UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
x ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2014
or
o TRANSITION REPORT UNDER 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)
DELAWARE |
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87-0400335 |
(State or other jurisdiction |
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(IRS Employer |
of incorporation or organization) |
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Identification Number) |
12012 Wickchester Lane, #475
Houston, Texas 77079
(Address of principal executive offices, including zip code)
(713) 353-9400
(Issuers telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class |
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Name of Each Exchange on Which Registered |
Common Stock, $0.001 par value |
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NYSE |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act o Yes x No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act o Yes x No
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 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. x Yes o No
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). xYes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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.
Large accelerated filer o |
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Accelerated filer x |
Non-accelerated filer o |
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b-2 of the Exchange Act) o Yes x No
As of December 31, 2013, the aggregate market value of the registrants common stock held by non-affiliates of the registrant was $85,659,625 based on the closing sale price as reported on the NYSE. We had 21,046,591 shares of common stock outstanding on September 8, 2014.
DOCUMENTS INCORPORATED BY REFERENCE
The information required in Part III of this Annual Report on Form 10-K is incorporated by reference from the registrants definitive proxy statement for the registrants Annual Meeting of Shareholders planned to be held on or about December 4, 2014 to be filed pursuant to Regulation 14A no later than 120 days after the end of the registrants fiscal year ended June 30, 2014.
CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION
This Report contains forward-looking statements within the meaning of Section 27 A of the Securities Act of 1933, as amended, and Section 21 E of the Securities Exchange Act of 1934, as amended. 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. Forward-looking statements generally can be identified by the use of forward-looking terminology such as may, will, expect, plan, project, anticipate, estimate, believe, or think. Forward-looking statements involve risks and uncertainties which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. We assume no duty to update or revise our forward-looking statements based on changes in plans or expectations or otherwise.
As used herein, references to Hyperdynamics, Company, we, us, and our refer to Hyperdynamics Corporation and our subsidiaries, including SCS Corporation Ltd (SCS). The rights in the Concession offshore Guinea are held by SCS.
Overview
We are an independent oil and gas exploration company with large prospects in offshore Republic of Guinea (Guinea) in Northwest Africa pursuant to rights granted to us by Guinea (the Concession) under a Hydrocarbon Production Sharing Contract, as amended (PSC). We hold a 37% participating interest in the Concession after selling a 40% gross interest to Tullow Guinea Ltd. (Tullow) in fiscal 2013, and a 23% gross interest to Dana Petroleum, PLC (Dana), a subsidiary of the Korean National Oil Corporation in 2010. Tullow became the Operator of the Concession on April 1, 2013. We refer to Tullow, Dana and us in the Concession as the Consortium.
Pursuant to the Share Purchase Agreement (SPA) between Tullow and us, Tullow agreed to pay all of our participating interest share of expenditures associated with joint operations in the Concession up to a gross expenditure cap of $100 million incurred during the carry period that began on September 21, 2013. From September 2013 until June 30, 2014, costs applied against the $100 million carry were $14.1 million. The timing of the well and the total costs are uncertain. We will be responsible for our 37% interest share of the cost in excess of the remaining gross carry amount. Additionally, Tullow agreed to pay our participating interest share of future costs for the drilling of an appraisal of the initial exploration well, if drilled, up to a gross expenditure cap of $100 million.
The Consortium planned to drill the exploration well in ultra-deepwater in the first half of calendar 2014. On March 11, 2014 Tullow unilaterally asserted its claim that there had been a Force Majeure event under the PSC with the Government of Guinea, the Joint Operating Agreement (JOA) between Dana, Tullow and us and the SPA. Tullow stated in its notice that the decisions by the DOJ and the SEC to open investigations into our activities in obtaining and retaining the Concession rights constituted a Force Majeure event under the terms of the PSC, JOA and SPA. Tullow unilaterally 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 operations under the PSC. We cannot predict the timing or outcome of these efforts.
Since the grant of the Concession, we have conducted 2-dimensional (2D) and 3-dimensional (3D) seismic surveys of a portion of the Concession and drilled one non commercial well completed in February of 2012. The most recent 3D seismic survey covering approximately 4,000 square kilometers in the deeper water portion of the Concession was completed and processed. These results are being used by the Consortium in the planning of the next exploratory well.
Our primary focus is the advancement of exploration work in Guinea. We have no source of operating revenue, and there is no assurance when we will, if ever. We have no operating cash flows, and we will require substantial additional funds, through additional participation arrangements, securities offerings, or through other means, to fulfill our business plans. If we farm-out additional interests in the Concession, our percentage will decrease. Although we have been successful in raising capital and in entering into key participation arrangements with Dana and Tullow, we have no firm commitments for additional capital resources. The terms of any such arrangements, if made, may not be advantageous. Our need for additional funding may also be affected by the uncertainties involved with the planned exploratory well and the FCPA investigations. Costs associated with these matters were significant in the year ended June 30, 2014, and while total costs and outcomes are not currently known, we expect the costs to continue to be substantial.
Our executive offices are located at 12012 Wickchester Lane, Suite 475, Houston, Texas 77079, and our telephone number is (713) 353-9400.
OPERATIONS OFFSHORE GUINEA
The PSC
We have been conducting exploration work related to offshore Guinea since 2002. On September 22, 2006, we entered into the PSC with Guinea. Under that agreement, we were granted certain exclusive contractual rights to explore and exploit offshore oil and gas reserves, if any, off the coast of Guinea. We refer to the rights to the offshore area subject to the Concession as the Contract Area.
On March 25, 2010, we entered into Amendment No. 1 to the PSC with Guinea (the PSC Amendment). In May 2010, the government of Guinea issued a Presidential Decree approving the PSC, as amended by the PSC Amendment. The PSC Amendment clarified that we retained a Contract Area of approximately 25,000 square kilometers, which is approximately equivalent to 9,650 square miles or 30% of the original Contract Area under the PSC. The PSC Amendment required that an additional 25% of the retained Contract Area be relinquished by September 21, 2013 as part of the renewal of the second exploration period. The Contract Area is currently 18,750 square kilometers. Under the terms of the PSC Amendment, the first exploration period ended and the second exploration period began on September 21, 2010. The second exploration period ran until September 2013, at which point it was renewed to September 2016 and may be extended for one additional year 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.
The PSC Amendment required the drilling of an exploration well, which had to be commenced by year-end 2011, and drilled to a minimum depth of 2,500 meters below seabed. This requirement was satisfied with the drilling of the Sabu-1 well which was commenced during October of 2011 and reached the minimum depth of 2,500 meters below the seabed in February of 2012. It also required the acquisition of at least 2,000 square kilometers of 3D seismic data which was satisfied by the 3,600 square kilometer seismic acquisition in 2010-2011. To satisfy the September 2013-2016 work requirement, the Consortium is required to commence drilling of an additional exploration well by the end of September 2016, to a minimum depth of 2,500 meters below seabed. The PSC Amendment requires the expenditure of $15 million on each of the exploration wells ($30 million in the aggregate). Greater than $15 million was spent on the first exploration well, and it is expected the cost of the next exploration well will be significantly greater than $15 million.
Fulfillment of work obligations exempts us from expenditure obligations, and exploration work in excess of minimum work obligations for each exploration period may be carried forward to the following exploration period.
Under the PSC Amendment, Guinea may participate in development of any discovery at a participating interest of up to 15% of costs being carried for its share. The cost of that carry is to be recovered out of 62.5% of Guineas share of cost and profit oil. The PSC Amendment removed the right of first refusal covering the relinquished acreage under the original PSC. The PSC Amendment clarified that only those eligible expenditures, which were made following the date the PSC was signed, on September 22, 2006, are eligible for cost recovery. It requires the establishment of an annual training budget of $200,000 for the benefit of Guineas oil industry personnel, and also obligates the Consortium to pay an annual surface tax of $2.00 per square kilometer on the retained Concession acreage. The PSC Amendment also provides that should the Guinea government note material differences between provisions of the PSC Amendment and international standards or the Petroleum Code, the parties will renegotiate the relevant articles.
In July of 2013, a proposal was submitted for a Second Amendment to the PSC (the Second PSC Amendment) to the Government of Guinea formally adding Tullow as a Contractor to the PSC as well as addressing other administrative issues. The Consortium and the Government of Guinea continue to discuss the proposed terms of the Second PSC Amendment.
Sale of Interest to Dana
On December 4, 2009, we entered into a Sale and Purchase Agreement (SPA) with Dana for Dana to acquire a 23% gross interest in the PSC. On January 28, 2010, we closed on the transaction with Dana, and we entered into an Assignment of Participating Interest (the Assignment), a Deed of Assignment and Joint Operating Agreement (JOA). Pursuant to the Assignment, we assigned to Dana an undivided 23% of our participating interest in the contractual interests, rights, obligations and duties under the PSC. As required by the PSC, the Deed of Assignment was delivered as the necessary notice of the Assignment to be given to the Guinean government. In May 2010, we received an administrative order from the Ministry of Mines and Geology of Guinea, referred to as an arrêté, confirming the Guinea governments approval of the assignment of a 23% participating interest in the PSC to Dana.
Sale of Interest to Tullow
On December 31, 2012, we closed a sale to Tullow of a 40% gross interest in the Concession. As consideration, we received $27 million from Tullow as reimbursement of our past costs in the Concession and, as additional consideration, Tullow agreed to: (i) pay our participating interest share of future costs associated with joint operations in the drilling of an exploration well in at least 2,000 meters of water in the deep water fan area of the Concession, up to a gross expenditure cap of $100 million; and (ii) pay our share of costs associated with an appraisal well of the initial exploration well, if drilled, subject to a gross expenditure cap on the appraisal well of $100 million. Tullow was 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 SPA. Tullow began to pay our costs attributable to the Concession on September 21, 2013, and Tullow will continue to pay our 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. 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.
Tullow agreed in the SPA to use reasonable endeavors to provide for the commencement of drilling of the exploration well not later than April 1, 2014. On March 11, 2014 Tullow unilaterally asserted its claim that there had been a Force Majeure event under the PSC with the Government of Guinea, the Joint Operating Agreement (JOA) between Dana, Tullow and us and the SPA. Tullow stated in its notice that the decisions by the DOJ and the SEC to open investigations into our activities in obtaining and retaining the Concession rights constituted a Force Majeure event under the terms of the PSC, JOA and SPA. Tullow unilaterally 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 operations under the PSC. We cannot predict the timing or outcome of these efforts.
In connection with the transaction, the Consortium entered into a Joint Operating Agreement Novation and Amendment Agreement reflecting that as a result of the sale to Tullow, the interests in the Concession are SCS 37%, Dana 23%, and Tullow 40%. The Amendment also provides for Tullow to be bound by the PSC and the Joint Operating Agreement previously entered into between Dana and us, and for Tullow to assume all our respective liabilities and obligations in respect to the assigned 40% interest. We executed a Deed of Assignment with Tullow. The Assignment was approved by Guineas Ministry of Mines and Geology by issuing an Arrêté on December 27, 2012 which formally authorized our assignment of a participating interest to Tullow. We, Dana and Tullow elected Tullow as the Operator of the Concession beginning April 1, 2013.
Exploration Strategies and Work to Date
Our business plan incorporates a multi-channel approach to exploring and developing our Contract Area under the PSC. We plan to continue to develop and evaluate drilling targets and complete technical work and planning with Tullow and Dana. We have completed the acquisition and processing of the most recent 3D seismic survey covering approximately 4,000 square kilometers on our Contract Area. This most recent 3D survey allows us to study Upper Cretaceous submarine fan structures along the Transform Margin trend of Guinea.
From the inception of our involvement in Guinea beginning in 2002 through June 2009, we accomplished exploration work, including:
· a 1,000 kilometer 2D seismic data shoot, the processing of the seismic data acquired, and the evaluation of that data and data that had been acquired in the past;
· a 4,000 kilometer 2D seismic data shoot, the processing of the seismic data acquired, and the evaluation of that data and data that had been acquired in the past;
· acquisition and geochemical analysis of core samples from the Contract Area and a satellite seeps study;
· third party interpretation and analysis of our seismic data, performed by PGS;
· reconnaissance within Guinea to evaluate drilling infrastructure, support services, and the operating environment;
· a 2,800 kilometer 2D seismic data shoot, the processing of the seismic data acquired, and the evaluation of that data and data that had been acquired in the past;
Since July 2009, we have accomplished critical exploration work, including:
· an oil seep study performed by TDI Brooks;
· a 10,400 kilometer 2D seismic data shoot, the processing of the seismic data acquired, and the evaluation of that data;
· a 3,635 square kilometer 3D seismic data shoot covering the shallower-water portion of the deep water area, and the processing of the seismic data acquired, and the evaluation of that data;
· completion of the drilling of the Sabu-1, an exploratory well, and evaluation of associated core and fluid samples; and
· a 4,000 square kilometer 3D seismic data shoot primarily covering the deeper water area, and the processing and evaluation of the seismic data acquired.
CGG Veritas
The acquisition phase of the most recent 3D seismic survey covering approximately 4,000 square kilometers in the deeper water portion of the Concession (referred to as Survey C) was completed by the CGG Veritas Ocean Endeavor in January 2012. Processing of the most recent 3D data set was completed during the first half of fiscal 2014. The total cost incurred to acquire and process the survey was approximately $27.7 million gross.
AGR Peak Well Management Limited
We contracted with AGR Peak Well Management Limited (AGR) to manage our exploration drilling project in offshore Republic of Guinea and to handle well construction project management services, logistics, tendering and contracting for materials as well as overall management responsibilities for the drilling program. The Sabu-1 well was drilled under this contract. The cost incurred on the Sabu-1 well was significantly higher than expected. On June 21, 2012, we filed suit against AGR following unsuccessful negotiations to address project management that led to cost overruns associated with the Sabu-1 well. On May 16, 2014, we entered into a settlement and release agreement with AGR and Jasper Drilling Private Ltd. (Jasper).
DESCRIPTION OF OIL AND GAS PROPERTIES
The Contract Area is located in the Transform Margin play, offshore Guinea. The Consortium has the exclusive exploration and production rights to explore and develop approximately 25,000 square kilometers in offshore Guinea (see map below) under the Concession. The PSC Amendment required that an additional 25% of the retained Contract Area be relinquished by September 21, 2013. The Contract Area is currently 18,750 square kilometers. The Consortium sent notice to the Government of Guinea and renewed the second exploration period to September 2016. 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.
An exploration well is required to be commenced by the end of September 2016, to a minimum depth of 2,500 meters below seabed to satisfy the September 2013-2016 work requirement. Drilling this deepwater exploration well would satisfy the requirement to drill in the second exploration period. Tullow agreed to pay all of our participating interest share of expenditures associated with joint operations in the Concession up to a gross expenditure cap of $100 million incurred during the carry period that began on September 21, 2013. From September 2013 until June 30, 2014, costs applied against the $100 million carry were $14.1 million. The timing of the well and the total costs are uncertain. We will be responsible for our 37% interest share of the cost in excess of the remaining gross carry amount. Additionally, Tullow agreed to pay our participating interest share of future costs for the drilling of an appraisal of the initial exploration well, if drilled, up to a gross expenditure cap of $100 million.
Our prospects are in an underexplored basin among multiple highly prospective trends with multiple play types: Turbidite fans, 4-way closures and Neocomian-age Carbonates.
Two wells have been drilled in the Contract Area: the GU-2B-1 well (1977) and the Sabu-1 well (2012). The GU-2B-1 well was drilled by another company in 100 meters of water reaching a total depth of 3,353 meters below sea level. Drilling of the Sabu-1 well was finished in February 2012 in 710 meters of water with the Jasper Explorer Drillship reaching a total depth of 3,601 meters below sea level.
The GU-2B-1 well drilled in 1977 demonstrated good Upper Cretaceous shelf reservoirs and source rock. The oil seep and oil slick evaluation done by us in 2009 indicated a working petroleum system with mature Upper Cretaceous marine source. Well data from the Sabu-1 well also confirmed to us the presence of a working petroleum system. Hydrocarbons in fluid inclusions in the rock drilled in the well demonstrate that the well was part of an oil-migration pathway, and oil and gas shows during drilling of the well indicate the presence of hydrocarbons in the upper Cretaceous section. Our well-log interpretations indicated residual oil (noncommercial oil saturations) in a 400-meter section of the Upper Cretaceous. The fluid sampling of Upper Cretaceous intervals did not find movable oil. We believe the Sabu-1 well was not a commercial success because of the lack of a reservoir seal such as marine shales or reservoir-seal pairs needed for a commercial accumulation.
We acquired approximately 18,200 kilometers of 2D seismic and 7,635 square kilometers of 3D seismic (with 4,000 square kilometers acquired during fiscal 2012 in the deepwater portion of the Concession) to evaluate the Concession. The most recent 3D seismic (Survey C), shows thick wedges of sediment that may contain deep water sandstone reservoirs with marine shale seals that may trap significant oil accumulations, similar to recent discoveries by others on trend. We believe the Sabu-1 well results, demonstrating good reservoir and a working petroleum system, reduce the risks associated with the deeper water exploration program and support the possibility of a continuation into Guinea of the oil-prone play along the Equatorial Atlantic margin.
Multiple discoveries have been made by other companies along the Equatorial Atlantic margin (the Transform Margin play), extending from Ghana to Sierra Leone and now possibly into Guinea. In addition, the Central North Atlantic margin of northwest Africa, located to the north, appears to continue southward into offshore Guinea and the northern portion of the PSC. Current industry interest in the Central North Atlantic margin, indicated by active exploration programs along that margin from Mauritania through Senegal and Guinea Bissau, suggests to us additional exploration potential for the northern portion of the Concession.
Reserves Reported To Other Agencies
We have not reported any estimates of proved or probable net oil or gas reserves to any federal authority or agency since July 1, 2008, on producing properties owned in the United States at that time, but subsequently sold in 2009.
Production
We have no producing properties and have had no production during the years covered by the financial statements in this Report.
Delivery Commitments
We have no existing contracts or agreements obligating us to provide a fixed or determinable quantity of oil or gas in the future.
Employees and Independent Contractors
As of September 8, 2014, we have 17 employees, all of whom are based in the United States. We also use independent contractors from time to time for specific projects. No employees are represented by a union.
Competition
Many companies and individuals engage in drilling for gas and oil, and there is competition for the most desirable prospects. We expect to encounter intense competition from other companies and other entities in the sale of our oil and gas. We could be competing with numerous oil and gas companies which may have financial resources significantly greater than ours.
Productive Wells and Acreage; Undeveloped Acreage
We do not have any productive oil or gas wells, and we do not have any developed acres (i.e. acres spaced or assignable to productive wells). The following table sets forth undeveloped acreage that we held as of June 30, 2014:
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Undeveloped Acreage (1)(2) |
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Foreign |
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Gross Acres |
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Net Acres |
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Offshore Guinea |
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4,632,000 |
|
1,713,840 |
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Total |
|
4,632,000 |
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1,713,840 |
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(1) A gross acre is an acre in which a working interest is owned. A net acre is deemed to exist when the sum of fractional ownership working or participation interests in gross acres equals one. The number of net acres is the sum of the fractional working interests owned in gross acres expressed as whole numbers and fractions thereof. Undeveloped acreage is considered to be those leased acres on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of crude oil and natural gas regardless of whether or not such acreage contains proved reserves.
(2) One square mile equals 640 acres. The Contract Area in the Concession is approximately 18,750 square kilometers, or 7,238 square miles. We have a 37% working interest in the Concession.
Drilling Activity
An exploratory well is a well drilled to find and produce crude oil or natural gas in an unproved area, to find a new reservoir in a field previously found to be productive of crude oil or natural gas in another reservoir, or to extend a known reservoir. A development well is a well drilled within the proved area of a crude oil or natural gas reservoir to the depth of a stratigraphic horizon known to be productive.
In October 2011, we commenced drilling operations on the Sabu-1 well. In February 2012, the Sabu-1 exploratory well reached the planned total depth of 3,600 meters.
The following table sets forth the results of our drilling activities during the three years ended June 30, 2014:
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Gross Wells |
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Net Wells |
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Fiscal Year |
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Type of Well |
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Total |
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Producing |
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Dry |
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Total |
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Producing |
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Dry |
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2014 |
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Exploratory - Guinea |
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|
|
|
|
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|
|
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Development - Guinea |
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2013 |
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Exploratory - Guinea |
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|
|
|
|
|
|
|
|
|
|
|
|
|
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Development - Guinea |
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2012 |
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Exploratory - Guinea |
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1 |
|
|
|
1 |
|
0.77 |
|
|
|
0.77 |
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|
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Development - Guinea |
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Geographical Information
The following table sets out long-lived assets associated with Guinea, including our investment in the Concession offshore Guinea as well as fixed assets:
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June 30, |
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June 30, |
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June 30, |
| |||
|
|
2014 |
|
2013 |
|
2012 |
| |||
Long-lived assets related to Guinea |
|
$ |
14,259,000 |
|
$ |
21,174,000 |
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$ |
39,617,000 |
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The seismic data we collected prior to Tullow becoming Operator and our geological and geophysical work product are maintained in our offices in the United States.
Cost of Compliance with Environmental Laws
Environmental laws have not materially hindered nor adversely affected our business. Capital expenditures relating to environmental control facilities have not been prohibitive to our operations. We believe we are in compliance with all applicable environmental laws.
Available Information
We are currently subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the Exchange Act). We file periodic reports, proxy materials and other information with the SEC. In addition, we expect to furnish stockholders with annual reports containing audited financial statements certified by our independent registered public accounting firm and interim reports containing unaudited financial information as may be necessary or desirable. We will provide without charge to each person who receives a copy of this report, upon written or oral request, a copy of any information that is incorporated by reference in this report (not including exhibits to the information that is incorporated by reference unless the exhibits are themselves specifically incorporated by reference). Such request should be directed to: Paolo Amoruso, Secretary, Hyperdynamics Corporation, 12012 Wickchester Lane, Suite 475, Houston, Texas 77079, voice: (713) 353-9400, fax: (713) 353-9421. Our website Internet address is www.hyperdynamics.com.
We provide free of charge on our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable.
Members of the public may read and copy any materials we file with the SEC at the SECs Public Reference Room at 100 F Street, NE, and Washington, DC 20549. Members of the public may obtain information on the operation of the Public Reference Room by calling the SEC at 1800SEC0330. The Internet address of the Commission is www.sec.gov. That website contains reports, proxy and information statements and other information regarding issuers, like Hyperdynamics Corporation, that file electronically with the Commission. Visitors to the Commissions website may access such information by searching the EDGAR database.
An investment in our common stock involves significant risks. Prior to making a decision about investing in common stock, and in consultation with your own financial and legal advisors, you should carefully consider, among other matters, the following risk factors. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently consider immaterial may also inadvertently affect us. If any of the following risks occur, our business, financial condition or results of operations could be materially harmed.
Risks Relating to Our Business and the Industry in Which We Operate.
Our business is dependent on a single exploration asset.
The Concession is currently our single exploration asset. We have been conducting exploration work related to offshore Guinea since 2002, including significant seismic data surveys, processing, evaluations and studies, but we have no reserves and there is no assurance that our exploration work will result in any discoveries or in any commercial success. The PSC requires the drilling of a minimum of one additional exploration well to a minimum depth of 2,500 meters below the seabed at a minimum cost of $15 million by September 21, 2016. The PSC has other work and additional obligations that need to be performed to maintain compliance with the PSC. Failure to comply could subject us to risk of loss of the Concession. In addition, oil and natural gas operations in Africa may be subject to higher political, health and security risks than operations in other areas of the world. Any adverse development affecting our operations such as, but not limited to, the drilling and operational hazards described below, could result in damage to, or destruction of, any wells and producing facilities constructed on the Concession as well as damage to life. As the Concession is our only exploration asset, any adverse development affecting it could have a material adverse effect on our financial position and results of operations.
The U.S. Department of Justice (DOJ) and the U.S. 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 and in January 2014 we received a subpoena from the SEC. Both subpoenas request that the Company produce documents relating to our 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 U.S. anti-money laundering statutes. We are unable to predict when the investigations will be completed, what outcome will result or the total costs we will incur in the course of these 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.
