U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
AMENDMENT NO. 3 TO
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended December 31, 1997
Commission File Number 0-17325
ENVIRONMENTAL REMEDIATION HOLDING CORP.
(Exact name of issuer in its charter)
COLORADO 88-0218499
(State of Incorporation) (IRS Employer ID Number)
3-5 Audrey Avenue
Oyster Bay, New York 11771
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (516) 922-4170
Indicate by check mark whether the registrant (1) has filed reports required to
be filed by Section 13 of 15 (d) of the Securities Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No ____
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
Common stock, $0.0001 par value
As of December 31, 1997 was 23,965,625
Documents Incorporated by Reference:
None
PART I - Financial Information
ITEM 1. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Page
Consolidated Balance Sheets ...............................................F-2
Consolidated Statements of Operations ......................................F-3
Consolidated Statements of Stockholders' Equity ............................F-4
Consolidated Statements of Cash Flows .....................................F-5
Notes to Consolidated Financial Statements .................................F-6
F-1
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Consolidated Balance Sheets
September 30, December 31,
1997 1997
----------------- --------------------
ASSETS (Unaudited)
CURRENT ASSETS
Cash $ 327,743 $ 797,102
Prepaid expenses and other current assets 215,708 447,231
----------------- --------------------
Total current assets 543,451 1,244,333
----------------- --------------------
PROPERTY AND EQUIPMENT
Oil and gas properties (Successful efforts method) 515,625 1,044,375
Equipment 4,220,000 6,364,537
Deposit on purchase of equipment 136,560 300,705
----------------- --------------------
Total property and equipment before depreciation 4,872,185 7,709,617
Less: accumulated depreciation and depletion (521,000) (625,221)
----------------- --------------------
Net property and equipment 4,351,185 7,084,396
----------------- --------------------
OTHER ASSETS
Master service agreement 300 300
DRSTP concession fee 0 2,008,300
----------------- --------------------
Total other assets 300 2,008,600
----------------- --------------------
Total Assets $ 4,894,936 $ 10,337,329
================= ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Stockholder loans payable $ 465,094 $ 475,008
Note payable - bank 175,000 0
Accounts payable and accrued liabilities :
Accrued salaries 960,000 1,230,000
Accrued interest 37,228 86,499
Other 111,054 569,220
----------------- --------------------
Total current liabilities 1,748,376 2,360,727
----------------- --------------------
LONG-TERM LIABILITIES
Convertible debt 0 3,838,825
----------------- --------------------
Total long term liabilities 0 3,838,825
----------------- --------------------
Total Liabilities 1,748,376 6,199,552
----------------- --------------------
Common stock issued under a repurchase agreement; issued and
outstanding 1,000,000 and 750,000 2,000,000 1,500,000
----------------- --------------------
STOCKHOLDERS' EQUITY
Preferred stock, $0.0001 par value; authorized 10,000,000 shares ;
none issued and outstanding 0 0
Common stock, $0.0001 par value; authorized 950,000,000 shares ;
issued and outstanding 21,989,526 and 22,965,625 2,199 2,322
Additional paid in capital in excess of par 19,952,865 22,269,186
Deficit (17,645,204) (19,414,981)
Stock subscriptions receivable (913,300) 0
Deferred compensation, net (250,000) (218,750)
----------------- --------------------
Total Stockholders' Equity 1,146,560 2,637,777
----------------- --------------------
Total Liabilities and Stockholders' Equity $ 4,894,936 $ 10,337,329
================= ====================
The accompanying notes are an integral part of the financial statements
F-2
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Consolidated Statements of Operations
Three months ended December 31,
-----------------------------------------
1996 1997
----------------- -----------------
REVENUE
Environmental remediation services $ 0 $ 146,083
Crude oil 0 96,914
----------------- -----------------
Total revenue 0 242,997
----------------- -----------------
COSTS AND EXPENSES
Compensation :
Officers 31,250 301,250
Directors 0 0
Consulting fees 0 251,171
Geological data and reports 0 0
General and administrative expense 52,500 1,281,363
Depreciation and depletion 62,000 123,503
Interest expense 0 55,487
----------------- -----------------
Total costs and expenses 145,750 2,012,774
----------------- -----------------
Net income (loss) $ (145,750) $ (1,769,777)
================= =================
Weighted average number of shares outstanding 3,239,374 24,017,700
================= =================
Net income (loss) per share - basic $ (0.04) $ (0.07)
================= =================
The accompanying notes are an integral part of the financial statements
F-3
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Consolidated Statements of Stockholders' Equity
Common Stock
-----------------------
Number Stk Subs Defr'd Accumulated TTL S/H
of Shares Amount APIC Receivable Comp. Deficit Equity
------------- --------- ------------ ---------------------- -------------- ------------
BEGINNING BALANCE, September 30, 1996 3,239,374 $ 324 4,629,598 0 (427,500) (732,152) 3,470,270
Year Ended September 30, 1997
Common stock issued for :
2/10 - S-8 services 1,600,000 160 1,099,840 0 0 0 1,100,000
