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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington
D.C. 20549
FORM
10-Q
(MARK
ONE)
|
x |
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
| |
|
|
|
For
the quarterly period ended March 31, 2005 |
| |
|
|
|
o |
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
For the
transition period from ____________ to ________________
Commission
File Number 0-17325
ERHC
ENERGY INC.
(Name of
small business issuer in its charter)
|
Colorado |
|
88-0218499 |
|
(State
of Incorporation) |
|
(I.R.S.
Employer Identification No.) |
5444
Westheimer Road
Suite
1570
Houston,
Texas 77056
(Address
of executive offices, including zip code.)
(713)
626-4700
(Registrant's
telephone number)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes x No o
Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act)
Yes x No o
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date:
The
number of common shares outstanding as of May 4, 2005 was
710,686,355.
TABLE OF
CONTENTS
ERHC
ENERGY INC.
Part
I. Financial Information
| |
|
Page |
|
Item
1. |
Unaudited
Consolidated Financial Statements |
|
| |
|
|
| |
Consolidated
Balance Sheets as of March 31, 2005 and September 30, 2004 |
3 |
| |
|
|
| |
Consolidated
Statements of Operations for the Three and Six Months Ended March 31, 2005
and 2004 |
4 |
| |
|
|
| |
Consolidated
Statements of Cash Flows for the Six Months Ended March 31, 2005 and
2004 |
5 |
| |
|
|
| |
Consolidated
Notes to the Financial Statements |
6 |
| |
|
|
|
Item
2. |
Management's
Discussion and Analysis of Financial Condition and Results of
Operations |
15 |
| |
|
|
|
Item
3. |
Quantitative
and Qualitative Disclosures about Market Risk |
19 |
| |
|
|
|
Item
4. |
Controls
and Procedures |
19 |
|
Part
II. Other Information
|
|
Item
1. |
Legal
Proceedings |
20 |
| |
|
|
|
Item
2. |
Unregistered
Sale of Securities and Use of Proceeds |
20 |
| |
|
|
|
Item
3. |
Defaults
Upon Senior Securities |
20 |
| |
|
|
|
Item
4. |
Submission
of Matters to a Vote of Security Holders |
21 |
| |
|
|
|
Item
5. |
Other
Information |
21 |
| |
|
|
|
Item
6. |
Exhibits
and Reports on Form 8-K |
|
| |
(a)
Exhibits |
|
| |
(b)
Reports on Form 8-K |
21 |
| |
|
|
| |
Signatures |
22 |
Item
1. Financial Statements
ERHC
ENERGY INC.
CONSOLIDATED
BALANCE SHEETS
| |
|
March
31, |
|
September
30, |
|
| |
|
2005 |
|
2004 |
|
| |
|
(unaudited) |
|
(audited) |
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT
ASSETS |
|
|
|
|
|
|
Cash
|
|
$ |
1,921,237 |
|
$ |
20,272 |
|
|
Restricted
cash |
|
|
3,016 |
|
|
3,026 |
|
|
Prepaid
expenses and other current assets |
|
|
191,078 |
|
|
26,258 |
|
|
Total
current assets |
|
|
2,115,331 |
|
|
49,556 |
|
| |
|
|
|
|
|
|
|
|
DRSTP
concession fee |
|
|
5,679,000 |
|
|
5,679,000 |
|
|
Furniture
and equipment, net |
|
|
23,792 |
|
|
- |
|
| |
|
|
|
|
|
|
|
|
TOTAL
ASSETS |
|
$ |
7,818,123 |
|
$ |
5,728,556 |
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY (DEFICIT) |
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES |
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities |
|
$ |
142,452 |
|
$ |
227,970 |
|
|
Accounts
payable and accrued liabilities, related party |
|
|
81,236 |
|
|
- |
|
|
Accrued
officers salaries |
|
|
421,325 |
|
|
723,035 |
|
|
Accrued
interest |
|
|
2,268 |
|
|
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 |
|
|
1,165,794 |
|
|
5,384,144 |
|
| |
|
|
|
|
|
|
|
|
LONG
TERM DEBT |
|
|
|
|
|
|
|
|
Nonconvertible
debt, related party |
|
|
- |
|
|
403,644 |
|
|
Convertible
debt, related party, net of discount |
|
|
- |
|
|
8,969,420 |
|
|
Total
long term debt |
|
|
- |
|
|
9,373,064 |
|
|
TOTAL
LIABILITIES |
|
|
1,165,794 |
|
|
14,757,208 |
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES |
|
|
- |
|
|
- |
|
| |
|
|
|
|
|
|
|
|
SHAREHOLDERS’
EQUITY (DEFICIT) |
|
|
|
|
|
|
|
Preferred
stock, $0.0001 par value; authorized 10,000,000; none issued
and outstanding |
|
|
|
|
|
|
|
|
Common
stock, $0.0001 par value; authorized 950,000,000 shares; issued and
outstanding 709,165,073 and 599,952,982
at March 31, 2005 and September 30, 2004,
respectively |
|
|
70,917 |
|
|
59,996 |
|
|
Additional
paid-in capital |
|
|
83,546,235 |
|
|
59,505,459 |
|
|
Accumulated
deficit |
|
|
(76,079,660 |
) |
|
(68,137,233 |
) |
|
Deferred
compensation |
|
|
(885,163 |
) |
|
(456,874 |
) |
|
Total
shareholders’ equity (deficit) |
|
|
6,652,329 |
|
|
(9,028,652 |
) |
| |
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES & SHAREHOLDERS' EQUITY (DEFICIT) |
|
$ |
7,818,123 |
|
$ |
5,728,556 |
|
|
The
accompanying notes are an integral part of these financial
statements |
ERHC
ENERGY INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS (UNAUDITED)
| |
|
Three
Months Ended March 31, |
|
Six
Months Ended March 31, |
|
| |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
|
COSTS
AND EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses |
|
$ |
980,821 |
|
$ |
361,687 |
|
$ |
1,654,056 |
|
$ |
926,389 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME AND (EXPENSES) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income |
|
|
7,703 |
|
|
- |
|
|
7,703 |
|
|
- |
|
|
Gain from settlement |
|
|
252,310 |
|
|
- |
|
|
252,310 |
|
|
- |
|
|
Interest expense |
|
|
(100,551 |
) |
|
(354,279 |
) |
|
(798,809 |
) |
|
(776,173 |
) |
|
