| HYPERDYNAMICS CORP Item 1A Risk Factors |
| You should carefully consider the following risk factors before purchasing our common stock |
| The risks and uncertainties described below are not the only ones we face |
| There may be additional risks and uncertainties that are not known to us or that we do not consider to be material at this time |
| If the events described in these risks occur, our business, financial condition and results of operations would likely suffer |
| This prospectus contains forward-looking statements that involve risks and uncertainties |
| Our actual results may differ significantly from the results discussed in the forward-looking statements |
| This section discusses the risk factors that might cause those differences |
| Risks about the Oil and Gas Industry OIL AND GAS PRICES ARE VOLATILE Our revenues, cash flow, operating results, financial condition and ability to borrow funds or obtain additional capital depend substantially on the prices that we receive for oil and gas production |
| Declines in oil and gas prices may adversely affect our financial condition, liquidity, ability to obtain financing and operating results |
| Lower oil and gas prices also may reduce the amount of oil and gas that we can produce economically |
| High oil and gas prices could preclude acceptance of our business model |
| Depressed 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 domestic and foreign supplies of oil; - the level of consumer product demand; - weather conditions; - political conditions in oil producing regions, including the Middle East; 18 _________________________________________________________________ [40]Table of Contens - the ability of the members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls; - the price of foreign imports; - actions of governmental authorities; - domestic and foreign governmental regulations; - the price, availability and acceptance of alternative fuels; - overall economic conditions |
| These factors and the volatile nature of the energy markets make it impossible to predict with any certainty future oil and gas prices |
| Our inability to respond appropriately to changes in these factors could negatively affect our profitability |
| INVESTMENT IN THE OIL AND GAS BUSINESS IS RISKY Oil and gas exploration and development are inherently speculative activities |
| There is no certain method to determine whether or not a given lease will produce oil or gas or yield oil or gas in sufficient quantities and quality to result in commercial production |
| There is always the risk that development of a lease may result in dry holes or in the discovery of oil or gas that is not commercially feasible to produce |
| There is no guarantee that a producing asset will continue to produce |
| Because of the high degree of risk involved, there can be no assurance that we will recover any portion of our investment or that our investment in leases will be profitable |
| THERE ARE DRILLING AND OPERATIONAL HAZARDS The oil and gas business involves a variety of operating risks, including: - blowouts, cratering and explosions; - mechanical and equipment problems; - uncontrolled flows of oil and gas or well fluids; - fires; - marine hazards with respect to offshore operations; - formations with abnormal pressures; - pollution and other environmental risks; - natural disasters |
| Any of these events could result in loss of human life, significant damage to property, environmental pollution, impairment of our operations and substantial losses |
| Locating pipelines near populated areas, including residential areas, commercial business centers and industrial sites, could increase these risks |
| In accordance with customary industry practice, we will maintain insurance against some, but not all, of these risks and losses |
| The occurrence of any of these events not fully covered by insurance could have an adverse effect on our financial position and results of operations |
| 19 _________________________________________________________________ [41]Table of Contents WE ARE SUBJECT TO GOVERNMENTAL REGULATIONS Oil and gas operations in the United States are subject to extensive government regulation and to interruption or termination by governmental authorities on account of ecological and other considerations |
| The Environmental Protection Agency of the United States and the various state departments of environmental affairs closely regulate gas and oil production effects on air, water and surface resources |
| Furthermore, proposals concerning regulation and taxation of the gas and oil industry are constantly before Congress |
| It is impossible to predict future proposals that might be enacted into law and the effect they might have on us |
| Thus, restrictions on gas and oil activities, such as production restrictions, price controls, tax increases and pollution and environmental controls may have an adverse effect on us |
