Attached files
file | filename |
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EX-31.2 - EXHIBIT 31.2 - ERHC Energy Inc | ex31_2.htm |
EX-32.1 - EXHIBIT 32.1 - ERHC Energy Inc | ex32_1.htm |
EX-31.1 - EXHIBIT 31.1 - ERHC Energy Inc | ex31_1.htm |
EX-32.2 - EXHIBIT 32.2 - ERHC Energy Inc | ex32_2.htm |
U.S.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
x
|
Annual
Report under Section 13 or 15(d) of the Securities Exchange Act of
1934
|
For the
fiscal year ended September 30, 2009
OR
¨
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Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
|
For the
transition period ended: __________________
Commission
file number: 000-17325
(Exact
name of registrant as specified in its charter)
Colorado
|
88-0218499
|
|
(State
or Other Jurisdiction of Incorporation or Organization)
|
(I.R.S.
Employer Identification No.)
|
|
5444
Westheimer Road, Suite 1440, Houston, Texas
|
77056
|
|
(Address
of Principal Executive Office)
|
(Zip
Code)
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713-626-4700
(Registrant’s
Telephone Number, Including Area Code)
Securities
registered pursuant to Section 12(b) of the Exchange
Act: None
Securities
registered pursuant to Section 12(g) of the Exchange Act: common
stock
Check if
the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes ¨ No x
Check if
the registrant is not required to file reports pursuant to Section 13 or 15(d)
of the Act. Yes ¨ No x
Check if
the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes
x No ¨
Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K contained in this form, and no disclosure will be contained, to
the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ¨
Check if
the registrant is a large accelerated filer, an accelerated filer or a
non-accelerated filer.
Large
Accelerated Filer ¨
Accelerated Filer x
Non-Accelerated Filer ¨
Check if
the registrant is a shell company. Yes ¨ No x
The
aggregate market value of the voting stock held by non-affiliates of the
registrant on March 31, 2009 was $128,313,100.
On
November 30, 2009, the registrant had 722,688,569 shares of common stock issued
and outstanding.
DOCUMENTS INCORPORATED BY
REFERENCE
Portions
of the Definitive Proxy Statement to be delivered to shareholders in connection
with the Annual Meeting of Shareholders to be held in 2010 are incorporated by
reference into Part III.
TABLE OF CONTENTS
PART
I
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PAGE
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Item
1.
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5
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Item
1A.
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13
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Item
1B.
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17
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Item
2.
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18
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Item
3.
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19
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Item
4.
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20
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PART
II
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||||
Item
5.
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21
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Item
6.
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22
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Item
7.
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23
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Item
7A.
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30
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Item
8.
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31
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Item
9.
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56
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Item
9A.
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56
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Item
9B.
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56
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PART
III
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Item
10.
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57
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Item
11.
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57
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Item
12.
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57
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Item
13.
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57
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Item
14.
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57
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PART
IV
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Item
15.
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58
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59
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Forward-Looking
Statements
ERHC
Energy Inc. (the “Company”) or its representatives may, from time to time, make
or incorporate by reference certain written or oral statements which
include, but are not limited to, information concerning the Company’s possible
or assumed future business activities and results of operations and statements
about the following subjects:
|
·
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business
strategy;
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·
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growth
opportunities;
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·
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future
development of concessions, exploitation of assets and other business
operations;
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·
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future
market conditions and the effect of such conditions on the Company’s
future activities or results of
operations;
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|
·
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future
uses of and requirements for financial
resources;
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·
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interest
rate and foreign exchange risk;
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·
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future
contractual obligations;
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·
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outcomes
of legal proceedings including, without limitation, the ongoing
investigations of the Company;
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·
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future
operations outside the United
States;
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·
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competitive
position;
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·
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expected
financial position;
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·
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future
cash flows;
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·
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future
liquidity and sufficiency of capital
resources;
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·
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future
dividends;
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·
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financing
plans;
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·
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tax
planning;
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·
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budgets
for capital and other expenditures;
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·
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plans
and objectives of management;
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·
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compliance
with applicable laws; and
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·
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adequacy
of insurance or
indemnification.
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These
types of statements and other forward-looking statements inherently are subject
to a variety of assumptions, risks and uncertainties that could cause actual
results, levels of activity, performance or achievements to differ materially
from those expected, projected or expressed in forward-looking
statements. These risks and uncertainties include, among others, the
following:
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·
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general
economic and business conditions;
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·
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worldwide
demand for oil and natural gas;
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·
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changes
in foreign and domestic oil and gas exploration, development and
production activity;
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·
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oil
and natural gas price fluctuations and related market
expectations;
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·
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termination,
renegotiation or modification of existing
contracts;
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·
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the
ability of the Organization of Petroleum Exporting Countries, commonly
called OPEC, to set and maintain production levels and pricing, and the
level of production in non-OPEC
countries;
|
|
·
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policies
of the various governments regarding exploration and development of oil
and gas reserves;
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·
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advances
in exploration and development
technology;
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·
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the
political environment of oil-producing
regions;
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·
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political
instability in the Democratic Republic of Sao Tome and Principe and the
Federal Republic of Nigeria;
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casualty
losses;
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·
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competition;
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·
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changes
in foreign, political, social and economic
conditions;
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·
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risks
of international operations, compliance with foreign laws and taxation
policies and expropriation or nationalization of equipment and
assets;
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·
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risks
of potential contractual
liabilities;
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·
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foreign
exchange and currency fluctuations and regulations, and the inability to
repatriate income or capital;
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·
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risks
of war, military operations, other armed hostilities, terrorist acts and
embargoes;
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·
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regulatory
initiatives and compliance with governmental
regulations;
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·
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compliance
with environmental laws and
regulations;
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·
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compliance
with tax laws and regulations;
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·
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customer
preferences;
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·
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effects
of litigation and governmental
proceedings;
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·
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cost,
availability and adequacy of
insurance;
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·
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adequacy
of the Company’s sources of
liquidity;
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·
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labor
conditions and the availability of qualified personnel;
and
|
|
·
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various
other matters, many of which are beyond the Company’s
control.
|
The risks
and uncertainties included here are not exhaustive. Other sections of
this report and the Company’s other filings with the U.S. Securities and
Exchange Commission (“SEC”) include additional factors that could adversely
affect the Company’s business, results of operations and financial
performance. Given these risks and uncertainties, investors should
not place undue reliance on our statements concerning future
intent. Our statements included in this report speak only as of
the date of this report. The Company expressly disclaims any
obligation or undertaking to release publicly any updates or revisions to any of
our statements to reflect any change in its expectations with regard to the
statement or any change in events, conditions or circumstances on which any
forward-looking statement is based.
PART
I
Item 1 – Business
Overview
ERHC
Energy Inc., a Colorado corporation, (“ERHC” or the “Company”) was incorporated
in 1986 and was engaged in a variety of businesses until 1996, when it began its
current operations. The Company’s goal is to maximize its value
through exploration and exploitation of oil and gas reserves in the Gulf of
Guinea offshore of central West Africa including its rights to working interests
in exploration acreage in the Joint Development Zone (“JDZ”) between the
Democratic Republic of Sao Tome and Principe (“DRSTP or “Tome”) and the Federal
Republic of Nigeria (“FRN or “Nigeria”) and in the exclusive territorial waters
of Sao Tome (the “Exclusive Economic Zone” or “EEZ”). ERHC does not directly
carry out the exploration and production operations in the JDZ but is
relying on reputable technical operators with whom the Company has entered into
partnership relationships, such as Addax Petroleum Inc. and Sinopec Corporation
to carry out those operations. The Company has formed relationships with these
upstream oil and gas companies to assist the Company in exploiting its assets in
the JDZ. The Company currently has no other operations but is exploring
opportunities in other areas of the Oil and Gas industry, including supply and
trading.
Our
business strategy is to farm out our rights to working interests in the JDZ and
EEZ to entities which we believe are established, well capitalized Oil and
Gas operators for upfront cash payments and negotiate contracts with
them to carry our share of the capital costs. This has been done
successfully on Blocks 2, 3 and 4 and resulted in cash proceeds of $45.9
million. We will continue this approach for JDZ Blocks 5, 6 and 9 as
well as the EEZ. We are also pursuing other business development activities in
the broad petroleum and related industries.
General
Development of the Business
In April
2003, the Company and the DRSTP entered into an Option Agreement (the “2003
Option Agreement”) in which the Company relinquished certain financial interests
in the JDZ in exchange for exploration rights in the JDZ. The Company
additionally entered into an Administration Agreement with the Nigeria-Sao Tome
and Principe Joint Development Authority (“JDA”). The Administration
Agreement is the formal agreement by the JDA that it will fully implement ERHC’s
preferential rights to working interests in the JDZ acreage as set forth in the
2003 Option Agreement and describes certain procedures regarding the exercising
of these rights. However, ERHC retained the following rights to
participate in exploration and production activities in the EEZ subject to
certain restrictions: (a) the right to receive up to two blocks of
ERHC’s choice and (b) the option to acquire up to a 15% paid working interest in
up to two blocks of ERHC’s choice in the EEZ. The Company would be
responsible for its proportionate share of exploration and exploitation costs in
the EEZ blocks.
This
exercise of ERHC’s rights was subject to the condition that if no license is
awarded or a license is awarded and subsequently withdrawn by the JDA prior to
the commencement of operations, ERHC shall be entitled to receive its working
interest in that block in a future license awarded for that block.
On April
28, 2005, ERHC and its then consortium partner Noble Energy International, Ltd.
(“Noble”) entered into a Memorandum of Understanding with Godsonic Oil Company
Limited (“Godsonic”), an independent bidder for interest in Block 4. The
Memorandum of Understanding stated that if ERHC and Noble (“ERHC/Noble”)
received less than a 26% bid-interest award in Block 4 in the JDZ, Godsonic
would transfer its entire bid interest award in Block 4 to ERHC/Noble; on the
other hand, if ERHC/Noble received more than a 26% bid-interest award in Block 4
from the JDA, ERHC/Noble would transfer the excess over 26% to Godsonic. In June
2005, the JDA awarded ERHC and its then consortium partner Noble a 35% bid
interest in Block 4 of the JDZ, in addition to the option interest of 25% which
ERHC had exercised in the Block. In October 2005, Noble withdrew from
participation in Block 4 and Addax Petroleum (Nigeria Offshore 2) Limited
(“Addax”) replaced Noble as ERHC’s consortium partner. By a Letter Agreement
dated October 24, 2005 (the “Letter Agreement”), ERHC and Addax undertook to
transfer a 9% interest of the 35% bid interest to Godsonic subject to Godsonic
meeting financial and other conditions.
ERHC and
Addax entered into a Participation Agreement dated November 17, 2005 (the
“Participation Agreement”) whereby ERHC undertook to assign a 42.3% interest
(the “Assigned Interest”) in Block 4 to Addax and retained an interest of
17.7% (the “Retained Interest”) . The Participation
Agreement stated Addax’s cash payment obligations to ERHC would be $18 million,
which was paid in February and March 2006. Pursuant to the
Participation Agreement between ERHC and Addax, as amended, Addax will serve as
operator and pay all of ERHC’s future costs in respect of all petroleum
operations in Block 4 subject to reimbursement upon production. Addax is
entitled to 100% of ERHC’s allocation of cost plus up to 50% of ERHC’s
allocation of profit until Addax recovers all costs advanced on behalf of
ERHC.
In an
amendment to the Participation Agreement dated February 23, 2006, Addax’s
amended interest in Block 4 was changed to 33.3% while ERHC’s retained interest
remained at 17.7%. On March 24, 2006, the Participation Agreement was further
amended to change ERHC’s interest to 26.7%.
On March
15, 2006, Godsonic and ERHC (on behalf of the ERHC/Addax consortium) entered
into an agreement wherein ERHC agreed to assign 9% of its interest in Block 4 to
Godsonic subject to certain stipulated financial and other conditions to be
fulfilled by Godsonic. On April 11, 2006, ERHC and Addax entered by an
amendment to the Participation Agreement, agreed that Addax would
acquire 7.2% of the 9% interest in the event that Godsonic failed to meet agreed
upon conditions and foreclosed from the claims to the 9% interest. This would
give Addax a total of 40.5% interest and ERHC 19% in Block 4.
In July
2007, Godsonic failed to meet the stipulated conditions and ERHC reclaimed the
9% interest. Addax claimed entitlement under the existing agreements to 7.2% out
of the recovered 9%, without payment of any further consideration to
ERHC. In July 2008, the London Court of International Arbitration
(LCIA) confirmed that under the Participation Agreement between the parties no
further consideration was payable by Addax Petroleum to ERHC for Addax
Petroleum’s 7.2% share of the 9%.
In
February 2006, ERHC sold 15% of its 25% participating interest in Block 3 of the
JDZ to Addax Petroleum Resources Nigeria Limited (“Addax Sub”) for $7.5 million
which was paid in the second quarter of fiscal 2006. Under the participation
agreement between ERHC and Addax Sub, Addax Sub agreed to “carry” all of ERHC’s
future costs in respect of petroleum operations in Block 3. Upon production
Addax Sub is entitled to 100% of ERHC’s allocation of cost plus up to 50% of
ERHC’s allocation of profit until Addax Sub recovers 100% of the costs advanced
on behalf of ERHC.
In March
2006, ERHC sold a 28.67% participating interest in Block 2 of the JDZ to Sinopec
International Petroleum Exploration and Production Corporation Nigeria
(“Sinopec”), and a 14.33% participating interest in Block 2 of the JDZ to Addax
Energy Nigeria Limited (“Addax Ltd.”) leaving a 22% participating interest in
Block 2 to the Company. In exchange, Sinopec paid ERHC $13.6 million and Addax
Ltd. paid ERHC $6.8 million in the second quarter of fiscal 2006. Under the
participation agreement among ERHC, Sinopec and Addax Ltd., Sinopec will serve
as operator, and Sinopec and Addax Ltd. will pay all of ERHC’s future costs in
respect of petroleum operations in Block 2. Sinopec and Addax Ltd. are entitled
to 100% of ERHC’s allocation of cost plus up to 50% of ERHC’s allocation of
profit until they recover 100% of the cost they advanced on behalf of ERHC and
Sinopec is to receive 6% interest on its future costs, up to $35 million, but
only to the extent that those interest costs are recoupable out of
production.
Related
to the sale of the participating interest in Block 2 to Sinopec, ERHC agreed to
pay a $3 million cash success fee ($1.5 million was paid in March 2006 and the
remaining $1.5 million was paid in March 2007) to Feltang International Inc., a
British Virgin Island company (“Feltang”) that was responsible for obtaining
Sinopec’s participation in Block 2. ERHC will issue to Feltang 5,250,000 shares
of common stock and warrants to purchase 6,500,000 shares at a fixed exercise
price of $0.355 per share. The common stock was valued at $4,803,750 based on
the quoted market value of the common stock on the date Sinopec signed the
production sharing agreement.
On June
24, 2009, Addax Petroleum Corporation announced that it has entered into a
definitive agreement with Sinopec pursuant to which Sinopec had agreed, subject
to the terms of the Support Agreement, to make an offer to acquire all of the
outstanding common shares of Addax Petroleum. On August 24, 2009, the
sale of Addax Petroleum Corporation to Sinopec was finalized.
Current
Business Operations
ERHC’s
operations are currently focused in the Gulf of Guinea, off the coast of central
West Africa. ERHC believes this region has the possibility of significant oil
reserves. ERHC has worked to realize the value of the assets it has acquired in
this region. The Company’s current holdings include those below,
details of which can be found at the link: http://www.erhc.com
JDZ
– ERHC has interests in six of the nine Blocks in the JDZ, a 34,548
square kilometer area approximately 200 kilometers off the coastline of Nigeria
and Săo Tomé & Principe that is adjacent to several large petroleum
discovery
areas.
EEZ – The government of Săo
Tomé & Principe has awarded ERHC rights to participate in exploration and
production activities in the EEZ, which encompasses an area of approximately
160,000 square kilometers. These rights were granted in a May 21, 2001
Memorandum of Agreement made between the DRSTP and the Company. The Company’s
rights in the EEZ expire on October 1, 2024 or, if the company has a producing
working interest in any Block(s) at October 1, 2024, the Company’s rights extend
in such Block(s), as long as the Block(s) remains in production.
Operations
in the JDZ
ERHC has
interests in six of the nine Blocks in the JDZ, as follow
|
·
|
JDZ
Block 2: 22.0% Working interest
percentage
|
|
·
|
JDZ
Block 3: 10.0% Working interest
percentage
|
|
·
|
JDZ
Block 4: 19.5% Working interest
percentage
|
|
·
|
JDZ
Block 5: 15.0% Working interest
percentage
|
|
·
|
JDZ
Block 6: 15.0% Working interest
percentage
|
|
·
|
JDZ
Block 9: 20.0% Working interest
percentage
|
The
working interest represents ERHC’s share of all the hydrocarbon production from
the blocks and obligates ERHC to pay a corresponding percentage of the costs of
drilling, production and operating the blocks. These costs in blocks 2, 3 and 4
are currently being carried by the operators until production, whereupon the
operators will recover their costs from the production revenues.
In early
2008, Addax Petroleum, an experienced exploration and production company that
has participation agreements with ERHC in JDZ Blocks 2, 3 and 4, publicly
disclosed seismic images and maps showcasing the prospectivity of its JDZ
interests. This seismic was compiled by Geco-Prakla (now WesternGeco)
in 1999 when WesternGeco shot a 2D seismic survey of approximately 5,900km
covering the major part of the JDZ. Interpretation carried out by WesternGeco
has led to the identification of 56 prospective structures within Blocks 1 to 9
in the JDZ, of which 17 were defined as prospects and 39 as leads. WesternGeco
used reservoir parameters similar to those known from nearby fields in Nigeria
and Equatorial Guinea. Combined recoverable reserves potential of the 17
prospects was estimated by WesternGeco. The scope of the WesternGeco report was
to interpret and map seismic data, highlight prospectivity, and calculate
volumetrics.
The
estimate of “recoverable reserves potential” based on WesternGeco’s report,
which interpreted and mapped seismic data, highlighted prospectivity and
calculated volumetrics, was not based on any attempt to comply with the SEC
definition of reserves and, accordingly the estimate of recoverable reserves
potential is not presented. ERHC Energy has access to the data compiled by
WesternGeco under the terms of a data use license with WesternGeco, and even
when properly interpreted, seismic data and visualization techniques are not
conclusive in determining if hydrocarbons are present in economically producible
amounts.
Operations
in JDZ Block 4
ERHC’s
consortium partner Addax Petroleum is the operator of JDZ Block 4. WesternGeco’s
interpretation of seismic data indicates significant recoverable reserves in JDZ
Block 4; however, even when properly interpreted, seismic data and visualization
techniques are not conclusive in determining if hydrocarbons are present in
economically producible amounts. On August 26, 2009, the Company announced that
exploratory drilling was underway in Block 4 and that Addax Petroleum
Corporation had spudded the Kina Prospect. The drilling campaign is
being conducted by Addax using Transocean’s Deepwater Pathfinder, a fifth
generation dynamically positioned deepwater drilling rig capable of drilling in
water depths up to 3,048 meters.
On
November 9, 2009 the Company announced commencement of exploratory drilling at
the Malanza 1X well in Block 4. It is the second well drilled in JDZ Block 4 in
the comprehensive drilling campaign that began in August.
Operations
in JDZ Block 3
Anadarko
Petroleum was originally the operator of JDZ Block 3. In 2009, Addax acquired
Anadarko’s stake in JDZ Block 3 from Anadarko and became the operator of the
Block.
Following
the initial drilling operation in Block 4 of the Kina Prospect, Addax moved the
Deepwater Pathfinder to the Lemba 1X well location in JDZ Block 3 in which ERHC
has a 10 percent interest. Exploratory drilling at Lemba 1X commenced October
2009 and was completed in early November. A comprehensive analysis
that incorporates the drilling results into relevant geologic and fluid models
is being carried out. The information from these wells is helping the
exploration team understand the geology and hydrocarbon potential of the various
prospects being drilled and provides valuable insight into the prospectively of
the entire area.
Operations
in JDZ Block 2
On August
19, 2009, ERHC announced that its technical partner, Sinopec Corp., was taking
possession of the SEDCO 702 semi-submersible drilling rig to drill the Bomu-1
Prospect in Block 2. The Bomu-1 prospect is one of several prospects in JDZ
Block 2 identified from 3-D seismic analysis and interpretation
The
Bomu-1 was spudded by Sinopec at the end of August and in October 2009 the
Company announced that Sinopec had completed exploratory drilling at the Bomu-1
well location. A comprehensive analysis that incorporates the drilling results
into relevant geologic and fluid models is being carried out. The information
from these wells is helping the exploration team understand the geology and
hydrocarbon potential of the various prospects being drilled and provides
valuable insight into the prospectivity of the entire area.
General
Information on Current Operations in Blocks 2, 3 and 4
Exploration
in the JDZ is currently being driven by our technical partners, Addax and
Sinopec. In addition, ERHC has interests in more JDZ Blocks than any other
company. Management believes that the start of exploratory drilling in the
Blocks is the third step in a five step process towards realizing the Company’s
assets in those Blocks.
Management
understands that each step in the process takes considerable
expertise and any resulting production, if in commercial quantities, may
considerably enhance shareholder value. No guarantees can be given at this stage
that there will be production in commercial quantities.
Management
also understands that analyzing drilling results and incorporating them into the
relevant geologic and fluid models takes time. Further, moving from field
appraisal and development onto production takes time. As has been the practice
in the JDZ, accurate, material information on the progress in the JDZ Blocks
will emanate from the operators or the JDA. ERHC will publish such
information in a timely manner in accordance with our contractual and regulatory
obligations.
Background
of the JDZ
In the
spring of 2001, the governments of Săo Tomé & Principe and Nigeria reached
an agreement over a long-standing maritime border dispute. Under the terms of
the agreement, the two established the JDZ to govern commercial
activities within the disputed boundaries. The JDZ is administered by the
JDA which oversees all future exploration and development activities in
the JDZ. The remaining claimed territorial waters of Săo Tomé & Principe are
known as the EEZ. Revenues derived from the JDZ will be shared 60/40 between the
governments of Nigeria and Săo Tomé & Principe, respectively.
