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 September 30, 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 November 23, 2009, 82,752,234 shares of common stock, $0.001 par value, were outstanding.
















Table of Contents








Part I. Financial InformationItem 1.      Financial StatementsConsolidated Balance Sheets (unaudited) at September  30, 2009 and June 30, 2009
3Consolidated Statements of Operations (unaudited) for the Three Months Ended September 30, 2009 and 2008, and the period from inception of the Exploration Stage (July 1, 2009) to September 30, 2009
4Consolidated Statements of Shareholders’ Equity (unaudited) for the Three Months Ended September 30, 2009
5Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended September 30, 2009 and 2008, and the period from inception of the Exploration Stage (July 1, 2009) to September 30, 2009
6Notes to Consolidated Financial Statements (unaudited)
8Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations
19Item 3.     Quantitative and Qualitative Disclosures about Market Risks
21Item 4T.     Controls and Procedures
22Part II. Other InformationItem 1.      Legal Proceedings
23Item 1A.  Risk Factors
23Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds
32Item 6.     Exhibits
33Signatures
34


2


HYPERDYNAMICS CORPORATION


(an Exploration Stage Company)


CONSOLIDATED BALANCE SHEETS


(In Thousands, Except Number of Shares and Per Share Amounts)


(Unaudited)





September 30, 2009


June 30,2009ASSETSCurrent assets:Cash and cash equivalents

$
1,142


$
1,360Prepaid expenses and other current assets


161



52Assets held for sale – Discontinued Operations


-



145Total current assets


1,303



1,557Property and equipment, net of accumulated depreciation of $370 and $339


170



209Oil and gas properties:Unevaluated properties excluded from amortization


9,380



7,663Deposits


11



11Total assets

$
10,864


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


3,094



803Accounts payable - seismic data


650



650Variable share issuance obligation


-



553Dividends payable


372



372Dividends payable to related party


458



434Short term notes payable and current portion of long term debt, net of discount of $132 and $134


869



639Total current liabilities


5,443



3,451Warrant derivative liability


1,640



-Long-term debt, net of discount of $263 and $342


1,585



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


-



18Deferred rent


52



56Total liabilities


8,720



5,186Commitments and contingencies (Note 10)


-



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


-



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


-



-Common stock, $0.001 par value, 250,000,000 shares authorized; 80,373,286 and 64,162,813 shares issued and outstanding


80



64Additional paid-in capital


71,599



71,805Accumulated deficit


(67,615
)


(67,615
)Deficit accumulated after reentering exploration stage


(1,920
)


-Total shareholders' equity


2,144



4,254Total liabilities and shareholders' equity

$
10,864


$
9,440





The accompanying notes are an integral part of these consolidated financial statements.








3











HYPERDYNAMICS CORPORATION


(an Exploration Stage Company)


CONSOLIDATED STATEMENTS OF OPERATIONS


(In Thousands, Except Number of Shares and Per Share Amounts)


(Unaudited)





Three Months Ended
September 30,


Inception of Exploration Stage (July 1, 2009) through
September 30, 20092009


2008Costs and expenses:Depreciation

$
30


$
33


$
30Selling, general and administrative


2,388



2,185



2,388Total costs and expenses


2,418



2,218



2,418Loss from operations


(2,418
)


(2,218
)


(2,418
)Other expense:Loss on derivative liability


(55
)


-



(55
)Interest expense, net


(215
)


(199
)


(215
)Loss on settlement of debt


-



(635
)


-Total other expense


(270
)


(834
)


(270
)Loss from continuing operations


(2,688
)


(3,052
)


(2,688
)Income from discontinued operations, net of tax


768



280



768Net loss


(1,920
)


(2,772
)


(1,920
)Preferred stock dividend to related party


(24
)


(25
)


(24
)Net loss attributable to common shareholders

$
(1,944
)

$
(2,797
)

$
(1,944
)Basic and diluted income (loss) per common shareFrom continuing operations

$
(0.04
)

$
(0.05
)From discontinued operations


0.01



0.00Net loss attributable to common shareholders

$
(0.03
)

$
(0.05
)Weighted average shares outstanding (basic and diluted)


64,668,989



59,696,645











The accompanying notes are an integral part of these consolidated financial statements.











4











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


-



-



-



-



388,251



-



258



-



-


258Conversion of Series B Preferred Stock into common stock


-



-



(2,406
)


-



15,822,222



16



(16
)


-



-


-Stock options issued for services


-



-



-







-



-



1,161



-



-


1,161Preferred stock dividends to related party


-



-



-



-



-



-



(24
)


-



-


(24
)Net loss


-



-



-



-



-



-



-



-



(1,920
)

(1,920
)Balance, September 30, 2009


1,945


$
-



-


$
-



80,373,286


$
80


$
71,599


$
(67,615
)

$
(1,920
)
$
2,144








The accompanying notes are an integral part of these consolidated financial statements.


























5







HYPERDYNAMICS CORPORATION


(an Exploration Stage Company)


CONSOLIDATED STATEMENTS OF CASH FLOWS


(In Thousands)


(Unaudited)





Three Months Ended September 30,


Inception of Exploration Stage through September 30,2009

2008


2009CASH FLOWS FROM OPERATING ACTIVITIES:Net loss

$
(1,920
)
$
(2,772
)
$
(1,920
)Income from discontinued operations


(768
)

(280
)

(768
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation, depletion and amortization


30


33


30Common stock issued for services


80


513


80Employee stock options


1,161


141


1,161Variable share issuance obligation


(375
)

-


(375
)Loss on debt extinguishment


-


635


-Loss on derivative liability


55


-


55Amortization of discount and financing costs on debt


79


81


79Changes in operating assets and liabilities:





-Prepaid expenses and other current assets


6


31


6Accounts payable and accrued expenses


2,387


(819
)

2,387Deferred rent


(4
)

(5
)

(4
)Cash provided by (used in) operating activities – continuing operations


731


(2,442
)

731Cash provided by (used in) operating activities – discontinued operations


(76
)

599


(76
)Net cash provided by (used in) operating activities


655


(1,843
)

655CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment


-


(5
)

-Investment in oil and gas properties


(1,717
)

-


(1,717
)Cash used in investing activities – continuing operations


(1,717
)

(5
)

(1,717
)Cash provided by investing activities – discontinued operations


884


(116
)

884Net cash used in investing activities


(833
)

(121
)

(833
)CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds 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


(40
)

(2,036
)

(40
)Cash provided by (used in) financing activities – continuing operations


(40
)

2,363


(40
)Cash used in financing activities – discontinued operations


-


-


-Net cash provided by (used in) financing  activities


(40
)

2,363


(40
)(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS


(218
)

399


(218
)CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR


1,360


1,480


1,360CASH AND CASH EQUIVALENTS AT END OF PERIOD

$
1,142

$
1,879

$
1,142





The accompanying notes are an integral part of these consolidated financial statements.





6










SUPPLEMENTAL DISCLOSURES:Interest paid in cash

$
-


$
89


$
-Income taxes paid in cash


-



-



-NON-CASH TRANSACTIONS - INVESTING AND FINANCING:Common stock issued for accounts payable

$
-


$
173


$
-Common stock issued for true-up liability


179



-



179Stock issued for deferred financing costs



-


103Deemed dividend attributable to repriced warrants originally issued as part of convertible debt



-


29Debt discount on convertible debt



-


2,372Acquisition of asset retirement obligation



-


86Accounts payable for oil and gas property



-


6Note payable for fixed assets



-


27Accrued and unpaid dividend to related parties


24



25



24Conversion of Series B Preferred Stock into Common Stock


16



-



16Note payable for prepaid insurance


115



-



115Asset retirement obligation transferred as part of sale of assets


18



-



18











The accompanying notes are an integral part of these consolidated financial statements.











7








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 Guinea limited liability company 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 to, among other things, raise additional capital to fund oursearch for oil and gas reserves 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 months ended September 30, 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.