Loss on extinguishment of debt |
|
|
- |
|
|
- |
|
|
(5,749,575 |
) |
|
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income and (expenses) |
|
|
159,462 |
|
|
(354,279 |
) |
|
(6,288,371 |
) |
|
(776,173 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss |
|
$ |
(821,359 |
) |
$ |
(715,966 |
) |
$ |
(7,942,427 |
) |
$ |
(1,702,562 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per common share - basic and diluted |
|
$ |
(0.00 |
) |
$ |
(0.00 |
) |
$ |
(0.01 |
) |
$ |
(0.00 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding - basic
and diluted |
|
|
659,921,132 |
|
|
594,169,223 |
|
|
630,040,917 |
|
|
589,182,322 |
|
|
The
accompanying notes are an integral part of these financial
statements |
ERHC
ENERGY INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (UNAUDITED)
| |
|
Six
Months Ended March 31, |
|
| |
|
2005 |
|
2004 |
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
Net
loss |
|
$ |
(7,942,427 |
) |
$ |
(1,702,562 |
) |
Adjustments
to reconcile net loss to net cash used by operating
activities |
|
|
|
|
|
|
|
|
Depreciation
expense |
|
|
2,163 |
|
|
- |
|
|
Gain
from settlement |
|
|
(252,310 |
) |
|
- |
|
Amortization
of beneficial conversion feature associated with convertible
debt |
|
|
413,503 |
|
|
252,090 |
|
|
Amortization
of deferred compensation |
|
|
561,710 |
|
|
- |
|
|
Loss
on extinguishment of debt |
|
|
5,749,575 |
|
|
- |
|
|
Changes
in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Prepaid
expenses and other current assets |
|
|
(46,720 |
) |
|
(7,707 |
) |
|
Accounts
payable and other accrued liabilities |
|
|
156,171 |
|
|
14,980 |
|
|
Accrued
officers' salaries |
|
|
(13,000 |
) |
|
- |
|
|
Accounts
payable, and accrued liabilities - related party |
|
|
81,236 |
|
|
- |
|
|
Accrued
interest and accrued interest, related party |
|
|
385,309 |
|
|
524,083 |
|
| |
|
|
|
|
|
|
|
|
Net
cash used by operating activities |
|
|
(904,790 |
) |
|
(919,116 |
) |
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Purchase
of furniture and equipment |
|
|
(25,955 |
) |
|
- |
|
| |
|
|
|
|
|
|
|
|
Net
cash used by investing activities |
|
|
(25,955 |
) |
|
- |
|
| |
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Proceeds
from line of credit, related party |
|
|
2,500,000 |
|
|
- |
|
|
Proceeds
from convertible debt, related party |
|
|
402,100 |
|
|
409,015 |
|
|
Repayment
of convertible debt, related party |
|
|
(70,400 |
) |
|
- |
|
|
Proceeds
from the sale of common stock, net of expenses |
|
|
- |
|
|
487,500 |
|
| |
|
|
|
|
|
|
|
|
Net
cash provided by financing activities |
|
|
2,831,700 |
|
|
896,515 |
|
| |
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash |
|
|
1,900,955 |
|
|
(22,601 |
) |
| |
|
|
|
|
|
|
|
|
Release
of restricted cash |
|
|
10 |
|
|
- |
|
| |
|
|
|
|
|
|
|
|
Cash,
beginning of period |
|
|
20,272 |
|
|
23,336 |
|
| |
|
|
|
|
|
|
|
|
Cash,
end of period |
|
$ |
1,921,237 |
|
$ |
735 |
|
ERHC
ENERGY INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (UNAUDITED)
| |
Six Months Ended March 31, |
|
|
|
2005 |
|
2004 |
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION |
|
|
|
|
Noncash
operating and financing activities: |
|
|
|
|
|
|
Stock
issued in exchange for: |
|
|
|
|
|
|
Accounts
payable and accrued liabilities |
|
$ |
241,689 |
|
$ |
291,701 |
|
|
Prepaid
expense |
|
|
118,100 |
|
|
- |
|
|
Accrued
salaries |
|
|
36,400 |
|
|
- |
|
|
Accrued
interest |
|
|
84,852 |
|
|
1,615,285 |
|
|
Accrued
interest - related party |
|
|
2,620,295 |
|
|
- |
|
Inducement
to restructure convertible debt and provide line of
credit |
|
|
5,749,575 |
|
|
- |
|
|
Noncash
investing and financing activities: |
|
|
|
|
|
|
|
|
Stock
issued for conversion of non-related party debt |
|
|
1,592,552 |
|
|
591,945 |
|
|
Beneficial
conversion feature associated with convertible debt |
|
|
331,699 |
|
|
543,009 |
|
|
Exchange
of convertible and non convertible debt, related party |
|
|
10,134,084 |
|
|
- |
|
|
Stock
issued for conversion of related party debt to equity |
|
|
12,634,084 |
|
|
- |
|
|
Beneficial
conversion feature repurchased |
|
|
347,517 |
|
|
- |
|
|
Repricing of options |
|
|
587,368 |
|
|
- |
|
|
The
accompanying notes are an integral part of these financial
statements. |
NOTE
1 - BUSINESS ORGANIZATION
The
financial statements included herein, which have not been audited pursuant to
the rules and regulations of the Securities and Exchange Commission, reflect all
adjustments which, in the opinion of management, are necessary to present a fair
statement of the results for the interim periods on a basis consistent with the
annual audited financial statements. All such adjustments are of a normal
recurring nature. The results of operations for the interim periods are not
necessarily indicative of the results to be expected for an entire year. Certain
information, accounting policies and footnote disclosures normally included in
financial statements prepared in accordance with U.S. generally accepted
accounting principles have been
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures are adequate to make the information presented not
misleading. These financial statements should be read in conjunction with the
Company’s audited financial statements included in the Company’s Annual Report
on Form 10-K for the year ended September 30, 2004.