Background
of the EEZ
The
government of Săo Tomé & Principe has awarded ERHC rights to participate in
exploration and production activities in Săo Tomé & Principe’s EEZ.
ERHC’s rights
include the following:
|
·
|
The
right to receive up to two blocks of ERHC’s choice;
and
|
|
·
|
The
option to acquire up to a 15 percent paid working interest in another two
blocks of ERHC’s choice.
|
ERHC
would be responsible for its proportionate share of exploration and exploitation
costs in the EEZ blocks.
The EEZ
describes waters of Săo Tomé that encompasses an area of
approximately 160,000 square km. It is measured from claimed archipelagic
baselines — territorial sea: 12 nautical miles, exclusive economic zone: 200
nautical miles. It is the largest such area in the Gulf of Guinea. Ocean water
depths around the two islands exceed 5,000 feet, depths that have only become
feasible for oil production in the past few years; however, oil and gas are
produced in the neighboring countries of Nigeria, Equatorial Guinea, Gabon and
Angola. The African coast is less than 400 nautical miles offshore,
which means the Exclusive Economic Zones of the concerned countries
overlap.
The
following chart represents ERHC’s current rights in the JDZ blocks.
JDZ
Block #
|
ERHC
Original
Participating
Interest
(1)
|
ERHC
Joint
Bid
Participating
Interest
|
Participating
Interest(s)
Sold
|
Current
ERHC
Retained
Participating
Interest
|
2
|
30%
|
35%
|
43%
(2)
|
22%
|
3
|
20%
|
5%
|
15%
(3)
|
10%
|
4
|
25%
|
35%
|
40.5%
(4)
|
19.5% (6)
|
5
|
15%
|
(5)
|
(5)
|
15%
|
6
|
15%
|
(5)
|
(5)
|
15%
|
9
|
20%
|
(5)
|
(5)
|
20%
|
(1)
|
Original
Participating Interest granted pursuant to the Option Agreement, dated
April 2, 2003, between DRSTP and ERHC (the “2003 Option
Agreement”).
|
(2)
|
In
March 2006, ERHC sold an aggregate 28.67% participating interest to
Sinopec and an aggregate 14.33% participating interest to Addax
Ltd.
|
(3)
|
In
February 2006, ERHC sold a 15% participating interest to Addax
Sub.
|
(4)
|
By
a Participation Agreement made in November 2005 and subsequently amended,
ERHC sold 40.5% participating interest to Addax. Includes 9% distributed
between Addax (7.2%) and ERHC (1.8%) reclaimed from Godsonic by ERHC on
behalf of the ERHC/Addax consortium following Godsonic’s inability to
fulfill financial and other conditions upon which the 9% was to have been
assigned to Godsonic.
|
(5)
|
No
contracts have been entered into as of the date
hereof.
|
(6)
|
Includes
the 9% distributed between ERHC (1.8%) and Addax (7.2%) reclaimed from
Godsonic by ERHC on behalf of the ERHC/Addax consortium following
Godsonic’s inability to fulfill financial and other conditions upon which
the 9% was to have been assigned to
Godsonic.
|
Particulars
of Participating Agreements
JDZ
Block 2 Participation Agreement
Date
of Participation Agreement
|
Parties
|
Key
Terms
|
||
2
March 2006
|
1.
Sinopec International Petroleum Exploration and Production Co. Nigeria
Ltd
|
ERHC
assigns 28.67% of participating interest to Sinopec International
Petroleum Exploration and Production Co Nigeria Ltd (“Sinopec”) and a
14.33% participating interest to Addax Energy Nigeria Limited (“Addax”)
leaving ERHC with a 22% participating interest.
|
||
1b.
Sinopec International Petroleum and Production Corporation
|
Consideration
from Sinopec to ERHC for the 28.67% interest (the “SINOPEC assigned
interest”) is $13.6 million.
|
|||
2a.
Addax Energy Nigeria Limited (Note 2)
|
Consideration
from Addax to ERHC for the 14.33% interest (the “Addax assigned interest”)
is $6.8 million
|
|||
2b.
Addax Petroleum Corporation (Note 2)
|
In
addition, Sinopec and Addax to pay all of ERHC’s future
costs for petroleum operations (“the carried costs”) in respect
of the 22% interest retained by ERHC (the “retained interest”) in Block
2.
|
|||
3.
ERHC Energy Inc
|
Sinopec
and Addax are entitled to 100% of ERHC’s allocation of cost oil plus up to
50% of ERHC’s allocation of profit oil from the retained interest on Block
2 until Sinopec and Addax Sub recover 100%
of ERHC’s carried costs
|
|||
JDZ
Block 3 Participation Agreement
|
||||
Date
of Participation Agreement
|
Parties
|
Key
Terms
|
||
15
February 2006
|
1.
ERHC Energy Inc
|
ERHC
assigns 15% of participating interest to Addax Petroleum Resources Nigeria
Limited (“Addax Sub”) leaving ERHC with a 10% participating
interest.
|
||
2a.Addax
Petroleum Resources Nigeria Limited (Note 2)
|
Consideration
from Addax Sub to ERHC for the 15% acquired interest is
$7.5 million.
|
|||
2b.Addax
Petroleum Corporation (Note 2)
|
In
addition, Addax to pay all of ERHC’s future costs for petroleum operations
as in respect of the 10% interest retained by ERHC in Block
3.
|
|||
Addax
Sub is entitled to 100% of ERHC’s allocation of cost oil plus up to 50% of
ERHC’s allocation of profit oil until Addax Sub recovers 100% of the
carried costs
|
Particulars
of Participating Agreements
JDZ
Block 4 Participation Agreement
|
||||
Date
|
Parties
|
Key
Terms
|
||
17
November 2005
(Note1)
|
1.
ERHC Energy Inc
|
ERHC
shall assign 33.3%
(Note) of participating interest to Addax Petroleum Nigeria
(Offshore 2) Limited (“Addax”) (leaving ERHC with a 26.7% participating
interest).
|
||
2a.
Addax Petroleum Nigeria (Offshore 2) Limited (Note 2)
|
Consideration
from Addax Sub to ERHC for the interest to be acquired by Addax is fixed
at $18 million.
|
|||
2b.
Addax Petroleum NV (Note
2)
|
In
addition, Addax to pay all of ERHC’s future costs for petroleum operations
(“the carried costs”) in respect of ERHC’s retained interest in Block
4.
|
|||
Addax
is entitled to 100% of ERHC’s allocation of cost oil plus up to 50% of
ERHC’s allocation of profit oil until Addax recovers 100% of ERHC’s
carried costs.
|
Note 1 – By an Amendment to
the Participation Agreement dated February 23 2006, ERHC and Addax amended the
Participation Agreement so that the assigned interest to Addax would be changed
to 33.3%. By a second Amendment to the Participation Agreement,
entered into on March 14 2006, ERHC and Addax amended the Participation
Agreement so that the assigned interest to Addax would be 33.3% and ERHC’s
participating interest would be 26.7%. By a third Amendment to the
Participation Agreement dated April 11 2006, ERHC and Addax agreed that if
Godsonic, a third party, did not meet financial and other obligations for the
transfer of 9% of ERHC’s participating interest to Godsonic (and was foreclosed
from all claims to the 9%), ERHC would transfer 7.2% out of the 9% interest to
Addax so that Addax’s participating interest would be 40.5% in aggregate and
ERHC’s participating interest would be 19.5% in aggregate. The amount
of fresh consideration to accrue from Addax to ERHC for the transfer of the 7.2%
is not stated in the third Amendment to the Participation
Agreement. On July 15, 2008, The London Court of International
Arbitration (LCIA) confirmed that under the Participation Agreement between
parties no further consideration is payable by Addax Petroleum to ERHC for Addax
Petroleum’s 7.2 percent share of the 9 percent. ERHC is entitled to the
remaining 1.8 percent out of the nine percent. The combine share of
JDZ Block 4 held by ERHC and Addax Petroleum under the Participation Agreement
is 60 percent. Following the ruling by the LCIA, ERHC’s share of JDZ Block 4
increased from 17.7 percent to 19.5 percent and Addax Petroleum’s share
increased to 40.5 percent.
Note 2 - On June 24, 2009,
Addax Petroleum Corporation announced that it has entered into a definitive
agreement with Sinopec pursuant to which Sinopec had agreed, subject to the
terms of the Support Agreement, to make an offer to acquire all of the
outstanding common shares of Addax Petroleum. On August 24, 2009, the
sale of Addax Petroleum Corporation to Sinopec was finalized.
Current
Plans for Operations
The
Company is currently focused on exploiting its interests in Blocks 2, 3 and
4. It has no current sources of income from operations other than
interest income from cash generated from sale of participation interests in
Blocks 2, 3 and 4 to Sinopec and Addax Ltd. The Company hopes to enter into
Participation Agreements in Blocks 5, 6 and 9, but the timing or likelihood of
such transactions cannot be predicted. The Company believes that the
participation agreements that it has entered into will be its primary source of
future cash flow; however, the Company is exploring plans to generate operating
income from new sources. The Company plans to diversify its business
activity by pursuing other growth opportunities possibly including acquiring
revenue-producing assets in diverse geographical areas and forging new strategic
business partnerships and alliances. To expand operations, ERHC is currently in
negotiations for potential investments that would increase the Company’s
presence in Nigeria’s oil and gas industry.
In
December 2009 ERHC signed a non-binding Memorandum of Understanding (MOU) with
Circle Ltd. and Excel Exploration and Production Ltd. to negotiate investment in
and acquisition of working interests in the Eremor Marginal Field (OML 46). The
Eremor Field, which is located in shallow water off-shore Nigeria, was
discovered in 1978. The discovery well, Eremor-1, encountered three oil and gas
zones, the most prominent of which is the D-03 reservoir with 43 feet of net oil
sand. It was re-entered for testing in 2005 with the D-03 reservoir testing
2,200 barrels per day of oil with API gravity of 22.0, a low gas to oil ratio
and no water. Excel was awarded a 100 percent interest and operatorship of
Eremor in 2003.
ERHC,
through its locally incorporated subsidiary, ERHC Energy Nigeria Ltd., has also
entered into a non-binding MOU with WellTest Integrated Services Ltd. to
negotiate the acquisition of a controlling equity interest in WellTest. The
company provides well testing, production engineering and procurement services
to Nigeria’s oil and gas industry. To coordinate the Company’s business
development in the Nigerian and West African oil and gas industry, ERHC has
opened its Nigeria liaison office at Oguda Close, Maitama, Abuja Nigeria. The
Company’s wholly owned subsidiary ERHC Energy Nigeria Ltd. operates the liaison
office.
ERHC
cannot currently predict the outcome of negotiations for acquisitions in
Nigeria, or, if successful, the impact on the Company's operations.
Government
Regulation
In the
event the Company begins direct exploration and exploitation of hydrocarbons, it
will be required to make necessary expenditures to comply with applicable health
and safety, environmental and other regulations.
The oil
and gas industry is subject to various types of regulation throughout the world.
Legislation affecting the oil and gas industry has been pervasive and is under
constant review for amendment or expansion. Pursuant to such legislation,
numerous government agencies have enacted extensive laws and regulations binding
on the oil and gas industry and companies engaged in this industry, some of
which carry substantial penalties for failure to comply. Such laws and
regulations have a significant impact on oil and gas exploration, production and
marketing and midstream activities. These laws and regulations increase the cost
of doing business and, consequently, will affect results of operations. In as
much as new legislation affecting the oil and gas industry is commonplace and
existing laws and regulations are frequently amended or reinterpreted, the
Company is unable to predict the future cost or the impact of complying with
such laws and regulations. However, the Company does not expect that any of
these laws and regulations will affect its operations in a manner materially
different than they would affect other oil and gas companies of similar size and
scope of operations.
Having
interest outside the United States requires the Company to comply with United
States laws and other foreign jurisdiction laws related to pursuing, owing, and
exploiting foreign investments, agreements and other relationships. The Company
is subject to all such laws, including, but not limited to, the Foreign Corrupt
Practices Act of 1977 (“FCPA”).
Competition
Significant
competition exists in all sectors of the oil and gas industry. ERHC competes
with other oil and gas companies for equipment and personnel required to
explore, develop and operate properties as well as marketing of oil, gas and
natural gas liquids. Commodity price increases have raised the costs of
potential acquisition properties and we compete with a number of companies to
pursue acquisition opportunities. Many of the Company’s competitors have
substantially larger financial and other resources than ours, and they have also
established strategic long-term positions and maintain
strong relationships in countries in which the Company may seek
entry. As a consequence, ERHC may be at a competitive disadvantage in bidding
for exploration rights. In addition, many of the Company’s larger competitors
have a competitive advantage when responding to factors that affect demand for
oil and natural gas production, such as changing worldwide prices and levels of
production, the cost and availability of alternative fuels and the application
of government regulations.
Employees
As of
September 30, 2009, the Company had six (6) employees.
Availability
of Information
We file
annual, quarterly and current reports, proxy statements and other documents with
the Securities and Exchange Commission (“SEC”) under the Securities Act of 1934.
The public may read and copy any materials that we file with the SEC at the
SEC’s Public Reference Room at 100 F Street NE, Washington, DC 20549. The public
may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website that
contains reports, proxy and information statements, and other information
regarding issuers, including us, that file electronically with the SEC. The
public can obtain any documents that we file with the SEC at
http://www.sec.gov
We also
make available, free of charge on or through our Internet website
(http://www.erhc.com), our Annual Report on Form 10-K or 10K/A, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K, and if applicable, amendments
to those reports filed or furnished pursuant to Section 13(a) of the Exchange
Act as soon as reasonably practicable after we electronically file such material
with, or furnish it to, the SEC.
Item 1A. Risk Factors
You
should carefully consider the risks described below before making any investment
decision related to the Company’s securities. The risks and
uncertainties described below are not the only ones facing the
Company. Additional risks and uncertainties not presently known
or that the Company currently deems immaterial also may impair its business
operations. If any of the following risks actually occur, the
Company’s business could be affected.
The
Company has no sources of revenue and a history of losses from
operations
The
Company’s business is in an early stage of development. The Company
has not generated any operating revenue since its entry into the oil and gas
industry and has incurred significant operating losses. The Company
expects to incur additional operating losses for the foreseeable
future.
The
Company has a limited operating history in the oil and gas industry
The
Company’s operations have consisted solely of acquiring rights to working
interests in the JDZ and EEZ and entering into production sharing
contracts. The Company will not be the operator with respect to these
contracts. The Company’s future financial results depend primarily on
(1) the ability of the Company’s venture partners to provide or obtain
sufficient financing to meet their financial commitments in the production
sharing contracts, (2) the ability to discover commercial quantities of oil and
gas, and (3) the market price for oil and gas. Management cannot predict if
or when the production sharing contracts will result in wells being
drilled or if drilled, whether oil and/or gas will be discovered in commercial
quantities.
Financing
may be needed to fund the financial commitments of the production sharing
contracts
While the
Company is not required to fund any financial commitments pursuant to
current production sharing contracts, its is likely that project
financing will be required to fund exploration activities. Failure of
our venture partners to provide or obtain the necessary financing will preclude
the continuation of exploration activities.
The
Company may not discover commercially productive reserves in the JDZ or
EEZ
The
Company’s future success depends on its ability to economically discover oil and
gas reserves in commercial quantities in the JDZ and EEZ. There can be no
assurance that the Company’s planned projects in the JDZ or EEZ will result in
significant, if any, reserves or that the Company and its partners will have
future success in drilling productive wells.
The
Company’s non-operator status limits its control over oil and gas
projects in the JDZ and EEZ
The
Company will focus primarily on creating exploration opportunities and forming
relationships with oil and gas companies to develop those opportunities in the
JDZ and EEZ. As a result, the Company will have only a limited
ability to exercise control over a significant portion of a project’s operations
or the associated costs of those operations in the JDZ or EEZ. The
success of a future project is dependent upon a number of factors that are
outside the Company’s control. These factors include:
|
•
|
the
availability of future capital resources to the Company and the other
participants for drilling wells;
|
|
•
|
the
approval of other participants for determining well locations and drilling
time-tables ;
|
|
•
|
the
economic conditions at the time of drilling, including the prevailing and
anticipated price of oil and gas;
and
|
|
•
|
the
availability and cost of deep water drilling rigs and the availability
of operating personnel
|
The
Company’s reliance on its consortium partners and its limited ability to
directly control future project costs could have a material adverse effect on
its future expected rates of return.
The
Company’s success depends on its ability to exploit its limited
assets
The
Company’s primary assets are rights to working interests in exploration acreage
in the JDZ and EEZ under agreements with the JDA and DRSTP. The
Company’s operations have been limited to managing and sustaining its rights
under these agreements. The Company’s viability depends on its
ability to exploit these assets, of which there is no assurance that it will be
successful.
The
Company’s competition includes oil and gas conglomerates that have significant
advantages over it
The oil
and gas industry is highly competitive. Many companies are engaged in exploring
for crude oil and natural gas and acquiring crude oil and natural gas
properties, resulting in a high degree of competition for desirable exploratory
and producing properties. The companies with which the Company
competes are much larger and have greater financial resources than the
Company.
Various
factors beyond the Company’s control will affect prices of oil and
gas
The
availability of a ready market for the Company’s future crude oil and natural
gas production depends on numerous factors beyond its control, including the
level of consumer demand, the extent of worldwide crude oil and natural gas
production, the costs and availability of alternative fuels, the costs and
proximity of transportation facilities, regulation by authorities and the costs
of complying with applicable environmental regulations.
The
Company’s business interests are located outside of the United States which
subjects it to risks associated with international activities beyond its
control.
At
September 30, 2009, the Company’s major assets are located outside the United
States. The Company’s primary assets are cash in various financial
institutions and agreements with DRSTP and the JDA, which
provide ERHC with rights to participate in exploration and production
activities in the Gulf of Guinea off the coast of central West
Africa. Production is subject to political risks which is inherent in
all foreign operations. The Company’s ability to exploit its interests in this
area pursuant to such agreements may be adversely impacted by this
circumstance.
The
future success of the Company’s international operations may also be adversely
affected by risks associated with international activities, including economic
and labor conditions, political instability, risk of war, expropriation,
termination, renegotiation or modification of existing contracts, tax laws
(including host-country import-export, excise and income taxes and United States
taxes
on foreign subsidiaries) and changes in
the value of the U.S. dollar versus the local currencies in which future oil and
gas producing activities may be denominated. Changes in
exchange rates may also adversely affect the Company’s future results of
operations and financial condition.
In
addition, to the extent the Company engages in operations and activities outside
the United States, it is subject to the Foreign Corrupt Practices Act (the
“FCPA”) which, among other restrictions, prohibits U.S. companies and their
intermediaries from making payments to foreign officials for the purpose of
obtaining or keeping business or otherwise obtaining favorable treatment, and
requires companies to maintain adequate record-keeping and internal accounting
practices to accurately reflect their financial and other transactions with
foreign officials. The FCPA applies to companies, individual
directors, officers, employees and agents. The FCPA also applies to
foreign companies and persons taking any action in furtherance of such payments
while in the United States. Under the FCPA, U.S. companies may also
be held liable for actions taken by strategic or local partners or
representatives.
The FCPA
imposes civil and criminal penalties for violations of its
provisions. Civil penalties may include fines of up to $500,000 per
violation, and equitable remedies such as disgorgement of profits causally
connected to the violation (including prejudgment interest on such profits) and
injunctive relief. Criminal penalties for violations of the payments
provisions could range up to the greater of $2 million per violation or twice
the gross pecuniary gain sought by making the payment, and/or incarceration for
up to 5 years per violation. Moreover, if a director, officer or
employee of a company is found to have willfully violated the FCPA books and
records provisions, the maximum penalty would be imprisonment for 20 years per
violation. Maximum fines of up to $25 million may also be imposed for
willful violations of the books and records provisions by a
company.
The SEC
and/or the Department of Justice (“DOJ”) could assert that there have been
multiple violations of the FCPA, which could lead to multiple
fines. The amount of any fines or monetary penalties which could be
assessed would depend on, among other factors, findings regarding the amount,
timing, nature and scope of any improper payments, whether any such payments
were authorized by or made with knowledge of ERHC or its affiliates, the amount
of gross pecuniary gain or loss involved, and the level of cooperation provided
to the government authorities during the investigations. Negotiated
dispositions of these types of violations also frequently result in an
acknowledgement of wrongdoing by the entity and the appointment of a monitor on
terms agreed upon with the SEC and DOJ to review and monitor current and future
business practices, including the retention of agents, with the goal of assuring
future FCPA compliance. Other potential consequences could be
significant and include suspension or debarment of ERHC’s ability to contract
with governmental agencies of the United States and of foreign
countries. Any determination that ERHC has violated the FCPA could
result in sanctions that could have a material adverse effect on the Company’s
business, prospects, operations, financial condition and cash
flow.
The
Company’s business interests are located in the Gulf of Guinea offshore of
central West Africa and are subject to the volatility of foreign
governments
All of
our primary assets are located the in the Gulf of Guinea offshore of central
West Africa. The governments of Nigeria and the island nation of Sao Tome and
Principe granted our participation interests in various concessions in their
offshore waters. The governments of Nigeria and Sao Tome and Principe exist in a
volatile political and economic environment and the Company is subject to all
the risks associated with those governments. These risks include, but are not
limited to:
|
·
|
Loss
of future revenue and our concessions as a result of hazards such as war,
acts of terrorism, insurrection and other political
risks
|
|
·
|
Increases
in taxes and governmental interests
|
|
·
|
Unilateral
renegotiation of contracts by government
entities
|
|
·
|
Difficulties
in enforcing our rights against a governmental agency because of the
doctrine of sovereign immunity and foreign sovereignty over international
operations
|
|
·
|
Changes
in laws and policies governing operations of foreign-based companies,
and
|
|
·
|
Currency
restrictions and exchange rate
fluctuations
|
Our
foreign operations may also be adversely affected by laws and policies of the
United States affecting foreign trade and taxation. Realization of any of these
factors could materially and adversely affect our financial position, results of
operations and cash flows.
