of proved oil and natural gas properties, including the costs of abandoned properties, dry holes, geophysical costs and annual lease rentals are capitalized. All selling, general and administrative corporate costs unrelated to drilling activities are expensed as incurred. Sales or other dispositions of oil and natural gas properties are accounted for as adjustments to capitalized costs, with no gain or loss recorded unless the ratio of capitalized costs to proved reserves would significantly change, or to the extent that the sale proceeds exceed our capitalized costs. Depletion of evaluated oil and natural gas properties would be computed on the units of production method based on proved reserves. The net capitalized costs of proved oil and natural gas properties are subject to quarterly impairment tests.

Costs Excluded

        Costs associated with unevaluated properties are excluded from the full cost pool until we have made a determination as to the existence of proved reserves. We review our unevaluated properties at the end of each quarter to determine whether the costs incurred should be transferred to the full cost pool and thereby subject to amortization.

        We assess all items classified as unevaluated property on a quarterly basis for possible impairment or reduction in value. We assess properties on an individual basis or as a group if properties are individually insignificant. The assessment includes consideration of the following factors, among others: intent to drill; remaining lease term under our concession; geological and geophysical evaluations; drilling results and activity; the assignment of proved reserves; and the economic viability of development if proved reserves are assigned. We assess our unevaluated properties on a country-by-country basis. During any period in which these factors indicate an impairment, the adjustment is recorded through earnings of the period.

Full-Cost Ceiling Test

        At the end of each quarterly reporting period, the unamortized cost of oil and natural gas properties is limited to the sum of the estimated future net revenues from proved properties (including future development and abandonment costs of wells to be drilled, using prices based on the preceding 12-months' average price based on closing prices on the first day of each month, or prices defined by existing contractual arrangements, are used in deriving future net revenues discounted at 10%) adjusted for related income tax effects ("Full-Cost Ceiling Test").

        The calculation of the Full-Cost Ceiling Test is based on estimates of proved reserves. There are numerous uncertainties inherent in estimating quantities of proved reserves and in projecting the future rates of production, timing, and plan of development. The accuracy of any reserves estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. Results of drilling, testing, and production subsequent to the date of the estimate may justify revision of such estimates. Accordingly, reserves estimates are often different from the quantities of oil and natural gas that are ultimately recovered.

        During the year ended June 30, 2012 we fully amortized $116,312,000 in proved properties subject to the Full-Cost Ceiling Test. We recognized no impairment charges in the years ended June 30, 2011 or 2010, respectively.

Sales of Oil and Gas Properties and Discontinued Operations

Sales of Oil and Gas Properties and Discontinued Operations

        On April 1, 2009, management executed a contract to sell the working interest in all of its domestic oil and gas properties in a transaction that was accounted for as three sales. The liabilities associated with the working interest in the oil and gas properties, asset retirement obligations were transferred with the assets. The transaction was completed during August 2009. The Company received scheduled payments of $1,030,000 and $820,000 during May 2009. The final payment of $820,000 was received in August 2009.

        These assets, which were associated with HYD, our domestic business segment, were a disposal group and constituted a component of the entity with distinguishable cash flows. Accordingly, these assets and cash flows and results of operations associated with these assets were classified as discontinued operations in the consolidated statements of operations and consolidated statements of cash flows for 2010.

Property and Equipment, other than Oil and Gas

Property and Equipment, other than Oil and Gas

        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, generally three to five years.

Provision for Impairments of Long-lived Assets

Provision for Impairments of Long-lived Assets

        Long-lived assets are reviewed for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment loss recognized is the excess of the carrying amount over the fair value of the asset. Any impairment charge is recorded through current period earnings. We recognized no impairment charges in the years ended June 30, 2012, 2011 or 2010, respectively.

Deferred Rent

Deferred Rent

        Accounting principles generally accepted in the United States require rent expense to be recognized on a straight-line basis over the lease term. Rent holidays, rent concessions, rent escalation clauses and certain other lease provisions are recorded on a straight-line basis over the lease term (including one renewal option period if renewal is reasonably assured based on the imposition of an economic penalty for failure to exercise the renewal option). The difference between the rent due under the stated lease agreement compared to that of the straight-line basis is recorded as deferred rent. The short-term portion is the portion which is scheduled to reverse within twelve months of the balance sheet date and it is included in accounts payable and accrued expenses. At the beginning of our office lease, we received a free rent period, which began in March 2010 and ended in November 2010. During the free rent period from March 2010 to November 30, 2010, we recorded $140,000 of deferred rent, which is being amortized over the term of the lease.

