6. SHAREHOLDERS’ EQUITY

Preferred Stock issuances

Series A Preferred Stock Offering

On March 17, 2017, we held the first closing of the Series A Offering of 680 Units of our securities, at a purchase price of $1,000 per Unit and on March 28, 2017, we consummated a second closing of the Series A Offering and issued and sold an additional 511 Units of our securities, at a purchase price of $1,000 per Unit. On April 18, 2017, we consummated a third closing of the Series A Offering and issued and sold additional 710 Units of our securities, at a purchase price of $1,000 per Unit. On April 26, 2017, we consummated a fourth closing of the Series A Offering and issued and sold additional 50 Units of our securities at a purchase price of $1,000 per Unit. Each “Unit” consisted of (i) one share of the Company’s Series A Preferred Stock, and (ii) the Series A Investor Warrant.

We entered into subscription agreements for the Units (the “Subscription Agreements”) with certain accredited investors (as such term is defined in the Rule 501 under the Securities Act of 1933, as amended (the “Securities Act”) (the “Subscribers”). The subscription agreements contained customary representations and warranties of the Company and the Subscribers, and indemnification of the Company and the Placement Agent by the Subscribers.

The Company received an aggregate of approximately $2.0 million in gross cash proceeds, before deducting placement agent fees and expenses, legal, accounting and other fees and expenses, in connection with the sale of the Units. The Company used the net proceeds of approximately $1.6 million from the sale of the Units for general corporate purposes and to further its business interests in the Republic of Guinea, including, but not limited to the drilling of an exploration well on the Company’s offshore Concession.

At the March 17, 2017 closing, we issued to the Subscribers an aggregate of: (i) 680 Units of Series A Preferred Stock and (ii) Series A Investor Warrants to purchase an aggregate of 151,640 shares of common stock and at the March 28, 2017 closing we issued to the Subscribers an aggregate of (i) 511 Units of Series A Preferred Stock and (ii) Series A Investor Warrants to purchase an aggregate of 113,953 shares of common stock. At the April 18, 2017 closing, we issued to the Subscribers an aggregate of (i) 710 shares of Series A Preferred Stock and (ii) Series A Investor Warrants to purchase an aggregate of 158,330 shares of common stock. At the April 26, 2017 closing, we issued to the Subscribers an aggregate of (i) 50 shares of Series A Preferred Stock and (ii) Series A Investor Warrants to purchase an aggregate of 11,150 shares of Common Stock.

Subscribers in the Offering had an option (the “Subscriber Option”) to purchase their pro rata share of up to an aggregate of $3,000,000 in additional Units following the effective date of the registration statement registering for resale the shares of Common Stock issuable upon conversion of the Series A Preferred Stock and exercise of the Investor Warrants and Placement Agent Warrants, which we filed on May 1, 2017 and amended on May 18, 2017, June 7, 2017, and June 20, 2017. See Note 9 for the subscriber option exercises.

On March 17, 2017, the Company filed a Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock (the “Certificate of Designations”) with the Secretary of State of the State of Delaware, authorizing, and establishing the voting powers, designations, preferences, limitations, restrictions and relative rights of, the Series A Preferred Stock. The Certificate of Designations was adopted by resolution of the Company’s board of directors pursuant to the Company’s Certificate of Incorporation, as amended, which vests in the Company’s board of directors with the authority to provide for the authorization and issuance of one or more series of preferred stock of the Company within the limitations and restrictions set forth therein. The Certificate of Designations contains the following key terms:

Each holder of Series A Preferred Stock is entitled to receive dividends payable on the Stated Value of such Series A Preferred Stock at the rate of 1% per annum, which shall be cumulative and be due and payable in Common Stock on the applicable conversion date or in cash in the case of a redemption of the Series A Preferred Stock by the Company.

Shares of Series A Preferred Stock are redeemable, in whole or in part, at the option of the Company, in cash, at a price per share equal to 115% of the Stated Value plus 115% of accrued but unpaid dividends.

In the event of any liquidation, dissolution or winding up of the Company, holders of Series A Preferred Stock will be entitled to receive, out of assets available therefor, an amount equal to 115% of the Stated Value of their shares plus 115% of any accrued but unpaid dividends.

The Series A Preferred Stock is convertible at the option of the holder, in whole or in part, into shares of Common Stock at any time after the earlier of (i) the date the Registration Statement is declared effective by the SEC or (ii) six months after the date of the closing. If no conversion has taken place within nine months after the date of the closing, the Series A Preferred Stock, plus any accrued but unpaid dividends, will automatically convert into shares of Common Stock.

