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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 June 30, 2014

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

(Exact name of registrant as specified in its charter)

 

Colorado		88-0218499
(State of Incorporation)		(I.R.S. Employer Identification No.)

5444 Westheimer Road

Suite1440

Houston, Texas 77056

(Address of principal executive offices, including zip code)

(713) 626-4700

(Registrant's telephone number, including area code)

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 (the "Exchange Act") during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and, (2) has been subject to such filing requirements for the past 90 days.  Yes  x    No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  o	Accelerated filer o
Non-accelerated filer  x	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o   No  x

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 shares of common stock, par value $0.0001 per share, outstanding as of July 31, 2014, was 765,194,088

 

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TABLE OF CONTENTS

ERHC ENERGY INC.

Part I. Financial Information		Page
Item 1.	Financial Statements	5
	Unaudited Consolidated Balance Sheets at June 30, 2014 and September 30, 2013	5
	Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2014 and 2013, and for the period from inception, September 5, 1995 to June 30, 2014	6
	Unaudited Consolidated Statements of Other Comprehensive Loss for the Three and Nine Months Ended June 30, 2014 and 2013, and for the period from inception, September 5, 1995 to June 30, 2014	7
	Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2014 and 2013,and for the period from inception, September 5, 1995 to June 30, 2014	8
	Notes to Unaudited Consolidated Financial Statements	10
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	26
Item 4.	Controls and Procedures	26
Part II. Other Information
Item 1.	Legal Proceedings	27
Item 6.	Exhibits	29
	Signatures	30

 

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Forward-Looking Statements

 

ERHC Energy Inc. (also referred to as "ERHC" or the "Company" and denoted by the use of the pronouns "we," "our" and "us" as the case may be in this Report) or its representatives may, from time to time, make or incorporate by reference certain written or oral statements of historical fact, statements  that  include, but are not limited to, information concerning the Company's possible or assumed future business activities and results of operations and statements about the following subjects:

●

business strategy;

●

growth opportunities;

●

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

●

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

●

future uses of and requirements for financial resources;

●

interest rate and foreign exchange risk;

●

future contractual obligations;

●

outcomes of legal proceedings including;

●

future operations outside the United States;

●

competitive position;

●

expected financial position;

●

future cash flows;

●

future liquidity and sufficiency of capital resources;

●

future dividends;

●

financing plans;

●

tax planning;

●

budgets for capital and other expenditures;

●

plans and objectives of management;

●

compliance with applicable laws; and,

●

adequacy of insurance or indemnification.

 

These types of statements and other forward-looking statements inherently are subject to a variety of assumptions, risks and uncertainties that could cause actual results, levels of activity, performance or achievements to differ materially from those expected, projected or expressed in forward-looking statements.  These risks and uncertainties include, among others, the following:

 

●

general economic and business conditions;

●

worldwide demand for oil and natural gas;

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●

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

●

oil and natural gas price fluctuations and related market expectations;

●

termination, renegotiation or modification of existing contracts;

●

the ability of the Organization of Petroleum Exporting Countries, commonly referred to as "OPEC", to set and maintain production levels and pricing, and the level of production in non-OPEC countries;

●

policies of the various governments regarding exploration and development of oil and gas reserves;

●

advances in exploration and development technology;

●

the political environment of oil-producing regions;

 

●

political instability in the Democratic Republic of Săo Tomé and Príncipe ("DRSTP"), the Federal Republic of Nigeria, Republic of Kenya, and the Republic of Chad;

 

●

casualty losses;

●

competition;

●

changes in foreign, political, social and economic conditions;

●

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

●

risks of potential contractual liabilities;

●

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

●

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

●

regulatory initiatives and compliance with governmental regulations;

●

compliance with tax laws and regulations;

●

customer preferences;

●

effects of litigation and governmental proceedings;

●

cost, availability and adequacy of insurance;

●

adequacy of the Company's sources of liquidity;

●

labor conditions and the availability of qualified personnel; and,

●

various other matters, many of which are beyond the Company's control.

 

The risks and uncertainties included here are not exhaustive.  Other sections of this report and the Company's other filings with the U.S. Securities and Exchange Commission ("SEC") include additional factors that could adversely affect the Company's business, results of operations and financial performance.  Given these risks and uncertainties, investors should not place undue reliance on our statements concerning future intent.   Our statements included in this report speak only as of the date of this report.  The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any of our statements to reflect any change in its expectations with regard to the statements or any change in events, conditions or circumstances on which any forward-looking statements are based.

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PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements

ERHC ENERGY INC.

A CORPORATION IN THE DEVELOPMENT STAGE

UNAUDITED CONSOLIDATED BALANCE SHEETS

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		June 30, 2014				September 30, 2013
ASSETS
Current assets:
Cash and cash equivalents		$	2,729,828			$	1,184,204
Investment in Oando Energy Resources			759,779				563,525
Deferred debt origination cost – short term			61,532				-
Prepaid expenses and other			431,517				228,881
Total current assets			3,982,656				1,976,610
Oil and gas concession fees			6,062,730				6,037,803
Furniture and equipment, net of accumulated depreciation of $353,137 and $300,303 at June 30, 2014 and September 30, 2013, respectively			149,531				202,364
Restricted certificate of deposit			-				2,186,182
Deferred debt origination cost – long term			30,580				-
Income tax receivable			2,018,533				2,018,533
Other assets			72,916				51,108
Total assets		$	12,316,946			$	12,472,600
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities		$	401,868			$	983,293
Convertible note payable, net of discount – short term			365,667				-
Derivative liability – short term			166,161				-
Total current liabilities			933,696				983,293
Convertible note payable, net of discount – long term			32,200				-
Derivative liability – long term			225,191				-
Total liabilities			1,191,087				983,293
Commitments and contingencies
Shareholders' equity:
Preferred stock, par value $0.0001; authorized 10,000,000 shares; none issued and outstanding			-				-
Common stock, par value $0.0001; authorized 3,000,000,000 shares; issued and outstanding 765,194,088 shares			76,520				76,485
Additional paid-in capital			101,080,306				101,067,084
Accumulated other comprehensive loss			(590,220	)			(786,475	)
Losses accumulated in the development stage			(89,440,747	)			(88,867,787	)
Total shareholders' equity			11,125,859				11,489,307
Total liabilities and shareholders' equity		$	12,316,946			$	12,472,600

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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ERHC ENERGY INC.

A CORPORATION IN THE DEVELOPMENT STAGE

UNAUDITED CONSOLIDATED  STATEMENTS OF OPERATIONS

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		Three Months Ended June 30,								Nine Months Ended June 30,								September 5, 1995 (Inception) to June 30, 2014
		2014				2013				2014				2013
Costs and expenses:
General and administrative		$	719,943			$	945,670			$	2,634,430			$	2,802,983			$	92,857,216
Exploration expenses			242,179				-				461,933				-				1,684,332
Depreciation			14,275				21,319				52,834				85,567				1,701,448
Gain on sale of partial interest on sale of concessions			-				-				(2,724,793	)			-				(32,827,043	)
Write-offs and abandonments			-				-				-				-				7,742,128
Total costs and expenses			(976,397	)			(966,989	)			(424,404	)			(2,888,550	)			(71,158,081	)
Other income and (expenses):
Interest income			1,592				854				3,804				1,752				4,857,892
Loss on change in fair value of derivatives			(16,496	)			-				(16,496	)			-				(16,496	)
Gain from settlements			-				-				-				-				130,178
Other income							-				-				-				439,827
Interest expense			(24,708	)			(18	)			(24,708	)			(24	)			(12,170,080	)
Loss on embedded derivative			(111,156	)			-				(111,156	)			-				(111,156	)
Provision for loss on deposits			-				-				-				-				(5,292,896	)
Loss on extinguishment of debt			-				-				-				-				(5,749,575	)
Total other income and (expense)			(150,768	)			836				(148,556	)			1,728				(17,912,306	)
Loss before benefit (provision) for income taxes			(1,127,165	)			(966,153	)			(572,960	)			(2,886,822	)			(89,070,387	)
Benefit (provision) for income taxes:
Current			-				-				-				-				(1,330,360	)
Deferred			-				-				-				-				960,000
Total benefit (provision) for income taxes			-				-				-				-				(370,360	)
Net loss		$	(1,127,165	)			(966,153	)		$	(572,960	)		$	(2,886,822	)		$	(89,440,747	)
Net loss per common share -basic and diluted		$	(0.00	)		$	(0.00	)		$	(0.00	)		$	(0.00	)
Weighted average number of common shares outstanding basic and diluted			764,917,468				764,429,260				764,871,996				747,782,323

