ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Policies)

3 Months Ended

Sep. 30, 2016

ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited condensed consolidated financial statements include the accounts of Hyperdynamics and its direct and indirect 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, 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, 2016.

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, 2016, 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. We believe our estimates and assumptions are reasonable; however, such estimates and assumptions are subject to a number of risks and uncertainties that may cause actual results to differ materially from such estimates. Significant estimates and assumptions underlying these financial statements include:

estimates in the calculation of share-based compensation expense,

estimates made in our income tax calculations,

estimates in the assessment of current litigation claims against the Company

estimates and assumptions involved in our assessment of unproved oil and gas properties for impairment, and

estimates and assumptions involved in our preliminary fair market value assessment of the well construction material received in the August 15, 2016 Settlement Agreement with Tullow and Dana.

We are subject to legal proceedings, claims, and liabilities that arise in the ordinary course of business. We accrue for losses when such losses are considered probable and the amounts can be reasonably estimated.

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.

Earnings per share

Basic profit (loss) per common share has been computed by dividing net profit (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 profit by weighted-average common shares outstanding during the period plus weighted-average dilutive potential common shares. Diluted potential common shares 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 period ended September 30, 2015 as their effects are antidilutive due to our net loss for that period.

Stock options to purchase approximately 1.1 million common shares at an average exercise price of $4.09 were outstanding at September 30, 2016. Using the treasury stock method, approximately 66 thousand common shares attributable to our outstanding stock options have been included in the fully diluted earnings per share for the three month period ended September 30, 2016.

Stock options to purchase approximately 1.1 million common shares at an average exercise price of $7.23 and warrants to purchase approximately 0.03 million shares of common stock at an average exercise price of $12.64 were outstanding at September 30, 2015. Using the treasury stock method, had we had net income, no common shares attributable to our outstanding stock options would have been included in the fully diluted earnings per share for the three month period ended September 30, 2015. There would have been no dilution attributable to our outstanding warrants to purchase common shares.

The following is a reconciliation of the numerators and denominators used in the calculation of Basic and Diluted Earnings per share for the periods indicated below (in thousands, except number of shares and per share amounts):

	Three Months Ended September 30, 2016					Three Months Ended September 30, 2015
	Net Profit (Loss)		Shares	Per Share Amount		Net Profit (Loss)			Shares	Per Share Amount
Basis EPS:
Net profit (loss) and share amounts	$	1,144	21,053,980	$	0.05	$	(1,905	)	21,046,591	$	(0.09	)

Dilutive Securities:
Stock option awards			65,649						—
Warrants			—						—

Diluted EPS:
Net profit (loss) and assumed share conversions	$	1,144	21,119,629	$	0.05	$	(1,905	)	21,046,591	$	(0.09	)

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 6 for more information on legal proceedings.

Fair Value Measurements

The accounting standards define fair value, establish a three-level valuation hierarchy for disclosures of fair value measurements and enhance disclosure requirements for fair value measures. As discussed in Note 2, we determined a preliminary fair value of the material (Level 3 fair value measurement) that we received at the time of our legal settlement with Tullow and Dana. The fair value estimate was based on the combination of cost and market approaches taking into consideration a number of factors, which included but were not limited to the original cost of the material condition and demand for steel and tubulars at the time of measurement.

- Definition

Disclosure of accounting policy for cash and cash equivalents, including the policy for determining which items are treated as cash equivalents. Other information that may be disclosed includes (1) the nature of any restrictions on the entity's use of its cash and cash equivalents, (2) whether the entity's cash and cash equivalents are insured or expose the entity to credit risk, (3) the classification of any negative balance accounts (overdrafts), and (4) the carrying basis of cash equivalents (for example, at cost) and whether the carrying amount of cash equivalents approximates fair value.

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