3/4 - oil wells/leases 300,000 30 309,345 0 0 0 309,375
=======
3/5 - oil wells/leases 200,000 20 206,230 0 0 0 206,250
3/13 - S-8 services 300,000 30 374,970 0 0 0 375,000
4/5 - Chevron contract 3,000,000 300 0 0 0 0 300
4/5 - services 1,342,981 134 1,342,847 0 0 0 1,342,981
4/5 - contributed to corp (100,000) (10) (99,990) 0 0 0 (100,000)
4/9 - BAPCO acquisition 4,000,000 400 499,600 0 0 0 500,000
5/14 - S-8 services 1,500,000 150 562,350 0 0 0 562,500
6/19 - services 150,000 15 28,110 0 0 0 28,125
7/8 - cash 800,000 80 399,920 0 0 0 400,000
7/25 - S-8 services 2,335,000 233 6,464,798 0 0 0 6,465,031
7/30 - services 1,500,000 150 2,249,850 0 0 0 2,250,000
7/30 - cash 147,000 15 146,985 0 0 0 147,000
8/8 - cash 74,000 8 147,992 0 0 0 148,000
9/4 - services 400,000 40 307,960 0 0 0 308,000
9/10 - cash stk subs recv 727,273 73 799,927 (800,000) 0 0 0
9/15 - cash & stk subs recv 473,898 47 482,533 (113,300) 0 0 369,280
9/30 - deferred comp. amort. - 0 0 0 177,500 0 177,500
Net loss - 0 0 0 0 (16,913,052) (16,913,052)
------------- --------- ------------ ---------------------- -------------- ------------
BALANCE, September 30, 1997 21,989,526 $ 2,199 19,952,865 (913,300) (250,000) (17,645,204) 1,146,560
Three months ended December 31, 1997
10/97 - stock subs. rec'd - 0 0 913,300 0 0 913,300
10/08 - Uinta acquisition 1,000,000 100 1,999,900 0 0 0 2,000,000
10/97 - Neuces acquisition 50,000 5 148,745 0 0 0 148,750
11/97 - cash, net 176,099 18 167,676 0 0 0 167,694
Deferred comp. amort. - 0 0 0 31,250 0 31,250
Net loss - 0 0 0 0 (1,769,777) (1,769,777)
------------- --------- ------------ ---------------------- -------------- ------------
BALANCE, December 31, 1997 (unaudited) 23,215,625 $ 2,322 22,269,186 0 (218,750) (19,414,981) 2,637,777
============= ========= ============ ====================== ============== ============
Common stock issued under a repurchase agreement
BEGINNING BALANCE, September 30, 1996 0 $ 0 0 0 0 0 0
7/97 - DRSTP info 1,000,000 100 1,999,900 0 0 0 2,000,000
------------- --------- ------------ ---------------------- -------------- ------------
BALANCE, September 30, 1997 1,000,000 100 1,999,900 0 0 0 2,000,000
12/97 - cash repurchase (250,000) 0 (500,000) 0 0 0 (500,000)
------------- --------- ------------ ---------------------- -------------- ------------
BALANCE, December 31, 1997 (unaudited) 750,000 $ 100 1,499,900 0 0 0 1,500,000
============= ========= ============ ====================== ============== ============
The accompanying notes are an integral part of the financial statements
F-4
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Consolidated Statements of Cash Flows
Three months ended December 31,
--------------------------------------
1996 1997
-------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (145,750) $ (1,769,777)
Adjustments to reconcile net loss to net cash used for operating
activities:
Amortization of deferred compensation 83,750 31,250
Depreciation and depletion 62,000 123,503
Changes in operating assets and liabilities:
(Increase) decrease in prepaid expenses and other assets 0 (231,523)
Increase (decrease) in accrued interest expense 0 49,271
Increase (decrease) in accrued expenses 0 458,166
Increase (decrease) in accrued salaries 0 270,000
-------------- ----------------
Net cash provided by (used by) operating activities 0 (1,069,110)
-------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
DRSTP concession fee payment 0 (2,008,300)
Increase in deposits on fixed assets 0 (164,145)
Acquisition of property and equipment 0 (58,694)
-------------- ----------------
Net cash provided by (used by) investing activities 0 (2,231,139)
-------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock sold for cash 0 167,694
Convertible debt sold for cash 0 3,767,000
Payments on bank borrowings 0 (175,000)
Proceeds from loans payable to stockholders 0 217,775
Payments on stockholder loans payable 0 (207,861)
-------------- ----------------
Net cash provided by (used by) financing activities 0 3,769,608
-------------- ----------------
Net increase (decrease) in cash 0 469,359
CASH, beginning of period 0 327,743
-------------- ----------------
CASH, end of period $ 0 $ 797,102
============== ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for interest $ 0 $ 11,825
============== ================
Non cash financing and investing activities: Stock issued to acquire :
Oil and gas properties and equipment $ 0 $ 2,148,750
============== ================
The accompanying notes are an integral part of the financial statements
F-5
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
December 31, 1996 and 1997
(1) Summary of Significant Accounting Policies
The Company.
Environmental Remediation Holding Corporation, (ERHC), was incorporated
on May 12, 1986 in Colorado as Valley View Ventures, Inc., (VVV). Its
name was changed to Regional Air Group Corporation, (RAGC), on
September 20, 1988, and then to Environmental Remediation Holding
Corporation on August 29, 1996. VVV was created in 1986 as a blind pool
to seek a merger opportunity with a viable operating company. In 1988
the company acquired, via a reverse merger, Mid-Continent Airlines
which was a regional "feeder" airline operating as Braniff Express. On
September 28, 1989, Braniff Airlines filed Chapter 11 Bankruptcy. This
event proved to be catastrophic to the then operating business of the
Company. RAGC liquidated its assets and liabilities shortly thereafter
and remained dormant until its reverse merger with Environmental
Remediation Funding Corporation on August 19, 1996.