8


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, substantially the full term of the financial instrument.·
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.





As required by a FASB accounting standard, 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 fair value of the warrants was determined using a Binomial Model, as level 3 inputs, and recorded the change in earnings. As a
result, the derivative warrant liability is carried on the balance sheet at its fair value.





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 September 30, 2009 (in thousands).





Carrying
Value at
September
30, 2009


Fair Value Measurement at
September 30, 2009Level 1


Level 2


Level 3Derivative warrants liability

$
1,640


$
-


$
-


$
1,640





Derivative warrants liability carried at fair value, 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 the FASB accounting standard.





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 as of September 30, 2009.





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.





9


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 $69,535,000 through September 30, 2009. Hyperdynamics has 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. 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 holds certain securities that were previously issued by us.  Pursuant to the Shares Purchase Agreement, we have issued to Enable 1,578,948 shares of our common stock, par value $.001 per share (the
“Offering”).  The aggregate net proceeds from the Offering, after deducting offering expenses payable by us, were approximately $1,460,000.  The Offering closed on November 17, 2009.  This offering will provide short term liquidity for the Company.





Management’s plans focus primarily on obtaining well capitalized joint venture partners to help us monetize a portion of our Guinea 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 raising additional funds, Hyperdynamics may not survive.





The financial statements do not include any adjustments that might result from the outcome of this uncertainty.





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 the HYDR, or 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 September 30, 2009 and June 30, 2009.  The amounts presented below do not include cash, or payables, which will be retained by Hyperdynamics.





September 30, 2009


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

$
-


$
43,00Oil 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 relates to the assets held for sale, which are a disposal group consisting of the domestic oil and gas properties of Hyperdynamics. The disposal group has distinguishable cash flows. Accordingly it is a component of the entity and its results have been segregated from continuing operations and
reported as discontinued operations in all periods presented. Because of Hyperdynamics’ net loss, there is no provision for income taxes.





September 30, 2009


September 30, 2008Revenues

$
-


$
1,119,000Cost and Expenses:Lease operating costs


-



546,000Depreciation, depletion and amortization


-



273,000Accretion


-



20,000Other expenses






-Gain on sale of discontinued operations


768,000



-Income (loss) from discontinued operations

$
768,000


$
280,000





10


4. INVESTMENT IN OIL AND GAS PROPERTIES





Investment in Oil and Gas properties consists of our Guinea concession in offshore West Africa. As of September 30, 2009 and 2008, all costs associated with the concession offshore Guinea were excluded from the amortization base.





The following table provides detail of costs (in thousands) to date for Guinea as of September 30, 2009 and June 30, 2009:





Republic of GuineaSeptember 30, 2009


June 30,2009Lease Acquisition Costs

$
291


$
291Geological and geophysical Cost


9,089



7,3729,380



7,663Less: AccumulatedDepletion and Depreciation


-



-$
9,380


$
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 $9,380,000
and $7,663,000 as of September 30, 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 September 30, 2009, based on our impairment review and our intent to continue evaluation activities, there was no impairment indicated for our excluded costs.





We incurred $1,717,000 of geological and geophysical costs for our Guinea concession during the quarter ended September 30, 2009.





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 requires us to surrender 64% of the Contract Area (approximately 51,200 square kilometers) no later than December 31, 2009.  If we do not submit a relinquishment offer pursuant to the 2009 MOU by December 31, 2009, Guinea may select the 64% of the Contract Area that is to be surrendered.  The 2009 MOU also
clarifies our right to participate in any new concessions 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 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 are 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.  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.





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 back to the original owner of the properties in a transaction that was treated for accounting purposes as three sales.  The final sale was completed in August 2009.  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 September 30, 2009 and June 30, 2009 include the following:





September 30, 2009


June 30, 2009(in Thousands)Accounts payable

$
3,016


$
688Accrued payroll


-



11Taxes payable


26



88Deferred rent


52



16$
3,094


$
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 payoff 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 September 30, 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 consist of the following:








September 30, 2009


June 30, 2009(in Thousands)Installment notes payable

$
97


$
23YA Global Notes


-



-Convertible debenturesGross


2,752



2,752Unamortized discount


(395
)


(476
)Net

$
2,357


$
2,276Total short term notes payable and long-term debt


2,454



2,299Less:  current portion


(869
)


(639
)Long term notes payable, net of discount

$
1,585


$
1,660





In addition to installment notes payable as of June 30, 2009, during the three months ended September 30, 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 with YA Global Investments, LP (“YA Global”). Under the financing agreement, we issued $2,000,000 of notes for net proceeds of $1,885,000.  In connection with the closing, we also issued an aggregate 94,899 shares of common stock and a total of 550,000
warrants with an exercise price of $2.00 per share.  We recorded an initial discount related to the warrants and shares issued, as well as certain financing fees paid directly to YA Global, of $461,000, which was to be amortized to expense over the life of the notes.





The notes carried an annual interest rate equal to 20%, were to mature on July 6, 2010 and were redeemable at our option at an earlier date provided we paid an “early redemption premium” of 15% of the principal amount being redeemed.





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 during the three months ended September 30, 2008.





Sale of 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, with $300,000 payable in cash and $103,000 payable with 66,000 shares of Hyperdynamics common stock, and the lender received $30,000 for legal costs. This
resulted 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.





The debentures carry an annual interest rate equal to 10% with a maturity date of September 12, 2012. The debentures were to be repaid in monthly installments of $139,000 beginning September 12, 2009.  Interest installments were also to be paid quarterly on the outstanding balance. Interest installments commenced on October 1, 2008.  Hyperdynamics
is required to pay the investor a “make-whole” payment with each conversion or redemption equal to 40% of the principal less interest previously paid.    Hyperdynamics had the option to pay, if certain conditions were met, the principal installments, interest payments, and make-whole payments using Hyperdynamics common stock using a formula based on current market prices of the stock.





The investors in the convertible debentures previously received 2,424,243 warrants to purchase common stock with an exercise price of $3.27 per share as part of a registered direct offering of our common stock completed in May 2008.  The provisions of the warrants include a reduction in the exercise price in the event stock or convertible
securities were issued with a lower exercise price. By agreement with the investors, the exercise price of the warrants was reduced from $3.27 to $3.00. The modification resulted in a deemed dividend to the warrant holders of $29,000.





On November 20, 2008, Hyperdynamics entered into an amendment agreement with the same debenture investor.  The agreement reduced the conversion price of the 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 “Accreted Payments”). Any Accreted Payments will increase the Monthly Redemption Amount (as such term is defined in the Debenture), accrue only ordinary interest
of 10% per annum and, upon conversion or redemption, will not be subject to any further make-whole interest payable due pursuant to the Debenture.





The amendment resulted in a substantial modification of terms of the debt.  Accordingly, Hyperdynamics recognized the amendment as an extinguishment of debt 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. Gain on extinguishment of $56,000 from the transaction was recognized during the three months ended December 31, 2008.





As a consequence of the 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 debentures.   The post modification debt has an effective interest rate of 29% per annum.





13


8. WARRANT DERIVATIVE LIABILITY





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.  This accounting standard 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.  This FASB accounting standard 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 adopting this FASB accounting standard 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.





In connection with the YA Global debt discussed above in Note 7, we issued a total of 550,000 warrants with an exercise price of $2.00 per share (YA Global Warrants). The exercise price of the YA Global Warrants 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.  The YA Global Warrants are subject to the provisions of ASC 815.





As such, effective July 1, 2009, the Company reclassified the fair value of these warrants from equity to liability, as if these warrants were treated as a derivative liability since their issuance in February 2008.  On 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. The fair value of the YA Global Warrants was $1,640,000 on September 30, 2009.  Therefore, the Company recognized a $55,000 loss from the change in fair value for the three months ended September 30, 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:




September 30, 2009


July 1, 2009(Unaudited)Annual dividend yield


0.00



0.00Expected life (years)


3.36



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 nine months
ended September 30, 2009 and 2008, dividends of $24,000 and $25,000 were accrued. The resulting balance in accrued dividends was $458,000 as of September 30, 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 three months ended September 30, 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 $258,000. Services were valued
using the market close price on the date of grant.