The
Company has filed suit to prevent tampering with its interest and any adverse
ruling related to JDZ Blocks 5 and 6 could have a material adverse effect on its
business, prospects, operations, financial condition and cash flow.
On November 3, 2008, the
Company filed a suit in Nigeria to prevent any tampering with its rights in JDZ
Blocks 5 and 6. The lawsuit comes after the JDA and the Joint Ministerial
Counsel (JMC) of the Nigeria-Săo Tomé and Príncipe JDZ failed to give a
satisfactory response to the Company’s letters seeking clarification of the
Company’s rights in JDZ Blocks 5 and 6 following media reports stating that the
JMC had approved of the Company’s removal from the Blocks. The Company was
awarded a 15 percent working interest in each of the Blocks in a 2005
bid/licensing round conducted by the JDA, following the exercise by ERHC of
preferential rights in the Blocks as guaranteed by contract and treaty. In
November 2008, the Company dispatched notices of arbitration for service on the
JDA and the governments of Nigeria and Sao Tome & Principe to commence
arbitration in London. ERHC wants the London Court of International
Arbitration to clarify that ERHC's interests in JDZ Blocks 5 and 6 remain
intact. If the Company fails to prevail in its lawsuit or arbitration
proceedings, there could be significant adverse effects on the Company’s future
planned operations in JDZ Blocks 5 & 6. These adverse effects could range
from loss of potential future revenue to a threat to the Company’s other
interests in Blocks 2, 3, 4 and 9. At this time, ERHC is unable to
reasonably estimate the economic impact if the Company fails to prevail in its
suit.
The
Company is under investigation by the SEC, the DOJ and a U.S. Senate
Subcommittee, and the results of these investigations could have a material
adverse effect on its business, prospects, operations, financial condition and
cash flow.
On May 4,
2006, a search warrant issued by the U.S. District Court of the Southern
District of Texas, Houston Division, was executed on ERHC seeking various records including, among
others, documents, if any, related to correspondence with foreign governmental
officials or entities in Săo Tomé and Nigeria. The search warrant
cited, among other things, possible violations of the FCPA, Section 10(b) of the
Exchange Act, Rule 10b-5 under the Exchange Act and criminal conspiracy
and wire fraud statutes. ERHC filed suit in federal district court in
Texas in June 2006 seeking to protect the Company’s attorney-client privileged
documents and to allow its counsel to determine the factual basis for the DOJ’s
search warrant affidavit, which is currently under seal.
A related
SEC subpoena was issued on May 9, 2006, and a second related subpoena issued on
August 29, 2006. The subpoenas requested from ERHC a range of
documents including all documents related to correspondence with foreign
governmental officials or entities in Sao Tome and Nigeria, personnel records
(specifically, those regarding the Company’s former Chief Financial Officer,
Franklin Ihekwoaba) and other corporate records. The Company has been
actively responding to both subpoenas.
On July
5, 2007, the U.S. Senate Committee on Homeland Security and Governmental
Affairs’ Permanent Subcommittee on Investigations served ERHC with a subpoena,
in connection with its review of matters relating to the potential abuse of
payments made to foreign governments. The subpoena, as amended on July 18, 2007,
seeks documents and information regarding ERHC’s activities, particularly those
related to the acquisition of ERHC’s interests in the Gulf of
Guinea. ERHC’s attorneys, Akin Gump Strauss Hauer & Feld LLP, are
assisting ERHC in responding to the subpoena. Please see “Legal
Proceedings” for more information.
The
investigations by the DOJ, SEC and Senate Subcommittee are
continuing. The Company anticipates that these investigations will be
lengthy and does not expect these investigations to be concluded in the
immediate future. If violations are found, the Company may be subject
to criminal, civil and/or administrative sanctions, including substantial fines,
and the resolution or disposition of these matters could have a material adverse
effect on ERHC’s business, prospects, operations, financial condition and cash
flow.
These
investigations could also result in:
|
·
|
third
party claims against us, which may include claims for special, indirect,
derivative or consequential
damages;
|
|
·
|
damage
to our business, operations and
reputation;
|
|
·
|
loss
of, or adverse effect on, cash flow, assets, goodwill, operations and
financial condition, business, prospects, profits or
commercial value;
|
|
·
|
adverse
consequences on our ability to obtain or continue financing for
current or future projects; and/or
|
|
·
|
claims
by directors, officers, employees, affiliates, advisors, attorneys,
agents, debt holders or other interest holders or constituents of
ERHC.
|
Continuing
negative publicity arising from these investigations could also adversely affect
our business and prospects in the commercial market. In addition,
these investigations have resulted in significant expenses to ERHC, including
substantial legal fees and the diversion of management’s attention from its
operations and other activities. If the Company incurs costs or
losses as a result of these matters, it may not have the liquidity or funds to
address those costs or losses, in which case such costs or losses could have a
material adverse effect on its business, prospects, operations, financial
condition and cash flow.
Through
September 30, 2009, ERHC has incurred substantial costs in responding to the
investigations by the DOJ, SEC and Senate Subcommittee. Those costs consist
primarily of legal fees paid to the Company’s legal counsel, Akin Gump Strauss
Hauer & Feld LLP and document reproduction costs. These costs have had a
significant negative impact on the Company’s cash flows from
operations. ERHC anticipates the use of even more of its cash
reserves to address these ongoing investigations. If continued at current levels
this could have a serious negative impact on the Company’s liquidity. Neither
management nor its legal counsel can assess the magnitude of future cash
requirements that could result from prolonged investigations or any negative
findings that might arise from the investigations. In a worst case scenario, the
Company’s cash resources could be exhausted and the Company’s status as a going
concern could also be brought into question.
The
Company has limited sources of working capital
The
Company believes that its working capital requirements for 2010 will be
approximately $4,000,000 based on maintaining operations at their current level
and the generation of interest income at levels similar to 2009. Our consortium
partners will pay all of ERHC’s future costs in respect of all operations in JDZ
Blocks 2,3 and 4 subject to total reimbursement upon production. Accordingly,
the commencement of drilling operations is not expected to have a significant
impact on our working capital requirements. Management believes that our current
cash resources will be adequate to maintain our planned operations throughout
the drilling and exploration phase of existing participation
agreements.
The
Company is currently focused on exploiting its interests in Blocks 2, 3, 4, 5, 6
and 9 but has no current source of income other than interest income from cash
investments generated from the sale of participation interests in Blocks 2, 3
and 4 to Sinopec and Addax Ltd. The Company hopes to enter into participation
agreements in JDZ Blocks 5, 6 and 9 and also in the EEZ, but the timing or
likelihood of such transactions cannot be predicted. The Company
might be required to exercise its rights in EEZ in 2010, in that event the
Company maybe required to incur significant capital cost in exercise of those
rights.
The
Company’s results of operations are susceptible to general economic
conditions
The
Company’s revenues and results of operations will be subject to fluctuations
based upon the general economic conditions both in the United States and
internationally. A general economic downturn or a recession in the
industry, will adversely impact the Company’s future revenues, the value of its
oil and natural gas exploration concession, as well as its ability to exploit
its assets.
One
shareholder controls approximately 43% of the Company’s outstanding common
stock
Chrome
Oil Services (“Chrome”) beneficially owns approximately 43% of the Company’s
outstanding common stock. As a result, Chrome has the ability to
substantially influence, and may effectively control the outcome of corporate
actions that require stockholder approval, including the election of
directors. This concentration of ownership may have the effect of
delaying or preventing a future change in control of the Company or a liquidity
event.
The
Company’s stock price is highly volatile
The
Company’s common stock is currently traded on the Over-the-Counter (OTC)
Bulletin Board. The market price of the Company’s common stock has experienced
fluctuations that are unrelated to its operating performance. The
market price of the common stock has been highly volatile over the last several
years. The Company can provide no assurance regarding
its stock price.
The
Company does not currently pay dividends on its common stock and does not
anticipate doing so in the near future
The
Company has paid no cash dividends on its common stock, and there is no
assurance that the Company will achieve sufficient earnings to pay cash
dividends on its common stock in the foreseeable future. The Company intends to
retain any earnings to fund its future operations.
The
Company’s stock is considered a “penny stock”
The SEC
has adopted rules that regulate broker-dealer practices in connection with
transactions in “penny stocks.” Penny stocks generally are equity
securities with a share price of less than $5.00. The penny stock
rules require a broker-dealer, prior to a transaction in a penny stock not
otherwise exempt from the rules, to deliver a standardized risk disclosure
document prepared by the SEC that provides information about penny stocks and
the nature and level of risks in the penny stock market. These
disclosure requirements may have the effect of reducing the level of trading
activity in any secondary market for a stock that becomes subject to the penny
stock rules. The Company’s common stock may be subject to the penny
stock rules, and accordingly, investors in the common stock may find it
difficult to sell their shares in the future, if at all.
The
Internal Revenue Service is currently conducting an examination of the Company’s
tax returns.
The
Internal Revenue Service is currently examining the tax returns for the
Company’s 2005 and 2006 tax years. The Company
anticipates that this examination will conclude in the next few
months. If adjustments are required, the Company may be subject to
taxes, penalties and interest and these could have a material adverse effect on
ERHC’s operations, financial condition and cash flow.
Item 1B. Unresolved Staff Comments
None
Item 2. Properties
Substantially
all of the Company’s properties are in the form of working interest which
represents ERHC’s share of all the hydrocarbon production from the blocks
awarded and obligates ERHC to pay a corresponding percentage of the costs of
drilling, production and operating these blocks. These costs in
Blocks 2, 3 and 4 are currently being carried by the operators until production,
whereupon the operators will recover their costs from production revenues. ERHC
has working interests in Blocks 2, 3, 4, 5, 6, and 9 in the offshore JDZ and in
addition has interests in the EEZ.
Joint
Development Zone
ERHC
has interests in six of the nine Blocks in the Joint Development Zone
(JDZ), a 34,548 sq km area approximately 200 km off the coast of Nigeria
and Sao Tome and Principe that is adjacent to several large petroleum
discovery areas. ERHC’s rights in the JDZ include:
|
|
·
|
JDZ
Block 2: 22.0% Working
interest
|
|
·
|
JDZ
Block 3: 10.0% Working
interest
|
|
·
|
JDZ
Block 4: 19.5% Working
interest
|
|
·
|
JDZ
Block 5: 15.0% Working
interest
|
|
·
|
JDZ
Block 6: 15.0% Working
interest
|
|
·
|
JDZ
Block 9: 20.0% Working
interest
|
Sao
Tome and Principe Exclusive Economic Zone
The
government of Sao Tome and Principe awarded ERHC rights to participate in
exploration and production activities in Sao Tome and Principe’s EEZ. ERHC’s
rights include the following:
|
·
|
The
right to receive up to two blocks of ERHC’s choice;
and
|
|
·
|
The
option to acquire up to a 15% paid working interest in another two blocks
of ERHC’s choice.
|
ERHC will
be responsible for its proportionate share of exploration and exploitation costs
in the EEZ blocks.
The EEZ
describes waters of Sao Tome that encompasses an area of approximately 160,000
square km. It is measured from claimed archipelagic baselines — territorial sea:
12 nautical miles, exclusive economic zone: 200 nautical miles. It is the
largest in the Gulf of Guinea.
Corporate
Office
The
Company’s corporate office is located at 5444 Westheimer Road, Suite 1440,
Houston, Texas 77056 pursuant to a lease that expires in December
2011.
Item 3. Legal Proceedings
Subpoenas. On
May 4, 2006, a federal court search warrant initiated by DOJ was executed on the
Company. The DOJ sought various records including, among others,
documents, if any, related to correspondence with foreign governmental officials
or entities in Sao Tome and Nigeria. Related SEC subpoenas issued on
May 9, 2006 and August 29, 2006 also requested a range of documents. ERHC
continues to interface with both the DOJ and SEC investigators to respond to the
SEC subpoenas and any additional requests for information from the DOJ or
SEC. ERHC’s attorneys, Akin Gump Strauss Hauer & Feld LLP, are
assisting ERHC in responding to the subpoena
On July
5, 2007, the U.S. Senate Committee on Homeland Security and Governmental
Affairs’ Permanent Subcommittee on Investigations served ERHC with a subpoena in
connection with its review of matters relating to the potential abuse of
payments made to foreign governments. The subpoena, as amended on July 18, 2007,
seeks documents and information regarding ERHC’s activities, particularly those
related to the acquisition of ERHC’s interests in the Gulf of
Guinea. ERHC’s attorneys, Akin Gump Strauss Hauer & Feld LLP, are
assisting ERHC in responding to the subpoena.
The
Company anticipates that these investigations may be lengthy and does not know
when they will conclude. If violations are found, the Company may be
subject to criminal, civil and/or administrative sanctions, including
substantial fines, and the resolution or disposition of these matters could have
a material adverse effect on ERHC business, prospects, operations, financial
condition and cash flows.
Godsonic
Negotiations. In July 2007, ERHC and Godsonic commenced negotiations
to have Godsonic relinquish all of its claims to a 9% interest in Block
4. The parties reached a settlement in August 2007 which resulted in
Godsonic’s relinquishment of all claims to the 9% interest in Block
4.
ERHC/Addax
Arbitration. Addax, our consortium partner in JDZ Block 4, claimed
entitlement under our existing agreements to 7.2% out of the recovered 9%
without the payment of any further consideration to ERHC. In
July 15, 2008, The London Court of International Arbitration (LCIA) confirmed
that under the participation agreement between parties no further consideration
is payable by Addax Petroleum to ERHC for Addax Petroleum’s 7.2 percent share of
the 9 percent. The LCIA also confirmed that ERHC was entitled to the remaining
1.8 percent out of the nine percent. The combine share of JDZ Block 4
held by ERHC and Addax Petroleum under the Participation Agreement is 60
percent. Following the ruling by the LCIA, ERHC’s share of JDZ Block 4 increased
from 17.7 percent to 19.5 percent and Addax Petroleum’s share increased to 40.5
percent.
Lakeshore
Arbitration. In October 2006, Lakeshore Capital Limited (“Lakeshore”)
filed an arbitration claim against ERHC seeking $4,400,000 for the alleged value
of 4,500,000 shares of ERHC common stock and for a warrant to purchase an
additional 1,500,000 shares of common stock at an exercise price of $.20 per
share, including interest and costs, as compensation for financial consultancy
and related services rendered under a contract with ERHC dated May 20,
2002. The claim was resolved in mediation conducted by the American
Arbitration Association by the payment by ERHC of $250,000 to
Lakeshore. Pursuant to the Settlement Agreement dated May 16, 2007,
the arbitration was discontinued with prejudice.
On
November 3, 2008, the Company filed a suit at the Federal High Court in Nigeria
to prevent any tampering with its rights in JDZ Blocks 5 and 6. The suit comes
after the JDA and Joint Ministerial Counsel (JMC) of the Nigeria-Sao Tome and
Principe JDZ failed to give a satisfactory response to the Company’s letters
seeking clarification on the Company’s rights in JDZ Blocks 5 and 6 following
media reports stating that the JMC had approved of the Company’s removal from
the Blocks. The Company was awarded a 15 percent working interest in each of the
Blocks in a 2005 bid/licensing round conducted by the JDA following the exercise
by ERHC of preferential rights in the Blocks as guaranteed by contract and
treaty. If the Company fails to prevail in its lawsuit, there could be
significant adverse affects on the Company’s future planned operations in JDZ
Blocks 5 and 6.
In
November 2008, the Company dispatched notices of arbitration for service on the
JDA and the governments of Nigeria and Sao Tome & Principe to commence
arbitration in London. ERHC wants the London Court of International
Arbitration to clarify that ERHC's interests in JDZ Blocks 5 and 6 remain
intact.
From time
to time, ERHC may be subject to routine litigation, claims, or disputes in the
ordinary course of business. ERHC intends to defend these matters
vigorously; the Company cannot predict with certainty, however, the outcome or
effect of any of the litigation or investigatory matters specifically described
above or any other pending litigation or claims. There can be no
assurance as to the ultimate outcome of these lawsuits and
investigations.
Item 4. Submission of Matters to a Vote of Security
Holders
None.
PART
II
Item 5. Market for Registrant’s Common Equity, Related
Shareholder Matters and Issuer Purchases of Equity Securities
Market
and Related Information
ERHC’s
common stock is currently traded on the OTC Bulletin Board under the symbol
“ERHE.” The market for the Company’s common stock is unpredictable
and highly volatile. The following table sets forth the closing sales
price per share of the common stock for the past three fiscal
years. These prices reflect inter-dealer prices, without retail
mark-ups, markdowns or commissions, and may not necessarily represent actual
transactions.
Stock
Price Highs & Lows
High
|
Low
|
|||||||
(per
share)
|
||||||||
Fiscal
Year 2007
|
||||||||
First
Quarter
|
$
|
0.51
|
$
|
0.31
|
||||
Second
Quarter
|
$
|
0.48
|
$
|
0.33
|
||||
Third
Quarter
|
$
|
0.42
|
$
|
0.24
|
||||
Fourth
Quarter
|
$
|
0.34
|
$
|
0.20
|
||||
Fiscal
Year 2008
|
||||||||
First
Quarter
|
$
|
0.30
|
$
|
0.19
|
||||
Second
Quarter
|
$
|
0.54
|
$
|
0.18
|
||||
Third
Quarter
|
$
|
0.60
|
$
|
0.40
|
||||
Fourth
Quarter
|
$
|
0.42
|
$
|
0.28
|
||||
Fiscal
Year 2009
|
||||||||
First
Quarter
|
$
|
0.30
|
$
|
0.11
|
||||
Second
Quarter
|
$
|
0.36
|
$
|
0.10
|
||||
Third
Quarter
|
$
|
0.72
|
$
|
0.29
|
||||
Fourth
Quarter
|
$
|
0.90
|
$
|
0.60
|
As of
November 30, 2009, there were approximately 2217 stockholders of
record. The closing price of the common stock as reported on the OTC
Bulletin Board on November 30, 2009 was $0.47 The Company has not
paid any dividends during the last three fiscal years and does not anticipate
paying any cash dividends in the foreseeable future.
Securities
Authorized for Issuance Under Equity Compensation Plans
In
November 2004, the Board of Directors adopted a 2004 Compensatory Stock Option
Plan pursuant to which it reserved 20,000,000 shares for
issuance. This plan was approved at a special meeting of the
stockholders of the Company in February 2005. Under this plan,
8,026,756 shares have been issued.
Plan
Category
|
Number
of securities to be
issued
upon exercise of
outstanding
options,
warrants
and rights
|
Weighted-average
exercise
price
of outstanding
options,
warrants and
rights
|
Number
of securities
remaining
available for
future
issuance under equity compensation plans
(excluding
securities
reflected
in column (a))
|
|||||||||
(a)
|
(b)
|
(c)
|
||||||||||
Equity
compensation plans approved by security holders
|
1,000,000
|
$
|
0.43
|
10,973,244
|
||||||||
Equity
compensation plans not approved by security holders
|
-
|
-
|
-
|
Recent
Sales of Unregistered Securities
The
Company has issued the following unregistered
securities:
|
·
|
During
the second quarter of fiscal 2007, warrants issued in 2003, with an
exercise price of $0.20, were exercised on a cashless basis, which
exercise resulted in the issuance of an aggregate of 2,949,587 shares of
common stock.
|
|
·
|
During
the first quarter of fiscal 2008, we issued an aggregate of 300,000 shares
of common stock to the Company’s directors for services rendered in
2007.
|
|
·
|
During
the second quarter of fiscal 2009, we issued an aggregate of 450,000
shares of common stock to the Company’s directors for services rendered in
2005 and 2008.
|
|
·
|
During
the fourth quarter of fiscal 2009, we approved the issuance of an
aggregate of 361,875 shares of common stock to the Company’s directors and
non-management staff for services rendered in
2009.
|
With
respect to the sale of the unregistered securities referenced above, all
transactions were exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933, as amended. No sales commissions were paid in
connection with these transactions.
Issuer
Purchases of Equity Securities
The
Company has not repurchased any of its Common Stock.
Item 6. Selected Financial Data
The
selected financial data of the Company presented below as of and for each of the
five years in the period ended September 30, 2009, has been derived from the
audited financial statements of the Company. The financial statements
as of and for the years ended September 30, 2009, 2008, 2007, 2006 and 2005 have
been audited by Malone & Bailey, PC, an independent registered public
accounting firm. The data set forth below should be read in conjunction
with the Company’s financial statements, related notes thereto and Management’s
Discussion and Analysis of Financial Condition and Plan of Operations, contained
elsewhere herein.
For
the Years Ended September 30,
|
||||||||||||||||||||
Statements
of Operations Data
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
Operating
expenses
|
$ | 4,239,706 | $ | 4,280,143 | $ | 4,976,765 | $ | (24,113,494 | ) | $ | 4,652,459 | |||||||||
Interest
expense
|
(1,843 | ) | (1,843 | ) | 1,843 | ) | (2,099 | ) | (1,147,248 | ) | ||||||||||
Other
Income (expense)
|
(3,447,588 | ) | 1,241,189 | 1,498,704 | 1,123,141 | 278,804 | ||||||||||||||
Loss
on extinguishment of debt
|
- | - | - | - | (5,749,575 | ) | ||||||||||||||
Provision
for taxes
|
- | (30,360 | ) | (1,723,000 | ) | 2,063,000 | - | |||||||||||||
Net
income (loss)
|
(7,689,137 | ) | (3,071,157 | ) | (1,756,904 | ) | 23,171,536 | (11,270,478 | ) | |||||||||||
|
||||||||||||||||||||
Net
income (loss) per share – basic and diluted
|
(0.01 | ) | 0.00 | 0.00 | 0.03 | (0.02 | ) | |||||||||||||
Weighted
average shares of common stock outstanding
|
722,549,254 | 722,182,831 | 720,966,165 | 712,063,980 | 671,164,058 |
As
of September 30,
|
||||||||||||||||||||
Balance
Sheets Data
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
DRSTP
Concession fee
|
$ | 2,839,500 | $ | 2,839,500 | $ | 2,839,500 | $ | 2,839,500 | $ | 5,679,000 | ||||||||||
Total
assets
|
28,859,825 | 36,880,422 | 39,854,641 | 45,878,249 | 6,720,210 | |||||||||||||||
Total
liabilities
|
5,470,450 | 5,907,960 | 5,947,982 | 10,390,126 | 2,799,011 | |||||||||||||||
Shareholders’
equity
|
23,389,375, | 30,972,462 | 33,906,659 | 35,488,123 | 3,921,199 |
Item 7. Management’s Discussion and Analysis of Financial
Condition and Plan of Operations
Introduction
The
following discussion and analysis presents management’s perspective of ours
business and, financial condition and its overall performance. This information
is intended to provide investors with an understanding of our past performance,
current financial condition and outlook for the future. You must read the
following discussion of the results of the operations and financial condition of
the Company in conjunction with its financial statements, including the notes
thereto included in this Form 10-K filing. The Company’s historical
results are not necessarily an indication of trends in operating results for any
future period.