Nature of operations.
ERHC operates in the environmental remediation industry and the oil and
natural gas production industry from its corporate headquarters in
Jericho, New York, and its operating offices in Lafayette, Louisiana.
Use of estimates
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles. In preparing the
financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities
as of the dates of the statements of financial condition and revenues
and expenses for the years then ended. Actual results could differ
significantly from those estimates. The following summarize the more
significant accounting and reporting policies and practices of the
Company:
Principles of consolidation
The consolidated financial statements include the accounts of SSI and
BAPCO, its wholly owned subsidiaries. Intercompany accounts and
transactions have been eliminated in consolidation. The consolidated
financial statements for the three months ended December 31, 1996 and
1997 include all adjustments which in the opinion of management are
necessary for fair presentation.
Net loss per share
Net loss per share - basic is computed by dividing the net loss by the
number of shares outstanding during the period. Net loss per share -
diluted is not presented because the inclusion of common share
equivalents would be anti-dilutive.
DRSTP geological data
In July 1997, the Company acquired substantial geologic data and other
information from an independent source in exchange for one million
shares of the Company's common stock. This data was valued at
$2,000,000 based the agreement with the seller that Company would
repurchase these shares for $2,000,000 at a rate of 25% per quarter
should the seller so choose. The Company expensed this acquisition cost
immediately.
(2) Significant Acquisitions
The Company acquired 100% of the issued and outstanding common stock of
Environmental Remediation Funding Corp., (ERFC), a Delaware
corporation, effective on August 19, 1996, in a reverse triangular
merger, which has been accounted for as a reorganization of ERFC. At
the same time the Company changed its name from RAGC. Prior to the
merger ERFC had acquired certain environmental remediation equipment in
F-6
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
2) Significant Acquisitions (Continued)
exchange for common stock. ERFC then employed the seller of this
equipment as an outside consultant in exchange for common stock.
Subsequently, ERFC was unable to enter into the environmental
remediation contracts it had hoped to and asked the consultant to
become the Chairman, President and CEO of ERFC.
At the time of the acquisition of ERFC by RAGC, ERFC owned 100% of Site
Services, Inc., (SSI). ERFC had acquired SSI from Bass Environmental
Services Worldwide, Inc., (BESW), a company controlled by the Chairman,
President and CEO of ERFC. SSI had always been an inactive company,
except for certain environmental remediation licences which it
continues to hold.
On April 9, 1997, the Company acquired 100% of the issued and
outstanding common stock of Bass American Petroleum Company, (BAPCO),
which was accounted for as a purchase. BAPCO had been an inactive
company for several years previously, however BAPCO owned a variety of
oil well production enhancing equipment, which is proprietary to, but
not patented by BAPCO. The transaction was in essence an asset
acquisition. At the time of the acquisition BAPCO was 100% owned by the
Chairman, President and CEO of ERHC. BAPCO is the operator of the
various oil and natural gas leases it has acquired.
(3) Liquidity
The Company's current liabilities exceed its current assets by
$1,100,000, reflecting a possible lack of liquidity. The Company is in
ongoing negotiations to raise general operating funds and funds for
specific projects. As discussed in notes 10 and 7, the Company raised
an additional $1,100,000 in October 1997 and $4,300,000 in November
1997. As discussed in note 15, the Company has also received a letter
of intent for a firm commitment from a registered broker/dealer to
raise an additional $50,000,000 in convertible debt.
However there is no assurance that such financing will be obtained.
(4) Equipment
Environmental remediation equipment was purchased by ERFC in exchange
for common stock. The Company recorded this equipment based on the fair
value of the common stock given up. At the date of acquisition, ERFC
was a privately held company, therefore there was no market for ERFC's
stock. At the time of negotiations for this transaction, it was an arms
length transaction between unrelated parties. The parties negotiated a
value of $5 per share for a total of 744,000 shares valuing this
transaction at $3,720,000. The Company has chosen to depreciate the
equipment using the straight line method over its estimated remaining
useful life of fifteen years. Expenditures for maintenance and repairs
are charged to operations as incurred.
In the BAPCO acquisition the Company acquired ownership of all rights
to BAPCO's proprietary oil well reworking tool, "the BAPCO Tool" as
well as other oil and natural gas well reworking equipment. The control
of this proprietary tool has enhanced the Company's position to the
extent that it would not have been able to enter into the contract to
control the Utah oil fields and the reworking of the Indonesian oil
fields. The control of this tool also enabled the acquisition of the
200 Texas oil wells to be economically feasible to a greater extent.
The Company received two completed "BAPCO" tools which were ready to be
placed in service in this transaction. The Company valued the equipment
received at historical cost amounting to $250,000 each for the two
tools, totalling $500,000. BAPCO was controlled by the CEO of ERHC at
the time of the BAPCO acquisition, therefore the Company believes
historical cost is the appropriate basis for valuing the transaction.
The Company is depreciating this tool and technology over ten years.
Depreciation expense for the three months ended December 31, 1996 and
1997 was $62,000 and $122,793 respectively.
F-7
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
(5) Crude oil reserves
At September 30, 1996, the Company had no oil and gas reserves. In
March 1997, the Company acquired an undivided 7/8 interest in a 100
well lease located in the Gunsite Sand Lease in Ector, Texas, in
exchange for 300,000 shares of the Company's common stock. The Company
valued this transaction at the closing price of stock given up,
$1.03125, or a total of $309,375. The Company received an independent
evaluation of this field which reflected 1,000,000 barrels of proved
oil reserves. In March 1997, the Company acquired an undivided 7/8
interest in a 100 well lease located in the Woodbine Sand Lease Block
in Henderson County, Texas, in exchange for 200,000 shares of the
Company's common stock. The Company valued this transaction at the
closing price of the stock given up, $1.03125, or a total of $206,250.
The Company received an independent evaluation of this field which
reflected 1,500,000 barrels of proved oil reserves. These reserve
reports, as amended in March 1998, reflect values of $4,831,323 for
Gunsite and $9,504,323 for Woodbine. A separate reserve report is in
the process of being prepared, which the Company will use to adjust the
quantity of barrels of reserves if the subsequent report is materially
different.
Both acquisitions also included all existing equipment on site. The
Company has not recorded the fair market value of the equipment in
place, as all of such equipment has minimal scrap value, which is the
only valuation method available due to the non-operational status of
the wells at acquisition. The Company spent $53,000 for the year ended
September 30, 1997 on well equipment repairs and well rework, all on
the Gunsite lease. The Company expects to capitalize and depreciate
repairs which are believed to extend the useful life of such existing
equipment beyond one year, as well as the cost of replacement
equipment.
Test oil production
In late November 1997, test oil production amounting to approximately
444 barrels was picked up from the tanks at the Gunsite Sand lease. At
that time the Company had approximately 9 wells back on line and
pumping. In late November and early December 1997, test oil production
amounting to approximately 1,292 barrels was picked up from the tanks
at the 22 leases in Uintah and Duchesne Counties, Utah.
The Company expects to utilize the successful efforts method of
accounting for its oil and gas producing activities once it has reached
the producing stage. The Company expects to regularly assess proved oil
and gas reserves for possible impairment on an aggregate basis in
accordance with SFAS 121.
Depletion
Depletion (including provisions for future abandonment and restoration
costs) of all capitalized costs of proved oil and gas producing
properties are expected to be expensed using the unit-of-production
method by individual fields as the proven developed reserves are
produced. Depletion expense for the three months ended December 31,
1996 and 1997 was $0 and $710 respectively.
(6) Master service agreement
In September 1996 Bass Environmental Services Worldwide, Inc., (BESW),
entered into a master service agreement with Chevron to plug and
abandon oil wells located in the Gulf of Mexico off the coast of
Louisiana. In April 1997, BESW assigned this contract to the Company in
exchange for 3,000,000 shares of the Company's common stock. Chevron
has reissued the contract in the Company's name. At the time of the
acquisition, BESW was controlled by the CEO of ERHC. The Company valued
this acquisition on the basis of the par value of the Company's common
stock given up, or $300, because no historical cost basis could be
individually determined and the contract has minimal value until the
Company has built or purchased the equipment to commercialize the
contract. The Company expects to begin commercializing the agreement in
mid 1998.
F-8
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
(7) Notes payable
The Company issued two notes payable to stockholders who are also
officers and directors in exchange for cash amounting to $978,157.
These notes carry no stated maturity date and an 8.5% rate of interest.
The Company has repaid $503,148 on these notes, including interest on
one. The remaining note is convertible into restricted stock at 50% of
the average bid price for the month in which the loan was made. The
conversion is at the option of the noteholder. Accrued interest on
these notes is $0 and $86,499 for the three months ended December 31,
1996 and 1997.
In January 1997, the Company issued a note payable to a bank in
exchange for $175,000 cash. This note carried a maturity date of March
15, 1997 and a 9.6875% interest rate. The Company is in default on this
note. The default interest rate is 13.6875%. The Company and the bank
had originally expected to roll this note over into a long-term credit
facility. The Company chose not to accept the long-term facility due to
the terms offered. The Company repaid this loan in full plus accrued
interest in December 1997.
Convertible notes
In November and December 1997, the Company issued 5.5% convertible
senior subordinated secured notes due 2002 in exchange for $4,300,000
in cash. These notes are convertible into shares of the Company's
common stock at a conversion price to be determined by so stated
formula, but at a price no less than $1.25 per share. If all of the
notes are converted at the lowest possible price, the Company would be
required to issue 3,440,000 shares of common stock. These notes also
carried warrants for an additional 258,000 shares of common stock with
an exercise price of $3.17 per warrant, or total proceeds to the
Company of $817,860 in the event all of the warrants are exercised. The
notes are secured by the Company's non-MIII oil reserves in Utah.
(8) Accrued salaries
At December 31, 1996 and 1997 the Company has accrued salaries of, $0
and $1,230,000, respectively, for three officers. These officers can,
at their option, convert these salaries into common stock of the
Company at the rate of one-half of the average bid price of the
Company's common stock for the months in which the salary was earned.
(9) Income taxes
The Company has a consolidated net operating loss carry-forward
amounting to $19,414,981, expiring as follows: $3,404 in 2010, $728,748
in 2011, $16,913,052 in 2012 and $1,714,290 in 2013. The Company has a
$7,766,000 deferred tax asset resulting from the loss carry-forward,
for which it has established a 100% valuation allowance. Until the
Company's current plans begin to produce earnings it is unclear as to
the ability of the Company to utilize these carry-forwards.
(10) Stockholders' equity
The Company has authorized 950,000,000 shares of $0.0001 par value
common stock and 10,000,000 shares of $0.0001 par value preferred
stock. On September 30, 1995, the predecessor entity, ERFC, had
1,639,450 shares issued and outstanding, which had been issued during
the month since inception as 884,407 shares for $88 in cash and 755,043
shares for a four year consulting agreement valued at $500,000 with a
then independent consultant who subsequently became the Company's
Chairman, President and CEO.
In October 1995, ERFC issued 744,000 shares in exchange for
environmental remediation equipment valued as discussed in note 1b at
$3,720,000. This equipment was acquired from the consultant who had
received the 755,043 shares and subsequently became the Company's
Chairman, President and CEO. In October 1995, ERFC issued 20,000 shares
for $50,000 in cash.
F-9
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
(10) Stockholders' equity (continued)
In August 1996, ERFC issued 20,500 shares in exchange for $42,892 in
cash. On August 19,1996, the sucessor Company issued 2,433,950 shares
of common stock to acquire 100% of the issued and outstanding common
stock of ERFC. At the time of the acquisition ERHC, then known as RAGC,
had 356,317 shares issued and outstanding as a result of a 1 for 2,095
share reverse stock split. On August 19, 1996, the Company issued
73,277 shares of common stock to a consultant in exchange for services
valued at $1.00 per share related to the merger. In August 1996, the
Company issued 10,000 shares of its common stock, valued at $70,000, to
an attorney for services to be rendered at below market rates for a
period of 4 months. In September 1996, the Company issued 55,000 shares
of its common stock under three consulting contracts previously
negotiated, valued at $385,000. In September 1996, the Company issued
320,830 shares of its common stock in exchange for $31,995 in cash
In February 1997, the Company issued 1,600,000 shares of common stock
via an S-8 registration in exchange for consulting and professional
services valued at $1,100,000. In March 1997, the Company acquired a
100 oil well lease with one million barrels of proven oil reserves in
exchange for 300,000 shares of the Company's common stock valued at
309,375. In March 1997, the Company acquired a 100 oil well lease with
one and one-half million barrels of proven oil reserves in exchange for
200,000 shares of the Company's common stock valued at $206,250. In
March 1997, the Company issued 300,000 shares of common stock via an
S-8 registration valued at $375,000 in exchange for public relations
services, of which approximately 150,000 had been earned at fiscal year
end. The balance will either be earned or returned to ERHC. In April
1997, the Company issued 3,000,000 shares of common stock in exchange
for the assignment of the Chevron P&A master service agreement, valued
at $300. In April 1997, the Company issued 1,342,981 shares of common
stock to three directors in lieu of cash compensation for services
rendered to the Company valued at $1,342,981. In April 1997, a director
contributed 100,000 shares of common stock back to the Company with a
value of $100,000. In April 1997, the Company issued 4,000,000 shares
of common stock in exchange for 100% of the issued and outstanding
common stock of Bass American Petroleum Company, (BAPCO), valued at
historical costs at $500,000. In May 1997, the Company issued 1,500,000
shares of common stock via an S-8 in exchange for consulting and
professional services valued at $562,500. In June 1997, the Company
issued 150,000 shares of common stock to two independent consultants
for services valued at $28,125. One of these consultants became an
employee of the Company in September 1997.
In July 1997, the Company issued 800,000 shares under a Section 4(2)
exemption from registration to a previously unrelated party in exchange
for $400,000 in cash. In July 1997, the Company acquired substantial
geologic data and other information from an independent source in
exchange for 1,000,000 shares of the Company's common stock. This data
was valued at $2,000,000 based the agreement with the seller that
Company would repurchase these shares for $2,000,000 at a rate of 25%
per quarter should the seller so choose. In July 1997, the Company
issued 2,335,000 shares of common stock to three independent
consultants for services valued at $6,465,031, principally relating to
the Company's acquisition of the MIII agreement. In July 1997, the
Company issued 1,500,000 shares of common stock to three directors in
lieu of cash compensation for services rendered to the Company valued
at $2,250,000. In July 1997, the Company issued 147,000 shares of
common stock under a Regulation D Rule 506 private placement in
exchange for $147,000 in cash. In August1997, the Company issued 74,000
shares of common stock under a Regulation D Rule 506 private placement
in exchange for $148,000 in cash. In September 1997, the Company issued
400,000 shares of common stock to an independent consultant for
services valued at $308,000. In September 1997, the Company issued
370,898 shares of common stock under a Regulation D Rule 506 private
placement in exchange for $407,988 in cash. In September 1997, the
Company received stock subscription agreements for $913,300 in cash
under a Regulation D Rule 506 private placement representing 830,273
shares of common stock.
F-10
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
(10) Stockholders' equity (continued)
The 830,273 shares of common stock were issued by the Company upon
receiving the $913,300 in cash in October 1997 which had been
subscribed for at September 30, 1997. In October and November 1997, the
Company issued 175,599 additional shares of common stock in exchange
for $183,359 in cash under the same private placement memorandum
offering in August and September 1997.
On September 29, 1997, the Company entered into an agreement to acquire
22 oil, gas and mineral leases located in Uintah and Duchesne Counties,
Utah from three joint owners. The purchase agreement was closed on
October 8, 1997, at which time the the Company received the lease
assignment. The terms of the acquisition are for the Company pay
$250,000 in cash, issue 250,000 shares of the Company's common stock at
each of the following four dates: closing; December 30, 1997; March 30,
1998 and June 30, 1998. The Company also was required to guarantee that
the bid price on the date the Rule 144 restrictions lapse will be no
less than $2.00 per share or the Company is required to either issue
additional shares or to pay the difference in cash, at the Company's
option. The Company also granted the sellers a 4% gross production
receipts royalty to a maximum of $677,000. The Company is currently
evaluating the existing reserve reports and underlying data on these
leases as well as has contracted another independent appraiser to
complete new reserve reports for its use. The total valuation of this
transaction is $2,250,000 and is applied as $375,800 of oil and gas
reserves and $1,874,200 of equipment.
In October 1997, the Company entered into an agreement to acquire a 3/8
undivided interest in a natural gas well that had been plugged and
abandoned approximately 10 years ago. This agreement requires the
Company to pay the seller $150,000 and 50,000 shares of the Company's
common stock, as well as to pay the Company's proportionate share of
the costs to reenter this well. The Company is also required to carry
the seller's 1/8 proportionate share of the reentry costs until the
well is producing. The seller also owns an undivided 50% interest in
the oil and gas lease on the 49,019 acres of land contiguous to the
initial well. The agreement allows the Company to acquire a 3/8
undivided interest in this lease by paying to the seller approximately
$343,000 each April for four years. The Company received the initial
lease assignment on December 1, 1997. The Company is currently
evaluating the existing reserve reports and underlying data on these
leases as well as has contracted another independent appraiser to
complete new reserve reports for its use.
In December 1997, the Company repurchased 250,000 shares of its common
stock for $500,000 in cash. This was the first 25% quarterly repurchase
agreed to by the Company relating to the 1,000,000 shares issued to
acquire the DRSTP geological data.
The Company is contingently liable to issue up to three million shares
of restricted stock in total to three officers and directors of the
Company for their efforts in closing the Sao Tome & Principe contract.
These shares will be issued upon the joint venture oil production level
of 20,000 barrels a day being attained. The Company is contingently
liable to issue up to two million shares of restricted stock to two
officers and directors of the Company for their efforts in closing the
M III contract in Utah upon the joint venture oil production level of
4,000 barrels a day being attained. This two million shares includes
the 500,000 shares the Company is to issue to MIII. The Company is also
contingently liable to issue an additional two million shares upon the
joint venture attaining production of a total of 6,000 barrels a day.
(11) Deferred compensation
ERFC issued 755,043 shares of its common stock into escrow in exchange
for services to be rendered by a consultant under a four year contract. These
services were valued at $125,000 per year, therefore the Company
F-11
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
(11) Deferred compensation (continued)
is amortizing this deferred compensation expense at a rate of $31,250
per quarter. This consultant later became ERFC's Chairman, President
and CEO. On August 30, 1996, the Company issued 10,000 shares of its
common stock, valued at $70,000, to an attorney for services to be
rendered at below market rates for a period of 4 months. Accordingly,
the Company amortized this expense over the term of the agreement.
(12) Commitments and contingencies
The Company is committed to lease payments for 9 vehicles under
operating leases totalling $52,292 and $20,043 for the fiscal years
ended September 30, 1998 and 1999, respectively. The Company currently
leases its office space and operating facilities on a month to month
basis.
(13) Segment information
The Company has three distinct lines of business through its two wholly
owned subsidiaries, Site Services, Inc., (SSI), and Bass American
Petroleum Company, (BAPCO), and a joint venture agreement. SSI operates
in the environmental remediation industry and BAPCO will operate in the
oil and gas production industry. SSI's principal identifiable assets
consist of $3,720,600, of environmental equipment, a barge deposit of
$131,000 and the Chevron P&A master service agreement valued at $300,
(net). Revenues of $146,083 relate to SSI. BAPCO's principal
identifiable assets consist of crude oil and natural gas reserves
valued at $1,044,375 and equipment valued at $2,570,000. Revenues of
$96,914 relate to BAPCO. The Company also expects to operate in the
supply industry through a joint venture agreement to supply fuel and
other goods to ships transiting the Panama Canal. No principal
identifiable assets yet exist for this line of business.
(14) Sao Tome concession payment
When the Company entered into the joint venture agreement in May 1997
with the Democratic Republic of Sao Tome and Principe, (DRSTP), the
Company was required to pay a $5,000,000 concession fee to the DRSTP
goverment. In September 1997, the Company received a Memorandum of
Understanding from the DRSTP government which allows the Company to pay
this concession fee within five days after the DRSTP files the relevant
official maritime claims maps with the United Nations and the Gulf of
Guinea Commission. In December 1997, the Company paid $2,000,000 of
this concession fee to the DRSTP from the proceeds of the convertible
note offering.
(15) Letter of intent
In December 1997, the Company received a letter of intent from a
registered brokerage house which contemplates a firm commitment public
offering of approximately $50,000,000 of convertible debt securities.
This offering, if it proceeds, is contemplated for early 1998. There is
no assurance that such offering will be consummated.
F-12
Item 2. Management's Discussion and Analysis and Plan of Operation.
Environmental Remediation Holding Corporation is an independent oil and gas
company engaged in the exploration, development, production and sales of crude
oil and natural gas properties with current operations focused in Texas, Utah,
and the Democratic Republic of Sao Tome and Principe in West Africa.
The Company's strategy in the United States is to increase oil and natural gas
reserves, production, and cash flow through (1) the exploration of its existing
acreage position in Texas, Utah, and the Democratic Republic of Sao Tome and
Principe; (2) the acquisition of additional properties in known producing areas
that provide significant development and exploratory drilling potential; (3) the
exploration for oil and natural gas reserves; (4) the maintenance of a low
operating and cost structure; and, (5) environmental remediation as it relates
to the oil and gas industry.
The Company has acquired all of its oil and gas properties within the past year.
The Company's current development plans require substantial capital expenditures
in connection with the exploration, development and exploitation of oil and
natural gas properties. Although the Company has historically funded capital
expenditures through a combination of equity contribution and short-term
financing arrangements, the Company's ability to meet its estimated capital
expenditure in Fiscal year 1998 are dependent on the Company's ability to
realize the proceeds of the Company's contemplated debt offering.
Should the Company's contemplated debt offering not proceed as planned, the
Company will continue to seek alternative sources of funding to enable the
Company to meet its demands for cash to commercialize the various agreements it
has entered into.
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto referred to in "Item 1. Financial
Statements.
RESULTS OF OPERATIONS
During the first quarter of fiscal 1998 the Company incurred a net loss of
$1,769,777, compared to a net loss of $145,750 in the first quarter of fiscal
1997. In the first quarter of fiscal 1998 a total of $960,000 was accrued, but
not paid in cash, as compensation to three officers of the Company. Depreciation
and amortization totaled $123,503 in the first quarter of fiscal 1998 compared
to $62,000 in the first quarter of fiscal 1997. Depletion expense was $710 in
the first quarter of fiscal 1998 compared to $0 the prior year. The net cash
operating loss of the Company for the first quarter of fiscal 1998 was
$1,069,110 compared to $0 for the first quarter of fiscal 1997.
Officers compensation, professional fees, travel, consultant fees and
miscellaneous expense for the three months ended December 31, 1997 compared to
the three months ended December 31, 1996 increased dramatically because the
Company had not yet funded and begun its operations by December 31, 1996.
Professional fees included legal, audit and petroleum engineering and other
engineering costs.
The Company had revenues of $243,000 in first quarter of fiscal 1998 compared to
$0 in the first quarter of fiscal 1997. Cost of sales were $44,362 in first
quarter of fiscal 1998 compared to $0.00 in first quarter of fiscal 1997.
Included in the first quarter of fiscal 1998 expenses was the cost of bringing a
delegation of government officials, including the Prime Minister of Sao Tome to
the United States for meetings with various committees of the United Nations and
the US government. The cost of this trip was approximately $200,000.
CAPITAL EXPENDITURES
When the Company entered into the joint venture agreement in May 1997 with the
Democratic Republic of Sao Tome and Principe, (DRSTP), the Company was required
to pay a $5,000,000 concession fee to the DRSTP goverment. In September 1997,
the Company received a Memorandum of Understanding from the DRSTP government
which allows the Company to pay this concession fee within five days after the
DRSTP files the relevant official maritime claims maps with the United Nations
and the Gulf of Guinea Commission. In December 1997 the Company paid $2,000,000
of this concession fee to the DRSTP from the proceeds of the convertible note
offering.
On September 29, 1997, the Company entered into an agreement to acquire 22 oil,
gas and mineral leases located in Uintah and Duchesne Counties, Utah from three
joint owners. The purchase agreement was closed on October 8, 1997, at which
time the the Company received the lease assignment. The terms of the acquisition
are for the Company to pay $250,000 in cash, issue 250,000 shares of the
Company's common stock, valued at $2,000,000, at each of the following four
dates: closing; December 30, 1997; March 30, 1998 and June 30, 1998. The Company
also was required to guarantee that the bid price on the date the Rule 144
restrictions lapse will be no less than $2.00 per share or the Company is
required to either issue additional shares or to pay the difference in cash, at
the Company's option. The Company also granted the sellers a 4% gross production
receipts royalty to a maximum of $677,000. The Company is currently evaluating
the existing reserve reports and underlying data on these leases and has
contracted another independent appraiser to complete new reserve reports for its
use.
10
In October 1997, the Company entered into an agreement to acquire a 3/8
undivided interest in a natural gas well that had been plugged and abandoned
approximately 10 years ago. This agreement requires the Company to pay the
seller $150,000 and 50,000 shares of the Company's common stock valued at
$148,750, as well as to pay the Company's proportinate share of the costs to
reenter this well. The Company is also required to carry the seller's 1/8
proportionate share of the reentry costs until the well is producing. The seller
also owns an undivided 50% interest in the oil and gas lease on the 49,019 acres
of land contiguous to the initial well. The agreement allows the Company to
acquire a 3/8 undivided interest in this lease by paying to the seller
approximately $343,000 each April for four years. The Company received the
initial lease assignment on December 1, 1997. The Company is currently
evaluating the existing reserve reports and underlying data on these leases and
has contracted another independent appraiser to complete new reserve reports for
its use.
RESERVES AND PRICING
Oil and natural gas prices fluctuate throughout the year. Generally higher
natural gas prices prevail during the winter months of September through
February. A significant decline in prices would have a material effect on the
measure of future net cash flows which, in turn, could impact the value of the
Company's oil and gas properties.
The Company's drilling and acquisition activities have increased its reserve
base and its productive capacity and, therefore, its potential cash flow. Lower
gas prices may adversely affect cash flow. The Company intends to continue to
acquire and develop oil and gas properties in its areas of activity as dictated
by market conditions and financial ability. The Company retains flexibility to
participate in oil and gas activities at a level that is supported by its cash
flow and financial ability. Management believes that the Company's borrowing
capacities and cash flow are sufficient to fund its currently anticipated
activities. The Company intends to continue to use financial leverage to fund
its operations as investment opportunities become available on terms that
management believes warrant investment of the Company's capital resources.
The Company is currently evaluating the existing reserve reports and underlying
data on all leases and has contracted another independent appraiser to complete
new reserve reports.
The Company's non-producing proved reserves are largely "behind-pipe" in fields
which it operates. Undeveloped proved reserves are predominantly infill drilling
locations and secondary recovery projects.
The reserve data set forth in this Form 10-Q represent only estimates. Reserve
engineering is a subjective process of estimating underground accumulations of
oil and gas that cannot be measured in an exact manner. The accuracy of any
reserve estimate is a function of the quality of available data and of
engineering and geological interpretation and judgment. As a result, estimates
of different engineers often vary. In addition, results of drilling, testing and
production subsequent to the date of an estimate may justify revision of such
estimate. Accordingly, reserve estimates often differ from the quantities of oil
and natural gas that are ultimately recovered. the meaningfulness of such
estimates is highly dependent upon the accuracy of the assumptions upon which
they were based.
Forward-Looking Statements
This Form 10-Q includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements, other than
statements of historical facts, included or incorporated by reference in this
Form 10-Q which address activities, events or developments which the Company
expects or anticipates will or may occur in the future, including such things as
future capital expenditures (including the amount and nature thereof), wells to
be drilled or reworked, oil and gas prices and demand, exploitation and
exploration prospects, development and infill potential, drilling prospects,
expansion and other development trends of the oil and gas industry, business
strategy, production of oil and gas reserves, expansion and growth of the
Company's business and operations, and other such matters are forward-looking
statements. These statements are based on certain assumptions and analyses made
by the Company in light of its experience and its perception of historical
trends, current conditions and expected future developments as well as other
factors it believes are appropriate in the circumstances. However, whether
actual results and developments will conform with the Company's expectations and
predictions is subject to a number of risks and uncertainties, general economic,
market or business conditions; the business opportunities (or lack thereof) that
may be presented to and pursued by the Company; changes in laws or regulation;
and other factors, most of which are beyond the control of the Company.
Consequently all of the forward-looking statements made in this Form 10-Q are
qualified by these cautionary statements and there can be no assurance that the
actual results or developments anticipated by the Company will be realized or,
even if substantially realized, that they will have the expected consequences to
or effects on the Company or its business or operations.
PART II - Other Information
Item 1. Legal Proceedings.
Connecticut Bank of Commence commenced an action against the Company in
Lafayette Parish, Louisiana, on or about March 15, 1997. The Plaintiff brought
the action to enforce collection of a note in the principal amount of
$175,000.00. The action has been settled, and satisfied in full.
Other than the above legal proceeding and claim, and any other items previously
reported, the Company is not a party to any material pending or threatened legal
proceeding or claim.
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Item 2. Changes in Securities
There have been no changes with respect to defining the rights of the holders of
any class of registered securities or otherwise.
In the first quarter of fiscal 1998, the Company issued 176,099 shares of common
stock in exchange for $190,859 in cash under a Regulation D Rule 506 private
placement memorandum offering.
In November and December 1997, the Company issued 5.5% convertible senior
subordinated secured notes due 2002 in exchange for approximately $4,300,000 in
cash. These notes are convertible into shares of the Company's common stock at a
conversion price to be determined by so stated formula, but at a price no less
than $1.25 per share. If all of the notes are converted at the lowest possible
price, the Company would be required to issue 3,440,000 shares of common stock.
These notes also carried warrants for an additional 258,000 shares of common
stock with an exercise price of $3.17 per warrant, or total proceeds to the
Company of $817,860 in the event all of the warrants are exercised. The notes
are secured by the Company's non-MIII oil reserves in Utah.
On September 29, 1997, the Company entered into an agreement to acquire 22 oil,
gas and mineral leases located in Uintah and Duchesne Counties, Utah from three
joint owners. The purchase agreement was closed on October 8, 1997, at which
time the the Company received the lease assignment. The terms of the acquisition
are for the Company pay $250,000 in cash, issue 250,000 shares of the Company's
common stock, valued at $2,000,000, at each of the following four dates:
closing; December 30, 1997; March 30, 1998 and June 30, 1998. The Company also
was required to guarantee that the bid price on the date the Rule 144
restrictions lapse will be no less than $2.00 per share or the Company is
required to either issue additional shares or to pay the difference in cash, at
the Company's option.
In October 1997, the Company entered into an agreement to acquire a 3/8
undivided interest in a natural gas well that had been plugged and abandoned
approximately 10 years ago. This agreement requires the Company to pay the
seller $150,000 and 50,000 shares of the Company's common stock valued at
$148,750, and to pay the Company's proportinate share of the costs to reenter
this well.
In December 1997, the Company repurchased 250,000 shares of its common stock for
$500,000 in cash. This was the first 25% quarterly repurchase agreed to by the
Company relating to the 1,000,000 shares issued to acquire the DRSTP geological
data.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunder duly authorized, this 24th day of
June, 1998.
Environmental Remediation Holding Corporation
By: /s/ Sam L. Bass, Jr., CEO
Sam L. Bass, Jr., CEO
By: /s/ Noreen Wilson, Vice President
Noreen Wilson, Vice President
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