Employee stock options





During the three months ended September 30, 2009, we granted options to purchase 4,840,000 shares of common stock to the Company’s employees and directors.   The compensation expense associated with employee stock options during the three months ended September 30, 2009 was $1,161,000. 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 1997 Stock and Stock Option Plan (“1997 Plan”) and the 2008 Stock and Stock Option Plan (“2008 Plan”). 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 nine months ended September 30, 2009 no options or warrants were issued under the plan.





1997 Stock and Stock Option Plan





Options granted to employees and directors during the three months ended September 30, 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 $10 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, $285,895 was expensed during the three months ended September 30, 2009.








15


The following table provides information about options granted during the three months ended September 30, 2009 and 2008:





2009


2008Number of options granted


4,840,000



190,000Compensation expense recognized as selling, general and administrative expense

$
1,161,000


$
31,000Compensation cost capitalized


-



-Weighted average fair value of options

$
0.24


$
1.61





The following table details the significant assumptions used to compute the fair market values of employee stock options granted:





2009


2008Risk-free interest rate


0.54 – 3.30
%


2.00-2.63
%Dividend yield


0
%


0
%Volatility factor


115 – 129
%


86.91-88.48
%Expected life (years)


1.0 – 7.5



1-1.5





At September 30, 2009, there was $1,246,000 of unrecognized compensation costs related to non-vested share based compensation arrangements granted to employees under the plan.





Summary information regarding employee stock options issued and outstanding as of September 30, 2009 is as follows:





Options


Weighted Average Share PriceOutstanding at year ended June 30, 2009


2,219,707



3.28Granted


4,840,000


$
0.62Exercised


-



-Expired


(223,447
)


-Outstanding at quarter ended September 30, 2009


6,836,260


$
0.86








Options outstanding and exercisable as of September 30, 2009Exercise Price
Outstanding Number of Shares
Remaining Life
Exercisable Number of Shares$
0.01 – 0.49
75,000
2 years
75,000$
0.01 – 0.49
410,000
3 years
210,000$
0.01 – 0.49
150,000
5 years
150,000$
0.01 – 0.49
3,500,000
5 years
550,000$
0.50 – 0.99
40,000
2 years
40,000$
0.50 – 0.99
115,000
3 years
115,000$
0.50 – 0.99
90,000
5 years
30,000$
1.00 – 1.49
22,500
1 year or less
22,500$
1.00 – 1.49
60,000
2 years
60,000$
1.00 – 1.49
30,000
3 years
30,000$
1.00 – 1.49
800,000
5 years
800,000$
1.50 – 1.99
15,000
1 year or less
15,000$
1.50 – 1.99
90,000
2 years
90,000$
1.50 – 1.99
50,000
5 years
50,000$
2 - $2.49
40,000
1 year or less
40,000$
2 - $2.49
170,000
2 years
170,000$
2 - $2.49
295,000
3 years
295,000$
2.50 - $2.99
65,000
1 year or less
65,000$
2.50 - $2.99
153,760
2 years
153,760$
3 - $3.50
65,000
2 years
65,000$
5.00
300,000
3 years
-$
10.00
300,000
3 years
-6,836,260

3,026,260





Options exercisable had an intrinsic value of $1,207,625 at September 30, 2009.





16


Warrants





During the three months ended September 30, 2009 and 2008, Hyperdynamics did not grant any warrants to consultants.





During the three months ended September 30, 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.





Summary information regarding common stock warrants issued and outstanding as of September 30, 2009 is as follows:





Warrants


Weighted Average Share PriceOutstanding at year ended June 30, 2009


10,343,131


$
2.24Granted


-



-Exercised


-



-Cancelled


1,000,000



1.65Expired






-Outstanding at year ended September 30, 2009


9,343,131


$
2.31





Warrants outstanding and exercisable as of September30, 2009Exercise Price
Outstanding Number of Shares

Remaining Life

Exercisable Number of Shares$
1.65

666,666

4 years


666,666$
1.65

2,480,000

5 years


2,480,000$
2.00

2,424,243

6 years


2,424,243$
2.25

1,111,111

7 years


1,111,111$
2.50

1,111,111

7 years


1,111,111$
4.00

1,500,000

5 years


1,500,000$
5.00

50,000

2 years


-9,343,131




9,343,131








11. COMMITMENTS AND CONTINGENCIES





Legal matters





The following case has been updated since our Annual Report on Form 10-K, as amended, 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 becomes final November 27, 2009 unless USOil appeals the decision.





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.  We anticipate Bergen will complete the seismic survey by the end of January 2010, subject to several variables, including but not limited to mobilization, logistical and prevailing sea conditions.  The cost of the survey is approximately $10 million, Through November 20, 2009 we have paid approximately $1.6 million in cash to Bergen.  Additionally, Bergen holds in escrow 2.5 million shares of our restricted common stock as a security
deposit for the additional 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.





After the $1.6 million payment referred to above, approximately $8 million remaining to be paid is due in three progress payments of $2.68 million each, payable in cash for each incremental 3,000 kilometers surveyed.





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.





17





12. SUBSEQUENT EVENTS





Equity transactions





Significant stock options granted since September 30, 2009 include:





·
705,000 stock options for certain employees and directors of the Company with a strike price of $1.61, a five year life and vesting ratable over either two years (364,000 options) or three years (341,000 options).  These options had an estimate value of $729,000.





Conversion of certain long- term debt





On October 12, 2009 and October 19, 2009, the holder of our convertible debenture, Enable converted a total of $1,320,000 in principal at a conversion price of $1.65 per share.  The Company issued a total of 800,000 shares of its common stock related to the conversion.





Registered Direct Offering





On November 12, 2009, we entered into a Shares Purchase Agreement with Enable which holds certain securities identified below 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 “Offering”).  The
aggregate net proceeds from the Offering, after deducting for offering expenses payable by us, were approximately $1,460,000.  The Offering closed on November 17, 2009.





The Shares Purchase Agreement provides that the conversion price of a debenture previously issued to Enable and the exercise prices of warrants previously issued to Enable are permanently reduced to $0.95 per share.   The Securities Purchase Agreement also prohibits us from issuing, or entering into any agreement to issue
or announce the issuance or proposed issuance of shares of our common stock or securities convertible into shares of our common stock for a period of 15 days after the closing of the transaction contemplated by the Shares Purchase Agreement.





As a result of the issuance of the Share Purchase Agreement with Enable, the YA Global warrants were repriced resulting in a revised exercise price of $0.95 per share and the number of shares of common stock into which the YA GLobal warrants are exercisable increased by 491,228 shares to 1,041,228 shares.  The expense associated with
this reporicing will be recognized in our results for the quarter ended December 31, 2009.





The Company evaluated subsequent events through November 23, 2009, which is the date the financial statements were issued and there were no other significant subsequent events to report.




18


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 the short-term we are seeking an industry partner to complete 2-D and 3-D seismic work in the Contract Area.  In the future, we intend to enter into a joint venture or other relationship with a strategic industry partner to fully execute our business plan including conducting exploratory drilling and production in the Contract
Area.





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.





·
Obtaining financing for working capital and further 2-D and 3-D seismic work in the Contract Area.





·
Entering into a joint venture or similar arrangement with an industry partner as a means of financing further seismic work in the Contract Area.





·
Obtaining funds and entering into a joint venture or similar arrangement with an industry partner to drill offshore Guinea.





We expect that entering into these partnering relationships would entail transferring a portion of our interest in the Concession to such partner.





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 this Quarterly Report on Form 10-Q in Item 1A. Risk Factors below 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.