These matters will require the involvement of our senior management that could impinge on the time they have available to devote to other matters relating to our business. Current or additional shareholder lawsuits may result in judgments against us and directors and officers named in those proceedings. We cannot predict at this time the outcome, cost or impact of the government investigations, the shareholder lawsuits, or our own internal investigations and review.
Legal fees and associated costs in connection with legal proceedings and the FCPA investigations will likely continue to be significant 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 the total costs we will incur in the course of the investigations, it is likely that we will continue to incur significant expenses for legal fees and associated costs. 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. 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 Guinea operations, including the operators overhead costs and 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, which will adversely affect our liquidity and financial condition. The Consortium plans to drill an ultra-deepwater exploration well. Tullow is responsible for payment of our participating interest share of costs associated with the overhead and the drilling of this well up to a gross expenditure cap of $100 million. Accurately predicting well costs and timing is difficult to achieve and there will be considerable uncertainty regarding the actual costs to be incurred. Moreover, Tullows delay of the drilling of the exploration well has increased the overhead and other expenditures eroding the $100 million carry. As of June 30, 2014 the Consortium has incurred $14.1 million of costs associated with the carry. Further, when drilling is resumed, budgetary, operating and other risks may be greater for the drilling of an ultra-deepwater well than for a shallower well onshore. Any costs in excess of the $100 million carry could exacerbate our liquidity concerns and adversely affect our financial condition and results of operations.
We will need additional financing. We have been successful in obtaining funds through equity financings and the sale of participation interests in our Concession rights in the past, but there can be no assurance that we will be successful in the future. The FCPA investigations, costs associated with the exploration well and/or with legal proceedings, and any negative outcomes, could adversely affect our ability to obtain financing, or to obtain financing on terms advantageous to us.
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. Effective May 3, 2014, Tullow provided notice to the Government of Guinea and the other members of the Consortium that it has unilaterally 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 operations under the PSC. However, we cannot predict the timing or outcome of these efforts. Continued delays to resume petroleum operations could cause the exploratory well to be postponed beyond 2014 that could have a material adverse effect on our Concession. 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 June 30, 2014 were $14.3 million.
The absence of cash inflows into our company raises substantial doubts about our ability to continue as a going concern as reflected in the opinion of the auditors of our financial statements. If we are not successful in carrying out our plans, we may not be able to continue operations.
Our financial statements have been prepared assuming that we will continue as a going concern. As noted in Note 1 to our financial statements, the absence of cash inflows raises substantial doubt about our ability to continue as a going concern. Our auditors have noted this concern in their opinion on our financial statements. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our plans to address this problem are discussed in Note 1. There can be no assurance that we will be successful in carrying out our plans to obtain additional cash resources. If we are unable to obtain additional cash resources, we may not be able to continue operations.
We have no proved reserves and our exploration program may not yield oil in commercial quantities or quality, or at all.
We have no proved reserves. We have drilled one exploratory well which had non-commercial results. We, and other members of the Consortium, have identified prospects and leads based on seismic and geological information that indicate the potential presence of oil. However, the areas to be drilled may not yield oil in commercial quantities or quality, or at all. Even when properly used and interpreted, 2D and 3D seismic data and visualization techniques are only tools used to assist geoscientists in identifying subsurface structures and hydrocarbon indicators and do not enable the interpreter to know whether hydrocarbons are, in fact, present in those structures. Accordingly, we do not know if any of our prospects will contain oil in sufficient quantities or quality to recover drilling and completion costs or to be economically viable. Even if oil is found in commercial quantities, construction costs of oil pipelines or floating production systems, as applicable, and transportation costs may prevent such leads from being economically viable. If these exploration efforts do not prove to be successful, our business, financial condition and results of operations will be materially adversely affected.
The recent sale of part of our interest in the Concession offshore Guinea improved our liquidity and financial condition, but our capital resources continue to be limited. Our liquidity will be strained if drilling cost estimates are exceeded, and we may need new funding for additional exploration in the Concession, the availability of which is unknown.
We received $27 million in December 2012 at closing of the sale to Tullow of a 40% gross interest in the Concession, which improved our liquidity and financial condition. In addition, Tullow agreed to make payments for our participating share (37%) of the costs in connection with the drilling of a deep water exploration well and, if drilled, an appraisal well in respect of such deep water exploration well. However, for each well there is a gross expenditure cap of $100 million. Drilling in deep water is expensive, and cost overruns often occur. If costs for the initial deep water well, or the appraisal well (if drilled), are greater than the amount agreed to be paid by Tullow, we will be responsible for our share of these costs. Our current capital resources are limited and may not be sufficient.
Additional exploration activity in the Concession, including additional seismic surveys or the drilling of additional wells, would likely require that we obtain additional funding to pay for our share of such costs. We may seek such funding through additional sales of interest in the Concession, from equity or debt financings, or through other means. We have no commitments for additional funding, and if obtained, the terms may not be advantageous to us.
Efforts to attract commercial partners may not be successful and may not be on terms advantageous to us.
We have no source of operating revenue and will likely need to obtain additional resources through sales of additional interests in the Concession, equity or debt financings, or through other means. If we seek to sell additional interests in the Concession, we may not be successful in attracting a commercial partner, or the commercial partner may not have the capital resources or other attributes that are deemed desirable by us. If we enter into an arrangement, the terms may not be advantageous to us. Any such arrangement will likely involve the transfer of a negotiated interest in the Concession, which could reduce the potential profitability of our interest in the Concession.
We may not be able to obtain the additional capital necessary to achieve our business plan.
Our business is capital intensive, and we must invest a significant amount in our activities. We intend to make substantial capital expenditures to find, develop and produce natural gas and oil reserves.
Additional capital could be obtained from a combination of funding sources. The current potential funding sources and the potential adverse effects attributable thereto, include:
· sales or assignments of interests in the Concession and exploration program, which would reduce any future revenues from that program while at the same time offsetting potential expenditures;
· offerings of equity, equity-linked and convertible debt securities, which would dilute the equity interests of our stockholders;
· debt and convertible debt offerings, which would increase our leverage and add to our need for cash to service such debt and which could result in assets being pledged as collateral; and
· borrowings from financial institutions, which may subject us to certain restrictive covenants, including covenants restricting our ability to raise additional capital or pay dividends.
It is difficult to quantify the amount of financing we may need to fund our business plan in the longer term. The amount of funding we may need in the future depends on various factors such as:
· our financial position;
· the cost of exploration and drilling;
· the prevailing market price of natural gas and oil; and
· the lead time required to bring any discoveries to production.
If we do not obtain capital resources in the future it is unlikely that we would be able to continue to pursue exploration offshore Guinea and our financial condition and operations would be adversely affected.
As a result of our recent sale, we do not own a majority interest in the Concession, and we are not the Operator. We have significantly less influence regarding the timing of exploration and development activities, associated budgets and costs, and other operational decisions.
As a result of the sale to Tullow in December 2012, our interest in the Concession was reduced from 77% to 37%. The transfer of operatorship to Tullow was completed in April 2013. The Joint Operating Agreement (JOA) that governs the relationship of the members of the Consortium in the Concession provides significant authority to the Operator. The JOA also requires certain actions to be approved by at least 67% of the interests. We have less ability to influence operations, including the timing of exploration and development activities, the amount of capital expenditures, and other material operating decisions. The reduced ability to influence operations may cause a material adverse effect on our financial condition and results of operations.
The PSC is subject to renegotiation under certain conditions, which may have an adverse impact upon our operations and profitability.
The PSC provides that should the Guinea government note material differences between provisions of the PSC and international standards or the Guinea Petroleum Code, the parties will renegotiate the relevant articles of the PSC. If the Guinea government identifies material differences between the PSCs provisions and international standards or the Guinea Petroleum Code, there is no assurance that we will be able to negotiate an acceptable modification to the PSC. If the parties are not successful in renegotiating the relevant articles of the PSC, the parties may be required to submit the matter to international arbitration. There is no assurance that any arbitration would be successful or otherwise lead to articles that are more favorable to us than the present articles. Therefore, 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, financial position, results of operation and future cash flows.
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.
Our business is dependent on retaining the services of a small number of key personnel of the appropriate caliber as the business develops. Our success is, and will continue to be to a significant extent, dependent upon the expertise and experience of the directors, senior management and certain key personnel, but the retention of their services cannot be guaranteed. 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. If any member of management or director were to leave our company, it may have a material adverse effect on our business, financial condition, results of operations and/or growth prospects.
We have claims and lawsuits against us that may result in adverse outcomes.
We are subject to a variety of claims and lawsuits concerning shareholder claims and other matters. Adverse outcomes in some or all of these claims may result in significant monetary damages or limit our ability to engage in our business activities. While we have director and officer insurance, it may not apply to or fully cover any liabilities we incur as a result of these lawsuits. Although management currently believes resolving all of these matters, individually or in the aggregate, will not have a material adverse impact on our financial statements, the litigation and other claims are subject to inherent uncertainties and managements view of these matters may change in the future. A material adverse impact on our financial statements also could occur for any period it was determined that an unfavorable final outcome is probable and reasonably estimable.
Drilling wells is speculative and potentially hazardous. Actual costs may be more than our estimates, and may not result in any discoveries. The cost of our recently drilled exploratory well was significantly higher than expected.
Exploring for and developing oil reserves involves a high degree of operational and financial risk, which precludes definitive statements as to the time required and costs involved in reaching certain objectives. The budgeted costs of drilling, completing and operating wells are often exceeded. The cost of our recently drilled exploratory well, the Sabu-1, was higher than we initially expected, primarily due to numerous delays and issues related to mechanical and operational matters on the rig, logistical delays resulting from limited port facilities in Guinea, and an expanded well logging program. In addition, oil was not discovered in commercial quantities. Unexpected delays and increases in costs associated with wells drilled in the future, could adversely affect our results of operation, financial position, liquidity and business plans.
Drilling may be unsuccessful for many reasons, including geological conditions, weather, cost overruns, equipment shortages and mechanical difficulties. Exploratory wells bear a much greater risk of loss than development wells. The successful drilling of an oil well may not be indicative of the potential for the development of a commercially viable field and will not necessarily result in a profit on investment. A variety of factors, both geological and market-related, can cause a well to become uneconomic or only marginally economic.
There are 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
· weather conditions and natural disasters.
Offshore operations are subject to a variety of operating risks particular 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.
The site for the next exploratory well the Consortium plans to drill will be in deep water. Deepwater drilling generally requires more time and more advanced drilling technologies than exploration in shallower waters, involving a higher risk of equipment failure and usually higher drilling costs. In addition, there may be production risks of which we are currently unaware. If we participate in the development of new subsea infrastructure and use floating production systems to transport oil from producing wells, these operations may require substantial time for installation or encounter mechanical difficulties and equipment failures that could result in significant liabilities, cost overruns or delays. Furthermore, deepwater operations generally, and operations in West Africa in particular, lack the physical oilfield service infrastructure present in other regions. As a result, a significant amount of time may elapse between a deepwater discovery and the marketing of the associated oil and natural gas, increasing both the financial and operational risks involved with these operations. Because of the lack and high cost of this infrastructure, further discoveries the Consortium may make in Guinea may never be economically producible.
We have no ability to control the prices that we may receive for oil or 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 currently have no source of operating revenue. Our financial condition is based solely on our ability to sell equity or debt securities to investors, enter into an additional joint operating or similar strategic relationship with an industry partner, sell interests related to the Concession or borrow funds. We expect that entering into these joint operating or similar relationships would entail transferring a portion of our interest in the Concession to such partner. Such investors would consider the price of oil and gas 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 and natural disasters;
· 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;
· speculation as to the future price of oil and natural gas and the speculative trading of oil and natural gas futures contracts;
· price and production controls;
· political and economic conditions, including embargoes in oil-producing countries or affecting other oil-producing activities, particularly in the Middle East, Africa, Russia and South America;
· continued threat of terrorism and the impact of military and other action, including U.S. military operations in the Middle East;
· the level of global oil and natural gas exploration and production activity;
· the price of foreign oil imports;
· actions of governments;
· domestic and foreign governmental regulations;
· the price, availability and acceptance of alternative fuels;
· technological advances affecting energy consumption;
· global economic conditions; and
· the value of the U.S. dollar, the Euro and fluctuations in exchange rates generally.
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.
The unavailability or high cost of drilling rigs, equipment, supplies, personnel and oilfield services, as well as gathering systems and processing facilities, and our dependence on the operator and on industry contractors generally, could adversely impact us.
We are dependent on Tullow as the operator and on industry contractors for the success of our oil and gas exploration projects. In particular, our drilling activity offshore of Guinea will require that we have access to offshore drilling rigs and contracts with experienced operators of such rigs. The availability and cost of drilling rigs and other equipment and services, and the skilled personnel required to operate those rigs and equipment is affected by the level and location of drilling activity around the world. An increase in drilling operations worldwide may reduce the availability and increase the cost to us of drilling rigs, other equipment and services, and appropriately experienced drilling contractors. The reduced availability of such equipment and services may delay our ability to discover reserves and higher costs for such equipment and services may increase our costs, both of which may have a material adverse effect on our business, results of operations and future cash flow. If we succeed in constructing oil wells, we may be required to shut them because access to pipelines, gathering systems or processing facilities may be limited or unavailable. If that were to occur, we would be unable to realize revenue from those wells until arrangements were made to deliver the production to market, which could cause a material adverse effect on our results of operations and financial condition.
We are exposed to the failure or non-performance of commercial counterparties.
Our operations will be dependent on certain third parties with whom we have commercial agreements (such as drilling contractors and the parties responsible for transporting and/or storing our production) for our future exploration, development, production, sales or other activities. The efficiency, timeliness and quality of contract performance by third party providers are largely beyond our direct control. If one or more of these third parties fails to meet its contractual obligations to us, or if such services are temporarily or permanently unavailable (for example, as a result of technical problems or industrial action), or not available on commercially acceptable terms, we may experience a material adverse effect on our business, results of operations, financial condition and future cash flow. In addition, as a named party under the PSC, we could be held liable for the environmental, health and safety impacts arising out of the activities of our drilling project management contractor or any other third party service provider contracted by us or on our behalf, which could have a material adverse effect on our business, results of operations and future cash flow.
Participants in the oil and gas industry are subject to numerous laws that can affect the cost, manner or feasibility of doing business.
Exploration and production activities in the oil and gas industry are subject to local laws and regulations. We may be required to make large expenditures to comply with governmental laws and regulations, particularly in respect of the following matters:
· licenses for drilling operations;
· tax increases, including retroactive claims;
· unitization of oil accumulations;
· local content requirements (including the mandatory use of local partners and vendors); and
· environmental requirements and obligations, including investigation and/or remediation activities.
Under these and other laws and regulations, we could be liable for personal injuries, property damage and other types of damages. Failure to comply with these laws and regulations also may result in the suspension or termination of our operations and subject us to administrative, civil and criminal penalties. Moreover, new laws and regulations may be enacted and current laws and regulations could change or their interpretations could change, in ways that could substantially increase our costs. These risks may be higher in the developing countries in which we conduct our operations, where there could be a lack of clarity or lack of consistency in the application of these laws and regulations. Any resulting liabilities, penalties, suspensions or terminations could have a material adverse effect on our financial condition and results of operations.
Furthermore, the explosion and sinking in April 2010 of the Deepwater Horizon oil rig during operations on the Macondo exploration well in the Gulf of Mexico, and the resulting oil spill, may have increased certain of the risks faced by those drilling for oil in deepwater regions, including increased industry standards, governmental regulation and enforcement, and less favorable investor perception of the risk-adjusted benefits of deepwater offshore drilling.
The occurrence of any of these factors, or the continuation thereof, could have a material adverse effect on our business, financial position or future results of operations.
We may not be able to commercialize our interests in any natural gas produced from our Guinea Concession.
The development of the market for natural gas in West Africa is in its early stages. Currently there is no infrastructure to transport and process natural gas on commercial terms in Guinea, and the expenses associated with constructing such infrastructure ourselves may not be commercially viable given local prices currently paid for natural gas. Accordingly, there may be limited or no value derived from any natural gas produced from our Guinea Concession.
Our insurance coverage may be insufficient to cover losses, or we could be subject to uninsured liabilities which could materially affect our business, results of operations or financial condition.
There are circumstances where insurance will not cover the consequences of an event, or where we may become liable for costs incurred in events or incidents against which we either cannot insure or may elect not to have insured (whether on account of prohibitive premium costs or for other commercial reasons). Further, insurance covering certain matters (such as sovereign risk, terrorism and many environmental risks) may not be available to us. Moreover, we may be subject to large excess payments in the event a third party has a valid claim against us, and therefore may not be entitled to recover the full extent of our loss, or may decide that it is not economical to seek to do so. The realization of any significant liabilities in connection with our future activities could have a material adverse effect on our business, results of operations, financial condition and future cash flow.
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, including those arising out of the activities of our third-party contractors. We intend to obtain insurance with respect to certain of these hazards, but such insurance likely will have limitations that may prevent us from recovering the full extent of such liabilities. The payment by us 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, 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 than we do, which puts 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 are likely to face competition from international oil and gas companies, which already may have significant operations in a region, together with potential new entrants into such markets, any of which may have greater financial, technological and other resources than us. There is a high degree of competition for the discovery and acquisition of properties considered to have a commercial potential. We compete with other companies for the acquisition of oil and gas interests, as well as for the recruitment and retention of qualified employees and other personnel.
There can be no assurance that we will be able to continue to compete effectively with other existing oil and gas companies, or any new entrants to the industry. Any failure by us to compete effectively could have a material adverse effect on our business, results of operations, financial condition and future cash flow.
We may incur a variety of costs to engage in future acquisitions, and the anticipated benefits of those acquisitions may never be realized.
As a part of our business strategy, we may make acquisitions of, or significant investments in, other assets, particularly those that would allow us to produce oil and natural gas and generate revenue to fund our exploration activities. Any future acquisitions would be accompanied by risks such as:
· diversion of our managements attention from ongoing business concerns;
· our potential inability to maximize our financial and strategic position through the successful development of the asset or assets acquired;
· impairment of our relationship with our existing employees if we cannot hire employees to staff any new operations and our existing employees are required to staff both old and new operations; and
· maintenance of uniform standards, controls, procedures and policies.
We cannot guarantee that we will be able to successfully integrate any business, products, technologies or personnel that we might acquire in the future, and our failure to do so could harm our business.
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 any actual production.
We do not have reserves nor do we have any reserve 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. Expectations as to oil and gas reserves are uncertain and may vary substantially from any actual production.
Risks Relating to Operating in Guinea
Geopolitical instability where we operate subjects us to political, economic and other uncertainties.
We conduct business in Guinea, which is in a region of the world where there have been recent civil wars, revolutions, coup détats and internecine conflicts. There is the risk of political violence and increased social tension in Guinea as a result of the past political upheaval, and there is a risk of civil unrest, crime and labor unrest at times. In 2010, democratic elections were held, and a president was elected and inaugurated. While these developments indicate that the political situation in Guinea is improving, external or internal political forces potentially could 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 PSC.
Further, we face political and economic risks and other uncertainties with respect to our operations, which may include, among other things:
· loss of future 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 or cancellation 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.
Realization of any of these factors could have a material adverse effect on our business, financial condition, results of operations and/or growth prospects. The Consortiums operations in Guinea also may be adversely affected by laws and policies of multiple jurisdictions.
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 US Foreign Corrupt Practices Act, 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. 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.
We are subject to governmental regulations, the cost of compliance with which may have an adverse effect on our financial condition, results of operations and future cash flow.
Oil and gas operations in Guinea will be subject to 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, future interpretation of existing laws or future amendments to the Guinea Petroleum Code or any other laws, or the effect those new or amended laws or changes in interpretation of existing laws 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 a material adverse effect on our financial condition, results of operations and future cash flows.
Social, economic and health conditions in Guinea may adversely affect our business, results of operation, financial condition and future cash flow.
As all of our potential revenue generating assets are currently located in Guinea, our operations are dependent on the economic and political conditions prevailing in Guinea. Accordingly, we are subject to the risks associated with conducting business in and with a foreign country, including the risks of changes in the countrys laws and policies (including those relating to taxation, royalties, acquisitions, disposals, imports and exports, currency, environmental protection, management of natural resources, exploration and development of mines, labor and safety standards, and historical and cultural preservation). The costs associated with compliance with these laws and regulations are substantial, and possible future laws and regulations as well as changes to existing laws and regulations could impose additional costs on us, require us to incur additional capital expenditures and/or impose restrictions on or suspensions of our operations and delays in the development of our assets.
Further, these laws and regulations may allow government authorities and private parties to bring legal claims based on damages to property and injury to persons resulting from the environmental, health and safety impacts of our past and current operations and could lead to the imposition of substantial fines, penalties or other civil or criminal sanctions. If material, these compliance costs, claims or fines could have a material adverse effect on our business, results of operations, financial condition and/or growth prospects. In addition, Guinea has high levels of poverty, crime, unemployment and an undeveloped health care system.
An Epidemic of the Ebola virus disease is ongoing in West Africa and may adversely affect our business operations and financial condition.
An epidemic of the Ebola virus disease is ongoing in Guinea and other parts of West Africa. More than 1,000 deaths have been reported by the World Health Organization (WHO) in West Africa, and the WHO has declared it a global health emergency. It is impossible to predict the effect and potential spread of the Ebola virus in Guinea or surrounding countries.
Should the Ebola virus continue to spread or not be satisfactorily contained in Guinea or surrounding countries, drilling plans could be delayed, or interrupted after commencement. Any changes to drilling operations could significantly increase costs of operations. The planned drilling activities of the Consortium require access to the Conakry airport and other infrastructure in Guinea. Several countries have announced travel bans to the neighboring countries of Sierra Leone and Liberia. If bans are extended to Guinea, or contractors or personnel refuse to travel there, the Consortium could be adversely affected. If services are obtained, costs associated with those services could be significantly higher than planned which will have a material adverse effect on our business, results of operations, and future cash flow.
The legal and judicial system in Guinea is relatively undeveloped and subject to frequent changes, and we may be exposed to similar risks if we operate in certain other jurisdictions.
Guinea has a less developed legal and judicial system than more established economies which could result in risks such as: (i) effective legal redress in the courts of such jurisdictions, whether in respect of a breach of contract, law or regulation, or in an ownership dispute, being more difficult to obtain; (ii) a higher degree of discretion on the part of Governmental authorities who may be susceptible to corruption; (iii) the lack of judicial or administrative guidance on interpreting applicable rules and regulations; (iv) inconsistencies or conflicts between and within various laws, regulations, decrees, orders and resolutions; or (v) relative inexperience of the judiciary and courts in such matters. In Guinea and certain other jurisdictions, the commitment of local business people, government officials and agencies and the judicial system to abide by legal requirements and negotiated agreements may be more uncertain, creating particular concerns with respect to the Concession or other licenses, permits or approvals required by us for the operation of our business, which may be susceptible to revision or cancellation, and legal redress may be uncertain or delayed. There can be no assurance that joint ventures, licenses, license applications or other legal arrangements will not be adversely affected by the actions of government authorities or others, and the effectiveness of and enforcement of such arrangements in these jurisdictions cannot be assured.
Risks Relating to Our Common Stock
The price of our common stock historically has been volatile. This volatility may affect the price at which you could sell your common stock, and the sale of substantial amounts of our common stock could adversely affect the price of our common stock.
The closing price for our common stock has varied between a high of $6.79 on February 5, 2014 and a low of $1.28 on April 28, 2014 for the fiscal year ended June 30, 2014. On September 8, 2014, the closing price of our common stock was $2.54. This volatility may affect the price at which an investor could sell the common stock, and the sale of substantial amounts of our common stock could adversely affect the price of our common stock. Our stock price is likely to continue to be volatile and subject to significant price and volume fluctuations in response to market and other factors, including the other factors discussed in Risks Relating to Our Business and the Industry in Which We Operate; variations in our quarterly operating results from our expectations or those of securities analysts or investors; downward revisions in securities analysts estimates; and announcement by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments.
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 have responded with a business plan to demonstrate our ability to regain compliance within 18 months.