General
Business and Nature of Operations and Significant Accounting Policies
On
February 4, 2005, the shareholders of Environmental Remediation Holding
Corporation approved a name change to “ERHC Energy Inc”. The name change was
effective February 15, 2005.
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 and
production in the Gulf of Guinea offshore of central West Africa. The Company’s
current focus is to exploit its only assets, which are rights to working
interest 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 intends to form
relationships with other oil and gas companies with technical and financial
capabilities to assist the Company in exploiting its assets in the EEZ and the
JDZ. The Company currently has no other operations.
The
Company has entered into agreements under which the Company has rights to
participate in exploration and production activities in both the exclusive
territorial waters of Sao Tome’s 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
additional exploration rights in the JDZ. In April 2003, the Company entered
into an Administration Agreement with the JDA. The Administration Agreement is
the formal agreement by the JDA that it will fully implement the ERHC
preferential rights to acreage interests in the JDZ as set forth in the 2003
Option Agreement and describes certain procedures regarding the exercising of
these rights. The Company retains exploration rights in the EEZ and has acquired
additional exploration rights in the JDZ via the 2003 Option Agreement. The
Company currently has no other operations.
Consolidated
financial statements
During
the quarter ended March 31, 2005, the Company formed a Cayman Islands
subsidiary. The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary after elimination of all significant
intercompany accounts and transactions.
Concentration
of risks
The
Company primarily transacts its business with two financial institutions. From
time to time the amount on deposit in either one of theses institutions may
exceed the $100,000 federally insured limit. The balances are maintained
in demand accounts to minimize risk.
Should
circumstances impede the Company from perfecting its interests in the JDZ, or
the EEZ the Company’s business would be materially affected. Should the
Company perfect its interests, there is no certainty that the Company will be
able to obtain sufficient financial and other recourses to develop its
interests.
Asset
Retirement Obligation
The
Company’s asset retirement obligation (“ARO”) relates to the plugging and
abandonment of certain oil and gas properties in Wichita Falls, Texas. The
provisions of Statement of Financial Accounting Standards (“SFAS”) No. 143 -
“Accounting for Asset Retirement Obligations” require the fair value of
a liability for an asset retirement obligation to be recorded and a
corresponding increase in the carrying amount of the associated asset. The cost
of the tangible asset, including the initially recognized asset retirement cost
is depleted over the useful life of the asset. If the fair value of the
estimated asset retirement obligation changes, an adjustment is recorded to the
retirement obligation and the asset retirement cost. The offsetting ARO
liability is recorded at fair value, and accretion expense recognized as the
discounted liability is accredited to its expected settlement value. The fair
value of the ARO asset and liability is measured using expected future cash 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.
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 and believes that there have been no events or
circumstances that would indicate that such asset might be impaired.
Income
taxes
The
Company accounts for income taxes under the provisions of SFAS No. 109 -
“Accounting for Income Taxes,” which provides for an asset and
liability approach in accounting for income taxes. Under this approach,
deferred tax assets and liabilities are recognized based on anticipated future
tax consequences, using currently enacted tax laws, attributable to differences
between financial statement carrying amounts of assets and liabilities and their
respective tax bases.
Common
stock issued for goods received and services rendered
The
Company has issued shares of common stock for goods received and services
rendered. The costs of the goods or services are valued according to the terms
of relative agreements or market value on the date of obligation. The cost of
the goods or services has been charged to operations.
Net
loss per share
Basic
earnings (loss) per share is computed by dividing net earnings or loss by the
weighted average number of common shares outstanding during the period.
Diluted earnings per share is computed by dividing net earnings or loss by the
weighted average number of shares outstanding, after giving effect to
potentially dilutive common share equivalents outstanding during the
period. Potentially dilutive common share equivalents are not included in
the computation of diluted earnings per share if they are anti-dilutive.
Diluted loss per common share is the same as basic loss per share for all
periods presented because the effect of potentially dilutive common shares
arising from outstanding stock warrants and options was anti-dilutive.
Stock-based
compensation
In
November 2004, the board of directors authorized the 2004 Compensatory
Stock Option Plan which was approved at a special meeting of the
stockholders of the Company held on February 4, 2005.