Reference
is made to “Item 6. Selected Financial Data” and “Item 8. Financial Statements
and Supplementary Data.”
Overview
of Business
ERHC
reports as a development stage enterprise as there are currently no significant
operations and no revenue has been generated from business
activities. The Company was incorporated in 1986 as a Colorado
corporation, and was engaged in a variety of businesses until 1996, when it
began its current operations as an independent oil and gas
company. The Company’s goal is to maximize its value through
exploration and exploitation of potential oil and gas reserves in the Gulf of
Guinea offshore of central West Africa. The Company’s current focus
is to exploit its primary assets, which are rights to working interests in
exploration acreage in the JDZ and the EEZ. The Company has entered
into production sharing contracts with upstream oil and gas companies in its JDZ
Blocks to assist the Company in exploring and developing its assets in the
JDZ. The technical and operational expertise in conducting
exploration and development of these JDZ Blocks will be provided by partner oil
and gas companies in exchange for participating in the Company’s interest in the
JDZ.. The Company is also exploring opportunities in other areas of
the oil and gas industry.
State
of Participation Interests
The
following represents ERHC’s current rights in the JDZ blocks.
JDZ
Block #
|
ERHC
Original
Participating
Interest
(1)
|
ERHC
Joint
Bid
Participating
Interest
|
Participating
Interest(s)
Sold
|
Current
ERHC
Retained
Participating
Interest
|
2
|
30%
|
35%
|
43%
(2)
|
22%
|
3
|
20%
|
5%
|
15%
(3)
|
10%
|
4
|
25%
|
35%
|
40.5%
(4)
|
19.5%
|
5
|
15%
|
(5)
|
(5)
|
15%
|
6
|
15%
|
(5)
|
(5)
|
15%
|
9
|
20%
|
(5)
|
(5)
|
20%
|
(1)
|
Original
Participating Interest granted pursuant to the Option Agreement, dated
April 2, 2003, between DRSTP and ERHC (the “2003 Option
Agreement”).
|
(2)
|
In
March 2006, ERHC sold an aggregate 28.67% participating interest to
Sinopec and an aggregate 14.33% participating interest to Addax
Ltd.
|
(3)
|
In
February 2006, ERHC sold a 15% participating interest to Addax
Sub.
|
(4)
|
By
a Participation Agreement made in November 2005 and subsequently amended,
ERHC sold 40.5 participating interest to
Addax.
|
(5)
|
No
contracts have been entered into as of the date
hereof.
|
Particulars
of Participating Agreements
JDZ Block
2 Participation Agreement
Date
of Participation Agreement
|
Parties
|
Key
Terms
|
||
2
March 2006
|
1.
Sinopec International Petroleum Exploration and Production Co. Nigeria
Ltd
|
ERHC
assigns 28.6% of participating interest to Sinopec International Petroleum
Exploration and Production Co Nigeria Ltd (“Sinopec”) and a 14.33%
participating interest to Addax Energy Nigeria Limited (“Addax”) leaving
ERHC with a 22% participating interest.
|
||
1b.
Sinopec International Petroleum and Production Corporation
|
Consideration
from Sinopec to ERHC for the 28.67% interest is
$13.6 million.
|
|||
2a.
Addax Energy Nigeria Limited (Note 2)
|
Consideration
from Addax to ERHC for the 14.33% interest is $6.8
million
|
|||
2b.
Addax Petroleum Corporation (Note 2)
|
In
addition, Sinopec and Addax to pay all of ERHC’s future costs for
petroleum operations in respect of the 22% interest retained by ERHC in
Block 2.
|
|||
3.
ERHC Energy Inc
|
Sinopec
and Addax are entitled to 100% of ERHC’s allocation of cost
reimbursement plus up to 50% of ERHC’s allocation of profit oil
from revenue generated by the retained interest on Block 2 until Sinopec
and Addax recover 100% of the carried costs
|
|||
JDZ
Block 3 Participation Agreement
|
||||
Date
of Participation Agreement
|
Parties
|
Key
Terms
|
||
15
February 2006
|
1.
ERHC Energy Inc
|
ERHC
assigns 15% of participating interest to Addax Petroleum Resources Nigeria
Limited (“Addax Sub”) leaving ERHC with a 10% participating
interest.
|
||
Consideration
from Addax Sub to ERHC for the 15% interest is
$7.5 million.
|
||||
2a.
Addax Petroleum Resources Nigeria Limited (Note 2)
|
In
addition, Addax Sub to pay all of ERHC’s future costs for
petroleum operations (“the carried costs”) in respect of the 10% interest
retained by ERHC (the “retained interest”) in Block 3.
|
|||
2b.
Addax Petroleum Corporation(Note 2)
|
Addax
Sub is entitled to 100% of ERHC’s future costs in respect of petroleum
operations.
|
|||
Addax
is entitled to 100% of ERHC’s allocation of cost
reimbursement plus up to 50% of ERHC’s allocation of profit oil
until Addax Sub recovers 100% of the carried
costs
|
JDZ
Block 4 Participation Agreement
|
||||
Date
|
Parties
|
Key
Terms
|
||
17
November 2005
(Note1)
|
1.
ERHC Energy Inc
|
ERHC
shall assign 33.3%
(Note1) of participating interest to Addax Petroleum Nigeria
(Offshore 2) Limited (“Addax”) (leaving ERHC with a 26.7% participating
interest).
|
||
2a.
Addax Petroleum Nigeria (Offshore 2) Limited (Note 2)
|
Consideration
from Addax Sub to ERHC for the interest to be acquired by Addax (the
“acquired interest”) is fixed at $18 million.
|
|||
2b.
Addax Petroleum NV(Note
2)
|
In
addition, Addax to pay all of ERHC’s future costs for petroleum operations
(“the carried costs”) in respect of ERHC’s retained interest in Block
4.
|
|||
Addax
is entitled to 100% of ERHC’s allocation of cost oil plus up to 50% of
ERHC’s allocation of profit oil until Addax recovers 100% of
the carried costs
|
Note 1 – By an Amendment to
the Participation Agreement dated February 23 2006, ERHC and Addax amended the
Participation Agreement so that the assigned interest to Addax would be changed
to 33.3%. By a second Amendment to the Participation Agreement,
entered into on March 14 2006, ERHC and Addax amended the Participation
Agreement so that the assigned interest to Addax would be 33.3% and ERHC’s
participating interest would be 26.7%. By a third Amendment to the
Participation Agreement dated April 11 2006, ERHC and Addax agreed that if
Godsonic, a third party, did not meet financial and other obligations for the
transfer of 9% of ERHC’s participating interest to Godsonic (and was foreclosed
from all claims to the 9%), ERHC would transfer 7.2% out of the 9% interest to
Addax so that Addax’s participating interest would be 40.5% in aggregate and
ERHC’s participating interest would be 19.5% in aggregate. The amount
of fresh consideration to accrue from Addax to ERHC for the transfer of the 7.2%
is not stated in the third Amendment to the Participation Agreement. On July 15,
2008, The London Court of International Arbitration (LCIA) confirmed that under
the participation agreement between parties no further consideration is payable
by Addax Petroleum to ERHC for Addax Petroleum’s 7.2 percent share of the 9
percent. ERHC is entitled to the remaining 1.8 percent out of the nine
percent. The combined share of JDZ Block 4 held by ERHC and Addax
Petroleum under the Participation Agreement is 60 percent. Following the ruling
by the LCIA, ERHC’s share of JDZ Block 4 increased from 17.7 percent to 19.5
percent and Addax Petroleum’s share increased to 40.5 percent.
Note 2 - On June 24, 2009,
Addax Petroleum Corporation announced that it has entered into a definitive
agreement with Sinopec pursuant to which Sinopec had agreed, subject to the
terms of the Support Agreement, to make an offer to acquire all of the
outstanding common shares of Addax Petroleum. On August 24, 2009, the
sale of Addax Petroleum Corporation to Sinopec was finalized.
Current
Plans for Income Generation
The
Company is currently focused on exploiting its interests in JDZ Blocks 2, 3, 4,
5, 6 and 9 and its interests in the EEZ. However, it has no current income other
than interest income from cash investments generated from the sale of
participation interests in Blocks 2, 3 and 4 to Sinopec and Addax Ltd. The
Company hopes to enter into participation agreements in JDZ Blocks 5, 6 and 9
and its to be awarded EEZ blocks, but the timing or likelihood of such
transactions cannot be predicted. The Company believes that the
Participation Agreements that it has entered into will be its primary source of
future revenue. However, to expand operations, ERHC is
currently in negotiations for potential investments that would increase the
Company’s presence in Nigeria’s oil and gas industry. In December
2009, the Company signed a non-binding Memorandum of Understanding (MOU) with
Circle Ltd. and Excel Exploration and Production Ltd. to negotiate investment in
and acquisition of working interests in the Eremor Marginal Field (OML 46). The
Eremor Field, which is located in shallow water off-shore Nigeria, was
discovered in 1978.
ERHC,
through its locally incorporated subsidiary, ERHC Energy Nigeria Ltd., has also
entered into a non-binding MOU with WellTest Integrated Services Ltd. to
negotiate the acquisition of a controlling equity interest in WellTest. The
company provides well testing, production engineering and procurement services
to Nigeria’s oil and gas industry. To coordinate the Company’s business
development in the Nigerian and West African oil and gas industry, ERHC has
opened its Nigeria liaison office at Oguda Close, Maitama, Abuja, Nigeria. The
Company’s wholly owned subsidiary ERHC Energy Nigeria Ltd. operates the liaison
office.
ERHC
cannot currently predict the outcome of negotiations for acquisitions in
Nigeria, or, if successful, the impact on the Company's
operations.
Critical
Accounting Policies
The
Company has identified the policies below as critical to its business operations
and the understanding of its results of operations. The impact and
any associated risks related to these policies on the Company’s business
operations are discussed throughout this section where such policies affect the
Company’s reported and expected financial results. Management’s
preparation of this Annual Report on Form 10-K requires it to make estimates and
assumptions that affect the reported amount of assets and liabilities, and the
disclosure of contingent assets and liabilities. There is no
assurance that actual results will not differ from those estimates and
assumptions.
Concentration
of Risks
The
Company’s current focus is to exploit assets consisting of agreements with the
DRSTP concerning oil and gas exploration in its EEZ and with the JDA concerning
oil and gas exploration in the JDZ. The Company has formed
relationships with other oil and gas companies with the technical and financial
capabilities to assist the Company in leveraging its interests in the EEZ and
the JDZ. The Company currently has no other operations.
Asset
Retirement Obligation
ERHC’s
asset retirement obligation relates to the plugging and abandonment of certain
oil and gas properties in Wichita Falls, Texas. The provisions of SFAS No. 143
require the fair value of a liability for an asset retirement obligation to be
recorded and a corresponding increase in the carrying amount of the associated
asset. The cost of the tangible asset, including the initially
recognized asset retirement cost is depleted over the useful life of the
asset. If the fair value of the estimated asset retirement obligation
changes, an adjustment is recorded to the retirement obligation and the asset
retirement cost. The offsetting ARO liability is recorded at fair value, and
accretion expense recognized as the discounted liability is accreted to its
expected settlement value. The fair value of the ARO asset and
liability is measured using expected future cash out flows discounted at the
Company’s credit adjusted risk free interestrate. These oil and gas properties
were abandoned and written off during the year ended September 30, 1999 and the
current liability is fully accreted and represents management’s best estimate of
the fair value of the outstanding obligation.
Impairment
of Long-lived Assets
ERHC
evaluates the recoverability of long-lived assets when events and circumstances
indicate that such assets might be impaired. ERHC determines
impairment by comparing the undiscounted future cash flows estimated to be
generated by these assets to their respective carrying
amounts. Impairments are charged to operations in the period to which
events and circumstances indicate that such assets might be
impaired. ERHC has evaluated its investment in its DRSTP concession
fee in light of its 2003 Option Agreement (see Note 4) and there have been no
events or circumstances that would indicate that such asset might be
impaired.
Recent
Accounting Pronouncements
Effective
July, 1, 2009, the Company adopted the Accounting Standards Codification (ASC)
issued by the Financial Accounting Standards Board (FASB). The ASC does not
change generally accepted accounting principles in the United States of America
(GAAP), but instead takes the numerous individual accounting pronouncements that
previously constituted GAAP and reorganizes them into approximately 90
accounting topics, which are then broken down into subtopics, sections and
paragraphs. The intent is to simplify user access to authoritative GAAP by
providing all of the guidance related to a particular topic in one place. The
ASC supersedes all previously existing non-SEC or non-grandfathered accounting
and reporting standards. The adoption of the ASC did not have any impact on the
Company’s consolidated financial statements.
In
December 2007, the FASB issued authoritative guidance which establishes
principles and requirements for determining how an enterprise recognizes and
measures the fair value of certain assets and liabilities acquired in a business
combination, including non-controlling interests, contingent consideration, and
certain acquired contingencies. The guidance also requires acquisition-related
transaction expenses and restructuring costs be expensed as incurred rather than
capitalized as a component of the business combination. The guidance will be
applicable prospectively to business combinations for which the acquisition date
is on or after the beginning of the first annual reporting period beginning on
or after December 15, 2008. The adoption of this guidance did not have any
impact on the Company’s consolidated financial statements.
In
December 2007, the FASB issued authoritative guidance which establishes
accounting and reporting standards for the non-controlling interest in a
subsidiary (previously referred to as minority interests). The guidance also
requires that a retained non-controlling interest upon the deconsolidation of a
subsidiary be initially measured at its fair value. Upon adoption this guidance,
the Company would be required to report any non-controlling interests as a
separate component of stockholders’ equity. The Company would also be required
to present any net income allocable to non-controlling interests and net income
attributable to the stockholders of the Company separately in its consolidated
statements of operations. The guidance is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2008. The guidance requires retroactive adoption of the presentation and
disclosure requirements for existing minority interests, however, all other
requirements shall be applied prospectively. This guidance will not have a
material effect on the Company’s consolidated financial statements since the
Company does not have existing minority interests.
In March
2008, the FASB issued authoritative guidance intended to provide users of
employers’ financial statements with more informative disclosures about the
nature and valuation of postretirement benefit plan assets. The disclosures on
plan assets are effective for fiscal years ending after December 15,
2009.
In April
2008, the FASB issued authoritative guidance that amends the factors that should
be considered in developing the renewal or extension assumptions used to
determine the useful life of a recognized intangible asset. The guidance also
requires expanded disclosure regarding the determination of intangible asset
useful lives. The guidance is effective for fiscal years beginning after
December 15, 2008. This guidance will not have a material impact on the
Company’s consolidated financial statements.
In June
2009, the FASB issued authoritative guidance which requires additional
information regarding transfers of financial assets, including securitization
transactions, and where companies have continuing exposure to the risks related
to transferred financial assets. The guidance eliminates the concept of a
“qualifying special-purpose entity,” changes the requirements for derecognizing
financial assets, and requires additional disclosures. It is effective for
fiscal years beginning after November 15, 2009. The Company is currently
evaluating the impact that the adoption of this guidance will have on its
consolidated financial statements and disclosures.
In June
2009, the FASB issued authoritative guidance which amends certain requirements
to improve financial reporting by enterprises involved with variable interest
entities and to provide more relevant and reliable information to users of
financial statements. The guidance will be effective as of the beginning of each
reporting entity’s first annual reporting period that begins after November 15,
2009, for interim periods within that first annual reporting period, and for
interim and annual reporting periods thereafter. The Company is currently
evaluating the impact, if any, that this guidance will have on its consolidated
financial statements.
Former
Operations – Asset Retirement Obligation
The
Company has accrued $485,000 as a liability on the balance sheet relating to the
estimated costs on plugging and abandonment of certain oil and gas properties in
Wichita Falls, Texas. The Company acquired a lease in oil fields
located in Wichita County, Texas. The Company uses SFAS
No. 143 to account for this obligation. These properties were
abandoned and written off during the year ended September 30, 1999. During the
year ended September 30, 2009, the Company reached a settlement with the state
of Texas under which the Company paid $120,000 to fully satisfy its obligation
for plugging and abandonment of the properties and recognized a gain of $365,000
on settlement of the obligation.
Results
of Operations
Year
ended September 30, 2009 Compared to Year Ended September 30, 2008
During
2009, the Company had general and administrative expenses of $4,202,809 compared
with $4,249,572 in fiscal 2008. This decrease of $46,763 reflects the
fact that the Company’s operations and expenditures were tightly
maintained.
During
2009, the Company had a net loss of $7,689,137, compared to a net loss of
$3,071,157 for fiscal 2008. The three primary reasons for the
$4,617,980 increase in net loss for the year ended September 30, 2009 were: (i)
a $4,234,317 provision for loss on certificates of deposits in a financial
institution where certain restrictions were placed on the investment and a
receiver was appointed to takeover the institution. (ii) a $819,460
decline in interest income as management moved deposits to non-interest bearing
accounts that provided greater security from loss; and (iii) partially offset by
a $365,000 gain from settlement of an asset retirement obligation with the State
of Texas.
During
fiscal 2009 and 2008, the Company had no revenues from which cash flows could be
generated to support operations. In fiscal 2009, the Company
continued to rely on cash generated from the 2006 sale of participation
interests in the three JDZ Blocks under production sharing contracts with
various joint venture partners to fund operations.
Year
ended September 30, 2008 Compared to Year Ended September 30, 2007
During
fiscal 2008, the Company had general and administrative expenses totaling
$4,249,572 compared with $4,954,848 in fiscal 2007. The primary reason for the
decrease in general and administrative expenses is a reduction in
legal and professional fees due to lower legal expenses in connection with all
the governmental agencies investigations of the Company. (See Item 3, Legal
Proceedings).
During
2008, the Company had a net loss of $3,071,157, compared to a net loss of
$1,756,904 for fiscal 2007. The primary reason for the increase in
net loss is due to the fact that the Company has no remaining tax benefits from
utilization of tax losses in 2008 because the Company is in a loss carry forward
position. In 2007, the Company generated tax benefits of $1,723,000 from
utilization of net operating losses.
During
fiscal 2008 and 2007, the Company had no revenues from which cash flows could be
generated to support operations. In fiscal 2008 and 2007, the Company
relied primarily upon cash generated from the 2006 sale of interests to fund
operations.
Year
ended September 30, 2007 Compared to Year Ended September 30, 2006
During
fiscal 2007, the Company had general and administrative expenses of $4,954,848
compared with $5,979,609 in fiscal 2006. The decrease results
primarily from the grant of stock warrants for our outside consultants valued at
$1,145,000 in fiscal 2006 versus employee compensatory stock option expense of
$175,440 in fiscal 2007.
During
2007, the Company had a net loss of $1,756,904, compared to a net income of
$23,171,536 for fiscal 2006. The primary reason for the $24,928,440
decrease in net income for the year ended September 30, 2007 was due to a
$30,102,250 net gain in fiscal 2006 from the sale of participation interests in
the three JDZ Blocks under production sharing contracts with joint venture
partners.
During
fiscal 2007 and 2006, the Company had no revenues from which cash flows could be
generated to support operations. In fiscal 2007 and 2006, the Company
relied primarily upon cash generated from the 2006 sale of interests to fund
operations.
Liquidity
and Capital Resources
As of
September 30, 2009, the Company had working capital of
$19,424,021. The Company believes that it has sufficient liquidity to
meet working capital requirements for the next twelve months.
The
Company believes that its working capital requirements for 2010 will be
approximately $4,000,000 based on maintaining operations at their current level.
Our consortium partners will pay all of ERHC’s future costs in respect of all
petroleum operations subject to total reimbursement upon production.
Accordingly, the commencement of drilling operations is not expected to have a
significant impact on our working capital requirements. Management believes that
our current cash resources will be adequate to maintain our planned operations
throughout the drilling and exploration phase of existing participation
agreements.
Through
September 30, 2009, ERHC has incurred substantial costs in responding to the
investigations by the DOJ, SEC and Senate Subcommittee. Those costs consist
primarily of legal fees paid to the Company’s legal counsel, Akin Gump Strauss
Hauer & Feld LLP and document reproduction costs. These costs have had a
significant negative impact on the Company’s cash flows from
operations. ERHC is now involved in proceedings to protect its interests in
the JDZ and the EEZ. ERHC anticipates the continued use of its cash
reserves to address ongoing investigations and protect its assets in the JDZ and
EEZ.. If continued at current levels this could have a serious negative impact
on the Company’s liquidity. Neither management nor its legal counsel can assess
the magnitude of future cash requirements that could result from prolonged
investigations or any negative findings that might arise from the
investigations. In a worst case scenario, the Company’s cash resources could be
exhausted and the Company’s status as a going concern could be brought into
question.
Off-Balance
Sheet Arrangements
As of
September 30, 2009, the Company does not have any off-balance sheet
arrangements.
Contractual
Obligations and Commercial Commitments
The
following table provides information at September 30, 2009, about the Company’s
contractual obligations and commercial commitments. The table
presents contractual obligation by due dates and related contractual commitments
by expiration dates.