On April 24, 2014, we received a notice from the New York Stock Exchange (the NYSE) that we fell below the NYSEs 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 submitted a business plan within 45 days from receipt of the NYSE notice to demonstrate our ability to regain compliance within 18 months. The NYSE accepted our plan and our market capitalization has recently exceeded $50 million. We will be subject to ongoing monitoring for compliance with this plan. Our plan, having been accepted by the NYSE, allows our shares to 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.
We may issue additional shares of common stock in the future, which could adversely affect the market price of our shares and cause dilution to existing stockholders.
We may issue additional shares of our common stock in the future which could adversely affect the market price of our shares. Significant sales of shares of our common stock by major stockholders, or the public perception that an offering or sale may occur also could have an adverse effect on the market price of shares of our common stock. Issuance of additional shares of common stock will dilute the percentage ownership interest of the existing stockholders, and may dilute the book value per share of our shares of common stock held by existing stockholders.
Sales of substantial amounts of shares of our common stock in the public market could harm the market price of the shares of common stock.
The sale of substantial amounts of shares of our common stock (including shares issuable upon exercise of outstanding options and warrants to purchase shares) may cause substantial fluctuations in the price of shares 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 an offering could impair our ability to raise capital in the near term.
Delaware law and our charter documents may impede or discourage a takeover, which could adversely impact the market price of our shares.
We are a Delaware corporation, and the anti-takeover provisions of Delaware law impose various impediments to the ability of a third party to acquire control of us, even if a change in control would be beneficial to our existing stockholders. Certain provisions of Delaware law and our certificate of incorporation and bylaws could impede a merger, takeover or other business combination involving us or discourage a potential acquirer from making a tender offer for our common stock, which, under certain circumstances, could reduce the market price of our common stock.
Item 1B. Unresolved Staff Comments
None.
Information on Oil and Gas Properties is included in Item 1. Business above in this Annual Report on Form 10-K.
Our executive and administrative offices are located at 12012 Wickchester Lane, Suite 475, Houston, Texas 77079 where we lease 13,949 square feet of space pursuant to a lease agreement that expires in March 2020.
From time to time, we and our subsidiaries are involved in business disputes. We are unable to predict the outcome of such matters when they arise. Currently pending proceedings, in our opinion, will not have a material adverse effect upon our consolidated financial statements. The following is a description of certain disputes involving us.
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. On May 12, 2014, lead plaintiff filed his amended complaint, and defendants filed their motion to dismiss on July 11, 2014. On August 20, 2014, the lead plaintiff filed a response to our motion to dismiss.
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. On May 12, 2014, a shareholder filed a motion for appointment as lead plaintiff, which remains pending. Also, on May 12, 2014, lead plaintiff in the April 2012 lawsuit described above filed a motion to consolidate the March 2014 cases with the earlier case. The parties await a ruling on the motion to consolidate. In addition to these lawsuits, we have received demands from stockholders to inspect our books and records; however, no proceedings have been instituted.
On May 6, 2014, a purported shareholder derivative petition was filed against all of our directors and our current and a former chief financial officer in the District Court of Harris County, Texas. The petition alleges breaches of their fiduciary duties, 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. Pursuant to an agreement between the parties, the plaintiff is scheduled to file an amended petition on September 16, 2014.
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.
AGR Lawsuit and Settlement
On June 21, 2012, we 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, Queens Bench Division, Technology and Construction Court 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. AGR denied our claims and asserted a counterclaim for $22.2 million for alleged unpaid amounts 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. 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.
On May 16, 2014 we reached a settlement of this litigation that resulted in the release to us of $17.7 million of the $19.2 million in long term restricted cash then held in escrow, and the release to AGR of $6.8 million in excess drilling equipment as part of the settlement. . Our claims and the counterclaims of AGR were released, and the litigation has been terminated. The net proceeds to us were approximately $15.8 million, after reconciliation of the joint interest account with Dana Petroleum, the other working interest holder during the drilling.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Price Range of Common Stock
Shares of our common stock, for the periods presented below, were traded on the NYSE. The following table sets forth the quarterly high and low sales prices per share for our common stock, as reported by the NYSE (adjusted for the 1-for-8 Reverse Stock Split effected on July 1, 2013).
|
|
High |
|
Low |
| ||
Fiscal 2014: |
|
|
|
|
| ||
Fourth Quarter |
|
$ |
4.46 |
|
$ |
1.28 |
|
Third Quarter |
|
6.79 |
|
1.74 |
| ||
Second Quarter |
|
4.38 |
|
3.14 |
| ||
First Quarter |
|
5.18 |
|
3.37 |
| ||
|
|
|
|
|
| ||
Fiscal 2013: |
|
|
|
|
| ||
Fourth Quarter |
|
$ |
5.04 |
|
$ |
3.44 |
|
Third Quarter |
|
5.36 |
|
3.76 |
| ||
Second Quarter |
|
9.44 |
|
4.72 |
| ||
First Quarter |
|
7.44 |
|
5.04 |
|
On September 8, 2014, the last price for our common stock as reported by the NYSE was $2.54 per share, and there were approximately 44 stockholders of record of the common stock.
Dividends
We have not paid, and we do not currently intend to pay in the foreseeable future, cash dividends on our common stock. The current policy of our Board of Directors is to retain all earnings, if any, to provide funds for operation and expansion of our business. The declaration of dividends, if any, will be subject to the discretion of the Board of Directors, which may consider such factors as our results of operations, financial condition, capital needs and acquisition strategy, among others.
Equity Compensation Plan Information
The following table gives aggregate information under all equity compensation plans of Hyperdynamics as of June 30, 2014.
Equity Compensation Plan Information
|
|
Number of Securities |
|
Weighted-Average |
|
Number of Securities |
| |
Plan Category |
|
A |
|
B |
|
C |
| |
Equity compensation plans approved by security holders |
|
1,441,732 |
|
$ |
8.76 |
|
231,324 |
|
Equity compensation plans not approved by security holders |
|
N/A |
|
N/A |
|
N/A |
| |
Total |
|
1,441,732 |
|
$ |
8.76 |
|
231,324 |
|
The Stock and Stock Option Plan (the 1997 Plan) of Hyperdynamics was adopted May 7, 1997 and amended on December 3, 2001, on January 21, 2005, and on February 20, 2008. The total number of shares authorized under the Plan, as amended, was 1,750,000, after giving effect to the 1-for-8 reverse stock split effected on July 1, 2013. The Board terminated the 1997 Plan effective upon stockholder approval of the 2010 Equity Incentive Plan (the 2010 Plan).
Our 2008 Restricted Stock Award Plan (the 2008 Plan) was adopted on February 20, 2008. The total number of shares authorized under the 2008 Plan was 375,000, after giving effect to the 1-for-8 reverse stock split effected on July 1, 2013. The Board terminated the 2008 Plan effective upon stockholder approval of the 2010 Plan.
On February 18, 2010, at our annual meeting of stockholders, the stockholders approved the 2010 Plan. On February 17, 2012 the 2010 Plan was amended to increase issuable shares from 625,000 to 1,250,000, in each case after giving effect to the 1-for-8 reverse stock split effected on July 1, 2013.
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. Shares of common stock, options, or restricted stock can only be granted under the Plan within 10 years from the effective date of February 18, 2010. A maximum of 1,250,000 shares, after giving effect to the 1-for-8 reverse stock split effected on July 1, 2013, are issuable under the 2010 Plan.
The purpose of the Plan is to further our interest, and the interest of our subsidiaries and our stockholders by providing incentives in the form of stock or stock options to key employees, consultants, directors, and vendors who contribute materially to our success and profitability. We believe that our future success will depend in part on our continued ability to attract and retain highly qualified personnel as employees, independent consultants, and directors. The issuance of stock and grants of options will recognize and reward outstanding individual performances and contributions and will give such persons a proprietary interest in us, thus enhancing their personal interest in our continued success and progress. We pay wages, salaries, and consulting rates that we believe are competitive. We use the 2010 Plan to augment our compensation packages.
The following table provides a reconciliation of the securities remaining available for issuance as of June 30, 2014 under the 2010 Plan:
|
|
2010 Plan |
|
Shares available for issuance, June 30, 2013 |
|
345,906 |
|
Stock options granted |
|
(372,086 |
) |
Restricted stock granted |
|
(21,030 |
) |
Previously issued options cancelled or expired |
|
278,534 |
|
Shares available for issuance, June 30, 2014 |
|
231,324 |
|
Stock Performance Chart
The following chart compares the yearly percentage change in the cumulative stockholder return on our common stock from July 1, 2009 to the end of the fiscal year ended June 30, 2014 with the cumulative total return on the (i) NYSE ARCA Oil & Gas Index and (ii) Russell 2000. The comparison assumes $100 was invested on July 1, 2009 in our common stock and in each of the foregoing indices and assumes reinvestment of dividends.
In accordance with the rules and regulations of the SEC, the above stock performance chart shall not be deemed to be soliciting material or to be filed with the SEC or subject to Regulations 14A or 14C of the Securities Exchange Act of 1934 (the Exchange Act) or to the liabilities of Section 18 of the Exchange Act and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except to the extent we specifically incorporate it by reference into such filing.
Item 6. Selected Financial Data
(In thousands, except earnings per |
|
Year ended June 30, |
| |||||||||||||
share data) |
|
2014 |
|
2013 |
|
2012 |
|
2011 |
|
2010 |
| |||||
Revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Full-Cost ceiling test write-down |
|
$ |
|
|
$ |
(441 |
) |
$ |
(116,312 |
) |
$ |
|
|
$ |
|
|
Loss from operations |
|
$ |
(17,123 |
) |
$ |
(18,545 |
) |
$ |
(149,201 |
) |
$ |
(10,869 |
) |
$ |
(8,048 |
) |
Net loss |
|
$ |
(17,117 |
) |
$ |
(18,461 |
) |
$ |
(149,313 |
) |
$ |
(11,238 |
) |
$ |
(8,009 |
) |
Basic loss per common share |
|
$ |
(0.81 |
) |
$ |
(0.88 |
) |
$ |
(7.44 |
) |
$ |
(0.72 |
) |
$ |
(0.75 |
) |
Diluted loss per common share |
|
$ |
(0.81 |
) |
$ |
(0.88 |
) |
$ |
(7.44 |
) |
$ |
(0.72 |
) |
$ |
(0.75 |
) |
Weighted Average Shares Outstanding |
|
21,047 |
|
20,962 |
|
20,086 |
|
15,750 |
|
10,739 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Cash |
|
$ |
35,270 |
|
$ |
26,468 |
|
$ |
37,148 |
|
$ |
79,889 |
|
$ |
26,040 |
|
Oil and Gas Properties |
|
$ |
14,259 |
|
$ |
21,174 |
|
$ |
39,278 |
|
$ |
36,200 |
|
$ |
92 |
|
Total Assets |
|
$ |
50,838 |
|
$ |
84,368 |
|
$ |
102,796 |
|
$ |
192,683 |
|
$ |
27,220 |
|
Long-Term Liabilities |
|
$ |
|
|
$ |
92 |
|
$ |
125 |
|
$ |
138 |
|
$ |
653 |
|
Shareholders Equity |
|
$ |
45,176 |
|
$ |
61,674 |
|
$ |
76,067 |
|
$ |
189,429 |
|
$ |
21,526 |
|
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
Overview
Our corporate mission is to provide energy for the future by exploring for, developing new, and re-establishing pre-existing sources of energy. Our primary focus is the advancement of exploration work in Guinea. We have no source of operating revenue, and there is no assurance when we will, if ever. We have no operating cash flows, and we will require substantial additional funds, through additional participants, securities offerings, or through other means, to fulfill our business plans.
Our operating plan within the next 12 months includes the following:
· Complete selection by the Consortium of the location for a deep water exploration well and commence drilling of the exploration well.
· Consider financing alternatives and other measures to continue to pursue our exploration objectives offshore Guinea.
Analysis of changes in financial position
Our current assets decreased by $7,098,000 from $43,279,000 on June 30, 2013 to $36,181,000 on June 30, 2014. The decrease in current assets is primarily due to cash used for general and administrative expenditures, a large portion of which was incurred on legal matters, and to a lesser extent for capital expenditures. This was offset by cash received as a result of the legal settlement with AGR that previously was in long term restricted cash.
Our long-term assets decreased $26,432,000, from $41,089,000 on June 30, 2013, to $14,657,000 on June 30, 2014. This decrease was primarily due to the settlement of litigation with AGR which resulted in the release to us of $17.7 million of the $19.2 million in long term restricted cash then held in escrow, and the release to AGR of $6.8 million in excess drilling equipment as part of the settlement.
Our current liabilities decreased $16,940,000, from $22,602,000 on June 30, 2013 to $5,662,000 on June 30, 2014. The decrease in current liabilities can be attributed primarily to the release of the $20.2 million in AGR related liabilities upon reaching a settlement of the litigation with AGR. This was offset by an increase in legal related payables as a result of the pending FCPA investigations.
Our long-term liabilities decreased from $92,000 at June 30, 2013, to zero at June 30, 2014, due to the amortization of the remaining deferred rent during the year upon entering into a new office lease agreement in April 2014.
Results of Operations
Based on the factors discussed below, the net loss attributable to common shareholders for the year ended June 30, 2014, decreased $1,344,000, to a net loss of $17,117,000, or $0.81 per share in 2014 from a net loss of $18,461,000, or $0.88 per share in 2013. The net loss attributable to common shareholders for the year ended June 30, 2013, decreased $130,852,000, to a net loss of $18,461,000, or $0.88 per share in 2013 from a net loss of $149,313,000, or $7.44 per share in 2012.
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 Republic of Guinea.
Comparison for Fiscal Year 2014 and 2013
Revenues. There were no revenues for the years ended June 30, 2014 and 2013.
Depreciation. Depreciation decreased 37%, or $230,000, from fiscal 2013 to fiscal 2014. Depreciation expense was $400,000 and $630,000 in the years ended June 30, 2014 and 2013, respectively. The decrease is primarily attributed to assets used in the prior year relating to drilling operations being fully depreciated in the current year.
General, Administrative and Other Operating Expenses. Our general, administrative and other operating expenses were $27.5 million and $17.5 million for the year ended June 30, 2014 and 2013, respectively. This represents an increase of 57% or, $10.0 million from fiscal 2013 to fiscal 2014. Netted in this increase is a $2.4 million decline in non-cash stock compensation from $3.0 million in the year ended June 30, 2013 to $0.5 million in the year ended June 30, 2014, which can be attributed primarily to a decline in the amount attributable to vesting options. The remaining $12.4 million increase in expense was attributable to an increase in legal and other professional fees of $14.3 million, which can be attributed to an increase in legal and other professional fees related to the FCPA investigations ($7.5 million) as well as an increase in legal fees related to the AGR lawsuit ($7.3 million), offset by a decrease in other legal costs of $0.7 million. Additionally, we had an increase in foreign currency losses of approximately $0.7 million. Our foreign currency transaction losses were the result of the large balance in accounts payable denominated in foreign currency held prior to our settlement with AGR, for which payment had been frozen pending the resolution of our legal dispute with AGR. The current year foreign currency transaction losses are the result of a weakening of the US Dollar against the British Pound and the Euro. These factors resulting in increased costs were offset by a decrease in personnel related costs of approximately $1.6 million, which can be attributed to a decline in headcount as a result of fiscal 2013 and 2014 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 year.
Gain on Legal Settlement. We recognized a non-cash gain on legal settlement of $10,734,000 in the year ended June 30, 2014 as a result of the settlement of our legal dispute with AGR. There was no such gain in the year ended June 30, 2013.
Other Income (Expense). Other income (expense) totaled $6,000 and $84,000 for the years ended June 30, 2014 and 2013, respectively. The decrease in other income is primarily the result of the current year interest income being offset by realized losses on available-for-sale securities.
Loss from Continuing Operations. Primarily as a result of the gain on legal settlement of $10,734,000, offset by the increase in general and administrative expenses of $9,983,000, our loss from continuing operations decreased by $1,344,000, from $18,461,000 in the year ended June 30, 2013 to $17,117,000 for the year ended June 30, 2014.
Comparison for Fiscal Year 2013 and 2012
Revenues. There were no revenues for the years ended June 30, 2013 and 2012.
Depreciation. Depreciation decreased 24%, or $197,000, from fiscal 2012 to fiscal 2013. Depreciation expense was $630,000 and $827,000 in the years ended June 30, 2013 and 2012, respectively. The decrease is primarily attributed to assets used in the prior year relating to drilling operations being fully depreciated or sold in the current year.
General, Administrative and Other Operating Expenses. Our general, administrative and other operating expenses were $17,474,000 and $22,062,000 for the years ended June 30, 2013 and 2012, respectively. This represents a decrease of 20.8%, or $4,588,000 from fiscal 2012 to fiscal 2013. Of this decrease, $2,045,000 is attributable to a decrease in non-cash stock compensation from $5,025,000 in fiscal 2012 to $2,980,000 in fiscal 2013 (including $365,000 in non-cash expense associated with an award of common shares associated with a severance agreement in the current year).
The remaining $2,543,000 decrease in expense was primarily attributable to a decrease in costs associated with prospective oil and gas investment opportunities of approximately $3,747,000. Additionally, there was a decrease in travel expenses of approximately $407,000 primarily as a result of the closure of our offices in Guinea and London. This was offset by an increase in employee related costs of $577,000, which is the result of a $1,660,000 increase in severance costs associated with staff reductions offset by a $1,083,000 decrease in recurring payroll expense as a result of the staff reductions. Additionally, there were increases in legal and accounting fees of approximately $569,000, and a decrease in foreign currency transaction gains from current operations in the current year of approximately $568,000. Our foreign currency transaction gains 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 had been frozen pending the resolution of our legal dispute with AGR.
Amortization and Write off of Costs. We fully amortized our proved oil and gas properties of $116,312,000 and wrote off a prospective investment deposit of $10,000,000 during the year ended June 30, 2012. We amortized an additional $441,000 of proved oil and gas properties during the year ended June 30, 2013. These are additional costs recognized during the year ended June 30, 2013 associated with the non-commercial Sabu-1 well. As required by the Full-Cost Accounting rules, we evaluated and moved these costs to proved properties and then fully amortized them through our Full-Cost Ceiling Test.
Other Income (Expense). Other income (expense) totaled $84,000 and $(112,000) for the years ended June 30, 2013 and 2012, respectively. The increase in other income is primarily the result of the reversal to net income of other than temporary impairment of available-for-sale securities of $472,000 during fiscal 2012 while there was no such reversal in the current year. This was offset by a decrease in interest income from 2012 to 2013.
Loss from Continuing Operations. Primarily as a result of the full amortization of proved oil and gas properties and the write off of a prospective investment deposit, which together totaled $126,312,000 in fiscal 2012, and the decrease in selling, general and administrative expenses of $4,588,000 our loss from continuing operations decreased by $130,852,000, from $149,313,000 in the year ended June 30, 2012 to $18,461,000 for the year ended June 30, 2013.
Liquidity and Capital Resources
General
|
|
Year Ended June 30, |
| |||||||
|
|
2014 |
|
2013 |
|
2012 |
| |||
Net cash used in operating activities |
|
$ |
(22,700 |
) |
$(15,617 |
) |
$ |
(12,438 |
) | |
Net cash provided by investing activities |
|
31,502 |
|
4,565 |
|
(59,135 |
) | |||
Net cash provided by financing activities |
|
|
|
372 |
|
28,832 |
| |||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
8,802 |
|
(10,680 |
) |
(42,741 |
) | |||
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR |
|
26,468 |
|
37,148 |
|
79,889 |
| |||
CASH AND CASH EQUIVALENTS AT END OF YEAR |
|
$ |
35,270 |
|
$ |
26,468 |
|
$ |
37,148 |
|
Operating Activities
Net cash used in operating activities for the year ended June 30, 2014 was $22.7 million compared to $15.6 million for the year ended June 30, 2013. The increase in cash used in operating activities is primarily attributable to our increase in General, administrative and other operating expenses which increased from $17.5 million in the prior year to $27.5 million in the current year, mainly the result of an increase in legal and other professional fees of $14.3 million resulting from fees related to the FCPA investigation and the AGR lawsuit.
Investing Activities
Net cash provided by investing activities for the year ended June 30, 2014 was $31.5 million compared to $4.6 million in the year ended June 30, 2013. The increase in cash provided from investing activities can be attributed to proceeds of $15.2 million received from maturing investments in the year ended June 30, 2014 as compared to $15.5 million used to purchase available-for-sale securities in the year ended June 30, 2013. This was combined with the receipt of previously restricted cash received upon legal settlement with AGR. These factors were offset by the $23.7 million in net proceeds being received in the prior year in connection with the sale of interest in the Concession to Tullow.
Financing Activities
There was net cash provided by financing activities for the year ended June 30, 2013 of $0.4 million, whereas there was no cash provided by financing activities during the year ended June 30, 2014. This decline in cash provided by financing activities is the result of a decline in stock options exercised.
Liquidity
On June 30, 2014, we had $35.2 million in cash and $5.7 million in liabilities, all of which are current. 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 carried by Tullow on our behalf. We have no other material commitments; however, we have incurred significant legal expenses in the year ended June 30, 2014, and it is likely that we will continue to incur significant expenses.
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 legal proceedings and the investigations being conducted by the DOJ and SEC. We incurred approximately $7.5 million in legal and other professional fees related to the investigations in the year ended June 30, 2014, and it is likely that we will incur significant expenses for legal and associated costs in the year ending June 30, 2015.
The Consortium sent notice in July 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 and total costs of which are uncertain. Tullow agreed to pay all of our participating interest share of expenditures associated with joint operations in the Concession up to a gross expenditure cap of $100 million incurred during the carry period that began on September 21, 2013. From September 2013 until June 30, 2014, costs applied against the $100 million carry were $14.1 million. We will be responsible for our 37% interest share of the cost in excess of the remaining gross carry amount. Additionally, Tullow agreed to pay SCSs participating interest share of future costs for the drilling of an appraisal of the initial exploration well, if drilled, up to a gross expenditure cap of $100 million.
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 joint operations expenditures, including operator overhead and the ultra-deepwater exploration well when drilled, and such excess expenditures 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.
Contractual Commitments and Obligations
Our subsidiary, SCS, has $350,000 remaining of a contingent note payable due to the former owners of SCS Corporations assets. It is payable in our common stock and it is payable only if SCS has net income in any given quarter. If SCS experiences net income in a quarter, 25% of the income will be paid against the note, until the contingency is satisfied.
Disclosure of Contractual Obligations as of June 30, 2014
|
|
Payments due by period ($thousands) |
| |||||||||||||
Contractual Obligations |
|
Total |
|
Less than 1 |
|
1-3 years |
|
3-5 years |
|
More than 5 |
| |||||
Installment Obligations |
|
$ |
80 |
|
$ |
40 |
|
$ |
40 |
|
$ |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Operating Lease Obligations |
|
2,220 |
|
328 |
|
778 |
|
806 |
|
309 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total (1) |
|
$ |
2,300 |
|
$ |
368 |
|
$ |
818 |
|
$ |
806 |
|
$ |
309 |
|
(1) We are subject to certain commitments under the PSC as discussed in Item 1 above.
CRITICAL ACCOUNTING POLICIES
Our Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those estimates that may have a significant effect on our financial condition and results of operations. Our significant accounting policies are disclosed in Note 1 to our Consolidated Financial Statements. The following discussion of critical accounting policies addresses those policies that are both important to the portrayal of our financial condition and results of operations and require significant judgment and estimates. We base our estimates and judgment on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
Oil and Gas Properties
We account for oil and natural gas producing activities using the full-cost method of accounting as prescribed by the SEC. Accordingly, all costs incurred in the acquisition, exploration, and development of oil and natural gas properties, including the costs of abandoned properties, dry holes, geophysical costs, and annual lease rentals are capitalized. All selling, general and administrative corporate costs unrelated to drilling activities are expensed as incurred. Sales or other dispositions of oil and natural gas properties are accounted for as adjustments to capitalized costs, with no gain or loss recorded unless the ratio of cost to proved reserves would significantly change, or to the extent that the sale proceeds exceed our capitalized costs. Depletion of evaluated oil and natural gas properties is computed on the units of production method based on proved reserves. The net capitalized costs of proved oil and natural gas properties are subject to a full cost ceiling limitation in which the costs are not allowed to exceed their related estimated future net revenues discounted at 10%, net of tax considerations. In accordance with SEC release 33-8995, prices based on the preceding 12-months average price based on closing prices on the first day of each month, or prices defined by existing contractual arrangements, are used in deriving future net revenues discounted at 10%, net of tax. The application of the full-cost method of accounting for oil and gas properties generally results in higher capitalized costs and higher depreciation, depletion and amortization rates compared to the successful efforts method of accounting for oil and gas properties.
