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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 March 31, 2014

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: 001-32490

HYPERDYNAMICS CORPORATION

(Exact name of registrant as specified in its charter)

12012 Wickchester Lane, # 475

Houston, Texas 77079

(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   x    No   o

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):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)   YES  o    NO   x

As of May 5, 2014, 21,046,591 shares of common stock, $0.001 par value, were outstanding.

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HYPERDYNAMICS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Number of Shares)

(Unaudited)

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

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HYPERDYNAMICS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

(Unaudited)

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

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HYPERDYNAMICS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In Thousands)

(Unaudited)

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

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HYPERDYNAMICS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In Thousands, Except Number of Shares)

(Unaudited)

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

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HYPERDYNAMICS CORPORATION

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the Joint Operating Agreement between SCS, Dana and Tullow (“JOA”) and the SPA. Tullow stated in its notice that the decisions by the DOJ and the SEC to open investigations into Hyperdynamics and SCS’ activities in obtaining and retaining the Concession rights constituted a Force Majeure event under the terms of the PSC, JOA and SPA.  Tullow lifted its declaration of Force Majeure effective May 3, 2014.  Diligent efforts are being made to satisfy the conditions to resuming petroleum operations which include clarification that the investigations of Hyperdynamics will not adversely affect Tullow’s operations under the PSC. We cannot predict the timing or outcome of these efforts.

Our costs related to the items referred to above and any additional expenses, or any negative outcomes, could adversely affect our liquidity and financial condition and results of operations.  We also will be responsible for our participating interest share of costs in excess of $100 million gross costs associated with the ultra-deepwater exploration well when drilled, and such excess well costs could exacerbate our liquidity concerns. Absent cash inflows, we could exhaust our current available liquidity within the next twelve months.  The timing and amount of our cash outflows are dependent on a number of factors including: legal and other professional fees related to the FCPA investigations, a negative outcome related to any of our legal proceedings and investigations, well costs exceeding our carry, or if we have unfavorable well results. As a result, absent cash inflows, there is substantial doubt as to whether we will have adequate capital resources to meet our current obligations as they become due and therefore be able to continue as a going concern. Our ability to meet our current obligations as they become due over the next twelve-months, and to be able to continue exploration, will depend on obtaining additional resources through sales of additional interests in the Concession, equity or debt financings, or through other means, although no assurance can be given that any of these actions can be completed.

Principles of consolidation

The accompanying unaudited consolidated financial statements include the accounts of Hyperdynamics and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States and the rules of the SEC, and should be read in conjunction with the audited financial statements and notes thereto contained in our Annual Report filed with the SEC on Form 10-K for the year ended June 30, 2013. 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, 2013, as reported in the Form 10-K, have been omitted.

Use of estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and expenses at the balance sheet date and for the period then ended. Actual results could differ from these estimates.

Cash and cash equivalents

Cash equivalents are highly liquid investments with an original maturity of three months or less.  We maintain our cash in bank deposit accounts which, at times, exceed the federally insured limits.

Restricted cash

Included in restricted cash at March 31, 2014 is $19.2 million held in escrow which relates to our drilling contract with AGR. Under the terms of the drilling contract, we funded the escrow account for the sole purpose of funding our drilling project as overseen by AGR.

Joint interest receivable and allowance for doubtful accounts

We establish provisions for losses on accounts receivable if we determine that we will not collect all or part of the outstanding balance. Accounts receivable are written down to reflect management’s best estimate or realizability based upon known specific analysis, historical experience, and other currently available evidence of the net collectible amount. There is no allowance for doubtful accounts as of March 31, 2014 or June 30, 2013. At March 31, 2014 we had no receivable balance. At June 30, 2013, all of our accounts receivable balance was related to joint interest billings to Tullow and Dana Petroleum (E&P) Limited (“Dana”), who own 40% and 23% participating interests in the Concession, respectively.

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Securities classified as available-for-sale and held to maturity

Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Marketable equity securities and debt securities not classified as held-to maturity are classified as available-for-sale. Available-for-sale securities are carried at fair value, with unrealized gains and losses, net of tax (if any), reported in other comprehensive income. Realized gains and losses, and declines in value deemed to be other-than-temporary, are included in earnings.

The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in earnings.

Earnings per share

Basic loss per common share has been computed by dividing net loss by the weighted average number of shares of common stock outstanding during each period. In period of earnings, diluted earnings per common share are calculated by dividing net income available to common shareholders by weighted-average common shares outstanding during the period plus weighted-average dilutive potential common shares.  Diluted earnings per share calculations assume, as of the beginning of the period, exercise of stock options and warrants using the treasury stock method.

All potential dilutive securities, including potentially dilutive options, warrants and convertible securities, if any, were excluded from the computation of dilutive net loss per common share for the three and nine month periods ended March 31, 2014 and 2013, respectively, as their effects are antidilutive due to our net loss for those periods.

Stock options to purchase approximately 1.1 million common shares at an average exercise price of $11.28 and warrants to purchase approximately 0.4 million shares of common stock at an average exercise price of $10.40 were outstanding at March 31, 2014. Using the treasury stock method, had we had net income, approximately 68,000 and 41,000 common shares attributable to our outstanding stock options would have been included in the fully diluted earnings per share for the three and nine month period ended March 31, 2014.  There would have been no dilution attributable to our outstanding warrants to purchase common shares. Had we had net income, approximately 21,000 and 7,000 common shares attributable to our outstanding unvested restricted stock awards would have been included in the fully diluted earnings per share for the three and nine month period ended March 31, 2014

Stock options to purchase approximately 1.3 million common shares at an average exercise price of $14.64 and warrants to purchase approximately 1.7 million shares of common stock at an average exercise price of $23.44 were outstanding at March 31, 2013. Using the treasury stock method, had we had net income, approximately 24,000 and 46,000 common shares attributable to our outstanding stock options would have been included in the fully diluted earnings per share for the three and nine month periods ended March 31, 2013.  There would have been no dilution attributable to our outstanding warrants to purchase common shares.