Contractual
Obligations
|
Total
|
Less
than
1
year
|
1
– 3 Years
|
3
– 5 Years
|
More
than
5
Years
|
|||||||||||||||
Convertible
debt (1)
|
$
|
33,513
|
$
|
33,513
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||||
Operating
lease (2)
|
240,840
|
107,040
|
133,800
|
-
|
-
|
|||||||||||||||
Total
|
$
|
274,353
|
$
|
140,553
|
$
|
133,800
|
$
|
-
|
$
|
-
|
(1)
|
This
represents a convertible note to Joseph Charles and Associates. However,
the Company has been unable to locate the
payee.
|
(2)
|
Lease
obligations consist of operating lease for office space. Office lease
represent non-cancelable leases for office space used in our daily
operations.
|
Contingencies
and Legal Matters
For a
detailed discussion of contingencies and legal matters, see “Item 3. Legal
Proceedings”.
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk
The
Company’s current focus is to exploit its primary assets, which are rights to
working interest in the JDZ and EEZ under agreements with the JDA and
DRSTP. The Company intends to continue to form relationships with
other oil and gas companies with operational, technical and financial
capabilities to assist the Company in leveraging its interests in the EEZ and
the JDZ. The Company currently has no other operations.
At
September 30, 2009, all of the Company’s operations were located outside the
United States. The Company’s primary assets are agreements with DRSTP
and the JDA, which provide ERHC with rights to participate in exploration and
production activities in the Gulf of Guinea off the coast of central West
Africa. This geographic area of interest is controlled by foreign
governments that have historically experienced volatility, which is out of
management’s control. The Company’s ability to exploit its interests in the
agreements in this area may be impacted by this circumstance.
The
future success of the Company’s international operations may also be adversely
affected by risks associated with international activities, including financial,
economic and labor conditions, political instability, risk of war,
expropriation, renegotiation or modification of existing contracts, tax laws
(including host-country import-export, excise and income taxes and United States
taxes on foreign subsidiaries) and changes in the value of the U.S. dollar
versus the local currencies in which future oil and gas producing activities may
be denominated. Furthermore, changes in exchange rates may adversely
affect the Company’s future results of operations and financial
condition.
Market
risks relating to the Company’s operations result primarily from changes in
interest rates as well as credit risk concentrations. The Company’s
interest expense is generally not sensitive to changes in the general level of
interest rates in the United States, particularly because a substantial majority
of its indebtedness is at fixed rates.
The
Company holds no derivative financial or commodity instruments.
Item 8. Financial Statements and Supplementary
Data
ERHC
ENERGY INC.
|
|
|
A
CORPORATION IN THE DEVELOPMENT STAGE
|
||
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
||
|
||
|
||
|
Page(s)
|
|
|
||
Reports
of Independent Public Accounting Firm:
|
||
|
||
Report
of Independent Registered Public Accounting Firm on Internal Control Over
Financial Reporting as of September 30, 2009
|
31
|
|
|
||
Report
of Independent Registered Public Accounting Firm on the Financial
Statements for the Years ended September 30, 2009 and 2008
|
32
|
|
|
||
Consolidated
Financial Statements:
|
||
|
||
Consolidated
Balance Sheets as of September 30, 2009 and 2008
|
33
|
|
|
||
Consolidated
Statements of Operations for the Years Ended September 30, 2009, 2008 and
2007, and for the period from inception, September 5, 1995, to September
30, 2009
|
34
|
|
|
||
Consolidated
Statements of Shareholders’ Equity (Deficit) for the period from
inception, September 5, 1995, to September 30, 2009
|
35
|
|
|
||
Consolidated
Statements of Cash Flows for the Years Ended September 30, 2009, 2008 and
2007, and for the period from inception, September 5, 1995, to September
30, 2009
|
39
|
|
|
||
Notes
to Consolidated Financial Statements
|
41
|
|
|
||
Financial
Statement Schedules:
|
||
|
||
None
|
All
schedules for which provision is made in the applicable accounting regulations
of the Securities and Exchange Commission are not required under instructions or
are inapplicable and therefore have been omitted.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
ERHC
Energy Inc.
Houston,
Texas
We have
audited the internal control of ERHC Energy Inc. over its financial reporting as
of September 30, 2009 based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). The Company’s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying “Management’s Annual Report on Internal Control
over Financial Reporting.” Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, ERHC Energy Inc. maintained, in all material respects, effective
internal control over financial reporting as of September 30, 2009, based on
criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of ERHC Energy
Inc. as of September 30, 2009 and 2008, and the related consolidated statements
of operations, shareholders’ equity and cash flows for the three years ended
September 30, 2009, and our reports dated December 11, 2009 expressed an
unqualified opinion on those consolidated financial statements.
Malone
& Bailey, PC
www.malone-bailey.com
Houston,
Texas
December
11, 2009
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
ERHC
Energy Inc.
Houston,
Texas
We have
audited the accompanying consolidated balance sheets of ERHC Energy Inc., a
corporation in the development stage, as of September 30, 2009 and 2008 and the
related consolidated statements of operations, shareholders’ equity and cash
flows for the three years ended September 30, 2007, 2008 and
2009. These financial statements are the responsibility of ERHC’s
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of ERHC as of September 30,
2009 and 2008, and the results of its operations and its cash flows for the
three years ended September 30, 2007, 2008 and 2009, in conformity with
accounting principles generally accepted in the United States of
America.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of ERHC’s internal control
over financial reporting as of September 30, 2009, based on criteria established
in Internal Control –
Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO), and our report dated
December 11, 2009 expressed an unqualified opinion on management’s assessment of
internal control over financial reporting and an unqualified opinion on the
effectiveness of internal control over financial reporting.
Malone
& Bailey, PC
www.malone-bailey.com
Houston,
Texas
December
11, 2009
ERHC
ENERGY INC.
|
||||||||
A
CORPORATION IN THE DEVELOPMENT STAGE
|
||||||||
CONSOLIDATED
BALANCE SHEETS
|
||||||||
September
30, 2009 and 2008
|
||||||||
2009
|
2008
|
|||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 22,428,728 | $ | 31,757,012 | ||||
Prepaid
expenses and other
|
447,345 | 199,419 | ||||||
Total
current assets
|
22,876,073 | 33,974,829 | ||||||
DRSTP
concession fee
|
2,839,500 | 2,839,500 | ||||||
Furniture
and equipment, net
|
67,275 | 66,093 | ||||||
Certificate
of deposit
|
1,058,579 | - | ||||||
Deferred
tax asset
|
2,018,398 | 2,018,398 | ||||||
Total
assets
|
$ | 28,859,828 | $ | 36,880,422 | ||||
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable and accrued liabilities
|
$ | 5,050,590 | $ | 5,025,794 | ||||
Accounts
payable and accrued liabilities, related party
|
115,236 | 354,934 | ||||||
Accrued
interest
|
10,561 | 8,719 | ||||||
Asset
retirement obligation
|
- | 485,000 | ||||||
Current
portion of convertible debt
|
33,513 | 33,513 | ||||||
Total
current liabilities
|
5,209,900 | 5,907,960 | ||||||
Commitments
and contingencies:
|
||||||||
Shareholders'
equity:
|
||||||||
Preferred
stock, par value $0.0001; authorized 10,000,000; none issued and
outstanding
|
- | - | ||||||
Common
stock, par value $0.0001; authorized 950,000,000 shares; issued and
outstanding 723,030,444 and 721,938,569at September 30, 2009 and September
30, 2008, respectively
|
72,308 | 72,224 | ||||||
Additional
paid-in capital
|
92,330,993 | 91,964,474 | ||||||
Accumulated
deficit
|
(68,753,373 | ) | (61,064,236 | ) | ||||
Total
shareholders’ equity
|
23,649,925 | 30,972,462 | ||||||
Total
liabilities and shareholders' equity
|
$ | 28,859,825 | $ | 36,880,422 |
The
accompanying notes are an integral part of these financial
statements
ERHC
ENERGY INC.
|
||||||||||||||||
A
CORPORATION IN THE DEVELOPMENT STAGE
|
||||||||||||||||
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
||||||||||||||||
For
the Years Ended September 30, 2007, 2008 and 2009 and for the
Period
|
||||||||||||||||
From
Inception, September 5, 1995, to September 30, 2009
|
||||||||||||||||
Inception
to September 30,
|
||||||||||||||||
2007
|
2008
|
2009
|
2009
|
|||||||||||||
Costs
and expenses:
|
||||||||||||||||
General
and administrative
|
$ | 4,954,848 | $ | 4,249,572 | $ | 4,202,809 | $ | 72,545,491 | ||||||||
Depreciation
and depletion
|
21,917 | 30,571 | 36,897 | 1,453,398 | ||||||||||||
Gain
on sale of partial interest in DRSTP concession
|
- | - | - | (30,102,250 | ) | |||||||||||
Write-offs
and abandonments
|
- | - | - | 7,742,128 | ||||||||||||
Total
costs and expenses
|
(4,976,765 | ) | (4,280,143 | ) | (4,239,706 | ) | (51,638,767 | ) | ||||||||
Other
income and (expenses):
|
||||||||||||||||
Interest
income
|
1,998,704 | 1,241,189 | 421,729 | 4,811,257 | ||||||||||||
Gain
(loss) from settlements
|
(500,000 | ) | - | 365,000 | 117,310 | |||||||||||
Other
income
|
- | - | - | 439,827 | ||||||||||||
Interest
expense
|
(1,843 | ) | (1,843 | ) | (1,843 | ) | (12,128,748 | ) | ||||||||
Provision
for loss on deposits
|
- | - | (4,234,317 | ) | (4,234,317 | ) | ||||||||||
Loss
on extinguishment of debt
|
- | - | - | (5,749,575 | ) | |||||||||||
Total
other income and (expenses), net
|
1,496,861 | 1,239,346 | (3,449,431 | ) | (16,744,246 | ) | ||||||||||
Income
(loss) before benefit (provision) for income taxes
|
(3,479,904 | ) | (3,040,797 | ) | (7,689,137 | ) | (68,383,013 | ) | ||||||||
Benefit
(provision) for income taxes:
|
||||||||||||||||
Current
|
1,243,000 | 449,640 | - | (1,330,360 | ) | |||||||||||
Deferred
|
480,000 | (480,000 | ) | - | 960,000 | |||||||||||
Total
benefit (provision) for income taxes
|
1,723,000 | (30,360 | ) | - | (370,360 | ) | ||||||||||
Net
income (loss)
|
$ | (1,756,904 | ) | $ | (3,071,157 | ) | $ | (7,689,137 | ) | $ | (68,753,373 | ) | ||||
Net
loss per common share -basic and diluted
|
$ | (0.00 | ) | $ | (0.00 | ) | $ | (0.01 | ) | |||||||
Weighted
average number of shares of common shares outstanding:
|
||||||||||||||||
Basic
|
720,966,165 | 722,182,831 | 722,794,828 | |||||||||||||
Diluted
|
720,966,165 | 722,182,831 | 722,794,828 |
The
accompanying notes are an integral part of these financial
statements
ERHC
ENERGY INC.
|
||||||||||||||||||||||||||||
A
CORPORATION IN THE DEVELOPMENT STAGE
|
||||||||||||||||||||||||||||
CONSOLIDATED
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
|
||||||||||||||||||||||||||||
For
the Period from Inception, September 5, 1995, to September 30, 2009,
(Unaudited for the
|
||||||||||||||||||||||||||||
Period
from Inception to September 30, 1998)
|
||||||||||||||||||||||||||||
Common
Stock
|
Additional
Paid-In
|
Accumulated
|
Subscription
|
Deferred
|
||||||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Deficit
|
Receivable
|
Compensation
|
Total
|
||||||||||||||||||||||
Balance
at September 5, 1995
|
- | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | |||||||||||||||
Common
stock issued for cash
|
884,407 | 88 | - | - | - | - | 88 | |||||||||||||||||||||
Common
stock issued for services
|
755,043 | 76 | 499,924 | - | - | (500,000 | ) | - | ||||||||||||||||||||
Net
loss
|
- | - | - | (3,404 | ) | - | - | (3,404 | ) | |||||||||||||||||||
Balance
at September 30, 1995
|
1,639,450 | 164 | 499,924 | (3,404 | ) | - | (500,000 | ) | (3,316 | ) | ||||||||||||||||||
Common
stock issued for cash, net of expenses
|
361,330 | 36 | 124,851 | - | - | - | 124,887 | |||||||||||||||||||||
Common
stock issued for services
|
138,277 | 14 | 528,263 | - | - | - | 528,277 | |||||||||||||||||||||
Common
stock issued for equipment
|
744,000 | 74 | 3,719,926 | - | - | - | 3,720,000 | |||||||||||||||||||||
Effect
of reverse merger
|
1,578,470 | 158 | (243,488 | ) | - | - | - | (243,330 | ) | |||||||||||||||||||
Amortization
of deferred compensation
|
- | - | - | - | - | 72,500 | 72,500 | |||||||||||||||||||||
Net
loss
|
- | - | - | (728,748 | ) | - | - | (728,748 | ) | |||||||||||||||||||
Balance
at September 30, 1996
|
4,461,527 | 446 | 4,629,476 | (732,152 | ) | - | (427,500 | ) | 3,470,270 | |||||||||||||||||||
Common
stock issued for cash
|
2,222,171 | 222 | 1,977,357 | - | (913,300 | ) | - | 1,064,279 | ||||||||||||||||||||
Common
stock issued for services
|
9,127,981 | 913 | 12,430,725 | - | - | - | 12,431,638 | |||||||||||||||||||||
Common
stock issued for oil and gas leases and properties
|
500,000 | 50 | 515,575 | - | - | - | 515,625 | |||||||||||||||||||||
Common
stock issued for
|
||||||||||||||||||||||||||||
Chevron
contract
|
3,000,000 | 300 | - | - | - | - | 300 | |||||||||||||||||||||
Common
stock issued for
|
||||||||||||||||||||||||||||
BAPCO
acquisition
|
4,000,000 | 400 | 499,600 | - | - | - | 500,000 | |||||||||||||||||||||
Contributed
|
(100,000 | ) | (10 | ) | (99,990 | ) | - | - | - | (100,000 | ) | |||||||||||||||||
Amortization
of deferred compensation
|
- | - | - | - | - | 177,500 | 177,500 | |||||||||||||||||||||
Net
loss
|
- | - | - | (16,913,052 | ) | - | - | (16,913,052 | ) | |||||||||||||||||||
Balance
at September 30, 1997
|
23,211,679 | 2,321 | 19,952,743 | (17,645,204 | ) | (913,300 | ) | (250,000 | ) | 1,146,560 | ||||||||||||||||||
Common
stock and warrants issued for cash
|
1,124,872 | 113 | 972,682 | - | - | - | 972,795 | |||||||||||||||||||||
Common
stock issued for services
|
1,020,320 | 102 | 1,526,878 | - | - | - | 1,526,980 | |||||||||||||||||||||
Common
stock issued for Uinta acquisition
|
1,000,000 | 100 | 1,999,900 | - | - | - | 2,000,000 | |||||||||||||||||||||
Common
stock issued for
|
||||||||||||||||||||||||||||
Nueces
acquisition
|
50,000 | 5 | 148,745 | - | - | - | 148,750 | |||||||||||||||||||||
Common
stock issued for accounts payable
|
491,646 | 49 | 337,958 | - | - | - | 338,007 | |||||||||||||||||||||
Beneficial
conversion feature associated with convertible debt
|
- | - | 1,387,500 | - | - | - | 1,387,500 | |||||||||||||||||||||
Receipt
of subscription receivable
|
- | - | - | - | 913,300 | - | 913,300 | |||||||||||||||||||||
Option
fee and penalty
|
299,536 | 30 | 219,193 | - | - | - | 219,223 | |||||||||||||||||||||
Common
stock issued for building equity
|
24,000 | 2 | 69,998 | - | - | - | 70,000 | |||||||||||||||||||||
Amortization
of deferred compensation
|
- | - | - | - | - | 125,000 | 125,000 | |||||||||||||||||||||
Net
loss
|
- | - | - | (11,579,024 | ) | - | - | (11,579,024 | ) | |||||||||||||||||||
Balance
at September 30, 1998
|
27,222,053 | $ | 2,722 | $ | 26,615,597 | $ | (29,224,228 | ) | $ | - | $ | (125,000 | ) | $ | (2,730,909 | ) |
The
accompanying notes are an integral part of these financial
statements
ERHC
ENERGY INC.
|
||||||||||||||||||||||||||||
A
CORPORATION IN THE DEVELOPMENT STAGE
|
||||||||||||||||||||||||||||
CONSOLIDATED
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
|
||||||||||||||||||||||||||||
For
the Period from Inception, September 5, 1995, to September 30, 2009,
(Unaudited for the
|
||||||||||||||||||||||||||||
Period
from Inception to September 30, 1998)
|
||||||||||||||||||||||||||||
Common
Stock
|
Additional
Paid-In
|
Accumulated
|
Subscription
|
Deferred
|
||||||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Deficit
|
Receivable
|
Compensation
|
Total
|
||||||||||||||||||||||
Balance
at September 30, 1998
|
27,222,053 | $ | 2,722 | $ | 26,615,597 | $ | (29,224,228 | ) | $ | - | $ | (125,000 | ) | $ | (2,730,909 | ) | ||||||||||||
Common
stock issued for cash
|
397,040,000 | 39,704 | 2,062,296 | - | - | - | 2,102,000 | |||||||||||||||||||||
Common
stock issued for services
|
7,169,000 | 717 | 1,034,185 | - | - | - | 1,034,902 | |||||||||||||||||||||
Common
stock issued for Uinta settlement
|
7,780,653 | 778 | 2,541,161 | - | - | - | 2,541,939 | |||||||||||||||||||||
Common
stock surrendered in
|
||||||||||||||||||||||||||||
BAPCO
settlement
|
7,744,000 | ) | (774 | ) | (2,709,626 | ) | - | - | - | (2,710,400 | ) | |||||||||||||||||
Common
stock issued for accounts payable
|
10,843,917 | 1,084 | 769,139 | - | - | - | 770,223 | |||||||||||||||||||||
Common
stock issued for conversion of debt and payment of accrued interest and
penalties
|
31,490,850 | 3,149 | 5,998,915 | - | - | - | 6,002,064 | |||||||||||||||||||||
Common
stock issued for officers' salary and bonuses
|
10,580,000 | 1,058 | 4,723,942 | - | - | - | 4,725,000 | |||||||||||||||||||||
Common
stock issued for shareholder loans and accrued interest
payable
|
3,939,505 | 394 | 771,318 | - | - | - | 771,712 | |||||||||||||||||||||
Reclassification
of common stock previously presented as a liability
|
750,000 | 75 | 1,499,925 | - | - | - | 1,500,000 | |||||||||||||||||||||
Amortization
of deferred compensation
|
- | - | - | - | - | 125,000 | 125,000 | |||||||||||||||||||||
Net
loss
|
- | - | - | (19,727,835 | ) | - | - | (19,727,835 | ) | |||||||||||||||||||
Balance
at September 30, 1999
|
489,071,978 | 48,907 | 43,306,852 | (48,952,063 | ) | - | - | (5,596,304 | ) | |||||||||||||||||||
Common
stock issued for conversion of debt and payment of accrued interest and
penalties
|
7,607,092 | 761 | 295,120 | - | - | - | 295,881 | |||||||||||||||||||||
Net
loss
|
- | - | - | (1,958,880 | ) | - | - | (1,958,880 | ) | |||||||||||||||||||
Balance
at September 30, 2000
|
496,679,070 | 49,668 | 43,601,972 | (50,910,943 | ) | - | - | (7,259,303 | ) | |||||||||||||||||||
Common
stock issued for services
|
37,000,000 | 3,700 | 1,846,300 | - | - | - | 1,850,000 | |||||||||||||||||||||
Net
loss
|
- | - | - | (6,394,810 | ) | - | - | (6,394,810 | ) | |||||||||||||||||||
Balance
at September 30, 2001
|
533,679,070 | 53,368 | 45,448,272 | (57,305,753 | ) | - | - | (11,804,113 | ) | |||||||||||||||||||
Common
stock issued for cash net of expenses
|
4,000,000 | 400 | 643,100 | - | - | - | 643,500 | |||||||||||||||||||||
Common
stock issued for services
|
3,475,000 | 348 | 527,652 | - | - | - | 528,000 | |||||||||||||||||||||
Common
stock issued for accounts payable
|
4,407,495 | 440 | 817,757 | - | - | - | 818,197 | |||||||||||||||||||||
Common
stock issued for con -version of debt and pay-ment of accrued interest and
penalties
|
7,707,456 | 771 | 1,540,721 | - | - | - | 1,541,492 | |||||||||||||||||||||
Common
stock issued for officer's salary and bonuses
|
2,700,000 | 270 | 289,730 | - | - | - | 290,000 | |||||||||||||||||||||
Net
loss
|
- | - | - | (4,084,210 | ) | - | - | (4,084,210 | ) | |||||||||||||||||||
Balance
at September 30, 2002
|
555,969,021 | $ | 55,597 | $ | 49,267,232 | $ | (61,389,963 | ) | $ | - | $ | - | $ | (12,067,134 | ) |
The
accompanying notes are an integral part of these financial
statements
ERHC
ENERGY INC.
|
||||||||||||||||||||||||||||
A
CORPORATION IN THE DEVELOPMENT STAGE
|
||||||||||||||||||||||||||||
CONSOLIDATED
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
|
||||||||||||||||||||||||||||
For
the Period from Inception, September 5, 1995, to September 30, 2009,
(Unaudited for the
|
||||||||||||||||||||||||||||
Period
from Inception to September 30, 1998)
|
||||||||||||||||||||||||||||
Common
Stock
|
Additional
Paid-In
|
Accumulated
|
Subscription
|
Deferred
|
||||||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Deficit
|
Receivable
|
Compensation
|
Total
|
||||||||||||||||||||||
Balance
at September 30, 2002
|
555,969,021 | $ | 55,597 | $ | 49,267,232 | $ | (61,389,963 | ) | $ | - | $ | - | $ | (12,067,134 | ) | |||||||||||||
Common
stock issued for cash, net of expenses
|
9,440,000 | 944 | 1,071,556 | - | - | - | 1,072,500 | |||||||||||||||||||||
Common
stock issued for accounts payable
|
1,527,986 | 153 | 177,663 | - | - | - | 177,816 | |||||||||||||||||||||
Common
stock issued for con -version of debt and payment of accrued
interest
|
17,114,740 | 1,711 | 3,421,227 | - | - | - | 3,422,938 | |||||||||||||||||||||
Net
loss
|
- | - | - | (3,153,882 | ) | - | - | (3,153,882 | ) | |||||||||||||||||||
Balance
at September 30, 2003
|
584,051,747 | 58,405 | 53,937,678 | (64,543,845 | ) | - | - | (10,547,762 | ) | |||||||||||||||||||
Common
stock issued for cash, net of expenses
|
3,231,940 | 323 | 974,677 | - | - | - | 975,000 | |||||||||||||||||||||
Common
stock issued for accounts payable
|
1,458,514 | 146 | 533,102 | - | - | - | 533,248 | |||||||||||||||||||||
Common
stock issued for con -version of debt and payment of accrued
interest
|
11,185,052 | 1,119 | 2,236,093 | - | - | - | 2,237,212 | |||||||||||||||||||||
Common
stock issued for Proceeds received in 2003
|
1,000,000 | 100 | (100 | ) | - | - | - | - | ||||||||||||||||||||
Beneficial
conversion feature associated with the con-vertible line of
credit
|
- | - | 1,058,912 | - | - | - | 1,058,912 | |||||||||||||||||||||
Options
issued to employee
|
- | - | 765,000 | - | - | (765,000 | ) | - | ||||||||||||||||||||
Amortization
of deferred compensation
|
- | - | - | - | - | 308,126 | 308,126 | |||||||||||||||||||||
Common
stock issued for cash-less exercise of options and/or
warrants
|
247,882 | 25 | (25 | ) | - | - | - | - | ||||||||||||||||||||
Net
loss
|
- | - | - | (3,593,388 | ) | - | - | (3,593,388 | ) | |||||||||||||||||||
Balance
at September 30, 2004
|
601,175,135 | 60,118 | 59,505,337 | (68,137,233 | ) | - | (456,874 | ) | (9,028,652 | ) | ||||||||||||||||||
Common
stock issued for accounts payable
|
735,000 | 73 | 359,716 | - | - | - | 359,789 | |||||||||||||||||||||
Common
stock issued for con -version of debt and payment of accrued
interest
|
107,819,727 | 10,782 | 22,678,054 | - | - | - | 22,688,836 | |||||||||||||||||||||
Common
stock issued in settle-ment of lawsuits
|
595,000 | 59 | 394,391 | - | - | - | 394,450 | |||||||||||||||||||||
Variable
accounting for repriced employee stock options
|
- | - | 300,000 | - | - | (300,000 | ) | - | ||||||||||||||||||||
Beneficial
conversion feature associated with the con-vertible line of
credit
|
- | - | 347,517 | - | - | - | 347,517 | |||||||||||||||||||||
Amortization
of deferred compensation
|
- | - | - | - | - | 449,737 | 449,737 | |||||||||||||||||||||
Common
stock issued for cash-less exercise of options and/or
warrants
|
587,364 | 59 | (59 | ) | - | - | - | - | ||||||||||||||||||||
Net
loss
|
- | - | - | (11,270,478 | ) | - | - | (11,270,478 | ) | |||||||||||||||||||
Balance
at September 30, 2005
|
710,912,226 | $ | 71,091 | $ | 83,584,956 | $ | (79,407,711 | ) | $ | - | $ | (307,137 | ) | $ | 3,941,199 |
The
accompanying notes are an integral part of these financial
statements
ERHC
ENERGY INC.
|
||||||||||||||||||||||||||||
A
CORPORATION IN THE DEVELOPMENT STAGE
|
||||||||||||||||||||||||||||
CONSOLIDATED
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
|
||||||||||||||||||||||||||||
For
the Period from Inception, September 5, 1995, to September 30, 2009,
(Unaudited for the
|
||||||||||||||||||||||||||||
Period
from Inception to September 30, 1998)
|
||||||||||||||||||||||||||||
Common
Stock
|
Additional
Paid-In
|
Accumulated
|
Subscription
|
Deferred
|
||||||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Deficit
|
Receivable
|
Compensation
|
Total
|
||||||||||||||||||||||
Balance
at September 30, 2005
|
710,912,226 | $ | 71,091 | $ | 83,584,956 | $ | (79,407,711 | ) | $ | - | $ | (307,137 | ) | $ | 3,941,199 | |||||||||||||
Common
stock issued for services
|
4,665,000 | 467 | 1,976,081 | - | - | - | 1,976,548 | |||||||||||||||||||||
Variable
accounting for repriced employee stock options
|
- | - | (60,660 | ) | - | - | - | (60,660 | ) | |||||||||||||||||||
Issuance
of warrants for success fee
|
- | - | 5,154,500 | - | - | - | 5,154,500 | |||||||||||||||||||||
Issuance
of options as comp-ensation to consultants
|
- | - | 1,145,000 | - | - | - | 1,145,000 | |||||||||||||||||||||
Common
stock issued upon exercise of warrants
|
800,000 | 80 | 159,920 | - | - | - | 160,000 | |||||||||||||||||||||
Amortization
of deferred compensation
|
- | - | (307,137 | ) | - | - | 307,137 | - | ||||||||||||||||||||
Common
stock issued for cash-less exercise of options and/or
warrants
|
2,611,756 | 261 | 261 | ) | - | - | - | - | ||||||||||||||||||||
Net
income
|
- | - | - | 23,171,536 | - | - | 23,171,536 | |||||||||||||||||||||
Balance
at September 30, 2006
|
718,988,982 | 71,899 | 91,652,399 | (56,236,175 | ) | - | - | 35,488,123 | ||||||||||||||||||||
Accounting
for employee stock options
|
- | - | 175,440 | - | - | - | 175,440 | |||||||||||||||||||||
Common
stock issued upon exercise of warrants
|
2,949,587 | 294 | (294 | ) | - | - | - | - | ||||||||||||||||||||
Net
loss
|
- | - | - | (1,756,904 | ) | - | - | (1,756,904 | ) | |||||||||||||||||||
Balance
at September 30, 2007
|
721,938,569 | 72,193 | 91,827,545 | (57,993,079 | ) | - | - | 33,906,659 | ||||||||||||||||||||
Common
stock issued for services
|
300,000 | 31 | 88,469 | - | - | - | 88,500 | |||||||||||||||||||||
Accounting
for employee stock options
|
- | - | 48,460 | - | - | - | 48,460 | |||||||||||||||||||||
Net
loss
|
- | - | - | (3,071,157 | ) | - | - | (3,071,157 | ) | |||||||||||||||||||
Balance
at September 30, 2008
|
722,238,569 | 72,224 | 91,964,474 | $ | (61,064,236 | ) | - | - | 30,972,462 | |||||||||||||||||||
Common
stock issued for services
|
811,875 | 81 | 366,519 | - | - | - | 366,600 | |||||||||||||||||||||
Net
loss
|
- | - | - | (7,689,137 | ) | - | - | (7,689,137 | ) | |||||||||||||||||||
Balance
at September 30, 2009
|
723,050,444 | $ | 72,305 | $ | 92,332,543 | $ | (68,753,373 | ) | $ | - | $ | - | $ | 23,649,925 |
The
accompanying notes are an integral part of these financial
statements
ERHC
ENERGY INC.
|
||||||||||||||||
A
CORPORATION IN THE DEVELOPMENT STAGE
|
||||||||||||||||
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||||||||||
For
the Years Ended September 30, 2007, 2008 and 2009 and for the Period
From
|
||||||||||||||||
Inception,
September 5, 1995 to September 30, 2009
|
||||||||||||||||
"Unaudited"
Inception to September 30,
|
||||||||||||||||
2007
|
2008
|
2009
|
2009
|
|||||||||||||
Cash
Flows From Operating Activities
|
||||||||||||||||
Net
income (loss)
|
$ | (1,756,904 | ) | $ | (3,071,157 | ) | $ | (7,689,137 | ) | $ | (68,753,373 | ) | ||||
Adjustments
to reconcile net income (loss) to net cash used by operating
activities:
|
||||||||||||||||
Depreciation
and depletion expense
|
21,917 | 30,571 | 36,897 | 1,453,398 | ||||||||||||
Provision
for loss on deposits
|
- | - | 4,234,317 | 4,234,317 | ||||||||||||
Write-offs
and abandonments
|
- | - | - | 7,742,128 | ||||||||||||
Deferred
income taxes
|
(1,088,758 | ) | 30,360 | - | (2,018,398 | ) | ||||||||||
Compensatory
stock options
|
175,440 | 48,460 | - | 1,308,240 | ||||||||||||
Gain
from settlement
|
- | - | (365,000 | ) | (617,310 | ) | ||||||||||
Gain
on sale of partial interest in
|
||||||||||||||||
DRSTP
concession
|
- | - | - | (30,102,250 | ) | |||||||||||
Amortization
of beneficial conversion feature associated with convertible
debt
|
- | - | - | 2,793,929 | ||||||||||||
Amortization
of deferred compensation
|
- | - | - | 1,257,863 | ||||||||||||
Loss
on extinguishment of debt
|
- | - | - | 5,682,368 | ||||||||||||
Stock
issued for services
|
- | - | - | 20,897,077 | ||||||||||||
Stock
issued for settlements
|
- | - | - | 225,989 | ||||||||||||
Stock
issued for officer bonuses
|
- | - | - | 5,015,000 | ||||||||||||
Stock
issued for interest and penalties on convertible debt
|
- | - | - | 10,631,768 | ||||||||||||
Stock
issued for board compensation
|
- | 88,500 | 366,600 | 2,431,648 | ||||||||||||
Changes
in operating assets and liabilities:
|
||||||||||||||||
Prepaid
expenses and other current assets
|
893,077 | (19,464 | ) | (247,926 | ) | (447,344 | ) | |||||||||
Accounts
payable and other accrued liabilities
|
(1,598,173 | ) | (156,342 | ) | 26,640 | (2,742,598 | ) | |||||||||
Income
tax payable
|
(3,013,147 | ) | - | - | 0 | |||||||||||
Accounts
payable and accrued liabilities, related party
|
169,175 | 116,319 | (239,700 | ) | 115,233 | |||||||||||
Accrued
interest - related party
|
- | - | - | - | ||||||||||||
Accrued
retirement obligation
|
- | - | (120,000 | ) | 365,000 | |||||||||||
Net
cash used by operating activities
|
(6,197,373 | ) | (2,932,753 | ) | (3,997,309 | ) | (40,527,315 | ) |
The
accompanying notes are an integral part of these financial
statements
ERHC
ENERGY INC.
|
||||||||||||||||
A
CORPORATION IN THE DEVELOPMENT STAGE
|
||||||||||||||||
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||||||||||
For
the Years Ended September 30, 2007, 2008 and 2009 and for the Period
From
|
||||||||||||||||
Inception,
September 5, 1995 to September 30, 2009
|
||||||||||||||||
Inception
to September 30,
|
||||||||||||||||
2007
|
2008
|
2009
|
2009
|
|||||||||||||
Cash
Flows From Investing Activities
|
||||||||||||||||
Purchase
of long-term investment
|
$ | - | $ | - | $ | (5,292,896 | ) | $ | (5,292,896 | ) | ||||||
Purchase
of DRSTP concession
|
- | - | - | (5,679,000 | ) | |||||||||||
Proceeds
from sale of partial interest in DRSTP concession
|
- | - | - | 45,900,000 | ||||||||||||
Purchase
of furniture and equipment
|
(71,808 | ) | (32,168 | ) | (38,079 | ) | (947,447 | ) | ||||||||
Net
cash provided (used) by investing activities
|
(71,808 | ) | (32,168 | ) | (5,330,975 | ) | 33,980,657 | |||||||||
Cash
Flows From Financing Activities:
|
||||||||||||||||
Proceeds
from warrants exercised
|
- | - | - | 160,000 | ||||||||||||
Proceeds
from common stock, net of expenses
|
- | - | - | 6,955,049 | ||||||||||||
Proceeds
from line of credit, related party
|
- | - | - | 2,750,000 | ||||||||||||
Proceeds
from non-convertible debt, related party
|
- | - | - | 158,700 | ||||||||||||
Proceeds
from convertible debt, related party
|
- | - | - | 8,207,706 | ||||||||||||
Proceeds
from sale of convertible debt
|
- | - | - | 9,019,937 | ||||||||||||
Proceeds
from bank borrowing
|
- | - | - | 175,000 | ||||||||||||
Proceeds
from stockholder loans
|
- | - | - | 1,845,809 | ||||||||||||
Proceeds
from stock subscription receivable
|
- | - | - | 913,300 | ||||||||||||
Repayment
of shareholder loans
|
- | - | - | (1,020,607 | ) | |||||||||||
Repayment
of long-term debt
|
- | - | - | (189,508 | ) | |||||||||||
Net
cash provided by financing activities
|
- | - | - | 28,975,386 | ||||||||||||
Net
increase (decrease) in cash and cash
equivalents
|
(6,269,181 | ) | (2,964,921 | ) | (9,328,284 | ) | 22,428,728 | |||||||||
Cash
and cash equivalents, beginning of period
|
40,991,114 | 34,721,933 | 31,757,012 | - | ||||||||||||
Cash
and cash equivalents, end of period
|
$ | 34,721,933 | $ | 31,757,012 | $ | 22,428,728 | $ | 22,428,728 |
The
accompanying notes are an integral part of these financial
statements
ERHC
ENERGY INC.
|
A
CORPORATION IN THE DEVELOPMENT STAGE
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
For
the Years Ended September 30, 2007, 2008 and 2009 and for the Period
From
|
Inception,
September 5, 1995 to September 30,
2009
|
Note
1 – Summary of Significant Accounting Policies
General
Business and Nature of Operations
ERHC
Energy Inc. is an independent oil and gas company that reports as a development
stage enterprise because there are currently no significant operations and no
revenue has been generated from business activities. ERHC was formed
in 1986, as a Colorado corporation, and was engaged in a variety of businesses
until 1996, when it began its current operations as an independent oil and gas
company. ERHC’s goal is to maximize its value through exploration and
exploitation of oil and gas reserves in the Gulf of Guinea offshore of central
West Africa. The Company’s current focus is to exploit its primary
assets, which are rights to working interests in exploration acreage in the JDZ
between the Democratic Republic of Sao Tome and Principe (“DRSTP”) and the
Federal Republic of Nigeria (“FRN”) and in the exclusive waters of Sao Tome (the
“Exclusive Economic Zone” or “EEZ”). The Company has formed
relationships with upstream oil and gas companies to assist the Company in
exploiting its assets in the JDZ as further described in Note 4. ERHC
currently has no other operations.
Consolidated
Financial Statements
The
consolidated financial statements include the accounts of ERHC and its wholly
owned subsidiaries, after elimination of all significant inter-company accounts
and transactions.
Use
of Estimates
The
consolidated financial statements have been prepared in conformity with US.
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period for the years then ended.
Actual results could differ significantly from those estimates.
Reclassification
Certain
prior year amounts have been reclassified to conform with the current year
presentation.
Concentration
of Risks
ERHC
primarily transacts its business with four financial institutions. From time to
time the amount on deposit in one or all of these institutions may exceed the
$250,000 federally insured limit. The balances are maintained in
demand accounts to minimize risk.
ERHC’s
focus is to exploit its assets which are agreements with the DRSTP concerning
oil and gas exploration in EEZ and with the JDA concerning oil and gas
exploration in the JDZ. ERHC has formed relationships with Sinopec
International Petroleum Exploration and Production Corporation Nigeria
(“Sinopec”), and Addax Energy Nigeria Limited (“Addax Ltd.”) to assist ERHC in
leveraging its interests in the EEZ and the JDZ. ERHC currently has no other
operations.
Cash
Equivalents
ERHC
considers all highly liquid short-term investments with an original maturity of
three months or less, when purchased, to be cash equivalents.
Furniture,
Fixtures and Equipments
Furniture,
fixtures and equipment are stated at cost and include expenditures for renewals
and improvements and capitalized interest. Maintenance and repairs are charged
to current operations. When property is retired or otherwise disposed of, the
cost and related accumulated depreciation are removed from the respective
accounts, and any gain or loss on disposition is included in income.
Depreciation is provided principally on the straight-line method over the
estimated service lives of the assets. In general, office furniture is
depreciated over 7 years, office equipment over 5 years and computer equipment
over 3 years.
Fair
Value of Financial Instruments
Effective
October 1, 2008, ERHC adopted new fair value measurements guidance for financial
assets and financial liabilities. In adopting the guidance the
Company delayed application of the fair value measurements
for non-financial assets and non-financial liabilities, until October 1, 2009.
The new guidance defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles and expands disclosures about
fair value measurements.
The new
guidance defines fair value as the price that would be received to sell an
asset, or paid to transfer a liability, in an orderly transaction between market
participants. The new guidance establishes a fair value hierarchy for valuation
inputs that gives the highest priority to quoted prices in active markets for
identical assets or liabilities and the lowest priority to unobservable inputs.
The fair value hierarchy is as follows:
|
•
|
Level
1 Inputs—Unadjusted quoted prices in active markets for identical assets
or liabilities that the reporting entity has the ability to access at the
measurement date.
|
|
•
|
Level
2 Inputs—Inputs other than quoted prices included in Level 1 that are
observable for the asset or liability, either directly or indirectly.
These might include quoted prices for similar assets or liabilities in
active markets, quoted prices for identical or similar assets or
liabilities in markets that are not active, inputs other than quoted
prices that are observable for the asset or liability (such as interest
rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that
are derived principally from or corroborated by market data by correlation
or other means.
|
|
•
|
Level
3 Inputs—Unobservable inputs for determining the fair values of assets or
liabilities that reflect an entity's own assumptions about the assumptions
that market participants would use in pricing the assets or
liabilities.
|
Cash
Equivalents. Cash equivalents are reported at fair value
utilizing Level 1 Inputs. We obtain quoted market prices in identical markets to
estimate the fair value of its cash equivalents.
The
adoption of the new guidance did not significantly change the
valuation techniques we had previously utilized prior to its
adoption.
Financial
instruments consist of cash and cash equivalents, accounts receivable,
installments receivable, collateralized receivables, accounts payable and
secured borrowings.
Successful
Efforts
ERHC uses
the successful efforts method of accounting for oil and gas producing
activities. Under this method, acquisition costs for proved and
unproved properties are capitalized when incurred. Exploration costs,
including geological and geophysical costs, the costs of carrying and retaining
unproved properties and exploratory dry hole drilling costs, are
expensed. Development costs, including the costs to drill and equip
development wells and successful exploratory drilling costs to locate proved
reserves are capitalized. Exploratory drilling costs are capitalized when
incurred pending the determination of whether a well has found proved
reserves. A determination of whether a well has found proved reserves
is made shortly after drilling is completed. The determination is based on a
process that relies on interpretations of available geologic, geophysic, and
engineering data. If a well is determined to be successful, the
capitalized drilling costs will be reclassified as part of the cost of the
well. If a well is determined to be unsuccessful, the capitalized
drilling costs will be charged to expense in the period the determination is
made. If an exploratory well requires a major capital expenditure
before production can begin, the cost of drilling the exploratory well will
continue to be carried as an asset pending determination of whether proved
reserves have been found only as long as: i) the well has found a sufficient
quantity of reserves to justify its completion as a producing well if the
required capital expenditure is made and ii) drilling of the additional
exploratory wells is under way or firmly planned for the near
future. If drilling in the area is not under way or firmly planned,
or if the well has not found a commercially producible quantity of reserves, the
exploratory well is assumed to be impaired, and its costs are charged to
expense.
In the
absence of a determination as to whether the reserves that have been found can
be classified as proved, the costs of drilling such an exploratory well is not
carried as an asset for more than one year following completion of
drilling. If, after that year has passed, a determination that proved
reserves exist cannot be made, the well is assumed to be impaired, and its costs
are charged to expense. Its costs can, however, continue to be
capitalized if sufficient quantities of reserves are discovered in the well to
justify its completion as a producing well and sufficient progress is made in
assessing the reserves and the well’s economic and operating
feasibility.
The
impairment of unamortized capital costs is measured at a lease level and is
reduced to fair value if it is determined that the sum of expected future net
cash flows is less than the net book value. ERHC determines if impairment has
occurred through either adverse changes or as a result of the annual review of
all fields.
Development
costs of proved oil and gas properties, including estimated dismantlement,
restoration and abandonment costs and acquisition costs, are depreciated and
depleted on a field basis by the units-of-production method using proved
developed and proved reserves, respectively. The costs of unproved oil and gas
properties are generally combined and impaired over a period that is based on
the average holding period for such properties and the Company’s experience of
successful drilling.
Asset
Retirement Obligation
ERHC’s
asset retirement obligation relates to the plugging and abandonment of certain
oil and gas properties in Wichita Falls, Texas. The provisions of SFAS No. 143
require the fair value of a liability for an asset retirement obligation to be
recorded and a corresponding increase in the carrying amount of the associated
asset. The cost of the tangible asset, including the initially
recognized asset retirement cost is depleted over the useful life of the
asset. If the fair value of the estimated asset retirement obligation
changes, an adjustment is recorded to the retirement obligation and the asset
retirement cost. The offsetting ARO liability is recorded at fair value, and
accretion expense recognized as the discounted liability is accreted to its
expected settlement value. The fair value of the ARO asset and
liability is measured using expected future cash out flows discounted at the
Company’s credit adjusted risk free interest rate. These oil and gas properties
were abandoned and written off during the year ended September 30, 1999 and the
current liability is fully accreted and represents management’s best estimate of
the fair value of the outstanding obligation. During the year ended September
30, 2009, the Company settled the asset retirement obligation by paying $120,000
and recognized a gain of $365,000
Impairment
of Long-lived Assets
ERHC
evaluates the recoverability of long-lived assets when events and circumstances
indicate that such assets might be impaired. ERHC determines
impairment by comparing the undiscounted future cash flows estimated to be
generated by these assets to their respective carrying
amounts. Impairments are charged to operations in the period to which
events and circumstances indicate that such assets might be
impaired. ERHC has evaluated its investment in its DRSTP concession
fee in light of its 2003 Option Agreement (see Note 4) and there have been no
events or circumstances that would indicate that such asset might be
impaired.
Income
Taxes
Income
taxes are accounted for under the under the assets and liability
method. Under this method, the deferred tax assets and liabilities
are estimated based upon the difference between the financial statement and tax
bases of assets and liabilities using tax rates in effect for the year in which
the Company expects the differences to affect taxable income. The tax
consequences of most events recognized in the current year’s financial
statements are included in determining income taxes currently payable. However,
because tax laws and financial accounting standards differ in their recognition
and measurement of assets, liabilities, equity, revenues, expenses, gains and
losses, differences arise between the amount of taxable income and pretax
financial income for a year and between the tax bases of assets or liabilities
and their reported amounts in the financial statements. Because the Company
assumes that the reported amounts of assets and liabilities will be recovered
and settled, respectively, a difference between the tax basis of an asset or a
liability and its reported amount in the balance sheet will result in a taxable
or a deductible amount in some future years when the related liabilities are
settled or the reported amounts of the assets are recovered, which gives rise to
a deferred tax asset. The Company must then assess the likelihood that the
deferred tax assets will be recovered from future taxable income and to the
extent the Company believes that recovery is not likely, the Company must
establish a valuation allowance.
The
Company estimates the provision for income taxes based on income before income
taxes for each tax jurisdiction in which the Company has established operations.
The Company does not provide incremental U.S. income taxes on un-remitted
foreign earnings taxed at rates less than the U.S. tax rates as such earnings
are considered permanently invested.
On
October 1, 2007, the Company adopted new FASB guidance on accounting for
uncertainty in income taxes which provides a financial statement recognition
threshold and measurement attribute for a tax position taken or expected to be
taken in a tax return. Under the new guidance, the Company may recognize the tax
benefit from an uncertain tax position only if it is more likely than not that
the tax position will be sustained on examination by the taxing authorities,
based on the technical merits of the position. The tax benefits recognized in
the financial statements from such a position should be measured based on the
largest benefit that has a greater than 50% likelihood of being realized upon
ultimate settlement. The guidance also extends to derecognition of income tax
assets and liabilities, classification of current and deferred income tax assets
and liabilities, accounting for interest and penalties associated with tax
positions, and income tax disclosures.
Net
Income (Loss) Per Share
Basic net
income (loss) per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding during the
period. Diluted income (loss) per share is computed by dividing net
income (loss) by the weighted average number of shares outstanding, after giving
effect to potentially dilutive common share equivalents outstanding during the
period. Potentially dilutive common share equivalents are not
included in the computation of diluted income (loss) per share if they are
anti-dilutive. Diluted income (loss) per common share is the same as
basic for all periods presented because the effect of potentially dilutive
common shares arising from outstanding stock warrants and options was
anti-dilutiveFor the year ended September 30, 2009, 2008 and 2007, potential
dilutive securities had an anti-dilutive effect and were not included in the
calculation of diluted net loss per common share.
Stock-based
Compensation
On
October 1, 2005, ERHC began recording compensation expense associated with stock
options and other forms of equity compensation in accordance with new fair value
guidance issued by the Financial Accounting Standards Board
and interpreted by the SEC.
New
Accounting Pronouncements
Effective
July, 1, 2009, the Company adopted the Accounting Standards Codification (ASC)
issued by the Financial Accounting Standards Board (FASB). The ASC does not
change generally accepted accounting principles in the United States of America
(GAAP), but instead takes the numerous individual accounting pronouncements that
previously constituted GAAP and reorganizes them into approximately 90
accounting topics, which are then broken down into subtopics, sections and
paragraphs. The intent is to simplify user access to authoritative GAAP by
providing all of the guidance related to a particular topic in one place. The
ASC supersedes all previously existing non-SEC or non-grandfathered accounting
and reporting standards. The adoption of the ASC did not have any impact on the
Company’s consolidated financial statements.
In
December 2007, the FASB issued authoritative guidance which establishes
principles and requirements for determining how an enterprise recognizes and
measures the fair value of certain assets and liabilities acquired in a business
combination, including non-controlling interests, contingent consideration, and
certain acquired contingencies. The guidance also requires acquisition-related
transaction expenses and restructuring costs be expensed as incurred rather than
capitalized as a component of the business combination. The guidance will be
applicable prospectively to business combinations for which the acquisition date
is on or after the beginning of the first annual reporting period beginning on
or after December 15, 2008. The adoption of this guidance did not have any
impact on the Company’s consolidated financial statements.
In
December 2007, the FASB issued authoritative guidance which establishes
accounting and reporting standards for the non-controlling interest in a
subsidiary (previously referred to as minority interests). The guidance also
requires that a retained non-controlling interest upon the deconsolidation of a
subsidiary be initially measured at its fair value. Upon adoption this guidance,
the Company would be required to report any non-controlling interests as a
separate component of stockholders’ equity. The Company would also be required
to present any net income allocable to non-controlling interests and net income
attributable to the stockholders of the Company separately in its consolidated
statements of operations. The guidance is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2008. The guidance requires retroactive adoption of the presentation and
disclosure requirements for existing minority interests, however, all other
requirements shall be applied prospectively. This guidance will not have a
material effect on the Company’s consolidated financial statements since the
Company does not have existing minority interests.
In March
2008, the FASB issued authoritative guidance intended to provide users of
employers’ financial statements with more informative disclosures about the
nature and valuation of postretirement benefit plan assets. The disclosures on
plan assets are effective for fiscal years ending after December 15,
2009.
In April
2008, the FASB issued authoritative guidance that amends the factors that should
be considered in developing the renewal or extension assumptions used to
determine the useful life of a recognized intangible asset. The guidance also
requires expanded disclosure regarding the determination of intangible asset
useful lives. The guidance is effective for fiscal years beginning after
December 15, 2008. This guidance will not have a material impact on the
Company’s consolidated financial statements.
In June
2009, the FASB issued authoritative guidance which requires additional
information regarding transfers of financial assets, including securitization
transactions, and where companies have continuing exposure to the risks related
to transferred financial assets. The guidance eliminates the concept of a
“qualifying special-purpose entity,” changes the requirements for derecognizing
financial assets, and requires additional disclosures. It is effective for
fiscal years beginning after November 15, 2009. The Company is currently
evaluating the impact that the adoption of this guidance will have on its
consolidated financial statements and disclosures.
In June
2009, the FASB issued authoritative guidance which amends certain requirements
to improve financial reporting by enterprises involved with variable interest
entities and to provide more relevant and reliable information to users of
financial statements. The guidance will be effective as of the beginning of each
reporting entity’s first annual reporting period that begins after November 15,
2009, for interim periods within that first annual reporting period, and for
interim and annual reporting periods thereafter. The Company is currently
evaluating the impact, if any, that this guidance will have on its consolidated
financial statements.
Note
2 - Fair Value of Financial Instruments
The
following table summarizes financial assets and financial liabilities measured
at fair value on a recurring basis as of September 30, 2009 segregated by the
level of the valuation inputs within the fair value hierarchy utilized to
measure fair value:
Quoted
Prices In Active Markets for Identical Assets (Level 1)
|
Significant
Other Observable Inputs (Level 2)
|
Significant
Unobservable Inputs (Level 3)
|
Total
|
|||||||||||||
Cash
and cash equivalents
|
$ | 22,428,728 | $ | - | $ | - | $ | 22,428,728 | ||||||||
Long-term
investment
|
- | - | 1,058,579 | 1,058,579 | ||||||||||||
Total
|
$ | 22,428,728 | $ | - | $ | 23,487,307 |
Level 3
Losses
The table
below sets forth a summary of changes in the fair value of the Plan’s level 3
assets for the year ended September 30, 2009:
Long-Term
Investment
|
||||
Balance,
beginning of year
|
$ | - | ||
Purchases
|
5,292,896 | |||
Write
down to estimated fair value
|
(4,234,317 | ) | ||
Balance,
end of year
|
$ | 1,058,579 |
Note
3 – Accounts Payable and Accrued Liabilities
Accounts
payable and accrued liabilities consisted of the following as of September 30,
2009 and 2008:
2009
|
2008
|
|||||||
|
|
|||||||
Accounts
payable
|
$ | 246,840 | $ | 222,044 | ||||
Accrued
stock payable – success fee
|
4,803,750 | 4,803,750 | ||||||
$ | 5,050,590 | $ | 5,025,794 |
Note
4 – Revision to Financial Statements
ERHC
revised its financial statements to report as a development stage company for
the year ended September 30, 2006 and subsequent
periods. Accordingly, the statements of operations, stockholders’
equity and cash flows include inception to date amounts. The
consolidated statements of stockholders’ equity of the Company for the years
ended from inception (September 5, 1995) through September 30, 1998 were audited
by other auditors who are no longer members of the Public Company Accounting
Oversight Board ("PCAOB") and whose reports for each of the years ended from
inception (September 5, 1995) through September 30, 1998 expressed an
unqualified opinion on those statements. Because the other auditors were no
longer members of the PCAOB, the inception to date amounts shown in the
accompanying statements of operations and statement of cash flows are considered
unaudited.
Note
5 – Sao Tome Concession
In April
2003, the Company and the DRSTP entered into an Option Agreement (the “2003
Option Agreement”) in which the Company relinquished certain financial interests
in the JDZ in exchange for exploration rights in the JDZ. The Company
additionally entered into an administration agreement with the Nigeria-Sao Tome
and Principe JDA. The administration agreement is the formal
agreement by the JDA that it will fully implement ERHC’s preferential rights to
working interests in the JDZ acreage as set forth in the 2003 Option Agreement
and describes certain procedures regarding the exercising of these
rights. However, ERHC retained under a previous agreement the
following rights to participate in exploration and production activities in the
EEZ subject to certain restrictions: (a) the right to receive up to
two blocks of ERHC’s choice and (b) the option to acquire up to a 15% paid
working interest in up to two blocks of ERHC’s choice in the EEZ. The
Company would be responsible for its proportionate share of exploration and
exploitation costs in the EEZ blocks.
The
following represents ERHC’s current rights in the JDZ blocks.
JDZ
Block #
|
ERHC
Original
Participating
Interest
(1)
|
ERHC
Joint
Bid
Participating
Interest
|
Participating
Interest(s)
Sold
|
Current
ERHC
Retained
Participating
Interest
|
2
|
30%
|
35%
|
43%
(2)
|
22%
|
3
|
20%
|
5%
|
15%
(3)
|
10%
|
4
|
25%
|
35%
|
40.5%
(4)
|
19.5%
|
5
|
15%
|
(5)
|
(5)
|
15%
|
6
|
15%
|
(5)
|
(5)
|
15%
|
9
|
20%
|
(5)
|
(5)
|
20%
|
(1)
|
Original
Participating Interest granted pursuant to the Option Agreement, dated
April 2, 2003, between DRSTP and ERHC (the “2003 Option
Agreement”).
|
(2)
|
In
March 2006, ERHC sold an aggregate 28.67% participating interest to
Sinopec and an aggregate 14.33% participating interest to Addax
Ltd.
|
(3)
|
In
February 2006, ERHC sold a 15% participating interest to Addax
Sub.
|
(4)
|
By
a Participation Agreement made in November 2005 and subsequently amended,
ERHC sold 40.5% participating interest to
Addax.
|
(5)
|
No
contracts have been entered into as of the date
hereof.
|
This
exercise of the Company’s rights was subject to the condition that if no license
is awarded or a license is awarded and subsequently withdrawn by the JDA prior
to the commencement of operations, ERHC will be entitled to receive its working
interest in that block in a future license awarded for the block.
On
March 15, 2006, Godsonic and ERHC (on behalf of the ERHC/Addax consortium)
entered into an agreement wherein ERHC agreed to assign 9% of its interest in
Block 4 to Godsonic subject to certain stipulated financial and other conditions
to be fulfilled by Godsonic. On April 11, 2006, ERHC and Addax by an amendment
to the Participation Agreement, agreed that Addax would acquire 7.2% of the 9%
interest in the event that Godsonic failed to meet agreed upon conditions and
foreclosed from the claims to the 9% interest. This would give Addax a total of
40.5% interest and ERHC 19% in Block 4.
In July
2007, Godsonic failed to meet the stipulated conditions and ERHC reclaimed the
9% interest. Addax claimed entitlement under the existing agreements to 7.2% out
of the recovered 9%, without payment of any further consideration to
ERHC. In July 2008, the London Court of International Arbitration
(LCIA) confirmed that under the Participation Agreement between the parties no
further consideration was payable by Addax Petroleum to ERHC for Addax
Petroleum’s 7.2 percent share of the 9 percent.
In
February 2006, ERHC sold 15% of its 25% participating interest in Block 3 of the
JDZ to Addax Petroleum Resources Nigeria Limited (“Addax Sub”) for $7.5 million
which was paid in the second quarter of fiscal 2006. Under the participation
agreement between ERHC and Addax Sub, Addax Sub agreed to “carry” all of ERHC’s
future costs in respect of petroleum operations in Block 3. Upon production
Addax Sub is entitled to 100% of ERHC’s allocation of cost plus up to 50% of
ERHC’s allocation of profit until Addax Sub recovers 100% of the costs advanced
on behalf of ERHC.
In March
2006, ERHC sold a 28.67% participating interest in Block 2 of the JDZ to Sinopec
International Petroleum Exploration and Production Corporation Nigeria
(“Sinopec”), and a 14.33% participating interest in Block 2 of the JDZ to Addax
Energy Nigeria Limited (“Addax Ltd.”) leaving a 22% participating interest in
Block 2 to the Company. In exchange, Sinopec paid ERHC $13.6 million and Addax
Ltd. paid ERHC $6.8 million in the second quarter of fiscal 2006. Under the
participation agreement among ERHC, Sinopec and Addax Ltd., Sinopec will serve
as operator, and Sinopec and Addax Ltd. will pay all of ERHC’s future costs in
respect of petroleum operations in Block 2. Sinopec and Addax Ltd. are entitled
to 100% of ERHC’s allocation of cost plus up to 50% of ERHC’s allocation of
profit until they recover 100% of the costs they advanced on behalf of ERHC and
Sinopec is to receive 6% interest on its future costs, up to $35 million, but
only to the extent that those interest costs are recoupable out
of production.
ERHC sold
various participating interests in Blocks 2, 3 and 4 (as noted above) during
2006 for total cash proceeds of $45,900,000. Following is an analysis
of the sale of the participating interests in blocks 2, 3 and 4.
Cost
Basis
|
Cash
Proceeds
|
Success
Fees (1)
|
Gain
Loss
|
|||||||||||||
|
|
|
|
|||||||||||||
Block
2
|
$ | 946,500 | $ | 20,400,000 | $ | 12,958,250 | $ | 6,495,250 | ||||||||
Block
3
|
946,500 | 7,500,000 | - | 6,553,500 | ||||||||||||
Block
4
|
946,500 | 18,000,000 | - | 17,053,500 | ||||||||||||
Total
|
$ | 2,839,500 | $ | 45,900,000 | $ | 12,958,250 | $ | 30,102,250 |
(1) See
Note 6
ERHC’s
goal is to enter into agreements to exploit its interests in Blocks 5, 6 and 9
also. Additionally, the Company intends to exploit its rights in the
EEZ.
Note
6 – DRSTP Success Fee
ERHC
agreed to pay a $3 million cash success fee ($1.5 million was paid in March 2006
and the remaining $1.5 million was paid in March 2007) to Feltang International
Inc., a British Virgin Island company that was responsible for obtaining
Sinopec’s participation in Block 2. ERHC will also issue to Feltang
5,250,000 shares of common stock and warrants to purchase 6,500,000 shares at an
exercise price of $0.355 per share. The common stock was valued at
$4,803,750 (included in accounts payable at September 30, 2009, 2008, 2007 and
2006) based on the quoted market value of the common stock on the date Sinopec
signed the production sharing agreement. The warrants were valued at $5,154,500
based on a valuation using the Black-Scholes Option Pricing Model and the
following assumptions; market price of $0.915, strike price of $0.355,
volatility of 115%, interest rate of 4.42%, dividend yield of 0% and expected
life of 4 years.
Upon sale
of the participation interests, ERHC removed the entire cost of the related
blocks due to the uncertainty surrounding their unproved interests.
Note
7 – Convertible Debt
At
September 30, 2009 and 2008, ERHC had $33,513 of nonaffiliated convertible debt
and $10,561 and $8,719, respectively, of accrued but unpaid interest
outstanding, respectively. At September 30, 2009 and 2008, this note
was in default and ERHC was unable to locate the investor. If the
outstanding convertible debt were converted using the conversion price of $0.20
per share, ERHC would be required to issue 220,370 shares of common stock based
on an outstanding principal amount of $33,513 and accrued interest of
$10,561.
Note
8 – Income Taxes
At
September 30, 2009, ERHC had a consolidated net operating loss carry-forward
(“NOL”) of approximately $13,775,097.
The
composition of deferred tax assets and the related tax effects at September 30,
2009 and 2008 are as follows:
2009
|
2008
|
|||||||
Net
operating losses
|
$
|
4,683,533
|
$
|
1,430,118
|
||||
Income
tax receivable
|
2,018,398
|
2,018,398
|
||||||
Accrual
for asset retirement
|
-
|
164,900
|
||||||
Allowance
for loss on deposits
|
1,439,668
|
-
|
||||||
Accrued
stock-based compensation
|
88,587
|
-
|
||||||
Total
deferred tax assets
|
8,230,186
|
3,613,416
|
||||||
Valuation
allowance
|
(6,211,788
|
)
|
(1,595,018
|
)
|
||||
Net
deferred tax asset
|
$
|
2,018,398
|
$
|
2,018,398
|
The
$2,018,398 deferred tax asset at September 30, 2009 and 2008, represents a
refundable amount of $2,018,398 to be claimed by ERHC because of overpayment
made in its 2006 tax return.
The
difference between the income tax benefit (provision) in the accompanying
statement of operations and the amount that would result if the U.S. federal
statutory rate of 34% were applied to pre-tax income (loss) for years ended
September 30, 2009, 2008 and 2007, is as follows:
2009
|
2008
|
2007
|
||||||||||
Income
tax benefit (provision) at federal statutory rate
|
$ | 2,597,254 | $ | 1,033,870 | $ | 1,183,167 | ||||||
Change
in valuation allowance
|
(2,575,312 | ) | (978,877 | ) | 1,998,759 | |||||||
Expiration
and adjustment of NOL’s
|
- | - | (1,364,518 | ) | ||||||||
Director’s
stock compensation
|
- | (24,633 | ) | (30,090 | ) | |||||||
Consultants
stock option expense
|
- | - | (59,650 | ) | ||||||||
State
income tax
|
- | - | - | |||||||||
Penalties
|
(11,982 | ) | - | (3,621 | ) | |||||||
Other
|
(10,000 | ) | - | (1,047 | ) | |||||||
Income
tax benefit (provision)
|
$ | - | $ | 30,360 | $ | 1,723,000 |
In
preparing the Company’s consolidated financial statements, the Company assesses
the likelihood that its deferred tax assets will be realized from future taxable
income. The Company establishes a valuation allowance if it determines that it
is more likely than not that some portion of the deferred tax assets will not be
realized. Changes in the valuation allowance, when recorded, would be included
in its consolidated statements of operations as a provision for (benefit from)
income taxes. The Company exercise significant judgment in determining its
provisions for income taxes, its deferred tax assets and liabilities and its
future taxable income for purposes of assessing its ability to utilize any
future tax benefit from its deferred tax assets. During 2009, the Company
assessed the need for a valuation allowance against its deferred tax assets. The
deferred tax asset valuation allowance was $6,211,788 as of September 30, 2009.
The valuation allowance relates primarily to the net operating losses and
various expense deductions for which a tax benefit is currently unavailable
.
At
September 30, 2009, the Company has Federal net operating loss carry forward of
approximately $13,755,097. The federal loss carry forward expires on various
dates through 2029.
FIN
48
On
October 1, 2007, the Company adopted the provisions of FASB Interpretation No.
48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes—an interpretation of
FASB Statement No. 109”
, which provides a financial statement recognition threshold
and measurement attribute for a tax position taken or expected to be taken in a
tax return. Under ASC 740, the Company may recognize the tax benefit from an
uncertain tax position only if it is more likely than not that the tax position
will be sustained upon examination by the taxing authorities, based on the
technical merits of the position. The tax benefits recognized in the financial
statements from such a position should be measured based on the largest benefit
that has a greater than 50% likelihood of being realized upon ultimate
settlement. ASC 740 also provides guidance on de-recognition of income tax
assets and liabilities, classification of current and deferred income tax assets
and liabilities, accounting for interest and penalties associated with tax
positions, and income tax disclosures.
The
Company is subject to taxation in the United States and various foreign
jurisdictions. The Company’s tax years for 2005 through 2008 are subject to
examination by the tax authorities. The Company is currently under examination
by the Internal Revenue Service for the 2006 tax year.
Note
9 – Shareholders’ Equity
Common
Stock Issued for Services:
During
the years ended September 30, 2009, 2008 and 2007, ERHC issued 1,111,875 shares
of common stock for payment of director and employee services as
follows:
|
(i)
|
315,000
shares to Directors for 2009 services rendered and the fair value of
$226,800 was recorded by the
Company.
|
|
(i)
|
240,000
shares to Directors for 2005 services rendered (these shares were issued
in the second quarter of 2009.
|
(iii)
|
46,875
shares to company non-management staff for 2009 services rendered and the
fair value of $33,755 was recorded by the
Company.
|
|
(iv)
|
210,000
shares for 2008 services rendered and fair value of $72,450 was
recorded.
|
|
(v)
|
300,000
shares for 2007 services rendered and fair value of $88,500 was
recorded.
|
Common
Stock Issued Upon Exercise of Warrants:
During
2007, 5,625,000 warrants were exercised on a cashless basis for 2,949,587 shares
of common stock.
Stock
Options:
On
January 1, 2005, ERHC issued options to purchase a total of 1,750,000 shares of
common stock, upon completion of a full year of service to three consultants as
part of their initial compensation packages. These options have an
exercise price of $0.20 per share and vested on December 31,
2005. Fair value of $816,550 was calculated using the Black-Scholes
Model. Variables used in the Black-Scholes option-pricing model during the year
ended September 30, 2006, include (1) 4.57% discount rate, (2) warrant life is
the expected remaining life of the options as of each year end, (3) expected
volatility of 115%, and (4) zero expected dividends. These options were
exercised, on a cashless basis, during the year ended September 30, 2006, for a
total of 1,339,030 shares.
During
the year ended September 30, 2007, the Company issued 1,000,000 options to
purchase common stock of the Company to an employee. These options are for a
term of three years, have an exercise price of $0.43 and vest over one year.
Fair value of $223,900 was calculated using the Black-Scholes Model. Variables
used in the Black-Scholes option-pricing model during the year ended September
30, 2007, include (1) 4.90% discount rate, (2) warrant life is the expected
remaining life of the options as of each year end, (3) expected volatility of
75.00%, and (4) zero expected dividends. Option expense of $48,460 and $175,440
was recorded during the years ended September 30, 2008 and 2007, respectively,
related to these options.
Stock
Warrants
During
the year ended September 30, 2009, 2008 and 2007, a total of 8,741,940
warrants expired unexercised as shown in the table below. These warrants had
exercise prices ranging from $0.25 per share to $3.00 per share. At
September 30, 2009, $6,500,000 warrants remain outstanding with an exercise
price of $0.36 per share and expiring on April 14, 2010, indicating a remaining
life of 0.5 years.
Stock
Warrants / Stock Options Summary
Information
regarding warrants/options, their respective changes and their weighted average
exercise prices as of and for the fiscal years ended September 30, 2009, 2008
and 2007 are as follows:
Weighted
Average Exercise
|
Market
Price Intrinsic
|
Weighted
Average Exercise
|
Exercise
Price Intrinsic
|
|||||||||||||||||||||
Description
|
Warrants
|
Price
|
Value
|
Options
|
Price
|
Value
|
||||||||||||||||||
Balance
at September 30, 2006
|
20,866,940 | $ | 0.37 | $ | - | - | $ | - | $ | - | ||||||||||||||
Granted
|
- | - | 1,000,000 | 0.43 | ||||||||||||||||||||
Exercised(a)
|
(5,625,000 | ) | 0.20 | - | - | |||||||||||||||||||
Expired
or cancelled.
|
(1,840,000 | ) | 0.50 | - | - | |||||||||||||||||||
Balance
at September 30, 2007
|
13,401,940 | 0.43 | - | 1,000,000 | 0.43 | - | ||||||||||||||||||
Granted
|
- | - | - | - | ||||||||||||||||||||
Exercised
|
- | - | - | - | ||||||||||||||||||||
Expired
or cancelled.
|
(4,281,940 | ) | 0.31 | - | - | |||||||||||||||||||
Balance
at September 30, 2008
|
9,120,000 | 0.36 | - | 1,000,000 | 0.43 | - | ||||||||||||||||||
Granted
|
- | - | - | - | ||||||||||||||||||||
Exercised
|
- | - | - | - | ||||||||||||||||||||
Expired
or cancelled.
|
(2,620,000 | ) | 0.36 | - | - | |||||||||||||||||||
Balance
at September 30, 2009
|
6,500,000 | 0.36 | 1,000,000 | 0.43 | 0.29 | |||||||||||||||||||
Exercisable
|
- | 1,000,000 | 0.43 |
(a)
During 2007, 5,625,000 warrants were exercised on a cashless basis for 2,949,587
shares of common stock.
The
1,000,000 Options outstanding at September 30, 2009 are fully vested, have a
weighted average exercise price of $0.43 per share, and a weighted average
remaining contractual life of 0.2 year. These options
expired
Note
10 – Commitments and Contingencies
Legal
Proceedings
DOJ, SEC and U.S. Senate Committee
Subpoenas. On May 4, 2006, a search warrant issued by the U.S.
District Court of the Southern District of Texas, Houston Division, was executed
on ERHC seeking various records including, among others, documents, if any,
related to correspondence with foreign governmental officials or entities in Sao
Tome and Nigeria. The search warrant cited, among other things,
possible violations of the FCPA, Section 10(b) of the Exchange Act, Rule 10b-5
under the Exchange Act and criminal conspiracy and wire fraud
statutes. ERHC filed suit in federal district court in Texas in June
2006 seeking to protect the Company’s attorney-client privileged documents and
to allow its counsel to determine the factual basis for the DOJ’s search warrant
affidavit, which is currently under seal.
A related
SEC subpoena was issued on May 9, 2006, and a second related subpoena issued on
August 29, 2006. The subpoenas request from ERHC a range of documents
including all documents related to correspondence with foreign governmental
officials or entities in Sao Tome and Nigeria, personnel records (specifically,
those regarding the Company’s former Chief Financial Officer, Franklin
Ihekwoaba) and other corporate records. The Company has been actively
responding to both subpoenas.
On July
5, 2007, U.S. Senate Committee on Homeland Security and Governmental Affairs’
Permanent Subcommittee on Investigations served ERHC with a subpoena, in
connection with its review of matters relating to the potential abuse of
payments made to foreign governments. The subpoena, as amended on July 18, 2007,
seeks documents and information regarding ERHC’s activities, particularly those
related to the acquisition of ERHC’s interests in the Gulf of
Guinea. ERHC’s attorneys, Akin Gump Strauss Hauer & Feld LLP, are
assisting ERHC in responding to all subpoenas.
The
Company anticipates that these investigations may be lengthy and do not know
when they will conclude. If violations are found, the Company may be
subject to criminal, civil and/or administrative sanctions, including
substantial fines, and the resolution or disposition of these matters could have
a material adverse effect on its business, prospects, operations, financial
condition and cash flows.
ERHC/Addax
Arbitration. Addax, our consortium partner in JDZ Block 4,
claimed entitlement under our existing agreements to 7.2% out of the recovered
9% interest in Block 4, leaving 1.8% remaining with ERHC. In July 2008, the
London Court of International Arbitration (LCIA) confirmed that under the
Participation Agreement between the parties in respect of JDZ Block 4, no
further consideration is payable by Addax Petroleum to ERHC for Addax
Petroleum’s 7.2 percent share of the 9 percent recovered by the ERHC/Addax
consortium from Godsonic upon the failure of Godsonic to meet certain financial
obligations under which the 9 percent was to have been transferred to
Godsonic.
Lakeshore
Arbitration. In October 2006, Lakeshore Capital Limited
(“Lakeshore”) filed an arbitration claim against ERHC seeking $4,400,000 for the
alleged value of 4,500,000 shares of ERHC common stock and for a warrant to
purchase 1,500,000 shares at an exercise price of $.20 per share, including
interest and costs, as compensation for financial consultancy and related
services rendered under a contract with ERHC dated May 20, 2002 and mediation
conducted by the American Arbitration Association which resulted in the payment
of $250,000 to Lakeshore. Pursuant to the Settlement Agreement dated
May 16, 2007, the arbitration was discontinued with prejudice.
Godsonic
Negotiations. In July 2007, ERHC and Godsonic commenced
negotiations over relinquishment by Godsonic of any claims by Godsonic to
entitlement to a 9% from the ERHC/Addax bid interest in JDZ Block 4. The parties
reached a settlement in August 2007 which resulted in Godsonic’s relinquishment
of all claims to the 9% interest in Block 4.
JDZ Blocks 5 &
6. On November 3, 2008, the Company filed a suit in Nigeria to
prevent any tampering with its rights in JDZ Blocks 5 and 6. The lawsuit comes
after the JDA and the Joint Ministerial Counsel (JMC) of the Nigeria-Săo Tomé and
Príncipe JDZ failed to give a satisfactory response to the Company’s letters
seeking clarification on the Company’s rights in JDZ Blocks 5 and 6 following
media reports stating that the JMC had approved of the Company’s removal from
the Blocks. The Company was awarded a 15 percent working interest in each
of the Blocks in a 2005 bid/licensing round conducted by the JDA, following the
exercise by ERHC of preferential rights in the Blocks as guaranteed by contract
and treaty. If the Company fails to prevail in its lawsuit, there
could be significant adverse affects on the Company’s future planned operations
in JDZ Blocks 5 & 6.
In
November 2008, the Company dispatched notices of arbitration for service on the
JDA and the governments of Nigeria and Sao Tome & Principe to commence
arbitration in London. ERHC wants the London Court of International Arbitration
to clarify that ERHC's interests in JDZ Blocks 5 and 6 remain
intact.
From time
to time, ERHC may be subject to routine litigation, claims, or disputes in the
ordinary course of business. ERHC intends to defend these matters
vigorously; the Company cannot predict with certainty, however, the outcome or
effect of any of the litigation or investigatory matters specifically described
above or any other pending litigation or claims. There can be no
assurance as to the ultimate outcome of these lawsuits and
investigations.
Operating
Lease
ERHC
leases office space at 5444 Westheimer Road, Houston, Texas. The
lease for office space expires December 2011. The monthly base rent
payment is $8,920 for approximately 5,200 square feet. During the
years ended September 30, 2009, 2008 and 2007, ERHC incurred lease expenses of
$107,040, $104,330 and $107,124, respectively. The future remaining
annual lease payments under this lease are as follows:
Year
Ending September 30,
|
Amount
|
||||
|
|
||||
2010
|
$ | 107,040 | |||
2011
|
107,040 | ||||
2012
|
26,760 |
Note
11 – Related Party Transactions
Mr. Emeka
Offor resigned, effective August 12, 2007, as ERHC’s non-executive Chairman of
the Board. As of September 30, 2007, Mr. Offor, through Chrome Oil
Services, Ltd. (“Chrome”) and Chrome Energy, LLC (“Chrome Energy”), beneficially
owns approximately 43% of the common stock of ERHC. He has been
compensated as a director of the Company as follows:
Year
|
Cash
Compensation
|
Common
Stock
Issuances
|
Value
of
Common
Stock
Issuances
|
Total
Compensation
|
||||||||||||
2009
|
$ | - | - | $ | - | $ | - | |||||||||
2008
|
- | - | - | - | ||||||||||||
2007
|
38,100 | 60,000 | 17,700 | 55,800 |
At
September 30, 2007, ERHC owed Chrome Energy, the entity controlled by Mr. Offor,
$62,314 for furniture. This liability was fully paid during the year ended
September 30, 2008.
Note
12 – Quarterly Financial Information (Unaudited)
For
the Year Ended September 30, 2009
|
||||||||||||||||
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
|||||||||||||
General
and administrative expenses
|
$ | 710,181 | $ | 943,714 | $ | 1,270,463 | $ | 1,945,127 | ||||||||
Interest
expense
|
461 | 461 | 461 | 460 | ||||||||||||
Other
income
|
281,535 | 130,640 | - | 9,554 | ||||||||||||
Provision
for loss on deposits
|
- | - | (2,117,158 | ) | (2,119,059 | ) | ||||||||||
Benefit
(provision) for income tax
|
- | - | - | - | ||||||||||||
Net
loss attributable to common stockholders
|
(429,107 | ) | (804,535 | ) | (3,379,743 | ) | (3,705,531 | ) | ||||||||
Basic
and diluted earnings per share
|
(0.00 | ) | (0.00 | ) | (0.00 | ) | (0.01 | ) | ||||||||
For
the Year Ended September 30, 2008
|
||||||||||||||||
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
Quarter
|
Quarter
|
Quarter
|
Quarter
|
|||||||||||||
General
and administrative expenses
|
$ | 1,018,167 | $ | 1,170,240 | $ | 828,692 | $ | 1,263,044 | ||||||||
Interest
expense
|
461 | 461 | 460 | 461 | ||||||||||||
Other
income
|
431,863 | 322,962 | 225,079 | 261,285 | ||||||||||||
Benefit
(provision) for income tax
|
- | - | - | (30,360 | ) | |||||||||||
Net
loss attributable to common stockholders
|
(586,765 | ) | (847,739 | ) | (604,073 | ) | (1,032,580 | ) | ||||||||
Basic
and diluted earnings per share
|
(0.00 | ) | (0.00 | ) | (0.00 | ) | (0.00 | ) |
For
the Year Ended September 30, 2007
|
||||||||||||||||
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
Quarter
|
Quarter
|
Quarter
|
Quarter
|
|||||||||||||
General
and administrative expenses
|
$ | 1,334,313 | $ | 1,181,541 | $ | 1,083,539 | $ | 1,377,372 | ||||||||
Interest
expense
|
461 | 461 | 461 | 460 | ||||||||||||
Other
income
|
543,632 | 540,495 | 457,541 | 457,036 | ||||||||||||
Gain
(loss) on settlements
|
- | - | (500,000 | ) | - | |||||||||||
Benefit
(provision) for income tax
|
269,000 | 197,000 | 539,241 | 717,759 | ||||||||||||
Net
loss attributable to common stockholders
|
(522,142 | ) | (444,507 | ) | (587,218 | ) | (203,037 | ) | ||||||||
Basic
and diluted earnings per share
|
(0.00 | ) | (0.00 | ) | (0.00 | ) | (0.00 | ) |
The sum
of the individual quarterly basic and diluted loss per share amounts may not
agree with year-to-date basis and diluted loss per share amounts as a result of
each period’s computation being based on the weighted average number of common
shares outstanding during that period.
Note
13 – Subsequent Events
The
Company has evaluated all subsequent events through December 10, 2009, the date
of this filing, and concluded there were no significant events to be
reported.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures
None.
Item 9A. Controls and Procedures
Disclosure
Controls and Procedures
We have
established disclosure controls and procedures to ensure that material
information relating to ERHC Energy, including its consolidated subsidiaries, is
made known to the officers who certify ERHC’s financial reports and to other
members of senior management and the Board of Directors.
Based on
their evaluation, ERHC’s principal executive and principal financial officers
have concluded that ERHC’s disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were
effective as of September 30, 2009 to ensure that the information required to be
disclosed by ERHC in the reports that it files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the SEC rules and forms. Our officers also concluded
that our disclosure controls and procedures are effective to ensure that
information required to be disclosed in the reports that we file or submit under
the Exchange Act is accumulated and communicated to our management, including
our principal executive and principal financial officers to allow timely
decisions regarding required disclosure.
Management’s
Annual Report on Internal Control Over Financial Reporting
Management
of ERHC is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) of the Exchange
Act). ERHC’s internal control over financial reporting is a process designed to
provide reasonable assurance 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 of
America.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Therefore, even those systems determined to be
effective can provide only reasonable assurance of achieving their control
objectives.
Management,
with the participation of the Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of ERHC’s internal control over financial
reporting as of September 30, 2009. In making this assessment, management used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control — Integrated Framework. Based on
this evaluation, management, with the participation of the Chief Executive
Officer and Chief Financial Officer, concluded that, as of September 30, 2009,
ERHC’s internal control over financial reporting was effective.
The
effectiveness of ERHC’s internal control over financial reporting as of
September 30, 2009 has been audited by Malone & Bailey PC, an
independent registered public accounting firm who audited ERHC’s consolidated
financial statements as of and for the year ended September 30, 2009, as stated
in their report, which is included under “Item 8. Financial Statements and
Supplementary Data.”
Changes
in Internal Control Over Financial Reporting
There
were no changes in ERHCs internal control over financial reporting (as defined
in Rule 13a-15(f) of the Exchange Act) during the quarter ended September 30,
2009, that have materially affected, or are reasonably likely to materially
affect, ERHC’s internal control over financial reporting.
Item 9B. Other Information
None.
Item 10. Directors,
Executive Officers and Corporate Governance
The
information called for by this Item 10 is incorporated hereby by reference to
the definitive Proxy Statement to be filed by ERHC pursuant to Regulation 14A of
the General Rules and Regulations under the Securities Exchange Act of 1934 not
later than January 28, 2010.
Item 11. Executive
Compensation
The
information called for by this Item 11 is incorporated herein by reference to
the definitive Proxy Statement to be filed by ERHC pursuant to Regulation 14A of
the General Rules and Regulations under the Securities Exchange Act of 1934 not
later than January 28, 2010.
Item 12. Security Ownership
of Certain Beneficial Owners and Management and Related Stockholder
Matters
The
information called for by this Item 12 is incorporated herein by reference to
the definitive Proxy Statement to be filed by ERHC on pursuant to Regulation 14A
of the General Rules and Regulations under the Securities Exchange Act of 1934
not later than January 28, 2010.
Item 13. Certain
Relationships and Related Transactions, and Director
Independence
The
information called for by this Item 13 is incorporated herein by reference to
the definitive Proxy Statement to be filed by ERHC pursuant to Regulation 14A of
the General Rules and Regulations under the Securities Exchange Act of 1934 not
later than January 28, 2010.
Item 14. Principal
Accounting Fees and Services
The
information called for by this Item 14 is incorporated herein by reference to
the definitive Proxy Statement to be filed by ERHC pursuant to Regulation 14A of
the General Rules and Regulations under the Securities Exchange Act of 1934 not
later than January 28, 2010.
PART
IV
Item 15. Exhibits and Financial Statement Schedules and
Reports on Form 8-K
|
(32)
|
Consolidated
Financial Statements and Schedules:
|
|
1.
|
Consolidated
Financial Statements: See Index to Consolidated Financial
Statements immediately following the signature pages of this
report.
|
|
2.
|
Consolidated
Financial Statement Schedule: See Index to Consolidated Financial
Statements immediately following the signature pages of this
report.
|
|
3.
|
The
following documents are filed as exhibits to this
report:
|
EXHIBIT
NO.
|
IDENTIFICATION
OF EXHIBIT
|
|
Exhibit
3.1*
|
Articles
of Incorporation
|
|
Exhibit
3.2*
|
Bylaws
|
|
Exhibit
4.1*
|
Specimen
Common Stock Certificate.
|
|
Exhibit
4.2*
|
Form
of Amended and Restated 12% Convertible Promissory Note, dated effective
January 2001.
|
|
Exhibit
4.3*
|
Form
of Amended and Restated 5.5% Convertible Promissory Note, dated effective
January 2001.
|
|
Exhibit
4.4*
|
20%
Convertible Promissory Note, dated January 31, 2001, in favor of
Chrome.
|
|
Exhibit
4.5*
|
Term
Loan Agreement, dated February 15, 2001, by and between Chrome and
ERHC.
|
|
Exhibit
4.6*
|
Senior
Secured 10% Exchangeable 10% Convertible Promissory Note, dated January
31, 2001, in favor of Chrome.
|
|
Exhibit
4.7*
|
Form
of Warrant entitling Chrome to purchase common stock of the Company,
exercise price of $0.40 per share.
|
|
Exhibit
10.1*
|
Option
Agreement, dated April 7, 2003, by and between the Company and the
Democratic Republic of Sao Tome and Principe (incorporated herein by
reference to Exhibit 10.1 of Form 8-K filed April 2,
2003)
|
|
Exhibit
10.2*
|
Management
and Administrative Services Agreement by and between Chrome Oil Services,
Ltd. And the Company. (Incorporated by reference to Form 10-KSB filed
September 24, 2001).
|
|
Exhibit
10.4*
|
Letter
Agreement, dated November 29, 2004, by and between the Company and Chrome
(incorporated herein by reference to Exhibit 10.1 of Form 8-K filed
December 29, 2004).
|
|
Exhibit
10.5*
|
Promissory
Note, dated December 15, 2004, made by the Company in favor of Chrome
(incorporated herein by reference to Exhibit 10.2 of Form 8-K filed
December 29, 2004).
|
|
Exhibit
10.6*
|
Promissory
Note, dated December 15, 2004, made by the Company in favor of Chrome
(incorporated herein by reference to Exhibit 10.3 of Form 8-K filed
December 29, 2004).
|
|
Exhibit
10.7*
|
Employment
Agreement with Ali Memon.
|
|
Exhibit
10.8*
|
Audit
committee charter
|
|
Exhibit
10.9
|
Employment
Agreement with James Ledbetter
|
|
Exhibit
10.10
|
May
21, 2001 Memorandum of Agreement made b/w DRSTP and
ERHC
|
|
Exhibit
10.11
|
March
15, 2003 Memorandum of Agreement made b/w DRSTP and
ERHC
|
|
Exhibit
10.12
|
April
2, 2003 Option Agreement b/w DRSTP and ERHC
|
|
Exhibit
10.13
|
Administrative
Agreement b/w Nigeria/DRSTP and ERHC
|
|
Exhibit
10.14
|
Block
2 Participation Agreement March 2, 2006 b/w ERHC, Addax and
Sinopec
|
|
Exhibit
10.15
|
Block
2 Participation Agreement August 11, 2004 b/w ERHC and
Pioneer
|
|
Exhibit
10.16
|
Block
3 Participation Agreement February 16, 2006 b/w ERHC and
Addax
|
|
Exhibit
10.17
|
Block
4 Participation Agreement November 17, 2005 b/w ERHC and
Addax
|
|
Exhibit
10.18
|
Block
4 2nd Amendment to Participation Agreement March 14,
2006
|
|
Exhibit
10.19
|
Block
4 3rd Amendment to Participation Agreement July 14,
2006
|
|
Exhibit 10.20
|
Employment
Agreement with Sylvan Odobulu
|
|
Exhibit 10.21
|
Employment
Agreement with David Alan Bovell
|
|
Exhibit 10.22
|
Employment
Agreement with Peter Ntephe
|
|
Certification
Pursuant to 18 U.S.C Section 1350, as adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
|
||
Certification
Pursuant to 18 U.S.C Section 1350, as adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
|
||
Certification
Pursuant to 18 U.S.C Section 1350, as adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
||
Certification
Pursuant to 18 U.S.C Section 1350, as adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
*
Previously filed
In
accordance with the Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on December 11, 2009 on its behalf by the
undersigned, thereunto duly authorized.
ERHC
Energy Inc.
|
||
By:
|
//s//Peter
Ntephe
|
|
Peter
Ntephe
|
||
Chief
Operating Officer & Acting Chief Executive Officer
|
||
//s//Sylvan
Odobulu
|
||
Sylvan
Odobulu
|
||
Principal
Accounting Officer
|
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature
|
Title
|
Date
|
||
//s// Howard
Jeter
|
Director
|
December
11, 2009
|
||
Howard
Jeter
|
Member
Audit Committee
|
|||
//s// Andrew
Uzoigwe
|
Director
|
December
11, 2009
|
||
Andrew
Uzoigwe
|
Member
Audit Committee
|
59