Costs Excluded
Costs associated with unevaluated properties are excluded from amortization until evaluated. We review our unevaluated properties at the end of each quarter to determine whether the costs incurred should be transferred to the amortization base.
We assess unproved property on a quarterly basis for possible impairment or reduction in value. We assess properties on an individual basis or as a group if properties are individually insignificant. The assessment includes consideration of the following factors, among others: intent to drill; remaining lease term under our concession; geological and geophysical evaluations; drilling results and activity; the assignment of proved reserves; and the economic viability of development if proved reserves are assigned. We assess our unproved properties on a country-by-country basis. During any period in which these factors indicate impairment, the adjustment is recorded through earnings of the period. At June, 30, 2014, we had $14.3 million of capitalized costs associated with our Guinea operations.
Environmental Obligations and Other Contingencies
Management makes judgments and estimates in accordance with applicable accounting rules when it establishes reserves for environmental remediation, litigation and other contingent matters. Provisions for such matters are charged to expense when it is probable that a liability has been incurred and reasonable estimates of the liability can be made. Estimates of environmental liabilities are based on a variety of matters, including, but not limited to, the stage of investigation, the stage of the remedial design, evaluation of existing remediation technologies, and presently enacted laws and regulations. In future periods, a number of factors could significantly change our estimate of environmental remediation costs, such as changes in laws and regulations, or changes in their interpretation or administration, revisions to the remedial design, unanticipated construction problems, identification of additional areas or volumes of contaminated soil and groundwater, and changes in costs of labor, equipment and technology. Consequently, it is not possible for management to reliably estimate the amount and timing of all future expenditures related to environmental or other contingent matters and actual costs may vary significantly from our estimates.
Fair Value of our debt and equity transactions
Many of our various debt and equity transactions require us to determine the fair value of a debt or equity instrument in order to properly record the transaction in our financial statements. Fair value is generally determined by applying widely acceptable valuation models, (e.g., the Black Scholes and binomial lattice valuation models) using the trading price of the underlying instrument or by comparison to instruments with comparable maturities and terms.
Share-Based Compensation
We follow ASC 718 which requires recognition in the financial statements of the cost of employee services received in exchange for an award of equity instruments over the period the employee is required to perform the services in exchange for the award (presumptively the vesting period). ASC 718 also requires measurement of the cost of employee services received in exchange for an award based on the grant-date fair value of the award. We account for non-employee share-based awards based upon the provisions of ASC 505-50, Equity-Based Payments to Non-Employees.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our functional currency is the US dollar. We had, prior to their closures, some foreign currency exchange rate risk resulting from our in-country offices in Guinea and the United Kingdom and from certain costs in our drilling program. US dollars are accepted in Guinea and many of our purchases and purchase obligations, such as our office lease in Guinea, were denominated in US dollars. However, our costs for labor, supplies, and fuel could have increased if the Guinea Franc, the Euro, or the Pound Sterling significantly appreciated against the US dollar. We did not hedge the exposure to currency rate changes. We do not believe our exposure to market risk to be material.
Item 8. Financial Statements and Supplementary Data
The Financial Statements and Supplementary Data information required hereunder is included in this report as set forth in the Index to Financial Statements on page F-1.
HYPERDYNAMICS CORPORATION
Index to Financial Statements
TABLE OF CONTENTS
REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Hyperdynamics Corporation (the Company or our), including the Companys Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting for the Company as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Companys internal control system was designed to provide reasonable assurance to the Companys management and board of directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.
Internal control over financial reporting includes the controls themselves, monitoring (including internal auditing practices), and actions taken to correct deficiencies as identified.
Internal control over financial reporting has inherent limitations and may not prevent or detect misstatements. The design of an internal control system is also based in part upon assumptions and judgments made by management about the likelihood of future events, and there can be no assurance that an internal control will be effective under all potential future conditions. Therefore, even those systems determined to be effective can provide only reasonable, not absolute, assurance with respect to the financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time.
Management assessed the effectiveness of the Companys internal control over financial reporting as of June 30, 2014. In making this assessment, management used the criteria for internal control over financial reporting described in Internal Control Integrated Framework (1992) by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Managements assessment included an evaluation of the design of the Companys internal control over financial reporting and testing of the operating effectiveness of its internal control over financial reporting. Management reviewed the results of its assessment with the Audit Committee of the Companys Board of Directors. Based on this assessment, management has concluded that, as of June 30, 2014, the Companys internal control over financial reporting was effective.
Hein & Associates LLP, the Companys independent registered public accounting firm, has issued an attestation report on the effectiveness on the Companys internal control over financial reporting as of June 30, 2014 which is included in Item 8. Consolidated Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Board of Directors and Shareholders of
Hyperdynamics Corporation
Houston, Texas
We have audited the internal control over financial reporting of Hyperdynamics Corporation and subsidiaries (the Company) as of June 30, 2014, based on criteria established in Internal Control Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Companys management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed by, or under the supervision of, the companys principal executive and principal financial officers, or persons performing similar functions, and effected by the companys board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2014, based on the criteria established in Internal Control Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended June 30, 2014 of the Company and our report dated September 12, 2014 expressed an unqualified opinion on those consolidated financial statements.
/S/ Hein & Associates LLP
Houston, Texas
September 12, 2014
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Hyperdynamics Corporation
Houston, Texas
We have audited the accompanying consolidated balance sheet of Hyperdynamics Corporation and subsidiaries (the Company) as of June 30, 2014, and the related consolidated statements of operations, comprehensive income (loss), shareholders equity, and cash flows for the year ended June 30, 2014.These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on the financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Hyperdynamics Corporation and subsidiaries as of June 30, 2014, and the results of their operations and their cash flows for the year ended June 30, 2014, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the absence of cash inflows raises substantial doubt about the Companys ability to continue as a going concern. Managements plans in regard to these matters are also discussed in Note 1 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Companys internal control over financial reporting as of June 30, 2014, based on the criteria established in Internal Control Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 12, 2014 expressed an unqualified opinion on the Companys internal control over financial reporting.
/S/ Hein & Associates LLP
Houston, Texas
September 12, 2014
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Hyperdynamics Corporation
Houston, Texas
We have audited the accompanying consolidated balance sheets of Hyperdynamics Corporation and subsidiaries (the Company) as of June 30, 2013, and the related consolidated statements of operations, comprehensive income (loss), shareholders equity, and cash flows for each of the two years in the period ended June 30, 2013. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Hyperdynamics Corporation and subsidiaries as of June 30, 2013, and the results of their operations and their cash flows for each of the two years in the period ended June 30, 2013, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the absence of cash inflows raises substantial doubt about the Companys ability to continue as a going concern. Managements plans in regard to these matters are also discussed in Note 1 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Deloitte & Touche LLP |
|
|
|
Houston, Texas |
|
September 11, 2013 |
|
(September 12, 2014 as to Note 1) |
|
HYPERDYNAMICS CORPORATION
(In Thousands, Except Number of Shares and Per Share Amounts)
|
|
June 30, |
|
June 30, |
| ||
ASSETS |
|
|
|
|
| ||
Current assets: |
|
|
|
|
| ||
Cash and cash equivalents |
|
$ |
35,270 |
|
$ |
26,468 |
|
Available-for-sale securities |
|
|
|
15,383 |
| ||
Accounts receivable joint interest |
|
65 |
|
754 |
| ||
Prepaid expenses |
|
832 |
|
637 |
| ||
Other current assets |
|
14 |
|
37 |
| ||
Total current assets |
|
36,181 |
|
43,279 |
| ||
|
|
|
|
|
| ||
Property and equipment, net of accumulated depreciation of $1,785 and $1,462 |
|
398 |
|
710 |
| ||
Unproved oil and gas properties excluded from amortization (Full-Cost method) |
|
14,259 |
|
21,174 |
| ||
|
|
14,657 |
|
21,884 |
| ||
Other Assets: |
|
|
|
|
| ||
Restricted cash |
|
|
|
19,190 |
| ||
Deposits |
|
|
|
15 |
| ||
Total assets |
|
$ |
50,838 |
|
$ |
84,368 |
|
|
|
|
|
|
| ||
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
| ||
Accounts payable and accrued expenses |
|
$ |
5,662 |
|
$ |
22,602 |
|
Total current liabilities |
|
5,662 |
|
22,602 |
| ||
|
|
|
|
|
| ||
Non-current liabilities |
|
|
|
92 |
| ||
Total liabilities |
|
5,662 |
|
22,694 |
| ||
|
|
|
|
|
| ||
Commitments and contingencies (Note 9) |
|
|
|
|
| ||
|
|
|
|
|
| ||
Shareholders equity: |
|
|
|
|
| ||
Preferred stock, $0.001 par value; 20,000,000 authorized, 0 shares issued and outstanding |
|
|
|
|
| ||
Common stock, $0.001 par value, 43,750,000 shares authorized; 21,046,591 shares issued and outstanding |
|
169 |
|
169 |
| ||
Additional paid-in capital |
|
316,760 |
|
316,235 |
| ||
Accumulated other comprehensive loss |
|
|
|
(94 |
) | ||
Accumulated deficit |
|
(271,753 |
) |
(254,636 |
) | ||
Total shareholders equity |
|
45,176 |
|
61,674 |
| ||
Total liabilities and shareholders equity |
|
$ |
50,838 |
|
$ |
84,368 |
|
The accompanying notes are an integral part of these consolidated financial statements.
HYPERDYNAMICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Number of Shares and Per Share Amounts)
|
|
Year Ended June 30, |
| |||||||
|
|
2014 |
|
2013 |
|
2012 |
| |||
Costs and expenses: |
|
|
|
|
|
|
| |||
Depreciation |
|
$ |
400 |
|
$ |
630 |
|
$ |
827 |
|
General, administrative and other operating |
|
27,457 |
|
17,474 |
|
22,062 |
| |||
Full-Cost ceiling test write-down |
|
|
|
441 |
|
116,312 |
| |||
Write-off of prospective investment deposit |
|
|
|
|
|
10,000 |
| |||
Gain on legal settlement |
|
(10,734 |
) |
|
|
|
| |||
Loss from operations |
|
(17,123 |
) |
(18,545 |
) |
(149,201 |
) | |||
Other income (expense): |
|
|
|
|
|
|
| |||
Other than temporary impairment of securities |
|
|
|
|
|
(472 |
) | |||
Realized gain (loss) on sale of securities |
|
(69 |
) |
|
|
59 |
| |||
Interest income |
|
75 |
|
84 |
|
301 |
| |||
Total other income (expense) |
|
6 |
|
84 |
|
(112 |
) | |||
Loss before income tax |
|
(17,117 |
) |
(18,461 |
) |
(149,313 |
) | |||
Income tax |
|
|
|
|
|
|
| |||
Net loss |
|
$ |
(17,117 |
) |
$ |
(18,461 |
) |
$ |
(149,313 |
) |
|
|
|
|
|
|
|
| |||
Basic and diluted loss per common share |
|
$ |
(0.81 |
) |
$ |
(0.88 |
) |
$ |
(7.44 |
) |
|
|
|
|
|
|
|
| |||
Weighted average shares outstanding basic and diluted |
|
21,046,591 |
|
20,962,096 |
|
20,085,915 |
|
The accompanying notes are an integral part of these consolidated financial statements.
HYPERDYNAMICS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In Thousands)
|
|
Year Ended June 30, |
| |||||||
|
|
2014 |
|
2013 |
|
2012 |
| |||
Net loss |
|
$ |
(17,117 |
) |
$ |
(18,461 |
) |
$ |
(149,313 |
) |
Other comprehensive income (loss): |
|
|
|
|
|
|
| |||
Unrealized gain (loss) on available-for-sale securities |
|
25 |
|
(94 |
) |
(123 |
) | |||
Reclassification adjustment for realized losses included in net loss |
|
69 |
|
|
|
|
| |||
Reclassification of other than temporary impairments of securities included in net loss |
|
|
|
|
|
472 |
| |||
Other comprehensive income (loss) |
|
94 |
|
(94 |
) |
349 |
| |||
Comprehensive loss |
|
$ |
(17,023 |
) |
$ |
(18,555 |
) |
$ |
(148,964 |
) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
HYPERDYNAMICS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(In Thousands, Except Number of Shares)
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
Other |
|
|
| |||||
|
|
Common Stock |
|
Additional Paid- |
|
Accumulated |
|
Comprehensive |
|
|
| |||||||
|
|
Shares |
|
Amount |
|
in Capital |
|
Deficit |
|
Income (Loss) |
|
Total |
| |||||
Balance, July 1, 2011 |
|
19,474,066 |
|
$ |
156 |
|
$ |
276,484 |
|
$ |
(86,862 |
) |
$ |
(349 |
) |
$ |
189,429 |
|
Net loss |
|
|
|
|
|
|
|
(149,313 |
) |
|
|
(149,313 |
) | |||||
Reclassification of other than temporary impairments of securities included in net income |
|
|
|
|
|
|
|
|
|
472 |
|
472 |
| |||||
Unrealized loss on available-for-sale securities |
|
|
|
|
|
|
|
|
|
(123 |
) |
(123 |
) | |||||
Common stock issued for: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Cash |
|
1,250,000 |
|
10 |
|
28,152 |
|
|
|
|
|
28,162 |
| |||||
Exercise of warrants |
|
42,525 |
|
|
|
|
|
|
|
|
|
|
| |||||
Exercise of options |
|
100,625 |
|
1 |
|
669 |
|
|
|
|
|
670 |
| |||||
Amortization of fair value of stock options |
|
|
|
|
|
6,770 |
|
|
|
|
|
6,770 |
| |||||
Balance, June 30, 2012 |
|
20,867,216 |
|
$ |
167 |
|
$ |
312,075 |
|
$ |
(236,175 |
) |
$ |
|
|
$ |
76,067 |
|
Net loss |
|
|
|
|
|
|
|
(18,461 |
) |
|
|
(18,461 |
) | |||||
Unrealized loss on available-for-sale securities |
|
|
|
|
|
|
|
|
|
(94 |
) |
(94 |
) | |||||
Common stock issued for: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Severance |
|
84,375 |
|
1 |
|
364 |
|
|
|
|
|
365 |
| |||||
Exercise of options |
|
95,000 |
|
1 |
|
371 |
|
|
|
|
|
372 |
| |||||
Amortization of fair value of stock options |
|
|
|
|
|
3,425 |
|
|
|
|
|
3,425 |
| |||||
Balance, June 30, 2013 |
|
21,046,591 |
|
$ |
169 |
|
$ |
316,235 |
|
$ |
(254,636 |
) |
$ |
(94 |
) |
$ |
61,674 |
|
Net loss |
|
|
|
|
|
|
|
(17,117 |
) |
|
|
(17,117 |
) | |||||
Unrealized gain on available-for-sale securities |
|
|
|
|
|
|
|
|
|
25 |
|
25 |
| |||||
Reclassification adjustment for realized losses included in net loss |
|
|
|
|
|
|
|
|
|
69 |
|
69 |
| |||||
Amortization of fair value of stock options |
|
|
|
|
|
525 |
|
|
|
|
|
525 |
| |||||
Balance, June 30, 2014 |
|
21,046,591 |
|
$ |
169 |
|
$ |
316,760 |
|
$ |
(271,753 |
) |
$ |
|
|
$ |
45,176 |
|
The accompanying notes are an integral part of these consolidated financial statements.
HYPERDYNAMICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
|
|
Years Ended June 30, |
| |||||||
|
|
2014 |
|
2013 |
|
2012 |
| |||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
| |||
Net loss |
|
$ |
(17,117 |
) |
$ |
(18,461 |
) |
$ |
(149,313 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
| |||
Depreciation |
|
400 |
|
630 |
|
827 |
| |||
Full-Cost ceiling test write-down |
|
|
|
441 |
|
116,312 |
| |||
Write-off of prospective investment deposit |
|
|
|
|
|
10,000 |
| |||
Gain on legal settlement |
|
(10,734 |
) |
|
|
|
| |||
Stock based compensation |
|
525 |
|
2,615 |
|
5,025 |
| |||
Shares issued in severance agreement |
|
|
|
365 |
|
|
| |||
Amortization of premium on short term investments |
|
158 |
|
25 |
|
1,562 |
| |||
Reclassification of other than temporary impairments of securities included in net income |
|
|
|
|
|
472 |
| |||
Unrealized gain (loss) on available-for-sale securities |
|
25 |
|
|
|
(123 |
) | |||
Loss on sale of securities |
|
69 |
|
|
|
|
| |||
Changes in operating assets and liabilities: |
|
|
|
|
|
|
| |||
(Increase) decrease in Accounts receivable - joint interest |
|
689 |
|
509 |
|
(555 |
) | |||
(Increase) decrease in Prepaid expenses |
|
(195 |
) |
116 |
|
(51 |
) | |||
(Increase) decrease in Other current assets |
|
38 |
|
3,538 |
|
(3,410 |
) | |||
Increase (decrease) in Accounts payable and accrued expenses |
|
3,534 |
|
(5,362 |
) |
6,829 |
| |||
Decrease in Other liabilities |
|
(92 |
) |
(33 |
) |
(13 |
) | |||
Net cash used in operating activities |
|
(22,700 |
) |
(15,617 |
) |
(12,438 |
) | |||
|
|
|
|
|
|
|
| |||
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
| |||
(Purchase) sale of property and equipment |
|
(89 |
) |
49 |
|
(1,075 |
) | |||
Investment in oil and gas properties |
|
(1,333 |
) |
(3,650 |
) |
(100,986 |
) | |||
Prospective investment deposit |
|
|
|
|
|
(10,000 |
) | |||
Decrease (Increase) in restricted cash |
|
17,699 |
|
|
|
(880 |
) | |||
Proceeds from sale of interest in unevaluated oil and gas properties, net of transaction costs of $3,332 |
|
|
|
23,668 |
|
|
| |||
(Purchase) maturity of short term investments |
|
15,225 |
|
(15,502 |
) |
53,806 |
| |||
Net cash provided by (used in) investing activities |
|
31,502 |
|
4,565 |
|
(59,135 |
) | |||
|
|
|
|
|
|
|
| |||
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
| |||
Proceeds from issuance of stock , net of offering costs of $1,838 |
|
|
|
|
|
28,162 |
| |||
Proceeds from exercise of options |
|
|
|
372 |
|
670 |
| |||
Net cash provided by financing activities |
|
|
|
372 |
|
28,832 |
| |||
|
|
|
|
|
|
|
| |||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
8,802 |
|
(10,680 |
) |
(42,741 |
) | |||
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR |
|
26,468 |
|
37,148 |
|
79,889 |
| |||
CASH AND CASH EQUIVALENTS AT END OF YEAR |
|
$ |
35,270 |
|
$ |
26,468 |
|
$ |
37,148 |
|
|
|
|
|
|
|
|
| |||
SUPPLEMENTAL DISCLOSURES: |
|
|
|
|
|
|
| |||
Interest paid in cash |
|
$ |
|
|
$ |
|
|
$ |
|
|
Income taxes paid in cash |
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
|
|
|
|
|
| |||
NON-CASH INVESTING AND FINANCING TRANSACTIONS: |
|
|
|
|
|
|
| |||
Accounts payable for oil and gas property |
|
$ |
1,439 |
|
$ |
1,859 |
|
$ |
16,659 |
|
Accounts payable relating to legal settlement |
|
$ |
19,035 |
|
$ |
|
|
$ |
|
|
The accompanying notes are an integral part of these consolidated financial statements.
HYPERDYNAMICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Nature of business
Hyperdynamics Corporation (Hyperdynamics, the Company, we, us, and our) is a Delaware corporation formed in March 1996. Hyperdynamics has two wholly-owned subsidiaries, SCS Corporation Ltd (SCS), a Cayman corporation, and HYD Resources Corporation (HYD), a Texas corporation. Through SCS and its wholly-owned subsidiary, SCS Guinea SARL (SCSG), which is a Guinea limited liability company formed under the laws of the Republic of Guinea (Guinea) located in Conakry, Guinea, Hyperdynamics focuses on oil and gas exploration offshore the coast of West Africa. Our exploration efforts are pursuant to a Hydrocarbon Production Sharing Contract, as amended (the PSC). We refer to the rights granted under the PSC as the Concession. We began operations in oil and gas exploration, seismic data acquisition, processing, and interpretation in late fiscal 2002.
As used herein, references to Hyperdynamics, Company, we, us, and our refer to Hyperdynamics Corporation and our subsidiaries, including SCS Corporation Ltd (SCS). The rights in the Concession offshore Guinea are held by SCS.
Status of our Business
We have no source of operating revenue and there is no assurance when we will, if ever. On June 30, 2014, we had $35.3 million in cash, and $5.7 million in liabilities, all of which are current liabilities. 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 year ended June 30, 2014, and it is likely that we will continue to incur significant expenses in the year ending June 30, 2015.
On December 31, 2012, we closed a sale to Tullow Guinea Ltd (Tullow), a subsidiary of Tullow Oil plc, of a 40% gross interest in the Concession. We now hold a 37% participating interest, with Dana Petroleum, PLC (Dana), which is a subsidiary of the Korean National Oil Corporation, holding the remaining 23% interest in the Concession. We refer to Tullow, Dana and us in the Concession as the Consortium.
We have drilled one exploratory well, the Sabu-1 well, which reached the planned total depth of 3,600 meters below the surface in February 2012. We determined the well to be non-commercial. As a result, we evaluated the costs associated with the well, subjected them to the Full-Cost Ceiling Test, resulting in a Full-Cost Ceiling Test write-down. See additional discussion in Note 3. As described in Note 9, we had filed suit for monetary damages against AGR, the manager of the Sabu-1 well, following unsuccessful negotiations to address mismanagement that led to significant well cost overruns. AGR filed a countersuit 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 disputed and excluded from our cost incurred to date. On May 16, 2014 we reached a settlement of this litigation that resulted in the release to us of $17.7 million of the $19.2 million in long term restricted cash then held in escrow, and the release to AGR of $6.8 million in excess drilling equipment as part of the settlement. Our claims and the counterclaims of AGR were released, and the litigation has been terminated. The net proceeds to us were approximately $15.8 million, after reconciliation of the joint interest account with Dana Petroleum, the other working interest holder during the drilling
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. See additional discussion in Note 9. We are unable to predict the outcome or future cost associated with legal proceedings and the investigations being conducted by the DOJ and SEC; however, we incurred approximately $7.5 million in legal and other professional fees related to the investigations in the year ended June 30, 2014, and it is likely that we will incur significant expenses for legal and associated costs in the year ending June 30, 2015.
Pursuant to the Share Purchase Agreement (SPA) between Tullow and us, Tullow agreed to pay all of our participating interest share of expenditures associated with joint operations in the Concession up to a gross expenditure cap of $100 million incurred during the carry period that began on September 21, 2013. From September 2013 until June 30, 2014, costs applied against the $100 million carry were $14.1 million. The timing of the well and the cost estimate are subject to change. We will be responsible for our 37% interest share of the cost in excess of the remaining gross carry amount. Additionally, Tullow agreed to pay our participating interest share of future costs for the drilling of an appraisal of the initial exploration well, if drilled, up to a gross expenditure cap of $100 million.
The Consortium planned to drill the exploration well in the ultra-deepwater portion of the Concession in the first half of calendar 2014. On March 11, 2014 Tullow unilaterally asserted its claim that there had been a Force Majeure event under the PSC with the Government of Guinea, the Joint Operating Agreement (JOA) between Dana, Tullow and us and the SPA. Tullow stated in its notice that the decisions by the DOJ and the SEC to open investigations into our activities in obtaining and retaining the Concession rights constituted a Force Majeure event under the terms of the PSC, JOA and SPA. Tullow unilaterally 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 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 joint operations expenditures, including operator overhead and the ultra-deepwater exploration well when drilled, and such excess expenditures could exacerbate our liquidity. 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 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 Securities and Exchange Commission (SEC).
