1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

General Overview

Hyperdynamics Corporation (“Hyperdynamics,” the “Company,” “we,” “us,” and “our”) is a Delaware corporation formed in March 1996. Hyperdynamics has two wholly-owned subsidiaries, SCS Corporation Ltd (“SCS”), a Cayman corporation, and HYD Resources Corporation (“HYD”), a Texas corporation. Through SCS and its wholly-owned subsidiary, SCS Guinea SARL (“SCSG”), which is a Guinea limited liability company formed under the laws of the Republic of Guinea (“Guinea”) located in Conakry, Guinea, Hyperdynamics focuses on oil and gas exploration offshore the coast of West Africa. Our exploration efforts are pursuant to a Hydrocarbon Production Sharing Contract, as amended (the “PSC”). We refer to the rights granted under the PSC as the “Concession.” We originally began operations in oil and gas exploration, seismic data acquisition, processing, and interpretation in late fiscal 2002.

As used herein, references to “Hyperdynamics,” “Company,” “we,” “us,” and “our” refer to Hyperdynamics Corporation and our subsidiaries, including SCS. The rights in the Concession offshore Guinea are held by SCS.

Status of our Business

We have no source of operating revenue and there is no assurance when we will, if ever. On September 30, 2016, we had $6.7 million in cash, and $1.3 million in liabilities, all of which are current liabilities. We plan to use our existing cash to fund our general corporate needs and our expenditures associated with the Concession. We have no other material commitments other than our commitments under the PSC.

In 2010 we sold a 23% gross interest in the Concession to Dana Petroleum, PLC (“Dana”), a subsidiary of the Korean National Oil Corporation. Later, at the end of 2012, we sold a 40% gross interest to Tullow Guinea Ltd. (“Tullow”). The Share Purchase Agreement (“Tullow SPA”) was dated December 31, 2012. A few months later Tullow became the Operator of the Concession on April 1, 2013. We refer to Tullow, Dana and us in the Concession as the “Consortium”.

Pursuant to the Tullow SPA between Tullow and us, Tullow paid us $26 million in cash and Tullow agreed to pay our entire participating interest share of expenditures associated with joint operations in the Concession up to a gross expenditure cap of $100 million incurred during the period of our carried interest while drilling the initial exploratory well that began on September 21, 2013. Tullow also agreed to pay our participating interest share of future costs for the drilling of an appraisal well following the initial exploration well, if drilled, up to an additional gross expenditure cap of $100 million.

The Consortium planned to drill the exploration well in the ultra-deepwater area (water depths of over 2,000 meters) of the Concession during the first half of calendar 2014, but Tullow declared Force Majeure in March of 2014 based on the mere existence of the Department of Justice (“DOJ”) and Securities and Exchange Commission (“SEC”) investigations pursuant to the Foreign Corrupt Practices Act of the United States (“FCPA Investigations”). Tullow withdrew its Force Majeure declaration in May of 2014, but did not resume petroleum operations citing the existence of the FCPA investigations and the Ebola outbreak in Guinea as the reason.

The DOJ investigation ended last May 2015, the SEC investigation ended last September 2015, and the World Health Organization declared Guinea Ebola free on December 29, 2015. Notwithstanding the resolution of the FCPA investigations, Dana insisted on further specific title assurances from the Government of Guinea and at a Petroleum Operations Management Committee meeting with the Government of Guinea in Conakry on December 16 and 17, 2015, Tullow and SCS obtained a PSC Amendment that we believed provided such further assurances. Instead of signing the PSC Amendment both Tullow and Dana refused to execute the agreement. Unable to see a path forward, we filed legal actions against Tullow and Dana under our Joint Operating Agreement.

On August 15, 2016, we entered into a Settlement and Release Agreement with Tullow and Dana (“Settlement Agreement”) that returned to Hyperdynamics 100% of the interest under the PSC, long-lead item property useful in the drilling of an exploratory well, and $0.7 million in cash, in return for a mutual release of all claims. We also agreed to pay Dana a success fee based upon the certified reserves of the Fatala well if it results in a discovery.

On August 19, 2016, we signed a non-binding Memorandum of Understanding with the Government of Guinea and executed a Second Amendment to the PSC (“2016 Amendment”) on September 15, 2016. We also received a Presidential Decree that gave Hyperdynamics a one year extension to the second exploration period of the PSC to September 22, 2017 (“PSC Extension Period”) and we also became the designated Operator with the receipt of the Presidential Decree.

In addition to clarifying certain elements of the initial PSC, we agreed in the 2016 Amendment to drill one exploratory well to a minimum depth of 2,500 meters below the seabed within the PSC Extension Period with a projected commencement date of April 2017 (the “Extension Well”) with the option of drilling additional wells. If the Extension Well is not drilled within the PSC Extension Period, we will owe the Government of Guinea the difference between the actual expenditures in Guinea that are related to the well and $46.0 million. Fulfillment of the work obligations exempts us from the expenditure obligations during the PSC Extension Period. Failure to comply with the drilling and other obligations of the PSC as amended subjects us to financial penalties and a risk of loss of the Concession.

The continued delays have adversely affected our ability to date to explore the Concession and reduce the attractiveness of the Concession to prospective industry participants and financing parties. While we currently hold 100% of the Concession, it is unknown whether we will be able to raise the necessary funds to drill the exploratory well during the PSC Extension Period. Absent cash inflows, there is substantial doubt as to whether we will have adequate capital resources to meet our current obligations as they become due and therefore be able to continue as a going concern. Our ability to meet our current obligations as they become due over the next twelve-months, and to be able to continue exploration, will depend on obtaining additional resources through sales of additional interests in the Concession, equity or debt financial offerings, or through other means. No assurance can be given that any of these actions can be completed.

Principles of consolidation

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.