19


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 $853,000, or 30%, from a net loss of $2,797,000, or $0.05 per share in 2008 to a net loss of $1,944,000, or $0.03 per share in 2009.  The 2009 net loss
is comprised of the net loss from operations for our corporate office of $2,340,000, the net loss of SCS of $372,000 and income from discontinued operations of $768,000.  The net loss chargeable to common shareholders includes a provision for preferred stock dividends of $24,000 in 2009 and $25,000 in 2008.





Reportable segments





Hyperdynamics has one reportable segment: our international operations in Guinea (“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 HYDR, which was our subsidiary that held certain properties located in Louisiana, have been sold.  Hyperdynamics evaluates performance based on profit or loss from operations.





Comparison for the three months ended September 30, 2009 and 2008





Revenues.  There were no revenues for the three months ended September 30, 2009 and 2008.   We have focused on the acquisition and interpretation of seismic data for our concession in Guinea.





Depreciation.  Depreciation expense was $30,000 and $33,000 in the three months ended September 30, 2009 and 2008, respectively.





Selling, General and Administrative Expenses.





Our selling, general and administrative expenses were $2,388,000 and $2,185,000 for the three months ended September 30, 2009 and 2008, respectively. This represents an increase of 9%, or $203,000.  The reason for the increase was primarily related to our focusing on our international segment as a result of the sale of the domestic
segment .





Loss from Continuing Operations.  Based on the factors discussed above, our loss from continuing operations decreased by 12%, or ($364,000), from ($3,052,000) in the three months ended September 30, 2008 to ($2,688,000) for the three months ended September 30, 2009.





Discontinued Operations.Discontinued operations generated income of $768,000 for the three months ended September 30, 2009 and $280,000 for three months ended September 30, 2008.





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 $69.5 million for the period from inception to September 30, 2009.  As of September 30, 2009, we had cash on hand of $1.1 million, current liabilities of $5.4
million and we have a working capital deficit of approximately $4.3 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 a joint venture or financial partner to participate in our exploration of our oil and gas concession offshore Guinea.  We
expect that entering into these partnering relationships would entail transferring a portion of our interest in the Concession to such partner.





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 obtaining well capitalized joint venture partners 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 attract a joint venture or financial partner 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 for future exploration and analysis will be approximately $12.0 million.





20


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 second quarter of fiscal year 2010.  However, future financing may not be available in amounts or on terms acceptable to us, if at all.  If we cannot raise funds on acceptable terms, we may be forced to curtail operations or may ultimately cease to exist.





On September 30, 2009, the Company had $1,142,000 in cash and $8,720,000 in liabilities. The liabilities include current liabilities of $5,443,000 and noncurrent liabilities of $3,277,000.  Net cash provided by operating activities for continuing operations for the three months ended September 30, 2009 was $731,000 compared to cash
used of $2,442,000 for the three months ended September 30, 2008. Cash used by investing activities for continuing operations during the three months ended September 30, 2009 was $1,717,000 compared to $5,000 used by investing activities in the three months ended September 30, 2008.  There was net cash used by financing activities for the three months ended September 30, 2009 of $40,000.  Net cash of $2,363,000 was provided by financing activities during the three months ended September 30, 2008.





Our current ratio was 0.24 at September 30, 2009 and 0.45 at September 30, 2008. Current liabilities as of September 30, 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 $458,000 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 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.  We expect that entering into these partnering relationships would entail transferring a portion
of our interest in the Concession to such partner.





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.





21


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 that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of September 30, 2009 were not effective in ensuring that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 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 three months ended September 30, 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:





Addressing deficiencies in the control environment as follows:


·
We have reduced our expenditures and implemented an imprest style system of funding for our Guinea operations that reduces our exposure to loss and fraud; as an alternate means of internal control of the operation;





·
We have hired a new Chief Financial Officer with extensive public accounting and SEC experience and hired additional accounting staff.  We have also contracted with a consulting firm that has provided additional accounting resources on a part time basis; and





·
Implementing policies and procedures designed to improve the overall control environment, such as obtaining timely acknowledgement of our Code of Ethics, annual re-certification of policies, conducting department meetings in order to communicate accounting policies and procedures, and implementing restrictions on users’ access to posting
in the accounting system.





Addressing deficiencies in staffing and segregation of duties as follows:





·
Augmenting our staff by hiring additional accounting personnel to assist in the preparation of financial statements and with the evaluation of and accounting for non-routine and non-systematic transactions; and·
Providing training to existing employees so that they can perform additional duties, thus improving our ability to have independent review and approval of financial accounting entries; and





·
Engaging a competent external financial services firm to review of the quarterly financial reporting package and the financial statements prior to issuance in order to mitigate the segregation of duty issue that the CFO is involved in the drafting of the financial statements and cannot conduct an independent review.





22


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 becomes final November 27, 2009 unless USOil appeals the decision.





Item 1A. RiskFactors





Set forth below are updated risk factors from those set forth in our Current Report on Form 8-K filed with the SEC on November 12, 2009, which superseded the risk factors disclosed in our Annual Report on Form 10-K, as amended, for the year ended June 30, 2009.





Geopolitical instability where we operate subjects us to political, economic and other uncertainties.





We conduct business in the Guinea, which is in a region of the world where there have been recent civil wars, revolutionary wars, coup d’états and internecine conflicts.  In September 2009, Guinea experienced a marked increase in violence including civil unrest and protests against the current government, which assumed
power in December 2008.  External or internal political forces could potentially create a political or military climate that might cause a change in political leadership, the outbreak of hostilities, or civil unrest.  Such uncertainties could result in our having to cease our Guinea operations and result in the loss or delay of our rights under the 2006 PSC and the 2009 MOU.





Further, we face political and economic risks and other uncertainties with respect to our operations, which may include, among other things:





·
loss of revenue, property and equipment as a result of hazards such as expropriation, war, acts of terrorism, insurrection and other political risks;





·
increases in taxes and governmental royalties;





·
unilateral renegotiation of contracts by governmental entities;





·
difficulties enforcing our rights against a governmental agency because of the doctrine of sovereign immunity and foreign sovereignty over international operations;





·
changes in laws and policies governing operations of foreign-based companies; and





·
currency restrictions and exchange rate fluctuations.





Our operations in Guinea may also be adversely affected by laws and policies of the United States affecting foreign trade and taxation.  Realization of any of these factors could materially and adversely affect our business plan, financial position, results of operations and future cash flows.





23


We will require substantial additional funding in the near term which may not be available to us on acceptable terms or at all; if we cannot obtain additional financing, we may have to curtail operations and may ultimately cease to exist.





Our financial statements reflect recurring, ongoing and substantial yearly net losses, and negative cash flows from operations. We need additional funding or alternative sources of capital to meet our working capital needs.  We have previously raised capital by selling common stock and warrants, issuing convertible debentures and
using a previously available equity line of credit which expired in February 2009.  Our management does not believe that existing cash resources will be sufficient to enable us to execute our business plan over the next twelve months and that we will need to raise substantial additional capital in the near term in order to do so.  However, future financing may not be available in amounts or on terms acceptable to us, if at all. If we cannot raise funds on acceptable terms, we will not be able
to execute our business plan and may be forced to curtail operations or may ultimately cease to exist.





We may not be able to meet our substantial capital requirements to conduct our operations and achieve our business plan and; we anticipate future losses and negative cash flow.





Our business is capital intensive.  We must invest a significant amount in development and exploration activities.  We are currently making and intend to continue to make substantial capital expenditures to find, develop and produce natural gas and oil reserves.  We currently have no operating revenue.  If
we do not obtain capital resources, we may not be able to meet the obligations under the 2006 PSC and the 2009 MOU – thus surrendering the rights granted to us by Guinea under the 2006 PSC (the “Concession”).  The Concession is our single most important asset and its loss would result in a substantial decrease in our ability to eventually become a profit-generating company.  Even if we acquire sufficient financing to meet the obligations under the 2006 PSC and the 2009 MOU,
we may not be able to raise or expend the capital necessary to undertake or complete future drilling programs or acquisition opportunities unless we raise additional funds through debt or equity financings, which may not be available on acceptable terms to us or at all.  We may not be able to obtain debt or equity financing or enter into a strategic relationship with an industry partner to meet our capital requirements on acceptable terms, if at all.  Moreover, our future cash flow from operations
may not be sufficient for continued exploration, development or acquisition activities, and we may not be able to obtain the necessary funds from other sources.