The
Company has adopted SFAS No. 123 - “Accounting
for Stock Based Compensation.” Under
SFAS No. 123, the Company is permitted to either record expenses for stock
options and other employee compensation plans based on their fair value at the
date of grant or to continue to apply our current accounting policy under
Accounting Principles Board, (“APB”) Opinion No. 25 “Accounting
for Stock Issued to Employees,” and
recognize compensation expense, if any, based on the intrinsic value of the
equity instrument at the measurement date. In December of 2002,
the Financial Accounting Standards Board ("FASB") issued SFAS
No. 148, “Accounting
for Stock- Based Compensation - Transition and Disclosure - An Amendment to FASB
Statement No. 123” to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. The
Company elected to not change to the fair value based method of accounting for
stock based compensation. Additionally, the statement amended disclosure
requirements of SFAS No. 123 to require more prominent disclosure in both
annual and interim financial statements. We elected to continue following APB
No. 25 and when required, provide the pro forma provisions of SFAS
No. 123.
As
referred to in Note 4, the Company repriced 3,000,000 options effective January
1, 2005. Repriced options are accounted for as compensatory options using
variable accounting treatment 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 repriced options until the options are exercised,
forfeited, or expire unexercised.
Had
compensation costs for stock options granted to an employee been determined
based on the fair value at the grant date for the three and six months
ended March 31, 2005 and 2004, consistent with the provisions of SFAS
No. 123, the net loss and net loss per share would have been reflective of
the pro forma amounts indicated below:
| |
|
Three
Months Ended March 31, |
|
Six
Months Ended March 31, |
|
| |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net
loss - as reported |
|
$ |
(821,359 |
) |
$ |
(715,966 |
) |
$ |
(7,942,427 |
) |
$ |
(1,702,562 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plus:
stock-based compensation expense determined using the
intrinsic value of the option at the measurement
date |
|
|
497,960 |
|
|
- |
|
|
561,710 |
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
stock-based employee compensation determined under
fair value method for all awards
granted to employees |
|
|
(137,884 |
) |
|
- |
|
|
(245,363 |
) |
|
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss - pro forma |
|
$ |
(461,283 |
) |
$ |
(715,966 |
) |
$ |
(7,626,080 |
) |
$ |
(1,702,562 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss per share - as reported |
|
$ |
(0.00 |
) |
$ |
(0.00 |
) |
$ |
(0.01 |
) |
$ |
(0.00 |
) |
|
Basic
and diluted net loss per share - pro forma |
|
$ |
(0.00 |
) |
$ |
(0.00 |
) |
$ |
(0.01 |
) |
$ |
(0.00 |
) |
New
accounting pronouncements
On
December 16, 2004, as subsequently amended on April 4, 2005, 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 first
interim period for fiscal years beginning after June 15, 2005. The Company has
not yet assessed the impact of adopting this new standard.
Note
2 - Sao Tome Concession
Concession
fee payment
The 1997
Agreement required the Company to pay a $5,000,000 concession fee to the DRSTP.
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
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.
The 2001
Agreement gives ERHC rights to participate in exploration and production
activities in both the EEZ of the DRSTP and an area between DRSTP and the FRN
that the two nations have designated as a JDZ. Since the 2001 Agreement replaces
the 1997 Agreement, it requires the Company to relinquish its rights arising
under the 1997 Agreement including any interest it had in STPetro, S.A. the
national petroleum company of the DRSTP in which the Company previously owned a
49% equity interest (“STPetro”).
The 2003
Option Agreement gives ERHC rights to participate in exploration and production
activities in the JDZ in exchange for relinquishing its rights to
participate in exploration and production activities in the JDZ granted under
the 2001 Agreement. ERHC received the following rights 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 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. These options must be exercised in
sequence and are subject to certain restrictions of choice. 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. Specifically, the percentages and
signature bonuses payable in each option pick are as follows:
| |
|
Working
Interest |
|
|
|
Option
Pick |
|
Percentage |
|
Signature
Bonus Payable |
|
ERHC
Choice 1 |
|
15% |
|
$0 |
|
ERHC
Choice 2 |
|
15% |
|
100%
of 15% of the total Signature Bonus |
|
ERHC
Choice 3 |
|
20% |
|
$0 |
|
ERHC
Choice 4 |
|
30% |
|
$0 |
|
ERHC
Choice 5 |
|
25% |
|
$0 |
|
ERHC
Choice 6 |
|
20% |
|
100%
of 20% of the total Signature Bonus |
On March
29, 2004, the Company received a notification on exercise of preferential rights
in the JDZ from the JDA inviting the Company to exercise its preferential rights
in the JDZ.
On April
20, 2004, the Company exercised its preferential rights in the JDZ under the
April 7, 2003 Administration Agreement with the JDA. The following represents
the choices made by the Company and the status of any Signature Bonus payable by
the Company for each relevant block:
| |
|
|
|
|
|
|
|
|
|
Option
Choice |
|
Percentage |
|
Type |
|
Status |
|
Block
Choice |
|
Choice
1 |
|
15% |
|
Signature
Bonus |
|
Bonus
Free |
|
Block
6 |
|
Choice
2 |
|
15% |
|
Signature
Bonus |
|
Bonus
Payable |
|
Block
5 |
|
Choice
3 |
|
20% |
|
Signature
Bonus |
|
Bonus
Free |
|
Block
3 |
|
Choice
4 |
|
30% |
|
Signature
Bonus |
|
Bonus
Free |
|
Block
2 |
|
Choice
5 |
|
25% |
|
Signature
Bonus |
|
Bonus
Free |
|
Block
4 |
|
Choice
6 |
|
20% |
|
Signature
Bonus |
|
Bonus
Payable |
|
Block
9 |
This
exercise of the Company’s rights was subject to the following condition: if no
license is awarded or a license is awarded and subsequently withdrawn by the JDA
prior to the commencement of operations, for any reason (for example, a failure
by the licensee(s) to meet the signature bonus conditions), the Company will be
entitled to receive its nominated percentage working interest in that block in
any future licensing of that block.
