HDYNQ Hyperdynamics Corporation New (CE)

PART I

participating interest in the PSC, the parties executed the Joint Operating Agreement in the form attached to the Farm-out Agreement, governing the conduct of operations, and Hyperdynamics executed a parent guaranty of SCS's obligations as required by the Farm-out Agreement. On June 12, 2017, we delivered to SAPETRO a Final Adjustment Statement with the final calculation of past costs incurred by SCS in the amount of $0.7 million. After final review done by SAPETRO the Final Adjustment Statement was submitted to SAPETRO, under which SAPETRO paid to SCS $0.3 million.

On July 12, 2017, we obtained a letter from the Director General of the National Office of Petroleum of Guinea stating that in the event of an oil discovery at the end of the drilling of the Fatala-1 well, the government would have no objection to granting an additional period of two years to enable us to carry out the work of appraisal on the Concession.

We spudded the Fatala-1 well in a water depth of 2,897 meters on August 11, 2017 and completed the well at a depth of 5,116 meters below sea level on September 8, 2017. We did not encounter oil in the main zone of the well, but based on subsequent interpretation of the data, we calculated that we encountered a five-meter hydrocarbon pay zone, which we believe is a petroleum discovery that implies the presence of commercially exploitable resources.  The Fatala-1 well was plugged and abandoned.

On September 19, 2017, SAPETRO notified us that it did not wish to participate in the application for the two-year appraisal program and subsequently withdrew from the JOA and the PSC on September 20, 2017.

We applied for an appraisal period on a 100% basis on September 19, 2017, in accordance with  our PSC, which provides that in case there is a petroleum discovery during the Extension Period and there is insufficient time to carry out the appraisal works of said discovery, an appropriate representative of the Government of Guinea has the authority to grant an extension for two additional years.  

We are awaiting the decision of the Government of Guinea on our appraisal application.

On October 8, 2017, we  agreed to a settlement of all of SAPETRO’s remaining obligations under the PSC and JOA for a payment to us of $4,924,000.      

Our primary focus is the advancement of exploration work in Guinea. We have not received any confirmation that our  application for an appraisal program will be granted and are not certain if it ever will. 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 participation arrangements (if the appraisal period is granted), securities offerings, or through other means, to fulfill our business plans. If the appraisal period is granted and we farm-out interests in the Concession, our percentage interest will decrease. The terms of any such arrangements may not be advantageous. Our need for additional funding may also be affected by the uncertainties related to petroleum operations and the planned exploratory well, and other risks discussed under "Risk Factors" below. 

Our executive offices are located at 12012 Wickchester Lane, Suite 475, Houston, Texas 77079, and our telephone number is +1-713-353-9400.

Stock Purchase Agreement with CLNG

On November 2, 2017, we executed an agreement to issue and sell 40 million shares of our common stock at a price of $0.15 per share (for a total purchase price of $6,000,000) to CLNG or its affiliate (the “Buyer”).  CLNG is a private investment company involved in global energy and mineral projects.  The closing of the sale is subject to (i) the completion of satisfactory due diligence by each party of the other, (ii) waiver by holders of our Series A Convertible Preferred Stock of their right of first refusal, (iii) negotiation of reductions in our outstanding current liabilities satisfactory to CLNG, and (iv) satisfaction of other customary closing conditions.  The form of the stock purchase agreement with CLNG is filed as an Exhibit with this Form 10-K.  If this purchase is completed, CLNG will own approximately 53% of our outstanding common stock.  

The Buyer agreed to place the $6,000,000 purchase price in escrow by November 9, 2017, but as of the date of this Report, that has not occurred.  We agreed with the Buyer to delay depositing the funds in escrow until preliminary due diligence is concluded by both parties.

If the transaction closes, CLNG has informed us that it intends, as majority stockholder, to expand the Board of Directors to seven members and to appoint four directors who will form a majority of Hyperdynamics’ board of directors.  The stock purchase agreement provides that Ray Leonard will remain President, Chief Executive Officer and a director of the Company, and Jason Davis will remain Chief Financial Officer, subject to the discretion of the board and resolutions of the stockholders.  There can be no assurance that our due diligence of the Buyer will be acceptable to us, that the Buyer’s due diligence of us will be acceptable to the Buyer, that all holders of our Series A Convertible Preferred Stock will waive their right of first refusal, that we will successfully negotiate reductions in our outstanding current liabilities satisfactory to CLNG, or, even if these conditions are satisfied, that the stock purchase agreement will close.

We have agreed to indemnify the Buyer and its stockholders, partners, members, officers, directors, employees and direct or indirect investors and any of the foregoing persons’ agents or other representatives against all actions, claims, losses, costs and damages, and expenses in connection therewith incurred by any indemnitee as a result of, or arising out of, or relating to (a) any misrepresentation or breach of any representation or warranty made by us in the stock purchase agreement and other agreements entered into by the parties in connection therewith (“Transaction Documents”) or any other certificate or document contemplated thereby, (b) any breach of any covenant, agreement or obligation of the Company contained in the Transaction Documents or any other certificate or document contemplated thereby or (c) any cause of action, suit or claim brought or made against an indemnitee by a third party (including for these purposes a derivative action brought on behalf of the Company) and arising out of or resulting from (i) the execution, delivery, performance or enforcement of the Transaction Documents or any other certificate, instrument or document contemplated hereby or thereby, (ii) any transaction financed or to be financed in whole or in part, directly or indirectly, with the proceeds of the issuance of the shares of common stock to the Buyer, or (iii) the status of the Buyer or holder of the common shares as an investor in the Company.

The Company intends to use the net proceeds of the stock purchase agreement to pay outstanding obligations. 

CLNG has had no prior business relationship with the Company and, to the Company's knowledge, does not currently own any of the Company's securities.

See Item 1A, “Risk Factors—We have entered into an agreement to raise $6,000,000 through the sale of 40,000,000 shares of our common stock, but there can be no assurance that this financing will be completed,” —If the stock purchase agreement with CLNG closes, you will experience immediate and substantial dilution of your ownership interest, and our stock price could be negatively impacted,” and “—If the stock purchase agreement with CLNG closes, CLNG or its affiliate will own a majority of our outstanding voting stock and will have effective control of the Company and could preclude other stockholders from influencing significant corporate decisions” for a discussion of certain risks associated with the proposed sale of shares to CLNG or its affiliate.

OPERATIONS OFFSHORE GUINEA

The PSC

We have been conducting exploration work related to offshore Guinea since 2002. On September 22, 2006, we entered into the PSC with Guinea. Under that agreement, we were granted certain exclusive contractual rights to explore and exploit offshore oil and gas reserves, if any, off the coast of Guinea. We refer to the rights to the offshore area subject to the Concession as the "Contract Area."