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. For the years presented, we maintained all of our cash in bank deposit accounts which, at times, exceed the federally insured limits.
Restricted cash
Included in restricted cash as of June 30, 2013 is $19.2 million held in escrow which related 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. As of June 30, 2014, our restricted cash balance is zero as a result of the legal settlement with 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 managements best estimate of 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 June 30, 2014 or 2013. At June 30, 2014, 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, respectively in the Concession.
Securities classified as available-for-sale
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, 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.
Oil and Gas Properties
Full-Cost Method
We account for oil and natural gas producing activities using the full-cost method of accounting as prescribed by the United States Securities and Exchange Commission (SEC). Accordingly, all costs incurred in the acquisition, exploration, and development of oil and natural gas properties, including the costs of abandoned properties, dry holes, geophysical costs and annual lease rentals are capitalized. All selling, general and administrative corporate costs unrelated to drilling activities are expensed as incurred. Sales or other dispositions of oil and natural gas
properties are accounted for as adjustments to capitalized costs, with no gain or loss recorded unless the ratio of capitalized costs to proved reserves would significantly change, or to the extent that the sale proceeds exceed our capitalized costs. Depletion of evaluated oil and natural gas properties would be computed on the units of production method based on proved reserves. The net capitalized costs of proved oil and natural gas properties are subject to quarterly impairment tests.
Costs Excluded from Amortization
Costs associated with unproved properties are excluded from amortization until it is determined whether proved reserves can be assigned to the properties. We review our unproved properties at the end of each quarter to determine whether the costs incurred should be transferred to the amortization base.
We assess unproved property on a quarterly basis for possible impairment or reduction in value. We assess properties on an individual basis or as a group if properties are individually insignificant. The assessment includes consideration of the following factors, among others: intent to drill; remaining lease term under our concession; geological and geophysical evaluations; drilling results and activity; the assignment of proved reserves; and the economic viability of development if proved reserves are assigned. We assess our unproved properties on a country-by-country basis. During any period in which these factors indicate an impairment, the adjustment is recorded through earnings of the period.
Full-Cost Ceiling Test
At the end of each quarterly reporting period, the capitalized costs less accumulated amortization and deferred income taxes shall not exceed an amount equal to the sum of the following items: (i) the present value of estimated future net revenues of oil and gas properties (including future development and abandonment costs of wells to be drilled) using prices based on the preceding 12-months average price based on closing prices on the first day of each month, or prices defined by existing contractual arrangements, discounted at 10%, (ii) the cost of properties not being amortized, and (iii) the lower of cost or estimated fair value of unproved properties included in the costs being amortized, less related income tax effects (Full-Cost Ceiling Test).
The calculation of the Full-Cost Ceiling Test is based on estimates of proved reserves. There are numerous uncertainties inherent in estimating quantities of proved reserves and in projecting the future rates of production, timing, and plan of development. The accuracy of any reserves estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. Results of drilling, testing, and production subsequent to the date of the estimate may justify revision of such estimates. Accordingly, reserves estimates are often different from the quantities of oil and natural gas that are ultimately recovered. We have no proved reserves.
We recognized no Full-Cost Ceiling test write-downs in the year ended June 30, 2014. During the years ended June 30, 2013 and 2012 we had Full-Cost Ceiling Test write-downs of $0.4 million and $116.3 million, respectively.
Property and Equipment, other than Oil and Gas
Property and equipment are stated on the basis of historical cost less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, generally three to five years.
Provision for Impairments of Long-lived Assets
Long-lived assets are reviewed for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment loss recognized is the excess of the carrying amount over the fair value of the asset. Any impairment charge is recorded through current period earnings. We recognized no impairment charges in the years ended June 30, 2014, 2013 or 2012, respectively.
Income Taxes
We account for income taxes in accordance with FASB Accounting Standards Codification (ASC) 740, Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the tax and financial reporting basis of assets and liabilities and for loss and credit carryforwards. Valuation allowances are provided when recovery of deferred tax assets is not considered likely.
Tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in our tax returns that do not meet these recognition and measurement standards. For the year ended June, 30, 2014 the Company has unrecognized tax benefits totaling $5.5 million.
Our policy is to recognize potential accrued interest and penalties related to unrecognized tax benefits within income tax expense. For the years ended June 30, 2014, 2013 and 2012, we did not recognize any interest or penalties in our consolidated statement of operations, nor did we have any interest or penalties accrued on our consolidated balance sheet at June 30, 2014 and 2013 relating to unrecognized benefits.
The tax years 2009-2013 remain open to examination for federal income tax purposes and by the other major taxing jurisdictions to which we are subject.
Stock-Based Compensation
ASC 718, Compensation-Stock Compensation requires recognition in the financial statements of the cost of employee services received in exchange for an award of equity instruments over the period the employee is required to perform the services in exchange for the award (presumptively the vesting period). We measure the cost of employee services received in exchange for an award based on the grant-date fair value of the award. We account for non-employee share-based awards based upon ASC 505-50, Equity-Based Payments to Non-Employees.
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 a 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 years ended June 30, 2014, 2013 and 2012, respectively, as their effects are antidilutive due to our net loss for those periods.
Stock options to purchase approximately 1.4 million common shares at an average exercise price of $8.76 and warrants to purchase approximately 0.03 million shares of common stock at an average exercise price of $11.69 were outstanding at June 30, 2014. Using the treasury stock method, had we had net income, approximately 1,412 common shares attributable to our outstanding stock options would have been included in the fully diluted earnings per share for the year ended June 30, 2014. There would have been no dilution attributable to our outstanding warrants to purchase common shares. Had we had net income, approximately 21,030 common shares attributable to our outstanding unvested restricted stock awards would have been included in the fully diluted earnings per share for the year ended June 30, 2014.
Stock options to purchase approximately 1.4 million common shares at an average exercise price of $13.12 and warrants to purchase approximately 0.4 million shares of common stock at an average exercise price of $10.40 were outstanding at June 30, 2013. Using the treasury stock method, had we had net income, approximately 0.04 million common shares attributable to our outstanding stock options would have been included in the fully diluted earnings per share calculation for the year ended June 30, 2013. There would have been no dilution attributable to our outstanding warrants to purchase common shares.
Stock options to purchase approximately 1.6 million common shares at an average exercise price of $16.72 and warrants to purchase approximately 1.7 million shares of common stock at an average exercise price of $23.52 were outstanding at June 30, 2012. Using the treasury stock method, had we had net income, approximately 0.4 million common shares attributable to our outstanding stock options and 0.2 million common shares attributable to our outstanding warrants to purchase common shares would have been included in the fully diluted earnings per share calculation for the year ended June 30, 2012.
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 9 for more information on legal proceedings.
Accumulated Other Comprehensive Income (Loss), net of tax
We follow the provisions of ASC 220, Comprehensive Income, which establishes standards for reporting comprehensive income. In addition to net income (loss), comprehensive income (loss) includes all changes to equity during a period, except those resulting from investments and distributions to the owners of the Company. At June 30, 2014, we had a balance in Accumulated other comprehensive loss, net of income tax on the consolidated balance sheet of zero. The components of accumulated other comprehensive loss and related tax effects were as follows (in thousands):
|
|
Gross Value |
|
Tax Effect |
|
Net of Tax |
| |||
Accumulated other comprehensive loss at June 30, 2012 |
|
$ |
|
|
$ |
|
|
$ |
|
|
Change in fair value of available-for-sale securities |
|
94 |
|
|
|
94 |
| |||
Accumulated other comprehensive loss at June 30, 2013 |
|
$ |
94 |
|
$ |
|
|
$ |
94 |
|
Change in fair value of available-for-sale securities |
|
(25 |
) |
|
|
(25 |
) | |||
Reclassification adjustment for realized losses included in net loss |
|
(69 |
) |
|
|
(69 |
) | |||
Accumulated other comprehensive loss at June 30, 2014 |
|
$ |
|
|
$ |
|
|
$ |
|
|
There is no tax effect of the unrealized gain (loss) in other comprehensive income given our full valuation allowance against deferred tax assets. Total comprehensive loss was $17.0 million, $18.6 million and $149.0 million in fiscal year 2014, 2013 and 2012, respectively.
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.
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 June 30, 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:
|
|
Carrying |
|
Fair Value Measurement at June 30, 2013 |
| ||||||||
|
|
June 30, 2013 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
| ||||
Assets: |
|
|
|
|
|
|
|
|
| ||||
Corporate debt securities |
|
$ |
15,383 |
|
$ |
15,383 |
|
$ |
|
|
$ |
|
|
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 are included in general, administrative and other operating expense, have not been significant. Net foreign currency transaction gains (losses) were ($0.6) million, $0.1 million and $0.6 million for the years ended June 30, 2014, 2013 and 2012, 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.
Subsequent Events
The Company evaluated all subsequent events from June 30, 2014 through the date of issuance of these financial statements.
2. PROPERTY AND EQUIPMENT
A summary of property and equipment as of June 30, 2014 and 2013 is as follows:
|
|
|
|
June 30, |
| ||||
(in thousands) |
|
Useful Life |
|
2014 |
|
2013 |
| ||
Computer equipment and software |
|
3 years |
|
$ |
1,324 |
|
$ |
1,320 |
|
Office equipment and furniture |
|
5 years |
|
330 |
|
330 |
| ||
Vehicles |
|
3 years |
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
Leasehold improvements |
|
3 years |
|
529 |
|
522 |
| ||
|
|
|
|
|
|
|
| ||
Total Cost |
|
|
|
2,183 |
|
2,172 |
| ||
Less - Accumulated depreciation |
|
|
|
(1,785 |
) |
(1,462 |
) | ||
|
|
|
|
$ |
398 |
|
$ |
710 |
|
We review assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. As of June 30, 2014 and 2013, there were no impairments of property and equipment.
3. 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.
Guinea Concession
We have been conducting exploration work related to the area off the coast of Guinea since 2002. On September 22, 2006 we entered into the PSC with Guinea. Under that agreement, we were granted certain exclusive contractual rights by Guinea to explore and exploit offshore oil and gas reserves, if any, off the coast of Guinea. We are conducting our current work in Guinea under the PSC, as amended on March 25, 2010.
The PSC Amendment clarified that we retained a Contract Area of approximately 25,000 square kilometers, which is approximately equivalent to 9,650 square miles or 30% of the original Contract Area under the PSC, following a December 31, 2009 relinquishment of approximately 70% of the original Contract Area. The PSC Amendment required that the Consortium relinquish an additional 25% of the retained Contract Area by September 30, 2013. Under the terms of the PSC Amendment, the first exploration period ended and the Consortium entered into the second exploration period on September 21, 2010. The second exploration period ran until September 2013, at which point it was renewed to September 2016 and may be extended for one (1) additional year to allow the completion of a well in process and for two (2) additional years to allow the completion of the appraisal of any discovery made.
The PSC Amendment required the drilling of an exploration well, which had to be commenced by the year-end 2011, to a minimum depth of 2,500 meters below seabed. This requirement was satisfied with the drilling of the Sabu-1 well which was commenced during October of 2011 and reached the minimum depth of 2,500 meters below the seabed in February of 2012. The Consortium is required to drill an additional exploration well, which is to be commenced by the end of September 2016, to a minimum depth of 2,500 meters below seabed. The PSC Amendment requires the expenditure of $15 million on each of the exploration wells ($30 million in the aggregate). The Consortium was also required to acquire a minimum of 2,000 square kilometers of 3D seismic by September 2013 with a minimum expenditure of $12 million. This requirement was satisfied with the first 3D seismic survey acquired in 2010. Fulfillment of work obligations exempts us from expenditure obligations and exploration work in excess of minimum work obligations for each exploration period may be carried forward to the following exploration period.
Under the PSC Amendment, Guinea may participate in development of any discovery at a participating interest of up to 15% of costs being carried for its share. The cost of that carry is to be recovered out of 62.5% of Guineas share of cost and profit oil. The PSC Amendment removed the right of first refusal held by us covering the relinquished acreage under the original PSC. The PSC Amendment clarified that only those eligible expenditures, which were made following the date the PSC was signed, on September 22, 2006, are eligible for cost recovery. We are required to establish an annual training budget of $200,000 for the benefit of Guineas oil industry personnel, and we are also obligated to pay an annual surface tax of $2.00 per square kilometer on our retained Concession acreage. The PSC Amendment also provides that should the Guinea government note material differences between provisions of the PSC Amendment and international standards or the Petroleum Code, the parties will renegotiate the relevant articles.
In July 2013, a proposal was submitted for a Second Amendment to the PSC (the Second PSC Amendment) to the Government of Guinea formally adding Tullow as a Contractor to the PSC as well as addressing other administrative issues.
Under the PSC and PSC Amendment our Guinea Concession is subject to a 10% royalty interest to Guinea. Of the remaining 90% of the first production, we will receive 75% of the revenue for recovery of the cost of operations, and Guinea will receive 25%.
After recovery cost of operations, revenue will be split as outlined in the table below:
Daily production (b/d) |
|
Guinea Share |
|
Contractor Share |
|
From 0 to 2,000 |
|
25 |
% |
75 |
% |
From 2,001 to 5,000 |
|
30 |
% |
70 |
% |
From 5,001 to 100,000 |
|
41 |
% |
59 |
% |
Over 100,001 |
|
60 |
% |
40 |
% |
The Guinea Government may elect to take a 15% working interest in any exploitation area.
In May 2010, the government of Guinea issued a Presidential Decree approving the PSC, as amended for the sale of the 23% participating interest to Dana, and again in December 2012 for the sale of a 40% gross interest to Tullow.
Sale of Interest to Tullow
On December 31, 2012, we closed a sale to Tullow of a 40% gross interest in the Concession. As consideration, we received $27 million from Tullow as reimbursement of our past costs in the Concession and, as additional consideration, Tullow agreed to: (i) pay our participating interest share of future costs associated with the drilling of an exploration well in at least 2,000 meters of water in the deep water fan area of the Concession, up to a gross expenditure cap of $100 million; and (ii) pay our share of costs associated with an appraisal well of the initial exploration well, if drilled, subject to a gross expenditure cap on the appraisal well of $100 million. Tullow was obligated to pay its 40% participating interest share of costs associated with the Concession as of November 20, 2012, the date of execution of SPA. Tullow began to pay our costs attributable to the Concession on September 21, 2013. Tullow will continue to pay our 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. 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 Guineas 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.
Accounting for oil and gas property and equipment costs
We follow the Full-Cost method of accounting for oil and natural gas property and equipment costs. Under this method, internal costs incurred that are directly identified with exploration, development, and acquisition activities undertaken by us for our own account, and which are not related to production, general corporate overhead, or similar activities, are capitalized. For the year ended June 30, 2013 we capitalized $2.7 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 and are excluded from amortization were $14.3 million and $21.2 million, as of June 30, 2014 and 2013, respectively.
The following table provides detail of total capitalized costs for our Guinea Concession as of June 30, 2014 and 2013 (in thousands):
|
|
June 30, |
|
June 30, |
|
Oil and Gas Properties: |
|
|
|
|
|
Unproved oil and gas Properties |
|
14,259 |
|
14,365 |
|
Other Equipment Costs |
|
|
|
6,809 |
|
Unproved properties not subject to amortization |
|
14,259 |
|
21,174 |
|
During the year ended June 30, 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. Additionally, during the year ended June 30, 2014, our oil and gas property balance decreased by $6.8 million after reaching a lawsuit settlement with AGR that resulted in the release to AGR of excess drilling equipment and the release to us of $17.7 million of previously escrowed cash. 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.
Write-off of Prospective Investment Deposit
We made payments of $5.0 million each in connection with a prospective oil and gas investment on September 20, 2011 and November 15, 2011. The $10.0 million in deposits were to have been credited on the purchase price of the prospective investment. As negotiations terminated without an agreement, we wrote off this deposit. The $10.0 million write off has been included as an operating expense in our Statement of Operations for the year ended June 30, 2012.
4. INVESTMENTS
During the third and fourth quarters of fiscal 2013, we purchased a total of $15.5 million in debt securities which were classified as available-for-sale. These securities matured during the third quarter of fiscal 2014. No investments were held as of June 30, 2014.
The following is a summary of available-for-sale securities as of June 30, 2013 (in thousands):
|
|
Amortized Cost |
|
Unrealized gains |
|
Fair Value |
| |||
US corporate debt securities |
|
$ |
15,477 |
|
$ |
(94 |
) |
$ |
15,383 |
|
Total available-for-sale |
|
$ |
15,477 |
|
$ |
(94 |
) |
$ |
15,383 |
|
We had no securities classified as held-to-maturity as of June 30, 2014 and 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 losses have been recorded with regard to securities on hand as of June 30, 2013.
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses as of June 30, 2014 and 2013 include the following (in thousands):
|
|
2014 |
|
2013 |
| ||
Accounts payable trade and oil and gas exploration activities |
|
$ |
998 |
|
$ |
22,208 |
|
Accounts payable joint interest partner share of legal settlement |
|
1,890 |
|
|
| ||
Accounts payable legal costs |
|
2,492 |
|
164 |
| ||
Accrued payroll |
|
282 |
|
215 |
| ||
Accrued Other |
|
|
|
15 |
| ||
|
|
$ |
5,662 |
|
$ |
22,602 |
|
6. INCOME TAXES
Federal Income taxes are not currently due since Hyperdynamics has had losses since inception. Components of deferred tax assets as of June 30, 2014 and 2013 are as follows (in thousands):
|
|
2014 |
|
2013 |
| ||
Current deferred tax assets: |
|
|
|
|
| ||
Other current deferred tax assets |
|
$ |
|
|
$ |
162 |
|
Total current temporary differences |
|
|
|
162 |
| ||
Less: valuation allowance |
|
|
|
(162 |
) | ||
Net current deferred tax assets |
|
$ |
|
|
$ |
|
|
|
|
|
|
|
| ||
Non-current deferred tax assets |
|
|
|
|
| ||
Stock compensation |
|
$ |
2,276 |
|
$ |
2,314 |
|
Property and Equipment |
|
55 |
|
|
| ||
Oil and gas properties |
|
16,277 |
|
20,244 |
| ||
Capital loss |
|
167 |
|
143 |
| ||
Total non-current deferred tax assets |
|
$ |
18,775 |
|
$ |
22,701 |
|
Non-current deferred tax liabilities |
|
|
|
|
| ||
Property and Equipment |
|
|
|
(21 |
) | ||
Net operating losses |
|
31,943 |
|
28,006 |
| ||
|
|
50,718 |
|
50,686 |
| ||
Less: valuation allowance |
|
(50,718 |
) |
(50,686 |
) | ||
Net non-current deferred tax assets (liabilities) |
|
$ |
|
|
$ |
|
|
Deferred tax assets have been fully reserved due to determination that it is more likely than not that the Company will not be able to realize the benefit from them.
Hyperdynamics has U.S. net operating loss carryforwards of approximately $103.8 million at June 30, 2014. The U.S. net operating losses contain excess tax benefits related to stock compensation in the amount of $2.2 million which have not been included in the financial statements.
Internal Revenue Code Section 382 restricts the ability to use these carryforwards whenever an ownership change, as defined, occurs. Hyperdynamics incurred such an ownership change on January 14, 1998 and again on June 30, 2001. As a result of the first ownership change, Hyperdynamics use of net operating losses as of January 14, 1998, of $949,000, is restricted to $151,000 per year. The availability of losses from that date through June 30, 2001 of $3,313,000 is restricted to $784,000 per year.
The Company underwent a restructuring during fiscal 2012 that removed approximately $13.2 million of net operating losses from the U.S. consolidated tax return. It is unlikely that the entity where these net operating losses reside will ever generate U.S. taxable income sufficient to utilize any of these losses. Due to the existence of the valuation allowance, it is not expected that any possible limitation will have an impact on the results of operations or financial position of the Company. The U.S. net operating loss carryforwards expire from 2019 to 2034.
The difference between the statutory tax rates and our effective tax rate is primarily due to the valuation allowance applied against our deferred tax assets generated by net operating losses. A reconciliation of the actual taxes to the U.S. statutory tax rate for the years ended June 30, 2014, 2013 and 2012 is as follows (in thousands):
|
|
2014 |
|
2013 |
|
2012 |
| |||
Income tax (benefit) at the statutory federal rate (35%) |
|
$ |
(5,991 |
) |
$ |
(6,461 |
) |
$ |
(52,256 |
) |
Increase (decrease) resulting from nondeductible stock compensation |
|
120 |
|
349 |
|
1,454 |
) | |||
Reduction of net operating losses related to excess tax benefits from non-qualifying stock options |
|
|
|
(68 |
) |
854 |
| |||
Deemed taxable income not recognized for book purposes from Tullow carried well costs |
|
|
|
12,950 |
|
|
| |||
Non-deductible capital loss |
|
|
|
7,875 |
|
|
| |||
Reserve against US net operating loss upon transfer of the Concession to non-US tax jurisdiction |
|
|
|
5,485 |
|
|
| |||
Foreign Rate Differential |
|
5,619 |
|
1,268 |
|
|
| |||
Other, net |
|
220 |
|
(1,052 |
) |
1,403 |
| |||
Change in valuation allowance |
|
32 |
|
(20,346 |
) |
48,545 |
| |||
Net income tax expense |
|
$ |
|
|
$ |
|
|
$ |
|
|
The following table summarizes the activity related to our gross unrecognized tax benefits from July 1, 2011 to June 30, 2014 (in thousands):
|
|
Federal, State and |
| |
|
|
(In thousands) |
| |
Balance at July 1, 2011 |
|
$ |
5,485 |
|
Additions to tax positions related to the current year |
|
|
| |
Additions to tax positions related to prior years |
|
|
| |
Statute expirations |
|
|
| |
Balance at June 30, 2012 |
|
$ |
5,485 |
|
Additions to tax positions related to the current year |
|
|
| |
Additions to tax positions related to prior years |
|
|
| |
Statute expirations |
|
|
| |
Balance at June 30, 2013 |
|
$ |
5,485 |
|
Additions to tax positions related to the current year |
|
|
| |
Additions to tax positions related to prior years |
|
|
| |
Statute expirations |
|
|
| |
Balance at June 30, 2014 |
|
$ |
5,485 |
|
The total unrecognized tax benefits that, if recognized, would affect our effective tax rate was $5,485 for the years ended June 30, 2014 and June 30, 2013 and $0 for the year ended June 30, 2012.
We file income tax returns, including tax returns for our subsidiaries, with federal, state, local, and foreign jurisdictions. Our tax returns are subject to routine compliance review by the taxing authorities in the jurisdictions in which we file tax returns in the ordinary course of business. We consider the United States to be our most significant tax jurisdiction; however, the taxing authorities in Guinea may audit various tax returns. We currently have no ongoing federal or state audits. The normal statute of limitations for tax returns being available for IRS audit is three years from the filing date of the return. However, net operating losses are subject to adjustment upon utilization of the loss to offset taxable income regardless of when the net operating loss was generated. Therefore, all of our historic losses are subject to adjustment until they are utilized or expire. We do not believe there will be any decreases to our unrecognized tax benefits within the next twelve months.
7. SHAREHOLDERS EQUITY
Common Stock issuances
Year ended June 30, 2014
For exercise of options:
There were no options exercised during the year ended June 30, 2014.
For exercise of warrants:
There were no warrants exercised during the year ended June 30, 2014.
Year ended June 30, 2013
For exercise of options:
During the year ended June 30, 2013, 95,000 options were exercised for cash at an exercise price of $3.92 for total gross proceeds of $0.4 million.
For exercise of warrants:
There were no warrants exercised during the year ended June 30, 2013.
Shares Issued in Severance Agreement:
On May 16, 2013, we issued 84,375 shares of our common stock with a fair value of $0.4 million to a former employee as part of a severance agreement. Sale of the shares was restricted for the first 6 months after which 37,500 of the shares issued were to be eligible to be sold. The remaining 46,875 shares were to become eligible to be sold 12 months from the date the shares were issued, however on November 13, 2013, the company and the former employee agreed to an indefinite stop order on the trading of all of these shares until a mutually agreed upon release date, if any.