Under the
2001 Agreement ERHC retained the following rights to participate in exploration
and production activities in the EEZ subject to certain restrictions: (a) right
to receive up to two blocks of ERHC's choice without the payment of signature
bonus, and (b) the option to acquire up to a 15% paid working interest in up to
two blocks of ERHC's choice in the EEZ. The Company would be required to pay its
proportionate share of the signature bonus and all other costs related to the
exploration and exploitation of the blocks in the EEZ. The above is only a brief
summary of the terms of the 2001 Agreement and the 2003 Option Agreement and
such summaries do not purport to be complete and are qualified in their entirety
by reference to the text of 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.
In August
2004, the Company entered into a Participation Agreement with Pioneer Natural
Resources 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
Energy International, Ltd., a subsidiary of Noble Energy, Inc., 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
Natural Resources whereby the companies will jointly apply for rights in the
production sharing contract for Block 3 of the JDZ.
Note
3 - Notes Payable
Convertible
debt non-related party
During
the quarter ended December 31, 2004 non-affiliated note holders agreed to
convert $1,592,520 of convertible debt and $84,850 of accrued interest into
8,386,853 shares of common stock. The conversion price was $0.20 per share and
the conversion was completed in January 2005.
As of
March 31, 2005, the Company has $33,513 of nonaffiliated convertible debt and
$2,268 accrued but unpaid interest outstanding. As of March 31, 2005, if the
outstanding convertible debt was converted using the conversion price of $0.20
per share, the Company would be required to issue 178,905 shares of common stock
based on an outstanding principal amount of $33,513.
Convertible
debt - related party
During
the three months ended December 31, 2004, 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 12,308,359 share
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 as of December 15, 2004, in favor of Chrome,
with a principal balance of $10,134,084 and accrued interest as of January 28,
2005 of $146,597, and the Promissory Note (the “Promissory Note”), dated as of
December 15, 2004, in favor of Chrome with an original principal amount of
$2,500,000 and accrued interest as of January 28, 2005 of $11,986.
The
Company issued to Chrome 73,100,962 of unregistered shares of ERHC common stock
in conversion of the entire outstanding principal and accrued interest of the
Consolidated Note and the Promissory Note. The Consolidated Note and Promissory
Note were converted at $0.175 per share pursuant to the terms of such
notes and cancelled in their entirety. ERHC issued these shares
pursuant to the exemption from registration requirements of the Securities Act
of 1933, as amended, by Section 4(2).
As of
March 31, 2005, the Company has no convertible debt with any related
party.
Note
4 - Shareholders’
Equity (Deficit)
Common
stock issued for settlements
During
October 2004, the Company issued 100,000 shares of common stock to one creditor
for an accounts payable balance owed in the aggregate amount of $36,437.
During
October 2004, the Company issued 160,000 shares of common stock to one creditor
for an accounts payable balance owed in the aggregate amount of $70,463.
During
October 2004, the Company issued 150,000 shares of common stock to one creditor
for an accounts payable balance owed in the aggregate amount of
$68,745.
In
January 2005, 400,000 warrants were exercised on a cashless basis for 229,787
shares of common stock.
During
February 2005, the Company issued 70,000 shares of common stock to in settlement
of the lawsuit Charles
Briley v. ERHC .
Fifteenth Judicial District Court, Lafayette Parish, Louisiana, No.
2002-2016.
During
February 2005, the Company issued 175,000 shares of common stock to one creditor
for an accounts payable balance owed and prepayment of fees in the aggregate
amount of $78,460
During
February 2005, the Company issued 70,000 shares of Rule 144 restricted
common stock and paid $9,000 in settlement of a lawsuit.
In
February 2005, 600,000 warrants were exercised on a cashless basis for 357,576
shares of common stock.
During
March 2005, the Company issued 150,000 shares of common stock to one creditor
for an accounts payable balance owed and prepayment of fees in the aggregate
amount of $105,684
Common
stock issued for conversion of debt and payment of accrued interest
During
the quarter ended December 31, 2004 non-affiliated noteholders agreed to convert
$1,677,371 of convertible debt and accrued interest into 8,386,853 shares of
common stock. The conversion price was $0.20 per share.
During
the quarter ended December 31, 2004, the Company also agreed to issue Chrome
14,023,352 shares of common stock, 12,465,202 issued immediately, 623,260 shares
issued on the advance of $1,000,000 and the remainder issued throughout the term
of the working capital loan. In addition the Company issued 12,308,359 share of
common stock to satisfy current interest accrued but not paid of $2,461,712. The
shares of common stock to Chrome for entering into the debt restructuring had a
fair value of $5,749,575 and have been recorded as a loss on extinguishment of
debt.
In
January, 2005, the Company issued 73,100,962 shares of common stock to Chrome
for conversion of debt representing $12,134,084 of principal and $158,583 of
accrued interest.
In
January, 2005, the Company issued 26,331,711 shares of common stock, of which
12,308,560 represented accrued interest totaling $2,461,712, and the remainder
for agreement to enter into the debt restructuring and provide an additional
working capital line of credit pursuant to the agreement. The
issuance of these shares was recognized in the period ending December 31, 2004,
as a loss on extinguishment of debt.
Stock
options issued and repriced
On
January 1, 2005, the Company agreed to issue options to purchase a total of
1,250,000 shares of common stock, upon completion of a full year of service, to
two consultants as part of their initial compensation packages. These options
have an exercise price of $0.20 per share and vest on December 31, 2005.