On March 25, 2010, we entered into the First PSC Amendment with Guinea. In May 2010, the government of Guinea issued a Presidential Decree approving the PSC, as amended by the First PSC Amendment. The First PSC Amendment clarified that we retained a Contract Area of approximately 25,000 square kilometers or 30% of the original Contract Area under the PSC. The First 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. As of June 30, 2016, the

Contract Area was 18,750 square kilometers. Under the terms of the First 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.

The First 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. We spent approximately $200 million fulfilling work obligations under the PSC through fiscal 2016.

Under the First 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.  It also required the establishment of an annual training budget for the benefit of Guinea's oil industry personnel, and obligated the Consortium to pay an annual surface tax of $2.00 per square kilometer on the retained Concession acreage. The First PSC Amendment further provided that should the Guinea government note material differences between provisions of the First PSC Amendment and international standards or the Petroleum Code, the parties will renegotiate the relevant articles.

On September 15, 2016, we executed the Second PSC Amendment in which we received a one (1) year extension to the second exploration period of the PSC to September 21, 2017 and confirmed that we were the holder of a 100% interest in the Concession following the official withdrawal by Tullow and Dana on August 15, 2016. The Second PSC Amendment became effective upon the receipt of a Presidential Decree on September 22, 2016.

We executed a Second Amendment to the PSC ("Second PSC Amendment") on September 15, 2016, and received a Presidential Decree on September 22, 2016 that gave us a one-year extension to the second exploration period of the PSC to September 22, 2017 ("PSC Extension Period") and became the designated Operator of the Concession.

In addition to clarifying certain elements of the PSC, we agreed in the Second PSC Amendment to drill one exploratory well to a minimum depth of 2,500 meters below the seabed within the PSC Extension Period (the "Extension Well") with a projected commencement date of May 2017 and the option of drilling additional wells. Fulfillment of the work obligations exempts us from the expenditure obligations during the PSC Extension Period.

In turn, we retained an area equivalent to approximately 5,000 square kilometers in the Guinea offshore waters and were obliged to provide the Government of Guinea: (1) A parent company guarantee for the well obligation, (2) monthly progress reports and a reconciliation of budget to actual expenditures, (failure to provide the reports and assurances on a timely basis could result in a notice of termination with a 30-day period to cure), and (3) certain guarantees to Guinea.

For the purposes of calculation for this clause (Article 4 of the PSC), however, only costs spent for services and goods provided in Guinea were to be taken into account until the drilling rig to be used in the drilling of the Extension Well is located in the territorial waters of the Republic of Guinea.

Additionally, we agreed to limit the cost recovery pool to that date to our share of expenditures in the PSC since 2009 (estimated to be approximately $165,000,000 net to our interest).  Finally, we agreed to allocate and administer a training budget during the PSC Extension Period for the benefit of the Guinea National Petroleum Office of $250,000 in addition to any unused portion of the training program under Article 10.3 of the PSC. The unused portion of the training program is now estimated to be approximately $221,000.

We also agreed to allocate up to a maximum total budget of $120,000 for the actual travel and operating expenses incurred by Guinea for its participation in the management and administration of the Concession, subject to our review of receipts and limited to reimbursement of actual costs. The unused portion of this budget is now estimated to be $22,000. 

Finally, we agreed that we would make available for the benefit of Guinea a virtual data room containing all seismic data in our possession relating to relinquished areas. We would not be agents of or work on behalf of Guinea, but would provide, at the request of Guinea during the PSC Extension Period, access to the virtual data room to interested third parties.

On March 30, 2017, we entered into the Farm-out Agreement with SAPETRO. On April 12, 2017 SCS, SAPETRO and Guinea executed a Third Amendment to the PSC (the "Third PSC Amendment") that was subject to the receipt of a Presidential Decree and the closing of the Farm-out Agreement. The Presidential Decree was signed on April 21, 2017 approving the assignment of 50% of SCS' participating interest in the Guinea concession to SAPETRO, and confirmed the two companies' rights to explore for oil and gas on our 5,000-square-kilometer Concession offshore the Republic of Guinea. The contract required that drilling operations in relation to the obligation well Fatala-1 (the "Extension Well") were to begin no later than May 30, 2017 and provided that additional exploration wells may be drilled within the exploration period at the companies' option.

The Third PSC Amendment further reaffirmed clear title of SAPETRO and SCS to the Concession as well as amended the security instrument requirements under the PSC. SCS and SAPETRO agreed to joint and several liability to the Government of Guinea in respect to the PSC.

SAPETRO and SCS further agreed that if SCS were unable to pay its share of any Fatala-1 well costs, SAPETRO could elect to pay for a portion of SCS's Fatala-1 well costs such amount so long as SCS is not in default of either the PSC or the Farmout Agreement. In case SAPETRO had made such payments for a share of SCS's costs of, SCS would have been obligated to assign to SAPETRO a 2% participating interest in the Concession for each $1 million of SCS's costs paid by SAPETRO.

On May 21, 2017, drilling operations commenced upon the Pacific Scirocco drillship entering Guinean continental shelf waters.

The Farmout Agreement was completed between the SCS and SAPETRO on June 2, 2017. Pursuant to the terms of the Farmout Agreement, SCS assigned and transferred to SAPETRO 50% of its 100% gross participating interest in the PSC and executed a Joint Operating Agreement. Upon closing, SAPETRO (i) reimbursed SCS its proportional share of past costs associated with the preparations for the drilling of the Fatala-1 well which amounted to $4.4 million, and (ii) agreed to pay its participating interest's share of future costs in the Concession.

On June 5, 2017, SCS received $4.1 million from SAPETRO in accordance with a Preliminary Closing Statement delivered by SCS, thus completing closing of the Farm-out Agreement and the assignment to SAPETRO of the 50% participating interest in the PSC, the parties executed a Joint Operating Agreement governing the conduct of operations, and Hyperdynamics executed a parent guaranty of SCS's obligations as required by the Farm-out Agreement. On June 12, 2017, we delivered to SAPETRO a Final Adjustment Statement with the final calculation of past costs incurred by SCS in the amount of $0.7 million. After final review done by SAPETRO the Final Adjustment Statement was submitted to SAPETRO, under which SAPETRO paid to SCS $0.3 million.

On July 12, 2017, we obtained a letter from the Director General of the National Office of Petroleum of Guinea stating that in the event of an oil discovery at the end of the drilling of the Fatala-1 well, the government would have no objection to granting an additional period of two years to enable us to carry out the work of appraisal on the Concession.

