ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Policies)

6 Months Ended

Dec. 31, 2012

ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation

Principles of consolidation

The accompanying unaudited 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”), and should be read in conjunction with the audited financial statements and notes thereto contained in our Annual Report filed with the SEC on Form 10-K for the year ended June 30, 2012. 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 ended June 30, 2012, as reported in the Form 10-K, have been omitted.

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.

Restricted cash

Restricted cash

Included in restricted cash at December 31, 2012 is $19.2 million held in escrow which relates to our drilling contract with 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

We establish provisions for losses on accounts receivable if we determine that we will not collect all or part of the outstanding balance. Accounts receivable are written down to reflect management’s best estimate or 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 December 31, 2012 or June 30, 2012. At December 31, 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 the Concession.

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. 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 three and six month periods ended December 31, 2012 and 2011, respectively, as their effects are antidilutive due to our net loss for those periods.

Stock options to purchase approximately 10.7 million common shares at an average exercise price of $1.94 and warrants to purchase approximately 13.5 million shares of common stock at an average exercise price of $2.93 were outstanding at December 31, 2012.

Using the treasury stock method, had we had net income, approximately 0.4 million and 0.5 million common shares attributable to our outstanding stock options would have been included in the fully diluted earnings per share for the three and six-month periods ended December 31, 2012.  There would have been no dilution attributable to our outstanding warrants to purchase common shares.

Stock options to purchase approximately 10.8 million common shares at an average exercise price of $1.22 and warrants to purchase approximately 3.4 million shares of common stock at an average exercise price of $1.30 were outstanding at December 31, 2011.

Using the treasury stock method, had we had net income, approximately 3.8 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 six-month period ended December 31, 2011, while approximately 3.7 million common shares attributable to our outstanding stock options and 2.6 million common shares attributable to our outstanding warrants would have been included for the three month period ended December 31, 2011.

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 7, Commitments and Contingencies, for more information on legal proceedings.

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. As of December 31, 2012, we had no financial assets or liabilities measured at fair value on a recurring basis.

Subsequent events

Subsequent events

We evaluated all subsequent events from December 31, 2012 through the date of the issuance of these condensed consolidated financial statements.

Recently issued or adopted accounting pronouncements

Recently issued or adopted accounting pronouncements

In June 2011, the Financial Accounting Standards Board (“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 is fiscal 2013 for us. The amendments in this update should be applied retrospectively and early application was permitted. We adopted the applicable provisions of this update in the first quarter of fiscal 2013. The adoption of this update resulted in the addition of the Consolidated Statements of Comprehensive Income (Loss) in our condensed consolidated financial statements.