With the completion of the sale of our domestic oil and gas properties in August 2009, we are strictly in the exploration phase and have no proven petroleum reserves.  We expect to continue to incur significant expenses over the next several years with our operations, including further seismic studies and exploratory drilling.  Based
on the exploration results to date, we anticipate that the cost per commercial well, if further results justify attempts at commercial drilling, would range from US$15 million each (shallow water gas prospects) to more than US$50 million each (deepwater oil prospects).





The 2006 PSC is subject to renegotiation pursuant to the terms of the 2009 MOU and prospective changes in Guinea’s laws and regulations, each of which may have an adverse impact upon our operations and profitability.





The 2009 MOU provides, among other things, that the 2006 PSC in its entirety will be renegotiated with a view to bringing the 2006 PSC into conformance with international standards.  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.  If the terms and conditions of the 2009 MOU are not met by March 31, 2010, the non-relinquished portion of the Contract Area could be required to be relinquished under the 2009 MOU.  We refer to the offshore area subject to our Concession as the “Contract Area.”  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.  The 2006 PSC is subject to Guinea laws and regulations that were in force at the time of its signing.  Consequently, if Guinea passes new laws and regulations which act to modify the provisions of the 2006 PSC in a manner which results in a material change concerning our operations and economic position, we will be required to enter into negotiations with Guinea regarding the
material change with a view toward restoring the original, respective economic positions of the parties before the change in laws or regulations occurred.  In the event we are not able to negotiate an acceptable modification of the 2006 PSC terms in light of new laws and regulations, we will be required to submit the matter to international arbitration.  There is no assurance that any arbitration would be successful.  The results of such negotiations or arbitration could be unfavorable
to us and, as a result, could have a material adverse effect on our business plan, financial position, results of operations and future cash flows.





Negotiations or arbitration in connection with the 2006 PSC and 2009 MOU could have an unfavorable outcome.





The 2009 MOU contains a provision whereby the 2006 PSC in its entirety will be negotiated with a view to bringing it into conformance with international standards.  If this review has 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.  If we do not submit a relinquishment offer pursuant to the 2009 MOU by December 31, 2009, Guinea may select the 64% of the Contract Area that is to be surrendered.  With respect to the remaining 36%, if the terms and conditions are not satisfied by March 10, 2010, absent an agreement to the contrary, the 36% could be required to be relinquished to Guinea, subject to each party’s right to recourse to international arbitration.  The results of such negotiations
or arbitration could be unfavorable to us and, as a result, could have a material adverse effect on our business plan, financial position, results of operations and future cash flows.





Our concession or obligations under the 2006 PSC or the 2009 MOU could be adversely affected by Guinea’s political uncertainties.





Guinea has faced and continues to face political, economic and social uncertainties which are beyond our control.  Maintaining a good working relationship with the Guinean government is important because the Concession is granted under the terms of the 2006 PSC and the 2009 MOU with the Guinean government.  A presidential
election in Guinea is scheduled for January 31, 2010.  While we intend to maintain a positive working relationship with the Guinean government, we cannot predict the impact that the 2010 election will have on our relationship.  A change in leadership at that time could result in political instability or substantial changes in government policies which could have a material adverse effect on our business plan, financial position, results of operations and future cash flows.





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.





We operate in Guinea, a country where governmental corruption has been known to exist. There is a risk of violating either the U.S. Foreign Corrupt Practices Act or laws or legislation promulgated pursuant to the 1997 OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions or other applicable
anti-corruption regulations that generally prohibit the making of improper payments to foreign officials for the purpose of obtaining or keeping business.  Some of the identified internal control deficiencies contributing to our material weaknesses in financial reporting relate to our operations in Guinea.  These material weaknesses make it more likely that a violation could have occurred.  Violation of these laws could result in monetary penalties against us or our subsidiaries
and could damage our reputation and, therefore, our ability to do business.  In addition, the future success of our Guinea operations may be adversely affected by risks associated with international activities, including economic and labor conditions, political instability, risk of war, expropriation, terrorism, renegotiation or modification of existing contracts, tax laws and changes in exchange rates.





24


Our past losses raise doubt about our ability to operate profitably or continue as a going concern.





The accompanying Consolidated Financial Statements contained in this report on Form 10-Q for the three months ended September 30, 2009 have been prepared assuming we will continue as a going concern.  We have incurred losses since inception, resulting in cumulative losses of $69,128,000 through September 30, 2009.  We have
historically been able to raise capital from debt or equity sources to finance our activities but there is no assurance we will be able to do so in the future or on acceptable terms, if at all.  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.  These combined conditions raise substantial doubt about our ability to continue as a going concern, as discussed in Note # 2 to the
Consolidated Financial Statements.  The Consolidated Financial Statements do not include any adjustments that might result from the outcome of this uncertainty.





Our expected future losses raise doubts about our ability to continue as a going concern unless we can raise capital.





Future events may make it difficult for us to raise capital.  To raise capital, we may sell equity or debt securities or obtain financing through a bank or other entity.  There is no limit as to the amount of debt we may incur.  Such financing may not be available to us or may not be available on terms acceptable
to us.  If we raise funds raised through the issuance of equity, there may be a significant dilution in the value of our currently outstanding common stock.  Our growth is dependent on our raising capital through the sale of equity or debt or our ability to attract a joint venture or financial partner for the Concession.  There is no assurance that we will be able to raise any equity or debt financing or that we will be able to attract a joint venture or financial partner to invest
in our Guinea concession.  We expect that entering into these partnering relationships would entail transferring a portion of our interest in the Concession to such partner.





We do not have reserve reports for the concession and our expectations as to oil and gas reserves are uncertain and may vary substantially from actual production.





We do not have any reserve reports or geology or petroleum engineering reports for the Concession.  A reserve report is the estimated quantities of oil and gas based on reports prepared by third party reserve engineers.  Reserve reporting is a subjective process of estimating underground accumulations of oil and natural
gas that cannot be measured in an exact manner.  Because we do not have any reserve reports for the Concession our expectations as to oil and gas reserves are uncertain and may vary substantially from actual production.





We have a history of losses and there is no assurance that we will ever achieve or sustain profitability.





We have experienced substantial operating losses.  We expect to incur significant operating losses until we commence sales from the Concession. We will also need to raise sufficient funds to finance our exploration and exploitation activities.  We may be unable to achieve or sustain profitability.





We have no ability to control the prices that we may receive for oil and gas.  Oil and gas prices are volatile and a substantial or extended decline in prices could adversely affect our financial condition, liquidity, ability to obtain financing and future operating results.





We have no source of revenue at this time.  Our financial condition is based solely on our ability to sell equity or debt securities to investors or enter into a joint venture or similar strategic relationship with an industry partner, sell interests related to the Concession or borrow funds.  We expect that entering into
these partnering relationships would entail transferring a portion of our interest in the Concession to such partner.  Such investors would consider the price of oil in making an investment decision.  Declines in oil and gas prices may adversely affect our financial condition, liquidity, ability to obtain financing and operating results. Low oil and gas prices also may reduce the amount of oil and gas that we could produce economically. Low oil and gas prices in the future could have a negative
effect on our future financial results.  Historically, oil and gas prices and markets have been volatile, with prices fluctuating widely, and they are likely to continue to be volatile. Prices for oil and gas are subject to wide fluctuations in response to relatively minor changes in supply and demand, market uncertainty and a variety of additional factors that are beyond our control.  These factors include:





·
the level of domestic and foreign supplies of oil;





·
the level of consumer product demand;





·
weather conditions;





·
political conditions in oil producing regions throughout the world;





·
the ability of the members of the Organization of Petroleum Exporting Countries to agree to and maintain oil production;





·
price and production controls;





·
the price of foreign oil imports;





·
actions of governments;





·
domestic and foreign governmental regulations;





·
the price, availability and acceptance of alternative fuels;





·
overall economic conditions; and





·
value of the U.S. dollar.





These factors and the volatile nature of the energy markets make it impossible to predict oil and gas prices. Our inability to respond appropriately to changes in these factors could have a material adverse effect on our business plan, financial position, results of operations and future cash flows.





25


Investment in the oil and gas business is risky and there is no assurance we will be successful in discovering oil and gas.





Oil and gas exploration and development are inherently speculative activities.  There is no certain method to determine whether or not a given lease or concession will produce oil or gas or yield oil or gas in sufficient quantities and quality to result in commercial production.  The development of a lease or concession
may result in dry holes or in the discovery of oil or gas that is not commercially feasible to produce.  There is no guarantee that we may find oil or gas in commercial quantities.  There is no guarantee that a producing asset will continue to produce. Because of the high degree of risk involved, there can be no assurance that we will recover any portion of our investment or that our investment in leases will be profitable.





Drilling activities are subject to numerous risks, including the significant risk that we do not reach our target reservoir or that no commercially productive reserve is encountered.  The cost of drilling, completing and operating wells and of installing production facilities and pipelines is often uncertain.  Drilling
costs could be significantly higher if we encounter difficulty in drilling offshore.





The quantities of oil and gas that we may produce and deliver may be affected by factors beyond our control, such as the inability of the wells to deliver at the necessary quality and pressure, premature exhaustion of reserves, changes in governmental regulations affecting allowable production and priority allocations, weather, natural events,
and price limitations imposed by governmental agencies.  If any of the foregoing risks occurred, our future revenue potential could be substantially reduced.





There are drilling and operational hazards associated with the oil and gas industry which could result in substantial losses.





The oil and gas industry involves a variety of operating risks, including:





·
blowouts, cratering and explosions;





·
mechanical and equipment problems;





·
uncontrolled flows of oil and gas or well fluids;





·
fires;





·
marine hazards with respect to offshore operations;





·
formations with abnormal pressures;





·
pollution and other environmental risks; and





·
natural disasters.





Offshore operations are subject to a variety of operating risks peculiar to the marine environment, such as capsizing and collisions.  Also, offshore operations are subject to damage or loss from adverse weather conditions.





Any of these events could result in loss of human life, significant damage to property, environmental pollution, impairment of our operations and substantial losses. Locating pipelines near populated areas, including residential areas, commercial business centers and industrial sites, could increase these risks. The occurrence of any of these
events could have a material adverse effect on our business plan, financial position, results of operations and future cash flows.





We are subject to governmental regulations of which the cost of compliance may have an adverse effect on our financial condition, results of operations and future cash flow.





Oil and gas operations in Guinea and the U.S. are subject to extensive government regulation and to interruption or termination by governmental authorities on account of ecological and other considerations.  It is impossible to predict future government proposals that might be enacted into law and the effect they might have on us.  Restrictions
on oil and gas activities, such as production restrictions, price controls, tax increases and pollution and environmental controls may have material adverse effect on our financial condition, results of operations and future cash flows.





The oil and gas industry is subject to hazards related to pollution and environmental issues which may create substantial liabilities to third parties.





Hazards in the drilling and/or the operation of gas and oil properties, such as accidental leakage or spillage, are sometimes encountered. Such hazards may cause substantial liabilities to third parties or governmental entities, the payment of which could adversely affect our liquidity or result in the loss of our leases. We may be subject
to liability for pollution and other damages due to environmental events.  Environmental regulatory matters also could increase substantially the cost of doing business, may cause delays in producing oil and gas or require the modification of operations in certain areas.





Our operations are subject to numerous stringent and complex laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. Failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal penalties, the imposition of remedial
requirements, and the imposition of injunctions to force future compliance.





Government regulations may require permits for drilling operations, drilling bonds and reports concerning operations. In addition, there may be statutes, rules and regulations governing conservation matters, including the unitization or pooling of oil and gas properties, establishment of maximum rates of production from oil and gas wells and
the spacing, plugging and abandonment of such wells. Such statutes and regulations may limit the rate at which oil and gas could otherwise be produced from our properties and may restrict the number of wells that may be drilled on a particular lease or in a particular field.





26


Decommissioning costs are unknown and may be substantial; unplanned costs could divert resources from other projects.





We may become responsible for costs associated with abandoning and reclaiming wells, facilities and pipelines which we use for production of oil and gas reserves. Abandonment and reclamation of these facilities and the costs associated therewith is often referred to as “decommissioning.”  We have not yet determined whether
we will establish a cash reserve account for these potential costs in respect of any of our current properties or facilities, or if we will satisfy such costs of decommissioning from the proceeds of production in accordance with the practice generally employed in onshore and offshore oilfield operations. If decommissioning is required before economic depletion of our properties or if our estimates of the costs of decommissioning exceed the value of the reserves remaining at any particular time to cover such decommissioning
costs, we may have to draw on funds from other sources to satisfy such costs. The use of other funds to satisfy such decommissioning costs could impair our ability to focus capital investment in other areas of our business.





The success of our business depends on our ability to find, develop and acquire oil and gas reserves.





We expect to find certain reserves of gas and oil that can be profitably exploited. There is, however, no guarantee that we will find reserves that will economically produce. Future drilling activities could subject us to many risks, including the risk that we will not find commercially productive reservoirs. Drilling for oil and natural gas
can be unprofitable, not only from dry wells, but from productive wells that do not produce sufficient revenues to return a profit. Also, title problems, weather conditions, governmental requirements and shortages or delays in the delivery of equipment and services can delay our drilling operations or result in their cancellation. The cost of drilling, completing and operating wells is often uncertain, and new wells may not be productive. As a result, we may not recover all or any portion of our investment. Moreover,
if natural gas and oil prices decline, the amount of natural gas and oil we can economically produce may be reduced, which may result in a material decline in our revenues, if any.





We may have write downs of our assets due to price volatility.





Accounting rules require us to review the carrying value of our oil and gas properties on a quarterly basis for possible write down or impairment. Under these rules, capitalized costs of proved reserves may not exceed a ceiling calculated at the present value of estimated future net revenues from those proved reserves. Capital costs in excess
of the ceiling must be permanently written down. A decline in oil and natural gas prices could cause a write down and would negatively affect our future income, if any.





The unavailability or high cost of drilling rigs, equipment, supplies, personnel and oilfield services could adversely impact us.





Drilling activity offshore Guinea will require that we have access to an offshore drilling rig. Unavailability, shortages or increases in the cost of drilling rigs, equipment, supplies or personnel could delay or adversely affect our Guinea operations.  There can be no assurance that we will be able to obtain the necessary equipment
or that services will be available at economical prices.





Expansion of our exploration program will require capital from outside sources.





We do not currently have the financial resources nor have we entered into a joint venture or similar strategic relationship with an industry partner to conduct further seismic testing or to drill offshore Guinea.  Absent raising additional capital or entering into a joint venture or similar arrangement, we will not be able to conduct
further seismic testing or to conduct drilling operations offshore Guinea.  There is no assurance that capital will be available in the future to us or that capital will be available under terms acceptable to us. We will need to raise additional money, either through the sale of equity securities (which could dilute the existing stockholders' interest), through the entering of joint venture agreements (which, while limiting our risk, could reduce our ownership interest in the Concession), or from borrowings
from third parties (which could result in our assets being pledged as collateral and which would increase our debt service requirements).