Income Taxes

Income Taxes

        We account for income taxes in accordance with FASB Accounting Standards Codification ("ASC") 740, "Income Taxes," which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the tax and financial reporting basis of assets and liabilities and for loss and credit carryforwards. Valuation allowances are provided when recovery of deferred tax assets is not considered likely.

        Tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in our tax returns that do not meet these recognition and measurement standards. For the year ended June, 30, 2012 the Company has no unrecognized tax benefits.

        Our policy is to recognize potential interest and penalties accrued related to unrecognized tax benefits within income tax expense. For the years ended June 30, 2012, 2011 and 2010, we did not recognize any interest or penalties in our consolidated statement of operations, nor did we have any interest or penalties accrued on our consolidated balance sheet at June 30, 2012 and 2011 relating to unrecognized benefits.

        The tax years 2007-2011 remain open to examination for federal income tax purposes and by the other major taxing jurisdictions to which we are subject.

Stock-Based Compensation

Stock-Based Compensation

        ASC 718, "Compensation-Stock Compensation" requires recognition in the financial statements of the cost of employee services received in exchange for an award of equity instruments over the period the employee is required to perform the services in exchange for the award (presumptively the vesting period). We measure the cost of employee services received in exchange for an award based on the grant-date fair value of the award. We account for non-employee share-based awards based upon ASC 505-50, "Equity-Based Payments to Non-Employees."

Earnings per Share

Earnings Per Share

        Basic loss per common share has been computed by dividing net loss by the weighted average number of shares of common stock outstanding during each period and after any preferred stock dividend requirements. In period of earnings, diluted earnings per common share are calculated by dividing net income available to common shareholders by weighted-average common shares outstanding during the period plus weighted-average dilutive potential common shares. Diluted earnings per share calculations assume, as of the beginning of the period, exercise of stock options and warrants using the treasury stock method. Convertible securities are included in the calculation during the time period they are outstanding using the if-converted method.

        All potential dilutive securities, including potentially dilutive options, warrants and convertible securities, if any, were excluded from the computation of dilutive net loss per common share for the years ended June 30, 2012, 2011 and 2010, respectively, as their effects are antidilutive due to our net loss for those periods.

        Stock options to purchase approximately 12.5 million common shares at an average exercise price of $2.09 and warrants to purchase approximately 13.4 million shares of common stock at an average exercise price of $2.94 were outstanding at June 30, 2012. Using the treasury stock method, had we had net income, approximately 2.8 million common shares attributable to our outstanding stock options and 1.7 million common shares attributable to our outstanding warrants to purchase common shares would have been included in the fully diluted earnings per share calculation for the year ended June 30, 2012.

        Stock options to purchase approximately 9.3 million common shares at an average exercise price of $1.85 and warrants to purchase approximately 3.9 million shares of common stock at an average exercise price of $1.26 were outstanding at June 30, 2011. Using the treasury stock method, had we had net income, approximately 3.7 million common shares attributable to our outstanding stock options and 2.7 million common shares attributable to our outstanding warrants to purchase common shares would have been included in the fully diluted earnings per share calculation for the year ended June 30, 2011.

        Stock options to purchase approximately 8.0 million common shares at an average exercise price of $0.91 and warrants to purchase approximately 11.1 million common shares at an average exercise price of $1.25 were outstanding at June 30, 2010. Using the treasury stock method, had we had net income, approximately 0.9 million common shares attributable to our then outstanding stock options and 0.6 million common shares attributable to our then outstanding warrants would have been included in the fully diluted earnings per share calculation for the year ended June 30, 2010.

Contingencies

Contingencies

        We are subject to legal proceedings, claims and liabilities which arise in the ordinary course of business. We accrue for losses associated with legal claims when such losses are probable and can be reasonably estimated. These accruals are adjusted as additional information becomes available or circumstances change. Legal fees are charged to expense as they are incurred. See Note 11, Commitments and Contingencies, for more information on legal proceedings.

Accumulated Other Comprehensive Income, net of tax

Accumulated Other Comprehensive Income (Loss), net of tax

        We follow the provisions of ASC 220, "Comprehensive Income", which establishes standards for reporting comprehensive income. In addition to net income (loss), comprehensive income (loss) includes all changes to equity during a period, except those resulting from investments and distributions to the owners of the Company. At June 30, 2012, we had a balance in "Accumulated other comprehensive loss, net of income tax" on the consolidated balance sheet of zero. The components of accumulated other comprehensive loss and related tax effects were as follows (in thousands):

	Gross Value			Tax Effect		Net of Tax Value
Accumulated other comprehensive loss at June 30, 2010	$	—		$	—	$	—
Change in fair value of available-for-sale securities		349			—		349
Accumulated other comprehensive loss at June 30, 2011	$	349		$	—	$	349
Change in fair value of available-for-sale securities		123			—		123
Reclassification of other than temporary impairment of securities included in net income		(472	)		—		(472	)
Accumulated other comprehensive loss at June 30, 2012	$	—		$	—	$	—

        There is no tax effect of the unrealized gain (loss) in other comprehensive income given our full valuation allowance against deferred tax assets. Total comprehensive loss was $149.0 million and $11.6 million in fiscal year 2012 and 2011, respectively.