On August 11, 2017, the actual drilling of the Fatala well commenced.  The well was completed on September 8,   2017, at a depth of 5,116 meters below sea level.  No oil shows were encountered during the drilling and the prime objective was apparently filled with silt and clay rather than reservoir quality sand and the Fatala-1 well was plugged and abandoned.

However, following detailed evaluation of the well results regarding the oil saturation calculation — plus our internal review and the log analysis conducted by eSeis, an independent geophysical and petrophysical consultant — ,  we have identified a section in our secondary objective, an upper Cenomanian channel (Cenomanian 03) located above the primary target formation that contained a five-meter interval with 17% porosity and 61% hydrocarbon saturation, which we believe is a petroleum discovery that implies the presence of commercially exploitable resources.  On the basis of this

discovery, on September 19, 2017, we applied to the government of Guinea for a two-year appraisal program of the Concession pursuant to Article 3.7 of our PSC on a 100% basis following SAPETRO’s vote by notice not to participate in the appraisal application.  SAPETRO formally exited from the  JOA and the PSC on September 20, 2017. 

We are awaiting the decision of the Government of Guinea on our appraisal application. There can be no assurance that such application will be approved, or if it is, that it will be on terms acceptable to us. If the Government of Guinea does not approve our appraisal period application, the PSC will have terminated by its terms on September 21, 2017.

Settlement of Claims with Tullow and Dana

On August 15, 2016, we entered into a Settlement and Release Agreement (“Settlement and Release”) with Tullow and Dana with respect to our dispute in arbitration (American Arbitration Association, Case No: 01-16-0000-0679, styled SCS Corporation Ltd v. Tullow Guinea Ltd. and Dana Petroleum (E&P) Ltd. ). Under the Settlement and Release, we released all claims against Tullow and Dana and (i) issued to the Government of Guinea a notice of withdrawal from the Concession and PSC effective immediately, (ii) Tullow and Dana transferred their interest in the long lead items previously purchased by the Consortium in preparation for the drilling of the Fatala well, and agreed to pay net cash of $686,570 to us. We also agreed to pay Dana a success fee which was based upon $50,000 per million barrels upon declaration of the certified commercial reserves of the Fatala-1 well, if it resulted in a commercial discovery. We recorded the long lead items and a gain once they had been inspected and appropriately valued.

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.

From the inception of our involvement in Guinea beginning in 2002 through June 2009, we accomplished exploration work, including:

Since July 2009, we have accomplished critical exploration work, including:

If our appraisal program application on the block is approved, we will need to raise further capital to develop and implement the appraisal program. We may raise capital through issuing equity and/or debt securities and/or farming out a portion of our participating interest in the Concession in exchange for cash and/or carry to finance project costs in respect of the retained participating interest in the Concession. There can be no assurance that such funding will be available in the amounts and at the times required.

Subject to our ability to raise capital, we believe that we have necessary staff and knowledge to continue being project operator through the appraisal period. However, we would likely seek a large oil & gas company to farm into the Concession to become an operator for the development phase of the project. To achieve this, we may seek to dispose of a portion of our participating interest in the Concession to such operator for consideration to be determined. No assurance can be given that any of these actions can be completed.

DESCRIPTION OF OIL AND GAS PROPERTIES

The Contract Area is located in the Transform Margin play, offshore Guinea. Following the relinquishment of approximately 77% of the remaining Contract Area as required by the Second PSC Amendment, we had the exclusive exploration and production rights, along with our then partner SAPETRO, to explore and develop approximately 5,000 square kilometers in offshore Guinea under the Concession and received a one-year extension of the PSC to September 21, 2017. The extension period is not renewable except in the case of a discovery, in which case, if an appraisal program is approved, we will have up to two additional years to allow the completion of the appraisal of any discovery made. Following a discovery on the Fatala-1 well, we have submitted an application to be granted a two-year appraisal period for the block, although the marginal nature of the discovery means that it is by no means certain that the Government of Guinea will accept our appraisal program proposal.   We are currently awaiting the decision of the Government of Guinea on our appraisal application.

An exploration well with a minimum depth of 2,500 meters below the seabed and a minimum cost of $46,000,000 was required to be drilled by September 21, 2017 to satisfy the work requirement during the PSC Extension Period. Under the terms of a Third PSC Amendment, we agreed to provide a satisfactory Security instrument in the amount of $5 million within 30 days of the receipt of the April 21, 2017 Presidential Decree, which was released at such time that the drilling rig used in the drilling of the extension well was located in the shelf waters of the Republic of Guinea, including its territorial waters. We also agreed that drilling operations for the Fatala-1 well must commence no later than May 30, 2017. The Pacific Sirocco entered territorial waters of the Republic of Guinea and began drilling operations on May 21, 2017.

Our prospects are in an underexplored basin among multiple highly prospective trends with Turbidite fans and 4-way closures. 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 reaching a total depth of 3,253 meters below seabed. Drilling of the Sabu-1 well by us was finished in February 2012 reaching a total depth of 2,891 meters below seabed.

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 (non-commercial 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 deep-water 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, reduced 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.

The Fatala-1 well encountered the main objective, a Cenomanian Channel, however, it was filled with silt and clay rather than reservoir potential sand and also had no hydrocarbon shows.  However, the secondary objective, an upper Cenomanian channel, was penetrated at its edge and encountered five meters of good quality reservoir (17% porosity) with calculated hydrocarbon saturation of 61%.  The well result will be integrated with the seismic data to determine the commercial potential of this zone.

Reserves Reported to Other Agencies

We have not reported any estimates of proved or probable net oil or gas reserves to any federal authority or agency since July 1, 2008, on producing properties owned in the United States at that time, but subsequently sold in 2009.

Production

We have no producing properties and have had no production during the years covered by the financial statements in this Report.

Delivery Commitments

We have no existing contracts or agreements obligating us to provide a fixed or determinable quantity of oil or gas in the future.

Employees and Independent Contractors

As of the date of this report, we have 16 employees, all of whom are based in the United States. We also use independent contractors from time to time for specific projects and functions.  No employees are represented by a union.

Competition

We are an independent oil and gas company that, if the government approves our application for a two-year appraisal period, will have the exclusive exploration and production rights to explore and develop our appraisal area offshore Guinea. We are the only operator that has conducted exploration for oil and gas in the entire offshore Guinea area since 1977. We face competition from other companies looking to evaluate the Concession for prospectivity and will likely in the future face competition regarding the sale of hydrocarbons if oil is found and produced.