Additional capital could be obtained from a combination of funding sources, many of which could have a material adverse effect on our business, results of operations and financial condition. These potential funding sources, and the potential adverse effects attributable thereto, include:





·
additional offerings of equity securities, which would cause dilution of our common stock;





·
sales of interests in the Concession and exploration program, which would reduce any future revenues from that program;





·
borrowings from financial institutions, which may subject us to certain restrictive covenants, including covenants restricting our ability to raise additional capital or pay dividends;





·
debt offerings, which would increase our leverage and add to our need for cash to service such debt (which could result in additional assets being pledged as collateral and which could increase our debt service requirements); and





·
sales of interests in other projects, which could reduce any future revenues.





It is difficult to quantify the amount of financing we may need to fund our business plan.  The amount of funding we may need in the future depends on various factors such as:





·
our financial position;





·
the prevailing market price of natural gas and oil; and





·
the lead time required to bring any discoveries to production.





Our ability to raise additional capital will depend on the results of operations and the status of various capital and industry markets at the time such additional capital is sought. Capital may not become available to us from any particular source or at all. Even if additional capital becomes available, it may not be on terms acceptable to
us. Failure to obtain additional financing on acceptable terms may have a material adverse effect on our business plan, financial position, results of operations and future cash flows.





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Pending and future claims and litigation may adversely affect our financial condition and results of operations.





We are currently involved in various lawsuits, including a claim involving contractually prohibited short selling, a claim that Hyperdynamics and its Officers and Directors breached their fiduciary duties to shareholders and committed other tortuous acts, a claim that our actions or omissions caused the loss of the Royalty and Production Sharing
Agreement, dated November 8, 2002, and an environmental cleanup case, among other claims more thoroughly described in Item 3 of our Annual Report on Form 10-K for the fiscal year ended June 30, 2009, as amended.  The outcome of litigation is difficult to assess or quantify, and we cannot predict how it will impact us, however the litigation described in Item 3 of our Annual Report on Form 10-K for the fiscal year ended June 30, 2009 could subject us to substantial legal expenses.  If we do
not prevail, we might not have sufficient funds to make payments on our debt or successfully execute our business strategy or have to declare bankruptcy or cease operations.





Drilling new wells could result in new liabilities, which could endanger our interests in our properties and assets.





There are risks associated with the drilling of oil and natural gas wells which could significantly reduce our revenues or cause substantial losses, impairing our future operating results. We may become subject to liability for pollution, blow-outs or other hazards. We intend to obtain insurance with respect to these hazards, but such insurance
has limitations on liability that may not be sufficient to cover the full extent of such liabilities. The payment of such liabilities could reduce the funds available to us or could, in an extreme case, result in a total loss of our properties and assets. Moreover, we may not be able to maintain adequate insurance in the future at rates that are considered reasonable. Oil and natural gas production operations are also subject to all the risks typically associated with such operations, including premature decline
of reservoirs and the invasion of water into producing formations.





We have competition from other companies that have larger financial and other resources that put us at a competitive disadvantage.





A large number of companies and individuals engage in drilling for gas and oil, and there is competition for the most desirable prospects. We will encounter intense competition from other companies and other entities in the sale of our oil and gas production. We could be competing with numerous oil and gas companies which may have financial
resources significantly greater than ours. The quantities of gas and oil to be delivered by us may be affected by factors beyond our control, such as the inability of the wells to deliver at the necessary quality and pressure, premature exhaustion of reserves, changes in governmental regulations affecting allowable production and priority allocations, and price limitations imposed by Federal and state regulatory agencies, as well as foreign governments.





We are highly dependent on our management team and consultants and any failure to retain the services of such parties could adversely affect our ability to effectively manage our operations or successfully execute our business plan.





The successful implementation of our business strategy is highly dependent on our management team and certain key geoscientists, geologists’, engineers and other professionals engaged by us.  The loss of key members of our management team or other highly qualified technical professionals could adversely affect our ability to
effectively manage our overall operations or successfully execute current or future business strategies which may have a material adverse effect on our business, financial condition and operating results.





The current recession could have a material adverse impact on our financial position, results of operations and cash flows.





The oil and gas industry is cyclical in nature and tends to reflect general economic conditions.  The US and other world economies are in a recession that may lead to significant fluctuations in demand and pricing for crude oil and natural gas production.  Our business plan will likely be significantly affected by decreased
demand and lower commodity prices.  If commodity prices continue to decline, there could be impairment of operating assets.  Our future access to capital, as well as that of our contractors, could be limited due to tightening credit markets that could inhibit our business development.





We depend on oil and gas industry vendors and may not be able to obtain adequate services.





We are dependent on industry vendors for the success of our oil and gas exploration projects. We could be harmed if we fail to attract quality industry vendors to participate in our exploration and production activities.





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New investors or commercial partners may require participation interests which could decrease future profitability.





The pace of exploration and the level of operations may be determined by the amount of funding available. If funding is limited, exploration may be continued under agreements that provide investors or commercial partners with a participation interest in a particular property held by us. Under this type of arrangement, an investor or commercial
partner would invest in specific property and receive a negotiated interest in that specific property. This could reduce the potential profitability of the remaining interest in the property and reduce our ability to control and manage the property. We expect that entering into these partnering relationships would entail transferring a portion of our interest in the Concession to such partner.





Dollar versus Euro denomination for oil and gas transactions may impact the value of future oil and gas transactions.





Our financial currency is the U.S. dollar.  Most international oil and gas transactions are currently denominated in U.S. dollars.  There could be a desire by some oil producing nations to denominate the price of oil transactions in Euros.  We do not hedge any market risk.  The Euro has recently increased
in value relative to the dollar.  If we later engage in Euro denominated transactions we could face a foreign currency exchange risk of the Euro decreasing in value relative to the U.S. dollar.





There are material weaknesses in our disclosure controls and procedures and our internal control over financial reporting and existing deficiencies may not be adequately remediated.





A material weakness is a control deficiency, or a combination of control deficiencies, that results in there being more than a remote likelihood that a material misstatement in our financial statements will not be prevented or detected.  We have determined that as of June 30, 2009 and September 30, 2009 that our disclosure controls
and procedures were not effective in ensuring that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is recorded, processed and reported within the time periods specified in the rules and forms of the SEC.





We have also determined as of June 30, 2009 that we have material weaknesses in our internal control over financial reporting and, as a result, our internal control over financial reporting is not effective.  Some of the weaknesses we identified in our internal control over financial reporting relate to our operations in Guinea,
including deficiencies in the Company’s control environment, deficiencies in the staffing of our financial accounting department, and departure of members of financial management. See Item 4T Controls and Procedures in this Quarterly Report on Form 10-Q and Item 9A(T) Controls and Procedures in our Annual Report on Form 10-K for the fiscal year ended June 30, 2009 for further disclosure concerning
our controls and procedures.  These deficiencies increase the likelihood of misstatements in our financial statements or violations of law.





Our internal control and procedures were developed through a process in which our management applied its judgment in assessing the costs and benefits of such internal controls and procedures, which, by their nature, can provide only reasonable assurance regarding the control objectives. The design of any system of internal controls and procedures
is based in part upon various assumptions about the likelihood of future events.  The actions taken to date have not been effective in remediation of the material weaknesses.  We do not know when, or if ever, the material weaknesses will be corrected.  Any failure to remediate the deficiencies noted in connection with our audits or to implement required new or improved controls, or difficulties encountered in their implementation, could cause us to fail to meet our reporting obligations
or result in material misstatements in our financial statements. Ineffective internal control over financial reporting could also cause investors to lose confidence in our reported financial information, which could result in a lower trading price of our stock.





We have an accumulated deficit and expect to incur additional losses.





We have a substantial accumulated deficit. We may not be able to meet our debts as they become due. If we are unable to generate sufficient cash flow or obtain funds to pay debt, we will be in default.





We may experience potential fluctuations in results of operations.





Our future revenues may be affected by a variety of factors, many of which are outside our control, including (a) the success of project results; (b) swings in availability of drilling services needed to implement projects and the pricing of such services; (c) a volatile oil and gas pricing market which may make certain projects that we undertake
uneconomic; (d) our ability to attract qualified employees and consultants; and (e) the amount and timing of operating costs and capital expenditures relating to conducting our business operations and infrastructure. As a result of our limited operating history and the emerging nature of our business plan, it is difficult to forecast revenues or earnings accurately, which may fluctuate significantly from quarter to quarter.