| 20 _________________________________________________________________ [42]Table of Contents THE OIL AND GAS INDUSTRY IS SUBJECT TO HAZARDS RELATED TO POLLUTION AND ENVIRONMENTAL ISSUES Hazards in the drilling and/or the operation of gas and oil properties, such as accidental leakage or spillage, are sometimes encountered |
| Such hazards may cause substantial liabilities to third parties or governmental entities, the payment of which could reduce distributions or result in the loss of our leases |
| Although it is anticipated that insurance will be obtained by third party operators for our benefit, we may be subject to liability for pollution and other damages due to environmental events which cannot be insured against due to prohibitive premium costs, or for other reasons |
| Environmental regulatory matters also could increase substantially the cost of doing business, may cause delays in producing oil and gas or require the modification of operations in certain areas |
| Our operations are subject to numerous stringent and complex laws and regulations at the Federal, state and local levels governing the discharge of materials into the environment or otherwise relating to environmental protection |
| Failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal penalties, the imposition of remedial requirements, and the imposition of injunctions to force future compliance |
| The Oil Pollution Act of 1990 and its implementing regulations impose a variety of requirements related to the prevention of oil spills, and liability for damages resulting from such spills in United States waters |
| OPA 90 imposes strict joint and several liability on responsible parties for oil removal costs and a variety of public and private damages, including natural resource damages |
| While liability limits apply in some circumstances, a party cannot take advantage of liability limits if the spill was caused by gross negligence or willful misconduct or resulted from violation of a Federal safety, construction or operation regulation |
| If a party fails to report a spill or to cooperate fully in a cleanup, liability limits likewise do not apply |
| Even if applicable, the liability limits for offshore facilities require the responsible party to pay all removal costs, plus up to dlra75 million in other damages |
| For onshore facilities, the total liability limit is dlra350 million |
| OPA 90 also requires a responsible party at an offshore facility to submit proof of its financial ability to cover environmental cleanup and restoration costs that could be incurred in connection with an oil spill |
| The Comprehensive Environmental Response, Compensation, and Liability Act, also known as the “Superfund” law, and analogous state laws impose joint and several liability on certain classes of persons that are considered to have contributed to the release of a “hazardous substance” into the environment |
| These parties include the owner or operator of the site where the release occurred, and those that disposed or arranged for the disposal of hazardous substances found at the site |
| Responsible parties under CERCLA may be subject to joint and several liability for remediation costs at the site, and may also be liable for natural resource damages |
| Additionally, it is not uncommon for neighboring landowners and other third parties to file tort claims for personal injury and property damage allegedly caused by hazardous substances released into the environment |
| State and local statutes and regulations require permits for drilling operations, drilling bonds and reports concerning operations |
| In addition, there are state statutes, rules and regulations governing conservation matters, including the unitization or pooling of oil and gas properties, establishment of maximum rates of production from oil and gas wells and the spacing, plugging and abandonment of such wells |
| Such statutes and regulations may limit the rate at which oil and gas could otherwise be produced from our properties and may restrict the number of wells that may be drilled on a particular lease or in a particular field |
| Risks About Our Business GEOPOLITICAL INSTABILITY We conduct business in Guinea, which is in a region of the world where there have been recent civil wars, revolutionary wars, and internecine conflicts |
| Although Guinea is a peaceful nation, external or internal political forces could potentially create a political or military climate that might cause a change in political leadership or the outbreak of hostilities |
| Such a change could result in our having to cease our Guinea operations and result in the loss or delay of our rights under the PSA 21 _________________________________________________________________ [43]Table of Contents GEOPOLITICAL POLITICS We recently entered into a 2006 Production Sharing Contract with the Republic of Guinea |