Year ended June 30, 2012
For cash:
On February 2, 2012, we closed the sale of 1,250,000 shares of our common stock and warrants to purchase 1,250,000 shares of our common stock in a registered direct public offering. The net proceeds to us from the offering were approximately $28,162,000. The warrants had an exercise price of $28.00 per share, became exercisable in August 2012, and expired in April 2013.
For exercise of options:
During the year ended June 30, 2012, 100,625 options were exercised for total gross proceeds of $670,000. The options were exercised at prices ranging from $2.48 to $16.00.
For exercise of warrants:
During the year ended June 30, 2012, we issued 42,526 shares of common stock upon the cashless exercise of warrants to purchase 53,750 shares of common stock.
8. SHARE-BASED COMPENSATION
On February 18, 2010, at our annual meeting of stockholders, the board of directors and 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 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 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, options, or restricted stock can only be granted under this plan within 10 years from the effective date of February 18, 2010. A maximum of 1,250,000 shares are issuable under the 2010 Plan and at June 30, 2014, 231,324 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, who 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 stock option awards is estimated using the Black-Scholes valuation model. For market based stock option awards, those options where vesting terms are dependent on achieving a specified stock price, 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 years ended June 30:
|
|
2014 |
|
2013 |
|
2012 |
| |||
Number of options granted |
|
372,086 |
|
247,197 |
|
534,182 |
| |||
Compensation expense recognized |
|
$ |
481,426 |
|
$ |
2,615,498 |
|
$ |
5,024,825 |
|
Compensation cost capitalized |
|
|
|
809,309 |
|
1,745,344 |
| |||
Weighted average fair value of options outstanding |
|
$ |
5.88 |
|
$ |
8.68 |
|
$ |
16.72 |
|
The following table details the significant assumptions used to compute the fair market values of employee and director stock options granted during the years ended June 30:
|
|
2014 |
|
2013 |
|
2012 |
|
Risk-free interest rate |
|
0.08-0.95 |
% |
0.07-0.96 |
% |
0.11-0.91 |
% |
Dividend yield |
|
0 |
% |
0 |
% |
0 |
% |
Volatility factor |
|
74-125 |
% |
80-123 |
% |
105-129 |
% |
Expected life (years) |
|
0.5-3.25 |
|
0.5-3.5 |
|
0.25-3.25 |
|
Summary information regarding employee stock options issued and outstanding under all plans as of June 30, 2014 is as follows:
|
|
Options |
|
Weighted |
|
Aggregate |
|
Weighted |
| ||
Outstanding at July 1, 2011 |
|
1,159,356 |
|
$ |
14.80 |
|
$ |
23,558,086 |
|
5.65 |
|
Granted |
|
534,182 |
|
20.56 |
|
|
|
|
| ||
Exercised |
|
(100,625 |
) |
6.64 |
|
|
|
|
| ||
Forfeited |
|
(31,000 |
) |
44.08 |
|
|
|
|
| ||
Options outstanding at June 30, 2012 |
|
1,561,913 |
|
$ |
16.72 |
|
$ |
1,145,800 |
|
4.62 |
|
Granted |
|
247,197 |
|
4.49 |
|
|
|
|
| ||
Exercised |
|
(95,000 |
) |
3.92 |
|
|
|
|
| ||
Forfeited |
|
(272,583 |
) |
25.66 |
|
|
|
|
| ||
Expired |
|
(80,018 |
) |
24.61 |
|
|
|
|
| ||
Options outstanding at June 30, 2013 |
|
1,361,509 |
|
$ |
13.12 |
|
$ |
52,277 |
|
3.26 |
|
Granted |
|
372,086 |
|
3.30 |
|
|
|
|
| ||
Exercised |
|
|
|
|
|
|
|
|
| ||
Forfeited |
|
(92,100 |
) |
18.78 |
|
|
|
|
| ||
Expired |
|
(199,768 |
) |
23.66 |
|
|
|
|
| ||
Options outstanding at June 30, 2014 |
|
1,441,727 |
|
$ |
8.76 |
|
$ |
8,327 |
|
3.14 |
|
Options exercisable at June 30, 2014 |
|
762,498 |
|
$ |
13.17 |
|
$ |
8,439 |
|
2.74 |
|
Options outstanding and exercisable as of June 30, 2014
Exercise Price |
|
Outstanding |
|
Remaining Life |
|
Exercisable |
| |
$ |
1.92-4.00 |
|
299,108 |
|
1 year |
|
149,107 |
|
$ |
1.92-4.00 |
|
510,880 |
|
5 years |
|
56,238 |
|
$ |
4.01-10.00 |
|
81,425 |
|
1 year |
|
81,425 |
|
$ |
4.01-10.00 |
|
175,319 |
|
3 years |
|
106,879 |
|
$ |
4.01-10.00 |
|
57,687 |
|
6 years |
|
53,625 |
|
$ |
10.01-20.00 |
|
106,375 |
|
1 year |
|
106,375 |
|
$ |
10.01-20.00 |
|
32,500 |
|
6 years |
|
31,250 |
|
$ |
20.01-30.00 |
|
55,375 |
|
6 years |
|
54,541 |
|
$ |
30.01-40.00 |
|
45,620 |
|
2 years |
|
45,620 |
|
$ |
30.01-40.00 |
|
68,688 |
|
7 years |
|
68,688 |
|
$ |
40.01-50.00 |
|
8,750 |
|
7 years |
|
8,750 |
|
|
|
1,441,727 |
|
|
|
762,498 |
|
Options outstanding and exercisable as of June 30, 2013
Exercise Price |
|
Outstanding |
|
Remaining Life |
|
Exercisable |
| |
$ |
1.92 4.00 |
|
292,500 |
|
1 year |
|
122,083 |
|
$ |
1.92 4.00 |
|
174,071 |
|
5 years |
|
6,250 |
|
$ |
4.01-10.00 |
|
149,479 |
|
1 year |
|
149,479 |
|
$ |
4.01-10.00 |
|
190,684 |
|
4 years |
|
46,270 |
|
$ |
4.01-10.00 |
|
46,125 |
|
7 years |
|
46,125 |
|
$ |
10.01-15.00 |
|
106,375 |
|
1 year |
|
106,375 |
|
$ |
10.01-15.00 |
|
15,000 |
|
4 years |
|
12,500 |
|
$ |
15.01-20.00 |
|
20,000 |
|
7 years |
|
18,333 |
|
$ |
20.01-25.00 |
|
14,875 |
|
1 year |
|
12,375 |
|
$ |
20.01-25.00 |
|
17,875 |
|
7 years |
|
17,875 |
|
$ |
25.01-30.00 |
|
102,500 |
|
1 year |
|
27,500 |
|
$ |
25.01-30.00 |
|
33,750 |
|
7 years |
|
28,333 |
|
$ |
30.01-35.00 |
|
28,338 |
|
1 year |
|
28,338 |
|
$ |
30.01-35.00 |
|
38,125 |
|
3 years |
|
19,063 |
|
$ |
30.01-35.00 |
|
64,312 |
|
8 years |
|
64,312 |
|
$ |
35.01-40.00 |
|
44,375 |
|
3 years |
|
28,125 |
|
$ |
40.01-45.00 |
|
11,875 |
|
1 year |
|
11,875 |
|
$ |
40.01-45.00 |
|
11,250 |
|
7 years |
|
11,250 |
|
|
|
1,361,509 |
|
|
|
756,461 |
|
At June 30, 2014, there was $1.6 million of unrecognized compensation costs related to non-vested share based compensation arrangements granted to employees under the plans.
During 2014, a total of 204,970 options, with a weighted average grant date fair value of $12.33 per share, vested in accordance with the underlying agreements. Unvested options at June 30, 2014 totaled 679,234 with a weighted average grant date fair value of $2.21, an amortization period of two to three years and a weighted average remaining life of 3.58 years.
Restricted Stock
The fair value of restricted stock awards classified as equity awards is based on the Companys stock price as of the date of grant. During the year ended June 30, 2014, we granted restricted stock awards with a fair value of $0.1 million or 21,030 shares. These awards do not grant any rights as a shareholder of the company until a certificate for the vested shares of common stock has been issued. There were no restricted stock awards issued in the year ended June 30, 2013. Summary information regarding employee and director restricted stock issued and outstanding under the 2010 Plan as of June 30, 2014 is as follows:
|
|
Options |
|
Weighted |
| |
Balance at July 1, 2013 |
|
|
|
$ |
|
|
Granted |
|
21,030 |
|
4.12 |
| |
Vested |
|
|
|
|
| |
Forfeited |
|
|
|
|
| |
Expired |
|
|
|
|
| |
Balance at June 30, 2014 |
|
21,030 |
|
$ |
4.12 |
|
Vested at June 30, 2014 |
|
|
|
$ |
|
|
Warrants
Year ended June 30, 2013:
On November 21, 2012, warrants to purchase a total of 6,375 shares of our common stock were granted at an exercise price of $7.84. The warrants were immediately exercisable and have a term of 24 months from the date they were granted. The exercise price of the warrants may be adjusted in the case of stock splits, stock dividends or combinations of shares, or in the event the Company issues rights, options or warrants to all holders of the Companys common stock with an exercise or purchase price less than the volume weighted average price of the Companys shares on the record date. The warrants are considered indexed to our common stock and therefore are not considered a derivative.
The warrants issued to the investors had a fair value of $16,000. The fair value of the warrants was determined using the Black-Scholes option pricing model. The following table details the significant assumptions used to compute the fair market value of the warrants:
|
|
2013 |
|
Risk-free interest rate |
|
0.17 |
% |
Dividend yield |
|
0 |
% |
Volatility factor |
|
114 |
% |
Expected life (months) |
|
12 |
|
Year ended June 30, 2012:
As a result of the equity transaction in February 2012, the Company issued warrants to purchase a total of 1,250,000 shares of its common stock to institutional investors. The warrants have an exercise price of $28.00 per share, a term of 14 months from the date they were granted, and are exercisable 6 months following the close of the transaction. The exercise price of the warrants may be adjusted in the case of stock splits, stock dividends or combinations of shares, or in the event the Company issues rights, options or warrants to all holders of the Companys common stock with an exercise or purchase price less than the volume weighted average price of the Companys shares on the record date. The warrants are considered indexed to our common stock and therefore are not considered a derivative. The warrants issued to the investors had a fair value of $7,820,000. The fair value of the 1,250,000 shares issued in the transaction was $22,180,000 based upon the market price on the transaction date. The fair value of the warrants was determined using the Black-Scholes option pricing model. The following table details the significant assumptions used to compute the fair market value of the warrants:
|
|
2012 |
|
Risk-free interest rate |
|
0.15 |
% |
Dividend yield |
|
0 |
% |
Volatility factor |
|
105 |
% |
Expected life (months) |
|
14 |
|
Summary information regarding common stock warrants issued and outstanding as of June 30, 2014 is as follows:
|
|
Warrants |
|
Weighted |
|
Aggregate |
|
Weighted |
| ||
Outstanding at year ended July 1, 2011 |
|
482,337 |
|
$ |
10.08 |
|
$ |
11,737,345 |
|
3.03 |
|
Granted |
|
1,250,000 |
|
28.00 |
|
|
|
|
| ||
Exercised |
|
(53,750 |
) |
7.20 |
|
|
|
|
| ||
Expired |
|
|
|
|
|
|
|
|
| ||
Outstanding at year ended June 30, 2012 |
|
1,678,587 |
|
$ |
23.52 |
|
$ |
|
|
1.08 |
|
Granted |
|
6,375 |
|
7.84 |
|
|
|
|
| ||
Exercised |
|
|
|
|
|
|
|
|
| ||
Expired |
|
(1,250,000 |
) |
28.00 |
|
|
|
|
| ||
Outstanding at year ended June 30, 2013 |
|
434,962 |
|
$ |
10.40 |
|
$ |
|
|
1.02 |
|
Granted |
|
|
|
|
|
|
|
|
| ||
Exercised |
|
|
|
|
|
|
|
|
| ||
Expired |
|
(402,604 |
) |
10.28 |
|
|
|
|
| ||
Outstanding at year ended June 30, 2014 |
|
32,358 |
|
$ |
11.69 |
|
$ |
|
|
1.12 |
|
Warrants outstanding and exercisable as of June 30, 2014
Exercise |
|
Outstanding |
|
Remaining Life |
|
Exercisable |
| |
$ |
7.84 |
|
6,375 |
|
1 year |
|
6,375 |
|
$ |
12.64 |
|
25,983 |
|
1 year |
|
25,983 |
|
|
|
32,358 |
|
|
|
32,358 |
|
Warrants outstanding and exercisable as of June 30, 2013
Exercise |
|
Outstanding |
|
Remaining Life |
|
Exercisable |
| |
$ |
7.20 |
|
351,250 |
|
1 year |
|
351,250 |
|
$ |
7.84 |
|
7,729 |
|
1 year |
|
7,729 |
|
$ |
12.64 |
|
25,983 |
|
2 years |
|
25,983 |
|
$ |
32.00 |
|
50,000 |
|
1 year |
|
50,000 |
|
|
|
434,962 |
|
|
|
434,962 |
|
9. 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. On May 12, 2014, lead plaintiff filed his amended complaint, and defendants filed their motion to dismiss on July 11, 2014. On August 20, 2014, the lead plaintiff filed a response to our motion to dismiss. 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. On May 12, 2014, a shareholder filed a motion for appointment as lead plaintiff, which remains pending. Also, on May 12, 2014, lead plaintiff in the April 2012 lawsuit described above filed a motion to consolidate the March 2014 cases with the earlier case. The parties await a ruling on the motion to consolidate. 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 a former chief financial officer in the District Court of Harris County, Texas. The petition alleges breaches of their fiduciary duties, 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. Pursuant to an agreement between the parties, the plaintiff is scheduled to file an amended petition on September 16, 2014.
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 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 and Settlement
On June 21, 2012, we 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, Queens Bench Division, Technology and Construction Court 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. AGR denied our claims and asserted aa counterclaim for $22.2 million for alleged unpaid amounts 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. 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.
On May 16, 2014 we reached a settlement of this litigation resulted in the release to us of $17.7 million of the $19.2 million in long term restricted cash then held in escrow, and the release to AGR of $6.8 million in excess drilling equipment as part of the settlement. Our claims and the counterclaims of AGR were released, and the litigation has been terminated. The net proceeds to us were approximately $15.8 million, after reconciliation of the joint interest account with Dana Petroleum, the other working interest holder during the drilling.
Foreign Corrupt Practices Act Investigations
In September 2013, we received a subpoena from the United States Department of Justice and in January 2014 we received a subpoena from the United States Securities and Exchange Commission for the production of documents relating to our 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 U.S. Foreign Corrupt Practices Act or U.S. anti-money laundering statutes. We have retained legal counsel to represent us in these matters, 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 plan, 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 $7.5 million in legal and other professional fees associated with the FCPA investigations in the year ended June 30, 2014, and it is likely that we will continue to incur significant expenses in the year ending June 30, 2015.
COMMITMENTS AND CONTINGENCIES
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 June 30, 2014 (in thousands):
Years ending June 30: |
|
|
| |
2015 |
|
328 |
| |
2016 |
|
386 |
| |
2017 |
|
392 |
| |
2018 |
|
399 |
| |
2019 and thereafter |
|
715 |
| |
Total minimum payments required |
|
$ |
2,220 |
|
Rent expense included in net loss from operations for the years ended June 30, 2014, 2013, and 2012 was $0.3 million, $0.4 million and $0.5 million, respectively.
10. QUARTERLY RESULTS (UNAUDITED)
Shown below are selected unaudited quarter data for the years ended June 30, 2014 and 2013 (in thousands, except per share data):
|
|
First Quarter |
|
Second Quarter |
|
Third Quarter |
|
Fourth Quarter |
| ||||
2014: |
|
|
|
|
|
|
|
|
| ||||
Depreciation |
|
$ |
110 |
|
$ |
111 |
|
$ |
97 |
|
$ |
82 |
|
General, administrative and other operating |
|
4,368 |
|
8,262 |
|
8,095 |
|
6,732 |
| ||||
Gain on legal settlement |
|
|
|
|
|
|
|
(10,734 |
) | ||||
Gain (Loss) from operations |
|
(4,478 |
) |
(8,373 |
) |
(8,192 |
) |
3,920 |
| ||||
Net income (loss) |
|
(4,454 |
) |
(8,353 |
) |
(8,235 |
) |
3,925 |
| ||||
Basic and diluted income (loss) per common share: |
|
$ |
(0.21 |
) |
$ |
(0.40 |
) |
$ |
(0.39 |
) |
$ |
0.19 |
|
|
|
First Quarter |
|
Second Quarter |
|
Third Quarter |
|
Fourth Quarter |
| ||||
2013: |
|
|
|
|
|
|
|
|
| ||||
Depreciation |
|
$ |
183 |
|
$ |
176 |
|
$ |
152 |
|
$ |
119 |
|
General, administrative and other operating |
|
5,570 |
|
4,890 |
|
2,650 |
|
4,364 |
| ||||
Full-Cost ceiling test write-down |
|
441 |
|
|
|
|
|
|
| ||||
Loss from operations |
|
(6,194 |
) |
(5,066 |
) |
(2,802 |
) |
(4,483 |
) | ||||
Net loss |
|
(6,190 |
) |
(5,064 |
) |
(2,798 |
) |
(4,409 |
) | ||||
Basic and diluted loss per common share: |
|
$ |
(0.30 |
) |
$ |
(0.24 |
) |
$ |
(0.13 |
) |
$ |
(0.21 |
) |
The sum of the individual quarterly net loss per share amounts may not agree with year-to-date net loss per share as each quarterly computation is based on the weighted average number of common shares outstanding during that period. In addition, certain potentially dilutive securities were not included in any of the quarterly computations of diluted net loss per share because to do so would have been antidilutive.
11. SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED)
Estimates of reserve quantities and related standardized measure of discounted net cash flows are estimates only, and are not intended to reflect realizable values or fair market values of reserves. Reserve estimates are inherently imprecise and estimates of new discoveries are more imprecise than producing oil and gas properties. Additionally, the price of oil has been very volatile and downward changes in prices can significantly affect quantities that are economically recoverable. Accordingly, estimates are expected to change as future information becomes available and these changes may be significant.
Proved reserves are estimated reserves of crude oil and natural gas that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are those expected to be recovered through existing wells, equipment and operating methods.
The standardized measure of discounted future net cash flows are computed by applying average price for the year (with consideration of price changes only to the extent provided by contractual arrangements) to the estimated future production of proved oil and gas reserves, less estimated future expenditures (based on year-end costs) to be incurred in developing and producing the proved reserves, less estimated future income tax expenses. The estimated future net cash flows are then discounted using a rate of 10% per year to reflect the estimated timing of the future cash flows.
Capitalized Costs Related to Oil and Gas Activities
Aggregate capitalized costs relating to our crude oil and natural gas producing activities, including asset retirement costs and related accumulated depreciation, depletion & amortization are shown below (in thousands):
|
|
United |
|
Republic of |
|
|
| |||
|
|
States |
|
Guinea |
|
Total |
| |||
June 30, 2014 |
|
|
|
|
|
|
| |||
Unproved properties |
|
$ |
|
|
$ |
14,259 |
|
$ |
14,259 |
|
Proved properties |
|
|
|
|
|
|
| |||
|
|
|
|
14,259 |
|
14,259 |
| |||
Less accumulated DD&A |
|
|
|
|
|
|
| |||
Net capitalized costs |
|
$ |
|
|
$ |
14,259 |
|
$ |
14,259 |
|
|
|
|
|
|
|
|
| |||
June 30, 2013 |
|
|
|
|
|
|
| |||
Unproved properties |
|
$ |
|
|
$ |
21,174 |
|
$ |
21,174 |
|
Proved properties |
|
|
|
|
|
|
| |||
|
|
|
|
21,174 |
|
21,174 |
| |||
Less accumulated DD&A |
|
|
|
|
|
|
| |||
Net capitalized costs |
|
$ |
|
|
$ |
21,174 |
|
$ |
21,174 |
|
|
|
|
|
|
|
|
| |||
June 30, 2012 |
|
|
|
|
|
|
| |||
Unproved properties |
|
$ |
|
|
$ |
39,278 |
|
$ |
39,278 |
|
Proved properties |
|
|
|
|
|
|
| |||
|
|
|
|
39,278 |
|
39,278 |
| |||
Less accumulated DD&A |
|
|
|
|
|
|
| |||
Net capitalized costs |
|
$ |
|
|
$ |
39,278 |
|
$ |
39,278 |
|
Costs Incurred in Oil and Gas Activities
Costs incurred in connection with our crude oil and natural gas acquisition, exploration and development activities are shown below (in thousands):
|
|
United |
|
Republic of |
|
|
| |||
|
|
States |
|
Guinea |
|
Total |
| |||
June 30, 2014 |
|
|
|
|
|
|
| |||
Property acquisition: |
|
|
|
|
|
|
| |||
Unproved |
|
$ |
|
|
$ |
|
|
$ |
|
|
Exploration |
|
|
|
(6,586 |
) |
(6,586 |
) | |||
Development |
|
|
|
|
|
|
| |||
Total costs incurred |
|
$ |
|
|
$ |
(6,586 |
) |
$ |
(6,586 |
) |
|
|
|
|
|
|
|
| |||
June 30, 2013 |
|
|
|
|
|
|
| |||
Property acquisition: |
|
|
|
|
|
|
| |||
Unproved |
|
$ |
|
|
$ |
441 |
|
$ |
441 |
|
Exploration |
|
|
|
5,381 |
|
5,381 |
| |||
Development |
|
|
|
|
|
|
| |||
Total costs incurred |
|
$ |
|
|
$ |
5,822 |
|
$ |
5,822 |
|
|
|
|
|
|
|
|
| |||
June 30, 2012 |
|
|
|
|
|
|
| |||
Property acquisition: |
|
|
|
|
|
|
| |||
Unproved |
|
$ |
|
|
$ |
90,834 |
|
$ |
90,834 |
|
Exploration |
|
|
|
28,556 |
|
28,556 |
| |||
Development |
|
|
|
|
|
|
| |||
Total costs incurred |
|
$ |
|
|
$ |
119,390 |
|
$ |
119,390 |
|
During the year ended June 30, 2014, we incurred $0.2 million of exploration costs. Additionally, during the year ended June 30, 2014, our oil and gas property balance decreased by $6.8 million after reaching a lawsuit settlement with AGR that resulted in the release to AGR of excess drilling equipment and the release to us of $17.7 million of previously escrowed cash.
Proved Reserves
We do not hold any proved reserves as of June 30, 2014 and 2013.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
On March 26, 2014, we were notified by our then independent registered public accounting firm, Deloitte & Touche LLP (Deloitte) that it did not wish to stand for re-election. Upon completion of Deloittes review of our interim condensed consolidated financial information as of and for the three and nine month periods ended March 31, 2014, Deloitte resigned as our independent registered public accounting firm.
The reports of Deloitte on our consolidated financial statements for the years ended June 30, 2013 and 2012 contained no adverse opinion or disclaimer of opinion, and such reports were not qualified or modified as to uncertainty, audit scope or accounting principles. However, as previously reported in our Form 10-K for the year ended June 30, 2012, Deloittes report expressed an adverse opinion on our internal control over financial reporting as of June 30, 2012 because of a material weakness related to oversight and review of financial information in the area of income taxes.
The Audit Committee of our Board of Directors discussed the subject matter of the material weakness with Deloitte. We authorized Deloitte to respond fully to inquiries of our new accounting firm concerning the subject matter of the material weakness reported in Deloittes report as of June 30, 2012. Deloittes report as of June 30, 2013 included an unqualified opinion on our internal control over financial reporting.
During the years ended June 30, 2013 and 2012, and the subsequent interim periods, there were no disagreements between us and Deloitte on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to Deloittes satisfaction, would have caused it to make reference to the subject matter of the disagreement in connection with its reports on our consolidated financial statements for such years.