The conversion price per share of common stock in either event is the lesser of (i) $2.75 per share (subject to adjustment in certain circumstances), or (ii) 80% of the lowest closing price during 21 consecutive trading days ending on the trading day immediately prior to the conversion date, subject to a floor of $0.25 per share (which floor is subject to “full ratchet” adjustment in certain circumstances if we issue Common Stock (or Common Stock equivalents) in the aggregate amount of not less than $1.0 million at a price below $0.25 per share of Common Stock, and to proportionate adjustment in certain other circumstances).

Except in certain limited circumstances affecting the rights of the holders of Series A Preferred Stock or as required by law, holders of the Series A Preferred Stock will not have voting rights.

Until the date that is six months following the date of the closing, the Company will not authorize or create any class of stock ranking as to dividends, redemption or distribution of assets upon a liquidation senior to the Series A Preferred Stock, without the consent of holders of no less than 66 2/₃ % of the then-outstanding shares of Series A Preferred Stock.

We also agreed in the Subscription Agreements that until the date that is 12 months following the closing, we will not create or allow to be created any security interest, lien, charge or other encumbrance on any of our or our subsidiaries’ rights under or interests in the PSC, as amended, that secures the repayment of indebtedness of the Company or any of its subsidiaries for money borrowed.

The Company engaged Katalyst Securities, LLC as Placement Agent for the Series A Offering, on a reasonable best effort basis. We agreed to pay to the Placement Agent (and any sub agent) a cash commission of 9% of the gross purchase price paid by the Subscribers for the Units (including for Units that may be issued upon exercise of the Subscriber Option), and to issue to the Placement Agent (and any sub agent) warrants to purchase a number of shares of common stock equal to 7% of the number of shares of common stock initially issuable upon conversion of the shares of Series A Preferred Stock at a fixed price of $2.75 per share contained in the Units sold in Series A Offering (including Units that may be issued upon exercise of the Subscriber Option), at the exercise price of $3.00 per share (the “Placement Agent Warrants”).

We also agreed to reimburse the Placement Agent for certain expenses related to the Series A Offering. At the March 17, 2017 closing, we paid the Placement Agent $61,200 of cash fees and issued to the Placement Agent or its designees Placement Agent Warrants to purchase an aggregate of 18,002 shares of common stock. At the March 28, 2017 closing, $45,990 of cash fees were paid and Placement Agent Warrants to purchase an aggregate of 13,528 shares of common stock were issued to the Placement Agent or its designees. In conjunction with the April 18, 2017 and April 26, 2017 closing, we paid the Placement Agent $68,400 of cash fees and issued to the Placement Agent or its designees Placement Agent Warrants to purchase an aggregate of 20,120 shares of common stock. The Placement Agency Agreement between the Company and the Placement Agent contains customary representations, warranties and covenants of and indemnifications by the parties.

Series A Investor Warrants – Series A Offering

The exercise price is subject to weighted average anti-dilution provisions. The Series A investor warrants are exercisable at any time at the option of the holder until the second annual anniversary of the first closing of the financing which was March 17, 2017.

The combined fair value of the Series A investor warrants is estimated to be $0.1 million as of June 30, 2017. The following are weighted average assumptions:



	June 30,
	2017

Expected term (in years)	1.75
Expected volatility%	75	%
Risk-free interest rate%	1.34	%
Expected dividend yield%	—	%

Placement Agent Warrants – Series A Offering

As part of the placement agent’s fees, the Placement Agent received warrants to purchase 51,650 shares of the Company’s stock at the exercise price of $3.00 per share in connection with these four closings of the Series A Offering. The exercise price is subject to weighted average anti-dilution provisions. The Placement Agent Warrants are exercisable at any time at the option of the holder until the second annual anniversary of the first closing of the financing which was March 17, 2017.

The Company estimated the aggregate fair value of the Series A warrants issued to the placement agent to be $15,029 as of June 30, 2017. The fair value of placement agent warrants which was not material at the issuance date, was considered part of total equity issuance cost and allocated between reduction to additional paid-in capital and expense based on relative values of investor warrants and preferred stock relative to proceeds from issuance.

The Series A Placement Agent Warrants were valued using the following weighted average assumptions:



	June 30,
	2017

Expected term (in years)	1.75
Expected volatility%	75	%
Risk-free interest rate%	1.34	%
Expected dividend yield%	—	%

The Series A Investor Warrants and the Placement Agent Warrants have provisions for the “weighted average” adjustment of their exercise price in the event that we issue shares of common stock (or common stock equivalents) for a consideration per share less than the exercise price then in effect, subject to certain exceptions.

On March 28, 2017, we also entered into an amendment to the Subscription Agreements (the “Amendment”) with Subscribers that purchased the Units in the initial closing of the Offering on March 17, 2017, and with the Subscribers in this closing, to expand the scope of a right of first refusal contained in the Subscription Agreement. As so amended, the Subscription Agreement provides that if, following the termination of the Offering and prior to December 17, 2017, the Company determines to offer for sale or to accept an offer to purchase any additional shares of common stock or securities convertible into or exercisable or exchangeable for shares of common stock (subject to certain limitations and adjustments described therein) for consideration consisting of cash and/or outstanding debt of the Company, each Subscriber who previously purchased Units in the Offering will have an option to purchase such Subscriber’s pro rata share of such securities on the same terms and conditions on which such securities are proposed to be issued, exercisable on the terms set forth in the Subscription Agreement.

Beneficial Conversion Feature

For the March 17, 2017 and the March 28, 2017 closing of the Series A Offering, the Company determined that the conversion feature in the Preferred Stock represented a beneficial conversion feature. The fair value of the common stock ranging from $1.60 to $1.75 per share on the Commitment Dates was greater than the effective conversion price of $0.47 per share of common stock, representing a beneficial conversion feature of $2.6 million in aggregate. Since the intrinsic value of the beneficial conversion feature is greater than the proceeds allocated to the convertible instrument, the amount of the reduction (the “Discount”) assigned to the beneficial conversion feature was limited to the amount of the proceeds allocated to the convertible instrument. A total of $1.2 million was recorded as the Discount to additional paid-in capital. The Discount resulting from the allocation of value to the beneficial conversion feature is required to be amortized on a non-cash basis from the issuance date over a six-month period, or fully amortized upon an accelerated date of redemption or conversion, and recorded as a preferred dividend.

For the April 18, 2017 and the April 26, 2017 closing of the Series A Offering, the Company determined that the conversion feature in the Preferred Stock represented a beneficial conversion feature. The fair value of the common stock ranging from $1.46 to $1.75 per share on the Commitment Dates was greater than the effective conversion price of $0.80 to $0.87 per share of common stock, representing a beneficial conversion feature of $0.5 million in aggregate. A total of $0.7 million was recorded as the Discount to additional paid-in capital. The Discount resulting from the allocation of value to the beneficial conversion feature is required to be amortized on a non-cash basis from the issuance date over a six-month period, or fully amortized upon an accelerated date of redemption or conversion, and recorded as a preferred dividend.

The S-1 Registration Statement (SEC File No. 333-217577) that we filed on May 1, 2017 and subsequently amended on May 18, 2017, June 7, 2017, and June 20, 2017, and which was declared effective by the SEC on June 22, 2017, triggered the full amortization of the beneficial conversion feature for the quarter and year ended June 30, 2017. Accordingly, a preferred dividend of $1.5 million was recorded as a reduction to additional paid in capital since the Company has no retained earnings.

Common Stock issuances

Shares issued for services

In consideration for the Drilling Contract Amendment and taking into account certain significant costs incurred by Pacific Scirocco while waiting for SCS to agree terms of the Farm-out Agreement with SAPETRO and the Third Amendment to the Production Sharing Contract between SCS and the Government of the Republic of Guinea, the Company agreed to issue to Pacific Drilling Operations a number of shares of our common stock equal to $1.0 million divided by the volume-weighted average price for the ten trading days preceding the date of the agreement, which was June 2, 2017. Under this agreement the issuance price was calculated at $1.761 per share, and 567,859 unregistered shares of our common stock were delivered to Pacific Drilling Operations within 10 business days.

Conversion of Series A Preferred Stock

During the year ended June 30, 2017, a total of 135,625 shares of common stock were issued upon the conversion of 160 shares of Series A Preferred Stock.

Common Unit Offering

On June 5, 2017, the Company held a first closing of the Common Unit Offering of 4,335,625 Units of our securities, at a purchase price of $1.46 per Unit.

The Company received an aggregate of approximately $6.3 million in gross cash proceeds, before deducting placement agent fees and expenses, legal, accounting and other fees and expenses, in connection with the sale of the Units.

Katalyst Securities, LLC, was engaged by the Company as Placement Agent for the Common Unit Offering, on a reasonable best effort basis. We agreed to pay to the Placement Agent (and any sub agent) a cash commission of 9% of the gross purchase price paid by the Subscribers for the Units, and to issue to the Placement Agent (and any sub agent) warrants to purchase a number of shares of common stock equal to 7% of the number of shares of common stock contained in the Units sold in the Common Unit Offering, at the exercise price of $1.825 per share (the "Common Unit Placement Agent Warrants"). We also agreed to reimburse the Placement Agent for certain expenses related to the Common Unit Offering. We paid the Placement Agent a total of $0.6 million of cash fees and issued to the Placement Agent or its designees Common Unit Placement Agent Warrants to purchase an aggregate of 303,502 shares of common stock.

Investor Warrants - Common Unit Offering

As part of the Common Unit Offering, each "Unit" consisted of (i) one share of our common stock, and (ii) (the Common Unit Investor Warrant to purchase three quarters (3/₄) of a share of our common stock, exercisable for two years from issuance, at an exercise price of $1.825 per whole share (subject to adjustment in certain circumstances). We entered into subscription agreements (the “Subscription Agreements”) for the Units with certain accredited investors (as such term is defined in the Rule 501 under the Securities Act). The Subscription Agreements contained customary representations and warranties of the Company and the subscribers, and indemnification of the Company and the Placement Agent by the subscribers. At that closing, we issued to the subscribers an aggregate of: (i) 4,335,625 shares of common stock and (ii) Common Unit Investor Warrants to purchase an aggregate of 3,251,726 shares of common stock.

The exercise price is subject to weighted average anti-dilution provisions. The Common Unit Investor Warrants are exercisable at any time at the option of the holder until the second annual anniversary of the common unit closing of the financing which was June 5, 2017.

The fair value of the Common Unit Investor Warrants is estimated to be $1.7 million as of June 30, 2017. The following are weighted average assumptions:



	June 30,
	2017

Expected term (in years)	1.93
Expected volatility%	76	%
Risk-free interest rate%	1.37	%
Expected dividend yield%	—	%

Placement Agent Warrants – Common Unit Offering

As part of the placement agent’s fees, the Placement Agent received Common Unit Placement Agent Warrants to purchase 303,502 shares of the Company’s stock at the exercise price of $1.825 per share. The exercise price is subject to weighted average anti-dilution provisions. These placement agent warrants are exercisable at any time at the option of the holder until the second annual anniversary of the closing of the common unit offering which was June 5, 2017.

The Company estimated the fair value of the warrants issued to the placement agent to be $161,410 as of June 30, 2017. The fair value of warrants at issuance date of $201,000 was considered part of total equity issuance cost and allocated between reduction to additional paid-in capital and expense based on relative values of investor warrants and common stock relative to proceeds from issuance.

The Common Unit Placement Agent Warrants were valued using the following weighted average assumptions:



	June 30,
	2017

Expected term (in years)	1.93
Expected volatility%	76	%
Risk-free interest rate%	1.37	%
Expected dividend yield%	—	%

The Common Unit Investor Warrants and the Common Unit Placement Agent Warrants have provisions for the "weighted average" adjustment of their exercise price in the event that we issue shares of common stock (or common stock equivalents) for a consideration per share less than the exercise price then in effect, subject to certain exceptions.

Registration Rights

The Series A Registration Rights Agreement

In connection with the Series A Offering, we entered into the Series A Registration Rights Agreement with each of the subscribers for the Series A Preferred Stock and the holders of the Series A Placement Agent Warrants, which required the Company to file a Registration Statement with the SEC by May 1, 2017, registering for resale (i) all shares of common stock issued or issuable upon conversion of the Series A Preferred Stock (including any shares of Series A Preferred Stock issued pursuant to the Subscriber Option) and (ii) all shares of common stock issued or issuable upon exercise of the Series A Investor Warrants (including any Series A Investor Warrants issued pursuant to the Subscriber Option described above) and the Placement Agent Warrants (including any that may be issued upon exercise of the Subscriber Option), and to use our commercially reasonable efforts to cause the Registration Statement to be declared effective no later than July 29, 2017. On May 1, 2017, we filed a registration statement in compliance with the agreement, which became effective on June 22, 2017.

We also granted to the holders of these registrable shares certain "piggyback" registration rights until two years after the effectiveness of the Registration Statement.

If the Registration Statement ceases to be effective or otherwise cannot be used for a period specified in the Series A Registration Rights Agreement, or trading of the common stock on the Company's principal market is suspended or halted for more than three consecutive trading days (each, a "Registration Event"), monetary penalties payable by the Company to the holders of registrable shares that are affected by such Registration Event will commence to accrue at a rate equal to 12% per annum of the purchase price paid for each Unit purchased, for the period that such Registration event continues, but not exceeding in the aggregate 5% of such purchase price.

We have agreed to use our commercially reasonable efforts to keep such Registration Statement effective until the earliest of (a) the date that is two years from the date it is declared effective by the SEC, (b) the date on which all the securities registered thereunder have been transferred other than to certain permitted assignees, and (c) the date as of which all of the selling stockholders may sell all of the securities registered hereunder without restriction pursuant to Rule 144 (including, without limitation, volume restrictions) and without the need for current public information required by Rule 144(c)(1) or Rule 144(i)(2), if applicable.

Pursuant to comments received from the staff of the SEC reflecting SEC staff policy, we were not permitted to include in such Registration Statement up to 12,573,598 as the number of shares that may be issuable upon conversion of the up to 3,000 shares of Series A Preferred Stock that may be issued pursuant to the Subscriber Option, up to 669,000 shares that may be issuable upon exercise of the Series A Investor Warrants that may be issued pursuant to the Subscriber Option, and up to 79,420 shares that may be issuable upon exercise of Series A Placement Agent Warrants that may be issued to the placement agent for the Series A Convertible Preferred Stock and its designees in connection with exercises of the Subscriber Option. (Such 12,573,598 shares represent the number of shares that would become issuable upon conversion of all of such shares of Series A Preferred Stock at a price of $0.25 per share, the current "floor" on the conversion price of the Series A Preferred Stock.) The Series A Registration Rights Agreement provides that in this circumstance, we are not liable for the payment of the monetary penalties described above with respect to those shares.

The Common Unit Registration Rights Agreement

In connection with the Common Unit Offering, we entered into a Registration Rights Agreement (the "Common Unit Registration Rights Agreement") with each of the subscribers of the common stock Units and the holders of the Common Unit Placement Agent Warrants, which requires the Company to file a Registration Statement with the SEC within 45 calendar days after the final closing of the Common Unit Offering, registering for resale (i) all shares of common stock sold in the Common Unit Offering, and (ii) all shares of common stock issued or issuable upon exercise of the Common Unit Investor Warrants and the Common Unit Placement Agent Warrants, and to use our commercially reasonable efforts to cause the Registration Statement to be declared effective no later than 90 calendar days after the filing deadline. The 567,859 unregistered shares of common stock issued to Pacific Drilling Operations as described above will also be included in this registration. The Company filed a registration statement on Form S-1 with the SEC on July 27, 2017 (SEC File No. 333-219495), which has not yet been declared effective.

We also granted to the holders of these registrable shares certain "piggyback" registration rights until two years after the effectiveness of the Registration Statement.

If the Registration Statement is not filed with or declared effective by the SEC within the specified deadlines set forth above, or the Registration Statement ceases to be effective or otherwise cannot be used for a period specified in the Registration Rights Agreement, or trading of the common stock on the Company's principal market is suspended or halted for more than three consecutive trading days (each, a "Registration Event"), monetary penalties payable by the Company to the holders of registrable shares that are affected by such Registration Event will commence to accrue at a rate equal to 12% per annum of the purchase price paid for each Unit purchased, for the period that such Registration event continues, but not exceeding in the aggregate 5% of such purchase price.

We have agreed to use our commercially reasonable efforts to keep the Registration Statement effective until the earliest of (a) the date that is two years from the date it is declared effective by the SEC, (b) the date on which all the securities registered thereunder have been transferred other than to certain permitted assignees, and (c) the date as of which all of the selling stockholders may sell all of the securities registered hereunder without restriction pursuant to Rule 144 (including, without limitation, volume restrictions) and without the need for current public information required by Rule 144(c)(1) or Rule 144(i)(2), if applicable.

Exercise of Stock Options

During the twelve months ended June 30, 2017 there were a total of 183,492 shares of common stock issued upon the exercise of stock options. There were no stock options or warrants exercised during 2016.

Awards issued in lieu of cash bonus

During the twelve months ended June 30, 2017, there were a total of 536,091 shares of common stock issued in lieu of cash bonuses.

Stock issued for settlement

On December 31, 2016, the Company entered into a settlement agreement with the plaintiffs (See Note 8) whereby Hyperdynamics issued to the plaintiffs a total of 600,000 shares of common stock. The shares of common stock were issued on February 2, 2017.