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). Undeveloped Acreage is owned through our Concession in offshore Guinea, a description

of and the terms of which are described above under “Operations Offshore Guinea – The PSC.” The following table sets forth the undeveloped acreage that we held as of June 30, 2017:

The PSC Extension Period expired on September 21, 2017.  However, we have applied for a two-year appraisal period on a 100% basis on September 19,   2017 and are awaiting a response to our application.

Drilling Activity

An exploratory well is a well drilled to find 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.

We spudded the Fatala-1 well in a water depth of 2,897 meters on August 11, 2017 and the well was completed on September 8, 2017 at a depth of 5,116 meters below sea level.

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. As of June 30, 2017 and 2016, based on our impairment assessment, we fully impaired $13.3 million and $14.3 million of unproved oil and gas properties. In fiscal year 2017, we impaired unproven oil and gas properties due to uncertainties surrounding the ability of the Company to continue operations and following the determination of non-commerciality of the Fatala-1 well ultimately fully impaired unproven oil and gas properties.  The fiscal year 2016 impairment assessment was based on the continued impasse by our members of the Consortium to resume petroleum operations and drill the next exploration obligation well, which needed to be commenced by the end of September 2016, and our inability to get interim injunctive relief from the American Arbitration Association requiring Tullow and Dana to join with SCS in the negotiation of an acceptable amendment to the PSC and to agree to a process that would result in the execution of the amendment which we hoped would have led to the resumption of petroleum operations. At the time, we believed all legal measures to require Tullow and Dana to drill the planned exploration well were exhausted. We entered in a Settlement and Release agreement with Tullow and Dana on August 15,

2016, and signed the Second PSC Amendment with Guinea on September 15, 2016, granting us a one-year extension to the PSC to September 22, 2017. We also executed a Farm-out Agreement with SAPETRO and a Third PSC Amendment with the Republic of Guinea.

Cost of Compliance with Environmental Laws

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.

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: Jason Davis, 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.

Risks Relating to Our Business and the Industry in Which We Operate.

Our business is dependent on a single exploration asset; if the proposed appraisal program is not approved, we will not have any exploration assets .

The Concession is 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.

After the completion of the Fatala-1 well, we applied for a two-year appraisal period  on the basis of the marginal discovery of five meters of calculated hydrocarbon pay in the well.  Our 50% partner, SAPETRO, decided not to join us in the application and exited the JOA and PSC, so it was made on a 100% basis.  There is no assurance that the Government of Guinea will approve the application at all or on acceptable terms. If the Government of Guinea does not approve the appraisal period on acceptable terms, our PSC will have expired by its terms and we will not have any exploration assets nor any prospect of revenues or cash flows to cover current obligations or ongoing operating expenses. 

The Concession, permits and contracts which rely on the Concession may be changed, thus adversely affecting our ability to continue the operations. In addition, the PSC has financial and other administrative obligations that need to be performed in order to maintain compliance with the PSC. Failure to comply could subject us to risk of losing 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.

We have entered into an agreement to raise $6,000,000 through the sale of 40,000,000 shares of our common stock, but there can be no assurance that this financing will be completed.

On November 2, 2017, we executed an agreement to issue and sell 40 million shares of our common stock at a price of $0.15 per share (for a total purchase price of $6,000,000) to CLNG or its affiliate.  The closing of the sale is subject to substantial conditions, including (i) the completion of satisfactory due diligence by each party of the other, (ii) waiver by holders of our Series A Convertible Preferred Stock of their right of first refusal, (iii) negotiation of reductions in our outstanding current liabilities satisfactory to CLNG, and (iv) satisfaction of other customary closing conditions.  If this purchase is completed, CLNG will own approximately 53% of our outstanding common stock.  There can be no assurance that our due diligence of CLNG will be acceptable to us, that CLNG’s due diligence of us will be acceptable to CLNG, that all holders of our Series A Convertible Preferred Stock will waive their right of first refusal, that we will successfully negotiate reductions in our outstanding current liabilities satisfactory to CLNG, or, even if these conditions are satisfied, that the stock purchase agreement will close.

The net proceeds of this stock sale, if it occurs, may not be sufficient to pay all of our outstanding liabilities and will not be sufficient to cover current operating expenses or, if the two-year appraisal period in Guinea for which we have applied is granted, to be able to fund operations for the appraisal program.  See the following Risk Factor for additional information.

We require additional financing to meet our general and administrative obligations and in order to fulfill our PSC commitments during an appraisal program. We are currently not in a position to predict when, if ever, we will be able to meet those obligations.

The Concession offshore Guinea is our principal asset and we do not have the funds necessary to fulfill the proposed appraisal program under the PSC.  On November 14, 2017, we had $0.7 million in unrestricted cash and $9.9 million in current liabilities.  In the absence of operating cash flows, in order to meet our current obligations as they become due over the next quarter and 12 months and, if the two-year appraisal period for which we have applied is granted, to be able to continue with our operations, we intend to rely exclusively on issuing equity or debt securities or, alternatively,

divestiture of additional participating interests in the Concession. There is no assurance that we will be successful in raising the funds or acquiring the partners in the time needed to execute the program required in the PSC.  If the two-year appraisal period is not granted by the Guinea government, the PSC will have expired by its terms and it is unlikely that we will be able to raise additional funds, unless the investment by CLNG closes.

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 fund-raising plans, we will 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 for the fiscal year ended June 30, 2017, 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 audited financial statements for the fiscal year ended June 30, 2017. 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 will 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. To date, we have drilled two exploratory wells which had non-commercial results. We have identified prospects and leads based on seismic and geological information that we believe indicate the potential presence of hydrocarbons. However, we operate in a virgin basin without any commercial hydrocarbon discoveries and the areas to be drilled may not yield oil in commercial quantities or quality, or at all. Even when properly used and interpreted, 2-dimensional ("2D") and 3-dimensional ("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, or at all, to allow us 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.

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 need to obtain additional resources through sales of additional participating interests in the Concession, equity or debt financings, or through other means. If we seek to sell additional participating interests in the Concession, we may not be successful in attracting commercial partners. In addition, if we enter into an arrangement, the terms of such arrangement may not be advantageous to us. Any such arrangement will likely involve a further transfer of a participating interest in the Concession, which could reduce the potential profitability of our interest in the Concession.

An extended period of depressed oil and gas prices could adversely affect our financial condition, liquidity, ability to obtain financing and future operating results. Oil and gas prices are volatile, and we have no ability to control the price of oil and gas. A continued 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 agreement 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. Prolonged periods of low oil and gas prices could adversely affect our financial condition, liquidity, ability to obtain financing, and operating results. Low oil and gas prices in the future will likely also reduce the amount of oil and gas that we could produce economically and could

have a negative effect on our future financial results. Historically, oil and gas prices and markets have been volatile and they are likely to continue to be volatile, with prices fluctuating widely 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:

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 terms of the PSC may become subject to renegotiation under certain circumstances, 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 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:

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:

If we do not obtain capital resources in the future it is unlikely that we will be able to continue to pursue exploration offshore Guinea and our financial condition and operations will be adversely affected.