During
the six months ended March 31, 2005 the Company modified the exercise price of
3,000,000 options to one employee from $0.30 per share to $0.20 per share and
those options became 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 exercise price of the option. Variable plan accounting is
applied to the repriced options until the options are exercised, forfeited, or
expire unexercised. During the three months ended March 31, 2005, the Company
incurred additional expenses of $434,201 as a result of this
pricing.
Note
5 - Commitments and Contingencies
Pending
Litigation and Other Contingencies
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.
Theses claims were fully resolved in April 2005 by the issuance of 525,000
shares of common stock valued at $430,725 and cash of $40,000 for a total
of $470,725 in cash and common stock. The Company had
previously recognized accrued officers’ salaries of $723,035 for amounts due
under these claims and, as a result of reaching a final settlement, recognized a
$252,310 gain from revision of this estimate in the quarter ended March 31,
2005. The Company is subject to other legal proceedings that have arisen
in the ordinary course of business and have not been fully adjudicated.
Although there can be no assurance as to the ultimate disposition of these
matters and the proceedings disclosed above, in the opinion of management, based
upon information available at this time, the cost of defense or settlement of
these actions, individually or in the aggregate, will not have a materially
adverse effect on the financial position, results of operations, or cash flows
of the Company.
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.
Commitments
On
January 25, 2005, the Board of Directors approved the increase in the salary of
the President and Chief Executive Officer, Mr. Ali Memon, from $150,000 to
$200,000 per year, effective February 1, 2005. Additionally, the Company agreed
to amend the exercise price of 3,000,000 options granted, or to be granted, to
Mr. Memon over the term of his employment agreement from $0.30 per share to
$0.20 per share with effect from January 1, 2005. The financial impact of this
change has been recognized during the three month period ending March 31, 2005.
Additionally, the change in exercise price of Mr. Memon’s options resulted in
variable plan accounting for his options that will result in his options
being
adjusted to fair value during each period until exercise or
expiration.
Effective
January 1, 2005 the Company entered into consulting agreements with two
individuals, which requires payment of cash and the issuance of
options for a total of 1,250,000 shares of common stock upon completion of a
full year of service. These options have an exercise price of $0.20 per share
and will vest immediately upon issuance and will have no expiration date. Either
party may terminate these consulting agreements with 30 days notice. The options
issued under these consulting agreements include provisions for cashless
exercise.
The
Company’s executive officers incurred significant direct expense for travel and
related expenses of approximately $47,000 and $143,000 during the three and six
months ended March 31, 2005 respectively. The comparable amounts for the three
and six month periods ended March 31, 2004 were approximately $96,000 and
$199,000, respectively.
The
Company leases office space at 5444 Westheimer Road, Houston, Texas. This
lease for office space expires February 2006. The monthly base rent payment is
$3,242 based on approximately 1,900 square feet of office space.
To date,
members of the board of directors have not received any compensation, but have
been reimbursed for expenses incurred in the performance of their duties.
In the future, the Company may decide to pay its directors.
The
Company currently has two officers and support staff that provide services to
the Company pursuant to consulting agreements.
In May
2002, the Company entered into an agreement with a consulting group to advise
the Company in securing financing of up to $1,500,000 and in structuring a joint
venture arrangement with a partner. The Company is required to pay an initial
fee of 1,000,000 shares of common stock as well as to reimburse the consultant
for out of pocket expenses. In addition, the Company is obligated to pay a 2.5%
fee of the amount of capital raised and an additional fee of 2,000,000 shares of
common stock contingent upon the successful first closing of a joint venture
transaction. During the six month period ended March 31, 2005, no funds were
raised and no expenses were incurred under this agreement.
During
May 2003, the Company entered into an agreement with a consultant to provide
general consulting services to the Company including transaction support,
evaluation of geological and seismic data, preparation of valuations and
participation in meetings with potential partners or purchasers of the Company
in connection with its oil and gas interests in the JDZ and the EEZ. The
terms of the agreement provide for monthly payments of $10,000 plus expenses for
twelve months beginning September 2003. In addition, the agreement
provides for a success fee of $50,000 should the Company close a transaction for
the sale of its interest in the JDZ or the EEZ. During July 2004, the Company
revised the agreement to a month-to-month arrangement effective June 1, 2004. In
addition, the revised agreement provides for an additional success fee of
500,000 shares of common stock. During the six month periods ended March 31,
2005, and 2004 total expenses incurred under this consulting agreement were $75,
677 and $43,971, respectively.
Note
6 - Subsequent Events
Sam
L. Bass, Jr. v. ERHC - U.S.
District Court, Western District of Louisiana, No. 6:99CV1668. The
plaintiff and the Company executed a settlement requiring the Company to issue a
total of 280,000 restricted shares and cash and the case was dismissed in April
2005.
George
LeBlanc v. ERHC -
Fifteenth Judicial District Court, Lafayette Parish, Louisiana, No. 2002-2017.
The plaintiff and the Company executed a settlement requiring the Company to
issue a total of 70,000 restricted shares and cash and the case was dismissed in
April 2005.
Robert
McKnight v. ERHC - Fifteenth
Judicial District Court, Lafayette Parish, Louisiana, No. 2002-2018 (filed April
18, 2002). The plaintiff and the Company executed a settlement requiring
the Company to issue a total of 175,000 restricted shares and the case was
dismissed in April 2005.
Item
2. 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-Q 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 Participation Agreements with Pioneer Natural Resources
with respect to Blocks 2 and 3 and Noble Energy with respect to Block 4 to
jointly evaluate and apply for interests in production sharing contracts in
these JDZ Blocks. The technical and operational expertise in conducting
exploration operations will be provided by the Company’s co-ventures. On
December 15, 2004, pursuant to these Participation Agreements, ERHC and its
respective co-ventures submitted bids on Blocks 2, 3 and 4 in the JDZ.