| The government of the Republic of Guinea could unlawfully terminate this new contract |
| WE MAY HAVE WRITE DOWNS OF OUR ASSETS DUE TO PRICE VOLATILITY SEC accounting rules require us to review the carrying value of our oil and gas properties on a quarterly basis for possible write down or impairment |
| Under these rules, capitalized costs of proved reserves may not exceed a ceiling calculated at the present value of estimated future net revenues from those proved reserves |
| Capital costs in excess of the ceiling must be permanently written down |
| A decline in oil and natural gas prices could cause a write down which would negatively affect our net income |
| ESTIMATES OF OIL AND GAS RESERVES ARE UNCERTAIN AND MAY VARY SUBSTANTIALLY FROM ACTUAL PRODUCTION We do not have any reserve reports or geology or petroleum engineering reports related to our foreign property |
| We do have a third-party reserve report for our Louisiana properties |
| There are numerous uncertainties inherent in estimating quantities of proved reserves and in projecting future rates of production and timing of expenditures, including many factors beyond our control |
| 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 |
| The accuracy of any reserve estimate is a function of the quality of available geological, geophysical, engineering and economic data and the precision of engineering and judgment |
| As a result, estimates of different engineers often vary |
| The estimates of reserves, future cash flows and present value are based on various assumptions, including those prescribed by the SEC relating to oil and natural gas prices, drilling and operating expenses, capital expenditures, taxes and availability of funds, and are inherently imprecise |
| THE UNAVAILABILITY OR HIGH COST OF DRILLING RIGS, EQUIPMENT, SUPPLIES, PERSONNEL AND OILFIELD SERVICES COULD ADVERSELY IMPACT US Drilling activity offshore Guinea will require that we have access to an offshore drilling rig |
| Either unavailability, shortages or increases in the cost of drilling rigs, equipment, supplies or personnel could delay or adversely affect our Guinea operations |
| There can be no assurance that we will be able to obtain the necessary equipment or that services will be available at economical prices |
| FAILURE TO FIND OIL AND GAS We may not be able to find oil and gas in commercial quantities, and if not, our future revenue potential would be substantially reduced |
| WE MAY BE UNABLE TO ACQUIRE OIL AND GAS LEASES To engage in oil and gas exploration, we must first acquire rights to conduct exploration and recovery activities on identified prospects |
| We may not be successful in acquiring farmouts, permits, lease options, leases or other rights to explore for or recover oil and gas |
| Other major and independent oil and gas companies with financial resources significantly greater than ours may bid against us for the purchase of oil and gas leases |
| If we or our subsidiaries are unsuccessful in acquiring these leases, permits, options and other interests, our prospect inventory for exploration and drilling could be significantly reduced, and our business, results of operations and financial condition could be substantially harmed |
| EXPANSION OF OUR EXPLORATION PROGRAM WILL REQUIRE CAPITAL FROM OUTSIDE SOURCES We do not currently have the financial resources to explore and drill all of our currently identified prospects |
| Absent raising additional capital or entering into joint venture agreements, we will not be able to increase our exploration and drilling operations at the projected rate |
| This could limit the size of our business |
| There is no assurance that capital will be available in the future to us or that capital will be available under terms acceptable to us |
| We will need to raise additional money, either through the sale of equity securities (which could dilute the existing stockholders &apos interest), through the entering of joint venture agreements (which, while limiting our risk, could reduce our ownership interest in particular assets), or from borrowings from third parties (which could result in additional assets being pledged as collateral and which would increase our debt service requirements) |
| 22 _________________________________________________________________ [44]Table of Contents Additional capital could be obtained from a combination of funding sources, many of which could have an adverse effect on our business, results of operations and financial condition |