Contingencies

We are subject to legal proceedings, claims and liabilities. We accrue for losses associated with legal claims when such losses are probable and can be reasonably estimated. These accruals are adjusted as additional information becomes available or circumstances change. Legal fees are charged to expense as they are incurred.  See Note 7, Commitments and Contingencies, for more information on legal proceedings.

Financial instruments

The accounting standards (ASC 820, “Fair Value Measurements and Disclosures”) regarding fair value of financial instruments and related fair value measurements define fair value, establish a three-level valuation hierarchy for disclosures of fair value measurement, and enhance disclosure requirements for fair value measures.

The three levels are defined as follows:

·     Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

·     Level 2 - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

·     Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value measurement.

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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 carrying values of cash and cash equivalents, accounts receivable — joint interest and accounts payable approximate fair value. Available-for-sale securities, which consist entirely of Corporate Debt securities, were valued at the closing price reported in the active market in which the security was traded. As of March 31, 2014, there were no remaining investments on hand.

The following table sets forth by level within the fair value hierarchy, our financial assets and liabilities (in thousands) that were accounted for at fair value on a recurring basis as of June 30, 2013:

Foreign currency gains and losses from current operations

In accordance with ASC Topic 830, Foreign Currency Matters , the functional currency of our international subsidiaries is the U.S. Dollar. Gains and losses from foreign currency transactions arising from operating assets and liabilities have not been significant and are included in general, administrative and other operating expense. Net foreign currency transaction gains (losses) were $(0.1) million and $(0.6) million for the three and nine month periods ended March 31, 2014, as compared to $0.3 million and $0.1 million for the three and nine month periods ended March 31, 2013 respectively.

Recently issued or adopted accounting pronouncements

In July 2013, the FASB issued ASU 2013-11,  Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward exists , which requires that an entity present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. ASU 2013-11 eliminates diversity in practice for presentation of an unrecognized tax benefits when such a carryforward is available to reduce the taxable income or tax payable that would result from the disallowance of a tax position. This accounting guidance will be effective for our first quarter in fiscal 2015. We do not expect ASU 2013-11 to have any impact on our financial position or results of operations.

2. INVESTMENT IN OIL AND GAS PROPERTIES

Investment in oil and gas properties consists entirely of our Guinea Concession in offshore West Africa. We owned a 77% participating interest in our Guinea Concession prior to the sale of a 40% gross interest to Tullow which closed on December 31, 2012. We now own a 37% interest in the Concession.

We follow the “Full-Cost” method of accounting for oil and natural gas property and equipment costs. Under this method, internal costs incurred that were directly identified with exploration, development, and acquisition activities undertaken by us for our own account, and which were not related to production, general corporate overhead, or similar activities, were capitalized. For the three and nine month periods ended March 31, 2013, we capitalized $0.5 million and $2.8 million of such costs respectively. Capitalization of internal costs was discontinued April 1, 2013 when Tullow became the operator. Geological and geophysical costs incurred that are directly associated with specific unproved properties are capitalized in “Unproved properties excluded from amortization” and evaluated as part of the total capitalized costs associated with a prospect. The cost of unproved properties not being amortized is assessed to determine whether such properties have been impaired. In determining whether such costs should be impaired, we evaluate current drilling results and available geological and geophysical information.

We exclude capitalized costs of unproved oil and gas properties from amortization until evaluated. Geological and geophysical information pertaining to the Guinea concession was collected and evaluated and no reserves have been attributed to the concession. In February 2012, we completed the drilling of the Sabu-1 well, which was determined to be non-commercial. As a result, we evaluated certain geological and geophysical related costs in unproved properties along with the drilling costs of the Sabu-1 well totaling $116.8 million and determined that these properties were subject to the Full-Cost Ceiling Test. As we have no proved reserves to include in the Full-Cost Ceiling Test, the entire $116.8 million resulted in a Full-Cost Ceiling Test write-down of our unproved oil and gas properties. The net costs associated with properties which remain unproved and unevaluated are excluded from amortization were $21.0 million and $21.2 million as of March 31, 2014 and June 30, 2013, respectively.

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The following table provides detail of total capitalized costs for our Guinea concession as of March 31, 2014 and June 30, 2013 (in thousands):  

During the nine month period ended March 31, 2014, our oil and gas property balance declined by $0.1 million as a result of a credit received from Tullow as a correction of costs previously billed to us. Evaluation activities of these unproved properties are expected to be completed within the next one to three years.

In prior periods we had presented oil and gas properties on the Consolidated Balance Sheets and within this footnote on a gross basis with the impaired properties presented as proved oil and gas properties, then fully amortized after applying the Full-Cost ceiling test, resulting in the net amount of unproved oil and gas properties. In the current period we have revised our disclosures to eliminate any amounts identified as proved oil and gas properties, and have presented the Full-Cost ceiling test write-down directly against the unproved property account. All prior periods presented were conformed to follow the current period presentation.

