UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ________________
Commission File Number 0-17325
ERHC ENERGY INC.
(Name of small business issuer in its charter)
Colorado 88-0218499
(State of Incorporation) (I.R.S. Employer Identification No.)
5444 Westheimer Road
Suite 1570
Houston, Texas 77056
(Address of executive offices, including zip code.)
(713) 626-4700
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act)
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, at the latest practicable date:
The number of common shares outstanding at August 4, 2005 was 709,690,093.
TABLE OF CONTENTS
ERHC ENERGY INC.
Part I. Financial Information
Item 1. Unaudited Consolidated Financial Statements
Consolidated Balance Sheets at June 30, 2005 and September 30, 2004 2
Consolidated Statements of Operations for the Three and Nine Months Ended
June 30, 2005 and 2004 3
Consolidated Statements of Cash Flows for the Nine Months Ended
June 30, 2005 and 2004 4
Notes to the Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
Item 4. Controls and Procedures 16
Part II. Other Information
Item 1. Legal Proceedings 17
Item 2. Unregistered Sale of Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits 17
Signatures 18
1
Item 1. Financial Statements
ERHC ENERGY INC.
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------------------
June 30, September 30,
2005 2004
------------ ------------
ASSETS (Unaudited)
CURRENT ASSETS
Cash $ 1,416,054 $ 20,272
Restricted cash -- 3,026
Prepaid expenses and other current assets 110,464 26,258
------------ ------------
Total current assets 1,526,518 49,556
DRSTP concession fee 5,679,000 5,679,000
Furniture and equipment, net 22,902 --
------------ ------------
TOTAL ASSETS $ 7,228,420 $ 5,728,556
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 88,747 $ 227,970
Accounts payable and accrued liabilities, related
party 89,077 --
Accrued officers' salaries -- 723,035
Accrued interest 2,728 65,917
Accrued interest, related party -- 2,256,189
Asset retirement obligation 485,000 485,000
Current portion of convertible debt 33,513 1,626,033
------------ ------------
Total current liabilities 699,065 5,384,144
------------ ------------
LONG TERM DEBT
Nonconvertible debt, related party -- 403,644
Convertible debt, related party, net of discount -- 8,969,420
------------ ------------
Total long term debt -- 9,373,064
------------ ------------
TOTAL LIABILITIES 699,065 14,757,208
------------ ------------
COMMITMENTS AND CONTINGENCIES -- --
SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock, $0.0001 par value; authorized
10,000,000; none issued and outstanding -- --
Common stock, $0.0001 par value; 950,000,000
authorized shares; 709,690,073 and 599,952,982
issued and outstanding at June 30, 2005 and
September 30, 2004, respectively 70,969 59,996
Additional paid-in capital 83,102,561 59,505,459
Accumulated deficit (76,303,288) (68,137,233)
Deferred compensation (340,887) (456,874)
------------ ------------
Total shareholders' equity (deficit) 6,529,355 (9,028,652)
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT) $ 7,228,420 $ 5,728,556
============ ============
The accompanying notes are an integral part of these financial statements.
2
ERHC ENERGY INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, Nine Months Ended June 30,
--------------------------------- ---------------------------------
2005 2004 2005 2004
------------- ------------- ------------- -------------
COSTS AND EXPENSES
General and administrative
expenses $ 233,704 $ 656,399 $ 1,887,760 $ 1,582,788
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSES)
Interest income 10,537 -- 18,240 --
Gain from settlement -- -- 252,310 --
Other income -- 163,796 -- 163,796
Interest expense (461) (386,774) (799,270) (1,162,947)
Loss on extinguishment of debt -- -- (5,749,575) --
------------- ------------- ------------- -------------
Total other income (expenses), net 10,076 (222,978) (6,278,295) (999,151)
------------- ------------- ------------- -------------
Net loss $ (223,628) $ (879,377) $ (8,166,055) $ (2,581,939)
============= ============= ============= =============
Net loss per common share - basic
and diluted $ (0.00) $ (0.00) $ (0.01) $ (0.00)
============= ============= ============= =============
Weighted average number of
common shares outstanding -
basic and diluted 709,558,919 598,621,411 656,546,918 592,328,685
============= ============= ============= =============
The accompanying notes are an integral part of these financial statements.
3
ERHC ENERGY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- -----------------------------------------------------------------------------------------------------
Nine Months Ended June 30,
-----------------------------
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(8,166,055) $(2,581,939)
Adjustments to reconcile net loss to net cash used by
operating activities
Depreciation expense 4,401 --
Gain from settlement (252,310) --
Amortization of beneficial conversion feature
associated with convertible debt 413,503 382,162
Amortization of deferred compensation 280,987 --
Loss on extinguishment of debt 5,749,575 --
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (25,549) (18,714)
Accounts payable and accrued liabilities 161,961 205,554
Accrued officers' salaries (53,000) --
Accounts payable and accrued liabilities - related party 89,077 --
Accrued interest and accrued interest, related party 385,769 780,786
----------- -----------
Net cash used by operating activities (1,411,641) (1,232,151)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment (27,303) --
----------- -----------
Net cash used by investing activities (27,303) --
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit, related party 2,500,000 --
Proceeds from convertible debt, related party 402,100 576,307
Repayment of convertible debt, related party (70,400) --
Proceeds from common stock, net of expenses -- 975,000
----------- -----------
Net cash provided by financing activities 2,831,700 1,551,307
----------- -----------
Net increase in cash 1,392,756 319,156
Release of restricted cash 3,026 --
Cash, beginning of period 20,272 23,336
----------- -----------
Cash, end of period $ 1,416,054 $ 342,492
=========== ===========
The accompanying notes are an integral part of these financial statements.
4
ERHC ENERGY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- -------------------------------------------------------------------------------------------------------
Nine Months Ended June 30,
----------------------------
2005 2004
----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Noncash operating activities:
Stock issued in exchange for:
Accounts payable and accrued liabilities $ 301,132 $ 291,701
Prepaid expense 58,657 --
Accrued salaries 417,725 --
Accrued interest 84,850 591,945
Accrued interest, related party 2,620,295 --
Inducement to restructure convertible
debt and provide line of credit 5,749,575 --
Noncash investing and financing activities:
Conversion of non-related party debt 1,592,520 1,645,065
Beneficial conversion feature associated with convertible debt 331,699 1,058,912
Exchange of convertible and non-convertible debt, related party 10,134,084 --
Conversion of related party debt to equity 12,634,084 --
Beneficial conversion feature repurchased 347,517 --
Repricing of options 165,000 --
The accompanying notes are an integral part of these financial statements.
5
Notes to Consolidated Financial Statements
Note 1 - Business Organization
The financial statements included herein, which have not been audited pursuant
to the rules and regulations of the Securities and Exchange Commission, reflect
all adjustments which, in the opinion of management, are necessary to present a
fair statement of the results for the interim periods on a basis consistent with
the annual audited financial statements. All such adjustments are of a normal
recurring nature. The results of operations for the interim periods are not
necessarily indicative of the results to be expected for an entire year. Certain
information, accounting policies and footnote disclosures normally included in
financial statements prepared in accordance with U.S. Generally Accepted
Accounting Principles have been omitted pursuant to such rules and regulations,
although the Company believes that the disclosures are adequate to make the
information presented not misleading. These financial statements should be read
in conjunction with the Company's audited financial statements included in the
Company's Annual Report on Form 10-K for the year ended September 30, 2004.
General Business and Nature of Operations and Significant Accounting Policies
ERHC Energy Inc. ("ERHC" or the "Company") is an independent oil and gas
company. The Company was formed in 1986, as a Colorado corporation, and was
engaged in a variety of businesses until 1996, when it began its current
operations as an independent oil and gas company. The Company's goal is to
maximize its value through exploration and exploitation of oil and gas reserves
in the Gulf of Guinea offshore of central West Africa. The Company's current
focus is to exploit its assets, which are rights to working interests in
exploration acreage in the Joint Development Zone ("JDZ") between the Democratic
Republic of Sao Tome & Principe ("DRSTP") and the Federal Republic of Nigeria
("FRN") and in the exclusive territorial waters of Sao Tome (the "Exclusive
Economic Zone" or "EEZ"). The Company has formed relationships with Pioneer
Natural Resources ("Pioneer") and Noble Energy International, Limited ("Noble"),
a subsidiary of Noble Energy, Inc., to assist the Company in exploiting its
assets in the JDZ as further described in note 2. The Company currently has no
other operations.
Consolidated Financial Statements
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary after elimination of all significant inter-company
accounts and transactions.
Concentration of risks
The Company primarily transacts its business with two financial institutions.
From time to time the amount on deposit in either one of theses institutions may
exceed the $100,000 federally insured limit. The balances are maintained in
demand accounts to minimize risk.
The Company is in the process of perfecting its interests in the JDZ, but there
is always some risk that circumstances may arise in the ordinary and usual
course of business that affect the ability of the Company to raise adequate
financial and other resources to develop its interests.
Asset retirement obligation
The Company's asset retirement obligation ("ARO") relates to the plugging and
abandonment of certain oil and gas properties in Wichita Falls, Texas. The
provisions of Statement of Financial Accounting Standards ("SFAS") No. 143 -
"Accounting for Asset Retirement Obligations" require the fair value of a
liability for an asset retirement obligation to be recorded and a corresponding
increase in the carrying amount of the associated asset. The cost of the
tangible asset, including the initially recognized asset retirement cost is
depleted over the useful life of the asset. If the fair value of the estimated
asset retirement obligation changes, an adjustment is recorded to the retirement
obligation and the asset retirement cost. The offsetting ARO liability is
recorded at fair value, and accretion expense recognized as the discounted
liability is accredited to its expected settlement value. The fair value of the
ARO asset and liability is measured using expected future cash outflows
discounted at the Company's credit adjusted risk free interest rate. These oil
and gas properties were abandoned and written off during the year ended
September 30, 1999 and the Company believes the current liability is fully
accreted and represents management's best estimate of the fair value of the
outstanding obligation.
6
Impairment of long-lived assets
The Company evaluates the recoverability of long-lived assets when events and
circumstances indicate that such assets might be impaired. The Company
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 in which events and
circumstances indicate that such assets might be impaired. Management of the
Company has evaluated its investment in its DRSTP concession fee in light of its
2003 Option Agreement and believes that there have been no events or
circumstances that would indicate that such asset might be impaired.
Income taxes
The Company accounts for income taxes under the provisions of SFAS No. 109 -
"Accounting for Income Taxes," which provides for an asset and liability
approach in accounting for income taxes. Under this approach, deferred tax
assets and liabilities are recognized based on anticipated future tax
consequences, using currently enacted tax laws, attributable to differences
between financial statement carrying amounts of assets and liabilities and their
respective tax bases.
Common stock issued for goods received and services rendered
The Company has issued shares of common stock for goods received and services
rendered. The costs of the goods or services are valued according to the terms
of relative agreements or market value on the date of obligation. The cost of
the goods or services has been charged to operations.
Net loss per share
Basic earnings (loss) per share is computed by dividing net earnings or loss by
the weighted average number of common shares outstanding during the period.
Diluted earnings per share is computed by dividing net earnings or 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 earnings per share if they are anti-dilutive. Diluted
loss per common share is the same as basic loss per share for all periods
presented because the effect of potentially dilutive common shares arising from
outstanding stock warrants and options was anti-dilutive.
Stock-based compensation
In November 2004, the board of directors authorized a 2004 Compensatory Stock
Option Plan which was approved at a special meeting of the stockholders of the
Company held on February 4, 2005. The Company has adopted SFAS No. 123 -
"Accounting for Stock Based Compensation". Under SFAS No. 123, the Company is
permitted to either record expenses for stock options and other employee
compensation plans based on their fair value at the date of grant or to continue
to apply our current accounting policy under Accounting Principles Board ("APB")
Opinion No. 25 "Accounting for Stock Issued to Employees," and recognize
compensation expense, if any, based on the intrinsic value of the equity
instrument at the measurement date. In December of 2002, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 148, "Accounting for Stock-
Based Compensation - Transition and Disclosure - An Amendment to FASB Statement
No. 123" to provide alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee compensation.
The Company elected to not change to the fair value based method of accounting
for stock based compensation. Additionally, the statement amended disclosure
requirements of SFAS No. 123 to require more prominent disclosure in both annual
and interim financial statements. We elected to continue following APB No. 25
and when required, provide the pro forma provisions of SFAS No. 123.
7
As referred to in Note 4, the Company changed the exercise price of 3,000,000
options effective January 1, 2005. Such options for which the exercise price has
been changed are referred to as re-priced options and are accounted for as
compensatory options using variable accounting treatments in accordance with
FASB Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Based Compensation - an Interpretation of APB No. 25" (FIN44"). Under variable
plan accounting, compensation expense is adjusted for increases or decreases in
the fair market value of the Company's common stock to the extent that the
market value exceeds the exercise price of the option. Variable plan accounting
is applied to the re-priced options until the options are exercised, forfeited,
or expire unexercised.
Had compensation costs for stock options granted to an employee been determined
based on the fair value at the grant date for the three and nine months ended
June 30, 2005 and 2004, consistent with the provisions of SFAS No. 123, the net
loss and net loss per share would have been reflective of the pro forma amounts
indicated below:
Three Months Nine Months
Ended June 30, Ended June 30,
--------------------------------- ---------------------------------
2005 2004 2005 2004
------------- ------------- ------------- -------------
Net loss - as reported $ (223,628) $ (879,377) $ (8,166,055) $ (2,581,939)
Plus: stock-based compensation expense
determined using the intrinsic value of the
option at the measurement date (280,724) -- 280,987 --
Less: stock-based employee
compensation determined under fair
value method for all awards
granted to employees (96,847) -- (342,210) --
------------- ------------- ------------- -------------
Net loss - pro forma $ (601,199) $ (879,377) $ (8,227,278) $ (2,581,939)
------------- ------------- ------------- -------------
Basic and diluted net loss per share - as reported $ (0.00) $ (0.00) $ (0.01) $ (0.00)
------------- ------------- ------------- -------------
Basic and diluted net loss per share - pro forma $ (0.00) $ (0.00) $ (0.01) $ (0.00)
------------- ------------- ------------- -------------
New accounting pronouncements
On December 16, 2004, as amended on April 14, 2005, the FASB issued SFAS No. 123
(revised 2004), "Share-Based Payment" ("SFAS No. 123(R)"). SFAS No. 123(R) will
require companies to measure all employee stock-based compensation awards using
a fair value method and record such expense in its consolidated financial
statements. In addition, the adoption of SFAS No. 123(R) requires additional
accounting and disclosure related to the income tax and cash flow effects
resulting from share-based payment arrangements. SFAS No. 123(R) is effective
beginning as of the first interim reporting period for fiscal years beginning
after December 15, 2005. We are in the process of determining the impact of the
requirements of SFAS No. 123(R). We believe it is likely that the financial
statement impact from the implementation of the requirements of SFAS No. 123(R)
will significantly impact our future results of operations and we continue to
evaluate it to determine the degree of significance.
On November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an Amendment
of ARB No. 43, Chapter 4. The standard requires that abnormal amounts of idle
capacity and spoilage costs within inventory be excluded from the cost of
inventory and expensed when incurred. The provisions of SFAS No. 151 are
applicable to inventory costs incurred during fiscal years beginning after June
15, 2005. The adoption of SFAS No. 153 is expected to have no impact on our
consolidated financial statements.
8
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets--an amendment of Accounting Principles Board ("APB") Opinion No. 29" is
effective for fiscal years beginning after June 15, 2005. This Statement
addresses the measurement of exchange of nonmonetary assets and eliminates the
exception from fair value measurement for nonmonetary exchanges of similar
productive assets in paragraph 21(b) of APB Opinion No. 29, "Accounting for
Nonmonetary Transactions" and replaces it with an exception for exchanges that
do not have commercial substance. The adoption of SFAS No. 153 is expected to
have no impact on our consolidated financial statements.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3". This
statement changes the requirements for the accounting for and reporting of a
change in accounting principle. This statement applies to all voluntary changes
in accounting principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. SFAS 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
Adoption of SFAS154 is not expected to have an effect on our consolidated
financial statements.
Note 2 - Sao Tome Concession
Concession Fee Payment
The 1997 Agreement required the Company to pay a $5,000,000 concession fee to
the DRSTP.
Concession Fee Agreement
On May 21, 2001, the Company and the DRSTP reached the 2001 Agreement that
replaced the 1997 Agreement.
The 2001 Agreement gives ERHC rights to participate in exploration and
production activities in both the EEZ and JDZ. The 2003 Option Agreement gives
ERHC rights to participate in exploration and production activities in the JDZ
in exchange for relinquishing its rights to participate in exploration and
production activities in the JDZ granted under the 2001 Agreement.
In April 2004 ERHC exercised its rights in the JDZ between Nigeria and Sao Tome
and Principe under the April 7, 2003 Administration Agreement with the JDA.
The following represents ERHC's rights in the JDZ blocks and the signature bonus
payable for each block:
Working
Interest
Location Percentage Type
---------------------- ------------- ----------------------------
Block 2 30% Signature Bonus Free
Block 3 20% Signature Bonus Free
Block 4 25% Signature Bonus Free
Block 5 15% Signature Bonus Payable
Block 6 15% Signature Bonus Free
Block 9 20% Signature Bonus Payable
This exercise of the Company's rights was subject to the condition that if no
license is awarded or a license is awarded and subsequently withdrawn by the JDA
prior to the commencement of operations, ERHC will be entitled to receive its
working interest in that block in a future license awarded for the block.
In August 2004, the Company entered into a Participation Agreement with Pioneer
whereby the companies will jointly apply for rights in the production sharing
contract for Block 2 of the JDZ.
In September 2004, the Company entered into a Participation Agreement with Noble
whereby the companies will jointly apply for rights in the production sharing
contract for Block 4 of the JDZ.
In December 2004, the Company entered into a Participation Agreement with
Pioneer under which the companies jointly applied for rights in the production
sharing contract for Block 3 of the JDZ.
9
In May 2005, the JDA announced the awards for the blocks in the 2004 JDZ
Licensing Round. The awards included both the preferential rights interests in
Blocks plus additional bid interests awarded to bid groups. The awards were:
o In Block 2, the Pioneer and ERHC group was awarded 35% interest as a
result of the joint bid submitted by the companies. In addition the
JDA confirmed the award to ERHC of its 30% Option Interest, free of
any signature bonus.
o In Block 3, the Pioneer and ERHC group was awarded 5% interest as a
result of the joint bid submitted by the companies. In addition the
JDA confirmed the award to ERHC of its 20% Option Interest, free of
any signature bonus.
o In Block 4, the Noble and ERHC group was awarded 35% interest as a
result of the joint bid submitted by the companies. In addition the
JDA confirmed the award to ERHC of its 25% Option Interest, free of
any signature bonus.
o In Block 5, the JDA confirmed the award to ERHC of its 15% Option
Interest, with signature bonus payable.
o In Block 6, the JDA confirmed the award to ERHC of its 15% Option
Interest, free of any signature bonus payable.
In June 2005, ERHC accepted the awards by the JDA for Blocks 2, 3, 4, 5 and 6,
subject to the execution of a mutually acceptable production sharing contract
and joint operating agreement for each block.
In July 2005, the JDA announced a schedule for the review, negotiation and
execution of Production Sharing Contracts for each block.
Under the 2001 Agreement ERHC retained the following rights to participate in
exploration and production activities in the EEZ subject to certain
restrictions: (a) a right to receive 100% interest in up to two blocks of ERHC's
choice without the payment of signature bonus, and (b) the option to acquire up
to a 15% paid working interest in up to two blocks of ERHC's choice in the EEZ.
The Company would be required to pay its proportionate share of the signature
bonus and all other costs related to the exploration and exploitation of the
blocks in the EEZ.
The above is only a brief summary of the terms of the 2001 Agreement and the
2003 Option Agreement and such summaries do not purport to be complete and are
qualified in their entirety by reference to the 2001 Agreement and 2003 Option
Agreement, respectively (any and all related documents). The 2001 Agreement and
2003 Option Agreement have been filed with the SEC and are available on the U.S.
Securities and Exchange Commission's ("SEC") web site at www.sec.gov.
Note 3 - Long-Term Debt
Convertible debt non-related party
During the quarter ended December 31, 2004 non-affiliated note holders agreed to
convert $1,592,520 of convertible debt and $84,850 of accrued interest into
8,386,853 shares of common stock. The conversion price was $0.20 per share and
the conversion was completed in January 2005.
At June 30, 2005, the Company has $33,513 of nonaffiliated convertible debt and
$2,728 accrued but unpaid interest outstanding. At June 30, 2005, if the
outstanding convertible debt was converted using the conversion price of $0.20
per share, the Company would be required to issue 181,207 shares of common stock
based on an outstanding principal amount of $33,513.
10
Convertible debt - related party
During the three months ended December 31, 2004 the Company reached an agreement
with Chrome Energy, L.L.C. ("Chrome") to restructure outstanding debt totaling
$10,134,084 and enter into a new $2,500,000 working capital line of credit. To
facilitate the debt restructuring, the Company agreed to issue Chrome 14,023,352
shares of common stock; 12,465,202 shares immediately, 623,260 shares on the
advance of $1,000,000 and the remaining 934,890 shares upon receipt of the
additional $1,500,000 available under the working capital line. In addition the
Company issued 12,308,560 shares of common stock to satisfy current interest
accrued but not paid of $2,461,712 on the notes that were consolidated into the
new $10,134,084 note.
Pursuant to the debt restructure agreement, the Company issued a 12% note with a
principal amount of $10,134,084, to be settled at the option of the Company at
$0.175 per share, and expiring on January 31, 2007. The Company also issued a
10% working capital line of credit in the amount of $2,500,000 to be settled at
the option of the Company at $0.175 per share. When the working capital line of
credit was fully funded in January 2005, there was $12,634,084 of principal
outstanding under these two notes.
On January 28, 2005, the Company exercised its right to convert the two new
notes (the "Consolidated Note"), dated at December 15, 2004, in favor of Chrome,
with a principal balance of $10,134,084 and accrued interest at January 28, 2005
of $146,597, and (the "Promissory Note"), dated at December 15, 2004, in favor
of Chrome with an original principal amount of $2,500,000 and accrued interest
at January 28, 2005 of $11,986.
The Company issued to Chrome 73,100,962 of unregistered shares of ERHC common
stock in conversion of the entire outstanding principal and accrued interest of
the Consolidated Note and the Promissory Note. The Consolidated Note and
Promissory Note were converted at $0.175 per share pursuant to the terms of such
notes and cancelled in their entirety. ERHC issued these shares pursuant Section
4(2) of the Securities Act of 1933, as amended.
At June 30, 2005, the Company has no convertible debt with any related party.
Note 4 - Shareholders' Equity (Deficit)
Common stock issued for settlements
During October 2004, the Company issued 100,000 shares of common stock to one
creditor for an accounts payable balance owed in the aggregate amount of
$36,437.
During October 2004, the Company issued 160,000 shares of common stock to one
creditor for an accounts payable balance owed in the aggregate amount of
$70,463.
During October 2004, the Company issued 150,000 shares of common stock to one
creditor for an accounts payable balance owed in the aggregate amount of
$68,745.
In January 2005, 400,000 warrants were exercised on a cashless basis for 229,787
shares of common stock.
During February 2005, the Company issued 175,000 shares of common stock to one
creditor for an accounts payable balance owed and prepayment of fees in the
aggregate amount $78,460.
During February 2005, the Company issued 70,000 shares of restricted common
stock and paid $9,000 in settlement of a lawsuit.
In February 2005, 600,000 warrants were exercised on a cashless basis for
357,576 shares of common stock.
During March 2005, the Company issued 150,000 shares of common stock to one
creditor for an accounts payable balance owed and prepayment of fees in the
aggregate amount $105,684.
During April 2005, the Company issued 280,000 shares of restricted common stock
(valued at $198,800) and paid $40,000 in settlement of a lawsuit.
11
During April 2005, the Company issued 175,000 shares of restricted common stock
(valued at $130,375) in settlement of a lawsuit.
During April 2005, the Company issued 70,000 shares of restricted common stock
(valued at $52,150) and paid $4,000 in settlement of a lawsuit.
Common stock issued for conversion of debt and payment of accrued interest
During the quarter ended December 31, 2004 non-affiliated noteholders agreed to
convert $1,677,371 of convertible debt and accrued interest into 8,386,853
shares of common stock. The conversion price was $0.20 per share.
During the quarter ended December 31, 2004, the Company also agreed to issue
Chrome 14,023,352 shares of common stock, 12,465,202 issued immediately, 623,260
shares issued on the advance of $1,000,000 and the remainder issued throughout
the term of the working capital loan. In addition the Company agreed to issue
12,308,359 share of common stock to satisfy current interest accrued but not
paid of $2,461,712. The shares of common stock to Chrome for entering into the
debt restructuring had a fair value of $5,749,575 and have been recorded as a
loss on extinguishment of debt.
In January 2005 the Company issued 26,331,711 shares of common stock, of which
12,308,560 represented accrued interest totaling $2,461,712, and the remainder
for agreement to enter into the debt restructuring and provide an additional
working capital line of credit pursuant to the agreement. The issuance of these
shares was recognized in the period ending December 31, 2004, as a loss on
extinguishment of debt.
In January 2005, the Company issued 73,100,962 shares of common stock to Chrome
for conversion of all of its debt representing $12,634,084 of principal and
$158,583 of accrued interest.
Stock options issued and re-priced
On January 1, 2005, the Company agreed to issue options to purchase a total of
1,250,000 shares of common stock, upon completion of a full year of service, to
two consultants as part of their initial compensation packages. These options
have an exercise price of $0.20 per share and vest on December 31, 2005.
During the nine months ended June 30, 2005 the Company modified the exercise
price of 3,000,000 options granted to one employee from $0.30 per share to $0.20
per share, which made those options subject to variable plan accounting. Under
variable plan accounting, compensation expense is adjusted for increases or
decreases in the fair market value of the Company's common stock to the extent
that the market value exceeds the new exercise price of the option. Variable
plan accounting is applied to the repriced options until the options are
exercised, forfeited, or expire unexercised. During the three months ended June
30, 2005, this repricing resulted in a reduction in overall expenses by $344,474
as a result of a downward change in the fair market value of the underlying
common stock. For the nine months ended June 30, 2005, the Company incurred
additional expenses of $89,737 as a result of this pricing change.
Note 5 - Commitments and Contingencies
Pending Litigation and Other Contingencies
From time to time, certain potential obligations are presented to the Company
that may have originated during periods not under existing management's control.
These alleged obligations are generally for goods and services for which the
Company has no record. The Company actively investigates these claims as they
arise. All known material obligations of the Company have been recorded and
reflected in the financial statements.
Commitments
On January 25, 2005, the Board of Directors approved the increase in the salary
of the President and Chief Executive Officer, Mr. Ali Memon, from $150,000 to
$200,000 per year, effective February 1, 2005 through July 31, 2007.
12
Effective January 1, 2005 the Company entered into consulting agreements with
two individuals, which requires payment of cash and the issuance of options for
a total of 1,250,000 shares of common stock upon completion of a full year of
service. These options have an exercise price of $0.20 per share and will vest
immediately upon issuance and will have no expiration date. Either party may
terminate these consulting agreements with 30 days notice. The options issued
under these consulting agreements include provisions for cashless exercise.
The Company's executive officers incurred significant direct expense for travel
and related expenses of approximately $104,000 and $247,000 during the three and
nine months ended June 30, 2005 respectively. The comparable amounts for the
three and nine month periods ended June 30, 2004 were approximately $120,000 and
$319,000 respectively.
The Company leases office space at 5444 Westheimer Road, Houston, Texas. This
lease for office space expires February 2006. The monthly base rent payment is
$3,242 based on approximately 1,900 square feet of office space.
To date, members of the board of directors have not received any compensation,
but have been reimbursed for expenses incurred in the performance of their
duties. In the future, the Company may decide to pay its directors.
The Company currently has two officers and support staff that provide services
to the Company pursuant to consulting agreements.
In May 2002, the Company entered into an agreement with a consulting group to
advise the Company in securing financing of up to $1,500,000 and in structuring
a joint venture arrangement with a partner. This agreement expired in March
2005. During the nine months ended June 30, 2005, no expenses were incurred
under this agreement. During the three and nine months ended June 30, 2004,
total expenses incurred under this consulting agreement were $27,462, of which
$25,000 was charged against additional paid-in capital.
During May 2003, the Company entered into a consulting agreement for general
consulting services, including transaction support and evaluation of geological
and seismic data. The Agreement has been revised several times. The most recent
revision became effective on April 1, 2005 and terminates on September 30, 2005.
This revision reduced the consultant's compensation to $2,000 per month (from
the former rate of $10,000 per month). In addition, the revised agreement
provides for a one time success fee of $50,000 and 500,000 shares of common
stock if the Company closes a transaction for sale of its interest in the JDZ
During the nine-month periods ended June 30, 2005 and 2004, total expenses
incurred under this consulting agreement were $84,970 and $115,501 respectively.
During the three-month periods ended June 30, 2005 and 2004, total expenses
incurred under this consulting agreement were $9,293 and $47,472, respectively.
Note 6 - Subsequent Events
In July 2005, the JDA informed Company and other participants that the
production sharing contract negotiations will commence on August 25, 2005, and
that the JDA expects the production sharing contracts to be executed in October
2005.
Further details are available on the JDA website at www.nigeriasaotomejda.com
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
You should 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 included in this Form 10-Q filing. You should also read this
in connection with "Managements discussion and Analysis of Financial Condition
and Results of Operations" and the audited financial statements included in the
Annual Report on Form 10-K for the year ended September 30, 2004. The Company's
historical results are not necessarily an indication of trends in operating
results for any future period.
Overview
The Company's current focus is to exploit its assets, which are rights to
working interests in exploration acreage in the JDZ and rights to working
interests in the EEZ. The Company has entered into Participation Agreements with
Pioneer Natural Resources ("Pioneer") with respect to Blocks 2 and 3 and Noble
Energy International, Limited ("Noble"), a subsidiary of Noble Energy, Inc.,
with respect to Block 4 to jointly evaluate and apply for interests in
production sharing contracts in these JDZ Blocks. The technical and operational
expertise in conducting exploration operations will be provided by Pioneer
and Noble.
Results of Operations
Nine months Ended June 30, 2005 Compared to the Nine months Ended June 30, 2004
During the nine months ended June 30, 2005, the Company incurred a net loss of
$8,166,055 compared to a net loss of $2,581,939 for the nine months ended June
30, 2004. A significant portion of the $5,584,116 increase in net loss for the
nine months ended June 30, 2005 relates to the $5,749,575 loss on extinguishment
of debt the Company incurred as a result of the debt restructuring. General and
administrative expenses increased by $304,972 for the nine months ended June 30,
2005 as compared to the nine months ended June 30, 2004. The increase was
primarily due to a $280,987 increase in charges related to amortization of
deferred compensation and re-pricing of stock options. The Company also reported
an increase of $106,754 in other income and a decrease of $363,677 in interest
expense because of debt conversion.
Through December 31, 2004, a management services agreement with Chrome Oil
Services, Ltd. ("COS") existed. Pursuant to that agreement, COS provided the
Company with management and business development services. COS provides these
services to the Company for a management fee of $68,000 per month. The Chief
Financial Officer and Secretary were employees of COS who received salaries and
overhead expense reimbursement from COS, not from the Company. Expenses not
covered under the management services agreement were paid by the Company and
included primarily general office supplies. This agreement was cancelled
effective December 31, 2004. During the nine months ended June 30, 2005 and
2004, total expenses incurred under this management services agreement were
$204,000 and $612,000 respectively. The Company's executive officers and
directors incurred - travel expenses of approximately $247,000 and $319,000
during the nine month periods ended June 30, 2005 and 2004, respectively, while
managing the ongoing affairs of the company. The net loss per common share was
$0.01, basic and diluted, for the nine months ended June 30, 2005 compared to a
net loss per common share of $0.00, basic and diluted, for the nine months ended
June 30, 2004.
During the nine months ended June 30, 2005 and 2004, the Company had no revenues
from which cash flows could be generated to support operations and thus relied
on its line of credit provided by Chrome as well as the sale of the Company's
common stock. The line of credit has since been converted into common stock of
the Company.
Three months Ended June 30, 2005 Compared to the Three months Ended June 30,
2004
During the three months ended June 30, 2005, the Company incurred a net loss of
$223,628 compared to a net loss of $879,377 for the three months ended June 30,
2004. The $655,749 decrease in net loss for the three months ended June 30, 2005
was primarily attributable to a $386,313 decrease in interest expense as a
result of debt conversions and a decrease in compensation expenses of $280,724
due to re-pricing of stock options.
14
Through December 31, 2004, a management services agreement with COS existed.
Pursuant to that agreement, COS provided the Company with management and
business development services. COS provides these services to the Company for a
management fee of $68,000 per month. The Chief Financial Officer and Secretary
were employees of COS that provided services to the Company under the management
services agreement. Accordingly, these persons received salaries and overhead
expense reimbursement from COS, not from the Company. Expenses not covered under
the management services agreement were paid by the Company and included
primarily general office supplies. This agreement was cancelled effective
December 31, 2004. During the three months ended June 30, 2005 and 2004, total
expenses incurred under this management services agreement were $0 and $204,000
respectively. The Company's executive officers and directors incurred
significant travel expenses of approximately $104,000 and $120,000 for the
quarters ended June 30, 2005 and 2004, respectively while managing the ongoing
affairs of the Company. The Company anticipates travel related expenses to
continue to be significant as the Company further develops its business
interests. The net loss per common share was $0.00, basic and diluted, for both
the three months ended June 30, 2005 and the three months ended June 30, 2004.
During the quarters ended June 30, 2005 and 2004, the Company had no revenues
from which cash flows could be generated to support operations and thus relied
on borrowings funded from its line of credit provided by Chrome as well as the
sale of common stock. The line of credit has since been converted into common
stock of the Company.
Liquidity and Capital Resources
As of June 30, 2005, the Company had $1,416,054 in cash and cash equivalents and
working capital of $827,453, an amount believed to be sufficient to fund working
capital obligations for the next twelve months. Historically, the Company has
financed its operations from the sale of debt and equity securities (including
the issuance of its securities in exchange for goods and services). We will need
to continue raising capital from external sources (from which we have no firm
commitments) until such time as the Company generates sufficient operating cash
flows. There is no assurance that financing will be obtained from any external
source, and it is not expected that the Company will generate sufficient
operating cash flows for the foreseeable future. Management intends to use its
best efforts to raise additional capital through the sale of debt or equity
securities, as required.
The Company presently intends to utilize its available sources of funds to
pursue its business development activities in West Africa and for general
administrative expenditures.
Debt Financing Arrangements
At June 30, 2005, the Company has $33,513 of nonaffiliated convertible debt and
$2,728 accrued but unpaid interest outstanding. At June 30, 2005, if the
outstanding convertible debt was converted using the conversion price of $0.20
per share, the Company would be required to issue 181,207 shares of common stock
based on an outstanding principal amount of $33,513.
At June 30, 2005, the Company has no convertible debt with any related party.
Forward Looking Statements
This report contains forward-looking statements. These statements related to
future events or ERHC Energy Inc.'s future financial performance and involve
known and unknown risks, uncertainties and other factors that may cause ERHC or
its industry's actual results, levels of activity, performance or achievements
to be materially different from any future results, levels of activity,
performance or achievements expressed or implied by the forward-looking
statements.
In some cases, - forward-looking statements may be identified by terminologies
such as "may", "will", "should", "expects", "plans", "anticipates", "believes",
"estimates", "predicts", "potential", or the negative of these terms or other
comparable terminology. These statements are only predictions. Actual events or
results may differ materially.
Although the Company believes that the expectations reflected in the
forward-looking statements are reasonable, there can be no guarantee of future
results, levels of activity, performance, or achievements. Moreover, neither the
Company nor any other person assumes responsibility for the accuracy and
completeness of these forward-looking statements. The Company is under no duty
to update any of the forward-looking statements after the date of this report to
conform prior statements to actual results.
15
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is in the process of perfecting its interest in the JDZ. There are
the usual risks arising in the ordinary and usual course of business regarding
the Company's abilities to meet its financial requirements relating to those
interests.
Currently all of the Company's contracts are denominated in United States
Dollars. As a result, our financial statement results are unlikely to be
affected by changes in foreign currency exchange rates.
The Company does not hold derivative financial or commodity instruments, nor do
we engage in any foreign currency denominated transactions.
Item 4. Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer have evaluated
the effectiveness of the Company's disclosure controls and procedures ((as
defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act)) at the end
of the third fiscal quarter of 2005. Based on such evaluation, such officers
have concluded that the Company's disclosure controls and procedures are
effective.
Changes in Internal Controls
There has been no change in the Company's internal control over financial
reporting identified in connection with our evaluation that occurred during our
last fiscal quarter ended June 30, 2005, that has materially affected, or is
reasonably likely to materially affect, the Company's internal controls over
financial reporting.
16
Part II. Other Information
Item 1. Legal Proceedings
The Company is not aware of any material legal proceedings pending to which it
is a party or its property is subject.
Item 2. Unregistered Sale of Securities and Use of Proceeds
During April 2005, the Company issued 280,000 shares of restricted common stock
and paid $40,000 in settlement of a lawsuit.
During April 2005, the Company issued 175,000 shares of restricted common stock
in settlement of a lawsuit.
During April 2005, the Company issued 70,000 shares of restricted common stock
and paid $4,000 in settlement of a lawsuit.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
EXHIBIT NO. IDENTIFICATION OF EXHIBIT
31.1 Certification Pursuant to 18 U.S.C Section 1350, as adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification Pursuant to 18 U.S.C Section 1350, as adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification Pursuant to 18 U.S.C Section 1350, as adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification Pursuant to 18 U.S.C Section 1350, as adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
following persons, in the capacities and on the dates indicated below, have
signed this report.
ERHC Energy, Inc.
Name Title Date
- ----------------------------- ----------------------- ---------------
/s/ Ali Memon Chief Executive Officer August 8, 2005
- -----------------------------
President and Director
Ali Memon
/s/ Cosmas (Ike) Okpala Chief Financial Officer August 8, 2005
- -----------------------------
Cosmas (Ike) Okpala
EXHIBIT INDEX
- ----- --------------------------------------------------------------------
31.1 Certification Pursuant to 18 U.S.C Section 1350, as adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification Pursuant to 18 U.S.C Section 1350, as adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification Pursuant to 18 U.S.C Section 1350, as adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification Pursuant to 18 U.S.C Section 1350, as adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
18