| These potential funding sources, and the potential adverse effects attributable thereto, include: - cash flow from operating activities, which is sensitive to prices we receive for oil and natural gas and the success of current and future operations; - borrowings from financial institutions, which may subject us to certain restrictive covenants, including covenants restricting our ability to raise additional capital or pay dividends; - debt offerings, which would increase our leverage and add to our need for cash to service such debt (which could result in additional assets being pledged as collateral and which could increase our debt service requirements); - additional offerings of equity securities, which would cause dilution of our common stock; - sales of prospects generated by the exploration program, which would reduce future revenues from that program; - additional sales of interests in our projects, which could reduce future revenues |
| Our ability to raise additional capital will depend on the results of operations and the status of various capital and industry markets at the time such additional capital is sought |
| Capital may not become available to us from any particular source or at all |
| Even if additional capital becomes available, it may not be on terms acceptable to us |
| Failure to obtain additional financing on acceptable terms may have an adverse effect on our business, results of operations and financial condition |
| WE HAVE COMPETITION FROM OTHER COMPANIES A large number of companies and individuals engage in drilling for gas and oil, and there is competition for the most desirable prospects |
| We will encounter intense competition from other companies and other entities in the sale of our gas and oil production |
| We could be competing with numerous gas and oil companies which may have financial resources significantly greater than ours |
| Further, the quantities of gas and oil to be delivered by us may be affected by factors beyond our control, such as the inability of the wells to deliver at the necessary quality and pressure, premature exhaustion of reserves, changes in governmental regulations affecting allowable production and priority allocations, and price limitations imposed by Federal and state regulatory agencies |
| WE DEPEND ON INDUSTRY VENDORS AND MAY NOT BE ABLE TO OBTAIN ADEQUATE SERVICES We are and will continue to be dependent on industry vendors for the success of our oil and gas exploration projects |
| These contracted services include, but are not limited to, accounting, drilling, completion, workovers (remedial down hole work on a well) and reentries (entering an existing well and changing the direction and/or depth of a well), geological evaluations, engineering, leasehold acquisition (landmen), operations, legal, investor relations/public relations, and prospect generation |
| We could be harmed if we fail to attract quality industry vendors to participate in the drilling of prospects which we identify or if our industry vendors do not perform satisfactorily |
| We often have, and will continue to have, little control over factors that would influence the performance of our vendors |
| WE RELY ON THIRD PARTIES FOR PRODUCTION SERVICES AND PROCESSING FACILITIES The marketability of our production depends upon the proximity of our reserves to, and the capacity of, facilities and third party services, including oil and natural gas gathering systems, pipelines, trucking or terminal facilities, and processing facilities |
| The unavailability or lack of capacity of such services and facilities could result in the shut-in of producing wells or the delay or discontinuance of development plans for properties |
| A shut-in or delay or discontinuance could adversely affect our financial condition |
| In addition, Federal and state regulation of oil and natural gas production and transportation affect our ability to produce and market oil and natural gas on a profitable basis |
| 23 _________________________________________________________________ [45]Table of Contents OUR APPROACH TO TITLE ASSURANCE COULD ADVERSELY AFFECT OUR BUSINESS AND OPERATIONS We intend to purchase oil and gas interests and leases from third parties or directly from the mineral fee owners as the inventory upon which we will perform our exploration activities |
| The existence of a title deficiency can render a lease worthless and can result in a large expense to us |
| Title insurance covering the mineral leaseholds is not generally available and in all instances, we forego the expense of retaining lawyers to examine the title to the mineral interest to be placed under lease or already placed under lease until the drilling block is assembled and ready to be drilled |
| We rely upon the judgment of oil and gas lease brokers or experienced landmen who perform the field work in examining records in the appropriate governmental office before attempting to acquire or place under lease a specific mineral interest |
| This is customary practice in the oil and gas industry |
| However, if there is a defect in title, the amount that we paid for such oil and gas leases or interests is generally lost |
| If the defective lease covers acreage which is critical to the success of a particular project, the loss could have an adverse effect by making the target area potentially not drillable |