Results
of Operations
Six
Months Ended March 31, 2005 Compared with Six Months Ended March 31, 2004
During
the six months ended March 31, 2005, the Company incurred a net loss of
$7,942,427, compared to a net loss of $1,702,562
for the six months ended March 31, 2004. A significant portion of the
$6,239,865 increase in net loss for the six months ended March 31, 2005 relates
to the $5,749,575 loss on extinguishment of debt the Company incurred as a
result of the debt restructuring. General and administrative expenses increased
by $727,667 for the six months ended March 31, 2005 as compared to the six
months ended March 31, 2004 primarily due to $561,710 in charges related to
amortization of deferred compensation and repricing of stock options. This was
offset by a gain of $252,310 for settlements of claims.
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 provided these services to the
Company for a management fee of $68,000 per month. The Chief Financial
Officer and Secretary were employees of COS that provided services to the
Company and these persons receive salaries and overhead expense reimbursement
from COS, not from the Company. Expenses not covered under the management
services agreement were paid by the Company and included primarily general
office supplies. This agreement was cancelled effective December 31, 2004.
During the six months ended March 31, 2005 and 2004, total expenses incurred
under this management services agreement were $204,000 and $408,000,
respectively. The Company’s executive officers and directors incurred
significant travel expenses of approximately $143,000 and $199,000 during
each of the six month periods ended March 31, 2005 and 2004, respectively while
managing the ongoing affairs of the Company. The Company anticipates
travel related expenses to continue to be significant as the Company further
develops its business interests. The net loss per common share was $0.01,
basic and diluted, for the six months ended March 31, 2005 compared to a net
loss per common share of $0.00, basic and diluted, for the six months ended
March 31, 2004.
During
the six months ended March 31, 2005 and 2004, the Company had no revenues
from which cash flows could be generated to support operations and thus relied
on borrowings funded from its line of credit provided by Chrome as well as the
sale of common stock. The line of credit has been converted into common stock of
the Company.
Three
Months Ended March 31, 2005 Compared with Three Months Ended March 31, 2004
During
the three months ended March 31, 2005, the Company incurred a net loss of
$821,359 compared to a net loss of $715,966
for the three months ended March 31, 2004. The $105,393 increase in net
loss for the three months ended March 31, 2005 was primarily attributable to a
$497,000 increase in compensation expense due to amortization of deferred
compensation and compensation associated with the repricing of stock options,
offset by a $253,728 decrease in interest expenses related to the conversion of
substantially all long-term debt to equity at the beginning of the quarter and a
$252,310 gain recognized upon settlement of claims for compensation.
Through
December 31, 2004, a management services agreement with Chrome Oil Services,
Ltd. (“COS”) existed. Pursuant to that agreement, COS provides the Company with
management and business development services. COS provides these services to the
Company for a management fee of $68,000 per month. The Chief Financial
Officer and Secretary were employees of COS that provided services to the
Company and these persons receive salaries and overhead expense reimbursement
from COS, not from the Company. Expenses not covered under the management
services agreement are paid by the Company which includes primarily general
office supplies. This agreement was cancelled effective December 31, 2004.
During the three months ended March 31, 2005 and 2004, total expenses incurred
under this management services agreement were $0 and $204,000
respectively. The Company’s executive officers and directors incurred
significant travel expenses of approximately $47,000 and $96,000 for the
quarters ended March 31, 2005 and 2004, respectively while managing the ongoing
affairs of the Company. The Company anticipates travel related expenses to
continue to be significant as the Company further develops its business
interests. The net loss per common share was $0.00, basic and diluted, for
the six three months ended March 31, 2005 compared to a net loss per common
share of $0.00, basic and diluted, for the three months ended March 31, 2004.
During
the three months ended March 31, 2005 and 2004, the Company had no revenues from
which cash flows could be generated to support operations and thus relied on
borrowings funded from its line of credit provided by Chrome as well as the sale
of common stock. The line of credit has since been converted into common stock
of the Company.
Liquidity
and Capital Resources
As of
March 31, 2005, the Company had $1,921,237 in cash and cash equivalents and
working capital of $949,537.
Included within this working capital amount, $421,325 relates to accrued
officers salaries that have been subsequently settled and will be paid primarily
in stock.
Historically,
the Company has financed its operations from the sale of debt and equity
securities (including the issuance of its securities in exchange for goods and
services) and from advances from bank and other debt agreements. There
have been no significant cash flows generated from operations in the past two
years.
Should it
be required, management will raise additional capital through the sale of common
stock and from various debt financing arrangements, and will attempt to continue
raising capital resources until such time as the Company generates revenues
sufficient from operations. 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 Sao
Tome and the JDZ/EEZ.
Debt
Financing Arrangements
During
the quarter ended December 31, 2004 non-affiliated noteholders agreed to convert
$1,677,371 of convertible debt and accrued interest into 8,386,853 shares of
common stock. The conversion price was $0.20 per share.
During
the three months ended December 31, 2004, 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
issued immediately, 623,260 shares issued 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 12,308,359 share
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. The
14,023,352 shares of common stock to Chrome for entering into the debt
restructuring had a share value of $5,749,525 and has been recorded as Loss on
Extinguishment of Debt with a corresponding amount recorded as Additional Paid
In Capital.
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
(that certain consolidated note (the “Consolidated Note”), dated as of December
15, 2004, in favor of Chrome, with a principal balance of $10,134,084 and
accrued interest as of January 28, 2005 of $146,597, and that certain Promissory
Note (the “Promissory Note”), dated as of December 15, 2004, in favor of Chrome
with an original principal amount of $2,500,000 and accrued interest as of
January 28, 2005 of $11,986.