29


NYSE Amex has issued us correspondence that informs us of non-compliance with their listing standards.





As described below in Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities of our Annual Report on Form 10-K, as amended, for the fiscal year ended June 30, 2009, the NYSE Amex has provided us correspondence that indicated
we were not in compliance with the NYSE Amex continued listing requirements base on the NYSE Amex’s review of our Form 10-Q for the quarter ended December 31, 2008.  We submitted a plan to regain compliance with the listing standard, which NYSE Amex accepted.  In a letter dated October 9, 2009, NYSE Amex notified us that, while we remain noncompliant with Section 1003(a)(iv) of the Company Guide, we have made a reasonable demonstration
of our ability to regain compliance with Section 1003(a)(iv) of the Company Guide no later than March 17, 2010, which is a six month extension of the September 17, 2009 compliance date originally established by NYSE Amex in its May 28, 2009 letter approving our plan of compliance.  During this extension period, we will be subject to periodic review by NYSE Amex.  Failure to make progress consistent with our plan of compliance or to regain
compliance with the continued listing standards by the end of the extension period could result in our being delisted from NYSE Amex.  In addition, NYSE Amex notified us that we have resolved the continued listing deficiencies with respect to Sections 1003(a)(ii) and (a)(iii) of the Company Guide, and that, pursuant to Section 1009(f) of the Company Guide, NYSE Amex may initiate delisting
procedures if we do not demonstrate compliance for two consecutive quarters and/or by September 17, 2010. We do not know when the NYSE Amex listing panel will make a decision regarding our listing delinquencies and there is no assurance that we will not be delisted from NYSE Amex.





If we are delisted from the NYSE Amex, it is expected that our common stock would be quoted on the Over-the-Counter Bulletin Board.  Any such delisting from the NYSE Amex, could result in:





·
an increase in the bid-ask spread on the stock;





·
reduced daily stock trading volume;





·
reduction in the number of investors who are interested in trading our stock; and





·
being categorized as a penny stock company because the stock price is below $5.00 per share and the stock is traded on the over the counter market.





In the event we become a penny stock company, FINRA sales practice requirements limit a stockholders' ability to buy and sell our stock.





In the event we become subject to the penny stock rules, there are certain rules that have been adopted by the Financial Industry Regulatory Authority, Inc. (FINRA) to which our common stock will be subject.  FINRA rules require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing
that the investment is suitable for that customer.  Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives, and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. FINRA requirements
make it more difficult for broker-dealers to recommend that their customers buy our common stock, which has the effect of reducing the level of trading activity and liquidity of our common stock.  Further, many brokers charge higher transactional fees for penny stock transactions. As a result, fewer broker-dealers are willing to make a market in our common stock, reducing a stockholders' ability to resell shares of our common stock.





We may issue additional shares of common stock in the future, which could cause dilution to all shareholders.





We may seek to raise additional equity capital in the future. Any issuance of additional shares of our common stock will dilute the percentage ownership interest of all shareholders and may dilute the book value per share of our common stock.





Shareholders could incur negative impact due to the removal of the legend on a significant percentage of our outstanding shares of common stock, or the exercise of options and warrants.





As of November 23, 2009, approximately 16,072,222 shares of our common stock were restricted shares, and we have outstanding warrants and options to purchase approximately 16,284,391 shares of common stock. If these options and warrants are exercised, the underlying shares may become eligible for immediate resale. We do not know when or if
these options will be exercised. In the event that a substantial number of these restricted shares are offered for sale in the market by several holders, the market price of our common stock could be adversely affected.




Our management controls a significant percentage of our current outstanding common stock; their interests may conflict with those of our shareholders.





As of the date of this Quarterly Report on Form 10Q, our Directors and Executive Officers and their affiliates collectively and beneficially own or control approximately 8% of our voting power (including stock, warrants and, options). This concentration of voting control gives our Directors and Executive Officers and their respective affiliates
substantial influence over any matters which require a shareholder vote, including, without limitation, the election of Directors, even if their interests may conflict with those of other shareholders. It could also have the effect of delaying or preventing a change in control of or otherwise discouraging a potential acquirer from attempting to obtain control of us. This could have a material adverse effect on the market price of our common stock or prevent our shareholders from realizing a premium over the then
prevailing market prices for their shares of common stock.





30


Our stock price is highly volatile and you may lose some or all of your investment.





Trading prices of our common stock may fluctuate in response to a number of events and factors, such as:





·
general economic conditions;





·
availability of credit;





·
changes in interest rates;





·
conditions or trends in the oil and gas business;





·
fluctuations in the stock market in general and market prices for oil and gas companies in particular;





·
quarterly variations in our operating results;





·
new products, services, innovations, and strategic developments by our competitors or us, or business;





·
combinations and investments by our competitors or us;





·
changes in environmental regulation;





·
changes in our capital structure, including issuance of additional debt or equity to the public;





·
additions or departures of our key personnel;





·
corporate restructurings, including layoffs or closures of facilities;





·
stock market analyst reports, news and speculation;





·
political turmoil in Guinea; and





·
natural disasters such as hurricane, flooding, earthquake, acts of God.





We do not intend to pay dividends in the foreseeable future; therefore, you may never see a return on your investment.





We do not anticipate the payment of cash dividends on our common stock in the foreseeable future. We anticipate that any profits from our operations will be devoted to our future operations. Any decision to pay dividends will depend upon our profitability at the time, cash available and other factors, and in the sole discretion of our Board
of Directors.





Since we have not paid any dividends on our common stock and do not intend to do so in the future, a purchaser of our common stock will only realize a gain on their investment if the market price of our common stock increases.





We have never paid, and do not intend to pay, any cash dividends on our common Stock for the foreseeable future. The payment of cash dividends in the future, if any, will be at the discretion of our board of directors and will depend upon such factors as restrictions contained in our financing facilities, earnings levels, capital requirements,
our overall financial condition, and any other factors deemed relevant by our board of directors. A purchaser of our common stock, in all likelihood, will only realize a profit on their investment if the market price of our common stock increases in value.





31


Our directors and officers have rights to indemnification.





The Delaware General Corporation Law provides that we will indemnify our directors and officers if they are a party to any civil or criminal action. This may discourage claimants from making claims against the directors and officers even if the claims have merit. The cost of indemnification could be high.





Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.





Sales of substantial amounts of our common stock in the public market could harm the market price of our common stock.





The sale of substantial amounts of our shares (including shares issuable upon exercise of outstanding options and warrants to purchase our common stock) may cause substantial fluctuations in the price of our common stock.  Because investors may be more reluctant to purchase shares of our common stock following substantial sales or
issuances, the sale of shares in this offering could impair our ability to raise capital in the near term.








Item 2. Unregistered Sales of Equity Securities and Use of Proceeds





As partial compensation for legal services rendered, we issued Patton Boggs, LLP 250,000 shares of the Company’s common stock, par value $.001, valued at $0.43 per share for a total market value of $107,500 on July 7, 2009.





This transaction was made in reliance upon exemptions from registration under Section 4(2) of the Securities Act.  Each certificate that may be issued for these unregistered shares of common stock, par value $.001 will contain a legend stating that the securities have not been registered under the Securities Act and setting forth
the restrictions on the transferability and the sale of the securities.  No underwriter participated in, nor did we pay any commissions or fees to any underwriter, in this transaction.  This transaction did not involve a public offering.  The investor was knowledgeable about our operations and financial condition.  The investor had knowledge and experience in financial and business matters that allowed it to evaluate the merits and its risk of receipt of these securities.








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Item 6. Exhibits








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.





33


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:
November 23, 2009





By:
/s/ Jason DavisJason DavisChief Financial OfficerPrincipal Accounting Officer





Dated:
November 23, 2009


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