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 consultants, but the retention of their services cannot be guaranteed.  The loss of key members of our management team or other highly qualified professionals has adversely affected our ability to effectively manage our overall operations or successfully execute current or future business strategies.  If any further member of management, director, or other consultants were to leave our company, it may have a material adverse effect on our business, financial condition, results of operations and/or growth prospects.

Claims and lawsuits against us may result in adverse outcomes.

While there are currently no pending legal proceedings to which we are a party (or that are, to our knowledge, contemplated by governmental authorities) that we believe will have individually or in the aggregate, a material adverse effect on our business, financial condition or operating results, from time to time we may become involved in various lawsuits and legal proceedings that arise in the ordinary course of business or otherwise. Litigation is subject to inherent uncertainties, and an adverse result in any such matters could occur that could harm our business, financial condition or results of operations, including significant monetary damages or limitations on our ability to engage in our business activities. Although we have director and officer insurance, in case such claims arise it may not apply to or fully cover any liabilities we may incur as a result of these lawsuits.

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.

Although we would intend to contract what we believe to be a high quality modern drillship rig and reliable contractors for a significant portion of any future drilling technological services, exploring for and developing hydrocarbon 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, especially in the ultra-deep offshore. The cost of our prior 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. Although the Fatala-1 well was completed within budget, it also did not encounter hydrocarbons in commercial quantities.  Unexpected delays and increases in costs associated with any future wells could adversely affect our results of operation, financial position, liquidity and business plans.

Drilling may be unsuccessful for many reasons, including geological conditions, weather, cost overruns, equipment shortages and mechanical difficulties. Exploratory wells bear a much greater risk of loss than development wells. The successful drilling of an oil well may not be indicative of the potential for the development of a commercially viable field and will not necessarily result in a profit on investment. A variety of factors, both geological and market-related, could cause a well to become uneconomic or only marginally economic.

These factors include a variety of operating risks, such as:

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 Fatala-1 exploratory well we completed is in the ultra-deep water. Even though this well was drilled safely and on budget, the following risks apply to any future ultra-deep water drilling:  Deep-water drilling generally requires more time and more advanced drilling technologies than exploration in shallower waters, involving a higher risk of equipment failure and higher drilling costs. In addition, even if there is a discovery, taking it to production presents risks that we may not be currently aware of. 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, deep-water operations generally, and operations in West Africa in particular, lack the physical oilfield service infrastructure that is often present in other regions. As a result, a significant amount of time may elapse between a deep-water discovery and the marketing of the associated oil and natural gas, thus increasing both the financial and operational risks involved with these operations. Because of the lack and high cost of this infrastructure, further discoveries we may make in Guinea may never be economically producible.

The cost of drilling rigs, equipment, supplies, personnel and oilfield services, as well as gathering systems and processing facilities, and our dependence on industry contractors generally, could adversely impact us.

We are dependent on industry contractors for the success of our oil and gas exploration projects. In particular, our drilling activity offshore 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.

Operator's responsibilities pose high risk in terms of organizing operations safely, in an environmentally responsible way and within the terms prescribed by the applicable legislation.

Under the terms of the PSC, SCS is designated as the Operator. SCS will be liable for the obligations under the PSC to the Government of the Republic of Guinea. Due to the complexity of the oil and gas operations of drilling deep-water exploration wells, we are unable to provide assurances that complications during drilling operations will not occur, whether we will be able to cover claims that may arise, and whether we will be able to carry sufficient catastrophic well insurance to adequately cover us.

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 to 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:

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 deep-water regions, including increased industry standards, governmental regulation and enforcement, and less favorable investor perception of the risk-adjusted benefits of deep-water 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.

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, or where it will be not sufficient to 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 may incur a variety of costs to engage in business transactions, and the anticipated benefits of those transactions may never be realized.

As a part of our business strategy, we enter into business transactions, 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:

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 neither have reserves nor 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

We operate in the Republic of Guinea, a country which is considered a high-risk jurisdiction for corruption; such corruption could impair our ability to do business in the future or result in significant fines or penalties.

We have been the Operator in a Concession offshore the Republic of Guinea, a country where 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 Guinea anti-corruption regulations that generally prohibit the making of improper payments to foreign officials for the purpose of obtaining or keeping business.

The Republic of Guinea is largely a cash-based society and that creates additional internal control and related risks. We have been subject to investigations by the Department of Justice and Securities and Exchange Commission under the US Foreign Corrupt Practices Act ("FCPA") into how we obtained or retained the original Concession and, as a result, expended approximately $12.8 million in legal fees in working with the US Government. While those matters were resolved in 2015, should the DOJ, the SEC, or the Republic of Guinea open additional investigations regarding prior or current activities in the Republic Guinea or elsewhere, we do not have the financial ability to bear the costs related to any additional investigations and are unable to predict whether we would be able to raise the funds to properly defend the Company.

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 prior 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.  Since

2010, democratic elections have been held, a president was democratically elected and re-elected.  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:

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.

An epidemic of the Ebola virus disease in Guinea could adversely affect our business operations and financial condition.

There was an outbreak of the Ebola virus disease in Guinea in 2013 to 2015. While the World Health Organization declared Guinea Ebola free on December 29, 2015, sporadic new cases of infection have occurred, and any future outbreak of the Ebola virus will adversely affect our business operations and financial condition. 

Any drilling activities in Guinea will require safe access to the Conakry airport and port as well as other infrastructure in Guinea. If there is another Ebola virus outbreak, drilling plans will likely be delayed, could be compromised and costs of operations will be increased, which additional costs we may not be able to cover in a timely manner and thus we could lose our participating interest in the Guinea Concession . Further, if contractors or subcontractors impose travel bans or personnel refuse to travel to Guinea, drilling plans will be further delayed or interrupted after commencement. It is likely that the cost of any services could be significantly higher than planned which in turn could have a material adverse effect on our liquidity, business, and results of operations.

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.

The legal and judicial system in Guinea is relatively undeveloped and subject to frequent changes, and we may be exposed to similar risks if we operate in certain other jurisdictions.