The
Company issued to Chrome 73,100,962 of unregistered shares of ERHC common stock
in conversion of the entire outstanding principal and accrued interest of the
Consolidated Note and the Promissory Note. The Consolidated Note was converted
at $0.175 per share pursuant to the terms of such note and cancelled in its
entirety. The Promissory Note was converted at $0.175 per share pursuant to the
terms of such note and cancelled in its entirety. ERHC issued these shares
pursuant to the exemption from registration requirements of the Securities Act
of 1933, as amended, by Section 4(2).
As of
March 31, 2005, the Company has $33,513 of nonaffiliated convertible debt and
$2,268 accrued but unpaid interest outstanding. As of March 31, 2005, if the
outstanding convertible debt was converted using the conversion price of $0.20
per share, the Company would be required to issue 178,905 shares of common stock
based on an outstanding principal amount of $33,513.
As of
March 31, 2005, the Company has no convertible debt with any related
party.
Forward
Looking Statements
This
report contains forward-looking statements. These statements relate to future
events or ERHC Energy Inc.’s (“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.
Item
3. Quantitative and Qualitative Disclosures about Market Risk
The
Company’s current focus is to exploit its only assets, which are rights to
working interests 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 would 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.
Currently
all of the Company’s contracts are denominated in $US. As a
result, the Company's financial statement results are unlikely to be
affected by factors such as changes in foreign currency exchange rates or weak
economic conditions in foreign markets.
The
Company does not hold derivative financial or commodity instruments, nor does it
engage in any foreign currency denominated transactions.
Item
4. Controls and Procedures
The
Company's Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of the Company's disclosure controls and procedures (as defined in
Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) as of March 31, 2005.
Based on such evaluation, such officers have concluded that the Company's
disclosure controls and procedures are effective.
Changes
in Internal Controls
There has
been no change in the Company's internal control over financial reporting
identified in connection with our evaluation that occurred during our last
fiscal quarter ended March 31, 2005, that has materially affected, or is
reasonably likely to materially affect, the Company's internal controls over
financial reporting.
Part
II. Other Information
Item
1. Legal Proceedings
Except as
described below, the Company is not aware of any other 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.
Sam
L. Bass, Jr. v. ERHC .
U.S. District Court, Western District of Louisiana, No. 6:99CV1668. This
matter was settled in April 2005.
George
LeBlanc v. ERHC .
Fifteenth Judicial District Court, Lafayette Parish, Louisiana, No. 2002-2017.
This matter was settled in April 2005.
Robert
McKnight v. ERHC .
Fifteenth Judicial District Court, Lafayette Parish, Louisiana, No.
2002-2018. This matter was settled in April 2005.
Item
2. Unregistered Sale of Securities and Use of Proceeds
During
February 2005, the Company issued 175,000 shares of common stock to one creditor
for an accounts payable balance owed and prepayment of fees in the aggregate
amount $78,460.
During
February 2005, the Company issued 70,000 shares of Rule 144 restricted
common stock and paid $9,000 in settlement of a lawsuit.
During
March 2005, the Company issued 150,000 shares of common stock to one creditor
for an accounts payable balance owed and prepayment of fees in the aggregate
amount $105,684.
In
January 2005, 400,000 warrants were exercised on a cashless basis for 229,787
shares of common stock.
In
February 2005, 600,000 warrants were exercised on a cashless basis for 357,576
shares of common stock.
Common
stock issued for conversion of debt and payment of accrued interest
In
January 2005, the Company issued 73,100,962 shares of common stock to Chrome for
conversion of debt representing $12,634,084 of principal and $158,583 of accrued
interest.
In
January 2005 the Company issued 26,331,711 shares of common stock, of which
12,308,560 represented accrued interest totaling $2,461,712, and the remainder
for agreement to the debt restructuring and provide an additional working
capital line of credit pursuant to the agreement.
Item
3. Defaults Upon Senior Securities
None
Item
4. Submission of Matters to a Vote of Security Holders
The
Company set a record date and a special meeting of the stockholders of the
Company to be held on February 4, 2005 to vote on the adoption of a stock option
plan and to change the name of the Company to “ERHC Energy Inc.”
On
February 4, 2005, the stockholders approved both proposals as
follows:
| |
|
For |
|
Against |
|
Abstain |
|
|
Proposition
1 - Name change |
|
|
565,966,612 |
|
|
235,714 |
|
|
102,544 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Proposition
2- Adoption of stock option plan |
|
|
370,702,526 |
|
|
3,140,950 |
|
|
1,003,248 |
|
Item
5. Other Information
The
Employment Agreement of Ali Memon was amended effective February 1, 2005. See
Exhibit 10.7.
Item
6. Exhibits and Reports on Form 8-K
|
EXHIBIT
NO. |
|
IDENTIFICATION
OF 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)
|
|
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). |
|
10.3*
|
|
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). |
|
10.4*
|
|
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). |
|
10.5*
|
|
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). |
|
10.6* |
|
Employment
Agreement with Ali Memon. (incorporated herein by reference to Exhibit
10.6 of Form 10-K filed December 29, 2004). |
|
10.7
* |
|
Amendment
to Employment Agreement with Ali Memon |
|
31.1
|
|
Certification
Pursuant to 18 U.S.C Section 1350, as adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 |
|
31.2
|
|
Certification
Pursuant to 18 U.S.C Section 1350, as adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 |
|
32.1
|
|
Certification
Pursuant to 18 U.S.C Section 1350, as adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 |
|
32.2
|
|
Certification
Pursuant to 18 U.S.C Section 1350, as adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 |
*
previously
filed