Financial instruments

Financial instruments

        The accounting standards (ASC 820, "Fair Value Measurements and Disclosures") regarding fair value of financial instruments and related fair value measurements define fair value, establish a three-level valuation hierarchy for disclosures of fair value measurement, and enhance disclosure requirements for fair value measures.

        The three levels are defined as follows:

• •

  Level 1—inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

  •

  Level 2—inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

  •

  Level 3—inputs to the valuation methodology are unobservable and significant to the fair value measurement.

        Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The carrying values of cash and cash equivalents, accounts receivable—joint interest and accounts payable approximate fair value. During fiscal 2012, we held investments which were classified as available-for-sale securities and therefore were recorded at their fair value at each reporting date. Available-for-sale investments, which consisted entirely of Corporate Debt securities, were valued at the closing price reported in the active market in which the security was traded. These securities were sold during the third quarter of fiscal 2012.

        The following table sets forth by level within the fair value hierarchy, our financial assets and liabilities (in thousands) measured at fair value on a recurring basis as of June 30, 2011:

			Fair Value Measurement at June 30, 2011
	Carrying Value at June 30, 2011
			Level 1		Level 2		Level 3
Assets:
Available-for-sale securities	$	55,368	$	55,368	$	—	$	—
Liabilities:
Warrant derivative liability	$	—	$	—	$	—	$	—

        See discussion of changes in the fair value of available-for-sale securities within Note 4.

        Additionally, we determined that certain warrants outstanding during the fiscal years 2011 and 2010 qualified as derivative financial instruments under the provisions of ASC 815-40, "Derivatives and Hedging—Contracts in an Entity's Own Stock". These warrant agreements included provisions designed to protect holders from a decline in the stock price ('down-round' provision) by reducing the exercise price in the event we issued equity shares at a price lower than the exercise price of the warrants. As a result of this down-round provision, the exercise price of these warrants could be modified based upon a variable that is not an input to the fair value of a 'fixed-for-fixed' option as defined under ASC 815-40 and consequently, these warrants were treated as a liability and recorded at fair value at each reporting date.

        The fair value of these warrants was determined using a lattice model, with any change in fair value during the period recorded in earnings as "Other income (expense)—Gain (loss) on warrant derivative liability." As a result, the derivative warrant liability was carried on the balance sheet at its fair value.

        Significant Level 3 inputs used to calculate the fair value of the warrants included the stock price on the valuation date, expected volatility, risk-free interest rate and management's assumptions regarding the likelihood of a future repricing of these warrants pursuant to the down-round provision.

        The following table sets forth the changes in the fair value measurement of our Level 3 warrant derivative liability:

Beginning balance—July 1, 2010	$	583
Change in fair value of derivative liability		771
Warrants exercised and reclassified to additional paid-in capital		(1,354	)
Balance at June 30, 2011	$	—

        The $771,000 change in fair value during the year ended June 30, 2011, was recorded as an increase to the derivative liability and as a non-cash loss in our statement of operations. For the year ended June 30, 2010, we incurred a $279,000 non-cash gain. All of the remaining warrants underlying this derivative liability were exercised in October 2010. At June 30, 2012 and June 30, 2011, there was no remaining derivative liability balance.

        As of June 30, 2012, we had no financial assets or liabilities measured at fair value on a recurring basis.

Recently issued or adopted accounting pronouncements

Recently issued or adopted accounting pronouncements

        In June 2011, the FASB issued an update to ASC 220, Comprehensive Income. This FASB Accounting Standards Update ("ASU") requires entities to present components of comprehensive income in either a continuous statement of comprehensive income or two separate but consecutive statements that would include reclassification adjustments for items that are reclassified from other comprehensive income to net income on the face of the financial statements. The amendments in this update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. Subsequently, in December 2011, the FASB issued ASU 2011-12 which deferred the requirements to include reclassification adjustments for items that are reclassified from other comprehensive income to net income on the face of the financial statements. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, which will be fiscal 2013 for us. The amendments in this update should be applied retrospectively and early application is permitted. We are currently evaluating which presentation option we will utilize for comprehensive income in our consolidated financial statements.

Subsequent events

Subsequent Events

        The Company evaluated all subsequent events from June 30, 2012 through the date of issuance of these financial statements.