Guinea has a less developed legal and judicial system than more established economies which could result in risks such as: (i) effective legal redress in the courts of such jurisdictions, whether in respect of a breach of contract, law or regulation, or in an ownership dispute, being more difficult to obtain; (ii) a higher degree of discretion on the part of Governmental authorities who may be susceptible to corruption; (iii) the lack of judicial or administrative guidance on interpreting applicable rules and regulations; (iv) inconsistencies or conflicts between and within various laws, regulations, decrees, orders and resolutions; or (v) relative inexperience of the judiciary and courts in such matters.  In Guinea and certain other jurisdictions, the commitment of local business people, government officials and agencies and the judicial system to abide by legal requirements and negotiated agreements may be more uncertain, creating particular concerns with respect to the Concession or other licenses, permits or approvals required by us for the operation of our business, which may be susceptible to revision or cancellation, and legal redress may be uncertain or delayed.  There can be no assurance that joint ventures, licenses, license applications or other legal arrangements will not be adversely affected by the actions of government authorities or others, and the effectiveness of and enforcement of such arrangements in these jurisdictions cannot be assured.

Risks Relating to Our Securities

You could lose all of your investment.

An investment in our securities is speculative and involves a high degree of risk. Potential investors should be aware that the value of an investment in the Company may go down as well as up. In addition, there can be no certainty that the market value of an investment in the Company will fully reflect its underlying value. You could lose your entire investment.

We have obtained shareholder approval for a 1-for-2 to 1-for-6 reverse stock split, and in the event that our board of directors decides to effectuate such reverse split, it could adversely affect the liquidity of our common stock and market capitalization.

We may effectuate a between 1-for-2 and 1-for-6 reverse split of our common stock.  On June 30, 2017, our board of directors approved a reverse stock split in that range and directed the Company to solicit the requisite votes of the stockholders of the Company for their approval of such reverse stock split by written consents in lieu of a special meeting. On August 10, 2017, we obtained shareholder approval for a reverse stock split in that range, with the exact reverse split

ratio to be determined within that range by the board of directors in its sole discretion, and with such reverse stock split to be effective at such date and time, if at all, as determined by the board of directors in its sole discretion.

A reverse stock split is often viewed negatively by the market and, consequently, can lead to a decrease in our overall market capitalization. If the per share market price does not increase proportionately as a result of the reverse stock split, then the value of our Company as measured by our market capitalization will be reduced, perhaps significantly. This would also significantly reduce the number of shares of our common stock that are outstanding, and the liquidity of our common stock could be adversely affected and you may find it more difficult to purchase or sell shares of our common stock.

You may experience dilution of your ownership interests because of the future issuance of additional shares of our common or preferred stock or other securities that are convertible into or exercisable for our common or preferred stock.

In the future, we may issue our authorized but previously unissued equity securities, which would result in the dilution of the ownership interests of our present stockholders and the purchasers of our common stock offered hereby. The Company is authorized to issue an aggregate of 87,000,000 shares of common stock and 20,000,000 shares of "blank check" preferred stock. We may issue additional shares of our common stock or other securities that are convertible into or exercisable for our common stock in connection with hiring or retaining employees, future acquisitions, future sales of our securities for capital raising purposes, or for other business purposes. The future issuance of any such additional shares of our common stock may   create   downward pressure on the trading price of the common stock. We will need to raise additional capital in the near future to meet our working capital needs, and there can be no assurance that we will not be required to issue additional shares, warrants or other convertible securities in the future in conjunction with these capital raising efforts, including at a price (or exercise prices) below the price you paid for your stock.

If the stock purchase agreement with CLNG closes, you will experience immediate and substantial dilution   of your ownership interest, and our stock price could be negatively impacted.

If the stock purchase agreement with CLNG closes (of which there is no assurance), we will issue to them 40,000,000 shares of common stock, and current shareholders will experience immediate and substantial dilution.  If this purchase is completed, CLNG or its affiliate will own approximately 53% of our then outstanding common stock, and existing stockholders will hold only approximately 47%.  The issuance of these shares, or other factors relating to the transaction, could cause our stock price to decline, perhaps significantly.

If the stock purchase agreement with CLNG closes, CLNG or its affiliate will own a majority of our outstanding voting stock and will have effective control of the Company   and   could preclude other stockholders from influencing significant corporate decisions. 

If the stock purchase agreement with CLNG is completed, CLNG or its affiliate will own approximately 53% of our outstanding common stock and will have the ability to elect all of our directors as well as to exercise a controlling influence over other matters requiring stockholder approval, including approval of significant corporate transactions and dilutive share issuances, and may have significant control over our management and policies.

If the transaction closes, CLNG has informed us that it or its affiliate intends to appoint representatives who will form a majority of our board of directors, but no specific agreement has yet been entered into in this respect, nor have such director candidates been definitively identified.  Such majority of directors would be able to effectively control the Company, by directing its business and controlling its finances, future issuances of stock and other securities, and otherwise.  A new board of directors could decide to change, expand or contract the business plan of the Company in its discretion.

While the stock purchase agreement provides that Ray Leonard will remain President, Chief Executive Officer and a director of the Company, and Jason Davis will remain Chief Financial Officer, they may be removed as officers by the board (subject, in the case of Mr. Leonard, to the provisions of his employment agreement), and Mr. Leonard can be

removed by, or not re-elected by, the stockholders in accordance with our certificate of incorporation and bylaws and Delaware law.

Future sales of our common stock or securities convertible or exchangeable for our common stock, or the perception that such sales might occur, may cause our stock price to decline and may dilute your voting power and your ownership interest in us.

If our existing stockholders or warrant or option holders sell, or indicate an intention to sell, substantial   amounts of our common stock in the public market, the price of our common stock could decline. The perception in the market that these sales may occur could also cause the price of our common stock to decline. Upon the effectiveness of the registration statement we have filed to register for resale certain shares of common stock by our stockholders or we could elect to file with respect to any other outstanding shares of common stock, any sales of those shares or any perception in the market that such sales may occur could cause the trading price of our common stock to decline. As of the date of effectiveness of such registration statement, such shares registered for resale will be freely tradable without restriction under the Securities Act of 1933.

The ability of our board of directors to issue additional stock may prevent or make more difficult certain transactions, including a sale or merger of the Company.

Our board of directors is authorized to issue up to 87,000,000 shares of common stock and 20,000,000 shares of preferred stock with powers, rights and preferences designated by it. (A total of 595 shares of Series A Preferred Stock are currently outstanding.) Shares of voting or convertible preferred stock could be issued, or rights to purchase such shares could be issued, to create voting impediments or to frustrate persons seeking to effect a takeover or otherwise gain control of the Company. The ability of the board of directors to issue such additional shares of preferred stock, with rights and preferences it deems advisable, could discourage an attempt by a party to acquire control of the Company by tender offer or other means. Such issuances could therefore deprive stockholders of benefits that could result from such an attempt, such as the realization of a premium over the market price for their shares in a tender offer or the temporary increase in market price that such an attempt could cause. Moreover, the issuance of such additional shares of preferred stock to persons friendly to the board of directors could make it more difficult to remove incumbent managers and directors from office even if such change were to be favorable to stockholders generally.

There currently is a limited market for our common stock and there can be no assurance that an active public market will ever develop. Failure to develop or maintain an active trading market could negatively affect the value of our common stock and make it difficult or impossible for you to sell your shares.

There is currently only a limited public market for shares of our common stock, and an active trading market may never develop. Our common stock is quoted on the OTC Markets. The OTC Markets is a thinly traded market and lacks the liquidity of certain other public markets with which some investors may have more experience. We may not ever be able to satisfy the listing requirements for our common stock to be listed on a national securities exchange, which is often a more widely-traded and liquid market. Some, but not all, of the factors which may delay or prevent the listing of our common stock on a more widely-traded and liquid market include the following: our stockholders' equity may be insufficient; the market value of our outstanding securities may be too low; our net income from   operations may be too low; our common stock may not be sufficiently widely held; we may not be able to secure market makers for our common stock; and we may fail to meet the rules and requirements mandated by the several exchanges and markets to have our common stock listed. Should we fail to satisfy the initial listing standards of the national exchanges, or our common stock is otherwise rejected for listing, and remains listed on the OTC Markets or is suspended from the OTC Markets, the trading price of our common stock could suffer and the trading market for our common stock may be less liquid and our common stock price may be subject to increased volatility .

We have not applied, and currently do not intend to apply, for the listing of our common stock on any national securities exchange.  We do not currently meet the listing criteria of any such exchange, and no assurance can be given that we will at any time in the future.

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 $2.80 on January 4, 2017 and a low of $0.37 on July 26, 2016 for the fiscal year ended June 30, 2017.  Since June 30, 2017, the closing price for our common stock has varied between a high of $2.05 and a low of $0.06.  On November 14, 2017, the closing price of our common stock was $0.14. 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.

Our common stock is currently subject to the "penny stock" rules of the SEC and the trading market in the securities is limited, which makes transactions in the stock cumbersome and may reduce the value of an investment in the stock.

Rule 15g-9 under the Exchange Act establishes the definition of a "penny stock," for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require: (a) that a broker or dealer approve a person's account for transactions in penny stocks; and (b) the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.

In order to approve a person's account for transactions in penny stocks, the broker or dealer must: (a) obtain financial information and investment experience objectives of the person and (b) make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.

The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which, in highlight form: (a) sets forth the basis on which the broker or dealer made the suitability determination; and (b) confirms that the broker or dealer received a signed, written agreement from the investor prior to the transaction. Generally, brokers may be less willing to execute transactions in securities subject to the "penny stock" rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our common stock.

Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker or dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.  

Our   stock may be traded infrequently and in low volumes, so you may be unable to sell your shares at or near the quoted bid prices if you need to sell your shares.

Until our common stock is listed on a national securities exchange such as the New York Stock Exchange or The Nasdaq Stock Market, we expect our common stock to remain eligible for quotation on the OTC Markets, or on another over-the-counter quotation system. In those venues, however, the shares of our common stock may trade infrequently and in low volumes, meaning that the number of persons interested in purchasing our common shares at or near bid prices at any given time may be relatively small or non-existent. An investor may find it difficult to obtain accurate quotations as to the market value of our common stock or to sell his or her shares at or near bid prices or at all. In addition, if we fail to meet the criteria set forth in SEC regulations, various requirements would be imposed by law on broker-dealers who sell our securities to persons other than established customers and accredited investors. Consequently, such regulations may

deter broker-dealers from recommending or selling our common stock, which may further affect the liquidity of our common stock. This would also make it more difficult for us to raise capital.

We do not anticipate paying dividends on our common stock.  Any return on your investment will likely be limited to the value of our common stock.

Cash dividends have never been declared or paid on our common stock, and we do not anticipate such a declaration or payment for the foreseeable future. We expect to use future earnings, if any, to fund business growth. Therefore, stockholders will not receive any funds absent a sale of their shares of common stock. If we do not pay dividends, our common stock may be less valuable because a return on your investment will only occur if our stock price appreciates. We cannot assure stockholders of a positive return on their investment when they sell their shares, nor can we assure that stockholders will not lose the entire amount of their investment.

We are a smaller reporting company and we cannot be certain if the reduced disclosure requirements applicable to smaller reporting companies will make our common stock less attractive to investors.

We qualify as a "smaller reporting company" (meaning that we are not an investment company, an asset-backed issuer, or a majority-owned subsidiary of a parent company that is not a smaller reporting company, and we have a public float of less than $75 million as of the last business day of our most recently completed second fiscal quarter), which allows us to take advantage of a number of exemptions from SEC disclosure requirements in our periodic reports and proxy statements, including, among other things, simplified executive compensation disclosures, only being required to provide two (rather than three) years of audited financial statements, and not being required to comply with the requirements of Section 404 of the Sarbanes-Oxley Act that our independent registered public accounting firm provide an attestation report on the effectiveness of our internal control over financial reporting. Decreased disclosures in our SEC filings due to our status as a "smaller reporting company" may make it harder for investors to analyze our results of operations and financial prospects and may cause some investors to find our common stock less attractive because we rely on these exemptions, there may be a less active trading market for our common stock, and our stock price may be more volatile.

Certain provisions of Delaware law and our charter documents may impede or discourage a takeover, which could adversely impact the market price of our shares.

As a Delaware corporation, we are governed by anti-takeover provisions of Section 203 of the Delaware General Corporation Law (the "DGCL") that prohibit certain publicly-traded Delaware corporations from engaging in a business combination with anyone who owns at least 15% of its common stock for a period of three years after the date of the transaction in which the person acquired the 15% ownership, unless the certificate of incorporation or by-laws of the corporation contain a provision expressly electing not to be governed by this anti-takeover statute, the merger or combination is approved in a prescribed manner, or the corporation does not have a class of voting stock that is listed on a national securities exchange or held by more than 2,000 stockholders of record. We are currently not subject to these restrictions; however, our certificate of incorporation and by-laws do not contain a provision electing not to be governed by this statute, and once our common stock is listed on a national securities exchange or held by more than 2,000 stockholders of record, we will become subject to these restrictions, which may 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.

Certain other provisions of Delaware law and of our certificate of incorporation and bylaws 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, or could discourage a potential acquirer from making a tender offer for our common stock. In addition, these provisions may frustrate or prevent any attempt by our stockholders to replace or remove our current management by making it more difficult to replace or remove our Board of Directors. These provisions include:

These restrictions, under certain circumstances, could reduce the market price of our common stock.

