Attached files

file filename
EX-32.2 - EXHIBIT 32.2 - ERHC Energy Incex32_2.htm
EX-32.1 - EXHIBIT 32.1 - ERHC Energy Incex32_1.htm
EX-31.2 - EXHIBIT 31.2 - ERHC Energy Incex31_2.htm
EX-31.1 - EXHIBIT 31.1 - ERHC Energy Incex31_1.htm

U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-K
 
Annual Report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended September 30, 2016

OR
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)

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   ☒

Check if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.   Yes  ☐  No    ☒

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      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    ☐
Non-Accelerated Filer    ☒

Check if the registrant is a shell company.  Yes  ☐    No  ☒

The aggregate market value of the voting stock held by non-affiliates of the registrant on March 31, 2016 was $2,108,791.
 
On December 31, 2016, the registrant had  shares of common stock issued and outstanding 952,399,512.
 


TABLE OF CONTENTS
 
PART I
PAGE
     
Item 1.
4
Item 1A.
15
Item 1B.
19
Item 2.
19
Item 3.
20
Item 4.
21
     
 
PART II
 
     
Item 5.
21
Item 6.
22
Item 7.
23
Item 7A.
28
Item 8.
29
Item 9.
53
Item 9A.
53
Item 9B.
53
     
 
PART III
 
     
Item 10.
54
Item 11.
58
Item 12.
65
Item 13.
66
Item 14.
66
     
 
PART IV
 
     
Item 15.
67
 
68
 
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:

·
business strategy;

·
growth opportunities;

·
future development of concessions, exploitation of assets and other business operations;

·
future market conditions and the effect of such conditions on the Company’s future activities or results of operations;

·
future uses of and requirements for financial resources;

·
interest rate and foreign exchange risk;

·
future contractual obligations;

·
outcomes of legal proceedings;

·
future operations outside the United States;

·
competitive position;

·
expected financial position;

·
future cash flows;

·
future liquidity and sufficiency of capital resources;

·
future dividends;

·
financing plans;

·
tax planning;

·
budgets for capital and other expenditures;

·
plans and objectives of management;
 
·
compliance with applicable laws; and

·
adequacy of insurance or indemnification.

These types of statements constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and 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:

·
general economic and business conditions;

·
worldwide demand for oil and natural gas;

·
changes in foreign and domestic oil and gas exploration, development and production activity;

·
oil and natural gas price fluctuations and related market expectations;

·
termination, renegotiation or modification of existing contracts;
 
·
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;

·
advances in exploration and development technology;

·
the political environment of oil-producing regions;

·
political instability in the Republic of Kenya, Republic of Chad, the Democratic Republic of Sao Tome and Principe and the Federal Republic of Nigeria;

·
casualty losses;

·
competition;

·
changes in foreign, political, social and economic conditions;

·
risks of international operations, compliance with foreign laws and taxation policies and expropriation or nationalization of equipment and assets;

·
risks of potential contractual liabilities;

·
foreign exchange and currency fluctuations and regulations, and the inability to repatriate income or capital;

·
risks of war, military operations, other armed hostilities, terrorist acts and embargoes;

·
regulatory initiatives and compliance with governmental regulations;

·
compliance with environmental laws and regulations;

·
compliance with tax laws and regulations;

·
customer preferences;

·
effects of litigation and governmental proceedings;

·
cost, availability and adequacy of insurance;

·
adequacy of the Company’s sources of liquidity;

·
labor conditions and the availability of qualified personnel; and

·
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.  Company’s 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. The Company is in the business of exploration for oil and gas in Africa. The Company’s business includes working interests in exploration acreage in the Republic of Kenya (“Kenya”), the Republic of Chad (“Chad”), the Joint Development Zone (“JDZ”) between the Democratic Republic of Săo Tomé and Príncipe (“STP”), the Federal Republic of Nigeria (“FRN” or “Nigeria”), and the exclusive economic zone of Săo Tomé and Príncipe (the “Exclusive Economic Zone” or “EEZ”).

ERHC’s strategy in Kenya and Chad is to partner with other oil and gas operators to perform exploration work and further develop assets held through Production Sharing Contracts (PSCs) with the governments of both countries.  ERHC plans to raise funds by farming out some working interest in these blocks in exchange for cash payments or other valuable consideration.

The Company’s strategy in the JDZ and EEZ is to farm out its working interests to well established oil and gas operators for valuable consideration including upfront cash payments and being carried for ERHC’s share of the exploration costs.  This has already been done successfully on Blocks 2, 3 and 4 of the JDZ where ERHC has benefited from partnerships with Addax Petroleum and Sinopec Corporation, which have operated some of the license areas on behalf of ERHC.

ERHC is now pursuing a similar approach for JDZ Blocks 5, 6 and 9 as well as for blocks in the EEZ.

Apart from its oil and gas exploration activities in Kenya, Chad, the JDZ and the EEZ, ERHC continues to pursue other oil and gas opportunities in Africa. These opportunities also include the possible acquisition of significant equity stakes in other oil and gas exploration and production companies and the resulting indirect interest in the underlying exploration and production assets of such other companies.

ERHC is currently acquiring oil and gas properties in Texas. These US acquisitions are being carried on by and in the name of NewStar Oil& Gas Company, Inc., a wholly owned subsidiary of ERHC (“NewStar”). NewStar is incorporated under the laws of the State of Texas. The focus of all acquisitions by Newstar will be producing or near-producing properties with significant upside potential.   
 
CURRENT BUSINESS OPERATIONS

REPUBLIC OF KENYA

ERHC Kenya Acreage

In June 2012, after months of negotiations between ERHC and the Government of Kenya, the Government awarded Block 11A for oil and gas exploration and development in Kenya to the Company. On June 28, 2012, the Company announced that it had signed a Production Sharing Contract (PSC) on Block 11A with the Government of Kenya.  A PSC is an agreement that governs the relationship between ERHC (and any future joint-venture partners) and the Government of Kenya in respect of exploration and production in the Block awarded to the Company.  The PSC details, among other things, the work commitments (including acquisition of data, drilling of wells, social projects, etc.), the time frame for completion of the work commitments, production sharing between the parties and the Government, and how the costs of exploration, development and production will be recovered.


By virtue of the PSC, the Company initially acquired a 90% interest in Block 11A, which encompasses 11,950.06 square kilometers or 2.95 million square acres.  The Government of Kenya has a 10% carried participating interest up to the declaration of commerciality and may thereafter acquire an additional 10% interest in the PSC in which case the total Government participation would rise to 20%.

Circle Oil Limited (www.circleoilandgas.com) (“Circle”) acted as finder in ERHC’s acquisition of the Block by facilitating ERHC’s entry into Kenya, including the introduction of Dr. Peter Thuo, ERHC’s Kenya-based geoscientist and technical adviser who provided liaison services in the pursuit of ERHC’s application. Circle’s involvement provided significant efficiencies, including substantial cost savings, in ERHC’s application process.  By virtue of the terms of the business finder’s agreement reached between Circle and ERHC, Circle is entitled to receive a 5% payment on the value of the acquisition accruing to ERHC from the application.  Circle has opted to receive this fee in the form of a carried 5% of ERHC’s total interest in Block 11A.

In October, 2013, ERHC entered into a farm-out agreement with CEPSA Kenya Limited, an affiliate of Compañía Española de Petróleos, S.A.U., an international oil and gas company ("CEPSA"). The farm-out agreement was approved by the Government of the Republic of Kenya during the quarter ended June 30, 2014. Under terms of the agreement, ERHC transferred majority of its interest in Kenya Block 11A as well as operatorship to CEPSA. The farm-out agreement includes a carry and other considerations.
 
Kenya Operations Update
 
·
As previously advised, the Tarach-1 well was always designed as an exploratory well. An exploratory well is drilled purely for information gathering (“exploration”) purposes in an area that is yet unproven with regard to petroleum resources. The site selection for an exploratory well is based on seismic data and other pre-drill geoscientific surveys.
·
Operator analysis of the results if the Tarach-1 well shows that it did not encounter any reservoirs. The operator has therefore classified Tarach-1 a dry well. The well has accordingly been plugged and abandoned
 
It is important to remind investors and other stakeholders, while the pre-drill geological and geophysical work might indicate prospectively and reasonable chances of success, there are no guarantees before drilling that there will be a discovery of hydrocarbons. If there is a discovery, there is no guarantee that it will be commercial or in such quantities as to justify a development project.

The Company continues to work with Deloitte Corporate Finance LLC (DCF) on a further farm-down of our interest in the Block to help raise funds for the company.

Key Provisions of the ERHC’s PSC on Block 11A
KENYA BLOCK 11A
 
LICENSE:
PSC with the Government of Kenya (effective September 2012)
   
PARTIES:
ERHC (35%); CEPSA (55%); Government of Kenya (10%)1

WORK PROGRAM:

Phase 1 (2 years – September 2012 to September 2014)
Minimum Work
Minimum Expenditure
Status
Acquire and interpret 1,000 square kilometers of gravity and magnetic data
$250,000
Completed: 14,943.8 line kilometers of FTG data acquired by January 2014 at an estimated total cost of $2,700,000.
Acquire and interpret 1,000 kilometers of 2D seismic data
$10,000,000
Completed: 1,086.6 line kilometers of 2D seismic data acquired by August 2014 at an estimated total cost of $28,300,000

Phase 2 (2 years – September 2014 to September 2016)
Minimum Work
Minimum Expenditure
Status
Acquire 750 square kilometers of 3D seismic data
$30,000,000
Decision taken not to acquire 3D seismic but to proceed to drilling based on FTG and 2D seismic
     
OR
OR
 
     
Drill one (1) well to a minimum depth of 3,000m
$30,000,000
Completed.

Phase 3 (2 years – September 2016 to September 2018)
Minimum Work
Minimum Expenditure
Status
Drill one (1) well to a minimum depth of 3,000m
$30,000,000
Not yet arisen
1 CEPSA is carrying ERHC’s proportionate share of exploration costs except for the first exploration well where ERHC is expected to contribute 25% of its proportionate (35%) share of costs of the well.
 
OTHER FINANCIAL OBLIGATIONS:
Ministry Training Fund
$175,000 per annum during the exploration period
   
 
$200,000 per annum (minimum) from adoption of first development plan
   
Social Projects:
$50,000 per annum (minimum)
   
Surface Rentals:
$5/km2 per annum (exploration phase 1); $10/km2 per annum (exploration phase 2); $15/km2 per annum (exploration phase 3)
   
 
$100/km2 per annum (development and production period)

Cost Recovery:
   
Cost Oil
Up to 60% of Cost Oil each fiscal year

Profit Oil
Incremental Production Tranches
Government Share
Contractor Share
0-30,000 barrels per day
50%
50%
Next 25,000 barrels per day
60%
40%
Next 25,000 barrels per day
65%
35%
Next 20,000 barrels per day
70%
30%
Above 100,000 barrels per day
78%
22%
 
REPUBLIC OF CHAD

ERHC’s Chad Acreage

On July 6, 2011, the Company announced that it had signed a Production Sharing Contract (PSC) on the three oil blocks with the Government of Chad.  A PSC is an agreement that governs the relationship between ERHC (and any future joint-venture partners) and the Government of Chad in respect of exploration and production in the Blocks awarded to the Company.  The initial period of exploration commenced on July 12, 2012 with the publication, in Chadian Government’s Gazette Principal, of the Exclusive Exploration Authorization, granted to ERHC by the Government of Chad.

During the quarter ended June 30, 2014, the Company received the arrêté (decree) of the President of Chad giving presidential seal of approval to the Company’s request to obtain oil exploration Block BDS 2008 and its voluntary relinquishment of the Manga and Chari-Ouest III Blocks.


 
Chad Operations Update

As of September 30, 2016, ERHC continues to talk with potential farm-in partners. The next stage of exploration is a seismic survey on ERHC’s two focus areas. ERHC is exploring, as one of its funding options, the possibility of a right-to-earn partnership in exchange for seismic services. Based on the result of an aero-magnetic and gravity survey that ERHC completed over the Block, total Petroleum Initially in Place (PIIP) for one of ERHC's two focus areas has been estimated at 278 million barrels (with a high case of 876 million barrels). ERHC holds a 100 percent interest in BDS 2008.