| We expect to incur significant operating losses until sales increase |
| We will also need to raise sufficient funds to finance our activities |
| We may be unable to achieve or sustain profitability |
| WE HAVE AN ACCUMULATED DEFICIT AND MAY INCUR ADDITIONAL LOSSES We have a substantial accumulated deficit |
| We may not be able to meet our debts as they become due |
| If we are unable to generate sufficient cash flow or obtain funds to pay debt, we will be in default |
| WE MAY EXPERIENCE POTENTIAL FLUCTUATIONS IN RESULTS OF OPERATIONS Our future revenues may be affected by a variety of factors, many of which are outside our control, including (a) the success of project results; (b) swings in availability of drilling services needed to implement projects and the pricing of such services; (c) a volatile oil and gas pricing market which may make certain projects that we undertake uneconomic; (d) the ability to attract new independent professionals with prospects in a timely and effective manner; and (e) the amount and timing of operating costs and capital expenditures relating to conducting our business operations and infrastructure |
| As a result of our limited operating history and the emerging nature of our business plan, it is difficult to forecast revenues or earnings accurately, which may fluctuate significantly from quarter to quarter |
| 24 _________________________________________________________________ [46]Table of Contents IF WE CANNOT OBTAIN ADDITIONAL FINANCING, WE MAY HAVE TO CURTAIL OPERATIONS AND MAY ULTIMATELY CEASE TO EXIST Our financial statements reflect recurring, ongoing and substantial yearly net losses, and negative cash flows from operations |
| These conditions require sufficient additional funding or alternative sources of capital to meet our working capital needs |
| We have raised capital by selling common stock, issuing convertible debentures and our equity line of credit which will also requires us to issue common stock |
| However, future financing may not be available in amounts or on terms acceptable to us, if at all |
| If we cannot raise funds on acceptable terms, or achieve positive cash flow, we may be forced to curtail operations or may ultimately cease to exist |
| WE MAY NOT BE ABLE TO RAISE THE REQUIRED CAPITAL TO CONDUCT OUR OPERATIONS; EQUITY LINE OF CREDIT We may require additional capital resources in order to conduct our operations |
| If we cannot obtain additional funding, we may make reductions in the scope and size of our operations |
| In order to grow and expand our business, and to introduce our services to the marketplace, we will need to raise additional funds |
| We have an equity line of credit |
| We have made 5 puts on the equity line of credit since February 2006 in the aggregate amount of dlra967cmam000 |
| At October 10, 2006, the remaining amount available for us to draw down on the equity line of credit is dlra19cmam032cmam900 |
| The equity line of credit expires in February 2009, after which we will not be able to draw down on the equity line of credit even if has not been fully utilized by us |
| The Cornell agreements limit our use of the equity line of credit |
| Whether as a result of the Cornell Agreements or as a result of our discretion, between now and February 2009, we may not have drawn down the full dlra19cmam032cmam900 currently available in the equity line of credit |
| RISKS ABOUT OUR SECURITIES WE MAY ISSUE ADDITIONAL SHARES OF COMMON STOCK IN THE FUTURE, WHICH COULD CAUSE DILUTION TO ALL SHAREHOLDERS We may seek to raise additional equity capital in the future |
| Any issuance of additional shares of our common stock will dilute the percentage ownership interest of all shareholders and may dilute the book value per share of our common stock |
| SHAREHOLDERS COULD INCUR NEGATIVE IMPACT DUE TO THE REMOVAL OF THE LEGEND ON A SIGNIFICANT PERCENTAGE OF OUR OUTSTANDING SHARES OF COMMON STOCK, OR THE EXERCISE OF OPTIONS AND WARRANTS As of June 30, 2006, approximately 9cmam225cmam938 shares of our common stock was restricted stock, some of which was eligible to be sold immediately pursuant Rule 144 of the Securities Act of 1933, as amended |
| We have outstanding warrants and options to purchase 8cmam421cmam902 shares of our common stock |
| If these options and warrants are exercised, the underlying shares will ultimately become subject to resale pursuant to Rule 144 |
| We do not know when or if these options will be exercised |
| In the event that a substantial number of these shares are offered for sale in the market by several holders, the market price of our common stock could be adversely affected |
| OUR MANAGEMENT CONTROLS A SIGNIFICANT PERCENTAGE OF OUR CURRENT OUTSTANDING COMMON STOCK; THEIR INTERESTS MAY CONFLICT WITH THOSE OF OUR SHAREHOLDERS Our Directors and Executive Officers and their affiliates collectively and beneficially owned approximately 35 % of our outstanding common stock voting control (including voting Series B Preferred Stock |