Sale of Interest to Tullow

On December 31, 2012, our wholly owned subsidiary, SCS, closed a sale to Tullow of a 40% gross interest in the Concession. As consideration, SCS received $27 million from Tullow as reimbursement of past costs of SCS in the Concession and, as additional consideration, Tullow agreed to:  (i) pay SCS’s participating interest share of future costs associated with the drilling of an exploration well in at least 2,000 meters of water in the deepwater fan area of the Concession,  up to a gross expenditure cap of $100 million; and (ii) pay SCS’s share of costs for an appraisal well of the initial exploration well, if drilled, subject to a gross expenditure cap on the appraisal well of $100 million. Tullow is obligated to pay its 40% participating interest share of costs associated with the Concession as of November 20, 2012, the date of execution of the purchase and sale agreement. Tullow began to pay SCS’s costs attributable to the Concession at the commencement of the next exploration period, September 21, 2013.  Tullow will continue to pay SCS’s costs, subject to the gross expenditure cap of $100 million, until 90 days following the date on which the rig contracted to drill the exploration well moves off the well location. We are responsible for our share of any costs exceeding the gross expenditure cap of $100 million on either well. Tullow agreed to use reasonable endeavors to provide for the commencement of drilling of the exploration well not later than April 1, 2014.  The $27 million payment was received by us on December 31, 2012 and was recorded as a reduction in unproved oil and gas properties, net of transaction costs of approximately $3.3 million.

In connection with the transaction, SCS, Tullow and Dana entered into a Joint Operating Agreement Novation and Amendment Agreement reflecting that as a result of the sale to Tullow, the interest of the parties in the Concession are SCS 37%, Dana 23%, and Tullow 40%, and that Tullow will be bound by the PSC and the Joint Operating Agreement previously entered into between SCS and Dana. Tullow will assume all the respective liabilities and obligations of SCS in respect of the assigned 40% interest. SCS and Tullow executed a Deed of Assignment. The Assignment was approved by Guinea’s Ministry of Mines and Geology by issuing an Arrêté on December 27, 2012 which formally authorized our assignment of a participating interest to Tullow. SCS, Dana and Tullow have elected Tullow as the Operator of the Concession beginning April 1, 2013.

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We had no securities classified as held-to-maturity as of March 31, 2014 or June 30, 2013.

At each reporting date, the Company performs an evaluation of debt and equity securities to determine if the unrealized losses are other-than-temporary. As of June 30, 2013 no other-than-temporary impairment losses were recorded with regard to securities.

5. SHARE-BASED COMPENSATION

On February 18, 2010, at our annual meeting of stockholders, stockholders approved the 2010 Equity Incentive Plan (the “2010 Plan”). Prior to the 2010 stockholder meeting, we had two stock award plans: the Stock and Stock Option Plan, which was adopted in 1997 (“1997 Plan”) and the 2008 Restricted Stock Award Plan (“2008 Plan”). In conjunction with the approval of the 2010 Plan at the annual meeting, the 1997 Plan and the 2008 Plan were terminated as of February 18, 2010. Subsequently, on February 17, 2012, the 2010 Plan was amended to increase the maximum shares issuable under the 2010 Plan.

The 2010 Plan provides for the grants of shares of common stock, restricted stock units or incentive stock options and/or nonqualified stock options to purchase our common stock to selected employees, directors, officers, agents, consultants, attorneys, vendors and advisors of ours’ or of any parent or subsidiary thereof. Shares of common stock or restricted stock can only be granted under the 2010 Plan within 10 years from the plan effective date of February 18, 2010. A maximum of 1,250,000 shares are issuable under the 2010 Plan and at March 31, 2014, 531,214 shares remained available for issuance.

The 2010 Plan provides 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, which has substantial discretion to determine which persons, amounts, time, price, exercise terms, and restrictions, if any.

Additionally, from time to time, we issue non-compensatory warrants, such as warrants issued to investors.

Stock Options

The fair value of non-market based options is estimated using the Black-Scholes valuation model. For market based options, the fair value was estimated using a Black-Scholes option pricing model with inputs adjusted for the probability of the vesting criteria being met and the median expected term for each grant as determined by utilizing a Monte Carlo simulation. 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 expect to pay cash dividends on our common stock during the expected term of the options.

The following table provides information about options during the nine months ended March 31, 2014 and 2013:

The following table details the significant assumptions used to compute the fair market values of employee and director stock options granted during the nine months ended March 31, 2014 and 2013:

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Summary information regarding employee and director stock options issued and outstanding under all plans as of March 31, 2014 is as follows:

At March 31, 2014, there was $0.8 million of unrecognized compensation costs related to non-vested share based compensation arrangements granted to employees and directors under the plans, with an amortization period of two to three years.

Restricted Stock

The fair value of restricted stock awards classified as equity awards is based on the Company’s stock price as of the date of grant. During the nine months ended March 31, 2014, we granted restricted stock awards with a fair value of $0.1 million or 21,030 shares. There were no restricted stock awards issued in the nine months ended March 31, 2013. Summary information regarding employee and director restricted stock issued and outstanding under the 2010 Plan as of March 31, 2014 is as follows:

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6. INCOME TAXES

Federal income taxes are not due as we have had losses since inception. Our effective tax rate for the three and nine month periods ended March 31, 2014 and 2013 is zero percent. This rate is lower than the U.S. statutory rate of 35 percent primarily due to the valuation allowance applied against our net deferred tax assets.

7. COMMITMENTS AND CONTINGENCIES

LITIGATION AND OTHER LEGAL MATTERS

From time to time, we and our subsidiaries are involved in disputes. We are unable to predict the outcome of such matters when they arise. We review the status of on-going proceedings and other contingent matters with legal counsel.  Liabilities for such items are recorded if and when it is probable that a liability has been incurred and when the amount of the liability can be reasonably estimated. If we are able to reasonably estimate a range of possible losses, an estimated range of possible loss is disclosed for such matters in excess of the accrued liability, if any. Liabilities are periodically reviewed for adjustments based on additional information.

Shareholder Lawsuits

On April 2, 2012, a lawsuit styled as a class action was filed in the U.S. District Court for the Southern District of Texas against us and our chief executive officer alleging that we made false and misleading statements that artificially inflated our stock prices. The lawsuit alleges, among other things, that we misrepresented the prospects and progress of our drilling operations, including our drilling of the Sabu-1 well and plans to drill the Baraka-1 well off the coast of the Republic of Guinea.  The lawsuit seeks damages based on Sections 10(b) and 20 of the Securities Exchange Act of 1934, although the specific amount of damages is not specified. Although several lead plaintiffs were appointed by the Court and then withdrew from the matter, a lead plaintiff has now been appointed and a scheduling order governing briefing on a motion to dismiss has been entered by the Court.  Pursuant to that order, an amended consolidated complaint in the matter must be filed by May 12, 2014.  Briefing on a motion to dismiss will follow that filing. We have assessed the status of this matter and have concluded that an adverse judgment remains reasonably possible, but not probable. As a result, no provision has been made in the consolidated financial statements. Given the early stage of this dispute, we are unable to estimate a range of possible loss; however, in our opinion, the outcome of this dispute will not have a material effect on our financial condition and results of operations.

Beginning on March 13, 2014, several lawsuits styled as class actions were filed in the U.S. District Court for the Southern District of Texas against us and several officers of the Company alleging that we made false and misleading statements that artificially inflated our stock prices.  The lawsuits allege, among other things, that we misrepresented our compliance with the Foreign Corrupt Practices Act and anti-money laundering statutes and that we lacked adequate internal controls.  The lawsuits seek damages based on Sections 10(b) and 20 of the Securities Exchange Act of 1934, although the specific amount of damages is not specified.  No party has yet made application for lead plaintiff and no lead plaintiff has been selected, nor have the matters yet been consolidated. In addition to these lawsuits, we have received demands from stockholders to inspect our books and records; however, no proceedings have been instituted. We have assessed the status of this matter and have concluded that an adverse judgment remains reasonably possible, but not probable. As a result, no provision has been made in the consolidated financial statements. Given the early stage of these disputes, we are unable to estimate a range of possible loss; however, in our opinion, the outcome of this dispute will not have a material effect on our financial condition and results of operations.

On May 6, 2014, a purported shareholder derivative petition was filed against all of our directors and our current and former chief financial officer in the District Court of Harris County, Texas.  The petition alleges breaches of their fiduciary duty, gross mismanagement, abuse of control, waste and unjust enrichment in connection with potential violations by us of the FCPA.  The plaintiff seeks unspecified damages against these persons and does not request any damages from us.  The plaintiff did not make a demand on our Board of Directors prior to filing the suit.

Iroquois Lawsuit

On May 9, 2012, a lawsuit was filed in the Supreme Court of the State of New York against us and all of our directors. The plaintiffs, five hedge funds that invested in us in early 2012, allege that we breached an agreement with the plaintiffs, and that we and the directors made certain negligent misrepresentations relating to our drilling operations.  Among other claims, the plaintiffs allege that we misrepresented the status of our drilling operations and the speed with which the drilling would be completed.  The plaintiffs advance claims for breach of contract and negligent misrepresentation and seek damages in the amount of $18.5 million plus pre-judgment interest. On July 12, 2012, we and the directors moved to dismiss the suit for failure to state a claim as to all defendants and for lack of personal jurisdiction over the director defendants.  On June 19, 2013, the court dismissed the negligent misrepresentation claim but declined to dismiss the breach of contract claim. The negligent misrepresentation claim was dismissed without prejudice, meaning plaintiffs could attempt to refile it. On August 12, 2013, the plaintiffs filed an amended complaint. That complaint names only us and seeks recovery for alleged breaches of contract. We filed an answer to the plaintiffs’ amended complaint on September 9, 2013, and the court has entered a scheduling order governing pre-trial proceedings in the matter.  The maximum possible loss is the full amount of $18.5 million plus interest accrued thereon until judgment.   We, however, have assessed the status of this matter and have concluded that although an adverse judgment is reasonably possible, it is not probable. As a result, no provision has been made

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in the consolidated financial statements. In our opinion, the outcome of this dispute will not have a material effect on our financial condition and results of operations.

AGR Lawsuit

On June 21, 2012, our wholly-owned subsidiary, SCS, filed suit against AGR following unsuccessful negotiations to address the cost overruns associated with the Sabu-1 well drilled off the coast of the Republic of Guinea. The suit was filed in London, England in the High Court of Justice, Queen’s Bench Division, Technology and Construction Court.  SCS is seeking to recover damages and other relief from AGR for claims of mismanagement of the drilling of the Sabu-1 well and various breaches of contract that resulted in the cost overruns. Among other things, the lawsuit alleges that AGR mismanaged the selection, reconditioning and crew staffing for the Jasper Explorer drilling rig used to drill the Sabu-1 well, mismanaged other subcontractor relationships, failed to seek cost relief from its subcontractors, and failed to return to SCS inventory purchased by SCS but not used in the drilling of Sabu-1 well. On October 1, 2012, AGR filed a defense denying SCS’s allegations and asserting a counterclaim for $22.2 million which AGR alleges to be the outstanding amount owed on the Sabu-1 drilling project, and seeking other unspecified damages and relief, including damages for loss of management time and associated expenses, a full indemnity for a claim brought by Jasper against AGR, and interest on any damages awarded.  SCS filed a reply to AGR’s defense on December 3, 2012 and responded by denying AGR’s counterclaim. At a hearing on May 24, 2013, the Court consolidated this matter with a pending matter between Jasper Drilling Private Limited, the owner of the Jasper Explorer drilling rig, and AGR, and established a pretrial schedule contemplating one trial for both matters in June 2014. Amended pleadings have been filed by all parties to the consolidated matter.  The trial is scheduled to begin on June 9, 2014.