ERHC's exploration team is developing a Request for Proposals for a 2-D seismic acquisition program. The exploration team continues to work on securing regulatory approvals for the seismic program in ERHC's two focus areas. One is north of Esso's Tega and Maku discoveries in the Doseo basin and the other is east of and on trend with OPIC's Benoy-1 margin discovery in the Doba basin.

Focus Areas
ERHC's exploration focus is on Block BDS 2008 which measures 41,800 square kilometers or 10,329,000 acres. Within this block, two focus areas have been identified:

- North of Esso’s Tega and Maku discoveries in the Doseo basin; and

- East of and on trend with OPIC’s Benoy-1 margin discovery in the Doba basin.


Key Provisions of ERHC’s Production Sharing Contract (PSC) in Chad

CHAD BLOCK BDS 2008
LICENSE:
PSC with the Government of Chad signed June 20112
   
PARTIES:
ERHC (100%)

WORK PROGRAM:

Phase 1 (5 years – June 2012 to June 2017)3
Minimum Work
Minimum
Expenditure
Status
Unspecified: annual work program to be proposed yearly by contractor
$15,000,000 in total for the exploration phase
EIA completed;
     
   
Aero gravity and magnetic survey completed;
     
   
·
4,720 line kilometers of high precision gravity and magnetic data acquired by November 2014;
   
·
Three leads identified;
     
   
Seismic in preparation;
     
   
·
2D seismic on focus areas planned


2 PSC originally covered thee Blocks; ERHC voluntarily relinquished two Blocks in 2013, retaining only BDS 2008.  Relinquishment and retention approved by Presidential Decree as provided for in PSC.
3 PSC provides for exploration period to run from date of grant of Exclusive Exploration Authorization (“EEA”).  EEA granted to ERHC in June 2012.
 
Phase 2 (3 years)
Minimum Work
Minimum Expenditure
Status
Unspecified: annual work program to be proposed yearly by contractor
$1,000,000
ERHC proposes an exploration well in this period if Phase 1 G&G studies justify

OTHER FINANCIAL OBLIGATIONS:
   
Ministry Training Fund
$250,000 per annum during the exploration period
   
 
$500,000 per annum during the exploitation period
   
Social Projects:
None specified in the PSC
   
Surface Rentals
$1/km2 per annum (Exploration Phase 1); $5/ km2 per annum (Exploration Phase 2); $10// km2 per annum (Extension)
   
 
$100/ km2 per annum (Exploitation Phase 1); $150/ km2 per annum (Exploitation Phase 1)

COST RECOVERY AND PRODUCTION SHARING:
   
Royalty
14.25% for crude oil
   
 
5% for natural gas
   
Cost Oil
Up to 70% of net production after deduction of royalty

Profit Oil
R-Factor, as defined by the PSC 4
Less than or equal to 2.25
Between 2.25 and 3
Greater than 3
Contractor’s share of profit oil
60%
50%
40%
State’s share of profit oil
40%
50%
60%

4 R-factor is based on a formula defined in the PSC.

ERHC’s exploration team has commenced planning toward 2-D seismic acquisition. The information gathered through an airborne gravity/magnetic survey of the Block in Southern Chad proved to be a significant improvement on current data resolution. ERHC's sub-contractor, Bridgeporth Ltd., a specialist geosciences company, completed the survey during the fourth quarter of 2014, confirming the preliminary leads and revealing additional targets. The main conclusions of the study are as follows:

a) The Graben edge is clearly visible in the southwest corner of the Bridgeporth survey.

b) The data can be used to target seismic acquisition over possible rift associated structures.

c) It appears that the Graben edge will enter into the ERHC block northeast of the Bridgeporth survey.

d) Regional profile data acquired by Bridgeporth suggests that the gravity low to the north of BDS 2008 could indeed be a rifted section.

e) The saddle feature in the west central portion of the Block should be investigated.
 

As the Company did with the JDZ and Kenya Block 11A, ERHC continues to explore a farm-out to spread risk. The Chad acreage is also within the scope of Deloitte Corporation Finance LLC (DCF)'s engagement and ERHC continues to work with DCF to find suitable farm-out or joint venture partners.
 
NIGERIA – SAO TOME AND PRINCIPE JOINT DEVELOPMENT ZONE (“JDZ”)

Background of the JDZ

In the spring of 2001, Sao Tome & Principe and Nigeria signed a treaty establishing a JDZ for the joint development of petroleum and other resources in the overlapping area of their respective maritime boundaries.  The treaty also established an administrative body, the Joint Development Authority (“JDA”), to administer the treaty and all activities in the JDZ. Revenues derived from the JDZ will be shared 60:40 between the governments of Nigeria and Săo Tomé & Príncipe, respectively. The JDZ lies approximately 180 kilometers south of Nigeria, in the Gulf of Guinea, one of the most prolific hydrocarbon regions of the world.     .

ERHC’s Rights in the JDZ

In April 2003, the Company and STP entered into an Option Agreement (the “2003 Option Agreement”) in which the Company relinquished significant prior legal rights and financial interests in the Joint Development Zone (“JDZ”) in exchange for preferential exploration rights in the JDZ.  Following the exercise of ERHC’s rights as set forth in the 2003 Option Agreement, the JDA confirmed the award in 2004 of participating interests (“Original Participating Interest”) in each of JDZ Blocks 2, 3, 4, 5, 6 and 9 of the JDZ during the 2004/5 licensing round conducted by the JDA.  ERHC also jointly bid with internationally recognized technical partners for additional participating interests in the JDZ during the 2004/5 licensing round.  As a result of the joint bid, ERHC won additional participating interests (“Joint Bid Participating Interest”) in Blocks 2, 3 and 4.  The following is a tabulation of ERHC’s participating interests in the JDZ.
 
JDZ Block
   
ERHC Original
Participating
Interest
   
ERHC Joint Bid
Participating
Interest
   
Participating
Interest(s) Assigned
   
Current ERHC Retained
Participating Interest
 
                           
2      
30.00%
 
   
35.00%
   
43.00%
 
   
22.00%
3      
20.00%
 
   
5.00%
 
   
15.00%
 
   
10.00%
4      
25.00%
 
   
35.00%
 
   
40.50%
 
   
19.50%
 
5      
15.00%
 
   
-
     
-
   
15.00% (in arbitration)
 
6      
15.00%
 
   
-
     
-
   
15.00% (in arbitration )
 
9      
20.00%
 
   
-
     
-
     
20.00%
 

ERHC’s Participating Agreements in the JDZ

The following are the particulars of the Participating Agreements by which ERHC assigned some of its participating interests in JDZ Blocks 2, 3 and 4 to technical partners so that the technical partners would operate the Blocks and carry ERHC’s proportionate share of costs in the Blocks until production, if any, commenced from the Blocks:
 
Date of Participation Agreement
Party(ies) to the Participation Agreement
 
Participating
Interest(s)
Assigned
   
Participating
Interest Assigned
Price
 
               
JDZ Block 2 - Participation Agreement - ERHC Retained Interest of 22.00%
       
               
March 2, 2006
Sinopec International Petroleum Exploration Production Co. Nigeria Ltd - a subsidiary of Sinopec International Petroleum and Production Corporation
   
28.67
%
 
$
13,600,000
 
                   
Addax Energy Nigeria Limited - an Addax Petroleum Corporation subsidiary
   
14.33
%
 
$
6,800,000
 
                   
JDZ Block 3 - Participation Agreement - ERHC Retained Interest of 10.00%
         
                   
February 15, 2006
Addax Petroleum Resources Nigeria Limited - a subsidiary of Addax Petroleum Corporation
   
15.00
%
 
$
7,500,000
 
                   
JDZ Block 4 - Participation Agreement - ERHC Retained Interest of 19.50%
         
                   
November 15, 2005
Addax Petroleum Nigeria (Offshore 2) Limited - a subsidiary of Addax Petroleum Corporation
   
40.50
%
 
$
18,000,000
 
 
Under the terms of the Participation Agreements Sinopec and Addax agreed to pay all of ERHC’s future costs for petroleum operations (“the carried costs”) in respect of ERHC's retained interests in the blocks.  Additionally, 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 interests on individual blocks until Sinopec and Addax Sub recover 100% of ERHC’s carried costs.

On or about October 2, 2009, Sinopec International Petroleum Exploration and Production Corporation acquired all of the outstanding shares of Addax Petroleum Corporation

ERHC’s JDZ Acreage

ERHC has working interests in six of the nine Blocks in the JDZ, as follows:

·
JDZ Block 2:  22.0%

·
JDZ Block 3:  10.0%

·
JDZ Block 4:  19.5%

·
JDZ Block 5:  15.0% (in arbitration)

·
JDZ Block 6:  15.0% (in arbitration)

·
JDZ Block 9:  20.0%

The working interest percentages represent 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.  Through Exploration Phase 1 in blocks 2, 3 and 4, these costs have been carried by the operators.  The operators can only recover their costs by carrying ERHC until production whereupon the operators will recover their costs from production revenues.

In 2009, Sinopec and Addax, ERHC's technical partners and operators in Blocks 2, 3 and 4 undertook an exploratory drilling campaign across the three blocks that was completed in January 2010.

Biogenic gas was discovered in each block and discussions continue between the Joint Development Authority and the parties, including ERHC, that hold interests in JDZ Blocks 2, 3 and 4, regarding drilling results. The meetings with the JDA are aimed at reaching a definitive agreement on how to proceed with the next stage of exploration in the Blocks following the expiration of Exploration Phase I in March 2012.

JDZ Operations Update

The JDZ partnership is currently assessing the data for possible new exploration play concepts in this area. As of September 30, 2016 The Nigeria - São Tomé and Príncipe Joint Development Authority (JDA) continues to engage with the remaining JDZ contracting parties, including ERHC, on the way forward for further exploration.
 
SAO TOME AND PRINCIPE EXCLUSIVE ECONOMIC ZONE (“EEZ”)

Overview of ERHC’s EEZ Blocks

The Săo Tomé and Príncipe EEZ is delineated over an expanse of waters offshore Săo Tomé and Príncipe that covers approximately 160,000 square kilometers.  In terms of hydrocarbon exploration and exploitation, the EEZ is a frontier region that sits south of the Niger Delta and west of the Gabon salt basin, retaining similarities with each of those prolific hydrocarbon regions.  The regional seismic database comprises approximately 12,000 kilometers of seismic data. Interpretation of that seismic data shows numerous structures in the EEZ that have similar characteristics to known hydrocarbon accumulations in the area.

ERHC’s Rights in the EEZ

Under a 2001 agreement with the Government of Săo Tomé and Príncipe (“STP”), ERHC was vested with the rights to participate in exploration and production activities in the EEZ.  These rights included (a) the right to receive up to 100% of two blocks of ERHC’s choice and (b) the option to acquire up to a 15% paid working interest in each of two additional blocks of ERHC’s choice in the EEZ.  In 2010, ERHC exercised its rights to receive up to 100% of two blocks of ERHC’s choice in the EEZ and was duly awarded Blocks 4 and 11 of the EEZ by the Government of STP.

EEZ Block 4 is 5,808 square kilometers, situated directly east of the island of Príncipe.  The northeastern area near EEZ Block 4 contains a large graben structure, which is bound by the Kribi Fracture Zone.

EEZ Block 11 totals 8,941 square kilometers, situated directly east of the island of Săo Tomé and abuts the territorial waters of Gabon. The southern area of the EEZ, where EEZ Block 11 is situated, contains parts of the Ascension and Fang Fracture Zones.

ERHC will decide whether to take up the option to acquire up to a 15% paid working interest in each of two additional blocks of the EEZ when called upon to exercise the option by the Government of STP in accordance with the agreements which provide for the rights and option.

PSC for the EEZ Block 11

In July 2014, ERHC and the National Petroleum Agency of Săo Tomé and Príncipe (ANP-STP) announced the conclusion of final terms for the Production Sharing Contract for EEZ Block 11.

A PSC is an agreement that governs the relationship between the Company (and its joint venture partners) and the Government of Săo Tomé and Príncipe in respect of exploration and production in any Block awarded to the Company.  The PSC spells out, among other things, the work commitments (including acquisition of data, drilling of wells, social projects, etc.), the time frames for accomplishing the work commitments, how production will be shared between the parties and the government, and how the costs of exploration, development and production will be recovered.