On April 1, 2014, the Audit Committee of our Board of Directors engaged Hein & Associates LLP (Hein) as our independent registered public accounting firm to audit our financial statements for the year ending June 30, 2014. Heins engagement was effective immediately after Deloittes resignation, which occurred after completion of Deloittes review of our interim condensed consolidated financial information as of and for the three and nine month periods ended March 31, 2014. During the years ended June 30, 2013 and 2012 and subsequent interim periods, neither us nor anyone on our behalf consulted with Hein regarding (a) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our financial statements, and neither a written report nor oral advice was provided to us that Hein concluded was an important factor considered by us in reaching a decision as to the accounting, auditing or financial reporting issue; or (b) any matter that was either the subject of a disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions to Item 304 of Regulation S-K) or a reportable event (as described in Item 304(a)(1)(v) of Regulation S-K).
During the year ended June 30, 2014, there were no disagreements between us and Hein on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to Heins satisfaction, would have caused it to make reference to the subject matter of the disagreement in connection with its reports on our consolidated financial statements for such year.
Item 9A. Controls and Procedures
We conducted 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 the design and operation of our disclosure controls and procedures. The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the 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 Commissions 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 companys management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.
Our management is responsible for establishing and monitoring internal control over financial reporting. Management assessed the effectiveness of the Companys internal control over financial reporting as of June 30, 2014. In making this assessment, management used the criteria for internal control over financial reporting described in Internal Control Integrated Framework (1992) by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Managements assessment included an evaluation of the design of the Companys internal control over financial reporting and testing of the operating effectiveness of its internal control over financial reporting. Management reviewed the results of its assessment with the Audit Committee of the Companys Board of Directors. Based on this assessment, management has concluded that, as of June 30, 2014, the Companys internal control over financial reporting was effective.
None.
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this item will be included in our proxy statement for the 2014 Annual Meeting of Stockholders and is incorporated herein by reference thereto.
Item 11. Executive Compensation.
The information required by this item will be included in our proxy statement for the 2014 Annual Meeting of Stockholders and is incorporated herein by reference thereto.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this item will be included in our proxy statement for the 2014 Annual Meeting of Stockholders and is incorporated herein by reference thereto.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this item will be included in our proxy statement for the 2014 Annual Meeting of Stockholders and is incorporated herein by reference thereto.
Item 14. Principal Accounting Fees and Services
The information required by this item will be included in our proxy statement for the 2014 Annual Meeting of Stockholders and is incorporated herein by reference thereto.
Item 15. Exhibits, Financial Statement Schedules
(A)
Exhibit |
|
Description |
|
|
|
3.1.1 |
|
Certificate of Incorporation (1) |
|
|
|
3.1.2 |
|
Certificate of Amendment of Certificate of Incorporation, dated January 21, 1997 (1) |
|
|
|
3.1.3 |
|
Certificate of Amendment of Certificate of Incorporation, dated September 20, 1999 (1) |
|
|
|
3.1.4 |
|
Certificate of Amendment of Certificate of Incorporation, dated December 22, 2003 (1) |
|
|
|
3.1.5 |
|
Certificate of Amendment of Certificate of Incorporation, dated March 11, 2011 (2) |
|
|
|
3.1.6 |
|
Certificate of Amendment of Certificate of Incorporation, dated June 28, 2013 (19) |
|
|
|
3.1.7 |
|
Series B Certificate of Designation (4) |
|
|
|
3.2 |
|
Amended and Restated By-laws (16) |
|
|
|
4.1 |
|
Form of Common Stock Certificate (3) |
|
|
|
4.2 |
|
Form of Common Stock Purchase Warrant issued to investors on February 2, 2012 (18) |
|
|
|
10.1 |
|
Hydrocarbon Production Sharing Contract (PSA) between SCS Corporation and the Republic of Guinea, dated September 22, 2006 (5) |
|
|
|
10.2 |
|
Amendment No. 1 to the Hydrocarbons Production Sharing Contract between SCS Corporation and the Republic of Guinea, dated March 25, 2010 (8) |
|
|
|
10.3* |
|
Amended and Restated Employment Agreement between Hyperdynamics and Ray Leonard, effective as of July 23, 2012 (6) |
|
|
|
10.4 |
|
Sale and Purchase Agreement between Hyperdynamics Corporation and Dana Petroleum (E&P) Limited, effective as of December 4, 2009 (9) |
|
|
|
10.5 |
|
Operating Agreement between SCS Corporation and Dana Petroleum (E&P) Limited, dated January 28, 2010 (13) |
|
|
|
10.6* |
|
2010 Equity Incentive Plan as amended (11) |
|
|
|
10.7* |
|
Form of Incentive Stock Option Agreement (7) |
|
|
|
10.8* |
|
Form of Non-Qualified Stock Option Agreement (7) |
|
|
|
10.9* |
|
Form of Restricted Stock Agreement (7) |
|
|
|
10.10 |
|
Contract Number: AGR/C105/10 between SCS Corporation and AGR Peak Well Management Limited for Provision of Well Construction Management Services, including LOGIC General Conditions as Appendix I (10) |
|
|
|
10.11 |
|
Agreement for the Supply of Marine Seismic Data Application and Processing Services, dated September 20, 2011 between SCS Corporation and CGG Veritas Services SA (16) |
|
|
|
10.12 |
|
Form of Securities Purchase Agreement, dated January 30, 2012, between Hyperdynamics Corporation and investors in the offering (17) |
|
|
|
10.13 |
|
Placement Agency Agreement, dated January 30, 2012, by and between Hyperdynamics Corporation and Rodman & Renshaw, LLC (17) |
|
|
|
10.14 |
|
Purchase and Sale Agreement between SCS Corporation Ltd. and Tullow Guinea Ltd., dated November 20, 2012. (12) |
|
|
|
10.15 |
|
Joint Operating Agreement Novation and Amendment Agreement relating to the Operating Agreement for the Hydrocarbon Production Sharing Contract, offshore Guinea, between SCS Corporation Ltd., Dana Petroleum E&P Limited, and Tullow Guinea Ltd. dated December 31, 2012. (14) |
10.16 |
|
Parent Company Guarantee between Tullow Oil plc and SCS Corporation Ltd., dated December 31, 2012 (14) |
|
|
|
10.17 |
|
Retention Bonus Agreement between Hyperdynamics and Paolo Amoruso, dated June 30, 2014 (19) |
|
|
|
10.18** |
|
Settlement Deed between Hyperdynamics Corporation, SCS Corporation Ltd., AGR Well Management Ltd, and Jasper Drilling Private Ltd dated May 16, 2014. |
|
|
|
14.1 |
|
Code of Ethics (1) |
|
|
|
21.1** |
|
Subsidiaries of the Registrant |
|
|
|
23.1** |
|
Consent of Deloitte & Touche LLP |
|
|
|
23.2** |
|
Consent of Hein & Associates LLP |
|
|
|
31.1** |
|
Certification of Chief Executive Officer of Hyperdynamics Corporation required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2** |
|
Certification of Chief Financial Officer of Hyperdynamics Corporation required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
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 Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350) |
|
|
|
32.2** |
|
Certification of Principal Financial Officer of Hyperdynamics Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350) |
|
|
|
101.INS |
|
XBRL Instance Document (20) |
|
|
|
101.SCH |
|
XBRL Taxonomy Extension Schema Document (20) |
|
|
|
101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase Document (20) |
|
|
|
101.DEF |
|
XBRL Taxonomy Extension Definitions Linkbase Document (20) |
|
|
|
101.LAB |
|
XBRL Taxonomy Extension Label Linkbase Document (20) |
|
|
|
101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase Document (20) |
* |
|
Management contracts or compensatory plans or arrangements. |
** |
|
Filed herewith. |
(1) |
|
Incorporated by reference to Form 10-K filed September 11, 2013. |
(2) |
|
Incorporated by reference to Schedule 14A filed January 11, 2011 and filed herewith. |
(3) |
|
Incorporated by reference to Form S-1 filed January 12, 2006, as amended. |
(4) |
|
Incorporated by reference to Form 8-K filed June 15, 2001. |
(5) |
|
Incorporated by reference to Form 8-K filed September 28, 2006. |
(6) |
|
Incorporated by reference to Form 10-K filed on September 13, 2012. |
(7) |
|
Incorporated by reference to Form S-8 filed June 14, 2010. |
(8) |
|
Incorporated by reference to Form 8-K, dated March 31, 2010. |
(9) |
|
Incorporated by reference to Form 8-K, filed December 7, 2009. |
(10) |
|
Incorporated by reference to Form 8-K filed December 6, 2010. |
(11) |
|
Incorporated by reference to Form 8-K filed November 6, 2012. |
(12) |
|
Incorporated by reference to Form 8-K filed November 21, 2012. |
(13) |
|
Incorporated by reference to Form 8-K, dated January 29, 2010. |
(14) |
|
Incorporated by reference to Form 8-K filed January 7, 2013. |
(15) |
|
Incorporated by reference to Form 8-K filed on December 28, 2011. |
(16) |
|
Incorporated by reference to Form 8-K filed on September 23, 2011 |
(17) |
|
Incorporated by reference to Form 8-K filed on February 1, 2012. |
(18) |
|
Incorporated by reference to Form 8-K filed on June 28, 2013. |
(19) |
|
Incorporated by reference to Form 8-K filed on July 1, 2013. |
(20) |
|
Pursuant to Rule 406T of Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, and is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended and otherwise is not subject to liability under these sections. |
(B)
FINANCIAL STATEMENT SCHEDULES
The financial statement schedules required by this item are set forth in the notes to our financial statements set forth on page F-1.
Pursuant to the requirements of Section 13 or 15(d) 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 authorized.
|
HYPERDYNAMICS CORPORATION |
|
|
September 12, 2014 |
/s/ Ray Leonard |
|
Ray Leonard |
|
President, CEO and Director |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
September 12, 2014 |
/s/ Robert A. Solberg |
|
Robert A. Solberg |
|
Non-Executive Chairman and Director |
|
|
|
|
September 12, 2014 |
/s/ Ray Leonard |
|
Ray Leonard |
|
President, CEO and Director |
|
|
|
|
September 12, 2014 |
/s/ William Strange |
|
William Strange |
|
Director |
|
|
|
|
September 12, 2014 |
/s/ Fred Zeidman |
|
Fred Zeidman |
|
Director |
|
|
|
|
September 12, 2014 |
/s/ David Owen |
|
David Owen |
|
Director |
|
|
|
|
September 12, 2014 |
/s/ Herman Cohen |
|
Herman Cohen |
|
Director |
|
|
September 12, 2014 |
/s/ Ian Norbury |
|
Ian Norbury |
|
Director |
|
|
September 12, 2014 |
/s/ David Wesson |
|
David Wesson |
|
Vice President and Chief Financial and Accounting Officer |
Exhibit Index
Exhibit |
|
Description |
|
|
|
3.1.1 |
|
Certificate of Incorporation (1) |
|
|
|
3.1.2 |
|
Certificate of Amendment of Certificate of Incorporation, dated January 21, 1997 (1) |
|
|
|
3.1.3 |
|
Certificate of Amendment of Certificate of Incorporation, dated September 20, 1999 (1) |
|
|
|
3.1.4 |
|
Certificate of Amendment of Certificate of Incorporation, dated December 22, 2003 (1) |
|
|
|
3.1.5 |
|
Certificate of Amendment of Certificate of Incorporation, dated March 11, 2011 (2) |
|
|
|
3.1.6 |
|
Certificate of Amendment of Certificate of Incorporation, dated June 28, 2013 (19) |
|
|
|
3.1.7 |
|
Series B Certificate of Designation (4) |
|
|
|
3.2 |
|
Amended and Restated By-laws (16) |
|
|
|
4.1 |
|
Form of Common Stock Certificate (3) |
|
|
|
4.2 |
|
Form of Common Stock Purchase Warrant issued to investors on February 2, 2012 (18) |
|
|
|
10.1 |
|
Hydrocarbon Production Sharing Contract (PSA) between SCS Corporation and the Republic of Guinea, dated September 22, 2006 (5) |
|
|
|
10.2 |
|
Amendment No. 1 to the Hydrocarbons Production Sharing Contract between SCS Corporation and the Republic of Guinea, dated March 25, 2010 (8) |
|
|
|
10.3* |
|
Amended and Restated Employment Agreement between Hyperdynamics and Ray Leonard, effective as of July 23, 2012 (6) |
|
|
|
10.4 |
|
Sale and Purchase Agreement between Hyperdynamics Corporation and Dana Petroleum (E&P) Limited, effective as of December 4, 2009 (9) |
|
|
|
10.5 |
|
Operating Agreement between SCS Corporation and Dana Petroleum (E&P) Limited, dated January 28, 2010 (13) |
|
|
|
10.6* |
|
2010 Equity Incentive Plan as amended (11) |
|
|
|
10.7* |
|
Form of Incentive Stock Option Agreement (7) |
|
|
|
10.8* |
|
Form of Non-Qualified Stock Option Agreement (7) |
|
|
|
10.9* |
|
Form of Restricted Stock Agreement (7) |
|
|
|
10.10 |
|
Contract Number: AGR/C105/10 between SCS Corporation and AGR Peak Well Management Limited for Provision of Well Construction Management Services, including LOGIC General Conditions as Appendix I (10) |
|
|
|
10.11 |
|
Agreement for the Supply of Marine Seismic Data Application and Processing Services, dated September 20, 2011 between SCS Corporation and CGG Veritas Services SA (16) |
|
|
|
10.12 |
|
Form of Securities Purchase Agreement, dated January 30, 2012, between Hyperdynamics Corporation and investors in the offering (17) |
|
|
|
10.13 |
|
Placement Agency Agreement, dated January 30, 2012, by and between Hyperdynamics Corporation and Rodman & Renshaw, LLC (17) |
|
|
|
10.14 |
|
Purchase and Sale Agreement between SCS Corporation Ltd. and Tullow Guinea Ltd., dated November 20, 2012. (12) |
|
|
|
10.15 |
|
Joint Operating Agreement Novation and Amendment Agreement relating to the Operating Agreement for the Hydrocarbon Production Sharing Contract, offshore Guinea, between SCS Corporation Ltd., Dana Petroleum E&P Limited, and Tullow Guinea Ltd. dated December 31, 2012. (14) |
10.16 |
|
Parent Company Guarantee between Tullow Oil plc and SCS Corporation Ltd., dated December 31, 2012 (14) |
|
|
|
10.17 |
|
Retention Bonus Agreement between Hyperdynamics and Paolo Amoruso, dated June 30, 2014 (19) |
|
|
|
10.18** |
|
Settlement Deed between Hyperdynamics Corporation, SCS Corporation Ltd., AGR Well Management Ltd, and Jasper Drilling Private Ltd dated May 16, 2014. |
|
|
|
14.1 |
|
Code of Ethics (1) |
|
|
|
21.1** |
|
Subsidiaries of the Registrant |
|
|
|
23.1** |
|
Consent of Deloitte & Touche LLP |
|
|
|
23.2** |
|
Consent of Hein & Associates LLP |
|
|
|
31.1** |
|
Certification of Chief Executive Officer of Hyperdynamics Corporation required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2** |
|
Certification of Chief Financial Officer of Hyperdynamics Corporation required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
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 Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350) |
|
|
|
32.2** |
|
Certification of Principal Financial Officer of Hyperdynamics Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350) |
|
|
|
101.INS |
|
XBRL Instance Document (20) |
|
|
|
101.SCH |
|
XBRL Taxonomy Extension Schema Document (20) |
|
|
|
101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase Document (20) |
|
|
|
101.DEF |
|
XBRL Taxonomy Extension Definitions Linkbase Document (20) |
|
|
|
101.LAB |
|
XBRL Taxonomy Extension Label Linkbase Document (20) |
|
|
|
101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase Document (20) |
* |
|
Management contracts or compensatory plans or arrangements. |
** |
|
Filed herewith. |
(1) |
|
Incorporated by reference to Form 10-K filed September 11, 2013. |
(2) |
|
Incorporated by reference to Schedule 14A filed January 11, 2011 and filed herewith. |
(3) |
|
Incorporated by reference to Form S-1 filed January 12, 2006, as amended. |
(4) |
|
Incorporated by reference to Form 8-K filed June 15, 2001. |
(5) |
|
Incorporated by reference to Form 8-K filed September 28, 2006. |
(6) |
|
Incorporated by reference to Form 10-K filed on September 13, 2012. |
(7) |
|
Incorporated by reference to Form S-8 filed June 14, 2010. |
(8) |
|
Incorporated by reference to Form 8-K, dated March 31, 2010. |
(9) |
|
Incorporated by reference to Form 8-K, filed December 7, 2009. |
(10) |
|
Incorporated by reference to Form 8-K filed December 6, 2010. |
(11) |
|
Incorporated by reference to Form 8-K filed November 6, 2012. |
(12) |
|
Incorporated by reference to Form 8-K filed November 21, 2012. |
(13) |
|
Incorporated by reference to Form 8-K, dated January 29, 2010. |
(14) |
|
Incorporated by reference to Form 8-K filed January 7, 2013. |
(15) |
|
Incorporated by reference to Form 8-K filed on December 28, 2011. |
(16) |
|
Incorporated by reference to Form 8-K filed on September 23, 2011 |
(17) |
|
Incorporated by reference to Form 8-K filed on February 1, 2012. |
(18) |
|
Incorporated by reference to Form 8-K filed on June 28, 2013. |
(19) |
|
Incorporated by reference to Form 8-K filed on July 1, 2014. |
(20) |
|
Pursuant to Rule 406T of Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, and is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended and otherwise is not subject to liability under these sections. |
Exhibit 10.18
SETTLEMENT DEED
THIS DEED is made on 16 May 2014
BETWEEN:
1. Hyperdynamics Corporation, of 2012 Wickchester Lane, Suite 475, Houston TX 77079, USA (Hyperdynamics);
2. SCS Corporation Ltd., of 12012 Wickchester Lane, Suite 475, Houston TX 77079, USA (SCS);
3. AGR Well Management Ltd, of Union Plaza, 1 Union Wynd, Aberdeen AB10 1SL, UK (AGR);
4. Jasper Drilling Private Ltd, of 1 Harbourfront Avenue, #14-08 Keppel Bay Tower, Singapore 098632 (Jasper),
Each a Party and together the Parties.
WHEREAS:
(A) Hyperdynamics is the sole shareholder of SCS.
(B) On 24 November 2010 SCS and AGR entered into a contract for the provision of well construction project management services (the SCS/AGR Contract);
(C) On or around 25 May 2011 AGR and Jasper entered into contract No. AGR/C046/11 for the provision of mobile drilling rig services to drill one well offshore the Republic of Guinea, plus an option well (the AGR/Jasper Contract);
(D) Pursuant to the SCS/AGR Contract and the AGR/Jasper Contract, during 2011 and 2012 the Sabu #1 well was drilled offshore the Republic of Guinea (the Project);
(E) Disputes have arisen between SCS, AGR and Jasper in respect of the Project, including disputes between SCS and AGR under the SCS/AGR Contract and between AGR and Jasper under the AGR/Jasper Contract (the Disputes);
(F) In consequence there are legal proceedings between SCS and AGR in the High Court of Justice, Queens Bench Division, Technology and Construction Court, Claim No. HT-12-194 (the SCS/AGR Action) and between Jasper and AGR in the High Court of Justice, Queens Bench Division, Technology and Construction Court, Claim No. HT-13-100 (the Jasper/AGR Action and, together with the SCS/AGR Action, the Court Proceedings).
IT IS AGREED:
1. RELEASE
1.1 This Deed is in full and final settlement of, and each of the Parties, , on its own part and for and on behalf of each of its Associated Persons (as defined in clause 1.3), hereby unconditionally and irrevocably releases,
waives and forever discharges, all and any actual and potential actions, claims and counterclaims, rights, demands and set-offs, sums of money, interest, costs, accounts whether in this jurisdiction or any other, whether under English law or any other law, whether or not presently known to the Parties, their respective Associated Persons or to the law, whether or not forming part of the Court Proceedings, and whether in law or equity, that they or any of them may have against any other Party and/or any Associated Persons of such Party arising out of or connected in any way with:
1.1.1 the Court Proceedings;
1.1.2 the Disputes;
1.1.3 the Project; or
1.1.4 any other matter arising out of or connected with the underlying facts of the Project and/or the Disputes and/or the Court Proceedings and/or the relationship between Hyperdynamics, SCS, AGR and/or Jasper (including their Associated Persons)
(collectively the Released Claims).
1.2 The release provided for in clause 1.1 includes the release of all claims, including future claims, of (or based upon allegations of) fraud, dishonesty or deceit.
1.3 The release provided for in clause 1.1 above shall apply to other parties and be given on behalf of and apply to all heirs, executors, administrators, successors and assigns, affiliates, subsidiaries, parent and holding companies, investment vehicles, investment funds, partners, predecessors, successors, shareholders, employees, owners, directors and officers, attorneys, representatives and agents of or connected to the Parties (Associated Persons), the intention of the Parties being to provide the widest release possible in both fact and law subject to the terms of this Deed.
2. AGREEMENT NOT TO SUE
Each of the Parties agrees that it will not (and will use its best endeavours to procure that its Associated Persons do not) commence or continue against any other Party (or its Associated Persons) any proceedings concerning any matter raised in connection with the Released Claims, whether in this jurisdiction or elsewhere (save in respect of breaches of this Deed).
3. INDEMNITIES
3.1 Each Party hereby indemnifies, and will keep indemnified, any other Party and/or such other Partys Associated Persons against all damages and costs (including the entire legal costs) incurred in all future actions, claims and/or proceedings in respect of any of the Released Claims which it or its Associated Persons brings against any other Party and/or such other Partys Associated Persons..
3.2 AGR will indemnify, and keep indemnified, SCS against all damages and costs (including the entire legal costs) incurred in any future actions, claims and/or proceedings brought against SCS by any subcontractors and suppliers retained or contracted by AGR in connection with the Project (Project Subcontractors) (except Jasper) arising out of or in connection with the Project.
3.3 AGR will indemnify, and keep indemnified, Jasper against all damages and costs (including the entire legal costs) incurred in any future actions, claims and/or proceedings brought against Jasper by any Project Subcontractors arising out of or in connection with the Project.
3.4 SCS will indemnify, and keep indemnified, AGR and Jasper against all damages and costs (including the entire legal costs) incurred in any future actions, claims and/or proceedings brought against AGR and/or Jasper by any
Project Subcontractors in consequence of any action, claim and/or proceedings brought by SCS against any Project Subcontractor arising out of or in connection with the Project.
3.5 Jasper will indemnify, and keep indemnified, AGR and SCS against all damages and costs (including the entire legal costs) incurred in any future actions, claims and/or proceedings brought against AGR and/or SCS by any Project Subcontractors in consequence of any action, claim and/or proceedings brought by Jasper against any Project Subcontractor arising out of or in connection with the Project.
4. SETTLEMENT PAYMENT
4.1 The Parties acknowledge that pursuant to an escrow agreement between SCS, AGR and J.P. Morgan Chase Bank, N.A., London branch (the Escrow Agent) dated 27 June 2011 (the Escrow Agreement), the Escrow Agent currently holds the sum of US$19,197,888.99 inclusive of interest..
4.2 Forthwith upon execution of this Deed and in any event within two business days, AGR and SCS shall give instructions to the Escrow Agent in accordance with the escrow release conditions of the Escrow Agreement to make the following payments:
4.2.1 US$1,498,944.50 shall be paid to Jasper (via AGR) by way of transfer to the following account:
4.2.2 US$17,698,944.49 shall be paid to SCS by way of transfer to the following account:
4.2.3 thereafter, any residue held by the Escrow Agent shall be paid to SCS.
4.2.4 Any outstanding fees and charges relating to the Escrow Agreement shall be borne equally by SCS and AGR.
4.3 The Parties shall further take all necessary steps to procure that the sums currently held by the Escrow Agent are paid to SCS and to Jasper (via AGR) in the amounts stated at Clause 3 above without unnecessary delay.
4.4 Save as set out above, AGR and SCS hereby grant to the other a mutual release to any claims to amounts held by the Escrow Agent.
5. END OF WELL REPORT
Forthwith upon execution of this Deed and in any event within two business days, AGR shall provide to SCS a complete and finalised copy of the end of well report in respect of the Project as contemplated by paragraph 5 of Section III and paragraph 23 of Section IV of the SCS/AGR Contract.
6. TERMINATION OF LITIGATION
6.1 Forthwith upon execution of this Deed and in any event within two business days, SCS and AGR shall cause their respective solicitors of record to sign a consent order in the form contained at Appendix 1 hereto and to file the same with the Technology and Construction Court. Once such consent order is sealed, SCS shall cause its solicitors of record forthwith to serve a copy on AGRs solicitors and Jaspers solicitors. SCS and AGR shall further take all necessary steps to procure a stay of the SCS/AGR Action without undue delay and with no further order as to costs.
6.2 Forthwith upon execution of this Deed, Jasper and AGR shall cause their respective solicitors of record to sign a consent order in the form contained at Appendix 2 hereto and to file the same with the Technology and Construction Court. Once such consent order is sealed, Jasper shall cause its solicitors of record forthwith to serve a copy on AGRs solicitors and SCSs solicitors. Jasper and AGR shall further take all necessary steps to procure a stay of the Jasper/AGR Action without undue delay and with no further order as to costs.
6.3 Each of the Parties to this Deed shall use their best endeavours to procure the dismissal of civil proceedings relating to the Disputes and the Project other than those set out above, if any, without undue delay, and with no further order as to costs.
6.4 Each of the Parties will bear its own costs of and in connection with this Settlement Agreement and/or the Court Proceedings and/or the Disputes and/or the Project. This clause 6.4 supersedes and overrides any and all prior court orders and/or prior agreements between the Parties concerning costs.but for the avoidance of doubt nothing in this clause requires the re-payment of monies already paid either on account of or in entire settlement of costs already ordered.
7. DISCLOSURE
7.1 The Parties have agreed that the economic terms of this Deed (being those matters contained in clause 4.2 above) may be disclosed after this Deed has been fully executed by all Parties. For the avoidance of doubt, the Parties also agree that disclosure of this Deed and/or its terms may be made:
7.1.1 to the Parties respective auditors, insurers or lawyers on terms which preserve confidentiality;
7.1.2 to the extent (if any) as any Party is advised to do so by counsel in order to comply with the rules of any applicable stock exchange;
7.1.3 pursuant to an order of a court of competent jurisdiction, or pursuant to any proper order or demand made by any competent authority or body where the Party is under a legal or regulatory obligation to make such a disclosure;
7.1.4 to the extent advised by Counsel in any proceedings; or
7.1.5 to the extent (if any) as necessary to implement and enforce any of the terms of this Deed.
7.2 For the avoidance of doubt, subject to clause 6 above, the terms of this deed, and the substance of all negotiations in connection with it, are confidential to the Parties and their advisers, who shall not disclose them to, or otherwise communicate them to, any third party.
8. NOTICES
8.1 Any notice or other information in connection with this Deed or the settlement contemplated in this Deed shall be sent by email and in hard copy by internationally recognised courier service (such as DHL or FedEx) to:
8.1.1 in the case of Hyperdynamics:
12012 Wickchester Lane
Suite 475
Houston TX 77079
USA
8.1.2 in the case of SCS:
12012 Wickchester Lane
Suite 475
Houston TX 77079
USA
8.1.3 in the case of AGR:
Union Plaza
1 Union Wynd
Aberdeen AB10 1SL
UK
8.1.4 in the case of Jasper:
1 Harbourfront Avenue
14-08 Keppel Bay Tower
Singapore 098632
9. GENERAL
9.1 This Deed is not, and shall not be represented or construed by the Parties, as an admission of liability or wrongdoing of any of the Parties.
9.2 The Parties warrant and represent that they have not sold, transferred, assigned or otherwise disposed of their interests in any matter connected to the Released Claims.
9.3 This Deed shall be binding on the Parties, their successors and assigns and the names of the Parties herein shall be deemed to include the names of any such successor or assign.
9.4 The Parties confirm that this Deed sets out the entire agreement and understanding between them in relation to its subject matter. Each of the Parties acknowledges that, in entering into this Deed, it has not relied on any oral or written representation, warranty, or other assurance (except as provided for or referred to in this Deed) and waives all rights and remedies which might otherwise be available to it in respect thereof, provided always, that nothing in this clause limits or excludes any liability for fraudulent misrepresentation.
9.5 Each of the Parties warrants that this Deed constitutes its legal valid and binding obligation and that it has full power and authority to enter into and perform, and has taken all necessary action to authorise its entry into and performance of this Deed.
9.6 No delay or omission on the part of any of the Parties in exercising any right, power or remedy provided by the law of any jurisdiction or under this Deed shall:
9.6.1 impair such right, power or remedy; or
9.6.2 operate as a waiver thereof.
9.7 This Deed may be executed in any number of counterparts, all of which, taken together, shall constitute one and the same agreement and any Parties may enter into this Deed by executing a counterpart. For the purposes of completion, faxed or emailed signatures by the Parties shall be binding.
9.8 Any variation of this Deed shall be in writing and signed by or on behalf of each of the Parties.
9.9 This Deed and any non-contractual obligations arising out of or in relation to it shall be governed by and shall be construed in accordance with English law. The Parties submit to the exclusive jurisdiction of the English courts for the purpose of any action arising out of or in relation to this Deed.
9.10 Subject to clauses 1.3 and 3 above, the Parties do not intend by virtue of this Deed to confer any rights on any third party pursuant to the provisions of the Contracts (Rights of Third Parties) Act 1999.
9.11 The Parties acknowledge that, damages not being an adequate remedy for any breach of any obligation under the terms of this Deed, injunctive relief shall be available to any Party which is or may be affected by any such breach or contemplated breach.
9.12 If any term or provision of this Deed shall be held to be illegal or unenforceable, in whole or in part, under any enactment or rule of law or otherwise, such term or provision or part shall to that extent be deemed not to form part of this Deed but the enforceability of the remainder of this Deed shall not be affected. For the avoidance of doubt, the Appendices to this Deed are integral to this Deed
Executed as a Deed by
HYPERDYNAMICS CORPORATION
Acting by
Executed as a Deed by
SCS CORPORATION
Acting by
Executed as a Deed by
AGR WELL MANAGEMENT LTD
Acting by
Executed as a Deed by
JASPER DRILLING PRIVATE LTD
Acting by
Appendix 1 TOMLIN ORDER
IN THE HIGH COURT OF JUSTICE |
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HT-12-194 |
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QUEENS BENCH DIVISION |
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TECHNOLOGY AND CONSTRUCTION COURT |
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B E T W E E N : |
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SCS CORPORATION
Claimant
- and -
AGR WELL MANAGEMENT LIMITED
Defendant
CONSENT ORDER
UPON the parties having reached agreement in the terms set out in the confidential schedule to this order, which schedule shall not form part of this order (the Deed),
BY CONSENT IT IS ORDERED that:
1. Except for the purpose of carrying the Deed into effect (for which purpose there is liberty to apply), these proceedings be stayed.
2. There be no order as to costs.
DATED: May 2014
We hereby consent to an Order in the above terms: |
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Mischcon de Reya |
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Solicitors for the Claimant |
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We hereby consent to an Order in the above terms: |
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McClure Naismith |
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Solicitors for the Defendant |
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Exhibit 21.1
LIST OF SUBSIDIARIES
Hyperdynamics Corporation Subsidiaries
Subsidiary Name |
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State or Other Jurisdiction of Incorporation |
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HYD Resources Corporation |
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Texas |
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SCS Corporation Ltd |
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Cayman Islands |
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SCS Corporation holds 100% ownership of the following subsidiary |
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SCS Guinea SARL |
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Guinea |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-170820 and 333-173051 on Form S-3, and Registration Statement Nos. 333-181281, 333-149774 and 333-167486 on Form S-8 of our report dated September 11, 2013 (September 12, 2014 as to Note 1), relating to the consolidated financial statements of Hyperdynamics Corporation and subsidiaries for the years ended June 30, 2013 and 2012, (which report expresses an unqualified opinion and includes an explanatory paragraph regarding going concern uncertainty), appearing in this Annual Report on Form 10-K of Hyperdynamics Corporation for the year ended June 30, 2014.
/s/ Deloitte & Touche LLP |
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Houston, Texas |
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September 12, 2014 |
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Exhibit 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-170820 and 333-173051 on Form S-3, and Registration Statement Nos. 333-181281, 333-149774 and 333-167486 on Form S-8 of our reports dated September 12, 2014, relating to the consolidated financial statements of Hyperdynamics Corporation and subsidiaries, and of the effectiveness of Hyperdynamics Corporations internal control over financial reporting, appearing in this Annual Report on Form 10-K of Hyperdynamics Corporation for the year ended June 30, 2014.
/S/ Hein & Associates LLP
Houston, Texas
September 12, 2014
EXHIBIT 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Ray Leonard, certify that:
1. I have reviewed this 10-K of Hyperdynamics Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: September 12, 2014 |
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By: |
/s/ Ray Leonard |
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Ray Leonard |
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Chief Executive Officer |
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EXHIBIT 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, David Wesson, certify that:
1. I have reviewed this 10-K of Hyperdynamics Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: September 12, 2014 |
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By: |
/s/ David Wesson |
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David Wesson |
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Chief Financial Officer |
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EXHIBIT 32.1
CERTIFICATIONS PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
In connection with the Annual Report of Hyperdynamics Corporation (Hyperdynamics), on Form 10-K for the year ended June 30, 2014, as filed with the Securities and Exchange Commission (the Report), Ray Leonard, Chief Executive Officer of Hyperdynamics, does hereby certify, pursuant to 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350), that to his knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
Date: September 12, 2014 |
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/s/ Ray Leonard |
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Ray Leonard |
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Chief Executive Officer |
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EXHIBIT 32.2
CERTIFICATIONS PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
In connection with the Annual Report of Hyperdynamics Corporation (Hyperdynamics), on Form 10-K for the year ended June 30, 2014, as filed with the Securities and Exchange Commission (the Report), David Wesson, Chief Financial Officer of Hyperdynamics, does hereby certify, pursuant to 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350), that to his knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
Date: September 12, 2014 |
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By: |
/s/ David Wesson |
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David Wesson |
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Chief Financial Officer |
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SHARE-BASED COMPENSATION (Details) (USD $)
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12 Months Ended | 12 Months Ended | 0 Months Ended | 12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jun. 30, 2014
|
Jun. 30, 2013
|
Jun. 30, 2012
|
Feb. 18, 2010
item
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Jun. 30, 2012
Minimum
|
Jun. 30, 2012
Maximum
|
Jun. 30, 2014
Stock options
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Jun. 30, 2013
Stock options
|
Jun. 30, 2012
Stock options
|
Jun. 30, 2011
Stock options
|
Jun. 30, 2014
Stock options
Minimum
|
Jun. 30, 2013
Stock options
Minimum
|
Jun. 30, 2012
Stock options
Minimum
|
Jun. 30, 2014
Stock options
Maximum
|
Jun. 30, 2013
Stock options
Maximum
|
Jun. 30, 2012
Stock options
Maximum
|
Jun. 30, 2014
Stock options
Exercise price range $1.92 - $4.00
Remaining Life, 1 year
|
Jun. 30, 2013
Stock options
Exercise price range $1.92 - $4.00
Remaining Life, 1 year
|
Jun. 30, 2014
Stock options
Exercise price range $1.92 - $4.00
Remaining life, 5 year
|
Jun. 30, 2013
Stock options
Exercise price range $1.92 - $4.00
Remaining life, 5 year
|
Jun. 30, 2014
Stock options
Exercise price range $4.01 - $10.00
Remaining Life, 1 year
|
Jun. 30, 2013
Stock options
Exercise price range $4.01 - $10.00
Remaining Life, 1 year
|
Jun. 30, 2013
Stock options
Exercise price range $4.01 - $10.00
Remaining life, 7 years
|
Jun. 30, 2014
Stock options
Exercise price range $4.01 - $10.00
Remaining life, 3 years
|
Jun. 30, 2014
Stock options
Exercise price range $4.01 - $10.00
Remaining life, 6 years
|
Jun. 30, 2013
Stock options
Exercise price range $4.01 - $10.00
Remaining life, 4 years
|
Jun. 30, 2013
Stock options
Exercise price range $10.01 - $15.00
Remaining Life, 1 year
|
Jun. 30, 2013
Stock options
Exercise price range $10.01 - $15.00
Remaining life, 4 years
|
Jun. 30, 2014
Stock options
Exercise price range $10.01 - $20.00
Remaining Life, 1 year
|
Jun. 30, 2014
Stock options
Exercise price range $10.01 - $20.00
Remaining life, 6 years
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Jun. 30, 2013
Stock options
Exercise price range $15.01 - $20.00
Remaining life, 7 years
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Jun. 30, 2014
Stock options
Exercise price range $20.01 - $30.00
Remaining life, 6 years
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Jun. 30, 2013
Stock options
Exercise price range $20.01 - $25.00
Remaining Life, 1 year
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Jun. 30, 2013
Stock options
Exercise price range $20.01 - $25.00
Remaining life, 7 years
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Jun. 30, 2013
Stock options
Exercise price range $25.01 - $30.00
Remaining Life, 1 year
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Jun. 30, 2013
Stock options
Exercise price range $25.01 - $30.00
Remaining life, 7 years
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Jun. 30, 2014
Stock options
Exercise price range $30.01 - $40.00
Remaining life, 7 years
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Jun. 30, 2014
Stock options
Exercise price range $30.01 - $40.00
Remaining life, 2 years
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Jun. 30, 2013
Stock options
Exercise price range $30.01 - $35.00
Remaining Life, 1 year
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Jun. 30, 2013
Stock options
Exercise price range $30.01 - $35.00
Remaining life, 8 year
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Jun. 30, 2013
Stock options
Exercise price range $30.01 - $35.00
Remaining life, 3 years
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Jun. 30, 2013
Stock options
Exercise price range $35.01 - $40.00
Remaining life, 3 years
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Jun. 30, 2014
Stock options
Exercise price range $40.01 - $50.00
Remaining life, 7 years
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Jun. 30, 2013
Stock options
Exercise price range $40.01 - $45.00
Remaining Life, 1 year
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Jun. 30, 2013
Stock options
Exercise price range $40.01 - $45.00
Remaining life, 7 years
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Jun. 30, 2014
Unvested restricted stock awards
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Jun. 30, 2013
Unvested restricted stock awards
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Feb. 18, 2010
2010 Plan
Stock options
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Jun. 30, 2014
2010 Plan
Stock options
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Jun. 30, 2014
2010 Plan
Unvested restricted stock awards
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Stock options and warrants | ||||||||||||||||||||||||||||||||||||||||||||||||||
Number of stock award plans prior to the adoption of 2010 plan | 2 | |||||||||||||||||||||||||||||||||||||||||||||||||
Period within which shares of common stock, options or restricted stock can be granted under the 2010 plan | 10 years | |||||||||||||||||||||||||||||||||||||||||||||||||
Number of shares issuable under the plan | 1,250,000 | |||||||||||||||||||||||||||||||||||||||||||||||||
Number of shares remaining available for issuance | 231,324 | |||||||||||||||||||||||||||||||||||||||||||||||||
Options granted to employees and directors | ||||||||||||||||||||||||||||||||||||||||||||||||||
Number of options granted (in shares) | 372,086 | 247,197 | 534,182 | |||||||||||||||||||||||||||||||||||||||||||||||
Compensation expense recognized | $ 481,426 | $ 2,615,498 | $ 5,024,825 | |||||||||||||||||||||||||||||||||||||||||||||||
Compensation cost capitalized | 809,309 | 1,745,344 | ||||||||||||||||||||||||||||||||||||||||||||||||
Weighted average fair value of options outstanding (in dollars per share) | $ 5.88 | $ 8.68 | $ 16.72 | |||||||||||||||||||||||||||||||||||||||||||||||
Significant assumptions used to compute the fair market values | ||||||||||||||||||||||||||||||||||||||||||||||||||
Risk-free interest rate, low end of range (as a percent) | 0.08% | 0.07% | 0.11% | |||||||||||||||||||||||||||||||||||||||||||||||
Risk-free interest rate, high end of range (as a percent) | 0.95% | 0.96% | 0.91% | |||||||||||||||||||||||||||||||||||||||||||||||
Dividend yield (as a percent) | 0.00% | 0.00% | 0.00% | |||||||||||||||||||||||||||||||||||||||||||||||
Volatility factor, low end of range (as a percent) | 74.00% | 80.00% | 105.00% | |||||||||||||||||||||||||||||||||||||||||||||||
Volatility factor, high end of range (as a percent) | 125.00% | 123.00% | 129.00% | |||||||||||||||||||||||||||||||||||||||||||||||
Expected life | 6 months | 6 months | 3 months | 3 years 3 months | 3 years 6 months | 3 years 3 months | ||||||||||||||||||||||||||||||||||||||||||||
Options | ||||||||||||||||||||||||||||||||||||||||||||||||||
Outstanding at the beginning of the period (in shares) | 1,361,509 | 1,561,913 | 1,159,356 | |||||||||||||||||||||||||||||||||||||||||||||||
Granted (in shares) | 372,086 | 247,197 | 534,182 | |||||||||||||||||||||||||||||||||||||||||||||||
Exercised (in shares) | 0 | (95,000) | (100,625) | (95,000) | (100,625) | |||||||||||||||||||||||||||||||||||||||||||||
Forfeited (in shares) | (92,100) | (272,583) | (31,000) | |||||||||||||||||||||||||||||||||||||||||||||||
Expired (in shares) | (199,786) | (80,018) | ||||||||||||||||||||||||||||||||||||||||||||||||
Outstanding at the end of the period (in shares) | 1,441,727 | 1,361,509 | 1,561,913 | 1,159,356 | ||||||||||||||||||||||||||||||||||||||||||||||
Options exercisable at end of period (in shares) | 762,498 | |||||||||||||||||||||||||||||||||||||||||||||||||
Weighted Average Share Price | ||||||||||||||||||||||||||||||||||||||||||||||||||
Outstanding at the beginning of the period (in dollars per share) | $ 13.12 | $ 16.72 | $ 14.80 | |||||||||||||||||||||||||||||||||||||||||||||||
Granted (in dollars per share) | $ 3.30 | $ 4.49 | $ 20.56 | |||||||||||||||||||||||||||||||||||||||||||||||
Exercised (in dollars per share) | $ 3.92 | $ 2.48 | $ 16.00 | $ 3.92 | $ 6.64 | |||||||||||||||||||||||||||||||||||||||||||||
Forfeited (in dollars per share) | $ 18.78 | $ 25.66 | $ 44.08 | |||||||||||||||||||||||||||||||||||||||||||||||
Expired (in dollars per share) | $ 23.66 | $ 24.61 | ||||||||||||||||||||||||||||||||||||||||||||||||
Outstanding at the end of the period (in dollars per share) | $ 8.76 | $ 13.12 | $ 16.72 | $ 14.80 | ||||||||||||||||||||||||||||||||||||||||||||||
Options exercisable at end of period (in dollars per share) | $ 13.17 | |||||||||||||||||||||||||||||||||||||||||||||||||
Aggregate intrinsic value | ||||||||||||||||||||||||||||||||||||||||||||||||||
Outstanding at the end of the period | 8,327 | 52,277 | 1,145,800 | 23,558,086 | ||||||||||||||||||||||||||||||||||||||||||||||
Options exercisable at period end | 8,439 | |||||||||||||||||||||||||||||||||||||||||||||||||
Weighted average remaining contractual term (years) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Outstanding at the end of the period | 3 years 1 month 20 days | 3 years 3 months 4 days | 4 years 7 months 13 days | 5 years 7 months 24 days | ||||||||||||||||||||||||||||||||||||||||||||||
Options exercisable at period end | 2 years 8 months 26 days | |||||||||||||||||||||||||||||||||||||||||||||||||
Options outstanding and exercisable | ||||||||||||||||||||||||||||||||||||||||||||||||||
Exercise Price, low end of the range (in dollars per share) | $ 1.92 | $ 1.92 | $ 1.92 | $ 1.92 | $ 4.01 | $ 4.01 | $ 4.01 | $ 4.01 | $ 4.01 | $ 4.01 | $ 10.01 | $ 10.01 | $ 10.01 | $ 10.01 | $ 15.01 | $ 20.01 | $ 20.01 | $ 20.01 | $ 25.01 | $ 25.01 | $ 30.01 | $ 30.01 | $ 30.01 | $ 30.01 | $ 30.01 | $ 35.01 | $ 40.01 | $ 40.01 | $ 40.01 | |||||||||||||||||||||
Exercise Price, high end of the range (in dollars per share) | $ 4.00 | $ 4.00 | $ 4.00 | $ 4.00 | $ 10.00 | $ 10.00 | $ 10.00 | $ 10.00 | $ 10.00 | $ 10.00 | $ 15.00 | $ 15.00 | $ 20.00 | $ 20.00 | $ 20.00 | $ 30.00 | $ 25.00 | $ 25.00 | $ 30.00 | $ 30.00 | $ 40.00 | $ 40.00 | $ 35.00 | $ 35.00 | $ 35.00 | $ 40.00 | $ 50.00 | $ 45.00 | $ 45.00 | |||||||||||||||||||||
Outstanding Number Of Shares | 1,441,727 | 1,361,509 | 299,108 | 292,500 | 510,880 | 174,071 | 81,425 | 149,479 | 46,125 | 175,319 | 57,687 | 190,684 | 106,375 | 15,000 | 106,375 | 32,500 | 20,000 | 55,375 | 14,875 | 17,875 | 102,500 | 33,750 | 68,688 | 45,620 | 28,338 | 64,312 | 38,125 | 44,375 | 8,750 | 11,875 | 11,250 | |||||||||||||||||||
Remaining Life | 1 year | 1 year | 5 years | 5 years | 1 year | 1 year | 7 years | 3 years | 6 years | 4 years | 1 year | 4 years | 1 year | 6 years | 7 years | 6 years | 1 year | 7 years | 1 year | 7 years | 7 years | 2 years | 1 year | 8 years | 3 years | 3 years | 7 years | 1 year | 7 years | |||||||||||||||||||||
Exercisable Number Of Shares | 762,498 | 756,461 | 149,107 | 122,083 | 56,238 | 6,250 | 81,425 | 149,479 | 46,125 | 106,879 | 53,625 | 46,270 | 106,375 | 12,500 | 106,375 | 31,250 | 18,333 | 54,541 | 12,375 | 17,875 | 27,500 | 28,333 | 68,688 | 45,620 | 28,338 | 64,312 | 19,063 | 28,125 | 8,750 | 11,875 | 11,250 | |||||||||||||||||||
Nonvested Share-based Compensation Arrangements, Additional Disclosure | ||||||||||||||||||||||||||||||||||||||||||||||||||
Unrecognized compensation costs | 1,600,000 | |||||||||||||||||||||||||||||||||||||||||||||||||
Option vested (in shares) | 204,970 | |||||||||||||||||||||||||||||||||||||||||||||||||
Weighted average grant date fair value of options vested (in dollars per share) | $ 12.33 | |||||||||||||||||||||||||||||||||||||||||||||||||
Unvested options outstanding (in shares) | 679,234 | |||||||||||||||||||||||||||||||||||||||||||||||||
Weighted average grant date fair value of unvested options outstanding (in dollars per share) | $ 2.21 | |||||||||||||||||||||||||||||||||||||||||||||||||
Amortization period | 2 years | 3 years | ||||||||||||||||||||||||||||||||||||||||||||||||
Weighted average remaining life of unvested options outstanding | 3 years 6 months 29 days | |||||||||||||||||||||||||||||||||||||||||||||||||
Fair value of restricted shares granted | $ 100,000 | |||||||||||||||||||||||||||||||||||||||||||||||||
Restricted Stock | ||||||||||||||||||||||||||||||||||||||||||||||||||
Granted (in shares) | 0 | 0 | 21,030 | |||||||||||||||||||||||||||||||||||||||||||||||
Outstanding at the end of the period (in shares) | 21,030 | |||||||||||||||||||||||||||||||||||||||||||||||||
Weighted Average Grant Price | ||||||||||||||||||||||||||||||||||||||||||||||||||
Granted (in dollars per share) | $ 4.12 | |||||||||||||||||||||||||||||||||||||||||||||||||
Outstanding at the end of the period (in dollars per share) | $ 4.12 |
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