As of March 31, 2014 $19.2 million remains in an escrow account established to fund the well drilling project. As described above, our claim against AGR seeks recovery of monies paid out as a result of AGR’s mismanagement of the project. In addition to the amounts paid, to comply with relevant accounting rules, we have accrued an additional $21.5 million of costs on a gross basis for costs AGR claims are associated with the drilling of the Sabu-1 well. We have not paid these funds to AGR and dispute AGR’s entitlement to these funds. Additionally, AGR holds $8.8 million on a gross basis of excess materials acquired during the drilling of the Sabu-1 well. We dispute AGR’s entitlement to these assets. Finally, an additional amount of $9.5 million on a gross basis or $7.3 million based on the 77% interest we then held is sought by AGR. Because of our claim, and because we dispute the validity of these charges, we have not accrued for this amount. We have assessed the status of AGR’s claims and have concluded that although an adverse judgment is reasonably possible, it is not probable. As a result, no provision for the $9.5 million has been made in the consolidated financial statements. In our opinion, the outcome of this dispute will not have a material adverse effect on our financial condition and results of operations. We incurred approximately $4.8 million in legal and other professional fees associated with the dispute with AGR in the nine month period ended March 31, 2014, and it is likely that we will continue to incur significant expenses in the next several months.

Foreign Corrupt Practices Act Investigations

During September 2013, we received a subpoena from the United States Department of Justice. Subsequently, in January 2014 we received a subpoena from the United States Securities and Exchange Commission. Both subpoenas request that the Company produce documents relating to its business in Guinea.  We understand that the DOJ and SEC are investigating whether our activities in obtaining and retaining the Concession rights and our relationships with charitable organizations potentially violate the U.S. Foreign Corrupt Practices Act or U.S. anti-money laundering statutes.  We have retained legal counsel to represent us in these matters, initiated an internal investigation, and we are cooperating fully with the government.

If violations of the FCPA occurred, we could be subject to fines, civil and criminal penalties, equitable remedies, and injunctive relief.   We could also face fines, sanctions and other penalties from authorities in other jurisdictions that could affect our ability to conduct business operations in those jurisdictions. In addition, disclosure and the pendency of the investigation could adversely affect our reputation and our ability to obtain new business or retain existing business or implement our business plans, to attract and retain employees and to access the capital markets. No amounts have been accrued related to any potential fines, sanctions or other penalties. We cannot currently predict what, if any, actions may be taken by the DOJ, the SEC, the applicable government or other authorities or the effect the actions may have on our results of operations, financial condition, on our financial statements or on our business in Guinea and other jurisdictions. We are unable to predict when the investigations will be completed, what outcome will result or what total costs we will incur in the course of the investigations. We incurred approximately $5.6 million in legal and other professional fees associated with the FCPA investigations in the nine month period ended March 31, 2014, and it is likely that we will continue to incur significant expenses in the next several months.

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COMMITMENTS

Operating Leases

We lease office space under long-term operating leases with varying terms. Most of the operating leases contain renewal and purchase options. We expect that in the normal course of business, the majority of operating leases will be renewed or replaced by other leases.

The following is a schedule by years of minimum future rental payments required under operating leases that have initial or remaining noncancellable lease terms in excess of one year as of March 31, 2014:

Rent expense included in net loss from operations for the three and nine month periods ended March 31, 2014 was $0.1 million and $0.3 million respectively, compared to $0.1 million and $0.3 million for the three and nine month periods ended March 31, 2013.

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Results of Operations

Based on the factors discussed below the net loss attributable to common shareholders for the three months ended March 31, 2014 increased $5.4 million, or 194%, to a net loss of $8.2 million, or $0.39 per share, from a net loss of $2.8 million, or $0.13 per share for the three months ended March 31, 2013. Net loss attributable to common shareholders for the nine months ended March 31, 2014 increased $7.0 million, or 50%, to a net loss of $21.0 million, or $1.00 per share, from a net loss of $14.1 million, or $0.67 per share for the nine months ended March 31, 2013.

Reportable segments

We have one reportable segment: our international operations in Guinea conducted through our subsidiary SCS. SCS is engaged in oil and gas exploration activities pertaining to offshore Guinea.

Three months ended March 31, 2014 Compared to Three Months Ended March 31, 2013

Revenues .  There were no revenues for the three months ended March 31, 2014 and 2013.

Depreciation .   Depreciation on property and equipment decreased 36% or $0.1 million from the fiscal 2013 period to the fiscal 2014 period. Depreciation expense was $0.1 million and $0.2 million in the three months ended March 31, 2014 and 2013, respectively.