| This concentration of voting control gives our Directors and Executive Officers and their respective affiliates substantial influence over any matters which require a shareholder vote, including, without limitation, the election of Directors, even if their interests may conflict with those of other shareholders |
| It could also have the effect of delaying or preventing a change in control of or otherwise discouraging a potential acquirer from attempting to obtain control of us |
| This could have an adverse effect on the market price of our common stock or prevent our shareholders from realizing a premium over the then prevailing market prices for their shares of common stock |
| 25 _________________________________________________________________ [47]Table of Contents IF WE ISSUE COMMON STOCK PURSUANT TO THE EQUITY LINE OF CREDIT, THEN EXISTING STOCKHOLDERS MAY EXPERIENCE SIGNIFICANT DILUTION We utilize an equity line of credit |
| The sale of shares pursuant to equity line of credit will have a dilutive impact on our stockholders |
| As a result, our net income per share could decrease in future periods, and the market price of our common stock could decline |
| In addition, the lower our stock price at the time we exercise draw down on the equity line of credit, the more shares we will have to issue |
| If our stock price decreases, then our existing stockholders would experience greater dilution |
| IMPACT OF THE EQUITY LINE OF CREDIT As we draw down on the equity line of credit, our common stock will be purchased at or less than the then market price |
| IF WE ISSUE COMMON STOCK PURSUANT TO CORNELL &apos S CONVERSION OF DEBENTURES OR EXERCISE OF WARRANT, THEN EXISTING STOCKHOLDERS MAY EXPERIENCE SIGNIFICANT DILUTION The conversion into shares pursuant to Cornell debentures and warrants will have a dilutive impact on our stockholders |
| As a result, our net income per share could decrease in future periods, and the market price of our common stock could decline |
| In addition, the lower our stock price at the time we exercise draw down on the equity line of credit, the more shares we will have to issue |
| If our stock price decreases, then our existing stockholders would experience greater dilution |
| OUR STOCK PRICE IS HIGHLY VOLATILE AND YOU MAY LOSE SOME OR ALL OF YOUR INVESTMENT Trading prices of our common stock may fluctuate in response to a number of events and factors, such as: - general economic conditions changes in interest rates; - conditions or trends in the oil and gas business; - fluctuations in the stock market in general and market prices for oil and gas companies in particular; - quarterly variations in our operating results; - new products, services, innovations, and strategic developments by our competitors or us, or business combinations and investments by our competitors or us; - changes in environmental regulation; - changes in our capital structure, including issuance of additional debt or equity to the public; - additions or departures of our key personnel; - corporate restructurings, including layoffs or closures of facilities; - certain analyst reports, news and speculation |
| 26 _________________________________________________________________ [48]Table of Contents WE DO NOT INTEND TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE; THEREFORE, YOU MAY NEVER SEE A RETURN ON YOUR INVESTMENT We do not anticipate the payment of cash dividends on our common stock in the foreseeable future |
| We anticipate that any profits from our operations will be devoted to our future operations |
| Any decision to pay dividends will depend upon our profitability at the time, cash available and other factors |
| SINCE WE HAVE NOT PAID ANY DIVIDENDS ON OUR COMMON STOCK AND DO NOT INTEND TO DO SO IN THE FUTURE, A PURCHASER OF OUR COMMON STOCK WILL ONLY REALIZE A GAIN ON THEIR INVESTMENT IF THE MARKET PRICE OF OUR COMMON STOCK INCREASES We have never paid, and do not intend to pay, any cash dividends on our common Stock for the foreseeable future |
| An investor in this offering, in all likelihood, will only realize a profit on their investment if the market price of our common stock increases in value |
| MATERIAL RISKS RELATED TO OUR CORPORATE GOVERNANCE OUR DIRECTORS AND OFFICERS HAVE RIGHTS TO INDEMNIFICATION The Delaware General Corporation Law provides that we will indemnify our directors and officers if they are a party to any civil or criminal action |
| This may discourage claimants from making claims against the directors and officers even if the claims have merit |
| The cost of indemnification could be high |
| Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, we have been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable |