U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Amendment No. 2)
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|X| Annual Report under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended September 30, 2005
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
ERHC ENERGY INC.
(Exact name of registrant as specified in its charter)
Commission file number: 000-17325
Colorado 88-0218499
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
5444 Westheimer Road, Suite 1570, Houston, Texas 77056
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(Address of Principal Executive Office) (Zip Code)
713-626-4700
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(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: common
stock
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No |_|
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No |_|
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the last sales price of $0.71 per share on the "over the
counter bulletin board" on March 31, 2005 was $237,822,494.
November 30, 2005, registrant had 710,912,226 shares of common stock, par value
$0.0001 per share, outstanding.
DOCUMENT INCORPORATED BY REFERENCE
None
INTRODUCTORY NOTE
Amendment No. 2 on Form 10-K/A to the Annual Report on Form 10-K for the fiscal
year ended September 30, 2005.
This Amendment No. 2 on Form 10-K/A is being filed to revise certain
disclosure in the Company's Consolidated Financial Statements for the fiscal
years ended September 30, 2005, and 2004, in connection with a review of our
financial statements and related disclosures by the Staff of the Division of
Corporation Finance of the U.S. Securities and Exchange Commission (the "SEC").
The disclosures revisions relate to the Company's use of the successful
efforts method of accounting for oil and gas exploration and production
activities and the elimination of certain information regarding unproven
reserves. The changes do not affect any of the amounts included in the financial
statements previously filed.
This amendment only reflects the changes discussed above. All other
information is unchanged and reflects the disclosures made at the time of the
original filing on December 29, 2005 and the amended filing on January 30, 2006,
which included only Part III, items 10, 11, 12, and 13.
TABLE OF CONTENTS
PART I PAGE
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Item 1. Description of Business 1
Item 2. Description of Property 6
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 6
PART II
Item 5. Market for Registrant's common stock and Related Shareholder Matters 7
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Financial Condition and
Plan of Operations 8
Item 7a. Quantitative and Qualitative Disclosures about Market Risk 11
Item 8. Financial Statements and Supplementary Data (See Index Below) 12
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures 12
Item 9a. Controls and Procedures 12
PART III
Item 10. Directors and Executive Officers of the Registrant 15
Item 11. Executive Compensation 17
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 19
Item 13. Certain Relationships and Related Transactions 20
Item 14. Principal Accounting Fees and Services 20
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 22
Signatures 23
Index to Financial Statements and Schedules
Reports of Independent Registered Public Accounting Firms F-2 - F-4
Financial Statements:
Consolidated Balance Sheets as of September 30, 2005 and 2004 F-5
Consolidated Statements of Operations for the Years Ended
September 30, 2005, 2004 and 2003 F-6
Consolidated Statements of Shareholders' Equity (Deficit)
for the Years Ended September 30, 2005, 2004 and 2003 F-7
Consolidated Statements of Cash Flows for the Years Ended
September 30, 2005, 2004 and 2003 F-8
Notes to Consolidated Financial Statements F-9
This annual report contains forward-looking statements. These statements relate
to future events or ERHC Energy Inc.'s (the "Company" or "ERHC") 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, you can identify forward-looking statements by terminology 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.
PART I
Item 1. Description of Business
Overview
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 upstream oil
and gas companies to assist the Company in exploiting its assets in the JDZ. The
Company currently has no other operations.
Corporate History; Former Operations
The Company acquired a lease in oil fields located in Wichita County, Texas,
which was subsequently assigned to a former shareholder. However, in connection
with the lease in Wichita County, the Company may remain liable for certain
plugging and abandonment costs, estimated to be approximately $485,000, which
have been accrued as of September 30, 2005 and 2004.
Current Business Operations
In May 1997, the Company entered into an exclusive joint venture with the DRSTP
(the "1997 Agreement"). On May 21, 2001, the 1997 Agreement was replaced by a
Memorandum of Agreement (the "2001 Agreement"), which was embodied in a Consent
Award issued by the arbitrator as a result of the satisfaction of several
conditions, including the ratification of a treaty between the FRN and the
DRSTP. The 2001 Agreement gave the Company rights to participate in exploration
and production activities in both the exclusive territorial waters of Sao Tome
referred to as the EEZ and an area between Sao Tome and the FRN that the two
nations have designated as a JDZ.
In April 2003, the Company and DRSTP entered into an Option Agreement (the "2003
Option Agreement") in which the Company relinquished certain financial interests
in the JDZ in exchange for exploration rights in the JDZ. In April 2003, the
Company additionally entered into an administration agreement with the
Nigeria-Sao Tome and Principe Joint Development Authority ("JDA"). The
administration agreement is the formal agreement by the JDA that it will fully
implement ERHC's preferential rights to working interests in the JDZ acreage as
set forth in the 2003 Option Agreement and describes certain procedures
regarding the exercising of these rights. However, ERHC retained under the 2001
Agreement the following rights to participate in exploration and production
activities in the EEZ subject to certain restrictions: (a) right to receive up
to two blocks of ERHC's choice, and (b) the option to acquire up to a 15% paid
working interest in up to two blocks of ERHC's choice in the EEZ. The Company
will 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.
Under the 2003 Option Agreement, ERHC may exercise options to acquire fractional
working interests in six (6) of the nine (9) blocks that have been announced by
the JDA and will be available for bidding in the JDZ. A block is an area
designated as an individual unit for exploration or production of crude oil and
natural gas. Additionally, the amount of signature bonus that is payable by ERHC
to acquire these working interests is zero in four (4) blocks. ERHC must pay its
proportionate share of any signature bonuses in two (2) blocks.
On April 13, 2004, the Company submitted a letter to the JDA exercising its
option rights in the JDZ. The options exercised by the Company were:
Option Pick-ERHC Working Interest
Choice Percentage JDZ Block # Signature Bonus Payable
- -------------------- -------------------- --------------- -------------------------------------------
1 15% 6 Signature Bonus Free
2 15% 5 100% of 15% of the total Signature Bonus
3 20% 3 Signature Bonus Free
4 30% 2 Signature Bonus Free
5 25% 4 Signature Bonus Free
6 20% 9 100% of 20% of the total Signature Bonus
1
Interpretation carried out by WesternGeco has enabled the identification of 56
prospective structures with Blocks 1 to 9 in the JDZ, of which 17 were defined
as prospects and 39 as leads. WesternGeco used reservoir parameters similar to
those known from nearby fields in Nigeria and Equatorial Guinea. The scope of
the WesternGeco report was to interpret and map seismic data, highlight
prospectivity and calculate volumetrics. It did not include an attempt to comply
with any SEC definition reserves. The SEC permits oil and gas companies, in
their filings with the United States Securities and Exchange Commission ("SEC")
SEC, to disclose only proved reserves that a company has demonstrated by actual
production or conclusive formation tests to be economically and legally
producible under existing economic conditions and operating conditions.
This exercise of the Company's rights was subject to the condition that if no
license is awarded or a license is awarded and subsequently withdrawn by the JDA
prior to the commencement of operations, ERHC will be entitled to receive its
working interest in that block in a future license awarded for the block.
On April 26, 2004, the Company announced that, at meetings on April 23rd and
24th, 2004, the Joint Ministerial Council ("JMC") of the JDZ acknowledged the
Company's option selections for award of interests pursuant to the exercise of
rights under the April 7, 2003 Administration Agreement.
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.
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. The Company originally formed a relationship
Noble Energy Resources ("Noble") to negotiate a production sharing
agreement for Block 4. However, Noble subsequently withdrew from
negotiations and the company has entered into an agreement with
Addax Petroleum ("Addax") under which Addax will replace Noble in
the ERHC/Noble group. Approval for Addax to participate in Block 4
has been requested from the JDA.
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. Since the acceptance of the
awards, the participants in each block have been negotiating the production
sharing contract and joint operating agreement. As of the date of this report,
negotiations were continuing.
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.
2
Government Regulation
In the event the Company begins activities relating to the exploration and
exploitation of hydrocarbons, it will be required to make the necessary
expenditures to comply with the applicable health and safety, environmental and
other regulations.
Employees
The Company currently has three officers and support staff that provide services
to the Company. The Company directly employs the President and Chief Executive
Officer and one support staff individual. The remaining two officers and support
staff are provided pursuant to consulting agreements. 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 consultants 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.
Beginning January 1, 2005, ERHC was directly responsible for all costs and
expenses of officers and staff, on the same or similar terms that each
individual had with COS.
Risk factors that may affect the results of operations and financial condition
of the Company
You should carefully consider the risks described below before making any
investment decision related to the Company's securities. The risks and
uncertainties described below are not the only ones facing the Company.
Additional risks and uncertainties not presently known or that the Company
currently deems immaterial also may impair its business operations. If any of
the following risks actually occur, the Company's business could be harmed.
The Company has no sources of revenue and a history of losses.
The Company's business is at an early stage of development. The Company has not
generated any revenue since its entry into the oil and gas business and has
incurred significant operating losses. The Company has incurred net losses of
$11,270,478, $3,593,388, and $3,153,882 in fiscal years 2005, 2004 and 2003,
respectively, and expects to incur additional operating losses for the
foreseeable future. The Company may never be profitable.
The Company's current liquidity is insufficient to fund its operations for
fiscal 2006.
To execute its business strategy, the Company will require more capital than it
currently has or has commitments to receive. As of September 30, 2005, the
Company had cash and other current assets totaling $1,020,583, and current
liabilities of $2,779,011, resulting in a working capital deficit of $1,758,428.
The Company has previously relied on the best-effort sales of its common stock
and debt securities to provide working capital. The Company currently has no
firm commitments for equity or debt financing nor does it anticipate entering
into such arrangements in the near future. The Company does not expect to
generate cash flows from operations for fiscal 2006, and expects to use proceeds
from future best-efforts debt or equity financing to fund working capital
requirements for the next twelve months. If the Company is unable to raise
sufficient capital from external sources to fund its operations, it may need to
sell assets to meet working capital needs or curtail operations.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern.
As shown in the financial statements and discussed in Note 2, the Company has
incurred significant recurring losses from operations since inception, has a
negative working capital and is dependent on outside sources of financing for
continuation of its operations. These factors raise substantial doubt about the
Company's ability to continue as a going concern.
The Company has a limited operating history in the oil and gas business.
The Company's operations to date have consisted solely of acquiring rights to
working interests in the JDZ and EEZ. The Company's future financial results
depend primarily on (1) its ability to enter into production sharing contracts;
(2) its ability to obtain sufficient financing to meet its financial commitments
in the production sharing contracts; (3) its ability to discover commercial
quantities of oil and gas; and (4) the market price for oil and gas. Management
cannot predict that the Company's future operations will be profitable. In
addition, the Company's operating results may vary significantly during any
financial period. These variations may be caused by significant periods of time
between discovery and development of oil or gas reserves, if any, in commercial
quantities.
The Company has not entered into any production sharing contracts.
3
The Company's success will depend on its ability to enter into production
sharing contracts for Blocks 2, 3, 4, 5 and 6 in the JDZ. Although the Company
is in preliminary negotiations to enter into productions sharing contracts in
these Blocks, it has no executed contracts. Because of the relative complexity
of these types of contracts, the large number of parties involved in these
Blocks and the relative inexperience of the JDA in processing these contracts,
it is impossible to estimate when, if at all, these contracts will be executed
and become effective. There is no assurance the Company will be able to
successfully enter into any production sharing contracts.
The Company will likely be required to raise money to fund its financial
commitments pursuant to any production sharing contracts.
When, and if the Company enters into a production-sharing contract, it will
likely be required to fund its financial commitments. The Company will have to
raise money in an equity or debt financing to meet its financial commitments,
and to date it has no firm commitments for such financing. If the Company is
unsuccessful in raising money in the financing, it will be unable to pay its
financial commitment under any production-sharing contract that will result in
its default.
The Company may not discover commercially productive reserves in the JDZ or EEZ.
The Company's future success depends on its ability to economically locate oil
and gas reserves in commercial quantities in the JDZ and EEZ. This is a region
in which no drilling operations have been conducted to date. There can be no
assurance that the Company's planned projects in the JDZ or EEZ will result in
significant, if any, reserves or that the Company will have future success in
drilling productive wells.
The Company's non-operator status limits its control over its oil and gas
projects in the JDZ or EEZ.
The Company will focus primarily on creating exploration opportunities and
forming relationships with oil and gas companies to develop those opportunities
in the JDZ or EEZ. As a result, the Company will have only a limited ability to
exercise control over a significant portion of a project's operations or the
associated costs of those operations in the JDZ or EEZ. The success of a future
project is dependent upon a number of factors that are outside the Company's
areas of control. These factors include:
o the availability of future capital resources to the Company and the
other participants to be used for drilling wells;
o the approval of other participants for the drilling of wells on the
projects; and
o the economic conditions at the time of drilling, including the
prevailing and anticipated prices for oil and gas.
The Company's reliance on other project participants and its limited ability to
directly control future project costs could have a material adverse effect on
its future expected rates of return.
The Company's success depends on its ability to exploit its limited assets.
The Company's only assets are rights to working interest in exploration acreage
in the JDZ and EEZ under agreements with the JDA and DRSTP. The Company's
operations have been limited to sustaining and managing its rights under these
agreements. The Company's success depends on its ability to exploit these
assets, of which there is no assurance that it will be successful.
Approximately 85% of The Company's total assets are comprised of intangible
assets including the DRSTP concession fee which is subject to review on a
periodic basis to determine whether impairment on this asset is required.
Impairment would not only greatly diminish the Company's assets, but would also
require it to record a significant charge against its earnings.
The Company is required under generally accepted accounting principles to review
its intangible assets for impairment when events or changes in circumstances
indicate the carrying value may not be recoverable. At the fiscal year ended
September 30, 2005, management evaluated its investment in its DRSTP concession
fee in light of its 2003 Option Agreement and believed that there were no events
or circumstances that would indicate that such asset might be impaired. If
management later determines that impairment exists, the Company will be required
to record a significant charge to earnings in its financial statements during
the period in which any impairment of the DRSTP concession fee is determined.
The Company's competition includes oil and gas conglomerates that have
significant advantages over it.
4
The oil and gas industry is highly competitive. Many companies and individuals
are engaged in exploring for crude oil and natural gas and acquiring crude oil
and natural gas properties, resulting in a high degree of competition for
desirable exploratory and producing properties. The companies with which the
Company competes are much larger and have greater financial resources than the
Company.
Various factors beyond The Company's control will affect prices of oil and gas.
The availability of a ready market for the Company's future crude oil and
natural gas production depends on numerous factors beyond its control, including
the level of consumer demand, the extent of worldwide crude oil and natural gas
production, the costs and availability of alternative fuels, the costs and
proximity of transportation facilities, regulation by authorities and the costs
of complying with applicable environmental regulations.
The Company's operations are located outside of the United States which subjects
it to risks associated with international activities.
At September 30, 2005, all of the Company's operations were located outside the
United States. The Company's only assets are agreements with DRSTP and the JDA,
which provide ERHC with rights to participate in exploration and production
activities in the Gulf of Guinea off the coast of central West Africa. This
geographic area of interest is controlled by foreign governments that have
historically experienced volatility, which is out of management's control. The
Company's ability to exploit its interests in the agreements in this area may be
impacted by this circumstance.
The future success of the Company's international operations may also be
adversely affected by risks associated with international activities, including
economic and labor conditions, political instability, risk of war,
expropriation, renegotiation or modification of existing contracts, tax laws
(including host-country import-export, excise and income taxes and United States
taxes on foreign subsidiaries) and changes in the value of the U.S. dollar
versus the local currencies in which future oil and gas producing activities may
be denominated. As well, changes in exchange rates may adversely affect the
Company's future results of operations and financial condition.
The Company's results of operations are susceptible to general economic
conditions.
The Company's revenues and results of operations will be subject to fluctuations
based upon the general economic conditions both in the United States and
internationally. If there were to be a general economic downturn or a recession
in the oil and gas industry, the Company's future revenues and the value of its
oil and natural gas exploration concession could be materially adversely
affected. If there were to be a general economic downturn or a recession in the
oil and gas industry, the Company's ability to exploit its assets in the JDZ and
EEZ could be materially adversely affected.
One shareholder controls approximately 43% of the Company's outstanding common
stock.
Chrome Oil Services Ltd. beneficially owns approximately 43% of the outstanding
common stock. As a result, Chrome has the ability to substantially influence,
and may effectively control the outcome of corporate actions that require
stockholder approval, including the election of directors. This concentration of
ownership may have the effect of delaying or preventing a future change in
control of the Company.
The Company's stock price is highly volatile.
The Company's common stock is currently traded on the Over-the-Counter Bulletin
Board. The market price of the Company's common stock has experienced
fluctuations that are unrelated to its operating performance. The market price
of the common stock has been highly volatile over the last several years. The
Company can provide no assurance that its current price will be maintained.
The Company does not currently pay dividends on its common stock and do not
anticipate doing so in the future.
The Company has paid no cash dividends on its common stock, and there is no
assurance that the Company will achieve sufficient earnings to pay cash
dividends on its common stock in the future. The Company intends to retain any
earnings to fund its operations. Therefore, the Company does not anticipate
paying any cash dividends on the common stock in the foreseeable future.
The Company's stock is considered a "penny stock."
The SEC has adopted rules that regulate broker-dealer practices in connection
with transactions i(n "penny stocks." Penny stocks generally are equity
securities with a share price of less than $5.00. The penny stock rules require
a broker-dealer, prior to a transaction in a penny stock not otherwise exempt
from the rules, to deliver a standardized risk disclosure document prepared by
the SEC that provides information about penny stocks and the nature and level of
risks in the penny stock market. These disclosure requirements may have the
effect of reducing the level of trading activity in any secondary market for a
stock that becomes subject to the penny stock rules. The Company's common stock
may be subject to the penny stock rules, and accordingly, investors in the
common stock may find it difficult to sell their shares in the future, if at
all.
5
Item 2. Description of Property
The Company's office is located at 5444 Westheimer Road, Suite 1570, Houston,
Texas 77056. Prior to December 31, 2004, these premises were leased by COS and
pursuant to a management services agreement, COS provided the space to the
Company. This lease for approximately 1,900 sq. ft. of office space expires in
February 2006. On December 23, 2004, the Company and COS cancelled, effective
December 31, 2004, the management services agreement. On January 1, 2005, ERHC
assumed this lease pursuant to its terms.
Item 3. Legal Proceedings
The Company is not aware of any material legal proceedings pending to which it
is a party or its property is subject. From time to time, the Company may be
subject to proceedings, lawsuits and other claims in the ordinary course of
business, the resolution of which, in the opinion of management should not have
a materially adverse effect on the Company's financial position.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
6
PART II
Item 5. Market for Registrant's common stock and Related Shareholder Matters
ERHC's common stock is currently traded on the OTC Bulletin Board under the
symbol "ERHE." The market for the Company's common stock is sporadic and highly
volatile. The following table sets forth the closing sales price per share of
the common stock for the past two fiscal years. These prices reflect
inter-dealer prices, without retail mark-ups, markdowns or commissions, and may
not necessarily represent actual transactions.
High Low
-------------- ---------------
(per share)
---------------------------------
Fiscal Year 2004
- ----------------
First Quarter $0.41 $0.28
Second Quarter $0.44 $0.28
Third Quarter $0.94 $0.42
Fourth Quarter $0.70 $0.43
Fiscal Year 2005
- ----------------
First Quarter $0.55 $0.28
Second Quarter $0.75 $0.42
Third Quarter $0.94 $0.43
Fourth Quarter $0.50 $0.32
On December 20, 2005, the closing price of the common stock as reported on the
"OTC Bulletin Board" was $0.33. As of November 30, 2005, there were
approximately 2,460 record owners of the common stock. It is the Company's
present policy not to pay cash dividends and to retain future earnings to
support growth. Any payment of cash dividends in the future will be dependent
upon the amount of funds legally available, the Company's earnings, financial
condition, capital requirements, and other factors that the board of directors
may deem relevant. The Company has not paid any dividends during the last two
fiscal years and does not anticipate paying any cash dividends in the
foreseeable future.
Recent Sales of Unregistered Securities
During the fourth quarter ended September 30, 2005, the Company issued no
securities that had not been previously reported.
Equity Compensation Plans
The following table gives information about the Company's common stock that may
be issued upon the exercise of options under its 2004 Compensatory Stock Option
Plan, which was approved by the Company's shareholders.
- -------------------------------------------------------------------------------------------------------------------------
Number of Securities
Number of Securities Remaining Available
To be Issued Upon for Future Issuance
Exercise of Weighted Average Under Equity Comp-
Outstanding Exercise Price of ensation Plans (Exclu
Options, Warrants and Outstanding Options, ding Securities Ref-
Rights Warrants and Rights elected in Column A)
Plan Category (A) (B) (C)
- -------------------------------------------------------------------------------------------------------------------------
Equity Compensation Plans Approved by Security - - 20,000,000
Holders
- -------------------------------------------------------------------------------------------------------------------------
Equity Compensation Plans Not Approved by Security 3,000,000 $0.20 -
Holders
- -------------------------------------------------------------------------------------------------------------------------
Total 3,000,000 $0.20 20,000,000
- -------------------------------------------------------------------------------------------------------------------------
7
Item 6. Selected Financial Data
The selected financial data of the Company presented below as of and for each of
the five years in the period ended September 30, 2005, has been derived from the
audited financial statements of the Company. The financial statements as of and
for the year ended September 30, 2005 have been audited by Malone & Bailey, PC,
and the financial statements as of and for each of the four years in the period
ended September 30, 2004 have been audited by Pannell Kerr Forster of Texas,
P.C., independent registered public accounting firms, and such financial
information for the three years ended September 30, 2005 is included elsewhere
in this Form 10-K. The data set forth below should be read in conjunction with
the Company's financial statements, related notes thereto and Management's
Discussion and Analysis of Financial Condition and Plan of Operations, contained
elsewhere herein.
For the Year Ended September 30,
---------------------------------------------------------------------------------
Statements of Operations Data 2005 2004 2003 2002 2001
------------- ------------- ------------- ------------- -------------
Revenues $ -- $ -- $ -- $ -- $ --
Operating expenses (4,652,459) (2,085,426) (1,944,655) (2,883,099) (4,318,493)
Interest expense (1,147,248) (1,671,759) (1,209,227) (1,201,111) (950,760)
Other Income (expense) 278,804 163,797 -- -- (1,125,557)
Loss on extinguishment of debt (5,749,575) -- -- -- --
Net loss (11,270,478) (3,593,388) (3,153,882) (4,084,210) (6,394,810)
Net loss per share (0.02) (0.01) (0.01) (0.01) (0.01)
Weighted average shares of common
stock outstanding 671,164,058 592,603,441 567,788,483 542,680,423 516,136,369
As of September 30,
--------------------------------------------------------------------------------
Balance Sheet Data 2005 2004 2003 2002 2001
------------- ------------- ------------- ------------- -------------
DRSTP Concession fee $ 5,679,000 $ 5,679,000 $ 5,679,000 $ 5,630,000 $ 5,550,000
Total assets 6,720,210 5,728,556 5,735,744 5,672,064 5,631,952
Total liabilities 2,779,011 14,757,208 16,283,506 17,739,198 17,436,065
Shareholders' equity (deficit) 3,941,199 (9,028,652) (10,547,762) (12,067,134) (11,804,113)
Item 7. Management's Discussion and Analysis of Financial Condition and Plan of
Operations
You must read the following discussion of the results of the operations and
financial condition of the Company in conjunction with its financial statements,
including the notes included in this Form 10-K filing. The Company's historical
results are not necessarily an indication of trends in operating results for any
future period.
Overview
The Company's current focus is to exploit its only assets, which are rights to
working interests in exploration acreage in the JDZ and the EEZ. The Company has
entered into agreements with upstream oil and gas companies to jointly evaluate
and apply for interest in production sharing contracts in these JDZ Blocks. The
technical and operation expertise in conducting exploration operations will be
provided by the Company's co-ventures.
Critical accounting policies
In December 2001, the SEC requested that companies discuss their most "critical
accounting policies" in the Management's Discussion and Analysis section of
their reports. The SEC indicated that a "critical accounting policy" is one that
is important to the portrayal of a company's financial condition and operating
results and requires management's most difficult, subjective or complex
judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain.
The Company has identified the policies below as critical to its business
operations and the understanding of its results of operations. The impact and
any associated risks related to these policies on the Company's business
operations are discussed throughout this section where such policies affect the
Company's reported and expected financial results. Management's preparation of
this Annual Report on Form 10-K requires it to make estimates and assumptions
that affect the reported amount of assets and liabilities, and that effect the
disclosure of contingent assets and liabilities. There is no assurance that
actual results will not differ from those estimates and assumptions.
Concentration of risks
The Company primarily transacts its business with two financial institutions.
From time to time the amount on deposit in either one of these institutions may
exceed the $100,000 federally insured limit. The balances are maintained in
demand accounts to minimize risk.
8
The Company's current focus is to exploit its only assets, which are agreements
with the DRSTP concerning oil and gas exploration in EEZ and with the JDA
concerning oil and gas exploration in the JDZ. The Company has formed
relationships with other oil and gas companies with the technical and financial
capabilities to assist the Company in leveraging its interests in the EEZ and
the JDZ. Should circumstances impede the Company from perfecting its interests
in the 2001 Agreement with DRSTP, or the 2003 Option Agreement the Company's
business would be materially affected. Should the Company perfect its interests
in the 2001 Agreement and the 2003 Option Agreement, there is no certainty that
the Company will be able to obtain sufficient financial and other resources to
develop its interests. The Company currently has no other operations.
Stock-based compensation
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
123 - "Accounting for Stock Based Compensation." Under SFAS No. 123, we are
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 the Company's 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 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.
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 to which events and
circumstances indicate that such assets might be impaired. Management of the
Company has evaluated its investment in its DRSTP concession fee and believes
that there have been no events or circumstances that would indicate that such
asset might be impaired.
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). The financial statement impact from the
implementation of the requirements of SFAS No. 123(R) may significantly impact
the Company's future results of operations and the Company will 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. 151 is expected to have no impact on the
Company's consolidated financial statements.
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 the Company's consolidated financial statements.
9
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 SFAS No. 154 is not expected to have an effect on the Company's
consolidated financial statements.
Results of Operations
Year ended September 30, 2005 Compared to Year Ended September 30, 2004
During the year ended September 30, 2005, the Company incurred a net loss of
$11,270,478, compared to a net loss of $3,593,388 for the year ended September
30, 2004. A significant portion of the increase in net loss for the year ended
September 30, 2005 was attributable to a $5,749,575 loss on extinguishment of
debt related to the inducement to Chrome to convert debt into common stock and
the addition of board compensation of $1,990,361.
Effective December 31, 2004, the Company cancelled its management services
agreement with Chrome and began to cover all its operating expenses.
During 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.
Year ended September 30, 2004 Compared to Year Ended September 30, 2003
During the year ended September 30, 2004, the Company incurred a net loss of
$3,593,388, compared to a net loss of $3,153,882 for the year ended September
30, 2003. A significant portion of the increase in net loss for the year ended
September 30, 2004 was attributable to a $463,000 increase in interest expense
related primarily to the amortization of the debt discount which was recorded
due to the beneficial conversion feature attributable to borrowings on the
Chrome line of credit during the year ended September 30, 2004 and the recording
of $308,000 in compensation expense for options granted to an employee during
the year ended September 30, 2004. This corresponding increase in expense was
offset by a decrease of approximately $167,000 of various expenses incurred in
carrying out the ongoing activities of the Company, of which no one single
amount was deemed to be significant. Also during the year ended September 30,
2004 other income increased by $163,796 as a result of receipt of net proceeds
from an insurance claim. There was no comparable amount in 2003.
During February 2001, the Company negotiated a management services agreement by
and between COS and the Company whereby the Company would pay a monthly
management fee of $68,000 for various services to be provided by COS inclusive
of all general office expenses. Total expenses incurred under this management
services agreement were $816,000 for each of the years ended September 30, 2004
and 2003. The Company's executive officers incurred significant travel expenses
of approximately $418,000 and $434,000 for the years ended September 30, 2004
and 2003, respectively, as they continued negotiations with officials of the FRN
and DRSTP as well as numerous trips to the United States from Nigeria by several
Chrome executives while managing the ongoing affairs of the Company. The Company
anticipates travel related expenses will continue to be significant as the
Company further develops its business interests. The net loss per common share
was $0.01, basic and diluted, for the year ended September 30, 2004 compared to
a net loss per common share of $0.01, basic and diluted, for the year ended
September 30, 2003.
During 2004 and 2003, 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.
Liquidity and Capital Resources
As of September 30, 2005, the Company had negative working capital of
$1,758,428. Subsequent to September 30, 2005, the Board of Directors has
approved the Company raising an additional $1,000,000 of working capital in the
market as soon as practicable.
Historically, the Company has financed its operations from the sale on a
best-efforts basis of debt and equity securities (including the issuance of its
securities in exchange for goods and services). There have been no cash flows
generated from operations in the past two years. During the fiscal year ended
September 30, 2005, the Company received advances on the Chrome line of credit
for $2,750,000 before conversion of this line into common stock of the Company.
In fiscal year 2004, the Company raised additional capital of $975,000 from the
sales of its common stock and $752,607 from borrowings under its Chrome line of
credit.
10
Management will be required to raise additional capital through the sale on a
best-efforts basis of common stock and debt securities, and will attempt to
continue raising capital resources until such time as the Company generates
revenues sufficient to maintain itself as a viable entity. It is expected that a
minimum of $2,500,000 will need to be raised to fund working capital
requirements in fiscal 2006. However, there is no assurance that such financing
will be obtained.
The Company presently intends to utilize any available sources of funds to
provide for general corporate overhead and to continue to pursue its interests
in the JDZ and EEZ. If the Company is successful in negotiating
production-sharing agreements in Blocks 2, 3 and 4, The Company expects to
receive funding from its partners that will support its operations in those
blocks.
Debt Financing Arrangements
As of September 30, 2005, $33,513 of convertible debt of the Company was
outstanding. At September 30, 2004, $11,024,774 of convertible debt of the
Company was outstanding (of which $9,398,741 was owed to Chrome) with maturity
dates ranging from demand to February 15, 2005, bearing interest at rates
ranging from 5.5% to 20%, and convertible at $0.20 per share.
The total convertible debt includes the Company's two lines of credit. The first
is a 10% working line of credit in the amount of $1,800,000, all of which is
outstanding. The $1,800,000 line of credit matured September 2004, but was
extended until January 2005. The second is a $5,000,000 senior convertible
promissory note bearing interest at a rate of 10% per annum, maturing in
February 2004. In February 2004, the Company extended the maturity on the
$5,000,000 line of credit to February 15, 2005 under similar terms. As of
September 30, 2004, approximately $3,962,761 is outstanding under this line of
credit. Additionally, interest accrued and unpaid on these notes as of September
30, 2004 is $2,192,182, of which $2,126,265 is owed to Chrome. At the option of
the note holders, unpaid interest can be converted into common stock of the
Company.
The Company agreed to restructure all Chrome debt, including the lines of
credit. As of December 24, 2004, Chrome has agreed to cancel all outstanding
debt (the "Old Notes") in exchange for a new 12% note with a principal amount of
$10,134,084, convertible at the option of the Company at $0.175 per share, and
expiring on January 31, 2007. Chrome also agreed to provide the Company with a
new 10% working capital loan in the amount of $2,500,000, which expires in
January 2007 and is convertible at the option of the Company at $0.175 per
share. In exchange for the cancellation and exchange of the Old Notes and the
new working capital line of credit, the Company 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 ERHC issued 12,308,560 shares of common
stock to satisfy current interest accrued but not paid of $2,461,712.
Furthermore, as of December 24, 2004, ERHC has received agreements from the
nonaffiliated note holders to convert $1,678,999 of convertible debt and accrued
interest into 8,386,855 shares of common stock. As of September 30, 2005, the
Company has $33,513 of nonaffiliated convertible debt and $3,189 of accrued but
unpaid interest outstanding.
Contractual Obligations and Commercial Commitments
The following table provides information at September 30, 2005, about the
Company's contractual obligations and commercial commitments. The table presents
contractual obligation by due dates and related contractual commitments by
expiration dates.
Less than 1 - 3 4 - 5 After 5
Contractual Obligations Total 1 year Years Years Years
- ----------------------- -------------- -------------- -------------- -------------- --------------
Convertible debt(1) $ 33,513 $ 33,513 $ -- $ -- $ --
-------------- -------------- -------------- -------------- --------------
Total $ 33,513 $ 33,513 $ -- $ -- $ --
============== ============== ============== ============== ==============
(1) See Note 5 to the Financial Statements in this Annual Report on Form
10K.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
The Company's current focus is to exploit its only assets, which are rights to
working interest in the JDZ and EEZ under agreements with the JDA and DRSTP. The
Company intends to form relationships with other oil and gas companies with
technical and financial capabilities to assist the Company in leveraging its
interests in the EEZ and the JDZ. Should circumstances impede the Company from
perfecting its interests in the 2001 Agreement with DRSTP or the 2003 Option
Agreement, the Company's business would be materially affected and could
possibly cease to exist. Should the Company perfect its interests in the 2001
Agreement and the 2003 Option Agreement, there is no certainty that the Company
will be able to obtain sufficient financial and other resources to develop its
interests. The Company currently has no other operations.
11
At September 30, 2005, all of the Company's operations were located outside the
United States. The Company's only assets are agreements with DRSTP and the JDA,
which provide ERHC with rights to participate in exploration and production
activities in the Gulf of Guinea off the coast of central West Africa. This
geographic area of interest is controlled by foreign governments that have
historically experienced volatility, which is out of management's control. The
Company's ability to exploit its interests in the agreements in this area may be
impacted by this circumstance.
The future success of the Company's international operations may also be
adversely affected by risks associated with international activities, including
economic and labor conditions, political instability, risk of war,
expropriation, renegotiation or modification of existing contracts, tax laws
(including host-country import-export, excise and income taxes and United States
taxes on foreign subsidiaries) and changes in the value of the U.S. dollar
versus the local currencies in which future oil and gas producing activities may
be denominated. As well, changes in exchange rates may adversely affect the
Company's future results of operations and financial condition.
Market risks relating to the Company's operations result primarily from changes
in interest rates as well as credit risk concentrations. The Company's interest
expense is generally not sensitive to changes in the general level of interest
rates in the United States, particularly because a substantial majority of its
indebtedness is at fixed rates.
The Company holds no derivative financial or commodity instruments, nor does it
engage in any foreign currency denominated transactions.
Item 8. Financial Statements and Supplementary Data
See Index to Financial Statements and Schedule at page F-1. The financial
statements with the report of the independent registered public accounting firms
are included on pages F-2 through F-22 of this document. Financial statement
schedules other than those included herein have been omitted because the
required information is contained in the financial statements or related notes,
or such information is not applicable.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
On November 4, 2005, Pannell Kerr Forster of Texas, P.C. ("PKF") notified the
Company that it resigned as the Company's independent auditor. PKF's report on
the financial statements for the fiscal years ended September 30, 2004 and 2003,
contained no adverse opinion or disclaimer of opinion and was not qualified or
modified as to uncertainty, audit scope or accounting principles. The Audit
Committee of the Company's Board of Directors was informed of, but did not
recommend or approve, PKF's resignation.
During the Company's fiscal years September 30, 2004 and 2003, and the
subsequent interim periods preceding PKF's resignation, there were no
disagreements between the Company and PKF on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which disagreements, if not resolved to PKF's satisfaction, would have caused
PKF to make reference to the subject matter of the disagreement in connection
with their report.
On November 14, 2005, the audit committee of the board of directors of the
Company engaged Malone & Bailey, PC as the Company's new independent auditor for
the fiscal year ended September 30, 2005. During the two most recent fiscal
years ended September 30, 2004 and September 30, 2003 and the subsequent interim
periods prior to the Company's engagement of Malone & Bailey, the Company did
not consult with Malone & Bailey regarding the application of accounting
principles to a specific Transaction, either completed or proposed, or the type
of audit opinion that might be rendered on the Company's consolidated financial
statements.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's reports under
the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms, and that such information is
accumulated and communicated to management, including the Company's Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. The Company's management, with
participation of the Company's Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the Company's disclosure controls
and procedures as of the end of the fiscal year covered by this Annual Report on
Form 10-K. As described below under Management's Report on Internal Control Over
Financial Reporting, the Company has identified material weaknesses in the
Company's internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)). The Company's Chief Executive Officer and Chief
Financial Officer have concluded that as a result of the material weaknesses, as
of the end of the period covered by this Annual Report on Form 10-K, the
Company's disclosure controls and procedures were not effective.
Management's Report on Internal Control over Financial Reporting
12
The management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rules 13a-15(f)
and 15d-15(f) under the Securities Exchange Act of 1934. The Company's internal
control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles in the United States of America. The Company's internal
control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the
Company; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the Company are being made only in accordance with authorizations of management
and directors of the Company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of the Company's assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate. Management assessed the
effectiveness of the Company's internal control over financial reporting as of
September 30, 2005. In making this assessment, management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control-Integrated Framework.
Based on our assessment and those criteria, management has concluded that the
Company did not maintain effective internal control over financial reporting as
of September 30, 2005 as a result of material weaknesses in (a) internal
controls surrounding corporate governance, and (b) internal controls surrounding
the accounting for common stock issuances.
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected.
Internal Controls Surrounding Corporate Governance:
The principal factors contributing to the material weakness in corporate
governance are as follows:
o Inadequate number of independent directors.
o Lack of independent audit committee.
o Lack of audit committee financial expert.
If these weaknesses are not addressed, they could result in material
misstatements of annual or interim financial statements that might not be
detected, corrected or disclosed in a timely manner, or at all.
Internal Controls Surrounding the Accounting for Transactions Involving Common
Stock:
The principal factor contributing to the material weakness in the
accounting for issuances of shares of common stock is based on:
o The existence of differences in the number of shares of common stock
outstanding as reflected in the Company's accounting records and prior
financial reports and the number reported by the Company's stock transfer
agent that resulted in a change in previously issued financial statements
at September 30, 2005.
o An error in accounting for conversion of debt to equity that occurred in
fiscal 2005 and resulted in a $347,517 audit adjustment at September 30,
2005.
The Company's independent registered public accounting firm has audited
management's assessment of the effectiveness of the Company's internal control
over financial reporting as of September 30, 2005, as stated in their report
which appears on page F-2 of this Form 10-K under the heading, Report of
Independent Registered Public Accounting Firm.
Remediation Plans for Material Weaknesses in Internal Control over Financial
Reporting
Corporate Governance
The Company has retained an executive recruiting firm to aid them in a search of
an independent financial expert to chair the audit committee. The Company is
also is the process of amending their Audit Committee Charter to include the
responsibilities of the financial expert and to ensure independent directors
fill all positions on the committee.
Accounting for Stock Issuances
The Company is implementing enhancements to its internal control over financial
reporting to provide reasonable assurance those errors and control deficiencies
in its accounting for stock issuances will not recur. These steps include the
engagement of independent financial reporting consultants for review of critical
accounting areas and disclosures and material non-standard transactions.
13
Until these changes are completed, weaknesses will continue to exist. Management
presently anticipates that the changes necessary to remediate these weaknesses
will be in place by the conclusion of the next fiscal year.
Changes in Internal Control over Financial Reporting
Except as otherwise discussed herein, there have been no changes in our internal
control over financial reporting during the most recently completed fiscal
quarter that have materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
14
PART III
Item 10. Directors and Executive Officers of the Registrant
The following are directors and executive officers of the Company as of January
21, 2006:
Name Age Position Member/Position Since
---- --- -------- ---------------------
Sir Emeka Offor 46 Chairman of the Board February 2001
Walter Brandhuber 52 Chief Executive Officer, January 2006
President and Director
Nicolae Luca 46 Director February 2001
Howard Jeter 58 Director April 2005
Andrew Uzoigwe 63 Director April 2005
Cosmas (Ike) Okpala 42 Chief Financial Officer June 2004
Peter C. Ntephe 39 Secretary February 2001
Sir Emeka Offor has served as the chairman of the board of ERHC since February
2001. In addition to his duties as chairman, Sir Emeka Offor is currently
chairman of Chrome Consortium. He is the director and shareholder of Chrome Oil
Services Limited ("COS"). COS is the company's majority shareholder. Sir Emeka
has held these positions at various times since 1995. Apart from owning majority
interests in these companies, Sir Emeka Offor has majority interests in
aviation, banking and insurance companies.
Walter Brandhuber served as a senior consultant at CRA International Limited, in
London, England, from September, 2005 until his appointment in January 2006 as
president and chief executive officer of the Company. He was also a senior
consultant with G.E.A.R.S Limited from July 2003. From 1999 to 2003, Mr.
Brandhuber served as a managing director and member of the board of Odin
Petroleum N.V. based in London, England and Amsterdam, Netherlands. From 1999 to
2000, Mr. Brandhuber served on the board of Calverton Limited. From 1989 to
1998, Mr. Brandhuber worked at Union Texas Petroleum, his last position being
vice-president. Mr. Brandhuber has an MBA (Hons) from the University of Notre
Dame, a BA (cum laude) from the Loyola University of Chicago and a Doctor of
Jurisprudence from the University of Oklahoma.
Nicolae Luca has served as a director since February 2001. Since April 1998, Mr.
Luca has also served as the technical director for the Nigeria-incorporated
entity Chrome Oil Services Limited, (a separate and distinct entity from the
Bahamas-incorporated Chrome Oil Services Limited which is the Company's majority
shareholder). Mr. Luca has a bachelor of science in mechanical engineering.
Howard Jeter has served as a director since April 2005. Howard Jeter retired
with the rank of career Minister from the State Department in 2003 after a 27
- -year career in Foreign Service. Ambassador Jeter is the immediate past US
Ambassador to Nigeria. He also served as Deputy Assistant Secretary of State for
African Affairs, State Director for West Africa, President Clinton's Special
Envoy for Liberia and Ambassador to Botswana. Ambassador Jeter was Deputy Chief
of Mission and later Charge d' Affairs in Lesotho and Namibia He also had
multi-year assignments in Tanzania and Mozambique. Ambassador Jeter has been the
recipient of numerous awards, including the Presidential Meritorious Service
Awards, Superior Honor Awards and several Performance Awards. He received the
Bennie Trailblazer Award from Morehouse College and the International Peace and
Justice Award from the rainbow Coalition. Ambassador Jeter is a member of the
Council on Foreign Relations, the American Foreign Service Association and Phi
Beta Kappa. He earned his Bachelor of Arts Degree with Honors from Morehouse
College and Masters Degrees in International Relations, Comparative Politics and
African Studies from the Columbia University and University of California, Los
Angeles (UCLA) He is currently the Executive Vice President of GoodWorks
International, an international consulting and business advisory group, Chairman
of the Advisory Committee on Africa, US Export - Import Bank and a board member
of Africare and African Action.
Andrew Uzoigwe has served as a director since April 2005. . Dr. Uzoigwe started
his career with Dow Chemical Company where he held various senior positions in
its Walnut Creek Research Center and in its Specialty Chemicals Facility in
Pittsburgh, California. He joined the Nigerian National Petroleum Corporation
(NNPC) in 1981. During his tenure in at NNPC, Dr. Uzoigwe held several senior
technical and management positions including Chief Engineer and Project
Coordinator (Petrochemicals), Group General Manager (R&D Division), Managing
Director of NNPC's Refining and Petrochemicals subsidiaries. In 1999 he was
appointed the Group Executive Director (Exploration & Production) a position he
held until he retired from NNPC in 2002. Dr. Uzoigwe has also served in the
Governing Boards of Raw Material Research and Development Council, National
Management Agency. He has traveled extensively on numerous professional and
official assignments on behalf of NNPC and the Nigerian Government. Dr. Uzoigwe
is a Registered Professional mechanical Engineer and a Registered Professional
Chemical Engineer in the State of California. He is a fellow of the Nigerian
Society of Chemical Engineers and a Fellow of the Polymer Institute of Nigeria.
He has BSc (Mechanical Engineering) and Master of Business Administration Degree
from University of California at Berkley. He also holds Msc and PhD Degrees in
Petroleum and Chemical Engineering from Stanford University California.
Cosmas (Ike) Okpala has served as chief financial officer of ERHC since June
2004. From February 2003 until serving at ERHC, Mr. Okpala served as Senior
Manager/Head of the Investment Banking Division of African Express Bank Plc.
From April 2001 to February 2003, Mr. Okpala served as General Manager/Chief
Operating Officer of First Capital Guaranty Limited. Mr. Okpala had previously
spent 11 years in various financial positions with banks and private
institutions. Mr. Okpala holds three degrees including a Masters of Business
Administration from the University of Nigeria, a Masters of Banking & Finance
from FINAFRICA, Italy and a Bachelor of Science in Business Administration from
California State University, U.S.A.
15
Peter C. Ntephe has served as secretary of ERHC since February 2001. From 1987
to 1992, Mr. Ntephe worked with Serena David Dokubo and Company, rising to the
Head of the Corporate Legal Services Department. From 1992 to 1999, he was a
partner in the law firm of NSW Law and oversaw the firm's provision of company
secretarial services to corporate clients. From 1999 to 2001, he was Chief
Legislative Aide to the Chairman of the Senate Committee for Judiciary and Legal
Matters, National Assembly of Nigeria. Mr. Ntephe has a Bachelors' and two
Masters degrees in law, the second Masters being a specialization in regulatory
issues from the University of London.
All officers serve at the discretion of the board of directors. There are no
family relationships between or among any executive officers and directors.
There are no arrangements or understandings between an executive officer or
director and any other person pursuant to which he was or is to be selected as
an executive officer or director. None of the executive officers or directors is
involved in any legal proceedings described in Item 401(f) of Regulation S-K.
The Company entered into a management services agreement with COS in February
2001. Pursuant to that agreement, COS provided the Company with management and
business development services, in addition to making available specialized
services in the areas of refinery maintenance, engineering design, and upstream
oil industry services. COS provided the Company with such services for a
management fee of $68,000 per month. Messrs. Okpala, and Ntephe were consultants
to COS and received fees and overhead expense reimbursement from COS. Expenses
not covered under the management services agreement were borne by the Company.
Total management fees incurred during each of the years ended September 30, 2005
and September 30, 2004 were $204,000 and $816,000, respectively. The Company's
executive officers incurred significant direct expense for travel and related
expenses of approximately $279,000 and $418,000 during the years ended September
30, 2005 and 2004, respectively, which were reimbursed by the Company to COS or
directly to the officers. At September 30, 2005 and 2004, accounts payable and
other accrued liabilities included $0 and $3,231 respectively owed to one
officer for direct travel expenses. In addition to the management services
agreement, the Company had one employment agreement with Mr. Memon. On December
23, 2004, the Company and COS cancelled, effective December 31, 2004, the
management services agreement. Beginning on January 1, 2005, ERHC made
arrangements to assume and provide directly all services currently being
provided under such management services agreement.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company's directors and executive
officers, and persons who own beneficially more than ten percent (10%) of the
common stock, to file reports of ownership and changes of ownership with the
Securities and Exchange Commission. Copies of all filed reports are required to
be furnished to us. Based solely on the reports received and the representations
of the reporting person, the Company believes that these persons have complied
with all applicable filing requirements during the fiscal year ended September
30, 2005, except for a late Form 3 filing by Mr. Uzoigwe, a late Form 4 and/or
Form 5 for Sir Emeka Offer and Chrome Energy LLC, and a late Form 4 for Mr. Ali
Memon reporting the grant of options. Each late Form 3, Form 4 and/or Form 5 has
been or will be subsequently filed.
Code of Ethics for the CEO, CFO and Senior Financial Officers
The Company has adopted the CEO, CFO and Senior Financial Officers Code of
Ethical Conduct. The Board believes that these individuals must set an exemplary
standard of conduct, particularly in the areas of accounting, internal
accounting control, auditing and finance. This code sets forth ethical standards
the designated officers must adhere to and other aspects of accounting, auditing
and financial compliance. The Code of Ethics for the CEO, CFO and Senior
Financial Officers is available on the Company's website at
http://www.erhc.com/CorporateGovernance.htm. The information contained on our
website is not incorporated by reference herein into this Report on Form 10-K.
Audit Committee Matters
The Company's Audit Committee was constituted of Mr. Ali Memon and Mr. Nicolae
Luca until Mr. Memon's disengagement from the Company in January 2006. Mr.
Memon's place as president and chief executive was taken by Mr. Walter
Brandhuber who also replaced Mr. Memon on the audit committee. The Audit
Committee is responsible for, among other things, overseeing the Company's
accounting and financial reporting processes and audits of the Company's
financial statements. There are currently no members of the Audit Committee who
qualify as an "audit committee financial expert." The two members of the Audit
Committee are also not "independent" directors as defined in federal securities
laws. The Company's securities are traded on over the counter and it is not
legally obligated to have independent directors or an audit committee financial
expert on the audit committee. To strengthen its financial management
nonetheless, the Company intends reconstitute its Audit Committee to be made up
of solely independent directors, one of whom would qualify as an audit committee
financial expert. It is expected that this will be done not later than the end
of the current fiscal year of the Company, although no guarantees are hereby
given in that regard.
16
Item 11. Executive Compensation
The following table sets forth certain information regarding compensation paid
by the Company to its chief executive officer and other executive officers who
received total annual salary and bonus that exceeded $100,000 during the periods
involved.
Summary Compensation Table
Long-term Compensation Awards
-----------------------------
Annual Restricted Securities
Fiscal Compensation Stock Underlying
Name and Principal Positions Year Salary ($) Bonus ($) Awards(s)($) Options/SARs
- ---------------------------- ------------- ------------- ------------- ------------- -------------
Ali Memon 2005 187,500(1) -- -- --
Chief Executive Officer 2004 25,000(2) 3,000,000(3)
Chude Mba 2004 70,000(4)(5) -- -- --
Chief Executive Officer 2003 84,000(5) -- -- --
2002 84,000(5) -- -- --
(1) Represents three months at $150,000 per year and nine months at an
increased salary of $200,000 per year.
(2) Ali Memon joined the Company in August 2004. The amount includes all
compensation earned since August 2004.
(3) Pursuant to Mr. Memon's employment agreement and subject to the provisions
for termination of employment in that agreement, Mr. Memon was awarded an
option to purchase up to 3,000,000 shares of Company common stock, of
which 1,000,000 shares vested on September 1, 2004 and 1,000,000 shares
vested on August 1, 2005.
(4) Represents compensation paid to Mr. Mba from October 1, 2003, until his
resignation on July 31, 2004.
(5) The Company paid a management services fee of $68,000 per month to COS, a
component of which is an amount representing compensation to this officer
for services provided under the management services agreement.
Option Grants in Fiscal Year Ending September 30, 2005
The following table sets forth information concerning individual grants of
options made during the fiscal year ended September 30, 2005, to our named
executive officers. No stock options or stock appreciation rights were issued
during the fiscal year.
Potential Realizable Value at
Assumed Annual Rates of Stock Price
Individual Grants Appreciation for Options Term (1)
-------------------------------------------------------------------- ------------------------------------
Number of Percent Of
Securities Total
Underlying Options/SARs Exercise Market
Option/SARs Granted to Of Base Price at Expiration
Name Granted (#) Employees In Price Date of Date 5% 10%
(a) (b) Fiscal Year (c) ($/Sh) (d) Grant (e) (f) (g) 0%
- ----------- -------------- --------------- ---------- --------- ----------- --------- ------------ ----------
Ali Memon - - - - - - - -
Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values
The following table sets forth information concerning options exercised during
the fiscal year ended September 30, 2005 and option holdings as of September 30,
2005, with respect to our named executive officers. No stock options or stock
appreciation rights were issued during the fiscal year.
17
Aggregated Option Exercises in 2005
and Year-End Option Values
Shares
Acquired
on Value Realized Number of Unexercised Value of Unexercised
Name Exercise(#) ($) Options at FY-end in-the-Money Options (1)
(a) (b) (c) (d) (e)
- ------------------- ------------- ----------------- ----------------------------------- --------------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
Ali Memon - - 2,000,000 1,000,000 $340,000 $170,000
(1) The values of the unexercised options above are based on the difference
between the exercise price of the options and the fair market value of our
common stock at the end of the fiscal year ended September 30, 2005, which
was $0.37 per share.
Compensation of Directors
Compensation expense for the year ended September 30, 2005, as recommended by
the Compensation Committee and approved by the board, is shown in the table
below.
Non-Executive Director Compensation
Director Name Fees Common Shares Value Total
- --------------- -------- ------------- -------- --------
Sir Emeka Offor $ 33,300 85,000 $ 36,125 $ 69,425
Nicolae Luca 19,125 85,000 36,125 55,250
Howard Jeter 13,292 85,000 36,125 49,417
Andrew Uzoigwe 13,644 85,000 36,125 49,769
-------- ------------- -------- --------
$ 79,361 340,000 $144,500 $223,861
-------- ------------- -------- --------
As of January 25, 2006, none of the compensation approved as above for the
directors has been paid or issued to any of the directors. Also approved was
compensation for past services for directors Offor and Luca. Sir Emeka Offor
will receive 4,000,000 shares of common stock valued at $1,700,000 for all
services rendered from 2001 through 2004 and Nicolae Luca will receive $66,500
for his past services rendered from 2001 to 2004. None of the approved
compensation for past services has been paid or issued to Offor and Luca as of
January 25, 2006.
Employment Contracts
Mr. Memon's employment agreement with the Company terminated on January 20, 2006
when, by mutual agreement with the board on his disengagement from the Company,
Mr. Memon resigned his employment with the Company. The Board of Directors
approved Mr. Walter Brandhuber's appointment as president and chief executive
officer on January 21, 2006.
Long Term Incentive Plan Awards and Benefit Plans
No executive officer received any long-term incentive plan awards during the
fiscal year ended September 30, 2005. The Company has not established any
defined plan or actuarial plan under which benefits are provided to its
executive officers.
Securities Authorized for Issuance Under Equity Compensation Plans
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 on February 4, 2005. Under this plan 4,340,000 shares have been approved
for issuance by the Board of Directors as board compensation for current and
past services.
18
- --------------------------------- ------------------------------ ------------------------------- ------------------------------
Plan Category Number of securities to be Weighted-average exercise Number of securities
issued upon exercise of price of outstanding options, remaining available for
outstanding options, warrants and rights future issuance under equity
warrants and rights compensation plans
(excluding securities
reflected in column (a))
- --------------------------------- ------------------------------ ------------------------------- ------------------------------
(a) (b) (c)
- --------------------------------- ------------------------------ ------------------------------- ------------------------------
Equity compensation plans 4,340,000 $0.425 15,660,000
approved by security holders
- --------------------------------- ------------------------------ ------------------------------- ------------------------------
Equity compensation plans not 4,750,000 $0.20 0
approved by security holders
- --------------------------------- ------------------------------ ------------------------------- ------------------------------
Total 9,090,000 $0.307 15,660,000
- --------------------------------- ------------------------------ ------------------------------- ------------------------------
Compensation Committee Interlocks Insider Participation
The Company's Compensation Committee is comprised Mr. Howard Jeter and Dr.
Andrew Uzoigwe. None of the members of the Compensation Committee has been or is
an officer or employee of the Company, or is involved with a related transaction
or a relationship as defined by Item 404 of Regulation S-K. None of the
Company's executive officers serves on the board of directors or compensation
committee of a company that has an executive officer that serves on the
Company's board or Compensation Committee. No member of the Company's board is
an executive officer of a company in which one of the Company's executive
officers serves as a member of the board of directors or compensation committee
of that company.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The following table and notes thereto set forth certain information regarding
beneficial ownership of the common stock as of November 15, 2005 by (i) each
person known by the Company to beneficially own more than five percent of the
common stock, (ii) each director (iii) each named executive officer and (iv) all
directors and officers of the Company as a group.
Shares of common stock Percentage
Name and Address Beneficially Owned Of Voting Power
- --------------------------------------------- -------------------------- ---------------------
Chrome Oil Services Ltd/Sir Emeka Offor 306,091,433(1) 43.03%(2)
Ali Memon 2,000,000(3) *
Ike Okpala 500,000(4) *
Nicolae Luca - -
Peter Ntephe 500,000(5) *
Andrew Uzoigwe - -
Howard Jeter - -
First Atlantic Bank 60,641,821(6) 8.52%(2)
All executive officers and directors
as a group (7 persons) 309,091,433 43.45%(2)
* Less than 1%.
The address of each beneficial owner, except First Atlantic Bank, is c/o ERHC
Energy, Inc., 5444 Westheimer Road, Suite 1570, Houston, Texas 77056.
Beneficial ownership is determined in accordance with rules of the SEC and
generally includes voting or dispositive power with respect to such shares.
(1) In March 2005, Chrome Energy LLC ("Chrome") transferred all holdings
in the Company to Chrome Oil Services Ltd. ("COS"). Previously, COS
was the sole member of Chrome. Sir Emeka Offor was the sole manager
of Chrome and the sole shareholder and director of COS. As of
November 15, 2005, COS owns 303,591,433 shares of the Company stock,
and warrants to purchase 2,500,000 shares of the Company's common
stock, of which 1,500,000 expire in October 2008 and have a $0.40
per share exercise price, and 1,000,000 expire in April 2009 and
have a $0.25 per share exercise price.
19
(2) Shares beneficially owned and percentage of ownership is based on
711,412,226 shares of common stock outstanding as of November 15,
2005, 2,500,000 immediately exercisable warrants held by COS, Mr.
Memon's immediately exercisable options for 2,000,000 shares of
common stock, Mr. Okpala's immediately exercisable options for
500,000, and Mr. Ntephe's immediately exercisable options for
500,000.
(3) Includes options for 2,000,000 shares immediately exercisable by Mr.
Memon.
(4) Includes options for 500,000 shares immediately exercisable by Mr.
Okpala.
(5) Includes options for 500,000 shares immediately exercisable by Mr.
Ntephe.
(6) These shares are owned by affiliates of First Atlantic Bank, and it
is the understanding of the Company that First Atlantic Bank
beneficially owns such shares. First Atlantic Bank's address is c/o
John b. Geddie of Siegnyrl, Oshman and Geddie, Allen Parkway,
Houston Texas 77019.
Item 13. Certain Relationships and Related Transactions
As more fully described in Item 10 above, the Company entered into a management
services agreement with COS. At the time, Chrome was the Company's largest
shareholder. Sir Emeka Offor, the chairman of the board of directors, is a
director and shareholder of COS. As such, COS is an affiliate of Sir Emeka Offor
and Chrome. On December 23, 2004, the Company and COS cancelled, effective
December 31, 2004, the management services agreement.
In December 2004, the Company reached an agreement with Chrome to restructure
all their outstanding notes payable. Pursuant to the debt restructure, Chrome
agreed to cancel all their outstanding notes in exchange for a new 12% note with
a principal amount of $10,134,084, convertible at the option of the Company at
$0.175 per share, and expiring on January 31, 2007. Chrome also provided the
Company with a new 10% working capital line of credit in the amount of
$2,500,000, which would expire on January 31, 2007 and would be convertible at
the option of the Company at $0.175 per share. In exchange for the cancellation
and exchange of the notes and the new working capital line of credit, the
Company agreed to issue Chrome 14,023,352 shares of common stock; 12,465,202
issued immediately, 623,260 shares on the advance of $1,000,000, and the
remaining 934,890 shares upon receipt of an additional $1,500,000 available
under the working capital loan. In addition, ERHC issued 12,308,359 shares of
common stock to satisfy current interest accrued but not paid of $2,461,712.
On January 28, 2005, the Company exercised its right to convert the two new
notes, dated December 15, 2004, in favor of Chrome, with a principal balance of
$10,134,084 and accrued interest of $146,597 and dated December 15, 2004, in
favor of Chrome with an original principal amount of $2,500,000 and accrued
interest 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. They were
converted at $0.175 per share pursuant to the terms of such notes and cancelled
in their entirety. ERHC issued these shares pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
Item 14. Principal Accounting Fees and Services
Aggregate fees for professional services rendered by Pannell Kerr Forster of
Texas, P.C. ("PKF") for the fiscal years ended September 30, 2005 and September
30, 2004, were as follows:
2005 2004
-------- --------
Audit fee $107,000* $ 47,290
Audit-related fees $ -- $ --
Tax fees $ -- $ --
All other fees $ 990 $ 4,275
* Malone & Bailey, PC was not engaged until subsequent to September 30, 2005.
Audit fees for the fiscal years ended September 30, 2005 and 2004 represent the
aggregate fees billed for professional services rendered by PKF for the audit of
our annual financial statements and review of financial statements included in
our quarterly reports on Form 10-Q or services that are normally provided in
connection with statutory and regulatory filings or engagements for those fiscal
years.
Tax fees for the fiscal year ended September 30, 2005 and 2004, represents the
aggregate fees billed for professional services rendered by PKF for tax
compliance, tax advice, and tax planning.
20
All other fees for the fiscal year ended September 30, 2005 and 2004, represents
the aggregate fees billed for products and services provided by PKF, other than
the services reported in the other categories. All other fees generally relate
to tax fees assessed for corporate tax restructuring and other general corporate
tax related matters.
Audit Committee Pre-Approval Policies and Procedures
A representative of the independent registered public accounting firm normally
attends each meeting of the Audit Committee. The Audit Committee on an annual
basis reviews audit and non-audit services performed by the independent auditor.
All audit and non-audit services are pre-approved by the Audit Committee, which
considers, among other things, the possible effect of the performance of such
services on the auditors' independence. The Audit Committee has considered the
role of Malone & Bailey, PC in providing services to us for the fiscal year
ended September 30, 2005 and has concluded that such services are compatible
with Malone & Bailey's independence as the Company's auditors.
21
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
a) Consolidated Financial Statements and Schedules:
1. Consolidated Financial Statements: See Index to Consolidated
Financial Statements immediately following the signature pages of
this report.
2. Consolidated Financial Statement Schedule: See Index to Consolidated
Financial Statements immediately following the signature pages of
this report.
3. The following documents are filed as exhibits to this report:
EXHIBIT NO. IDENTIFICATION OF EXHIBIT
Exhibit 3.1* Articles of Incorporation
Exhibit 3.2* Bylaws
Exhibit 4.1* Specimen Common Stock Certificate.
Exhibit 4.2* Form of Amended and Restated 12% Convertible Promissory Note, dated effective January 2001.
Exhibit 4.3* Form of Amended and Restated 5.5% Convertible Promissory Note, dated effective January 2001.
Exhibit 4.4* 20% Convertible Promissory Note, dated January 31, 2001, in favor of Chrome.
Exhibit 4.5* Term Loan Agreement, dated February 15, 2001, by and between Chrome and ERHC.
Exhibit 4.6* Senior Secured 10% Exchangeable 10% Convertible Promissory Note, dated January 31, 2001, in favor of
Chrome.
Exhibit 4.7* Form of Warrant entitling Chrome to purchase common stock of the Company, exercise price of $0.40 per
share.
Exhibit 10.1* Option Agreement, dated April 7, 2003, by and between the Company and the Democratic Republic of Sao
Tome and Principe (incorporated herein by reference to Exhibit 10.1 of Form 8-K filed April 2, 2003)
Exhibit 10.2* Management and Administrative Services Agreement by and between Chrome Oil Services, Ltd. and the
Company. (Incorporated by reference to Form 10-KSB filed September 24, 2001).
Exhibit 10.4* Letter Agreement, dated November 29, 2004, by and between the Company and Chrome (incorporated herein by
reference to Exhibit 10.1 of Form 8-K filed December 29, 2004).
Exhibit 10.5* Promissory Note, dated December 15, 2004, made by the Company in favor of Chrome (incorporated herein by
reference to Exhibit 10.2 of Form 8-K filed December 29, 2004).
Exhibit 10.6* Promissory Note, dated December 15, 2004, made by the Company in favor of Chrome (incorporated herein by
reference to Exhibit 10.3 of Form 8-K filed December 29, 2004).
Exhibit 10.7* Employment Agreement with Ali Memon.
Exhibit 10.8* Audit committee charter
Exhibit 23.1 Consent of Independent Registered Public Accounting Firm
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
Exhibit 31.2 Certification Pursuant to 18 U.S.C Section 1350, as adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 32.1 Certification Pursuant to 18 U.S.C Section 1350, as adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification Pursuant to 18 U.S.C Section 1350, as adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
* Previously filed
b) Form 8-K Filings
Current Report on Form 8-K dated December 28, 2004, reporting Item 1
and Item 5.
22
SIGNATURES
In accordance with the Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on April 13, 2006 on its behalf by the
undersigned, thereunto duly authorized.
ERHC Energy Inc.
By: /s/ Walter Brandhuber
------------------------------------------------------
Walter Brandhuber,
Chief Executive Officer and President
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature Title Date
- --------------------------------
/s/ Sir Emeka Offor Chairman of the Board April 13, 2006
- --------------------------------
Sir Emeka Offor
/s/ Walter Brandhuber Chief Executive Officer, April 13, 2006
- -------------------------------- President and Director
Walter Brandhuber
/s/ Nicolae Luca Director April 13, 2006
- --------------------------------
Nicolae Luca
/s/ Franklin Ihekwaba Chief Financial Officer (Principal April 13, 2006
- -------------------------------- Accounting Officer)
Franklin Ihekwaba
23
ERHC ENERGY INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------------------------------
PAGE
----
Report of Independent Registered Public Accounting Firm on Management's Assessment of
Internal Control Over Financial Reporting as of September 30, 2005 F-2
Report of Independent Registered Public Accounting Firm on the Financial Statements for
the Year ended September 30, 2005 F-3
Report of Independent Registered Public Accounting Firm on the Financial Statements for
the Years ended September 30, 2004 and 2003 F-4
Financial Statements:
Consolidated Balance Sheets as of September 30, 2005 and 2004 F-5
Consolidated Statements of Operations for the Years Ended September 30,
2005, 2004 and 2003 F-6
Consolidated Statements of Shareholders' Equity (Deficit) for the Years Ended
September 30, 2005, 2004 and 2003 F-7
Consolidated Statements of Cash Flows for the Years Ended September 30,
2005, 2004 and 2003 F-8
Notes to Consolidated Financial Statements F-9
Financial Statement Schedules
None
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
related instructions or are inapplicable and therefore have been omitted.
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
ERHC Energy Inc.
We have audited management's assessment, included in Management's Report on
Internal Control Over Financial Reporting appearing under Item 9A, that ERHC
Energy Inc. ("ERHC") did not maintain effective internal control over financial
reporting as of September 30, 2005, because of the effect of material weaknesses
in (a) internal controls surrounding corporate governance and (b) internal
controls surrounding the accounting for common stock issuances based on criteria
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). ERHC's management
is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion on management's
assessment and on the effectiveness of the ERHC's internal control over
financial reporting based on our audit.
We conducted our audit of internal control over financial reporting in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. The following material weaknesses have been identified and included
in management's assessment. Material weaknesses in (a) internal controls
surrounding corporate governance and (b) internal controls surrounding the
accounting for common stock issuances. These material weaknesses were considered
in determining the nature, timing, and extent of audit tests applied in our
audit of the 2005 financial statements, this report does not affect our report
dated December 28, 2005 on those financial statements.
In our opinion, management's assessment that ERHC did not maintain effective
internal control over financial reporting as of September 30, 2005, is fairly
stated, in all material respects, based on criteria established in Internal
Control - Integrated Framework issued by the COSO. Also, in our opinion, because
of the effects of the material weaknesses described above on the achievement of
the objectives of the control criteria, ERHC has not maintained effective
internal control over financial reporting as of September 30, 2005, based on
criteria established in Internal Control - Integrated Framework issued by the
COSO.
/s/ Malone & Bailey, PC
- -----------------------
Malone & Bailey, PC
www.malone-bailey.com
Houston, Texas
December 28, 2005
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
ERHC Energy Inc.
We have audited the accompanying consolidated balance sheet of ERHC Energy Inc.
("ERHC") as of September 30, 2005 and the related consolidated statements of
operations, cash flows, and shareholders' equity (deficit) for the year then
ended. These financial statements are the responsibility of ERHC's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ERHC as of September
30, 2005, and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.
The accompanying consolidated financial statements have been prepared assuming
that ERHC will continue as a going concern. As shown in the financial statements
and discussed in Note 2, ERHC has incurred significant recurring losses from
operations since inception and is dependent on outside sources of financing for
continuation of its operations. These factors raise substantial doubt about
ERHC's ability to continue as a going concern. Management's plans with regard to
this matter are also discussed in Note 2. These financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of ERHC's internal
control over financial reporting as of September 30, 2005, based on criteria
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO), and our report
dated December 28, 2005 expressed an unqualified opinion on management's
assessment of internal control over financial reporting and an adverse opinion
on the effectiveness of internal control over financial reporting.
/s/ Malone & Bailey, PC
- -----------------------
Malone & Bailey, PC
www.malone-bailey.com
Houston, Texas
December 28, 2005
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
ERHC Energy Inc.
We have audited the accompanying consolidated balance sheet of ERHC Energy Inc.
(the "Company") as of September 30, 2004, and the related consolidated
statements of operations, cash flows, and shareholders' equity (deficit) for
each of the two years in the period ended September 30, 2004 and 2003. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ERHC Energy Inc. as
of September 30, 2004 and 2003, and the results of its operations and its cash
flows for each of the two years in the period ended September 30, 2004 in
conformity with U.S. generally accepted accounting principles.
/s/ Pannell Kerr Forster of Texas, P.C.
- ---------------------------------------
Pannell Kerr Forster of Texas, P.C.
Houston, Texas
December 28, 2004
F-4
ERHC ENERGY INC.
CONSOLIDATED BALANCE SHEETS
September 30, 2005 and 2004
- --------------------------------------------------------------------------------
2005 2004
---------- ----------
ASSETS
Current assets:
Cash $ 988,490 $ 20,272
Restricted cash -- 3,026
Prepaid expenses and other current assets 32,093 26,258
---------- ----------
Total current assets 1,020,583 49,556
DRSTP concession fee 5,679,000 5,679,000
Furniture and equipment, net 20,627 --
---------- ----------
Total assets $6,720,210 $5,728,556
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable and accrued liabilities $ 192,634 $ 227,970
Accounts payable and accrued liabilities,
related party 2,064,675 --
Accrued officers salaries -- 723,035
Accrued interest 3,189 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 2,779,011 5,384,144
Nonconvertible debt, related party -- 403,644
Convertible debt, related party, net of discount -- 8,969,420
---------- ----------
Total liabilities 2,779,011 14,757,208
---------- ----------
Commitments and contingencies:
Shareholders' equity (deficit):
Preferred stock, par value $0.0001; authorized
10,000,000; none issued and outstanding -- --
Common stock, par value $0.0001; authorized
950,000,000 shares; issued and outstanding
710,912,226 and 601,175,135 at September 30,
2005 and 2004, respectively 71,091 60,118
Additional paid-in capital 83,584,956 59,505,337
Accumulated deficit (79,407,711) (68,137,233)
Deferred compensation (307,137) (456,874)
---------- ----------
Total shareholders' equity (deficit) 3,941,199 (9,028,652)
---------- ----------
Total liabilities and shareholders'
equity (deficit) $6,720,210 $5,728,556
========== ==========
The accompanying notes are an integral part of these financial statements
F-5
ERHC ENERGY INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended September 30, 2005, 2004 and 2003
- --------------------------------------------------------------------------------
2005 2004 2003
------------- ------------- -------------
General and administrative expenses $ 4,652,459 $ 2,085,426 $ 1,944,655
------------- ------------- -------------
Other income and (expenses):
Interest income 26,494 -- --
Gain from settlement 252,310 -- --
Other income -- 163,797 --
Interest expense (1,147,248) (1,671,759) (1,209,227)
Loss on extinguishment of debt (5,749,575) -- --
------------- ------------- -------------
Total other income and expenses, net (6,618,019) (1,507,962) (1,209,227)
------------- ------------- -------------
Net loss $ (11,270,478) $ (3,593,388) $ (3,153,882)
============= ============= =============
Net loss per common share - basic
and diluted $ (0.02) $ (0.01) $ (0.01)
============= ============= =============
Weighted average number of common
shares outstanding - basic and diluted 671,164,058 592,603,441 567,788,483
============= ============= =============
The accompanying notes are an integral part of these financial statements
F-6
ERHC ENERGY INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Years Ended September 30, 2005, 2004 and 2003
- --------------------------------------------------------------------------------
Common Stock Additional
--------------------------- Paid-In Accumulated Deferred
Shares Amount Capital Deficit Compensation Total
------------ ------------ ------------ ------------ ------------ ------------
Balance - September 30, 2002 555,969,021 $ 55,597 $ 49,267,232 $(61,389,963) $ -- $(12,067,134)
Common stock issued for cash,
net of expenses 9,440,000 944 1,071,556 -- -- 1,072,500
Common stock issued for
accounts payable 1,527,986 153 177,663 -- -- 177,816
Common stock issued for con -
version of debt and payment
of accrued interest 17,114,740 1,711 3,421,227 -- -- 3,422,938
Net loss -- -- -- (3,153,882) -- (3,153,882)
------------ ------------ ------------ ------------ ------------ ------------
Balance - September 30, 2003 584,051,747 58,405 53,937,678 (64,543,845) -- (10,547,762)
Common stock issued for cash,
net of expenses 3,231,940 323 974,677 -- -- 975,000
Common stock issued for
accounts payable 1,458,514 146 533,102 -- -- 533,248
Common stock issued for con-
version of debt and payment
of accrued interest 11,185,052 1,119 2,236,093 -- -- 2,237,212
Common stock issued for
proceeds received in 2003 1,000,000 100 (100) -- -- --
Beneficial conversion feature
associated with the
convertible line of
credit -- -- 1,058,912 -- -- 1,058,912
Options issued to employee -- -- 765,000 -- (765,000) --
Amortization of deferred
compensation -- -- -- -- 308,126 308,126
Common stock issued for cash-
less exercise of options
and warrants 247,882 25 (25) -- -- --
Net loss -- -- -- (3,593,388) -- (3,593,388)
------------ ------------ ------------ ------------ ------------ ------------
Balance - September 30, 2004 601,175,135 60,118 59,505,337 (68,137,233) (456,874) (9,028,652)
Common stock issued for
accounts payable 735,000 73 359,716 -- -- 359,789
Common stock issued for con -
version of debt and payment
of accrued interest 107,819,727 10,782 22,678,054 -- -- 22,688,836
Common stock issued in settle-
ment of lawsuits 595,000 59 394,391 -- -- 394,450
Variable accounting for re-
priced employee stock
options -- -- 300,000 -- (300,000) --
Beneficial conversion feature
associated with con-
vertible line of
credit -- -- 347,517 -- -- 347,517
Amortization of deferred
compensation -- -- -- -- 449,737 449,737
Common stock issued for cash-
less exercise of options and
warrants 587,364 59 (59) -- -- --
Net loss -- -- -- (11,270,478) -- (11,270,478)
------------ ------------ ------------ ------------ ------------ ------------
Balance - September 30, 2005 710,912,226 $ 71,091 $ 83,584,956 $(79,407,711) $ (307,137) $ 3,941,199
============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements
F-7
ERHC ENERGY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30, 2005, 2004 and 2003
- --------------------------------------------------------------------------------
2005 2004 2003
------------ ------------ ------------
Cash Flows From Operating Activities
Net loss $(11,270,478) $ (3,593,388) $ (3,153,882)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation expense 6,676 -- --
Gain from settlement (252,310) -- --
Amortization of beneficial conversion feature
associated with convertible debt 784,348 629,591 --
Amortization of deferred compensation 449,737 308,126 --
Loss on extinguishment of debt 5,749,575 -- --
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (5,835) (11,193) 6,685
Accounts payable and other accrued liabilities 324,454 (121,493) 110,244
Accrued officers' salaries (76,275) -- --
Accounts payable, and accrued liabilities
related party 2,146,375 -- --
Accrued interest - related party 386,228 1,042,369 1,209,226
------------ ------------ ------------
Net cash used by operating activities (1,757,505) (1,745,988) (1,827,727)
------------ ------------ ------------
Cash Flows From Investing Activities
Release of restricted cash 3,026 15,317 (269)
Investment in DRSTP concession -- -- (49,000)
Purchase of furniture and equipment (27,303) -- --
------------ ------------ ------------
Net cash used by investing activities (24,277) 15,317 (49,269)
------------ ------------ ------------
Cash Flows From Financing Activities:
Proceeds from line of credit, related party 2,750,000 -- --
Proceeds from convertible debt, related party -- 752,607 825,592
Proceeds from common stock, net of expenses -- 975,000 1,072,500
------------ ------------ ------------
Net cash provided by financing activities 2,750,000 1,727,607 1,898,092
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 968,218 (3,064) 21,096
Cash and cash equivalents, beginning of period 20,272 23,336 2,240
------------ ------------ ------------
Cash and cash equivalents, end of period $ 988,490 $ 20,272 $ 23,336
============ ============ ============
The accompanying notes are an integral part of these financial statements
F-8
ERHC ENERGY INC.
NOTES TO THE CONSOLIDATED FINANCIAL STSTEMENTS
- --------------------------------------------------------------------------------
Note 1 - Summary of Significant Accounting Policies
General Business and Nature of Operations
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 upstream oil
and gas companies to assist the Company in exploiting its assets in the JDZ as
further described in Note 3. The Company currently has no other operations.
In May 1997, the Company entered into an exclusive joint venture with the DRSTP
(the "1997 Agreement"). On May 21, 2001, the 1997 Agreement was replaced by a
Memorandum of Agreement (the "2001 Agreement"), which was embodied in a Consent
Award issued by the arbitrator as a result of the satisfaction of several
conditions, including the ratification of a treaty between the FRN and the
DRSTP. The 2001 Agreement gives the Company rights to participate in exploration
and production activities in both the exclusive territorial waters of Sao Tome
referred to as the EEZ and an area between Sao Tome and the FRN that the two
nations have designated as a JDZ.
In April 2003, the Company and DRSTP entered into an Option Agreement (the "2003
Option Agreement") in which the Company relinquished certain financial interests
in the JDZ in exchange for exploration rights in the JDZ. In April 2003, the
Company additionally entered into an administration agreement with the
Nigeria-Sao Tome and Principe Joint Development Authority ("JDA"). The
administration agreement is the formal agreement by the JDA that it will fully
implement ERHC's preferential rights to working interests in the JDZ acreage as
set forth in the 2003 Option Agreement and describes certain procedures
regarding the exercising of these rights. However, ERHC retained under the 2001
Agreement the following rights to participate in exploration and production
activities in the EEZ subject to certain restrictions: (a) right to receive up
to two blocks of ERHC's choice, and (b) the option to acquire up to a 15% paid
working interest in up to two blocks of ERHC's choice in the EEZ. The Company
will 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.
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.
Use of estimates
The consolidated financial statements have been prepared in conformity with U.
S. generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period for the years then ended.
Actual results could differ significantly from those estimates.
Cash equivalents
The Company considers all highly liquid short-term investments with an original
maturity of three months or less, when purchased, to be cash equivalents.
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.
F-9
The Company's current focus is to exploit its assets, which are agreements with
the DRSTP concerning oil and gas exploration in EEZ and with the JDA concerning
oil and gas exploration in the JDZ. The Company has formed relationships with
Pioneer Natural Resources ("Pioneer") and Addax Petroleum ("Addax") to assist
the Company in leveraging its interests in the EEZ and the JDZ. Should
circumstances impede the Company from perfecting its interests in the 2001
Agreement with DRSTP, or the 2003 Option Agreement the Company's business would
be materially affected. Should the Company perfect its interests in the 2001
Agreement and the 2003 Option Agreement, there is no certainty that the Company
will be able to obtain sufficient financial and other resources to develop its
interests. The Company currently has no other operations.
Properties and equipment
The Company uses the successful efforts method of accounting for oil and gas
producing activities. Under this method, acquisition costs for proved and
unproved properties are capitalized when incurred. Exploration costs, including
geological and geophysical costs, the costs of carrying and retaining unproved
properties and exploratory dry hole drilling costs, are expensed. Development
costs, including the costs to drill and equip development wells, and successful
exploratory drilling costs to locate proved reserves are capitalized.
Exploratory drilling costs are capitalized when incurred pending the
determination of whether a well has found proved reserves. A determination of
whether a well has found proved reserves is made shortly after drilling is
completed. The determination is based on a process that relies on
interpretations of available geologic, geophysic, and engineering data. If a
well is determined to be successful, the capitalized drilling costs will be
reclassified as part of the cost of the well. If a well is determined to be
unsuccessful, the capitalized drilling costs will be charged to expense in the
period the determination is made. If an exploratory well requires a major
capital expenditure before production can begin, the cost of drilling the
exploratory well will continue to be carried as an asset pending determination
of whether proved reserves have been found only as long as: i) the well has
found a sufficient quantity of reserves to justify its completion as a producing
well if the required capital expenditure is made and ii) drilling of the
additional exploratory wells is under way or firmly planned for the near future.
If drilling in the area is not under way or firmly planned, or if the well has
not found a commercially producible quantity of reserves, the exploratory well
is assumed to be impaired, and its costs are charged to expense.
In the absence of a determination as to whether the reserves that have been
found can be classified as proved, the costs of drilling such an exploratory
well is not carried as an asset for more than one year following completion of
drilling. If, after that year has passed, a determination that proved reserves
exist cannot be made, the well is assumed to be impaired, and its costs are
charged to expense. Its costs can, however, continue to be capitalized if a
sufficient quantity of reserves are discovered in the well to justify its
completion as a producing well and sufficient progress is made in assessing the
reserves and the well's economic and operating feasibility.
The impairment of unamortized capital costs is measured at a lease level and is
reduced to fair value if it is determined that the sum of expected future net
cash flows is less than the net book value. The Company determines if impairment
has occurred through either adverse changes or as a result of the annual review
of all fields.
Development costs of proved oil and gas properties, including estimated
dismantlement, restoration and abandonment costs and acquisition costs, are
depreciated and depleted on a field basis by the units-of-production method
using proved developed and proved reserves, respectively. The costs of unproved
oil and gas properties are generally combined and impaired over a period that is
based on the average holding period for such properties and the Company's
experience of successful drilling.
Asset retirement obligation
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 SFAS No. 143 require the fair value of a liability for an asset
retirement obligation to be recorded and a corresponding increase in the
carrying amount of the associated asset. The cost of the tangible asset,
including the initially recognized asset retirement cost is depleted over the
useful life of the asset. If the fair value of the estimated asset retirement
obligation changes, an adjustment is recorded to the retirement obligation and
the asset retirement cost. The offsetting ARO liability is recorded at fair
value, and accretion expense recognized as the discounted liability is
accredited to its expected settlement value. The fair value of the ARO asset and
liability is measured using expected future cash out flows discounted at the
Company's credit adjusted risk free interest rate. These oil and gas properties
were abandoned and written off during the year ended September 30, 1999 and the
Company believes the current liability is fully accreted and represents
management's best estimate of the fair value of the outstanding obligation.
F-10
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 to 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 (see Note 3) 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 Statement of
Financial Accounting Standards ("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 loss per share is computed by dividing net loss by the weighted average
number of common shares outstanding during the period. Diluted loss per share is
computed by dividing net loss by the weighted average number of shares
outstanding, after giving effect to potentially dilutive common share
equivalents outstanding during the period. Potentially dilutive common share
equivalents are not included in the computation of diluted loss per share if
they are anti-dilutive. Diluted loss per common share is the same as basic for
all periods presented because the effect of potentially dilutive common shares
arising from outstanding stock warrants and options was anti-dilutive. For the
year ended September 30, 2005 and 2004, the potentially dilutive common shares
from stock options and warrants were 10,925,000 and 5,395,813, respectively.
There were no potentially dilutive common stock options and warrants for the
year ended September 30, 2003. If all convertible debt instruments, including
accrued interest were to be considered, an additional 167,565, 65,492,921 and
76,162,918 common shares for the three years ended September 30, 2005, 2004 and
2003, respectively, may have been dilutive depending on the results of
operations of the Company.
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 Statement of Financial Accounting Standards ("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 the Company's 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 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.
F-11
As referred to in Note 9, 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 the stock options granted to an employee been
determined based on the fair value at the grant date for the years ending
September 30, 2005, 2004, and 2003, 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:
Description 2005 2004 2003
- -------------------------------------------------------- ------------- ------------- -------------
Net loss - as reported $ (11,270,478) $ (3,593,388) $ (3,153,882)
Plus: stock-based compensation expense determined
using the intrinsic value of the option at the
measurement date 449,737 308,126 --
Less: stock-based employee compensation determined
under fair value method for all awards granted to
Employees (456,793) (519,483) --
------------- ------------- -------------
Net loss - pro forma $ (11,277,534) $ (3,804,745) $ (3,153,882)
============= ============= =============
Basic and diluted net loss per share - as reported $ (0.02) $ (0.01) $ (0.01)
============= ============= =============
Basic and diluted net loss per share - proforma $ (0.02) $ (0.01) $ (0.01
============= ============= =============
The weighted average fair value at date of grant for options re-priced during
the fiscal year ended September 30, 2005 was $0.38. The weighted average fair
value at date of grant for options granted during the fiscal year ended
September 30, 2004 was $0.40. The Company did not grant options to employees for
the fiscal year ended September 30, 2003. The fair value of options at date of
grant was estimated using the Black-Sholes option-pricing model with the
following weighted average assumptions:
Assumptions 2005 2004 2003
- ---------------------------- ----------- ----------- ---------
Expected life (years) 3.58 years 4 years -
Interest rate 4.00% 4.00% -
Dividend yield 0.00% 0.00% -
Volatility 107.00% 94.20% -
The Black-Scholes option valuation model was developed for estimating the fair
value of traded options that have no vesting restrictions and are fully
transferable. Because option valuation models require the use of subjective
assumptions, changes in these assumptions can materially affect the fair value
of the options. The Company's options do not have the characteristics of traded
options; therefore, the option valuation models do not necessarily provide a
reliable measure of the fair value of its options.
New accounting pronouncements
On December 16, 2004, as amended on April 14, 2005, the Financial Accounting
Standards Board (FASB) issued FASB "SFAS" No. 123 (revised 2004), "Share-Based
Payment" ("SFAS No. 123(R)"), which is a revision of SFAS No. 123, "Accounting
for Stock-Based Compensation." SFAS No. 123(R) supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and amends SFAS No. 95, "Statement
of Cash Flows." Generally, the approach in SFAS No. 123(R) is similar to the
approach described in SFAS No. 123. However, SFAS No. 123(R) requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the income statement based on their fair values. Pro forma
disclosure is no longer an alternative. The new standard will be effective for
public entities in the first interim or annual reporting period beginning after
June 15, 2005. The Company has not yet assessed the impact of adopting this new
standard.
F-12
In 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. 151 is expected to have no impact on the
Company's consolidated financial statements.
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 the Company's 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 SFAS 154 is not expected to have an effect on the Company's
consolidated financial statements.
Reclassifications
During the year ended September 30, 2005 the Company corrected a 1,222,153
understatement in the number of shares of common stock outstanding that has
consistently existed for many years. The shares were issued at a time when the
stock had no significant value and, accordingly, the correction of outstanding
shares resulted in a $122 increase in common stock and a corresponding decrease
in additional paid-in capital. All periods presented have been corrected to
include these additional shares.
Note 2 - Going Concern
The Company's current liabilities exceed its current assets by $1,758,428 at
September 30, 2005. The Company has incurred net losses of $11,270,478,
$3,593,388, and $3,153,882 in fiscal years 2005, 2004 and 2003, respectively.
These conditions raise substantial doubt as to the ability of the Company to
continue as a going concern. The Company is in ongoing negotiations to raise
general operating funds and funds for specific projects. Management will be
required to, and expects to, raise additional capital through the issuance of
debt securities and offerings of equity securities to fund the Company's
operations, and will attempt to continue raising capital resources until such
time as the Company generates revenues sufficient to maintain itself as a viable
entity. However, there is no assurance that such financing will be obtained.
The Company's current focus is to exploit its only assets, which are agreements
with the DRSTP concerning oil and natural gas exploration in Sao Tome, an island
nation located in the Gulf of Guinea off the coast of central West Africa, and
in a JDZ between Sao Tome and the FRN. The Company is currently forming
relationships with other oil and gas companies having technical and financial
capabilities to assist the Company in leveraging its interests in Sao Tome and
the JDZ. Should circumstances impede the Company's progress in negotiating
production-sharing contracts to develop its interests in the 2001 Agreement and
the 2003 Option Agreement with DRSTP, the Company's business would be adversely
affected. Should the Company complete successful negotiations of
production-sharing contracts, there is no certainty that the Company and its
joint venture partner(s) will be able to successfully develop the Company's
interests. The Company currently has no other operations.
The Company expects to continue borrowing funds from Chrome in the future but
there is no assurance that funds will be made available or under similar terms.
If the Company is successful in its efforts to negotiate production-sharing
contracts, it expects that those contracts will provide cash to the Company for
continued operations. In prior years, the Company was able to raise funds in a
timely manner, but there is no assurance that they will continue to do so in the
future. The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. If the Company is unable to
continue as a going concern, the values realized from the Company's assets may
be less than the carrying amounts reported in its financial statements. The
accompanying financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
F-13
Note 3 - Sao Tome Concession
Concession Fee Payment
The 1997 Agreement required the Company to pay a $5,000,000 concession fee to
the DRSTP.
In October 1999, the DRSTP claimed that the Company had breached certain terms
of the 1997 Agreement and announced a termination of the Agreement. The Company
immediately exercised its rights to have the matter settled via international
arbitration in accordance with the terms of the 1997 Agreement.
Concession Fee Agreement
In May 1997, the Company entered into an exclusive joint venture with the DRSTP
(the "1997 Agreement"). On May 21, 2001, the 1997 Agreement was replaced by a
Memorandum of Agreement (the "2001 Agreement"), which was embodied in a Consent
Award issued by the arbitrator as a result of the satisfaction of several
conditions, including the ratification of a treaty between the FRN and the
DRSTP. The 2001 Agreement gives the Company rights to participate in exploration
and production activities in both the exclusive territorial waters of Sao Tome
referred to as the EEZ and an area between Sao Tome and the FRN that the two
nations have designated as a JDZ.
After the acquisition by Chrome in February 2001, the Company initiated
negotiations with the DRSTP concurrent with the arbitration process. On May 21,
2001, the Company and the DRSTP reached the 2001 Agreement, witnessed by the
FRN, which replaced the 1997 Agreement and suspended the arbitration process. In
July 2002, the 2001 Agreement was embodied in a Consent Award issued by the
arbitrator as a result of the satisfaction of several conditions, including the
ratification of a treaty between the FRN and the DRSTP relative to the JDZ
between the countries, and will remain in effect through September 30, 2024.
In April 2003, the Company and DRSTP entered into an Option Agreement (the "2003
Option Agreement") in which the Company relinquished certain financial interests
in the JDZ in exchange for exploration rights in the JDZ. In April 2003, the
Company additionally entered into an administration agreement with the
Nigeria-Sao Tome and Principe Joint Development Authority ("JDA"). The
administration agreement is the formal agreement by the JDA that it will fully
implement ERHC's preferential rights to working interests in the JDZ acreage as
set forth in the 2003 Option Agreement and describes certain procedures
regarding the exercising of these rights. However, ERHC retained under the 2001
Agreement the following rights to participate in exploration and production
activities in the EEZ subject to certain restrictions: (a) right to receive up
to two blocks of ERHC's choice, and (b) the option to acquire up to a 15% paid
working interest in up to two blocks of ERHC's choice in the EEZ. The Company
will 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.
Under the 2003 Option Agreement, ERHC may exercise options to acquire fractional
working interests in six (6) of the nine (9) blocks that have been announced by
the JDA and will be available for bidding in the JDZ. A block is an area
designated as an individual unit for exploration or production of crude oil and
natural gas. Additionally, the amount of signature bonus that is payable by ERHC
to acquire these working interests is zero in four (4) blocks. ERHC must pay its
proportionate share of any signature bonuses in two (2) blocks.
On April 13, 2004, the Company submitted a letter to the JDA exercising its
option rights in the JDZ. The options exercised by the Company were:
Option Pick-ERHC Working Interest
Choice Percentage JDZ Block# Signature Bonus Payable
- ----------------------- -------------------- --------------- ----------------------------------------------
<s>
1 15% 6 Signature Bonus Free
2 15% 5 100% of 15% of the total Signature Bonus
3 20% 3 Signature Bonus Free
4 30% 2 Signature Bonus Free
5 25% 4 Signature Bonus Free
6 20% 9 100% of 20% of the total Signature Bonus
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.
F-14
On April 26, 2004, the Company announced that, at meetings on April 23rd and
24th, 2004, the Joint Ministerial Council ("JMC") of the JDZ acknowledged the
Company's option selections for award of interests pursuant to the exercise of
rights under the April 7, 2003 Administration Agreement.
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.
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.
The Company originally formed a relationship Noble Energy Resources
("Noble") to negotiate a production sharing agreement for Block 4.
However, Noble subsequently withdrew from negotiations and the company has
entered into an agreement with Addax Petroleum under which Addax will
replace Noble in the ERHC/Noble group. Approval for Addax to participate
in Block 4 has been requested from the JDA.
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.
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).
Note 4 - Restricted Cash
At September 30, 2004 the Company had restricted cash of $3,026 which was
invested in an interest-bearing certificate of deposit, pledged as collateral
for a letter of credit for a performance bond covering certain oil and gas
properties. These oil and gas properties were abandoned and written off during
the year ended September 30, 1999. The company was released from the performance
bond in 2005.
Note 5 - Notes Payable
Convertible Debt - Non-Related Party
The company had several convertible debt notes with individual third parties and
all but one of those notes had been repaid or converted to common stock at
September 30, 2005. At September 30, 2005, the Company has $33,513 of
nonaffiliated convertible debt and $3,189 accrued but unpaid interest
outstanding. At September 30, 2005, the note was in default and if the
outstanding convertible debt were converted using the conversion price of $0.20
per share, the Company would be required to issue 167,565 shares of common stock
based on an outstanding principal amount of $33,513.
F-15
At September 30, 2004, the Company's nonaffiliated convertible debt and related
accrued but unpaid interest totaled $1,626,033 and $65,917, respectively. During
the year ended September 30, 2005, non-affiliated note holders agreed to convert
$1,592,520 of convertible debt and $84,850 of accrued interest into 8,386,855
shares of common stock. The conversion price was $0.20 per share.
During the year ended September 30, 2004, the Company received notice of
conversion of convertible debt of $1,556,199 and accrued interest of $88,867
into 8,225,330 shares of common stock.
Convertible Debt - Related Party
At September 30, 2004, the Company had convertible debt instruments with Chrome
Energy, L.L.C ("Chrome"), a related party totaling $8,969,420, bearing interest
at rates ranging from 5.5% to 20%. Certain of the maturity dates on these notes
had been extended and all were converted during the year ended September 30,
2005. Interest accrued and unpaid on these notes at September 30, 2004 was
$2,126,265.
During 2005, the Company reached an agreement with 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 73,100,954 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 September 30, 2005, the Company has no convertible debt with any related
party.
Note 6 - Accrued Salaries
At September 30, 2004, the Company had accrued salaries of $723,035, owed to
former officers of the Company. The amounts and rights claimed by these officers
were subject to lawsuits in which the Company negotiated final settlements in
2005. During the year ended September 30, 2005, the Company paid cash of $76,275
and issued 595,000 shares of common stock, valued at $394,450, to fully settle
these claims. The Company recognized a $252,310 gain in connection with the
settlement.
Note 7 - Accrued Interest
Accrued interest consists of the following at September 30, 2005 and 2004:
2005 2004
---------- ----------
Accrued interest - non convertible related party loan $ -- $ 129,924
Accrued interest - convertible related party loans -- 2,126,265
Accrued interest - convertible debt 3,189 65,917
---------- ----------
Total $ 3,189 $2,322,106
========== ==========
F-16
In December 2004, the Company called the conversion feature on the
non-affiliated convertible debt of $1,592,520 and accrued interest of $84,850
and issued 7,962,605 and 424,250 shares of common stock respectively at a
conversion price of $0.20 per share. In January 2004, the Company solicited the
consent of non-affiliated convertible debt holders to pay interest due on
January 31, 2004 with common stock of the Company having a per share conversion
price to $0.20 per share. During the year ended September 30, 2004, the Company
issued 951,450 shares of common stock to these non-affiliated convertible debt
holders (444,330 shares were for conversions of notes during 2004) and 2,453,607
shares of common stock to Chrome for payment of accrued interest in the
aggregate amounts of $190,290 and $490,723, respectively.
Note 8 - Income Taxes
At September 30, 2005 the Company has a consolidated net operating loss
carry-forward ("NOL") of approximately $63.6 million expiring through 2025. The
Company has a deferred tax asset of approximately $22.8 million resulting from
this NOL. The loss carry forwards are subject to certain limitations under the
Internal Revenue Code including Section 382 of the Tax Reform Act of 1986. ERHC
believes that the utilization of this net operating loss carry forwards could be
significantly limited due to the changes in ownership and control. The ultimate
realization of the resulting net deferred tax asset is dependent upon generating
sufficient taxable income prior to expiration of the NOLs. Due to the nature of
these NOLs and since realization is not assured, management has established a
valuation allowance relating to the deferred tax asset for both 2005 and 2004 in
an amount equal to the deferred tax asset.
The composition of deferred tax assets and the related tax effects at September
30, 2005 and 2004 are as follows:
2005 2004
------------ ------------
Net operating losses $ 21,629,493 $ 21,724,651
Accrual for asset retirement 164,900 164,900
Accrued litigation expenses -- 245,831
------------ ------------
Total deferred tax assets 21,794,393 22,135.382
Valuation allowance (21,794,393) (22,135,382)
------------ ------------
Net deferred tax asset $ -- $ --
============ ============
The difference between the income tax benefit in the accompanying statement of
operations and the amount that would result if the U.S. federal statutory rate
of 34% were applied to pre-tax loss for the years ended September 30, 2005, 2004
and 2003 is as follows:
CHECK FOR SPACE - may have overwritten text
2005 2004 2003
-------------------------- -------------------------- --------------------------
Amount % Amount % Amount %
----------- ----------- ----------- ----------- ----------- -----------
Benefit for income tax at
federal statutory rate 3,831,962 34.0% $ 1,221,752 34.0% $ 3,558,869 34.0%
Loss on debt extinguishments (1,954,856) (17.3) -- -- -- --
Directors stock compensation (627,130) (5.6) -- -- --
Accrued interest not paid (390,064) (3.5) (354,337) (9.9) (411,136) (3.9)
Amortization of deferred
compensation (152,910) (1.4) (104,763) (2.9) -- --
Other (25,747) (0.1) (4,825) (0.1) -- --
Expiration of net operating
losses (1,022,244) (9.1) (221,000) (6.2) -- --
Change in valuation allowance 340,989 3.0 (536,827) (14.9) (3,147,733) (30.1)
----------- ----------- ----------- ----------- ----------- -----------
Effective rate $ -- -% $ -- -% $ -- -%
=========== =========== =========== =========== =========== ===========
F-17
Note 9 - Shareholders' Equity (Deficit)
Common Stock and Warrants Issued For Cash
From time to time, in order to fund operating activities of the Company, common
stock is issued for cash. Generally, offerings of the Company's common stock
include warrants to acquire common stock of the Company at fixed exercise
prices. Occasionally, depending on the nature of the offering and restrictions
imposed on the shares being acquired, the exercise price of the warrant may be
below the fair market value of the underlying common stock on the date of
issuance. There was no stock issued with warrants during the year ended
September 30, 2005. During the year ended September 30, 2004 the Company issued
3,231,940 shares of common stock, with warrants to purchase an additional
3,231,940 shares at exercise prices ranging from $0.50 to $0.55, for net cash
proceeds of $975,000. During the year ended September 30, 2003 the Company
issued 9,440,000 shares of common stock, with warrants to purchase an additional
7,840,000 shares at exercise prices ranging from $0.20 to $0.50, for net cash
proceeds of $1,072,500.
Common Stock Issued For Settlement of Accounts Payable
The Company has issued shares of common stock for settlement of outstanding
accounts payable to various creditors. During the years ended September 30,
2005, 2004 and 2003, the Company issued 735,000, 1,458,514 and 1,527,986 shares
of common stock with an aggregate value of $359,789, $533,248 and $177,816,
respectively, for payment of accounts payable balances.
Common Stock Issued For Conversion of Debt and Payment of Accrued Interest
The Company has issued shares of common stock for the conversion of convertible
debt notes and accrued interest on convertible debt notes. During the year ended
September 30, 2005, non-affiliated note holders agreed to convert $1,677,371 of
convertible debt and accrued interest into 8,386,855 shares of common stock. The
conversion price was $0.20 per share. 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 remaining 934,890 shares upon
receipt of an additional $1,500,000 available under the working capital line. In
addition, the Company agreed to issue 12,308,359 shares 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.
During the year ended September 30, 2005, the Company issued 73,100,954 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.
During the year ended September 30, 2004, the Company issued 7,780,995 shares of
common stock for the conversion of $1,556,199 worth of convertible debt and
issued 3,404,057 shares of common stock for the payment of $681,013 of accrued
interest on convertible debt. During the year ended September 30, 2003 the
Company issued 13,612,495 shares of common stock for the conversion of
$2,722,499 worth of convertible debt and issued 3,502,245 shares of common stock
for the payment of $700,439 accrued interest on convertible debt. All
conversions and interest payments were based upon a conversion price of $0.20.
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. On
September 1, 2005, the Company agreed to issue options to purchase a total of
500,000 shares of common stock, upon completion of a full year of service to a
consultant as part of his initial compensation package. These options have an
exercise price of $0.20 per share and vest on September 1, 2006.
During the year ended September 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 re-priced options until the options are
exercised, forfeited, or expire unexercised. For the year ended September 30,
2005, the Company incurred additional expense of $194,737 as a result of an
upward change in the fair market value on the underlying common stock.
F-18
Common Stock Issued For Proceeds Previously Received
During September 2003, the Company entered into a stock subscription agreement
to issue 1,000,000 shares of common stock at $0.25 per share generating and
receiving total proceeds of $250,000 as of September 30, 2003. However, the
shares were not issued until November 2003. The total proceeds received of
$250,000 was recorded in additional paid-in capital at September 30, 2003 and
the Company has excluded these shares in its calculation of weighted average
number of basic and diluted common stock shares outstanding for the year ended
September 30, 2003. In connection with the sale of stock, 1,000,000 warrants
were issued with a weighted average exercise price of $0.50 per warrant expiring
in September 2007.
Warrants
Information regarding warrants and their respective changes as of and for the
fiscal years ended September 30, 2005, 2004 and 2003 are as follows:
Warrants Options
---------------------------------------- ---------------------------------------
2005 2004 2003 2005 2004 2003
----------- ----------- ----------- ----------- ----------- -----------
Outstanding, beginning of year 16,166,940 13,430,000 8,780,575 3,000,000 -- --
Granted -- 3,231,940 7,840,000 -- (c)3,000,000 --
Exercised (a)(1,000,000) (b)(375,000) -- -- -- --
Expired/cancelled -- (120,000) (3,190,575) -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Outstanding, end of year 15,166,940 16,166,940 13,430,000 3,000,000 3,000,000 --
=========== =========== =========== =========== =========== ===========
Exercisable 15,166,940 16,166,940 13,430,000 2,000,000 1,000,000 --
=========== =========== =========== =========== =========== ===========
(a) During 2005, 1,000,000 warrants were exercised on a cashless basis for
587,364 shares of common stock.
(b) During July 2004, 375,000 warrants were exercised on a cashless basis for
247,882 shares of common stock.
(c) During the year ended September 30, 2004, the Company issued options to
purchase 3,000,000 shares of common stock to an employee as part of his initial
compensation package. These options have a revalued exercise price of $0.20 a
share, with 1,000,000 options vesting in each of September 2004, August 2005 and
August 2006.
The weighted average option and warrant exercise price information as of and for
the fiscal years ended September 30, 2005, 2004 and 2003 is as follows:
Warrants Options
---------------------------------------- ---------------------------------------
2005 2004 2003 2005 2004 2003
----------- ----------- ----------- ----------- ----------- -----------
Outstanding, beginning of year $ 0.36 $ 0.32 $ 0.86 $ -- $ -- $ --
Granted -- 0.52 -- 0.20 0.30 --
Exercised 0.20 0.20 -- -- -- --
Expired/cancelled -- 0.50 1.99 -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Outstanding, end of year $ .37 $ 0.36 $ 0.32 $ 0.20 $ 0.30 $ --
=========== =========== =========== =========== =========== ===========
Exercisable $ .37 $ 0.36 $ 0.32 $ 0.20 $ 0.30 $ --
=========== =========== =========== =========== =========== ===========
Significant warrant groups outstanding at September 30, 2005, and related
weighted average exercise price, exercise price range and weighted average
remaining contractual life information are as follows:
F-19
Weighted Weighted
Average Exercise Average
Warrants Exercise Price Contractual
Grant Grouping Outstanding Price Range Years
- -------------------------- ------------- ------------ ------------ --------------
Chrome 2,500,000 $0.25 $0.25 3.2
Common stock purchase 11,496,940 0.33 0.20-0.55 1.7
S-1/S-3 contingent 1,050,000 0.75 0.75 (a)
Other 120,000 3.00 3.00 3.25
(a) These warrants expire 14 months after the Company files an effective S-1 or
S-3 registration statement.
Note 10 - Commitments and Contingencies
Litigation
During August 1999 and February 2001, the Company underwent changes of control.
Following the changes of control of the Company, new management and the new
board of directors were required to expend significant Company resources to
settle claims and expenses arising out of the conduct of prior management. In
addition, the Company faced additional unresolved claims and disputes, including
suits seeking recoveries in excess of $1.0 million brought by former employees
and officers for back salary and other amounts. The Company negotiated full
settlement of these claims in 2005 and cash of $76,275 was paid and 595,000
shares of common stock was issued at a value of $394,450 and a gain on
settlement of $252,310 was recognized. As of September 30, 2004 officers'
salaries of $723,035 were accrued in connection with these claims.
Additionally, 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, but there is no
certainty that all material claims have been presented to the Company nor have
the benefits of available statutes of limitations been considered, should they
apply.
Operating Lease
The Company leases office space at 5444 Westheimer Road, Houston, Texas. The
lease for office space expires February 2006. The monthly base rent payment is
$3,567 based on approximately 1,900 square feet of office space. Upon expiration
of its current lease, the Company expects to lease the same space or comparable
space in the normal course of business. During the year ended September 30,
2005, the company incurred lease expense of $31,697. Prior to 2005, lease
expense was included in the management services agreement with Chrome Oil
Services, Ltd. ("COS"), a company controlled by the Company's board chairman/
primary stockholder. (See note 12)
Employment and Consulting Agreements
The Company's President and Chief Executive Officer, Mr. Ali Memon, has a
three-year employment agreement that began on August 1, 2004 and originally
included a base salary of $150,000 per year. On January 25, 2005, the Board of
Directors approved an increase in Mr. Memon's salary from $150,000 to $200,000
per year for the remaining term of the contract, beginning January 1, 2005, and
expiring July 31, 2007.
Effective January 1, 2005, the Company entered into consulting agreements with
two individuals, which require payment of cash and 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.
Effective January 1, 2005, the Company entered into a consulting agreement with
an individual which requires payment of cash and the issuance of options for a
total of 500,000 shares of common stock upon a full year of service (This
agreement was signed September 1, 2005, but was effective at January 1, 2005).
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.
F-20
In August 2005, the Company entered into an agreement with a consulting group to
identify and introduce to the Company oil and gas acquisition opportunities in
Nigeria. The Company is required to pay a base fee of $1,000 per month. In
addition the Company shall pay a success fee of $75,000 per successful
acquisition, as defined. The agreement has a term of one year but expires
immediately upon the 30 day written notice of termination by either party,
without penalty to either party.
In August 2005, the Company entered into an agreement with a consulting group to
identify and introduce to the Company oil and gas acquisition interests in
oil/mining leases granted by the government of the Federal Republic of Nigeria.
The Company is required to pay a base fee of $1,000 per month. In addition the
Company shall pay a success fee of $80,000 per successful acquisition, as
defined. The agreement also provides for the payment of legal fees per
successful transaction, as defined. The agreement has a term of one year but
expires immediately upon the 30 day written notice of termination by either
party, without penalty to either party.
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 years ended September 30, 2005 and 2004, total expense incurred under
this consulting agreement was $84,970 and $166,370, respectively.
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 year ended September 30, 2005, no expenses were incurred under
this agreement. During the year ended September 30, 2004, total expenses
incurred under this consulting agreement were $27,462, of which $25,000 was
charged against additional paid-in capital.
Note 11 - Supplemental Disclosure of Cash Flow Information
Following is an analysis of non-cash operating and financing activities and
non-cash investing and financing activities for the years ended September 30,
2005, 2004 and 2003.
2005 2004 2003
----------- ----------- -----------
Noncash operating and financing activities:
Stock issued in exchange for:
Accounts payable and accrued liabilities $ 359,790 $ 533,248 $ 177,816
Accrued salaries 394,450 -- --
Accrued interest 84,852 681,013 700,439
Accrued interest, related party 2,620,295 -- --
Noncash investing and financing activities:
Stock issued for conversion of non-related
party debt to equity 1,592,521 -- --
Beneficial conversion feature associated with
convertible debt 347,517 1,058,912 --
Exchange of convertible and non convertible
debt, related party 10,134,084 -- 2,722,499
Stock issued for conversion of related party
debt to equity 12,634,084 -- --
The Company did not make cash payments for interest or income taxes in any of
the three years ended September 30, 2005.
Note 12 - Related Party Transactions
Since the Company began its current business operations, it has been dependent
on its primary stockholder/ board chairman and companies he controls for debt
and equity financing. Transactions with this stockholder are described in notes
5 and 9.
F-21
Management Services Agreement
The Company entered into a management services agreement with Chrome Oil
Services, Ltd. ("COS") in February 2001. Pursuant to that agreement, COS
provided the Company with management and business development services in
addition to providing specified services in the areas of refinery maintenance,
engineering design, and upstream oil industry services. COS provided these
services to the Company for a management fee of $68,000 per month. Messrs Okpala
and Ntephe were consultants of COS that provides services to the Company and
these persons receive salaries and overhead expense reimbursement from COS, not
from the Company. Expenses not covered under the management services agreement
were borne by the Company. Total management fees incurred during each of the
years ended September 30, 2005, 2004 and 2003 were $204,000, $816,000 and
$816,000, respectively. On December 23, 2004, the Company and COS cancelled,
effective December 31, 2004, the management services agreement. In 2005 the
Company entered into consulting agreements with Messrs Okpala and Ntephe.
Related Party Liabilities
The Company's executive officers incurred significant direct expense for travel
and related expenses of approximately $279,000, $418,000, and $434,000 during
the three years ended September 30, 2005, 2004, and 2003 respectively. At
September 30, 2004 accounts payable and other accrued liabilities included
$3,231, of amounts owed to one officer for direct travel expenses.
Note 13 - Quarterly Financial Information (Unaudited)
For the Year Ended September 30, 2005
--------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
Revenue $ -- $ -- $ -- $ --
General and administrative expenses 643,235 980,821 233,704 2,794,699
Interest expense 698,258 100,551 461 347,978
Other Income -- 260,013 10,537 8,254
Loss on extinguishments of debt 5,749,575 -- -- --
Net loss attributable to common stockholders (7,091,0685) (821,359) (223,628) (3,134,423)
Basic and diluted earnings per share $ (.01) $ -- $ -- $ (.01)
For the Year Ended September 30, 2004
--------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
Revenue $ -- $ -- $ -- $ --
General and administrative expenses 564,702 361,687 656,399 502,638
Interest expense 421,894 354,279 516,846 378,740
Other Income -- -- 163,797 --
Net loss attributable to common
stockholders (986,596) (715,966) (1,009,449) (881,377)
Basic and diluted earnings per share $ -- $ -- $ -- $ --
The sum of the individual quarterly basic and diluted loss per share amounts may
not agree with year-to-date basic and diluted loss per share amounts as a result
of each period's computation being based on the weighted average number of
common shares outstanding during that period.
In the fourth quarter of 2005, the Company made a $347,517 adjustment to
interest expense. The adjustment relates to the improper recognition of interest
arising from unamortized beneficial conversion costs upon conversion of debt to
equity.
F-22