ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Policies)

3 Months Ended

Sep. 30, 2014

ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

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, 2014. 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, 2014, as reported in the Form 10-K, have been omitted.

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 equivalents are highly liquid investments with an original maturity of three months or less. For the periods presented, we maintained all of our cash in bank deposit accounts which, at times, exceed the federally insured limits.

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 our 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 September 30, 2014 or June 30, 2014. At September 30, 2014 and at June 30, 2014 we had a balance of $65,000, all of which related to joint interest billings to Tullow and Dana Petroleum (E&P) Limited (“Dana”), who own 40% and 23% participating interests in the Concession, respectively.

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.

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 month periods ended September 30, 2014 and 2013, respectively, as their effects are antidilutive due to our net loss for those periods.

Stock options to purchase approximately 1.0 million common shares at an average exercise price of $10.11 and warrants to purchase approximately 32,000 shares of common stock at an average exercise price of $11.69 were outstanding at September 30, 2014. Using the treasury stock method, had we had net income, approximately 1,500 common shares attributable to our outstanding stock options would have been included in the fully diluted earnings per share for the quarter ended September 30, 2014. There would have been no dilution attributable to our outstanding warrants to purchase common shares. Had we had net income, approximately 16,500 common shares attributable to our outstanding unvested restricted stock awards would have been included in the fully diluted earnings per share for the quarter ended September 30, 2014.

Stock options to purchase approximately 1.3 million common shares at an average exercise price of $12.90 and warrants to purchase approximately 0.4 million shares of common stock at an average exercise price of $10.40 were outstanding at September 30, 2013. Using the treasury stock method, had we had net income, approximately 0.1 million common shares attributable to our outstanding stock options would have been included in the fully diluted earnings per share for the quarter ended September 30, 2013. There would have been no dilution attributable to our outstanding warrants to purchase common shares.

Contingencies

We are subject to legal proceedings, claims and liabilities. 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 for more information on legal proceedings.

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. Available-for-sale securities, which consisted entirely of Corporate Debt securities, were valued at the closing price reported in the active market in which the security was traded. As of September 30, 2014, there were no remaining investments on hand.

Foreign currency gains and losses from current operations

In accordance with ASC Topic 830, Foreign Currency Matters, the functional currency of our international subsidiaries is the U.S. Dollar. Gains and losses from foreign currency transactions arising from operating assets and liabilities are included in general, administrative and other operating expense, have not been significant. Net foreign currency transaction gains (losses) were $ (14) thousand for the three month period ended September 30, 2014, as compared to $(0.4) million for the three month period ended September 30, 2013.

Recently issued or adopted accounting pronouncements

In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward exists, which requires that an entity present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. ASU 2013-11 eliminates diversity in practice for presentation of an unrecognized tax benefits when such a carryforward is available to reduce the taxable income or tax payable that would result from the disallowance of a tax position. We adopted this accounting guidance in this, our first quarter of fiscal 2015 with no impact on our financial position or results of operations.