In October 2015, the Company reached an agreement with Kosmos Energy (NYSE: KOS), a leading independent oil and gas exploration and production company focused on frontier and emerging areas to transfer all ERHC's rights to Block 11 of the São Tomé and Principe Exclusive Economic Zone (EEZ) to Kosmos. The agreement has been approved by the National Petroleum Agency of Sao Tome & Principe ("ANP-STP") as required in the requisite Production Sharing Contract ("PSC") for EEZ Block 11.

EEZ Operations Update

ERHC has concluded negotiation of the terms of a Production Sharing Contract with the National Petroleum Agency of São Tomé and Principe (ANP-STP) for Block 4. The Company is currently in discussions with potential farm in partners. ERHC holds a 100 percent interest in EEZ Block 4, and 15% right to paid working interest in each of two additional blocks of the EEZ.
 
INVESTMENT IN OANDO ENERGY RESOURCES (FORMERLY EXILE RESOURCES)

During the year ended September 30, 2011, ERHC invested $1,350,000 in Exile Resources Inc, a company listed on the Toronto Stock Exchange (Ventures Exchange) stock in open market purchases.  ERHC’s intention was to gain an indirect interest in Exile’s underlying oil and gas exploration and production assets as well as the ability to participate in Exile’s decision making in respect of those assets.  ERHC was particularly interested in Exile’s carried interest in the proven Akepo field in the Niger Delta.

In July 2011, Oando Petroleum and Exploration Company (“Oando Petroleum”) commenced a reverse takeover (“RTO”) of Exile Resources.  In July 2012, Exile announced the completion of the RTO by Oando Petroleum and the change of name of the resultant company to Oando Energy Resources Inc, (“Oando Energy”). It also announced the listing of the company’s shares under the symbol “OER” on the Toronto Stock Exchange (TSX) and commencement of trading in the shares on the TSX from July 30, 2012.

During the year ended September 30, 2016, ERHC’s investment in the common stock of Oando Energy Resources, Inc. (“OER”), a Canadian oil and gas company that trades on the Toronto Stock Exchange (TSX) was purchased by the majority shareholder of OER, pursuant to a shareholder approved buyout.

CURRENT PLANS FOR OPERATIONS

ERHC’s principal assets are its interests in rights for exploration for hydrocarbons in Kenya, Chad, the JDZ and the EEZ. ERHC has no current sources of income from its operations. The Company plans to develop its business by the acquisition of other assets which may include revenue-producing assets in diverse geographical areas and the forging of strategic, new business partnerships and alliances.  ERHC cannot currently predict the outcome of negotiations for acquisitions, or, if successful, their impact on the Company's operations.

PLANS FOR FUNDING EXISTING ASSETS AND POTENTIAL NEW ACQUISITIONS

ERHC's future plans will depend on the Company's ability to attract new funding. The Company is implementing a series of steps to fund the geophysical work, including magnetic/gravity and seismic surveys, prior to securing potential farm-out on Chad acreage. Said funding steps include but are not limited to the issuance of a series of convertible notes, which the Company has commenced, issuance of shares of common stock through registered direct offerings, which the Company plans to commence shortly and farm-outs to potential partners on its assets in Africa. The fund raising might include:

  ·
Farm-outs of part of the Company’s assets in Kenya, Chad and the Săo Tomé and Príncipe Exclusive Economic Zone

  ·
Issue shares of common stock through a registered direct offering

  ·
Other available financing options

The Company is continuing discussions with several international investment advisory and financial brokerage firms to act as financial advisors and intermediaries to ERHC. While ERHC has always used expert professional assistance to formulate and execute its capital raising initiatives, it is re-focusing on the retention of such advisors and intermediaries as a strategic imperative of the increased funding requirements that arise from the rollout of the new work programs in Chad and Kenya.  The new firms retained will perform such financial advisory and investment banking services for the Company as are customary and appropriate in transactions of this type, including assisting the Company in analyzing, structuring, negotiating and effecting proposed capital raises.  These initiatives may include any transaction or series of transactions in which one or more capital providers (existing or otherwise) commits debt capital to the Company, purchases equity of the Company (or securities of the Company convertible into equity), or alternatively funds the Company either directly or through farm-ins, farm-outs or other arrangements in which the capital provider earns an interest in oil and gas properties of the Company.
 
UPDATES AND INFORMATION

ERHC’s website at http://www.erhc.com contains information about the Company’s operations, assets, and initiatives and a FAQ page that is frequently updated to address the latest questions.

The Company provides free of charge on our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable.

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 h http://www.sec.gov 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 historically incurred significant operating losses.  The Company may continue to incur operating losses for the foreseeable future. As such, the Company is subject to significant risks and may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect its business. The Company’s financial statements as of September 30, 2016 have been prepared on the assumption that the Company will continue as a going concern. The Company’s business requires significant financial resources.  The ability of the Company to continue as a going concern is dependent on raising additional capital to fund its exploration projects and for other working capital requirements. There can be no assurance that the Company will be successful in its efforts to raise additional financing or if financing is available, that it will be on terms acceptable to the Company.

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 Kenya, Chad, the JDZ and the EEZ and entering into production sharing contracts.  The Company may not be the operator with respect to these contracts.  The Company’s future financial results depend primarily on (1) the ability of the Company or its 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 future 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

The Company’s failure or the failure of the Company’s venture partners to provide or obtain the necessary financing may preclude the continuation of exploration activities which would adversely affect the value of its concessions in Kenya, Chad, the JDZ and the EEZ.

The Company may not discover commercially productive reserves in Kenya, Chad, the JDZ or the EEZ

 
The Company’s future success depends on its ability to economically discover oil and gas reserves in commercial quantities in Kenya, Chad, the JDZ, and/or the EEZ.  There can be no assurance that the Company’s planned projects in Kenya, Chad, the JDZ or the 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 Kenya, Chad, the JDZ and the EEZ

The Company will focus primarily on creating exploration opportunities and forming relationships with oil and gas companies to develop those opportunities in Kenya, Chad, the JDZ and the EEZ.  As a result, the Company may have only a limited ability to exercise control over a significant portion of a project’s operations and the associated costs of those operations in Kenya, Chad, the JDZ or the EEZ.  The success of a future project is dependent upon a number of factors that may be outside the Company’s control.  These factors include:

·
the availability of future capital resources to the Company and the other participants for drilling additional wells;

·
the approval of the Company or 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 land based and/or 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 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 Kenya, Chad, the JDZ and the EEZ under agreements with the Government of Kenya, Chad, 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.  However, there is no assurance that it will be successful.

The Company is subject to Government Regulation over which it has no control

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 regulations 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 from that in which they would affect other oil and gas companies of similar size and scope of operations.

Having interests outside the United States requires the Company to comply with United States laws and other laws in foreign jurisdictions 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”).

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 significant competition for desirable exploratory and producing properties.  The companies with which the Company competes are much larger and have greater financial resources and technical expertise 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 if any depends on numerous factors beyond its control, including the cyclical nature of the price of crude oil and natural gas, 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 and other 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, 2016, 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 Kenya, Chad, the DRSTP and the JDA, which provide ERHC with rights to participate in exploration and production activities in Kenya, Chad, the EEZ and the JDZ.  Production is subject to political risks which are 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 relative to 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 position.

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 Company’s business interests are located in Kenya, Chad and in the Gulf of Guinea offshore Africa and are subject to the volatility of foreign governments

The Company’s primary assets are located in Kenya, Chad and in the Gulf of Guinea, offshore Africa.  The Governments of Kenya, Chad, Nigeria and the island nation of Sao Tome and Principe granted ERHC participation interests in various concessions in their lands and offshore waters.  The Governments of Kenya, Chad, 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 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.

The Company’s 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. This action could have a material adverse effect on ERHC’s business, prospects, operations, financial condition and cash flow.

The Company’s rights in JDZ Blocks 5 and 6 are currently the subject of legal proceedings at the London Court of International Arbitration and the Federal High Court in Abuja, Nigeria. The Company instituted both proceedings in November 2008 against the JDA and the Governments of Nigeria and Săo Tomé and Príncipe.  The Company seeks legal clarification that its rights in the two Blocks remain intact.

The issue in contention is contractual. The Company was awarded a 15 percent working interest in each of the Blocks in a 2004/5 bid/licensing round conducted by the JDA following the Company’s exercise of preferential rights in the Blocks as guaranteed by contract and treaty.  The JDA and the Government of STP contend that certain correspondence issued by a previous CEO/President of the Company in 2006 amount to a relinquishment of the Company’s rights in Blocks 5 and 6 under the Company’s contracts with STP which provide for the rights.  The Company contends that no such relinquishment has occurred and has sought recourse to arbitration accordingly. It also filed the suit to prevent any tampering with its said rights in JDZ Blocks 5 and 6 pending the outcome of arbitration.

Proceedings on the suit and the arbitration are currently suspended while the Company pursues amicable settlement with the Governments of Nigeria and Săo Tomé & Príncipe.
 
The Company has limited sources of working capital

The Company is currently focused on consolidating and exploiting its interests in Kenya, Chad, JDZ Blocks 2, 3, 4, 5, 6 and 9 and has limited working capital.

As described in more detail in “Item 7 Future Capital Requirements” of this Form 10-K, the Company’s minimum working capital requirements in 2017 will be approximately $13,100,000.

If ERHC is unable to successfully raise capital to cover its planned operations or negotiate participation agreements with operating and other partners in, Chad and the EEZ, the Company’s cash resources could be strained and the Company’s future plans curtailed.

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 prospective future revenues, the value of its oil and natural gas exploration concession, as well as its ability to exploit its assets.

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.
 
Item 1B.
Unresolved Staff Comments

None.

Item 2.
Properties

Republic of Kenya

The Company initially held a 90% interest in Block 11A, which encompasses 11,950.06 square kilometers or 2.95 million square acres.  The Government of Kenya has a 10% carried participating interest up to the declaration of commerciality and may thereafter acquire an additional 10% interest in the PSC in which case the total Government participation would rise to 20%.  Circle Limited, which acted as ERHC’s finder in the acquisition of ERHC’s interest in the Block is entitled to 5% of ERHC’s interest as agreed finder’s fee.

In October, 2013, the Company entered into a farm-out agreement with CEPSA Kenya Limited, an affiliate of Compañía Española de Petróleos, S.A.U., an international oil and gas company ("CEPSA"). Under the terms of this agreement, the Company assigned and transferred 55% of its participating interest in Kenya Block 11A to CEPSA.

In exchange for the transferred rights, CEPSA will carry the Company's proportionate share of obligations and financial costs under the terms and conditions outlined in the farm-out agreement. The agreement was approved in January 2014 by the Kenyan Government and from February 2014, CEPSA took over from ERHC as operator under the production sharing contract ("PSC") for Kenya Block 11A.

 
Republic of Chad

On July 6, 2011, the Company announced that it had signed a Production Sharing Contract (PSC) on the three oil blocks with the Government of Chad.  The initial period of exploration commenced on July 12, 2012 with the publication, in Chadian Government’s Gazette Principal, of the Exclusive Exploration Authorization, granted to ERHC by the Government of Chad.

ERHC subsequently offered to novate the PSC by retaining only the BDS2008 Block and relinquishing the Manga and Chari Ouest III Blocks to the Chadian government for efficiency.  The Chadian Ministry of Energy and Petroleum approved the novation of the PSC and ERHC received the Presidential decree of approval in March 2014.  The BDS 2008 Block has an area of 16,360 square kilometers or 4,042,644 acres.

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%

·
JDZ Block 3:  10.0%

·
JDZ Block 4:  19.5%

·
JDZ Block 5:  15.0% (in Arbitration)

·
JDZ Block 6:  15.0% (in Arbitration)

·
JDZ Block 9:  20.0%

Sao Tome and Principe Exclusive Economic Zone

ERHC holds the following working interests and rights in the EEZ:

·
EEZ Block 4: 100%  working interest and no signature bonus

·
EEZ Block 11: 100% working interest and no signature bonus

·
The option to acquire up to a 15% paid working interest in additional two blocks of ERHC’s choice.

ERHC will be responsible for its proportionate share of exploration and exploitation costs in the EEZ blocks.

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 July 2017.

Item 3.
Legal Proceedings

JDZ Blocks 5 and 6

Arbitration and Lawsuit

The Company's rights in JDZ Blocks 5 and 6 are currently the subject of legal proceedings at the London Court of International Arbitration and the Federal High Court in Abuja, Nigeria. The Company instituted both proceedings in November 2008 against the JDA and the Governments of Nigeria and Săo Tomé and Príncipe.  The Company seeks legal clarification that its rights in the two Blocks remain intact.
 
The issue in contention is contractual. The Company was awarded a 15 percent working interest in each of the Blocks in a 2004/5 bid/licensing round conducted by the JDA following the Company's exercise of preferential rights in the Blocks as guaranteed by contract and treaty.  The JDA and the Government of STP contend that certain correspondence issued by a previous CEO/President of the Company in 2006 amount to a relinquishment of the Company's rights in Blocks 5 and 6 under the Company's contracts with STP which provide for the rights.  The Company contends that no such relinquishment has occurred and has sought recourse to arbitration accordingly. It also filed the suit to prevent any tampering with its said rights in JDZ Blocks 5 and 6 pending the outcome of arbitration.

Suspension of Proceedings on the Arbitration and Lawsuit

Proceedings on the suit and the arbitration are currently suspended while the Company pursues amicable settlement with the Governments of Nigeria and Săo Tomé Príncipe.
 
Routine Claims

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
 
   
(Price per share)
 
Fiscal Year 2016
           
First Quarter
 
$
0.002
   
$
0.001
 
Second Quarter
  $
0.440
    $
0.014
 
Third Quarter
  $
0.090
    $
0.033
 
Fourth Quarter
  $
0.055
    $
0.006
 
                 
Fiscal Year 2015
               
First Quarter
 
$
0.053
   
$
0.070
 
Second Quarter
  $
0.023
    $
0.001
 
Third Quarter
  $
0.003
    $
0.001
 
Fourth Quarter
  $
0.004
    $
0.001
 
 
As of December 31, 2016, there were approximately 2,200 stockholders of record.  The closing price of the common stock as reported on the OTC Bulletin Board on December 31, 2016 was $0.0002. 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, 14,681,756 shares have been authorized.
 
   
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights (a)
   
Weighted-average
exercise price of
outstanding options,
warrants and rights (b)
   
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a)) (c)
 
             
Equity compensation plans approved by security holders
   
4,150,000
     
0.20
     
5,318,244
 
                         
Equity compensation plans not approved by security holders
   
-
     
-
     
-
 

Recent Sales of Securities Exempt from Registration

None.

Issuer Purchases of Equity Securities

The Company has not repurchased any of its Common Stock.

Item 6.
Selected Financial Data

Not applicable.
 
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 the Company’s 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.”

The business of exploring for, developing, or acquiring oil and gas assets is capital intensive and the Company expects to continue to make significant capital expenditures over the next several years as part of its long-term growth strategy.  The Company has no revenue from current operations and its existing cash and cash equivalents are finite.  It is anticipated that external financing will be required in the future to fund the Company’s intended acquisition and exploration programs.

Possible sources of funding include private or public financings (including possible rights offering, registered direct offerings or private placements of the Company’s capital stock), strategic relationships or other arrangements.  While ERHC has obtained funding for operations from private equity placements in the past, there is no assurance that the Company will be able to do so again in the near future at commercially reasonable terms or at all despite any progress in its business prospects.  At the Company’s current stage of development, public or private debt funding may not be available on acceptable terms or at all.  If ERHC enters into strategic relationships to raise additional funds, it might be required to relinquish certain rights to its assets and/or future revenue streams from any prospective resource plays.

Failure to raise capital or secure financing when needed could leave ERHC with insufficient resources in the future to sustain its exploration and development activities.  Without additional capital resources, the Company may be forced to limit, defer or cease acquisitions or capital expenditures, sell assets, cede acreage or acquired interest, reduce operating expenses, or delay or reduce planned exploration and development programs, which in turn may adversely affect the Company’s financial condition and business prospects.  Raising any additional funds through equity or debt financing, convertible debt financing, joint ventures with corporate partners or other sources may be dilutive to the Company’s existing shareholders and may affect the price of its common stock.  Ultimately, there can be no assurance that ERHC will be successful in obtaining additional financing to fund its growth.
 
CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION

This Annual Report on Form 10-K contains forward-looking statements.  Forward-looking statements include statements concerning plans, objectives, goals, strategies, expectations, future events or performance and underlying assumptions and other statements which are other than statements of historical facts.  Certain statements contained herein are forward-looking statements and, accordingly, involve risks and uncertainties which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements.  Our expectations, beliefs and projections are expressed in good faith and are believed by us to have a reasonable basis, including without limitations, management's examination of historical operating trends, data contained in our records and other data available from third parties, but there can be no assurance that management's expectations, beliefs or projections will result or be achieved or accomplished.  In addition to other factors and matters discussed elsewhere herein and the risks discussed in      Item 1A.  Risk Factors   , the following are important factors that, in our view, could cause actual results to differ materially from those discussed in the forward-looking statements: geopolitical instability where we operate; our ability to meet our capital needs; our ability to raise sufficient capital and/or enter into one or more strategic relationships with one or more industry partners to execute our business plan; our ability and success in finding, developing and acquiring oil and gas reserves; our ability to respond to changes in the oil exploration and production environment, competition, and the availability of personnel in the future to support our activities.

Overview

ERHC Energy Inc., a Colorado corporation, (“ERHC” or the “Company”) was incorporated in 1986.  The Company’s business is the exploration and exploitation of oil and gas resources in Africa including its rights to working interests in exploration acreage in the Republic of Kenya (“Kenya”), in the Republic of Chad (“Chad”), in the Joint Development Zone (“JDZ”) between the Democratic Republic of Săo Tomé and Príncipe (“STP”) and the Federal Republic of Nigeria (“FRN or “Nigeria”) and in the exclusive economic zone of Săo Tomé (the “Exclusive Economic Zone” or “EEZ”).

A description of the Company’s current operations is contained in  Item 1 of this Form 10-K and readers are encouraged to read that analysis in connection with  Management’s Discussion and Analysis of Financial Condition and Plan of Operations.

In recent years ERHC has been focused on identifying opportunities in Africa that works to its strengths and leverage the experience gained through the Company's long term involvement in the JDZ and EEZ.

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 working interests in agreements with Kenya, Chad, the DRSTP and JDA concerning oil and gas exploration.  The Company has developed internal capabilities and is also forming relationships with other oil and gas companies with the technical and financial capabilities to assist the Company in leveraging its interests in Kenya, Chad, the EEZ and the JDZ.  The Company currently has no other operations.

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 interests in Kenya, Chad, its DRSTP concession, and its JDA interests in light of its 2003 Option Agreement and there have been no events or circumstances that would indicate that such assets might be impaired.
 
Recent Accounting Pronouncements

In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update ASU 2015-03 “Simplifying the Presentation of Debt Issuance Costs” (ASU 2015-03). ASU 2015-03 changes the presentation of debt issuance costs in financial statements. Upon adoption of ASU 2015-03, debt issuance costs will be reported in the balance sheet as a direct deduction from the related debt liability rather than as an asset. We adopted ASU 2015-03 retrospectively during the year ended September 30, 2016.  As a result, $19,664 and $61,710 of debt issuance costs were recorded as a reduction of total debt at September 30, 2016 and September 30, 2015, respectively.
 
In March, 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. For public business entities, the amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For all other entities, the amendments are effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted for any entity in any interim or annual period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period.

In March, 2016, the FASB issued ASU No. 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments (a consensus of the Emerging Issues Task Force). For public business entities, the amendments are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. For entities other than public business entities, the amendments are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.

In March, 2016, the FASB issued ASU No. 2016-07, Investments—Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting. Effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Earlier application is permitted.

In May, 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The amendments in this Update affect the guidance in Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by Update 2014-09). Accounting Standards Update 2015-14,Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year.

In August, 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments(a consensus of the Emerging Issues Task Force). Effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period.
 
Results of Operations

Year Ended September 30, 2016 Compared with Year Ended September 30, 2015

General and administrative expenses decreased from $2,828,685 in the year ended September 30, 2015 to $2,413,404 in the year ended September 30, 2016.  The decrease was primarily due to decrease in general and administrative expenses as part of our cost savings plan.

Exploration expense increased from $1,425,592 in year ended September 30, 2015 to $10,510,061 in the year ended September 30, 2016. The increase was primarily due to exploration cost related to Tarach-1 well in Kenya Block 11A started during the year 2016.

During the year ended September 30, 2016, we had a net loss of $12,046,858 compared with a net loss of $6,631,403 for the year ended September 30, 2015.  The increase in net loss was primarily due to increase in exploration cost of $9,084,469 and loss of $841,948 recognized from sale of investment in common stock of Oando Energy Resources, which offset by decrease in interest expenses of $2,099,464 and loss on embedded derivative of $629,631 related to our convertible debts during the year ended September 30, 2016 compared the same period in 2015.
 
Liquidity

Year Ended September 30, 2016 Compared with Year Ended September 30, 2015
 
Net cash used by operating activities during the year ended September 30, 2016 was $4,744,786, an increase of $2,351,471 from cash used by operating activities of $2,393,315 in the year ended September 30, 2015.  This increase was primarily due to increase in payable of exploration expense related to Tarach-1 well in Kenya Block 11A started during the year 2016.
 
Net cash provided by investing activities during the year ended September 30, 2016 was $3,991,906, a change of $3,766,284 from cash provided by investing activities of $225,622 for the year ended September 30, 2015.  The change in cash used in investing activities was primarily due to the increase in proceeds from sales of EEZ Block 11 interest in oil and gas concessions of $4,000,000 for the year ended September 30, 2016.
 
Net cash provided by financing activities during the year ended September 30, 2016 was $435,111, a decrease of $307,489 from $742,600 in the year ended September 30, 2015.  This decrease was primarily due to less proceeds from convertible debts were issued during the year ended September 30, 2016 compared to the same period in 2015.
 
Capital Resources

Our working capital (defined as current assets minus current liabilities) has historically been generated primarily from the following sources: investing cash flow (proceeds from sale of partial interest in DRSTP and Kenya concessions) and financing cash flows (proceeds from sale of common stock under various arrangements).

As of September 30, 2016, the Company had $439,544 in cash and cash equivalents and working capital deficit of $12,596,993.  We are implementing a series of steps to fund the deficits. The fund raising might include:

Farm-outs of part of the Company's assets in Kenya, Chad and the Săo Tomé and Príncipe Exclusive Economic Zone

Issue shares of common stock through a registered direct offering

Convertible loans and other debt instruments

Other available financing options
 
Assets Carried at Fair Value

The Company holds common stock and warrant investments (collectively “Marketable Equity Securities”) in Oando Energy Resources, Inc. (formerly Exile Resources, Inc.) which is a publicly traded company listed on the Toronto Stock Exchange. These assets are carried at fair market value in ERHC’s financial statements.  Both stocks and warrants are accounted for as available for sale securities, and changes in their fair value are recognized in other comprehensive income (loss).  The Company relies on an independent broker to provide fair values for its investments.   Management believes that changes in fair value of the above mentioned assets do not have a material effect on liquidity or capital resources.

Off-Balance Sheet Arrangements

At September 30, 2016, the Company had no off-balance sheet arrangements.

Short –Term Obligations

As of September 30, 2016, the Company had a total of $13,066,042 in short-term obligations. These short-term obligations include accounts payable of $9,273,608, account payable – related party of $100,438, income tax payable of $2,739,607, $181,535 in convertible short term notes payable and $770,854 of short term derivative liability.
 
Contractual Obligations and Commercial Commitments

The following table provides information at September 30, 2016, 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
 
                               
Kenya license interest
  $       $      
$
-
   
$
-
   
$
-
 
Chad license interest (1)
   
14,081,800
     
250,000
     
4,250,000
     
9,581,800
     
-
 
Operating lease (2)
   
110,968
     
110,968
                     
-
 
                                         
Total
 
$
14,192,768
   
$
360,968
   
$
4,250,000
   
$
9,581,800
   
$
-
 

(1)
This represents obligations under our PSC with Chad. The Company has a $15,000,000 commitment under a five year work program. Furthermore, the Company is contractually obligated to pay annual Surface Area Fees, estimated to be $16,360 per year during the Initial Exploration Period.

(2)
Lease obligations consist of operating lease for office space. Office lease represent non-cancelable leases for office space used in 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

At September 30, 2016, all the Company’s oil and gas exploration acreages were located outside the United States.  The Company’s primary assets are agreements with Government of the Republic of Kenya, the Republic of Chad, the DRSTP and the JDA, which provide ERHC with rights to participate in exploration and production activities in the Republic of Kenya, the Republic of Chad, and in Gulf of Guinea off the coast of 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 relative to 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.
 
Item 8.
Financial Statements and Supplementary Data

ERHC ENERGY INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 
Page(s)
   
30
   
31
   
Consolidated Financial Statements:
 
   
32
   
33
   
34
   
35
   
36
   
37
   
Financial Statement Schedules
 

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
ERHC Energy Inc.

We have audited the accompanying consolidated balance sheet of ERHC Energy Inc. and its subsidiaries (collectively the “Company”) as of September 30, 2016, and the related consolidated statements of operations, other comprehensive loss, changes in shareholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The consolidated financial statements of ERHC Energy Inc. and subsidiaries as of September 30, 2015, were audited by other auditors whose report dated December 22, 2015 (except for Note 1, 2 and 7, which is as May 10, 2016) expressed an unqualified opinion on those statements.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, 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 Energy Inc. and its subsidiaries as of September 30, 2016, and the results of its operations, other comprehensive loss, changes in shareholders’ equity, and cash flows for the period described above in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has insufficient working capital, which raises substantial doubt about its ability to continue as a going concern. Management's plans regarding those matters also are described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ M&K CPAS, PLLC
www.mkacpas.com
Houston, Texas
January 19, 2017
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Shareholders’ of
ERHC Energy Inc.
Houston, Texas
 
We have audited the accompanying consolidated balance sheet of ERHC Energy Inc. and its subsidiaries   (collectively the “Company”) as of September 30, 2015 and the related consolidated statement of operations, other comprehensive loss, changes in shareholders' equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 accompanying consolidated financial statements of the Company present fairly, in all material respects, their consolidated financial position as of September 30, 2015, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States.

As discussed in Note 2 to the consolidated financials, the 2015 financial statements have been restated to reflect an adjustment related to income taxes.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has incurred a net loss and working capital deficit, which raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty
 
/s/ MaloneBailey, LLP
 
MaloneBailey, LLP
Houston, Texas
December 22, 2015, except for Note 1, 2 and 6, which is as May 10, 2016
 
ERHC ENERGY INC.
CONSOLIDATED BALANCE SHEETS
As of September 30, 2016 and 2015

   
2016
   
2015
 
          (As restated)  
ASSETS
           
             
Current assets:
           
Cash and cash equivalents
 
$
439,544
   
$
757,313
 
Investment in Oando Energy Resources
   
-
     
211,699
 
Prepaid expenses and other
   
29,505
     
207,636
 
                 
Total current assets
   
469,049
     
1,176,648
 
                 
Oil and gas properties and concession fees
   
5,683,819
     
6,016,014
 
Furniture and equipment, net of accumulated depreciation of $509,894 and $445,626 at September 30, 2016 and 2015, respectively
   
70,081
     
133,349
 
                 
Total assets
 
$
6,222,949
   
$
7,326,011
 
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
                 
Current liabilities:
               
Accounts payable and accrued liabilities
 
$
9,273,608
   
$
942,833
 
Accounts payable – related parties
   
100,438
     
46,250
 
Convertible note payable, net – short term
   
181,535
     
191,540
 
Federal income tax payable
   
2,739,607
     
2,739,607
 
Derivative liability – short term
   
770,854
     
725,898
 
                 
Total current liabilities
   
13,066,042
     
4,646,128
 
                 
Convertible note payable, net – long term
   
-
     
2,874
 
                 
Total liabilities
   
13,066,042
     
4,649,002
 
Commitments and contingencies:
               
                 
Shareholders’ equity:
               
Preferred stock, par value $0.0001; authorized 10,000,000 shares; none issued and outstanding
    -      
-
 
Common stock, par value $0.0001; authorized 3,000,000,000 shares; issued and outstanding 47,479,975 and 29,216,038 shares at September 30, 2016 and 2015, respectively
   
4,748
     
2,922
 
Additional paid-in capital
   
107,436,940
     
106,047,738
 
Accumulated other comprehensive loss
   
-
     
(1,135,728
)
Accumulated deficits
   
(114,284,781
)
   
(102,237,923
)
                 
Total shareholders’ (deficit) equity
   
(6,843,093
)
   
2,677,009
 
                 
Total liabilities and shareholders’ equity
 
$
6,222,949
   
$
7,326,011
 

The accompanying notes are an integral part of these consolidated financial statements.
 
ERHC ENERGY INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended September 30, 2016 and 2015

 
Year Ended September 30,
 
   
2016
   
2015
 
          (As restated)  
Costs and expenses:
           
General and administrative
 
$
2,413,404
   
$
2,828,685
 
Exploration expenses
   
10,510,061
     
1,425,592
 
Depreciation
   
64,268
     
77,038
 
Gain on sale of interest in oil and gas concession, net
   
(2,727,805
)
   
(239,515
)
                 
Total costs and expenses
   
10,259,928
     
4,091,800
 
                 
Other income and (expenses):
               
Gain on conversion of note payable to common stock
   
56,020
     
-
 
Interest income
   
683
     
2,062
 
Loss on change in fair value of derivatives
   
(248,204
)
   
(105,951
)
Loss on embedded derivative
   
(394,661
)
   
(1,024,292
)
Loss on available for sale securities
   
(844,521
)
   
(2,573
)
Gain on insurance recovery for loss on deposit
   
-
     
1,046,862
 
Interest expense
   
(356,247
)
   
(2,455,711
)
                 
Total other income and (expense)
   
(1,786,930
)
   
(2,539,603
)
                 
Loss before for income taxes
   
(12,046,858
)
   
(6,631,403
)
                 
Benefit (provision) for income taxes:
               
Current
   
-
     
-
 
Deferred
   
-
     
-
 
                 
Total benefit (provision)for income taxes
   
-
     
-
 
                 
Net loss
 
$
(12,046,858
)
 
$
(6,631,403
)
                 
Net loss per common share –basic and diluted
 
$
(0.32
)
 
$
(0.38
)
                 
Weighted average number of common shares outstanding - basic and diluted
   
37,530,452
     
17,276,986
 

The accompanying notes are an integral part of these consolidated financial statements.
 
ERHC ENERGY INC.
CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE LOSS
For the Years Ended September 30, 2016 and 2015

 
Year Ended September 30,
 
   
2016
   
2015
 
          (As restated)  
             
Net loss
 
$
(12,046,858
)
 
$
(6,631,403
)
                 
Other comprehensive income (loss):
               
Unrealized loss on available for sale securities
   
-
     
(457,130
)
Less reclassification of loss on available for sale equity securities
   
1,135,728
     
-
 
                 
Total other comprehensive income (loss)
   
1,135,728
     
(457,130
)
                 
Total other comprehensive loss
 
$
(10,911,130
)
 
$
(7,088,533
)

The accompanying notes are an integral part of these consolidated financial statements.
 
ERHC ENERGY INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended September 30, 2016 and 2015

 
Common Stock
   
Additional
Paid-In
   
Accumulated
   
Accumulated
Other
Comprehensive
       
   
Shares
   
Amount
   
Capital
   
Deficit
   
Income
   
Total
 
Balance at September 30, 2014 (As restated)
   
7,651,941
   
$
765
   
$
101,156,061
   
$
(95,606,520
)
 
$
(678,598
)
 
$
4,871,708
 
Common stock issued for services
   
2,100
     
-
     
8,400
     
-
     
-
     
8,400
 
Common stock issued for convertible debts-related party
   
928,254
     
93
     
249,907
     
-
     
-
     
250,000
 
Derivative liabilities extinguished on conversion – related party
   
-
     
-
     
432,646
     
-
     
-
     
432,646
 
Common stock issued for convertible debts
   
20,633,744
     
2,064
     
1,726,306
     
-
     
-
     
1,728,370
 
Derivative liabilities extinguished on conversion
   
-
     
-
     
2,474,418
     
-
     
-
     
2,474,418
 
Unrealized loss on available for sale equity securities
   
-
     
-
     
-
     
-
     
(457,130
)
   
(457,130
)
Net loss
   
-
     
-
     
-
     
(6,631,403
)
   
-
     
(6,631,403
)
                                                 
Balance at September 30, 2015 (As restated)
   
29,216,038
     
2,922
     
106,047,738
     
(102,237,923
)
   
(1,135,728
)
   
2,677,009
 
Common stock issued for convertible debts
   
18,220,277
     
1,822
     
429,241
     
-
     
-
     
431,063
 
Derivative liabilities extinguished on conversion
   
-
     
-
     
959,965
     
-
     
-
     
959,965
 
Reclassification of loss on available for sale equity securities
   
-
      -      
-
     
-
     
1,135,728
     
1,135,728
 
Fractional shares issued
   
43,660
     
4
     
(4
)     -       -       -  
Net loss
   
-
     
-
     
-
     
(12,046,858
)
   
-
     
(12,046,858
)
                                                 
Balance at September 30, 2016
   
47,479,975
   
$
4,748
   
$
107,436,940
   
$
(114,284,781
)
 
$
-
   
$
(6,843,093
)

The accompanying notes are an integral part of these consolidated financial statements
 
ERHC ENERGY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30, 2016 and 2015
 
   
Year Ended September 30,
 
   
2016
   
2015
 
         
(As restated)
 
Cash flows from operating activities:
           
Net loss
 
$
(12,046,858
)
 
$
(6,631,403
)
Adjustments to reconcile net loss to net cash provided by/(used by) operating activities:
               
Depreciation and depletion expense
   
64,268
     
77,038
 
Loss on embedded derivative
   
394,661
     
1,024,292
 
Loss on change in fair value of derivatives
   
248,204
     
105,951
 
Loss on debt penalties
   
-
     
34,467
 
Gain on sale of  interest in oil and gas concession
   
(2,727,805
)
   
(239,515
)
Amortization of convertible debt discount
   
233,720
     
2,023,979
 
Amortization of debt issuance cost
   
81,971
     
247,669
 
Stock issued for services
   
-
     
8,400
 
Realized loss on available for sale securities
   
844,521
     
2,573
 
Changes in operating assets and liabilities:
               
Prepaid expenses and other
   
207,569
     
211,719
 
Accounts payable and other accrued liabilities
   
7,900,775
     
695,265
 
Accounts payable – related party
   
54,188
     
46,250
 
                 
Net cash used by operating activities
   
(4,744,786
)
   
(2,393,315
)
                 
Cash Flows From Investing Activities
               
Purchase of oil and gas properties
   
(510,000
)    
(9,779
)
Proceeds from sale of interest in oil and gas concession
   
4,000,000
     
239,515
 
Proceeds from sale of available for sale securities
   
502,906
     
-
 
Purchase of furniture and equipment
   
(1,000
)
   
(4,114
)
                 
Net cash provided by investing activities
   
3,991,906
     
225,622
 
                 
Cash flows from financing activities:
               
Debt origination fees
   
-
     
(69,200
)
Payment on convertible debt principle
   
(37,500
)
   
(46,200
)
Proceeds from convertible debt, related party
   
-
     
250,000
 
Proceeds from convertible debt, net of expense
   
472,611
     
608,000
 
                 
Net cash provided by financing activities
   
435,111
     
742,600
 
                 
Net decrease in cash and cash equivalents
   
(317,769
)
   
(1,425,093
)
                 
Cash and cash equivalents at beginning of period
   
757,313
     
2,182,406
 
                 
Cash and cash equivalents at end of period
 
$
439,544
   
$
757,313
 
                 
Supplemental disclosure of cash flow information:
               
Interest paid
 
$
-
   
$
-
 
Income taxes paid
 
$
-
   
$
-
 
                 
Non-cash investing and financing activities:
               
Unrealized loss in Investment Oando Energy Resources
 
$
-
   
$
(457,130
)
Discount from derivative
 
$
756,717
   
$
1,480,777
 
Conversion of note payable to common stock – related party
 
$
-
   
$
250,000
 
Conversion of note payable to common stock
 
$
431,063
   
$
1,728,370
 
Derivative liabilities extinguished on conversion – related party
 
$
-
   
$
432,646
 
Derivative liabilities extinguished on conversion
 
$
959,965
   
$
2,474,418
 
Recognition of loss on available for sale securities
 
$
1,135,728
   
$
-
 
Issuance of fractional shares from stock split
 
$
4
   
$
-
 
 
 The accompanying notes are an integral part of these consolidated financial statements
 
ERHC ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended September 30, 2016 and 2015

Note 1 – Summary of Significant Accounting Policies

General Business and Nature of Operations

ERHC Energy Inc. ("ERHC", the “Company”) is an independent oil and gas company formed in 1986, as a Colorado corporation.  The Company’s current focus is to exploit its primary assets, which are rights to working interests in exploration acreage in the Republic of Kenya (“Kenya”), in the Republic of Chad ("Chad"), in the Joint Development Zone (“JDZ”) between the Democratic Republic of Sao Tome and Principe (“DRSTP”), in 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 6.

ERHC is currently acquiring oil and gas properties in Texas. These US acquisitions are being carried on by and in the name of NewStar Oil& Gas Company, Inc., a wholly owned subsidiary of ERHC (“NewStar”). NewStar is incorporated under the laws of State of Texas. The focus of all acquisitions by Newstar will be producing or near-producing properties with significant upside potential.

Principles of Consolidation

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 U.S. 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.

Concentration of Risks

ERHC primarily maintains its finances with seven financial institutions. From time to time the amount on deposit in one or all of these institutions may exceed federal insurance limits.  The balances are maintained in demand accounts to minimize risk.

ERHC’s focus is to exploit its assets which are agreements with the Government of Kenya concerning oil and gas exploration in Kenya, with the Government of Chad concerning oil and gas exploration in Chad, with the DRSTP concerning oil and gas exploration in EEZ and with the JDA concerning oil and gas exploration in the JDZ.  In the past, 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 JDZ. ERHC currently has no other operations.

Going Concern

The accompanying financial statements have been prepared on the basis that the Company will continue as a going concern which contemplates the realization of assets and the satisfaction of liabilities in the ordinary and usual course of business. As of September 30, 2016, the Company has a working capital deficit and negative cash flows from operating activities. The Company also has significant tax arrears which resulted from a deduction disallowance made by an IRS audit of ERHC’s 2006 return, which audit lasted nearly seven years and has been previously disclosed.  There is an outstanding IRS lien imposed on ERHC in Harris County, Texas in consequence.  Furthermore, the Company is in significant arrears of cash calls relating to the company’s proportionate share of drilling costs (beyond operator-carried expenses) on the Tarach-1 well in Kenya Block 11A. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent on raising additional capital to fund ongoing exploration projects and ultimately on attaining future profitable operations. The Company is continuing with its plan to further seek new opportunity for farm-out its assets in Kenya, Chad and the Săo Tomé and Príncipe Exclusive Economic Zone. Management believes that the Company’s current operating strategy will provide the opportunity for the Company to continue as a going concern as long as the Company continues to obtain additional financing; however there is no assurance that this will occur. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
The Company has restated its previously issued consolidated financial statements for the years ended September 30, 2015 and 2014 to reflect emergent developments related to income tax following the completion of an Internal Revenue Service tax audit of the Company’s 2006 tax return.

This restatement is necessitated by the Internal Revenue Service disallowing certain deductions on ERHC’s 2006 tax return.  The disallowance resulted from stock based compensation expense that the Company had recognized as a deductible expense in its 2006 tax return. The disallowance was the outcome of an Internal Revenue Service audit of ERHC’s 2006 return, which audit lasted nearly seven years and has been previously disclosed.  As such, the consolidated financial statements for the years ended September 30, 2015 and 2014 have been restated to properly reflect the tax liabilities that should have been recorded in 2006.
 
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.
 
Investment in Oando Energy Resources (OER)

The Company's investments in common stock and warrants are carried at market value.  Both stocks and warrants are accounted for as available for sale securities, and changes in their fair value are recognized in other comprehensive income (loss).
 
Furniture, Fixtures and Equipment

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.

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 after drilling is completed. The determination is based on a process that relies on interpretations of available geologic, geophysics, 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.

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 investments located in Republic Kenya, Republic of Chad and in its DRSTP concession fee in light of its 2003 Option Agreement (see Note 6 and there have been no events or circumstances that would indicate that such assets might be impaired).
 
Income Taxes

Income taxes are accounted for 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.

The Company follows the 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 this 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 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.

Net Loss Per Share

Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period.  Diluted loss per share is computed by dividing net 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 loss per share if they are anti-dilutive.  Diluted 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-dilutive. For the years ended September 30, 2016 and 2015, 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

ERHC recognizes compensation costs resulting from the issuance of stock-based awards to employees and directors over the requisite period based on the fair value of each stock award on the grant date.
 
Recent Accounting Pronouncements
 
In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update ASU 2015-03 “Simplifying the Presentation of Debt Issuance Costs” (ASU 2015-03). ASU 2015-03 changes the presentation of debt issuance costs in financial statements. Upon adoption of ASU 2015-03, debt issuance costs will be reported in the balance sheet as a direct deduction from the related debt liability rather than as an asset. The Company adopted ASU 2015-03 retrospectively during the year ended September 30, 2016.  As a result, $19,664 and $61,710 of debt issuance costs recorded as direct deduction from the carrying amount of the outstanding debt at September 30, 2016 and September 30, 2015, respectively.
 
In March, 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. For public business entities, the amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For all other entities, the amendments are effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted for any entity in any interim or annual period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period.

In March, 2016, the FASB issued ASU No. 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments (a consensus of the Emerging Issues Task Force). For public business entities, the amendments are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. For entities other than public business entities, the amendments are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.

In March, 2016, the FASB issued ASU No. 2016-07, Investments—Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting. Effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Earlier application is permitted.

In May, 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The amendments in this Update affect the guidance in Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by Update 2014-09). Accounting Standards Update 2015-14,Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year.

In August, 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments(a consensus of the Emerging Issues Task Force). Effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period.
 
Reclassifications
 
Certain amounts in the financial statements as of and for the year ended September 30, 2015 have been reclassified to conform with the adoption. Such reclassifications have no impact on net loss, shareholders’ equity or cash flows as previously reported.
 
Note 2 – Restatement of Financial Statements

The Company has restated its previously issued consolidated financial statements for the years ended September 30, 2015 to reflect emergent developments related to income tax following the completion of an Internal Revenue Service tax audit of the Company’s 2006 tax return.

This restatement is necessitated by the Internal Revenue Service disallowing certain deductions on ERHC’s 2006 tax return.  The disallowance resulted from stock based compensation expense that the Company had recognized as a deductible expense in its 2006 tax return. The disallowance was the outcome of an Internal Revenue Service audit of ERHC’s 2006 return, which audit lasted nearly seven years and has been previously disclosed.  As such, the consolidated financial statements for the year ended September 30, 2015 has been restated to properly reflect the tax liabilities that should have been recorded in 2006.

The effect of the restatement on the September 30, 2015 consolidated financial statements as follows:

   
September 30, 2015 (As restated)
 
   
As Previously
Reported
   
Adjustment
   
As Restated
 
Income tax payable
 
$
-
   
$
2,739,607
   
$
2,739,607
 
Total current liabilities
 
$
1,906,521
   
$
2,739,607
   
$
4,646,128
 
Total liabilities
 
$
1,909,395
   
$
2,739,607
   
$
4,649,002
 
Accumulated deficits
 
$
(99,498,316
)
 
$
(2,739,607
)
 
$
(102,237,923
)
Total shareholders’ equity
 
$
5,416,616
   
$
(2,739,607
)
 
$
2,677,009
 
Provision for income taxes
 
$
2,018,533
   
$
(2,018,533
)
 
$
-
 
Net loss
 
$
8,649,936
   
$
(2,018,533
)
 
$
6,631,403
 
Total other comprehensive loss
 
$
9,107,066
   
$
(2,018,533
)
 
$
7,088,533
 
 
Note 3 - Fair Value of Financial Instruments
 
Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Level inputs are 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.

Interest income on cash and cash equivalents is recognized as earned on the accrual basis.

Investments in equity instruments are accounted for as available for sale securities and reported at fair value, determined based on the quoted prices in an active market for identical assets and classified as Level 1 under the Accounting Standards Codification (“ASC”) Topic 825.

During the year ended September 30, 2016, the Company disposed its investment in the common stock of Oando Energy Resources, Inc. (“OER”), a Canadian oil and gas company that trades on the Toronto Stock Exchange (TSX).
 
During the year ended September 30, 2015, the Company’s investment in the common stock and warrants of OER, a Canadian oil and gas company that trades on the Toronto Stock Exchange (TSX) decreased in value by $457,130 to $211,699. This decrease in value is included as a decrease in stockholders' equity in accumulated other comprehensive income (loss).
 
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values.  Furthermore, while ERHC believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.  In determining fair value, the ERHC generally applies the market approach, which uses prices and other relevant data based on market transactions involving identical or comparable assets and liabilities.  There have been no changes in the methodologies used at September 30, 2016 and 2015.

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of September 30, 2016 and 2015, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

September 30, 2016

 
Quoted Prices
In an Active
Market for
Identical
Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
 
                 
Derivative liability
 
$
-
   
$
-
   
$
(770,854
)
 
$
(770,854
)

September 30, 2015

 
Quoted Prices
In an Active
Market for
Identical
Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
 
                 
Marketable equity securities - Oando Energy Resources:
 
$
211,699
   
$
-
   
$
-
   
$
211,699
 
Derivative liability
 
$
-
   
$
-
   
$
(725,898
)
 
$
(725,898
)

During the years ended September 30, 2016 and 2015, the Company issued a number of convertible notes payable, and identified derivatives related to these notes. ERHC classifies its derivative liabilities as Level 3 and values them using the methods discussed in Note 5. While the Company believes that its valuation methods are appropriate and consistent with other market participants, it recognizes that the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The primary assumptions that would significantly affect the fair values using the methods discussed in Note 3 are that of volatility and market price of the underlying common stock of the Company.

As of September 30, 2016, the Company did not have any derivative instruments that were designated as hedges.

The derivative liability for the years ended September 30, 2016 and 2015 of $770,854 and 725,898, respectively, classified as level 3.

The following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities as of September 30, 2016:
 
   
Derivative
Liability
 
       
Balance at September 30, 2015
 
$
725,898
 
Increase in derivative value due to issuances of convertible promissory notes
   
756,717
 
Decrease in derivative value due to convertible promissory notes converted to common stocks
   
(959,965
)
Change in fair market value of derivative liabilities on convertible notes due to the mark to market adjustment
   
248,204
 
         
Balance at September 30, 2016
 
$
770,854
 
 
The following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities as of September 30, 2015:
 
   
Derivative Liability
 
Balance at September 30, 2014
 
$
1,021,942
 
Increase in derivative value due to issuances of convertible promissory notes
   
1,480,777
 
Decrease in derivative value due to convertible promissory notes converted to common stocks
   
(2,907,064
)
Day 1 loss on derivative liabilities
   
1,024,292
 
Change in fair market value of derivative liabilities on convertible notes due to the mark to market adjustment
   
111,849
 
Change in fair market value of derivative liabilities on tainted warrants due to the mark to market adjustment
   
(5,898
)
         
Balance at September 30, 2015
 
$
725,898
 

Note 4 – Convertible Debt

The Company had the following convertible debt outstanding at September 30, 2016:

Lender
Date of
Agreement
 
Term
(Months)
   
Annual
Interest rate
   
Outstanding
balance
   
Accrued
Interest at
Reporting
date
   
Deferred
debt
origination
costs
   
Discount
   
Net
Convertible
Note payable
   
Note
Derivative
Liability
 
JMJ Financial #4
3/9/2016
   
12
     
8
%
  $
39,416
    $
-
    $
-
    $
37,114
    $
2,302
    $
74,913
 
Adar Bay
3/10/2016
   
12
     
8
%
   
32,000
     
2,000
     
1,544
     
22,863
     
9,593
     
71,087
 
Union Capital #4
4/12/2016
   
12
     
8
%
   
50,000
     
1,732
     
 2,126
     
-
     
49,606
     
-
 
Auctus Private Equity Fund
4/27/2016
   
12
     
10
%
   
54,250
     
2,318
     
1,839
     
46,757
     
7,972
     
137,157
 
Black Mountain Equities.
5/20/2016
   
12
     
8
%
   
51,500
     
926
     
4,131
     
-
     
48,295
     
-
 
Rock Capital #2
5/26/2016
   
12
     
10
%
   
55,125
     
529
     
5,950
     
-
     
49,704
     
-
 
Crown Bridge Partners
6/2/2016
   
12
     
8
%
   
53,500
     
1,407
     
1,678
     
45,232
     
7,997
     
143,932
 
Toledo Advisors
6/22/2016
   
12
     
10
%
   
63,000
     
1,726
     
2,396
     
59,309
     
3,021
     
168,812
 
LG Capital
8/23/2016
   
12
     
8
%
   
32,000
     
250
           
31,033
     
1,217
 
   
43,965
 
Auctus Private Equity Fund 2
9/22/2016
   
9
     
10
%
   
58,750
     
119
             
57,041
     
1,828
 
   
130,988
 
                                                                   
                     
$
489,541
   
$
11,007
   
$
19,664
   
$
299,349
   
$
181,535
   
$
770,854
 
 
The Company had the following convertible debt outstanding at September 30, 2015:

Lender
Date of
Agreement
 
Term
(Months)
   
Annual
Interest Rate
     
Outstanding
balance
   
Accrued
interest at
Reporting
date
   
Deferred
Debt
Origination
Costs
   
Discount
   
Net
Convertible
Note Payable 
   
Note
Derivative
Liability
 
Redwood Fund III
5/15/2014
   
6
     
12
%
   
$
40,000
   
$
5,918
     
4,500
   
$
15,867
   
$
25,551
   
$
114,005
 
Tonaquint, Inc
10/7/2014
   
12
     
22
%
(a)
   
98,177
     
46,416
     
15,098
     
16,700
     
112,795
     
128,566
 
Various
Various
                      -       -      
14,340
      -      
(14,340
)     -  
JMJ Financial #3
10/22/2014
   
24
     
5.83
%
     
8,900
     
5,556
     
5,000
     
11,582
     
-
(2,126)
   
27,375
 
LG Capital #2
10/23/2014
   
12
     
8
%
     
23,533
     
2,500
     
506
     
9,398
     
16,129
     
52,628
 
Cardinal Capital Group
11/6/2014
   
24
     
22
%
(a)
   
43,998
     
30,133
     
9,333
     
41,984
     
22,814
     
94,158
 
Rock Capital
2/6/2015
   
12
     
10
%
     
23,005
     
-
     
5,311
     
20,351
     
(2,657
)
   
67,377
 
Union Capital #3
2/17/2015
   
12
     
8
%
     
34,500
     
-
     
1,500
     
-
     
33,000
     
93,039
 
Adar Bay #2
2/19/2015
   
12
     
8
%
     
12,000
     
-
     
3,500
     
11,742
     
(3,242
)
   
39,280
 
LG Capital #3
3/10/2015
   
12
     
8
%
     
52,500
     
-
     
2,622
     
43,388
     
6,490
     
109,470
 
                                                                     
                           
$
336,613
   
$
90,523
   
$
61,710
   
$
171,012
   
$
194,414
   
$
725,898
 
 
During the years ended September 30, 2016 and 2015, the Company issued an aggregate of 18,220,277 and 20,633,744 shares of common stock for conversion of convertible debts of $487,083 and $1,728,370; a gain of $56,020 and $0, and decrease in derivative value due to conversion of $959,965 and $2,474,418, respectively.
 
(a)
During the year ended September 30, 2015, the note was defaulted due to insufficient authorized common share to fulfill conversion request, additional interest accrual recorded due to interest rate increased to 22% from 12% related to the default.
 
The following table summarizes conversion terms of the notes outstanding at September 30, 2016:

Lender
 
Date of Agreement
 
Term Of Conversion
 
Eligible for
Conversion
             
JMJ Financial
 
March 9, 2016
 
Conversion Price shall be lesser of $0.06 or 60% of lowest trade price in the 25 trading days previous to conversion.
 
180 after the effective dates
Adar Bay
 
March 10, 2016
 
Conversion price shall equal be 50% of the lowest trading price of the Common Stock as reported on the National Quotations Bureau OTCQB exchange which the Company’s shares are traded or any exchange upon which the Common Stock may be traded in the future, for the twenty prior trading days including the day upon which a Notice of Conversion is received by the Company.
 
On effective date
Union Capital
 
April 12, 2016
 
Conversion Price for each share of Common Stock equal to 40% of the lowest closing bid price of the Common Stock as reported on the National Quotations Bureau OTCQB exchange which the Company’s shares are traded or any exchange upon which the Common Stock may be traded in the future ("Exchange"), for the twenty prior trading days including the day upon which a Notice of Conversion is received by the Company (provided such Notice of Conversion is delivered by fax or other electronic method of communication to the Company after 4 P.M. Eastern Standard or Daylight Savings Time if the Holder wishes to include the same day closing price)".
 
180 after the effective date
Auctus Private Equity Fund, LLC
 
April 27, 2016
 
Conversion Price shall equal the lesser of (i) 55% multiplied by the lowest Trading Price (as defined below) (representing a discount rate of 45%) during the previous twenty-five (25) Trading Day period ending on the latest complete Trading Day prior to the date of this Note and (ii) the Variable Conversion Price
 
On effective date
Black Mountain Equities, Inc.
 
May 20, 2016
 
Conversion Price shall equal 60% of the lowest trade occurring during the twenty (20) consecutive Trading Days immediately preceding the applicable Conversion Date on which the Holder elects to convert all or part of this Note, subject to adjustment as provided in this Note.
 
150 after the effective date
Rock Capital
 
May 26, 2016
 
Conversion Price for each share of Common Stock equal to 50% of the lowest trading price of the Common Stock as reported on the National Quotations Bureau OTCQB exchange which the Company’s shares are traded or any exchange upon which the Common Stock may be traded in the future ("Exchange"), for the twenty prior trading days including the day upon which a Notice of Conversion is received by the Company or its transfer agent
 
180 after the effective date
Crown Bridge Partners LLC
 
June 2, 2016
 
Variable Conversion Price shall mean 50% multiplied by the Market Price (as defined herein)(representing a discount rate of 50%). “Market Price” means the lowest one (1) Trading Prices (as defined below) for the Common Stock during the twenty (20) Trading Day period ending on the last complete Trading Day prior to the Conversion Date.
 
On effective date
Toledo Advisors LLC
 
June 22, 2016
 
Conversion Price for each share of Common Stock equal to 50% of the lowest trading price of the Common Stock as reported on the National Quotations Bureau OTCQB exchange which the Company’s shares are traded or any exchange upon which the Common Stock may be traded in the future ("Exchange"), for the  twenty prior trading days
 
On effective date
LG Capital
 
August 23, 2016
 
Conversion price shall equal be 60% of the lowest trading price of the Common Stock as reported on the National Quotations Bureau OTCQB exchange which the Company’s shares are traded or any exchange upon which the Common Stock may be traded in the future, for the twenty prior trading days including the day upon which a Notice of Conversion is received by the Company.
 
On effective date
Auctus Private Equity Fund 2
 
September 22, 2016
 
Conversion Price shall equal the lesser of (i) 55% multiplied by the lowest Trading Price (as defined below) (representing a discount rate of 45%) during the previous twenty-five (25) Trading Day period ending on the latest complete Trading Day prior to the date of this Note and (ii) the Variable Conversion Price
 
On effective date
 
The following table summarizes conversion terms of the notes outstanding at September 30, 2015:

Lender
 
Date of Agreement
 
Term Of Conversion
 
Eligible for
Conversion
 
 
 
 
 
 
 
Redwood Fund III
 
May 15, 2014
 
Conversion Price shall be 55% of the lowest traded price, determined on the then current trading market for the Company’s common stock, for 20 trading days prior to conversion.
 
180 after the effective dates
JMJ Financial
 
October 22, 2014
 
Conversion Price shall be lesser of $0.06 or 60% of lowest trade price in the 25 trading days previous to conversion.
 
180 after the effective dates
Tonaquint, Inc
 
October 7, 2014
 
Conversion price shall be 65% (the “Conversion Factor”) of the lowest intra-day trade price of Borrower’s common stock (“Common Stock”) in the twenty-five (25) Trading Days immediately preceding the Conversion .
 
180 after the effective date
LG Capital #2
 
October 23, 2014
 
Conversion price shall be 50% of the lowest trading price of the Common Stock as reported on the National Quotations Bureau OTCQB exchange which the Company’s shares are traded or any exchange upon which the Common Stock may be traded in the future, for the twenty prior trading days including the day upon which a Notice of Conversion is received by the Company.
 
180 after the effective date
Cardinal Capital Group
 
November 6, 2014
 
Conversion price shall equal the lesser of (a) $0.05 or (b) 60% of the lowest trade occurring during the twenty five (25) consecutive Trading Days immediately preceding the applicable Conversion Date on which the Holder elects to convert all or part of this Note, subject to adjustment as provided in this Note.
 
180 after the effective date
Rock Capital
 
February 6, 2015
 
Conversion price shall equal be 55% of the lowest closing bid price of the Common Stock as reported on the National Quotations Bureau OTCQB exchange which the Company’s shares are traded or any exchange upon which the Common Stock may be traded in the future ("Exchange"), for the twenty prior trading days including the day upon which a Notice of Conversion is received by the Company (provided such Notice of Conversion is delivered by fax or other electronic method of communication to the Company after 4 P.M. Eastern Standard or Daylight Savings Time if the Holder wishes to include the same day closing price).
 
180 after the effective date
Union Capital
 
February 17, 2015
 
Conversion price shall equal be 55% of the lowest closing bid price of the Common Stock as reported on the National Quotations Bureau OTCQB exchange which the Company’s shares are traded or any exchange upon which the Common Stock may be traded in the future ("Exchange"), for the twenty prior trading days including the day upon which a Notice of Conversion is received by the Company (provided such Notice of Conversion is delivered by fax or other electronic method of communication to the Company after 4 P.M. Eastern Standard or Daylight Savings Time if the Holder wishes to include the same day closing price).
 
180 after the effective dates
Adar Bay
 
February 19, 2015
 
Conversion price shall equal be 50% of the lowest trading price of the Common Stock as reported on the National Quotations Bureau OTCQB exchange which the Company’s shares are traded or any exchange upon which the Common Stock may be traded in the future, for the twenty prior trading days including the day upon which a Notice of Conversion is received by the Company.
 
180 after the effective date
LG Capital #3
 
March 10, 2015
 
Conversion price shall equal be 60% of the lowest trading price of the Common Stock as reported on the National Quotations Bureau OTCQB exchange which the Company’s shares are traded or any exchange upon which the Common Stock may be traded in the future, for the twenty prior trading days including the day upon which a Notice of Conversion is received by the Company.
 
180 after the effective date
 
Note 5 – Derivative Liabilities

As described in Notes 3 and 8, the Company has identified embedded derivatives in notes payables and outstanding warrants.

The fair value of the embedded derivatives related to the convertible notes payable, comprising conversion feature with the reset provisions and the default provisions, at issuance and September 30, 2016 and 2015 was determined using the multinomial lattice models that value the derivative liability based on a probability weighted discounted cash flow model.  These models are based on future projections of the various potential outcomes and utilize the following assumptions:

·
The stock price would fluctuate with the Company projected volatility;

·
The Derivative Convertible Notes convert at 40%  to 60%  of the market prices;

·
An event of default would occur initially 0% of the time, increasing 1.00% per month until it reaches 10%;

·
The projected volatility curve for each valuation period was based on the historical volatility of the Company, ranging between 200% and 260%;

·
The Company would redeem the notes initially 0% of the time, and increase monthly by 1.00% to a maximum of 5.00%;

·
The holders of the notes would automatically convert the notes at the maximum of two times the conversion price if the Company is not in default, with the target conversion price dropping as maturity approaches; and

·
The Holder would convert the note early after 0-90-180 days and at maturity if the registration was effective and the Company was not in default.

As discussed in Note 4, the Company issued convertible notes payable that provide for the issuance of convertible notes with variable conversion provisions. The conversion terms of the convertible notes are variable based on certain factors, such as the future price of the Company’s common stock. The number of shares of common stock to be issued is based on the future price of the Company’s common stock. The number of shares of common stock issuable upon conversion of the promissory note is indeterminate. Due to the fact that the number of shares of common stock issuable could exceed the Company’s authorized share limit, the equity environment is tainted and all additional convertible debentures and warrants are included in the value of the derivative. Pursuant to ASC 815-15 Embedded Derivatives, the fair values of the variable conversion option and warrants and shares to be issued were recorded as derivative liabilities on the issuance date.
 
Note 5 – Derivative Liabilities, continued

The fair value of the embedded derivatives related to the tainted outstanding warrants, comprising exercise feature with the full ratchet reset, at September 30, 2016 and 2015 was determined using the lattice models that value the derivative liability based on a probability weighted discounted cash flow model.  These models are based on future projections of the various potential outcomes and utilize the following assumptions:

  ·
The stock price would fluctuate with the Company projected volatility;

·
The stock price would fluctuate with an annual volatility. The projected volatility curve for each valuation period was based on the historical volatility of the Company, ranging between 101% and 103%;

·
The Holder would exercise the warrant as they become exercisable at target prices of two times the higher of the projected reset price or stock price;

·
The Warrants with the $0.355; $0.28; and $0.275 exercise prices are fixed and not projected to adjust; and

·
The Feltang Warrants expired in the period ending September 30, 2014 without being exercised.

The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date and to fair value as of each subsequent reporting date which at September 30, 2016 and 2015 was an aggregate of $770,854 and $725,898, respectively.

During the years ended September 30, 2016 and 2015, the Company recorded an aggregate loss of $248,204 and $105,951 on change in fair value of derivative liabilities and $394,661 and $1,024,292 day 1 loss on embedded derivative upon recognition of these derivatives, respectively. See Note 2 for more information.
 
Note 6 – Oil and Gas Properties and Concession Fees

Following is an analysis of the cost of oil and gas properties and concession fees at September 30, 2016 and 2015:

   
2016
   
2015
 
             
DRSTP concession
 
$
2,271,600
   
$
3,113,795
 
Chad concession
   
2,800,600
     
2,800,600
 
United States oil and gas properties
   
510,000
     
-
 
Pending concessions in other African countries
   
101,619
     
101,619
 
                 
   
$
5,683,819
   
$
6,016,014
 

Republic of Kenya Concession Fees and Other Financial Commitments

On June 28, 2012, ERHC entered into a production sharing contract ("PSC") with the Government of the Republic of Kenya for certain onshore hydrocarbon exploration and production of Block 11A located in northwestern Kenya.

ERHC is also committed under the PSC to:

a.
pay surface fees of $60,000 per year and annual training fees of $175,000 per year during the initial exploration term of two years that started in the first quarter of 2013,

b.
spend at least $10,250,000 over the first two years on a minimum work program, and an additional $30,000,000 in each of the following two periods of two years each.

In October 2015, the Company reached an agreement with Kosmos Energy (NYSE: KOS), a leading independent oil and gas exploration and production company focused on frontier and emerging areas to transfer all ERHC's rights to Block 11 of the Săo Tomé and Principe Exclusive Economic Zone (EEZ) to Kosmos. The agreement has been approved by the National Petroleum Agency of Sao Tome & Principe ("ANP-STP") as required in the requisite Production Sharing Contract ("PSC") for EEZ Block 11. The purchase price for the assigned interest consist of a fixed sum in the amount of $2.5 million signing fee, plus reimbursement for verifiable cost paid by the Company prior to July 1, 2015 subject to maximum amount of $1.5 million.  In connection with this agreement, the Company received $4,000,000 and recognized a gain of $2,727,805 of reimbursement of exploration costs incurred during the six months ended March 31, 2016.

In October, 2013, the Company entered into a farm-out agreement with CEPSA Kenya Limited, an affiliate of Compañía Española de Petróleos, S.A.U., an international oil and gas company ("CEPSA"). Under the terms of this agreement, the Company assigned and transferred 55% of its participating interest in Kenya Block 11A to CEPSA. Pursuant to the agreement, the Company received farm-in fee of $2,000,000, reimbursement of $2,175,966 of exploration costs incurred, and recovery of capitalized concession costs of $555,642 for the year ended September 30, 2015. In connection with this farm-out, the Company recognized a gain of $239,515 during the years ended September 30, 2015.

In exchange for the transferred rights, CEPSA will carry the Company's proportionate share of obligations and financial costs under the terms and conditions outlined in the farm-out agreement. The agreement was approved in January 2014 by the Kenyan Government and from February 2014, CEPSA took over from ERHC as operator under the production sharing contract ("PSC") for Kenya Block 11A.
 
·
As of September 30, 2016, the Company was $8,876,853 in arrears of part of its proportionate share of drilling expenses for Kenya Block 11A and therefore in default from May 2016 of its obligation to CEPSA. The drilling expenses are for the Tarach-1 exploratory well which was completed on Kenya Block 11A in summer 2016.
 
·
The Tarach-1 well was always designed as an exploratory well. An exploratory well is drilled purely for information gathering (“exploration”) purposes in an area that is yet unproven with regard to petroleum resources. The site selection for an exploratory well is based on seismic data and other pre-drill geoscientific surveys.
 
·
Operator analysis of the results if the Tarach-1 well shows that it did not encounter any reservoirs. The operator has therefore classified Tarach-1 a dry well. The well has accordingly been plugged and abandoned

Republic of Chad Concession Fees and Other Financial Commitments

On June 30, 2011, ERHC entered into a production sharing contract ("PSC") with Chad for certain onshore hydrocarbon exploration and development.  In September 2013, the Ministry of Energy and Petroleum of Chad approved ERHC’s application to voluntarily relinquish two of the three Blocks covered by the PSC.

The following is an analysis of the costs paid or incurred at September 30, 2016 and 2015:

   
2016
   
2015
 
             
Signature bonus
 
$
2,000,000
   
$
2,000,000
 
Advisers’ and ancillary costs related to the PSC
   
320,600
     
320,600
 
Legal fees and costs for the drafting and negotiation of the PSC, as provided in PSC
   
480,000
     
480,000
 
                 
   
$
2,800,600
   
$
2,800,600
 
 
ERHC is also committed under the PSC to:

a. spend at least $15,000,000 over the first five years on a minimum work program and at least an additional $1,000,000 over a further period of up to three years

 
b.
incur surface fees of $16,360 per calendar year during the first validity period starting on July 12, 2012, and lasting for up to eight years.   Surface fees for subsequent periods will depend on the exploration progress as well as on the acreage retained by ERHC.

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 100% working interest signature free bonus of two blocks of ERHC’s choice and (b) the option to acquire up to a 15% paid working interest in up to two additional 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 and EEZ blocks:
 
Block
 
ERHC
Original Participating Interest
   
ERHC Joint Bid
Participating
Interest
   
Participating
Interest(s)
Transferred
   
Current ERHC
Retained
Participating
Interest
   
Remaining
Cost Allocated
to Blocks
 
JDZ 2
   
30.00%
   
35.00%
 
   
43.00%
 
   
22.00%
 
 
$
-
 
JDZ 3
   
20.00%
 
   
5.00%
 
   
15.00%
 
   
10.00%
 
   
-
 
JDZ 4
   
25.00%
 
   
35.00%
 
   
40.50%
 
   
19.50%
 
   
-
 
JDZ 5
   
15.00%
 
   
-
     
-
   
15.00% (in arbitration)
     
567,900
 
JDZ 6
   
15.00%
 
   
-
     
-
   
15.00% (in arbitration)
     
567,900
 
JDZ 9
   
20.00%
 
   
-
     
-
     
20.00%
 
   
567,900
 
EEZ 4
   
100.00%
 
   
-
     
-
     
100.00%
 
   
567,900
 

The Original Participating Interest is the interest granted pursuant to the Option Agreement, dated April 2, 2003, between DRSTP and ERHC (the “2003 Option Agreement”).

Under the terms each of the Participation Agreements Sinopec and Addax agreed to pay all of ERHC’s future costs for petroleum operations (“the carried costs”) in respect of ERHC's retained interests in JDZ blocks 2,3 and 4. Additionally, 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 interests on individual blocks until Sinopec and Addax Sub recover 100% of ERHC’s carried costs.

The remaining $2,271,600 and $3,113,795 of cost related to the DRSTP concession, as shown on the Company's balance sheet at September 30, 2016 and 2015, respectively, relate to blocks 5, 6 and 9 of the JDZ, and the Company's EEZ blocks. Production Sharing Contracts are yet to be signed on block 4. As of September 30, 2016, blocks 5 and 6 are in arbitration (see Note 10).
 
United States Oil and gas properties

In September 2016, NewStar, a wholly- owned subsidiary of ERHC made its first acquisition, with purchase price of $510,000, of a small producing oil and gas well in Ganado, Jackson County, Texas. NewStar applied for and was granted an Operatorship License by the Texas Railroad commission.

Note 7 – Income Taxes

The composition of deferred tax assets and the related tax effects at September 30, 2016 and 2015 are as follows:
 
   
2016
   
2015
 
Net operating losses
 
$
15,013,370
   
$
10,932,812
 
Allowance for loss on deposits
   
-
     
1,443,651
 
Other
   
753,211
     
1,702,196
 
Total deferred tax assets
   
15,766,581
     
14,078,659
 
Valuation allowance
   
(15,766,581
)
   
(14,078,659
)
                 
Net deferred tax asset
 
$
-
   
$
-
 
 
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 loss for years ended September 30, 2016 and 2015, is as follows:
 
   
2016
   
2015
 
             
Income tax benefit at federal statutory rate
 
$
4,095,932
   
$
2,254,677
 
Change in valuation allowance
   
(1,687,922
   
(3,408,739
)
Expiration and adjustment of NOLs
   
(2,400,742
)
   
1,019,766
 
Stock compensation
   
-
     
(2,856
)
Other
   
(7,268
)
   
137,152
 
   
$
-
   
$
-
 

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 2016, the Company assessed the need for a valuation allowance against its deferred tax assets.   The deferred tax asset valuation allowance was $15,766,581 as of September 30, 2016. 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, 2016, the Company has Federal net operating loss carry forward of approximately $44,156,971. The federal loss carry forward expires on various dates through 2036.
 
Uncertainty in Tax Positions

On October 1, 2007, the Company adopted the guidance related to 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 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. Management has determined that the Company has no uncertain tax positions requiring recognition under ASC 740 as of September 30, 2016 and 2015.

Note 8 – Shareholders’ Equity

Common Stock
 
During the year ended September 30, 2016, 43,660 fractional shares issued to shareholders due to reverse split effective on January 5, 2016.
 
During the years ended September 30, 2016 and 2015, the Company issued 0 and 2,100 shares common stocks and recognized compensation expense of $0 and $8,400, respectively, related to service granted to the Board of Directors.

During the years ended September 30, 2016 and 2015, the Company issued an aggregate of 18,220,277 and 20,633,744 shares of common stock for conversion of convertible debts of $487,083 and $1,728,370; and recognized a gain on conversion of $56,020 and $0, and decrease in derivative value due to conversion of $959,965 and $2,474,418, respectively.
 
During the years ended September 30, 2016 and 2015, the Company issued of 0 and 928,254 shares of common stock to its related party for conversion of convertible debts of $0 and $250,000 and decrease in derivative value due to conversion of $0 and $432,646, respectively.
 
Stock Options

On January 6, 2012, the Board of Directors granted a total of 47,500 stock options to officers and board of directors members of the Company under the Company’s 2004 Stock Option Plan. The options vest over two years, are exercisable for a period of 2 years and have a $20 strike price. However, the options are only exercisable if the Company’s share price reaches $75 per share and remains consistently at or above that level for a period of one month.   They have a grant-date fair value of $63,711 or $13 per share based on and independent valuation of the options using a lattice model and the following weighted average assumptions:

Risk free interest rate
   
0.25
%
Dividend yield
   
0.00
%
Annual volatility
   
105.97
%
Exit/Attrition rates
   
2.00
%
Target exercise multiple
   
2.14
%

During the years ended September 30, 2016 and 2015, the Company recognized compensation expense of $0 and $6,957, respectively, related to the options grant as described above.   As of September 30, 2016 and 2015, there are 0 and 41,500, respectively fully-vested options outstanding; none of which are exercisable.

Stock Warrants

On October 6, 2010, an equivalent of 68,182 warrants with a term of 5 years and an exercise price of $28 were issued to the investors along with the common shares sold.   ERHC also issued to the placement agent a total of 4,596 warrants which have an exercise price of $27.5 and a term of approximately 5 years.   At September 30, 2016, all warrants were expired.   During the years ended September 30, 2016 and 2015, 68,182 and 4,596 warrants expired unexercised, respectively.
 
Stock Warrants Summary

Information regarding warrant, their respective changes