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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)

12012 Wickchester Lane, #475

Houston, Texas 77079

(Address of principal executive offices, including zip code)

(713) 353-9400

(Issuer’s telephone number, including area code)

Securities registered under Section 12(b) of the Exchange Act:

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 registrant’s 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.

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 registrant’s 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 registrant’s definitive proxy statement for the registrant’s 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 registrant’s fiscal year ended June 30, 2014.

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PART I

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.

Item 1.   Business

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.”

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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 Guinea’s 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 Guinea’s 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 government’s 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.

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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 Guinea’s Ministry of Mines and Geology by issuing an Arrêté on December 27, 2012 which formally authorized our assignment of a participating interest to Tullow. 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.

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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.

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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:

(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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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:

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 SEC’s 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 1—800—SEC—0330.  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 Commission’s website may access such information by searching the EDGAR database.

Item 1A.  Risk Factors

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.

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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 operator’s 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, Tullow’s 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.

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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.

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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 PSC’s 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 management’s 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.

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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;

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·                  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;

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·                  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.

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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 management’s 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 d’états 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 Consortium’s operations in Guinea also may be adversely affected by laws and policies of multiple jurisdictions.

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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 country’s 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.

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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 NYSE’s continued listing standards because our average global market capitalization has been less than $50 million over a consecutive 30 trading-day period, and total stockholders’ equity is less than $50 million.

In accordance with NYSE procedures, we 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.

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Item 1B.  Unresolved Staff Comments

None.

Item 2. Properties

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.

Item 3. Legal Proceedings

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, Queen’s 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

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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.

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PART II

Item 5. Market for Registrant’s 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).

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

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”).

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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:

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.

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Item 6. Selected Financial Data

Item 7. Management’s 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.

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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.

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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

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.

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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 SCS’s 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 Corporation’s 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

(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.

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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.

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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.

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HYPERDYNAMICS CORPORATION

Index to Financial Statements

TABLE OF CONTENTS

F-1

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REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of Hyperdynamics Corporation (the “Company” or “our”), including the Company’s 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 Company’s internal control system was designed to provide reasonable assurance to the Company’s 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 Company’s 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”). Management’s assessment included an evaluation of the design of the Company’s 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 Company’s Board of Directors. Based on this assessment, management has concluded that, as of June 30, 2014, the Company’s internal control over financial reporting was effective.

Hein & Associates LLP, the Company’s independent registered public accounting firm, has issued an attestation report on the effectiveness on the Company’s internal control over financial reporting as of June 30, 2014 which is included in Item 8. Consolidated Financial Statements and Supplementary Data.

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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 Company’s 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 Company’s 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 company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s 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 company’s 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 company’s 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

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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 Company’s 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 Company’s ability to continue as a going concern. Management’s 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 Company’s 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 Company’s internal control over financial reporting.

/S/ Hein & Associates LLP

Houston, Texas

September 12, 2014

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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 Company’s 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 Company’s ability to continue as a going concern. Management’s 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.

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HYPERDYNAMICS CORPORATION

CONSOLIDATED BALANCE SHEETS

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

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

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HYPERDYNAMICS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

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

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

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HYPERDYNAMICS CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In Thousands)

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

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HYPERDYNAMICS CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In Thousands, Except Number of Shares)