General, Administrative and Other Operating Expenses . Our general, administrative and other operating expenses were $8.1 million and $2.7 million for the three months ended March 31, 2014 and 2013, respectively. This represents an increase of 205% or, $5.4 million from the fiscal 2013 period to the fiscal 2014 period. The increase in expense was attributable to an increase in legal and other professional fees of $5.2 million, which can primarily be attributed to legal and other professional fees related to the FCPA investigations ($2.6 million) as well as legal fees related to the AGR lawsuit ($2.4 million). Additionally, we had an increase in foreign currency losses of approximately $0.4 million. Our foreign currency transaction losses are the result of a large balance in accounts payable denominated in foreign currency, primarily associated with our drilling contract with AGR, for which payment has been frozen pending the resolution of our legal dispute with AGR. The current period losses are the result of a weakening of the US Dollar against the British Pound and the Euro.

Loss from Continuing Operations . As a result of the factors discussed above, our loss from operations increased by $5.4 million, from $2.8 million in the three months ended March 31, 2013 to $8.2 million for the three months ended March 31, 2014.

Nine months ended March 31, 2014 Compared to Nine Months Ended March 31, 2013

Revenues .  There were no revenues for the nine months ended March 31, 2014 and 2013.

Depreciation .   Depreciation on property and equipment decreased 38% or $0.2 million from the fiscal 2013 period to the fiscal 2014 period. Depreciation expense was $0.3 million and $0.5 million in the nine months ended March 31, 2014 and 2013, respectively.

General, Administrative and Other Operating Expenses . Our general, administrative and other operating expenses were $20.7 million and $13.1 million for the nine months ended March 31, 2014 and 2013, respectively. This represents an increase of 58% or, $7.6 million from the fiscal 2013 period to the fiscal 2014 period. Included in this increase is a $1.7 million decline in non-cash stock compensation from $2.3 million in the nine months ended March 31, 2013 to $0.6 million in the nine months ended March 31, 2014, which can be attributed to a decline in the amount attributable to vesting options. The remaining $9.3 million increase in expense was attributable to an increase in legal and other professional fees of $9.8 million, which can be attributed to an increase in legal and other professional fees related to the FCPA investigations ($5.6 million) as well as an increase in legal fees related to the AGR lawsuit ($4.6 million), offset by a decrease in other legal costs of $0.4 million. Additionally, we had an increase in foreign currency losses of approximately $0.7 million. Our foreign currency transaction losses are the result of a large balance in accounts payable denominated in foreign currency, primarily associated with our drilling contract with AGR, for which payment has been frozen pending the resolution of our legal dispute with AGR. The current period losses are the result of a weakening of the US Dollar against the British Pound and the Euro. These factors were offset by a decrease in personnel related costs of approximately $0.5 million, which can be attributed to a decline in headcount as a result of fiscal 2013 staff reductions. Additionally, there was a decrease in travel and other office expenditures of approximately $0.3 million primarily as a result of costs incurred to sell an interest in our concession in the prior period.

Full-Cost Ceiling Test Write-Down. We recorded a Full-Cost Ceiling Test write-down of $0.4 million during the nine months ended March 31, 2013. No such write-down was recorded in the current period.

Loss from Continuing Operations . As a result of the factors discussed above, our loss from operations increased by $7.0 million, from $14.1 million in the nine months ended March 31, 2013 to $21.0 million for the nine months ended March 31, 2014.

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Operating Activities

Net cash used in operating activities for the nine months ended March 31, 2014 was $14.2 million compared to $11.2 million for the nine months ended March 31, 2013. The increase in cash used in operating activities is primarily attributable to an increase in net loss, offset by changes in working capital during the period. Both the increase in accounts payable and the increase in net loss can be attributed primarily to the increase in legal and other professional fees associated with the FCPA investigations and the AGR lawsuit.

Investing Activities

Net cash provided by investing activities for the nine months ended March 31, 2014 was $13.8 million compared to $15.3 million in the nine months ended March 31, 2013. The decrease in cash provided from investing activities can be attributed to $23.9 million in net proceeds being received in the prior period in connection with the sale of interest in the Concession to Tullow. This was offset by an increase in cash provided from the disposal of available-for-sale securities. $15.2 million was provided from the disposal of available-for-sale securities in the nine months ended March 31, 2014 as compared to $5.1 million used to purchase available-for-sale securities in the nine months ended March 31, 2013.

Financing Activities

There was net cash provided by financing activities for the nine months ended March 31, 2013 of $0.4 million, whereas there was no cash provided by financing activities during the nine months ended March 31, 2014. This decline in cash provided by financing activities is the result of a decline in stock options exercised.

Liquidity

On March 31, 2014, we had $26.1 million in cash and $19.2 million in restricted cash, which is held in escrow in connection with our drilling contract with AGR. We had $25.7 million in liabilities, which are comprised of current liabilities of $25.6 million, including $20.2 million of liabilities currently pending resolution of our dispute with AGR, and noncurrent liabilities of $0.1 million. We plan to use our existing cash to fund our general corporate needs, our legal and other professional fees and our expenditures associated with the Concession, including our share of future capital expenditures that are not paid by Tullow on our behalf. We have no other material commitments; however, we have incurred significant legal expenses in the nine months ended March 31, 2014, and it is likely that we will continue to incur significant expenses in the next several months.

We have filed suit for monetary damages against AGR following unsuccessful negotiations to address the cost overruns associated with the Sabu-1 well. Payment of the remaining drilling costs is pending resolution of this dispute.  AGR filed a countersuit on October 1, 2012 in which AGR has made claims for additional cost of $9.5 million on a gross basis or $7.3 million based on the 77% interest we then held, which we dispute and have excluded from cost incurred to date. Additionally, AGR holds $8.8 million on a gross basis of excess materials acquired during the drilling of the Sabu-1 well. We dispute AGR’s entitlement to these assets. Resolution of this dispute may result in the recovery of a portion of the costs incurred to date; however, it is possible that the resolution of this dispute may result in additional liability associated with disputed costs as well as additional legal expenses. The trial is scheduled to begin on June 9, 2014. In addition, the court could require a party to pay a portion of the legal fees of the other party. We incurred approximately $4.8 million in legal and other professional fees related to the dispute with AGR in the nine months ended March 31, 2014, and it is likely that we will incur significant expenses for legal and associated costs in the next several months.

Since September 2013, we have received subpoenas from the United States Department of Justice (“DOJ”) and the United States Securities and Exchange Commission (“SEC”) requesting that we produce documents relating to our Concession in Guinea. We are unable to predict the outcome or future cost associated with the AGR case, other legal proceedings and the investigations being conducted by the DOJ and SEC; however, we incurred approximately $5.6 million in legal and other professional fees related to the

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investigations in the nine months ended March 31, 2014, and it is likely that we will incur significant expenses for legal and associated costs in the next several months.

The Consortium sent notice in September 2013 to the Government of Guinea of its intention to renew the second exploration period to September 2016 and the coordinates of the area to be relinquished as required under the PSC. A renewal of the second exploration period by the Minister of Mines and Geology occurs upon application when the work and expenditure obligations from the preceding period have been fulfilled.  There has been no question raised by the Minister or others regarding satisfaction of these conditions.  The second exploration period may be extended for one additional year beyond 2016 to allow the completion of a well in process and for two additional years to allow the completion of the appraisal of any discovery made. Additionally, to satisfy the September 2013-2016 work requirement, one exploration well is required to be drilled, which is to be commenced by the end of September 2016, to a minimum depth of 2,500 meters below seabed.

The Consortium plans to drill an ultra-deepwater exploration well, the timing of which is uncertain. Tullow has agreed to pay our participating interest share of costs associated with an exploration well up to a gross expenditure cap of $100 million. The Consortium currently estimates the well, when drilled, will cost approximately $115 million, which estimate is subject to change. We will be responsible for our 37% interest share of the cost in excess of the $100 million gross carry.

Our costs related to the items referred to above and any additional expenses, or any negative outcomes, could adversely affect our liquidity and financial condition and results of operations.  We also will be responsible for our participating interest share of costs in excess of $100 million gross costs associated with the ultra-deepwater exploration well when drilled, and such excess well costs could exacerbate our liquidity concerns. Absent cash inflows, we could exhaust our current available liquidity within the next twelve months.  The timing and amount of our cash outflows are dependent on a number of factors including: legal and other professional fees related to the FCPA investigations, a negative outcome related to any of our legal proceedings and investigations, well costs exceeding our carry, or if we have unfavorable well results. As a result, absent cash inflows, there is substantial doubt as to whether we will have adequate capital resources to meet our current obligations as they become due and therefore be able to continue as a going concern. Our ability to meet our current obligations as they become due over the next twelve-months, and to be able to continue exploration, will depend on obtaining additional resources through sales of additional interests in the Concession, equity or debt financings, or through other means, although no assurance can be given that any of these actions can be completed.

Capital Expenditures

During the first nine months of fiscal 2014, we received credits for costs previously incurred resulting in a $0.1 million reduction in unproved oil and gas properties, but we expended $1.3 million for previous property additions included in accounts payable as of June 30, 2013. Additionally, during the first nine months of fiscal 2014 $0.1 million was expended for the purchase of property, plant and equipment. This compares to $3.5 million expended on unproved oil and gas properties during the nine months ended March 31, 2013, while $0.05 million was provided from sales of property plant and equipment net of related expenditures.  Fiscal 2013 oil and gas properties expenditures mostly pertained to costs associated with the processing of our most recent 3-D survey.

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controls and procedures. Our disclosure controls and procedures have been designed to provide reasonable assurance of achieving their objectives. Based on the evaluation of our disclosure controls and procedures as of December 31, 2013, our CEO and CFO concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Our management, including the CEO and CFO, identified no change in our internal control over financial reporting that occurred during our fiscal quarter ended March 31, 2014, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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The U.S. Department of Justice (DOJ) and the United States Securities and Exchange Commission (“SEC”) are investigating potential violations of the Foreign Corrupt Practices Act (FCPA) and anti-money laundering statutes.  If an action is commenced or we are found to have violated the FCPA or other legal requirements, our business and financial condition could be adversely affected.

In September 2013 we received a subpoena from the DOJ.   Subsequently, in January 2014 we received a subpoena from the SEC. Both subpoenas request that the Company produce documents relating to its business in Guinea. We understand that they are investigating whether our activities in obtaining and retaining the Concession rights and our relationships with charitable organizations potentially violate the FCPA and anti-money laundering statutes.  We have retained legal counsel to represent us in this matter, and we are fully cooperating with the government. We are unable to predict when the investigations will be completed, what outcome will result or what the total costs we will incur in the course of the investigations.

The DOJ and the SEC have a broad range of criminal and civil sanctions under the FCPA and other laws and regulations, which they may seek against corporations and individuals, including injunctive relief, monetary penalties and compliance programs, based on alleged improper payments and deficiencies in books and records and internal controls.  In addition, the pendency or outcome of the investigations by the SEC and DOJ could subject us to fines, sanctions and other penalties from authorities in other jurisdictions, including, but not limited to, loss or delay of our rights under the PSC, that could affect our ability to conduct business operations in those jurisdictions and materially impact our financial condition and results of operations.

Legal fees and associated costs in connection with legal proceedings and the FCPA investigations will likely be significant in the next several months and are expected to adversely affect our liquidity and financial condition and results of operations.  The pendency of those matters, and the related legal fees and associated costs, could also adversely affect our business relationships.

We are involved in several legal proceedings and FCPA investigations. There are significant uncertainties involved in these matters, and we are unable to predict the length of the FCPA investigations or what outcome will result.   Although we cannot estimate what total costs we will incur in the course of the investigations, it is likely that we will incur significant expenses for legal fees and associated costs in the next several months.  Similarly, certain legal proceedings that we are involved in are in various stages, and it is unknown whether the cases will be dismissed, tried, or otherwise resolved.   The lawsuit we filed against AGR regarding costs overruns associated with our exploration well offshore Guinea, and their counterclaim against us, are currently scheduled to be tried in London, England in June 2014.  We expect our legal fees and associated costs to be significant.   These additional expenses, or a negative result, could adversely affect our liquidity and financial condition and results of operations.  In addition, our ability to conduct business with persons with whom we have business relationships, or with whom we potentially could have business relationships, including potential financing sources, may be adversely affected by the pendency of, and expense related to, these matters, and the uncertain nature of potential outcomes.

Due to expected significant costs in connection with our various legal proceedings and the FCPA investigations, our liquidity and financial condition will be strained.  Liquidity concerns will be exacerbated if costs associated with the drilling of the planned exploration well are greater than $100 million.  In addition, these costs and any negative outcomes could also adversely affect our ability to obtain financing, or to obtain financing on terms advantageous to us.

We expect to continue to incur significant legal fees and associated costs during the next year, which will adversely affect our liquidity and financial condition.  The Consortium has made plans to drill an ultra-deepwater exploration well.  Tullow is responsible for payment of our participating interest share of future costs associated with the drilling of this well up to a gross expenditure cap of $100 million.  The Consortium currently estimates the well will cost approximately $115 million, which estimate is subject to change.  Accurately predicting well costs is difficult to achieve and there will be considerable uncertainty regarding the actual costs to be incurred.  Moreover, budgetary, operating and other risks may be greater for the drilling of an ultra-deepwater well than for a shallower well onshore. Costs in excess of $100 million on the planned exploratory well could exacerbate our liquidity concerns and adversely affect our financial condition and results of operations.

We need additional financing.  We have been successful in obtaining funds through equity financings and the sale of participation interests in our Concession rights.  There can be no assurance that we will be successful in the future.  Costs associated with legal proceedings, FCPA investigations and/or the exploration well, and any negative outcomes, could adversely affect our ability to obtain financing, or to obtain financing on terms advantageous to us.

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The Operator in our Consortium has suspended plans for drilling an exploratory well.  If drilling is not commenced soon, our ability to obtain additional financing and our financial condition will be adversely affected.

On March 11, 2014 Tullow, the Operator in our Consortium, unilaterally asserted its claim that there had been a Force Majeure event under the PSC and suspended plans to drill an exploratory well offshore Guinea. The well was planned to be drilled during the first half of calendar 2014.  Effective May 3, 2014, Tullow provided notice to the Government of Guinea and the other members of the Consortium that Tullow has lifted its declaration of Force Majeure under the PSC and the JOA. Diligent efforts are being made to satisfy the conditions to resuming petroleum operations which includes clarification that the U.S. FCPA investigations of Hyperdynamics will not adversely affect Tullow’s operations under the PSC. However, we cannot predict the timing or outcome of these efforts.   The Concession offshore Guinea is our principal asset, and our ability to obtain additional financing is likely dependent upon the valuation of this asset and prospects for exploration in the Concession area.  If drilling is not commenced soon, our ability to obtain additional financing and our financial condition will be adversely affected, which may impact our ability to conduct exploration. An inability to conduct exploration could result in an impairment of our unproved properties. Unproved properties as of March 31, 2014 were $21.0 million.

Uncertainties and our present capital resources, absent a cash inflow, create substantial doubt we can continue as a going concern.  If we do not obtain additional financing, we could be forced to curtail operations.

Due to uncertainties related to the cost, pendency and ultimate outcome of legal proceedings and FCPA investigations, and the costs and outcome of the ultra-deep water exploration well planned to be drilled by the Consortium, there is substantial doubt about our ability to continue as a going concern.  If we are unable to obtain additional financing, we could be unable to continue exploration and execute our business plan, and we could be forced to curtail operations.

We have received a notice from the New York Stock Exchange (“NYSE”) that we have fallen below its continued listing standards related to average market capitalization and total stockholders’ equity, and we plan to respond with a business plan to demonstrate our ability to regain compliance within 18 months. If our business plan is not accepted by the NYSE, we will be subject to suspension and delisting procedures.

On April 24, 2014, we received a notice from the New York Stock Exchange (the “NYSE”) that we fell below the NYSE’s continued listing standards because our average global market capitalization has been less than $50 million over a consecutive 30 trading-day period, and total stockholders’ equity is less than $50 million.

In accordance with NYSE procedures, we have notified the NYSE that we will submit a business plan within 45 days from receipt of the NYSE notice that demonstrates our ability to regain compliance within 18 months.  Upon receipt of the plan, the NYSE has 45 days to review and determine whether we have made a reasonable demonstration of our ability to come into conformity with the relevant standards within the 18-month period.  The NYSE will either accept the plan, at which time we will be subject to ongoing monitoring for compliance with this plan, or the NYSE will not accept the plan and we will be subject to suspension and delisting proceedings.  If the NYSE accepts the plan, our shares would continue to be listed and traded on the NYSE during the 18-month cure period, subject to compliance with other NYSE continued listing standards, including common stock price criteria.

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