Any failure to maintain effective internal control over our financial reporting could materially adversely affect us.

Section 404 of the Sarbanes-Oxley Act of 2002 requires us to include in our annual reports on Form 10-K an assessment by management of the effectiveness of our internal control over financial reporting. In addition, at such time, if any, as we are no longer a "smaller reporting company," our independent registered public accounting firm will have to attest to and report on management's assessment of the effectiveness of such internal control over financial reporting. Based upon the last evaluation conducted as of June 30, 2017, our management concluded that our internal control over financial reporting was not effective as of such date 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. Our management identified a material weakness in our internal control over financial reporting that occurred during our fiscal quarter ended March 31, 2017 and continued through June 30, 2017 and thereafter through the date of this filing, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. During the fiscal year 2017, the Company has experienced turnover in its accounting group and as of June 30, 2017, it lacked a sufficient number of competent accounting personnel.   This material weakness in our internal controls over financial reporting had a material adverse impact on our quarterly and annual financial close process and reporting. The Company is in the process of remediating this weakness by adding additional competent accounting personnel.

If we fail to maintain effective internal control over financial reporting, we may be unable to prevent or detect fraud or provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements. This could result in a loss of investor confidence in the reliability of our financial statements, which in turn could negatively affect the price of our common stock.

In particular, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management and (if required in future) our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404(b). Our compliance with Section 404(b) may require that we incur substantial accounting expense and expend significant management efforts. We currently do not have an internal audit group. We may need to retain the services of additional accounting and financial staff or consultants with appropriate public company experience and technical accounting knowledge to satisfy the ongoing requirements of Section 404(b). We intend to review the effectiveness of our internal controls and procedures and make any changes management determines appropriate, including to achieve compliance with Section 404(b) by the date on which we are required to so comply.

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IN ADDITION TO THE ABOVE RISKS, BUSINESSES ARE OFTEN SUBJECT TO RISKS NOT FORESEEN OR FULLY APPRECIATED BY MANAGEMENT. IN REVIEWING THIS REPORT, POTENTIAL INVESTORS SHOULD KEEP IN MIND THAT OTHER POSSIBLE RISKS MAY ADVERSELY IMPACT THE COMPANY’S BUSINESS OPERATIONS AND THE VALUE OF THE COMPANY’S SECURITIES.

On January 11, 2017, a payment of $1.35 million was made by the insurance underwriters of the Company's directors' and officers' insurance policy to the hedge funds in the Iroquois lawsuit on behalf of the Company. On February 2, 2017, the Company issued 600,000 shares of its common stock to the hedge funds named in the settlement agreement.

Tullow and Dana Legal Actions

On January 11, 2016, we filed legal actions against members of the Consortium under the Joint Operating Agreement governing the oil and gas exploration rights offshore Guinea ("First JOA") in the United States District Court for the Southern District of Texas and before the AAA against Tullow for their failure to meet their obligations under the First JOA. On January 28, 2016, the action in the Federal District Court was voluntarily dismissed by us and refiled in District Court in Harris County, Texas. On February 8, 2016 Tullow and Dana removed the case to Federal District Court.

On February 2, 2016, SCS filed an Application for Emergency Arbitrator and Interim Measures of Protection and requested the following relief: (a) expedite discovery prior to the constitution of the arbitral tribunal; (b) provide that the time period permitted by the parties' arbitration agreement for the selection of the arbitrators and the filing of any responsive pleadings or counterclaims be accelerated; (c) require Tullow, as the designated operator under the First JOA, to maintain existing "well-planning activities"; (d) require Tullow to undertake and complete certain planning activities; and (e) require Tullow and Dana to join with SCS in completing the negotiation of an acceptable amendment to the PSC and to agree to a process that will result in the execution of the amendment. With the exception of limited relief regarding discovery and agreement by Tullow to maintain certain well plan readiness, the Emergency Arbitrator ruled on February 17, 2016, that SCS is not entitled to the emergency injunctive relief it requested. Further, the Emergency Arbitrator enjoined all parties to the dispute from pursuing parallel District Court proceedings. On February 12, 2016, the case was voluntarily stayed by us.

The AAA action sought (1) a determination that Tullow and Dana were in breach of their contractual obligations and (2) the damages caused by the repeated delays in well drilling caused by the activities of Tullow and Dana. We determined to bring the legal actions only after it became apparent that Tullow and Dana would not move forward, despite many opportunities to do so, with petroleum operations. SCS believed that it exhausted all of its options for the pursuit of legal measures to require Tullow and Dana to drill the planned exploration well.

On August 15, 2016, we subsequently entered into a Settlement and Release Agreement with Tullow and Dana ("Settlement and Release") with respect to our dispute in arbitration. Under the Settlement and Release, we released all claims against Tullow and Dana and Tullow and Dana (i) issued to the Government of Guinea a notice of withdrawal from the Concession and PSC effective immediately, (ii) transferred their interest in the long lead items of well construction material previously purchased by the Consortium in preparation for the initial drilling of the Fatala well, and agreed to pay net cash of $0.7 million to us. We also agreed to pay Dana a success fee which is based upon $50,000 per million barrels upon declaration of the certified commercial reserves of the Fatala-1 well, if it results in a discovery.

The following table sets forth the quarterly high and low closing bid prices per share for our common stock on the QX Tier of the OTC Markets. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. Our common stock is thinly traded and, thus, pricing of our common stock on OTC Markets does not necessarily represent its fair market value .

On November 14, 2017, the last reported sales price for our common stock as reported by OTC Markets was $0.14 per share .

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.  Other than provisions of the Delaware Revised Statutes requiring post-dividend solvency according to certain measures, there are no material restrictions limiting, or that are likely to limit, our ability to pay dividends on our common stock.

Securities Authorized for Issuance under Equity Compensation Plans

On February   18, 2010, at our annual meeting of stockholders, our Board of D irectors and stockholders approved our 2010 Equity Incentive Plan (the "2010 Plan"). Subsequently, on February   17, 2012, the 2010 Plan was amended to increase the maximum shares issuable under the 2010 Plan from 625,000 shares to 1,250,000 shares and again on January   27, 2016, at our annual meeting of stockholders, the stockholders approved amending the 2010 Plan to increase the number of shares available for issuance by 750,000 shares to 2,000,000 shares.

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.

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 information as of June 30, 2017, with respect to the shares of common stock that may be issued under our existing equity compensation plans:

The following table provides a reconciliation of the securities remaining available for issuance as of June 30, 2017 under the 2010 Plan: