UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
 x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934: For the quarterly period ended December 31, 2009
 
 or
 o
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934: For the transition period from _______ to _________
 
 Commission file number: 000-32490
 
 HYPERDYNAMICS CORPORATION
 (Exact name of registrant as specified in its charter)
 
 Delaware
87-0400335(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
 
 
 One Sugar Creek Center Blvd., # 125
 Sugar Land, Texas 77478
 
 (Address of principal executive offices, including zip code)
 
 713-353-9400
 (registrant's principal executive office telephone number)
 
 
 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  x    No o
 
 
  Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files.)    Yes   ̈    No   ̈
 
  Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
 Large accelerated filer   ̈

Accelerated filer   ̈

Non-accelerated filer   ̈

Smaller reporting company  þ
 
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)   YES o   NOx
 
 APPLICABLE ONLY TO CORPORATE ISSUERS
 
 As of February 15, 2010, 91,177,666 shares of common stock, $0.001 par value, were outstanding.
 
 
  
  
 Table of Contents
 
 
 Part I. Financial InformationItem 1.      Financial StatementsConsolidated Balance Sheets (unaudited) at December  31, 2009 and June 30, 2009
2Consolidated Statements of Operations (unaudited) for the Three and Six Months Ended December 31, 2009 and 2008, and for the period from inception of the Exploration Stage (July 1, 2009) to December 31, 2009
3Consolidated Statements of Shareholders’ Equity (unaudited) for the Six Months Ended December 31, 2009
4Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended December 31, 2009 and 2008, and for the period from inception of the Exploration Stage (July 1, 2009) to December 31, 2009
5Notes to Consolidated Financial Statements (unaudited)
7Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations
20Item 3.     Quantitative and Qualitative Disclosures about Market Risks
23Item 4T.     Controls and Procedures
23Part II. Other InformationItem 1.      Legal Proceedings
23Item 6.     Exhibits
24Signatures
25
  
  HYPERDYNAMICS CORPORATION
 (an Exploration Stage Company)
 CONSOLIDATED BALANCE SHEETS
 (In Thousands, Except Number of Shares and Per Share Amounts)
 (Unaudited)
 
 December 31, 2009


June 30,
2009ASSETSCurrent assets:Cash and cash equivalents

$
1,122


$
1,360Prepaid expenses and other current assets


146



52Assets held for sale – Discontinued Operations


-



145Total current assets


1,268



1,557Property and equipment, net of accumulated depreciation of $399 and $339


178



209Oil and gas properties, using full cost method:Unevaluated properties excluded from amortization


13,997



7,663Deposits


117



11Total assets

$
15,560


$
9,440LIABILITIES AND SHAREHOLDERS' EQUITYCurrent liabilities:Accounts payable and accrued expenses


3,632



803Accounts payable - seismic data


650



650Variable share issuance obligation


-



553Dividends payable


372



372Dividends payable to related party


442



434Short-term notes payable and current portion of long-term debt, net of discount of $- and $134


57



639Total current liabilities


5,153



3,451Warrant derivative liability


2,063



-Long-term debt, net of discount of $- and $341


-



1,661Liabilities related to assets held for sale - discontinued operations-noncurrent


-



18Deferred rent


49



56Total liabilities


7,265



5,186Commitments and contingencies (Note 11)


-



-Shareholders' equity:Convertible preferred stock, par value $0.001; stated value $1,000; 20,000,000 authorizedSeries A – 3,000 shares issued and 1,945 shares outstanding


-



-Series B - 2,725 shares issued and 0 and 2,406 shares outstanding


-



-Common stock, $0.001 par value, 250,000,000 shares authorized; 91,177,666 and 64,162,813 shares issued and outstanding


91



64Additional paid-in capital


82,026



71,805Accumulated deficit


(67,615
)


(67,615
)Deficit accumulated after reentering exploration stage


(6,207
)


-Total shareholders' equity


8,295



4,254Total liabilities and shareholders' equity

$
15,560


$
9,440
 
 The accompanying notes are an integral part of these consolidated financial statements.
 
 
  2
  
 
 
 HYPERDYNAMICS CORPORATION
 (an Exploration Stage Company)
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (In Thousands, Except Number of Shares and Per Share Amounts)
 (Unaudited)
 
 Three months ended December 31,


Six months ended December 31,


Inception of exploration stage through December 31,2009


2008


2009


2008


2009Costs and expenses:Depreciation

$
29


$
34


$
59


$
67


$
59Selling, general and administrative


3,038



2,042



5,426



4,227



5,426Total costs and expenses


3,067



2,076



5,485



4,294



5,485Loss from operations


(3,067
)


(2,076
)


(5,485
)


(4,294
)


(5,485
)Other income (expense)Loss on derivative liability


(423
)


-



(478
)


-



(478
)Interest expense, net


(496
)


(2,022
)


(711
)


(2,221
)


(711
)Gain (loss) on settlement of debt


(298
)


200



(298
)


(435
)


(298
)Total other income (expense)


(1,217
)


(1,822
)


(1,487
)


(2,656
)


(1,487
)Loss from continuing operations


(4,284
)


(3,898
)


(6,972
)


(6,950
)


(6,972
)Income (loss) from discontinued operations, net of tax


(3
)


(2,275
)


765



(1,995
)


765Net loss


(4,287
)


(6,173
)


(6,207
)


(8,945
)


(6,207
)Preferred stock dividend to related party


16



(24
)


(8
)


(49
)


(8
)Net loss attributable to common shareholders

$
(4,271
)

$
(6,197
)

$
(6,215
)

$
(8,994
)

$
(6,215
)Basic and diluted income (loss) per shareFrom continuing operations

$
(0.05
)

$
(0.06
)

$
(0.09
)

$
(0.12
)From discontinued operations


(0.00
)


(0.04
)


0.01



(0.03
)Net loss per share attributable to common shareholders

$
(0.05
)

$
(0.10
)

$
(0.08
)

$
(0.15
)Weighted average shares outstandingBasic and diluted


84,461,229



61,114,189



74,565,109



60,405,417
 
 
 
 
 
 
 The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
  3
  
 
 
 HYPERDYNAMICS CORPORATION
 (an Exploration Stage Company)
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
 (In Thousands, Except Number of Shares)
 (Unaudited)
 
 Series A Preferred


Series B Preferred


Common Stock


Additional Paid-in


Accumulated


Deficit Accumulated during ExplorationShares


Amount


Shares


Amount


Shares


Amount


Capital


Deficit


Stage


TotalBalance, June 30, 2009, as previously reported

1,945


$
-



2,406


$
-



64,162,813


$
64


$
71,805


$
(67,615
)
$
-


$
4,254Cumulative effect of reclassification of warrants as a derivative under ASC 815

-



-



-



-



-



-



(1,585
)


--


-



(1,585
)Balance at July 1, 2009, as adjusted

1,945



-



2,406



-



64,162,813



64



70,220



(67,615
)

-



2,669Common stock issued for:Services

-



-



-



-



442,049



-



322



-


-



322Conversion of Series B Preferred Stock

-



-



(2,406
)


-



15,822,222



16



(16
)


-


-



-Conversion of debentures

-



-



-



-



1,949,411



2



1,294



-


-



1,296Cash in private placement

-



-



-



-



8,801,171



9



7,521



-


-



7,530Stock options issued for services

-



-



-







-



-



1,363



-


-



1,363Discount related to modification of convertible debt

-



-



-



-



-



-



1,172



-


-



1,172Warrant repricing charged to interest expense

-



-



-



-



-



-



158



-


-



158Warrant repricingDeemed dividend

-



-



-



-



-



-



322



-


-



322Deemed dividend

-



-



-



-



-



-



(322
)


-


-



(322
)Preferred stock dividends to related party

-



-



-



-



-



-



(8
)


-


-



(8
)Net loss

-



-



-



-



-



-



-



-


(6,207
)


(6,207
)Balance, December 31, 2009

1,945


$
-



-


$
-



91,177,666


$
91


$
82,026


$
(67,615
)
$
(6,207
)

$
8,295
 
 
 
 
 The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
 
 
 
 
 
  4
  
  HYPERDYNAMICS CORPORATION
 (an Exploration Stage Company)
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In Thousands)
 (Unaudited)
 
 Six Months Ended December 31,



Inception of Exploration Stage through December 31,2009


2008



2009CASH FLOWS FROM OPERATING ACTIVITIES:Net loss

$
(6,207
)

$
(8,945
)

$
(6,207
)Income from discontinued operations


(765
)


1,995



(765
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation, depletion and amortization


59



68



59Common stock issued for services


143



896



143Employee stock options


1,363



211



1,363Variable share issuance obligation


(374
)


543



(374
)Warrant repricing charged to interest expense


158



-



158Loss on debt extinguishment


298



435



298Loss on derivative liability


478



-



478Interest accreted to debt principal


342



1,464



342Gain on disposal of assets


-



(65
)


-Amortization of discount and financing costs on debt


144



550



144Changes in operating assets and liabilities:Prepaid expenses and other current assets


21



533



21Other assets


(106
)


-



(106
)Accounts payable and accrued expenses


(889
)


(1,312
)


(889
)Deferred rent


(7
)


(9
)


(7
)Cash used in operating activities – continuing operations


(5,342
)


(3,636
)


(5,342
)Cash provided by operating activities – discontinued operations


(76
)


749



(76
)Net cash used in operating activities


(5,418
)


(2,887
)


(5,418
)CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment


(37
)


(5
)


(37
)Investment in oil and gas properties


(2,521
)


(203
)


(2,521
)Cash used in investing activities – continuing operations


(2,558
)


(208
)


(2,558
)Cash provided by investing activities – discontinued operations


881



69



881Net cash used in investing activities


(1,677
)


(139
)


(1,677
)CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from issuance of stock, net of offering costs of $470


7,530



-



7,530Proceeds from convertible debt, net of financing costs


-



5,000



-Placement fees on convertible debentures


-



(300)



-Financing costs deducted from convertible debentures


-



(30)



-Prepayment penalty on notes payable


-



(271
)


-Payments on notes payable and installment debt


(673
)


(2,077
)


(673
)Cash provided by financing activities – continuing operations


6,857



2,322



6,857Cash used in financing activities – discontinued operations


-



-



-Net cash provided by financing  activities


6,857



2,322



6,857DECREASE IN CASH AND CASH EQUIVALENTS


(238
)


(704
)


(238
)CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD


1,360



1,480



1,360CASH AND CASH EQUIVALENTS AT END OF PERIOD

$
1,122


$
776


$
1,122
 
 The accompanying notes are an integral part of these consolidated financial statements.
 
  5
  
  
 SUPPLEMENTAL DISCLOSURES:Interest paid in cash

$
69


$
471


$
69Income taxes paid in cash


-



-



-NON-CASH TRANSACTIONS:Common stock issued for accounts payable

$
-


$
173


$
-Common stock issued to settle variable share obligation


179



-



179Common stock issued for investment in oil and gas properties


-



34Stock issued for deferred financing costs


-



103



-Deemed dividend attributable to repriced warrants originally issued with purchase of common stock


322



29



322Debt discount on convertible debt


-



2,372



-Conveyance of asset retirement obligation


-



86Accounts payable for oil and gas property


3,813



129



3,813Note payable for fixed assets


-



32



-Fair value of warrant repricing associated with debt modification


-



106Accrued and unpaid preferred stock dividend to related parties


8



49



8Accelerated discount associated with debt conversion


1,116



1,814



1,116Conversion of debt into common stock


2,412



3,817



2,412Conversion of Series B Preferred Stock into Common Stock


16



-



16Discount related to modification of convertible debt


1,172



-



1,172Relative fair value of warrants issued in connection with equity offering


1,642



-



1,642Asset retirement obligation transferred as part of sale of assets


18



-



18Note payable issued for prepaid insurance


115



-



115
 
 
 
 The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
  6
  
 
 HYPERDYNAMICS CORPORATION
 (an Exploration Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 
 
 1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
 
 Hyperdynamics Corporation (“Hyperdynamics,” the “Company,” “we,” and “our”) is a Delaware corporation formed in March 1996. Hyperdynamics has two wholly-owned subsidiaries, SCS Corporation (SCS) and HYD Resources Corporation (“HYD”). Through SCS and its wholly owned subsidiary, SCS
Corporation Guinea SARL, which is a 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. SCS began operations in oil and gas exploration, seismic data acquisition, processing, and interpretation in late fiscal 2002. In April 2004, Hyperdynamics acquired HYD, and in January 2005, HYD acquired Trendsetter Production Company (Trendsetter), an oil and gas operator
in Louisiana that had been under common ownership with HYD. Trendsetter operated all of the Company’s domestic oil and gas assets until the completion of their sale in August, 2009.
 
 With sale of all of our proved reserves, Hyperdynamics reentered the Exploration stage effective July 1, 2009.  Our primary focus going forward will be, among other things, to raise additional capital to fund our search for oil and gas deposits on our Guinea concession.
 
 The unaudited consolidated financial statements of Hyperdynamics 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 Hyperdynamics'
Annual Report filed with the SEC on Form 10-K, as amended, for the year ended June 30, 2009. 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, 2009, as reported in the Form 10-K, as amended, have been omitted.
 
 Estimates
 
 The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses at the balance sheet date and for the period then ended. Actual
results could differ from these estimates.
 
 Earnings Per Share
 
 Basic loss per share is computed using the weighted average number of shares of common stock outstanding during each period. Diluted loss per share includes the dilutive effects of common stock equivalents on an “as if converted” basis. For the three and six months ended December 31, 2009 and 2008, all potential dilutive securities
had an anti-dilutive effect and were not included in the calculation of diluted net loss per common share.
 
 Contingencies
 
 Legal
 
 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 Part II, Other Information, Item 1. Legal Proceedings for more information on legal proceedings.
 
 Environmental
 
 We accrue for losses associated with environmental remediation obligations when such losses are probable and can be reasonably estimated. These accruals are adjusted as additional information becomes available or circumstances change. Costs of future expenditures for environmental remediation obligations are not discounted to their present
value. Recoveries of environmental remediation costs from other parties are recorded at their undiscounted value as assets when their receipt is deemed probable.
 
 7
 Financial instruments
 
 The accounting standards 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 Company has determined that certain warrants outstanding as of the date of these financial statements qualify as derivative financial instruments under the provisions of FASB
ASC Topic No. 815-40, Derivatives and Hedging – Contracts in an Entity’s Own Stock.” See Note 8 for discussion of the impact the adoption of this standard had on the Company’s financial statements and results of operations.  These warrant agreements include provisions designed to protect holders from a decline in the stock price (‘down-round’ provision) by reducing the exercise price in the event we issue equity
shares at a price lower than the exercise price of the warrants.  As a result of this down-round provision, the exercise price of these warrants could be modified based upon a variable that is not an input to the fair value of a ‘fixed-for-fixed’ option as defined under FASB ASC Topic No. 815-40 and consequently, these warrants must be treated as a liability and recorded at fair value at each reporting date.
 
 The fair value of these warrants was determined using a Binomial Model with any change in fair value during the period recorded in earnings as “Other income (expense) – Income (loss) on derivative liability". As a result, the derivative warrant liability is carried on the balance sheet at its fair value.
 
 Significant Level 3 inputs used to calculate the fair value of the warrants include the stock price on the valuation date, expected volatility, risk-free interest rate and management’s assumptions regarding the likelihood of a repricing of these warrants pursuant to the down-round provision.
 
 The following table sets forth by level within the fair value hierarchy our financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2009 (unaudited).
 
 In Thousands:
 Carrying
Value at
December 31, 2009


Fair Value Measurement at
December 31, 2009Level 1


Level 2


Level 3Derivative warrants liability

$
2,063


$
-


$
-


$
2,063
 
 The following table sets forth the changes in the fair value measurement of our Level 3 derivative warrant liability:
 
 Beginning balance – July 1, 2009 (after adoption of ASC 815)
$
1,585Included in earnings

55At September 30, 2009
$
1,640Included in earnings

423At December 31, 2009
$
2,063
 
 
 The Company did not identify any other assets and liabilities that are required to be presented on the consolidated balance sheet at fair value in accordance with FASB ASC Topic No. 815.
 
 8
 Recently issued or adopted accounting pronouncements
 
 In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162 ” (“SFAS
168”). The FASB Accounting Standards Codification TM , (“Codification”) will become the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of SFAS 168, the Codification will supersede all then-existing non-SEC accounting and reporting
standards. All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company has adopted the requirements of SFAS 168.
 
 Following SFAS 168, the FASB will no longer issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead, it will issue Accounting Standards Updates (ASU’s). The FASB will not consider ASU’s as authoritative in their own right; rather these updates will serve only to update
the Codification, provide background information about the guidance, and provide the bases for conclusions on the change(s) in the Codification. SFAS No. 168 is incorporated in ASC Topic 105, Generally Accepted Accounting Principles. The Company adopted SFAS No. 168 in the third quarter of 2009, and the Company will provide reference to both the Codification topic reference and the previously authoritative references related to Codification topics and subtopics, as appropriate.
 
 Effective July 1, 2009, the Company adopted a FASB accounting standard, ASC 815 (EITF 07-05) which defines determining whether an instrument (or embedded feature) is indexed to an entity’s own stock.  See Note 8 for discussion of the impact the adoption of this standard had on the Company’s financial statements and
results of operations.
 
 2. GOING CONCERN
 
 The accompanying Consolidated Financial Statements have been prepared assuming the Company will continue as a going concern.  The Company has incurred losses since inception, resulting in cumulative losses of $73,822,000 through December 31, 2009. Hyperdynamics has historically been able to raise capital from debt or equity sources
to finance our activities. The world economic crisis, the volatile price for oil, and the depressed price of our stock have weakened our ability to continue to raise new capital in this manner. These combined conditions raise substantial doubt about Hyperdynamics’ ability to continue as a going concern.
 
 The Company’s plan to resolve the uncertainty about our ability to continue as a going concern includes raising additional capital, cost reductions and monetization of our oil and gas exploration assets by attracting a joint venture or financial partner to participate in our exploration of our oil and gas concession offshore the Republic
of Guinea (“Guinea”).
 
 On November 12, 2009, we entered into a Shares Purchase Agreement with Enable Growth Partners, L.P. (“Enable”), which then held certain securities that were previously issued by us.  Pursuant to the Shares Purchase Agreement, we issued to Enable 1,578,948 shares of our common stock, par value $.001 per share.  The
aggregate net proceeds from the Offering, after deducting offering expenses payable by us of $15,000, were approximately $1,485,000.  The offering closed on November 17, 2009.  This offering provided short term liquidity for the Company.
 
 On December 3, 2009, the Company entered into a Securities Purchase Agreement pursuant to which the Company agreed to sell an aggregate of 7,222,223 shares of its common stock and warrants to purchase a total of 3,250,000 shares of its common stock to institutional investors for gross proceeds of approximately $6.5 million.  The
purchase price of a share of common stock and fractional warrant was $0.90 with the exercise price of the warrants priced at $0.98.  Subject to certain ownership limitations, the warrants are exercisable 181 days following the closing date of the offering and expire four years following the initial exercise date at an exercise price of $0.98.    The net proceeds to the Company from the offering, after deducting placement agent fees and the Company’s offering expenses of
$455,000, were approximately $6,045,000.  The offering is closed on December 7, 2009.  This offering provided additional short term liquidity for the Company and was used to pay for a portion of the current seismic program as well as to retire the Company’s outstanding Convertible Debentures (see Note 7).
 
 Management’s plans focus primarily on obtaining well capitalized participants in its concession to help the Company fund exploration and development.  Management is also evaluating how it can raise additional capital to further its business objectives. If management is not successful in securing outside funding by monetizing
a portion of its exploration assets or raising additional funds, Hyperdynamics may not survive.
 
 The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
 9
 3. SALES OF OIL AND GAS PROPERTIES, ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
 
 On April 1, 2009, management executed a contract to sell the working interest in all of its domestic oil and gas properties in a transaction that was treated for accounting purposes as three sales.  The liabilities associated with the working interest in the oil and gas properties, asset retirement obligations, were transferred with
the assets. The sale was completed during August 2009.  The Company received scheduled payments of $1,030,000 and $820,000 during May 2009.  The final payment of $820,000 was received in August 2009.
 
 These assets, which were associated with HYD, our former domestic business segment, are a disposal group and constitute a component of the entity with distinguishable cash flows.  Accordingly, these assets and cash flows and results of operations associated with these assets are classified as discontinued operations in the accompanying
Consolidated Statements of Operations, Consolidated Balance Sheets, and Consolidated Statements of Cash Flows for all periods presented.
 
 Assets held for sale as of June 30, 2009 consisted of land and a building in Trout, Louisiana and working interest in our remaining domestic oil and gas properties.  The remaining properties were sold in August 2009.  The following assets and liabilities have been segregated and classified as assets held for sale and liabilities
associated with assets held for sale, as appropriate, in the Consolidated Balance Sheets as of December 31, 2009 and June 30, 2009.  The amounts presented below do not include cash, or payables, which will be retained by Hyperdynamics.
 
 December 31, 2009


June 30,
2009Assets held for saleLand and building, net of accumulated depreciation of $0 and $7,000

$
-


$
43,000Oil and Gas Properties, net of accumulated impairment of $0 and $576,000


-



102,000Assets held for sale and discontinued operations

$
-


$
145,000Liabilities related to assets held for sale and discontinued operations- noncurrentAsset retirement obligations

$
-


$
18,000
 
 The following summarized financial information for the six months ended December 31, 2009 and 2008 relates to the assets held for sale and have been reported as discontinued operations in all periods presented. Because of Hyperdynamics’ net loss, there is no provision for income taxes.
 
 December 31, 2009


December 31, 2008Revenues

$
-


$
1,731,000Cost and Expenses:Lease operating costs


-



820,000Depreciation, depletion and amortization


-



495,000Accretion


-



40,000Impairment and other expenses






2,371,000Gain on sale of discontinued operations


765,000



-Income (loss) from discontinued operations

$
765,000


$
(1,995,000
)
 
 10
 4. INVESTMENT IN OIL AND GAS PROPERTIES
 
 Investment in Oil and Gas properties consists of our Guinea concession in offshore West Africa.
 
 The following table provides detail of costs (in thousands) to date for Guinea as of December 31, 2009 and June 30, 2009:
 
 Republic of GuineaDecember 31, 2009


June 30,
2009Lease Acquisition Costs

$
291


$
291Geological and geophysical Cost


13,706



7,37213,997



7,663Less: AccumulatedDepletion and Depreciation


-



-$
13,997


$
7,663
 
 Excluded Costs
 
 Hyperdynamics excludes capitalized costs of unevaluated oil and gas properties from amortization. Currently, geological and geophysical information pertaining to the Guinea concession is being collected and evaluated and no reserves have been attributed to this concession. The costs associated with such unproved properties of $13,997,000
and $7,663,000 as of December 31, 2009 and June 30, 2009, respectively, are excluded from amounts subject to amortization. The majority of the evaluation activities are expected to be completed within the next two years. As of December 31, 2009, based on our impairment review and our intent to continue evaluation activities, there was no impairment indicated for our excluded costs.
 
 We incurred $6,334,000 and $321,000 of geological and geophysical costs for our Guinea concession during the six months ended December 31, 2009 and 2008, respectively.
 
 Guinea Concession
 
 On September 22, 2006, we signed a Production Sharing Contract (the “2006 PSC”) with the Republic of Guinea. On September 11, 2009, we entered into a Memorandum of Understanding (the “2009 MOU”) with Guinea in which we agreed with the government to resolve certain issues related to the 2006 PSC.
 
 2009 MOU
 
 The 2009 MOU required us to surrender 64% of the Contract Area (approximately 51,200 square kilometers) no later than December 31, 2009.  The relinquishment was submitted by the Company and received by the Guinean government on December 30, 2009.   Pursuant to the 2009 MOU we maintain the right to participate in any new
concessions granted within this surrendered Contract Area on a right of first refusal basis, on equal terms and conditions with bidding parties.
 
 In addition to our other obligations under the 2006 PSC as described above, we agreed in the 2009 MOU to commence drilling of at least one exploratory well within the non-surrendered portion of the  Contract Area no later than December 31, 2011.  The 2009 MOU requires negotiation between the parties concerning certain provisions
in the 2006 PSC to make such terms more consistent with usually applicable international standards and practices by March 11, 2010, subject to force majeure and then-pending arbitration, without any modification of our existing rights to the non-surrendered portion of the Contract Area of approximately 28,800 square kilometers. If the parties’ negotiations have not come to a satisfactory conclusion by March 10, 2010, the 2009 MOU will be cancelled pursuant to its terms.
 
 Under the 2009 MOU, we were required to submit a timeline of work programs and operations to Guinea no later than December 31, 2009, subject to a thirty day extension, with any further delay resulting in the cancellation of the 2009 MOU.  The two-year work plan was submitted by the Company
and received by the Guinean government on December 30, 2009.  If the terms and conditions of the 2009 MOU are not satisfied by March 31, 2010, and in the absence of an agreement between the parties, our retained portion of the Contract Area could be required to be relinquished to Guinea.  In order to reach agreement, the parties have the right to seek international arbitration.  If the results of such negotiations or arbitration are unfavorable to us, our investment in the Guinea
Concession could be subject to impairment.
 
 Dana Petroleum Agreement
 
 On December 4, 2009, the Company and Dana Petroleum (E&P) Limited (“Dana”) signed a Sale and Purchase Agreement to acquire a 23% participation interest in the Guinea Production Sharing Agreement.  On January 28, 2010, the Company effected the closing of the Sale and Purchase Agreement with Dana and assigned a minority
interest in the oil and gas concession offshore Guinea to Dana.  See Note 12 for further discussion.
 
 Oil and Gas Properties
 
 On April 1, 2009, management executed a contract to sell the working interest in all of its domestic oil and gas properties. The final sale was completed in August 2009 and as a result of the sale, we no longer have any proved oil and gas reserves.
 
 11
 5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
 
 Accounts payable and accrued expenses as of December 31, 2009 and June 30, 2009 include the following:
 
 December 31, 2009


June 30, 2009(in Thousands)Accounts payable

$
3,599


$
688Accrued payroll


-



11Taxes payable


33



88Deferred rent


-



16$
3,632


$
803
 
 
 6. ACCOUNTS PAYABLE – SEISMIC DATA
 
 In February 2003, SCS agreed to pay $650,000 to Offshore Seismic Surveys, Inc. (OSS), an offshore seismic company, in exchange for OSS agreeing to release SCS from the $550,000 due to OSS for Guinea seismic data and to accept a deferred payment arrangement. The additional $100,000 was charged to interest expense in 2003. OSS maintains a lien
on the ownership and sale of 1,000 kilometers of the seismic data acquired in 2002, as security for the $650,000.
 
 Any user license sales proceeds generated from user licenses of this data shall first go to pay off the $650,000 liability at a rate of 90 percent of gross user license sales proceeds to OSS and 10 percent to SCS until the $650,000 is paid in full. Any funding arrangement SCS enters into with respect to the 2006 PSC, whereby all rights and
obligations under the 2006 PSC are transferred, shall cause the $650,000 to become immediately due upon signing and funding of such agreement. The payable is accrued at December 31, 2009. The agreement does not provide for interest payments.  Accordingly, we have not accrued interest on this payable.
 
 7. SHORT-TERM NOTES PAYABLE AND LONG-TERM DEBT
 
 Short-term notes payable and long-term debt consists of the following:
 
 
 December 31, 2009


June 30, 2009(in Thousands)Installment notes payable

$
57


$
23YA Global Notes


-



-Convertible debenturesGross


-



2,752Unamortized discount


-



(475)Net

$
-


$
2,277Total short term notes payable and long-term debt


57



2,300Less:  current portion


(57
)


(639)Long term notes payable, net of discount

$
-


$
1,661
 
 In addition to installment notes payable as of June 30, 2009, during the six months ended December 31, 2009, Hyperdynamics financed an insurance policy for an aggregate amount of $115,000. Hyperdynamics is obligated to pay installments of principal and interest of approximately $13,000 per month.
 
 12
 YA Global
 
 On February 6, 2008, Hyperdynamics entered into a financing agreement (the “Financing Agreement”) with YA Global Investments, LP (“YA Global”). Under the Financing Agreement, we issued  $2,000,000 of notes, whose carrying value (net of discount of $402,000) as of June 30, 2008 was $1,598,000.  Hyperdynamics
repaid the notes on September 12, 2008.  At the time of payoff, Hyperdynamics paid $1,950,000 principal remaining on the debt and  a prepayment penalty of $271,000.  Hyperdynamics recognized accelerated discount amortization of $364,000 related to the payoff of these notes.  Accordingly, Hyperdynamics recognized a loss on extinguishment of debt of $635,000.
 
 Convertible Debentures
 
 On September 12, 2008, Hyperdynamics sold $5,000,000 convertible debentures, convertible at $2.25 per share, to an investor in a registered direct offering.  Placement costs totaled $403,000, resulting in net cash proceeds of $4,670,000.   The investor also received warrants to purchase 1,111,111 shares of common stock
at $3.00 per share and warrants to purchase 1,111,111 shares of common stock at $2.75 per share.
 
 During October 2008, the above investor converted $563,000 of debenture principal to common stock, resulting in the issuance of 250,000 shares of common stock and payment of cash of $89,000 for a portion of the associated make whole interest.  The remaining make whole interest of $133,000 associated with these conversions was added
to the debenture principal in November 2008 as discussed below.
 
 On November 20, 2008, Hyperdynamics entered into an amendment agreement with the same debenture investor.  The agreement reduced the conversion price of the convertible debentures to $1.65 per share, reduced the exercise price of the 2,424,243 warrants issued during May 2008 to $2 per share, and reduced the exercise price of the
1,111,111 Series A and Series B warrants each issued during  September 2008 to $2.25 per share and $2.50 per share, respectively. The amendment also provided a new interest payment option, payment in kind, by which interest, including any ‘make whole’ interest due, could be added to the outstanding principal amount of the Debenture.
 
 The amendment resulted in a substantial modification of terms of the debt.  Accordingly, Hyperdynamics recognized the amendment as an extinguishment of debt (the “2008 Extinguishment) which provides  that the fair value of the assets given to the investor to refund the existing debt will be compared with the carrying
value of the existing debt and a gain or loss on extinguishment be recognized.  Hyperdynamics recognized a gain associated with the 2008 Extinguishment of $56,000 during the three months ended December 31, 2008.  As a consequence of the 2008 Extinguishment, the post modification debt was recorded at its fair value and the resulting discount is amortized as interest expense over the term of the convertible debentures.  The post modification debt had an effective interest rate of 29%
per annum.
 
 On November 12, 2009, we entered into a Securities Purchase Agreement with the convertible debenture holder (See Note 9 for additional information).  Pursuant to the Securities Purchase Agreement and the terms of the convertible debenture, the conversion price of the convertible debenture was reduced from $1.65 per share to $0.95
per share, subject to no further adjustment other than for stock splits and stock dividends. Pursuant to FASB ASC Topic No. 470-20, “Debt with Conversion and Other Options,” we determined the reduction in the conversion price resulted in the recognition of a contingent beneficial conversion feature.  The intrinsic value of the contingent beneficial conversion feature was $1,172,000, which was treated as additional discount on the outstanding
convertible debenture balance of $1,590,000 on November 12, 2009.
 
 During the six months ended December 31, 2009, based upon the conversion prices of $1.65 and $0.95 per share, the convertible debenture investor converted a total principal amount, including interest accreted to principal,  of $1,296,000 (net of a discount of $1,116,000) into 1,949,411 shares of the Company’s common stock.  Following
the offering with Enable Growth Partners, L.P., as discussed previously in Note 2, the Company paid approximately $525,000 to retire the remaining outstanding convertible debenture amount.  We recognized a loss of approximately $298,000 for the six months ended December 31, 2009, which represents the difference between the remaining convertible debenture amount outstanding, net of the discount associated with the contingent beneficial conversion feature discussed above, and the payoff amount.  The
beneficial conversion feature did not have any intrinsic value at the time the convertible debenture was paid off.
 
 13
 8. WARRANT DERIVATIVE LIABILITY
 
 Effective July 1, 2009, the Company adopted FASB ASC Topic No. 815 (formerly EITF 07-05) which defines determining whether an instrument (or embedded feature) is indexed to an entity’s own stock.  This literature specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed
to the Company’s own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument and provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the scope exception.
 
 As a result of this adoption, warrants previously treated as equity pursuant to the derivative treatment exemption are no longer afforded equity treatment because the warrants have downward ratchet provision on the exercise price. As a result, the warrants are not considered indexed to the Company’s own stock, and as such, all future
changes in the fair value of these warrants will be recognized currently in earnings in our consolidated statement of income under the caption “Change in fair value of warrant liability” until such time as the warrants are exercised or expire.
 
 The exercise price of certain warrants issued to YA Global Investments, LP (“YA Global”) is subject to “reset” provisions in the event we subsequently issue common stock, stock warrants, stock options or convertible debt with a stock price, exercise price or conversion price lower than $2.00. If these provisions are
triggered, YA Global will receive warrants to purchase additional shares of common stock and a reduction in the exercise price of all their warrants.
 
 As such, effective July 1, 2009, the Company reclassified from additional paid-in capital, as a cumulative effect adjustment, $1,585,000 to warrant liabilities to recognize the fair value of the YA Global Warrants as if these warrants had been treated as a derivative liability since their issuance in February 2008.
 
 In November 2009, the YA Global warrants, then totaling 666,666 were reset to an exercise price of $0.95 and into a total number of shares of 1,157,894.  In December 2009, these warrants, then totaling 1,157,894 were reset to an exercise price of $0.90 and into a total number of shares of 1,222,222. The Company recognized a $478,000
loss from the change in fair value for the six months ended December 31, 2009.  The fair value of the YA Global Warrants was $2,063,000 on December 31, 2009.
 
  These common stock purchase warrants do not trade in an active securities market, and as such, we estimate the fair value of these warrants using a Binomial Model using the following assumptions:
  
  December 31, 2009


July 1, 2009Annual dividend yield


0.00



0.00Expected life (years)


3.11



3.61Risk-free interest rate


1.45
%


1.57
%Expected volatility


454
%


442
%
 
  Expected volatility is based on historical volatility of the Company’s common stock.  The expected life is based on the remaining term of the warrants. The risk-free interest rate is based on U.S. Treasury securities according to the remaining term of the warrants. The expected dividend yield was based on the Company’s
current and expected dividend policy.
 
 9. SHAREHOLDERS' EQUITY
 
 Series B Preferred Stock
 
 Prior to the conversion of our Series B preferred stock on September 29, 2009, the Series B stockholders were entitled to a 4% cumulative dividend on the stated value, which was payable only upon conversion of the preferred stock. Dividends may be paid in stock or cash at Hyperdynamics' option. During the six months ended December 31, 2009
and 2008, dividends of $8,000 and $25,000 were accrued. The resulting balance in accrued dividends was $442,000 as of December 31, 2009.
 
 On September 29, 2009, we entered into the Series B Agreement with the holders of all of our Series B preferred stock in which the Series B holders (i) converted all of  their shares of Series B preferred stock into approximately 15,822,222 shares of common stock, (ii) agreed to the cancellation of warrants to purchase 1,000,000
shares of common stock, (iii) agreed to donate, pursuant to a specified schedule, 2,000,000 shares of common stock, issued upon conversion of the Series B preferred stock, and warrants to purchase 1,000,000 shares of common stock, to the American Friends of Guinea, a charitable organization that provides support to the people of Guinea, and (iv) agreed to be subject to a nine month lock-up of the 15,822,222 million shares of common stock received in connection with the conversion of the Series B preferred stock,
and any shares that may be received upon exercise of their warrants.  The common stock received upon conversion represented a reduction of 2,000,000 shares that otherwise would have been issuable under the original terms of the Series B preferred stock.
 
 Under the terms of the Series B Agreement, if we complete an equity or debt financing in the future of $10,000,000 or more, we also agreed to (i)  pay a previously owed dividend in the aggregate amount of approximately $430,000 to the Series B holders and (ii) subject to market conditions, release from the lock-up provision described
above, up to 1,000,000 shares of common stock received in connection with the Series B preferred stock conversion in order to allow for resale by the Series B holders.
 
 Common Stock issuances
  In addition to the 15,822,222 common shares issued pursuant to the Series B Conversion discussed above, during the six months ended December 31, 2009, the Company issued 388,251 shares of common stock from its Stock and Stock Option plan to employees, directors and consultants for services valued at $188,000. Services were valued
using the market close price on the date of grant.
 
 On November 12, 2009, we entered into a Shares Purchase Agreement with Enable Growth Partners, L.P. (“Enable”), which then held certain securities that were previously issued by us.  Pursuant to the Shares Purchase Agreement, we issued to Enable 1,578,948 shares of our common stock, par value $.001 per share.  The
aggregate net proceeds from the offering, after deducting offering expenses payable by us, were approximately $1,485,000.  The offering closed on November 17, 2009.
 
 On December 3, 2009, the Company entered into a Securities Purchase Agreement pursuant to which the Company agreed to sell an aggregate of 7,222,223 shares of its common stock and warrants to purchase a total of 3,250,000 shares of its common stock to institutional investors for gross proceeds of approximately $6.5 million.  The net proceeds
to the Company from the offering, after deducting placement agent fees and the Company’s offering expenses, were approximately $6,045,000.  The placement agent also received warrants to purchase 144,444 shares of common stock as additional compensation.  The purchase price of a share of common stock and fractional warrant was $0.90 with the exercise price of the warrants priced at $0.98.  Subject to certain ownership limitations, the warrants are exercisable 181 days following the
closing date of the offering and expire four years following the initial exercise date at an exercise price of $0.98.  See Note 10 for additional information.  The offering closed on December 7, 2009.  The proceeds from this offering were used to pay for a portion of the current seismic program as well as to retire the Company's outstanding convertible debentures (see Note 7).
 
 Employee stock options
 
 During the six months ended December 31, 2009, we granted options to purchase 6,065,000 shares of common stock to the Company’s employees and directors.   The compensation expense associated with employee stock options during the six months ended December 31, 2009 was $1,363,000. The fair value of the options grants was
determined using the Black-Scholes option pricing model.  See Note 10.
 
 14
 10. STOCK OPTIONS AND WARRANTS
 
 The Company has two stock award plans: the Stock and Stock Option Plan, which was adopted in 1997 (“1997 Plan”) and the 2008 Restricted Stock Award Plan (“2008 Plan”). The Company has proposed to its stockholders to approve a new 2010 Equity Incentive Plan (the “2010 Plan”) that has been approved by our
board of directors.  Upon stockholder approval of the 2010 Plan at our annual meeting of stockholders to be held on February 18, 2010, the 1997 Plan and 2008 Plan will be retired.  The 1997 Plan provides for the grant of common stock, incentive stock options and /or non qualified stock options or warrants to purchase the common stock of the company to selected employees, directors, officers, agents, consultants, attorneys and advisors of the company. The shares of common stock, options, or
warrants may be granted under this plan only within 20 years from the effective date of the plan, as amended. A maximum of 14,000,000 shares are issuable under the 1997 Plan.
 
 The 2008 Plan provides for grant of shares of common stock or incentive stock options and/or nonqualified stock options or warrants to purchase the common stock of the company to selected employees, directors, officers, agents, consultants, attorneys, vendors and advisors of the company or of any parent or subsidiary thereof. The shares of
common stock, options, or warrants may be granted under this plan only within 10 years from the effective date of this plan. A maximum of 3,000,000 shares are issuable under the 2008 Plan.
 
 These plans provide a means to attract and retain the services of participants and also to provide added incentive to such persons by encouraging stock ownership in the company. Plan grants are administered by the Compensation Committee, who have substantial discretion to determine which persons, amounts, time, price, exercise terms, and restrictions,
if any. Options granted generally are exercisable immediately as of the effective date of the option grant.
 
 The fair value of each option or warrant award is estimated using the Black-Scholes valuation model. Expected volatility is based solely on historical volatility of our common stock over the period commensurate with the expected term of the stock options. We rely solely on historical volatility as we do not have traded options. The expected
term calculation for stock options is based on the simplified method as described in the Securities and Exchange Commission Staff Accounting Bulletin number 107. We use this method because we do not have sufficient historical information on exercise patterns to develop a model for expected term. The risk-free interest rate is based on the U. S. Treasury yield in effect at the time of grant for an instrument with a maturity that is commensurate with the expected term of the stock options. The dividend yield rate
of zero is based on the fact that we have never paid cash dividends on our common stock and we do not intend to pay cash dividends on our common stock.
 
 Additionally, from time to time, the Company issues non-compensatory warrants, such as warrants issued to investors.
 
 2008 Restricted Stock Award Plan
 
 During the three and six months ended December 31, 2009 no options or warrants were issued under the plan.
 
 Stock and Stock Option Plan
 
 Options granted to employees and directors during the six months ended December 31, 2009:
 
 ·
550,000 stock options granted to a vendor for services rendered associated with the search and hiring of our new CEO, Ray Leonard.  These options are immediately vested and have a $1.28 strike price and a five year life.  These options had an estimated value of $491,083, all of which was expensed immediately.
 
 ·
250,000 stock options granted with immediate vesting to Robert Solberg in connection with his addition and appointment to the Board of Directors as Chairman of the Board with a strike price of $1.15 and a five year life.  These options had an estimated value of $247,535.
 
 ·
155,000 stock options granted with immediate vesting to certain officers and directors of the Company with a strike price of $0.52.  A total of 40,000 of the options have a two year life and the remaining 115,000 options have a three year life.  These options had an estimated value of $43,396.
 
  ·
45,000 stock options granted with immediate vesting to an officer of the Company with a strike price of $0.42 and a three year life.  These options had an estimated value of $13,443 all of which was expensed immediately.
 
 ·
90,000 stock options granted to an employee of the Company in connection with his hiring with a strike price of $0.54, vesting ratably over three years and a five year life.  These options had an estimated value of $25,114.
 
 ·
200,000 stock options for a director of the Company with a strike price of $0.40, with vesting dependent upon certain performance conditions and a two year life.  These options had an estimated value of $46,557.
 
  ·
50,000 stock options to a director upon his election to the Board of the Company with a strike price of $1.54, immediate vesting and a five year life.  These options had an estimated value of $53,718, all of which was expensed immediately.
 
 ·
In connection with the hiring of our CEO, we granted our CEO:
 
  o
Options with immediate vesting to purchase 500,000 shares of our common stock at an exercise price of $0.49 and with a five year life.
 o
Options to purchase 300,000 shares of our common stock at an exercise price of $0.49 that vests on a monthly basis over five years.  These options have a five year life.
 
 In addition to the equity award grants discussed above, Mr. Leonard received the following stock option grants, the vesting of which starts on the date the performance metric (Trigger Event) is achieved:
 
 ·
When $8 million cumulative is raised, the award is 210,000 stock options.
 
 ·
When $20 million cumulative is raised, the award is an additional 180,000 stock options.
 
 ·
When $30 million cumulative is raised, the award is an additional 210,000 stock options.
 
 All awards vest 1/36 per month over a three-year period from the Trigger Event.  These options have a five year life starting from the Trigger Event, and the exercise price will be $0.49.
 
 A stock option incentive grant will also be made to our CEO based on achieving the following share price thresholds:
 
 $2.00/share
90,000 stock options$3.00/share
210,000 stock options$5.00/share
600,000 stock options$9.00/share
1,200,000 stock options
 
 All awards vest 1/36 per month over a three-year period from the Trigger Event.  These options have a five year life starting from the Trigger Event, and the exercise price will be $0.49.
 
 For awards related to the $2.00 and $3.00 share price, the stock option is earned if the closing price of the shares trade at or above the target price for 15 consecutive trading days.  For awards related to the $5.00 and $9.00 share price, the stock option is earned if the closing price of the shares trade at or above the target
price for 5 consecutive trading days.
 
 These options had a fair value of $1,468,927 which was calculated using the Black-Scholes option pricing model adjusted for the performance conditions of the options. Based on the expected vesting schedule, $395,194was expensed during the three months ended September 30, 2009.
 
 ·
In October and November 2009, we granted options to purchase 825,000 shares of common stock to employees, directors and consultants.  The options have an exercise price of between $1.12 and $1.61 and a term of five years.  The options vest ratably over three years.  These options had an estimated fair value of $839,000.
  ·
In December 2009, we granted options to purchase 400,000 shares of common stock to William Young, our Executive Vice President of Commercial Affairs.  The options have an exercise price of $0.92 per share and a term of five years.  Options to purchase 200,000 shares of common stock vest ratably over three years.  The remaining
200,000 vest upon achieving a trading share price for our common stock of $3.00 per share.  These options had an estimated fair value of $196,000.
 
 
 15
 The following table provides information about options granted during the six months ended December 31, 2009 and 2008:
 
 2009


2008Number of options granted


6,065,000



385,000Compensation expense recognized as selling, general and administrative expense

$
1,363,000


$
43,000Compensation cost capitalized


-



-Weighted average fair value of options

$
0.43


$
1.56
 
 The following table details the significant assumptions used to compute the fair market values of employee stock options granted during the six months ended December 31, 2009 and 2008:
 
 2009


2008Risk-free interest rate


0.38 – 3.30
%


0.76-2.63
%Dividend yield


0
%


0
%Volatility factor


115 – 178
%


87-118
%Expected life (years)


1.0 – 7.5



1-1.5
 
 At December 31, 2009, there was $1,419,000 of unrecognized compensation costs related to non-vested share based compensation arrangements granted to employees and directors under the plan.
 
 Summary information regarding employee stock options issued and outstanding as of December 31, 2009 is as follows:
 
 Options


Weighted Average Share PriceOutstanding at year ended June 30, 2009


2,219,707



3.28Granted


6,065,000


$
0.77Exercised


-



-Expired or forfeited


(413,447
)


2.25Outstanding at December 31, 2009


7,871,260


$
1.39
 
 
 
 Options outstanding and exercisable as of December 31, 2009Exercise Price
Outstanding Number of Shares
Remaining Life
Exercisable Number of Shares$
0.01 – 0.49
275,000
2 years
125,000$
0.01 – 0.49
190,000
3 years
190,000$
0.01 – 0.49
1,160,000
5 years
650,000$
0.01 – 0.49
2,490,000
Over 5 years
-$
0.50 – 1.00
60,000
2 years
60,000$
0.50 – 1.00
95,000
3 years
95,000$
0.50 – 1.00
490,000
5 years
90,000$
1.00 – 1.49
52,500
1 year or less
52,500$
1.00 – 1.49
60,000
2 years
60,000$
1.00 – 1.49
920,000
5 years
800,000$
1.50 – 1.99
75,000
1 year or less
75,000$
1.50 – 1.99
30,000
2 years
30,000$
1.50 – 1.99
755,000
5 years
755,000$
2.00 - 2.49
100,000
1 year or less
100,000$
2.00 - 2.49
280,000
2 years
280,000$
2.00 - 2.49
85,000
3 years
85,000$
2.50 - 2.99
88,760
1 year or less
88,760$
3.00 - 3.50
65,000
1 year or less
65,000$
5.00
300,000
3 years
-$
10.00
300,000
3 years
-7,871,260

2,886,260
 
 Options exercisable had an intrinsic value of $487,850 at December 31, 2009.
 
 16
 Warrants
 
 During the six months ended December 31, 2009 and 2008, Hyperdynamics did not grant any warrants to consultants.
 
 During the six months ended December 31, 2009, the holders of all of our Series B preferred stock agreed to the cancellation of warrants to purchase 1,000,000 shares of the Company’s common stock.
 
 As a result of the offerings in November and December 2009, outstanding YA Global warrants to purchase 666,666 shares of common stock at an exercise price of $1.65 were amended to increase the number of underlying shares of common stock to 1,222,222 and decrease the exercise price to $0.98 per share.  These warrants are included
in the warrant derivative liability.  The change in value of the warrants as a result of the amendment is reflected in the valuation of the derivative as of December 31, 2009.
 
 As a result of the offering in November 2009, the exercise price of 2,424,243 warrants held by Enable and previously granted as part of an equity purchase, was reduced from $2.00 per share to $0.95 subject to no further adjustment other than for stock splits and stock dividends.  The modification resulted in a deemed dividend of
$322,000 which was calculated as the difference in the fair value of the warrants immediately before and after the modification using the Black-Scholes option pricing model. The following table details the significant assumptions used to compute the fair market value of the warrant modification:
 
 
 Before
Modification

After ModificationRisk-free interest rate


2.63
%
2.63
%Dividend yield


0
%
0
%Volatility factor


127
%
127
%Remaining term (years)


5.49

5.49
 
 
 
 As a result of the offering in November 2009, the exercise price of warrants held by Enable and previously granted as part of the convertible debenture transaction discussed in Note 7, was reduced from $2.50 to $0.95 per share for 1,111,111 warrants, and from $2.25 to $0.95 per share for 1,111,111 warrants, subject to no further adjustment
other than for stock splits and stock dividends.  This modification resulted in an increased fair value of $158,000, which has been treated as additional interest expense and which was calculated as the difference in the fair value of the warrants immediately before and after the modification using the Black-Scholes option pricing model. The following table details the significant assumptions used to compute the fair market value of the warrant modification:
 
 
 Before
Modification

After
ModificationRisk-free interest rate


2.63
%
2.63
%Dividend yield


0
%
0
%Volatility factor


125
%
125
%Remaining term (years)


5.80

5.80
 
 
 As a result of the offering in December 2009, the Company issued warrants to purchase a total of 3,250,000 shares of its common stock to institutional investors.  The placement agent in the transaction received 144,444 warrants. The warrants have an exercise price of $0.98 per share a term of four years from the date they become exercisable
and are exercisable 181 days following the close of the transaction.  The exercise price of the warrants may be adjusted in the case of stock splits, stock dividends or combinations of shares, or in the event the Company issues rights, options or warrants to all holders of the Company’s common stock with an exercise or purchase price less than the volume weighted average price of the Company’s shares on the record date.  The warrants issued to the investors and the placement agent
had a relative fair value of $1,572,000 and $70,000, respectively.  The relative fair value of the 7,222,223 shares issued in the transaction was $4,403,000 based upon the market price on the transaction date, The fair value of the warrants was determined using the Black-Scholes option pricing model. The following table details the significant assumptions used to compute the fair market value of the warrant modification:
 
 Risk-free interest rate
2.14
%Dividend yield
0
%Volatility factor
118
%Expected term (years)
4.5
 
 17
 Summary information regarding common stock warrants issued and outstanding as of December 31, 2009 is as follows:
 
 Warrants


Weighted Average Share PriceOutstanding at year ended June 30, 2009


10,343,131


$
2.24Granted


3,950,000



0.98Exercised


-



-Cancelled


1,000,000



1.65Expired


-



-Outstanding at year ended December 31, 2009


13,293,131


$
1.44
 
 Warrants outstanding and exercisable as of December 31, 2009Exercise Price


Outstanding Number of Shares

Remaining Life

Exercisable Number of Shares$
0.90



1,222,222

4 years


1,222,222$
0.95



2,424,243

6 years


2,424,243$
0.95



2,222,222

7 years


2,222,222$
0.98



3,394,444

4 years


-$
1.65



2,480,000

5 years


2,480,000$
4.00



1,500,000

5 years


1,500,000$
5.00



50,000

2 years


-13,293,131




9,848,687
 
 The outstanding and exercisable warrants had no intrinsic value at December 31, 2009.
 
 11. COMMITMENTS AND CONTINGENCIES
 
 Legal matters
 
 The following case has been updated since our Annual Report on Form 10-K was filed.
 
 US Oil Lawsuit
 
 In August 2007, USOil Corporation (“USOil”) re-filed a previously dismissed lawsuit claiming it was the actions or omissions of SCS that caused the 2002 PSA to be cancelled by the Guinea Government. In addition to denying all claims, SCS filed a counterclaim seeking damages for frivolous litigation and tortuous interference of
a contract.   On October 28, 2009, the court issued a ruling dismissing USOil’s lawsuit. The order became final November 27, 2009.
 
 Contingent notes payable
 
 Hyperdynamics' subsidiary, SCS, has $350,000 remaining of a contingent note payable due to Seacon Computer Systems Inc., the former owners of SCS Corporation's assets. It is payable in Hyperdynamics common stock and it is payable only if SCS has net income in any given quarter. If SCS experiences net income in a quarter, 25% of the income
will be paid against the note.
 
 Bergen Oilfield Services
 
 On September 29, 2009, we entered into a Marine 2D Seismic Data Acquisition Services Agreement (the “Bergen Agreement”) with Bergen Oilfield Services AS of Norway (“Bergen”).  Pursuant to the Bergen Agreement, Bergen is obligated to conduct a 9,000 kilometer 2D marine seismic survey on portions of
our oil and gas concession off the coast of Guinea.  Bergen completed the seismic survey on February 8, 2010.  The cost of the survey is approximately $11 million.  At December 31, 2009, the Company had paid or accrued a total of $4.7 million related to the Bergen survey.  Through February 12, 2010, the Company has paid approximately $7.2 million to Bergen.  In February 2010, the Company received $1.7 million and $2.7 million, respectively, from Dana Petroleum (E&P)
Limited and Repsol Exploracion, S.A. representing their proportionate share of the total cost of the survey, pursuant to the agreements further described in Note 12 below.  .  Pursuant to those agreements, Dana and Repsol will pay a cumulative 60% of remaining Bergen invoices.  Additionally, Bergen holds in escrow 2.5 million shares of our restricted common stock as a security deposit for the additional mobilization fees due under the Bergen Agreement (Deposit Shares).  In
the event we do not pay in cash our invoices from Bergen, the Deposit Shares will become saleable by Bergen and the proceeds will be applied to the amounts due from the Company.  The Company remains liable for any amounts due after application of any proceeds from the sale of the Deposit Shares, and may elect a credit against future services from Bergen for any excess Deposit Share proceeds.  The Deposit Shares are not considered to be issued for accounting purposes.
 
 Environmental Contingencies
 
 Because we are engaged in extracting natural resources, our business is subject to various Federal, state and local provisions regarding the environment. Compliance with environmental laws may, in certain circumstances, necessitate significant capital outlays, affect our earnings potential, and cause material changes in our current and proposed
business activities. At the present time, however, the environmental laws do not materially hinder nor adversely affect our business. Capital expenditures relating to environmental control facilities have not been prohibitive to our operations since our inception. We have abided by and are in compliance with all applicable environmental laws.
 
 
 18
 12. SUBSEQUENT EVENTS
 
 Joint Operating Agreement with Dana Petroleum
 
 On January 28, 2010, the Company effected a closing of the Sale and Purchase Agreement dated December 4, 2009 (the “SPA”) between the Company and Dana Petroleum (E&P) Limited (“Dana”), whereby the Company assigned a minority interest in the oil and gas concession offshore Guinea.
 
 Pursuant to the closing of the SPA, the Company and Dana entered into an Assignment of Participating Interest (the “Assignment”), a Deed of Assignment and an Operating Agreement.  Pursuant to the Assignment, the Company assigned to Dana an undivided twenty three percent of the Company’s participating interest in
the contractual interests, rights, obligations and duties under the 2006 PSC.  As required by the 2006 PSC, the Deed of Assignment was delivered as the necessary notice of the Assignment to be given to the Ministry of Mines, Energy and Hydraulics of Guinea.
 
 Upon conclusion and finality of the 2006 PSC review, the SPA requires Dana to pay the Company consideration of $19.6 million and assume its proportionate share of costs for all operations pursuant to the Operating Agreement.  The $ 19.6 million is comprised of $5 million in cash, and $14.5 million in cash or shares of Dana at Dana’s
option.
 
 As part of the obligation to bear the proportionate share of costs, the SPA required Dana to make a cash payment to the Company immediately after closing the assignment of the twenty three percent participating interest to Dana in the amount of $ 1.7 million for Dana’s pro-rata portion of accrued expenditures associated with the Company’s
marine 2D seismic data acquisition program within the PSC contract area.  The $1.7 million payment was received by the Company on February 4, 2010.
 
 The Operating Agreement appoints the Company as the operator for purposes of conducting oil and gas exploration and production activities within the contract area covered by the PSC.  The Company and Dana share operating costs of joint operations in proportion to their respective 77% and 23% participating interests. An operating
committee and voting procedures are established whereby managerial and technical representatives of the Company and Dana make decisions regarding joint operations, exploration and appraisal of commercial discoveries, and the disposition of commercial production.  The Operating Agreement places restrictions upon the transfer of the parties’ respective participating interests in the form of a right of first purchase that is triggered by a proposed transfer or certain changes in control of the Company
or Dana.
 
 Extension of the Letter of Intent among the Company and Repsol
 
 On January 29, 2010 the Company entered into an Amendment to the Agreement for Exclusive Dealing and Letter of Intent (“Amended LOI”) with Repsol Exploracion, S.A., (“Repsol”).  This Amended LOI extends the term of the Agreement for Exclusive Dealing and Letter of Intent (“Original LOI”) that was
entered into between the parties on November 26, 2009, from January 31, 2010 until March 11, 2010 unless extended by further agreement.  The Original LOI contemplates the prospective acquisition by Repsol of an undivided 37% working interest in the Company’s concession off the coast of the Republic of Guinea.
 
 Under the provisions of the Original LOI, Repsol has committed to make certain seismic acquisition payments.  Under the Amended LOI, no later than 10 business days following the effective date of the Amended LOI, Repsol is obligated to pay $2.7 million to the Company, which payment is Repsol’s pro-rata share of work preformed
to date under the Marine 2D Seismic Data Acquisition Services Agreement with Bergen Oilfield Services.  The $2.7 million payment was received by Hyperdynamics on February 11, 2010. In addition, following the Company’s delivery of an invoice to Repsol for subsequent work performed under the BOS Agreement, Repsol agrees to pay its pro-rata share of such invoice, currently estimated to be $1,400,000.  These funds would be repaid to Repsol, at its option, if the 2006 PSC clarification has
not been ratified by Guinea by September 10, 2010.
 
 Office Lease
 
 On January 4, 2010, the Company and Parkway Properties LP terminated the lease agreement dated as of December 19, 2005, as amended, for the use and occupancy in the building known as the Comercia Bank Building located at One Sugar Creek Center Blvd., #125, Sugar Land, Ft. Bend County, Texas, 77478.
 
 In connection with the termination of the original lease agreement, on January 4, 2010, the Company entered into a new lease agreement with Parkway for the use and occupancy of Suite 475 in the Woodbranch Building located at 12012 Wickchester, Houston, Harris County, Texas 77079, at which address the Company’s principal executive office
will be located.  The term of the new lease agreement is for 60 months beginning on the latest of (i) February 1, 2010, (ii) the date the Company takes possession of the property, or (iii) completion of the work plans for initial improvements the property.  Pursuant to the new lease agreement, the Company is obligated to make the following base rental payments: (i) $0.00 per month during months 1 – 9; (ii) $17,472 per month during months 10 – 12; (iii) $17,957 per month during
months 13 – 24; (iv) $19,413 per month during months 25 – 36; (v) $21,354 per month during months 37 – 48; and (vi) $24,266 per month during months 49 – 60.
 
 In addition to the base rent, the Company is responsible for the pro-rata share (10.664%) of excess operating expenses in connection with the property. The Company also paid a security deposit of $50,000 at the time of execution of the new lease agreement of which $35,000 is expected to be refunded at the end of the 25th month
subject to certain conditions.
 
 Equity transactions
 
 Significant stock options granted since December 31, 2009 include:
 
 ·
300,000 stock options for certain employees of the Company with strike prices ranging from $0.87 to $0.90, a five year life.  Options to purchase 200,000 shares of common stock vest ratably over three years. The remaining options to purchase 100,000 share of common stock vest upon the achievement of a $3.00 per share trading price. These options
had an estimate value of $153,000.
 
 The Company evaluated subsequent events through February 16, 2010, which is the date the financial statements were issued and there were no other significant subsequent events to report.
  
 19
  Item
2. Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION
 
 The Company is including the following cautionary statement to make applicable and take advantage of the safe harbor provision of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements made by, or on behalf of, the Company. This quarterly report on Form 10-Q contains forward-looking statements. Forward-looking
statements include statements concerning plans, objectives, goals, strategies, expectations, future events or performance and underlying assumptions and other statements which are other than statements of historical facts. Certain statements contained herein are forward-looking statements and, accordingly, involve risks and uncertainties which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. The Company's expectations, beliefs and projections
are expressed in good faith and are believed by the Company to have a reasonable basis, including without limitations, management's examination of historical operating trends, data contained in the Company's records and other data available from third parties, but there can be no assurance that management's expectations, beliefs or projections will result or be achieved or accomplished. In addition to other factors and matters discussed elsewhere herein, the following are important factors that, in the view of
the Company, could cause actual results to differ materially from those discussed in the forward-looking statements: the ability of the Company to respond to changes in the oil and gas exploration and production environment, competition, the availability of financing, and, if available, on terms and conditions acceptable to the Company, and the availability of personnel in the future.
 
 Overview
 
 We devote substantially all of our efforts to raising funds to support our exploration and development of sub-surface hydrocarbons in commercial quantities offshore Guinea.   We intend to continue acquiring, exploring and developing oil and gas properties on a global basis.  At this time we have no source of operating
revenue and there is no assurance when we will, if ever.  We have limited cash and require substantial additional funds to fulfill our business plans.  In October 2009, we signed a letter of intent with Dana Petroleum (E&P) Limited (“Dana”) under which the two companies would negotiate the assignment of a 23 percent participating interest in our concession offshore Guinea.  In January 2010, we finalized the sale of this participating interest by signing an assignment
and an operating agreement between us and Dana. Upon the conclusion of the review and the effectiveness of any resulting clarifications and amendments to the 2006 PSC, Dana is to pay us an additional purchase price of $19.6 million and assume its proportionate share of costs for all operations. Of that figure, Dana will pay $5.0 million in cash and the remaining $14.6 million will be paid either in cash or in shares of Dana, at Dana's option. Should Dana choose to pay in stock, there would be no restriction on
the immediate resale of these shares by us. Dana’s common stock is traded on the London Stock Exchange.  Up to the point of paying the $19.6 MM, Dana has agreed to fund their 23% share of the ongoing Bergen Oil field Sevices Seismic program. Through February 12th they have contributed $1.7 million and a further contribution of $ 0.9 MM is anticipated later in February 2010.
 
 On November 30, 2009, we signed a letter of intent (“LOI”) with Spanish-based Repsol YPF, S.A. under which we would negotiate the assignment to Repsol of a 37 percent interest in our oil and gas concession offshore Guinea.  The LOI gave Repsol exclusive negotiating rights to take a 37 percent share in our concession for
$31.5 million. Repsol also would be the operator of the Guinea project, subject to government and third-party approvals and consents as required. Under the terms of the LOI, the two companies would work to sign definitive documents no later than January 31, 2010. On January 29, 2010, we extended the terms of the LOI until March 11, 2010. As consideration for extending the LOI, Repsol agreed to pay us $2.7 million for their pro rata share of work performed to date on our ongoing 2-D seismic program. Repsol agreed
to pay its pro rata share of the remaining work on the seismic program, estimated to be approximately $1.4 million, upon its completion. These monies would be repaid to Repsol at its option if the 2006 PSC clarification has not been ratified by Guinea by September 10, 2010.
 
 Prior to the execution of definitive documents as described in the LOI, Repsol has the right to participate with us in the evaluation of geological and geophysical data, subject to licensing obligations with the various seismic services companies. It also has the right to participate in the preparation for negotiations with the Ministry of
Mines, Energy and Hydraulics of the Republic of Guinea regarding the terms of the clarification of the2006 PSC pursuant to the terms of the 2009 MOU that we have recently entered into with the Guinea government.  The LOI with Repsol satisfies the clause in our existing LOI with Dana Petroleum PLC of the U.K. that envisioned Dana's option right to take up to an additional 27 percent of the concession if we did not secure the participation of a major oil company by November 30, 2009.
 
 Our corporate mission is to provide energy for the future by exploring for, developing new, and re-establishing pre-existing sources of energy worldwide.  Through our international business segment, we are currently exploring for oil and gas offshore Guinea, West Africa.
 
 Our operating plan within the next 12 months includes the following:
 
 ·
Completing the review and renegotiation of the 2006 PSC with proper Guinean authorities and resolving any differing positions regarding the terms of the 2006 PSC with Guinea.
 ·
Completing the processing and interpretation of the 10,000 km 2D sieismic survey acquired by Bergen Oilfield Servies to identify areas in which to shoot a 3D survey later in 2010.
  ·
Obtaining financing for working capital and further 2-D and 3-D seismic work in the Contract Area and acquiring, processing and interpreting the 3D survey leading to allow identification of a proposed driling location for late 2011.
 
 ·
Completing the arrangements with our two prospective industry partners as a means of financing further seismic work in the Contract Area.
 
 ·
Obtaining funds and completing technical work and planning with our prospective participants in our concession to drill offshore Guinea to drill in late 2011.
 
 These relationships entail the transferring of a portion of our interest under the 2006 PSC to such participants in our concession.
 
 You should carefully consider the risks in evaluating our company.  The risks and uncertainties described in our Annual Report on Form 10-K, as updated by the risk factors in Part II, Item 1A of the Quarterly Report on Form 10-Q for the quarter ended September 30, 2009, are not the only ones we face and include, among others, that
we may not continue as a going concern, we require substantial additional funding in the near term which may not be available to us on acceptable terms or at all and if we cannot obtain additional, our ability to raise sufficient capital and/or enter into a strategic relationship with a industry partner to execute our business plan, ability to respond to changes in the oil exploration and production environment, competition, and the availability of personnel in the future to support our activities may be curtailed
and we may ultimately cease to exist; the 2006 PCS is subject to renegotiation and there is no assurance that these negotiations will result in a mutually acceptable agreement.  If these negotiations do not come to a satisfactory conclusion (i.e., through negotiations between us and Guinea) by March 10, 2010, the 2009 MOU will be cancelled pursuant to its terms. We operate in Guinea, a country where corrupt behavior exists that could impair our ability to do business in the future or result in significant
fines or penalties.  If the terms and conditions of the 2009 MOU are not satisfied by March 31, 2010, and in the absence of an agreement between the parties, our retained portion of the Contract Area could be required to be relinquished to Guinea.  However, in order to reach agreement, either party has the right to recourse to international arbitration, in which event both parties shall wait for the arbitration decision to be rendered.  There are significant risks associated with
operating in Guinea.
 
 20
 Results of Operations.
 
 Based on the factors discussed below for our international segment, discontinued operations and for corporate overhead, the net loss attributable to common shareholders decreased $3,844,000, or 43%, from a net loss of $8,994,000, or $0.15 per share in 2008 to a net loss of $5,150,000, or $0.07 per share in 2009.  The net loss is
comprised of the net loss from operations for our corporate office of $4,457,000, the net loss of SCS of $1,466,000 and income from discontinued operations of $765,000.  The net loss chargeable to common shareholders includes a provision for preferred stock dividends of $8,000 in 2009 and $49,000 in 2008.
 
 Reportable segments
 
 Hyperdynamics has one reportable segment: our international operations in Guinea through our subsidiary SCS Corporation (“SCS”).  SCS is engaged in oil and gas exploration activities pertaining to offshore Guinea, West Africa.    During the year ended June 30, 2009, our domestic operations were discontinued,
and as of August 2009, all the assets associated with HYD, which was our subsidiary that held certain properties located in Louisiana, have been sold.  Hyperdynamics evaluates performance based on profit or loss from operations.
 
 Results of Operations
 
 Three months ended December 31, 2009 Compared to Three Months Ended December 31, 2008
 
 Revenues.  There were no revenues for the three months ended December 31, 2009 and 2008.   We have focused on the acquisition and interpretation of seismic data for our concession in Guinea.
 
 Depreciation.  Depreciation expense was $29,000 and $34,000 in the three months ended December 31, 2009 and 2008, respectively.
 
 Selling, General and Administrative Expenses. Our selling, general and administrative expenses were $3,038,000 and $2,042,000 for the three months ended December 31, 2009 and 2008,
respectively. This represents an increase of 49%, or $996,000.  The reason for the increase was primarily related to higher stock based compensation related to options granted to employees and others.
 
 Other income (expense). Other income (expense) totaled expense of $1,217,000 and $1,822,000 for the three months ended December 31, 2009 and 2008, respectively.  During
the 2009 period, the Company recognized a non-cash loss on the derivative liability related to the YA Global warrants of $423,000.  No such loss was recognized in the 2008 period.  Interest expense was $496,000 for the 2009 period, versus $2,022,000 for the 2008 period.  The higher interest expense in the 2008 was primarily attributable to the early conversion of convertible debentures outstanding during the period and the expensing of the associated debt discount.  During
the 2009 period, the Company recognized a loss on extinguishment of the remaining convertible debenture balance of $298,000, primarily attributable to the expensing of the remaining discount associated with these debentures, versus a gain of $200,000 in the 2008 period, primarily attributable to the settlement of a debt obligation for less than the accrued amount.
 
 Loss from Continuing Operations.  Based on the expenses discussed above, our loss from operations decreased by 10%, or ($386,000), from ($3,898,000) in the three months ended December 31, 2008 to ($4,284,000) for the three months ended December 31, 2009.
 
 Discontinued Operations.Discontinued operations generated a loss of $3,000 for the three months ended December 31, 2009 and a loss of $2,275,000 for three months ended December 31, 2008.
 
 Six months ended December 31, 2009 Compared to Six Months Ended December 31, 2008
 
 Revenues.  There were no revenues for the six months ended December 31, 2009 and 2008.   We have focused on the acquisition and interpretation of seismic data for our concession in Guinea.
 
 Depreciation.  Depreciation expense was $59,000 and $67,000 in the six months ended December 31, 2009 and 2008, respectively.
 
 Selling, General and Administrative Expenses. Our selling, general and administrative expenses were $5,426,000 and $4,227,000 for the six months ended December 31, 2009 and 2008, respectively.
This represents an increase of 28%, or $1,199,000.  The reason for the increase was primarily related to higher stock based compensation related to the issuance of stock options to employees and others.
 
 Other income (expense). Other income (expense) totaled ($1,487,000) and ($2,656,000) for the six months ended December 31, 2009 and 2008, respectively.  During
the 2009 period, the Company recognized a non-cash loss on the derivative liability related to the YA Global warrants of ($478,000).  No such loss was recognized in the 2008 period.  Interest expense was ($711,000) for the 2009 period, versus ($2,221,000) for the 2008 period.  The higher interest expense in the 2008 was primarily attributable to the early conversion of convertible debentures outstanding during the period and the expensing of the associated debt discount.  During
the 2009 period, the Company recognized a loss on extinguishment of the remaining convertible debenture balance of ($298,000), primarily attributable to the expensing of the remaining discount associated with these debentures, versus a loss of ($435,000) in the 2008 period, primarily attributable to the early extinguishment of the YA Global debenture that resulted in a loss of ($635,000), partially offset by a gain on settlement of a debt obligation for less than the accrued amount.
 
 Loss from Continuing Operations.  Based on the expenses discussed above, our loss from continuing operations increased by 0%, or $22,000, from ($6,950,000) in the six months ended December 31, 2008 to ($6,972,000) for the six months ended December 31, 2009.
 
 Discontinued Operations.Discontinued operations generated income of $765,000 for the six months ended December 31, 2009 and a loss of $1,995,000 for six months ended December 31, 2008.
 
 21
 Liquidity and Capital Resources
 
 Going Concern Considerations
 
 The accompanying Consolidated Financial Statements have been prepared assuming we will continue as a going concern.   We have incurred a cumulative net loss of $73.8 million for the period from inception to December 31, 2009.  As of December 31, 2009, we had cash on hand of $1.1 million, current liabilities of $5.2
million and we have a working capital deficit of approximately $3.9 million.  We require significant additional funding to sustain our current operations.  Our ability to continue as a going concern is dependent upon our ability to obtain additional funding in order to finance our planned operations.  We have historically been able to raise capital from debt or equity sources to finance our activities.  The world economic crisis, the depressed price for oil, and the depressed
price of our stock have weakened our ability to continue to raise new capital in this manner.  Capital may not be available on the terms and conditions acceptable to us or at all.  These combined conditions raise substantial doubt about our ability to continue as a going concern.
 
 Our plan to resolve the uncertainty about our ability to continue as a going concern includes raising additional capital, cost reductions, and monetization of our oil and gas exploration assets by attracting one or more participants in our concession to participate in our exploration of our oil and gas concession offshore Guinea.  Entering
into these relationships will entail transferring a portion of our interest in the Concession to such participant.
 
 On April 1, 2009, we executed a contract to sell our domestic oil and gas assets, which for accounting purposes was treated as three separate sales.  Under the terms of the agreement, the buyer has already paid the full, aggregate cash amount of $2,670,000 in 2009 for the properties.  Two of the sales transactions closed
in the fourth quarter of the year ended June 30, 2009, and the third sale closed in August 2009.
 
 Management’s plans focus primarily on engaging well capitalized concession participants to help us monetize a portion of our Concession.  Management is also evaluating how it can raise additional capital to further its business operations.  If management is not successful in securing outside funding by monetizing
a portion of its exploration assets or in raising additional funds, we may cease operations.
 
 Our top corporate priority at this time is to complete the arrangements with our two prospective concession participants so that we can fund an accelerated exploration work program offshore Guinea.  We now expect these major funds to come primarily from selling working interests to financial partners or joint venture partners that
invest in our Contract Area.  It is expected that our near term estimated costs (2010) for future exploration and analysis will be approximately $12-$20 million.
 
 Liquidity
 
 Based on the Company’s current plans and market conditions, management does not believe that the Company’s existing cash and current operations will be sufficient to satisfy its anticipated cash requirements for the next twelve months.  The Company requires additional working capital and has adequate capital resources
to meet current working capital and capital expenditure requirements through the third quarter of fiscal year 2010.  The Company intends to meet its short-term working capital needs by assigning 60% of its interest in the concession under the 2006 PSC to participants for cash payments totaling $36.5 million in cash and $14.6 million in cash or Dana stock, completely freely tradable, on the London Stock Exchange..  If we cannot complete these deals as previously described, or alternatively
raise funds on acceptable terms, we may be forced to curtail operations or may ultimately cease to exist.
 
 On December 31, 2009, the Company had $1,122,000 in cash and $7,265,000 in liabilities. The liabilities include current liabilities of $5,153,000 and noncurrent liabilities of $2,112,000.  Net cash used in operating activities for continuing operations for the six months ended December 31, 2009 was $5,342,000 compared to $3,636,000
for the six months ended December 31, 2008. Cash used by investing activities for continuing operations for the six months ended December 31, 2009 was $2,558,000 compared to $208,000 used by investing activities in the six months ended December 31, 2008.  There was net cash provided by financing activities for the six months ended December 31, 2009 of $6,857,000.  Net cash of $2,322,000 was provided by financing activities during the six months ended December 31, 2008.
 
 Current liabilities as of December 31, 2009 contain several items that are payable in stock, that are the subject of deferred payment arrangements whereby the vendor will not get paid except out of future revenues or cash received from a joint venture partner, or that will be assumed by others.  Dividends payable of $372,000, and
dividends payable to related party of $442,000 are payable in stock.   Accounts payable – seismic data of $650,000 is payable only when we sell the data to third parties or if we get cash infusion for the Guinea concession.  Additionally, $65,000 is accrued in accounts payable to a vendor who, by the terms of his agreement, will not be paid until we obtain funding from a financial or joint venture partner for Guinea.
 
 Liquidity Effects of Discontinued Operations
 
 On April 1, 2009, we executed a contract to sell all of our working interests in our U.S. domestic oil and gas properties for $2,670,000.  The third and final installment under the agreement was completed in August 2009.  The cash flows from discontinued operations are separately reported in the audited Consolidated Statements
of Cash Flows for all periods presented.  While this transaction improved our short term liquidity, it also eliminated our sole revenue source.  Accordingly, the liquidity implication of the discontinued operations is that we will require additional funding from debt or equity sources or from a joint venture or financial partner in our Guinea concession in order to continue operations.
 
 22
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
 We are exposed to various risks including energy commodity price risk, specifically, risk associated with changing prices of oil. We expect oil prices to remain volatile and unpredictable. If oil prices were to decline significantly, revenues and cash flow would significantly decline, and our ability to borrow to finance our operations could
be adversely impacted.   We do not hedge the oil commodity price risk at this time.  We believe this is appropriate to the size and scope of our operations.
 
 Our functional currency is the US dollar. We have some foreign currency exchange rate risk resulting from our in-country office in Guinea. US dollars are accepted in Guinea and many of our purchases and purchase obligations, such as our office lease in Guinea, are denominated in US dollars. However, our costs for labor, supplies, and fuel
could increase if the Guinea Franc appreciates against the US dollar. We do not hedge the exposure to currency rate changes.
 
 Item 4T. Controls and Procedures
 
 Disclosure Controls and Procedures
 
 We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and as of the end of the period covered by this quarterly report. The term “disclosure controls and procedures,” as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange act of 1934, as amended (“Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.  Disclosure controls and procedures also include, without limitation,
controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.  In the course of this evaluation, our management considered the material weaknesses in our internal
control over financial reporting discussed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2009. Based on management’s evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of December 31, 2009 were not effective in ensuring that the information required to be disclosed by us in reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and
forms of the SEC.
 
 Changes in Internal Control Over Financial Reporting
 
 To address the issues associated with our material weaknesses as described in our Annual Report on form 10-K, we have made changes in our internal controls over financial reporting in the quarter ended December 31, 2009 through the date of this report, and we continue to spend a significant amount of time and effort to improve our control
environment; including our implementation of enhanced compliance policies and procedures. We have taken steps in an effort to ensure our consolidated financial statements included in this quarterly report have been prepared in accordance with accounting principles generally accepted in the United States. Accordingly, management believes that the financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.
 
 We have been implementing and will aggressively continue to implement changes that are both organizational and process-focused to improve the control environment. The changes made through the date of this quarterly report include, among others:
 
 ·
Utilizing industry standard GAAP and SEC Checklists for disclosure requirements for interim financial information.
 
 
 Part II Other Information
 
 Item 1. Legal Proceedings
 
 For information regarding our legal proceedings see the legal proceedings disclosed in Item 3 of our most recent is Form 10-K. In addition, the following information updates the previously made disclosure concerning the lawsuit involving USOil Corporation (“USOil”) as reflected in our Annual Report on Form 10-K was filed.
 
 USOil Lawsuit
 
 In August 2007, USOil re-filed a previously dismissed lawsuit claiming it was the actions or omissions of SCS that caused the 2002 PSA to be cancelled by the Guinea Government. In addition to denying all claims, SCS filed a counterclaim seeking damages for frivolous litigation and tortuous interference of a contract.   On October
28, 2009, the court issued a ruling dismissing USOil’s lawsuit. The order became final November 27, 2009.
 
 
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 Item 6.Exhibits
 
 4.1           Form of Common Stock Purchase Warrant to be issued by Hyperdynamics Corporation to certain investors (2)
 
 10.1           Employment Agreement by and between Hyperdynamics Corporation and William A. Young (1)
 
 10.2           Form of Stock Option Agreement pursuant to the Stock and Stock Option Plan, as amended (1)
 
 10.3           Agreement for Exclusive Dealing and Letter of Intent effective as of November 26, 2009 between HyperDynamics Corporation and Repsol Exploracion, S.A. (1)
 
 10.4           Form of Securities Purchase Agreement, dated December 3, 2009, by and between Hyperdynamics Corporation and certain investors (2)
 
 10.5           Sale and Purchase Agreement, effective as of December 4, 2009, between HyperDynamics Corporation and Dana Petroleum (E&P) Limited (3)
 
 10.6           Letter Agreement, dated December 2, 2009, between HyperDynamics Corporation and Dana Petroleum (E&P) Limited (3)
 
 10.7           Employment Agreement Amendment, effective as of December 11, 2009, between Hyperdynamics Corporation and Ray Leonard (4)
 
 10.8           Stock Option Agreement Amendment, effective as of December 11, 2009, between Hyperdynamics Corporation and Ray Leonard (4)
 
 10.9           Lease Agreement effective as of December 29, 2009, between Hyperdynamics Corporation and Parkway Properties LP (5)
 
 10.10           Operating Agreement between SCS Corporation and Dana Petroleum (E&P) Limited, effective January 28, 2010 (6)
 
 10.11           Amendment to Agreement for Exclusive Dealing and Letter of Intent between Hyperdynamics Corporation, SCS Corporation and Repsol Exploracion, S.A., effective January 29, 2010 (7)
 
 
 Exhibit 31.1 - Certification of Chief Executive Officer of Hyperdynamics Corporation required by Rule 13a-14(1) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 Exhibit 31.2 - Certification of Chief Financial Officer of Hyperdynamics Corporation required by Rule 13a-14(1) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 Exhibit 32.1 - Certification of Chief Executive Officer of Hyperdynamics Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Section 1350 of 18 U.S.C. 63.
 
 Exhibit 32.2 - Certification of Chief Financial Officer of Hyperdynamics Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Section 1350 of 18 U.S.C. 63.
 
 (1) Incorporated by reference to our Form 8-K filed on December 1, 2009
 
 (2) Incorporated by reference to our Form 8-K filed on December 3, 2009
 
 (3) Incorporated by reference to our Form 8-K filed on December 7, 2009
 
 (4) Incorporated by reference to our Form 8-K filed on December 11, 2009
 
 (5) Incorporated by reference to our Form 8-K filed on January 6, 2010
 
 (6) Incorporated by reference to our Form 8-K filed on January 29, 2010
 
 (7) Incorporated by reference to our Form 8-K filed on February 1, 2010
 
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 Signatures
 
 Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly
 
 Hyperdynamics Corporation(Registrant)By:
/s/ Ray LeonardRay LeonardChief Executive Officer
 
 Dated: February 15, 2010
 
 By:
/s/ Jason DavisJason DavisChief Financial OfficerPrincipal Accounting Officer
 
 Dated: February 15, 2010
 
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  EXHIBIT INDEX
 
 4.1           Form of Common Stock Purchase Warrant to be issued by Hyperdynamics Corporation to certain investors (2)
 
 10.1           Employment Agreement by and between Hyperdynamics Corporation and William A. Young (1)
 
 10.2           Form of Stock Option Agreement pursuant to the Stock and Stock Option Plan, as amended (1)
 
 10.3           Agreement for Exclusive Dealing and Letter of Intent effective as of November 26, 2009 between HyperDynamics Corporation and Repsol Exploracion, S.A. (1)
 
 10.4           Form of Securities Purchase Agreement, dated December 3, 2009, by and between Hyperdynamics Corporation and certain investors (2)
 
 10.5           Sale and Purchase Agreement, effective as of December 4, 2009, between HyperDynamics Corporation and Dana Petroleum (E&P) Limited (3)
 
 10.6           Letter Agreement, dated December 2, 2009, between HyperDynamics Corporation and Dana Petroleum (E&P) Limited (3)
 
 10.7           Employment Agreement Amendment, effective as of December 11, 2009, between Hyperdynamics Corporation and Ray Leonard (4)
 
 10.8           Stock Option Agreement Amendment, effective as of December 11, 2009, between Hyperdynamics Corporation and Ray Leonard (4)
 
 10.9           Lease Agreement effective as of December 29, 2009, between Hyperdynamics Corporation and Parkway Properties LP (5)
 
 10.10           Operating Agreement between SCS Corporation and Dana Petroleum (E&P) Limited, effective January 28, 2010 (6)
 
 10.11           Amendment to Agreement for Exclusive Dealing and Letter of Intent between Hyperdynamics Corporation, SCS Corporation and Repsol Exploracion, S.A., effective January 29, 2010 (7)
 
 
 Exhibit 31.1 - Certification of Chief Executive Officer of Hyperdynamics Corporation required by Rule 13a-14(1) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 Exhibit 31.2 - Certification of Chief Financial Officer of Hyperdynamics Corporation required by Rule 13a-14(1) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 Exhibit 32.1 - Certification of Chief Executive Officer of Hyperdynamics Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Section 1350 of 18 U.S.C. 63.
 
 Exhibit 32.2 - Certification of Chief Financial Officer of Hyperdynamics Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Section 1350 of 18 U.S.C. 63.
 
 (1) Incorporated by reference to our Form 8-K filed on December 1, 2009
 
 (2) Incorporated by reference to our Form 8-K filed on December 3, 2009
 
 (3) Incorporated by reference to our Form 8-K filed on December 7, 2009
 
 (4) Incorporated by reference to our Form 8-K filed on December 11, 2009
 
 (5) Incorporated by reference to our Form 8-K filed on January 6, 2010
 
 (6) Incorporated by reference to our Form 8-K filed on January 29, 2010
 
 (7) Incorporated by reference to our Form 8-K filed on February 1, 2010
 
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