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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ERHC ENERGY INC.

A CORPORATION IN THE DEVELOPMENT STAGE

UNAUDITED CONSOLIDATED  STATEMENTS OF OTHER COMPREHENSIVE INCOME (LOSS)

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	Three Months Ended June 30,								Nine Months Ended June 30,								September 5, 1995 (Inception) to June 30, 2014
	2014				2013				2014				2013
Net loss		$	(1,127,165	)		$	(966,153	)		$	(572,960	)		$	(2,886,822	)		$	(89,440,747	)
Other comprehensive income (loss) on available for sale securities			251,088				(66,905	)			196,254				(37,625	)			(590,221	)
Other comprehensive loss		$	(876,077	)		$	(1,033,058	)		$	(376,706)			$	(2,924,447	)		$	(90,030,968	)

The accompanying notes are an integral part of these unaudited consolidated financial statements

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ERHC ENERGY INC.

A CORPORATION IN THE DEVELOPMENT STAGE

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

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		Nine Months Ended June 30,								September 5, 1995 (Inception)  to June 30, 2014
		2014				2013
Cash Flows From Operating Activities:
Net loss		$	(572,960	)		$	(2,886,822	)		$	(89,440,747	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and depletion expense			52,834				85,567				1,701,447
Change in derivative liabilities			127,652				-				127,651
Provision for loss on deposits			-				-				5,292,896
Write-offs and abandonments			-				-				7,742,128
Deferred income taxes			-				-				(2,018,398	)
Compensatory stock options			6,957				17,856				1,363,902
Gain from settlement			-				-				(617,310	)
Gain on sale of partial interest in Kenya concession			(4,175,966	)			-				(4,175,966	)
Gain on sale of partial interest in DRSTP concession			-				-				(30,102,250	)
Amortization of beneficial conversion feature associated with convertible debt			-				-				2,793,929
Amortization of convertible debt discount			7,307				-				7,307
Amortization of debt issuance costs			10,955				-				10,955
Amortization of deferred compensation			-				-				1,257,863
Loss on extinguishment of debt			-				-				5,669,500
Stock issued for services			20,001				-				20,917,079
Stock issued for settlements			-				-				225,989
Stock issued for officer bonuses			-				-				5,221,638
Stock issued for interest and penalties on convertible debt			-				-				10,631,768
Stock issued for board compensation			-				-				2,751,149
Changes in operating assets and liabilities:
Prepaid expenses and other current assets			(174,444	)			57,233				(454,567	)
Accounts payable and other accrued liabilities			(569,033	)			(216,847	)			(2,677,872	)
Accrued retirement obligation			-				-				365,000
Net cash used in operating activities			(5,266,697	)			(2,943,013	)			(63,406,909	)

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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ERHC ENERGY INC.

A CORPORATION IN THE DEVELOPMENT STAGE

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

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		Nine Months Ended June 30,								September 5, 1995 (Inception)  to June 30, 2014
		2014				2013
Cash Flows From Investing Activities:
Purchase of long-term investment			-				-				(5,292,896	)
Purchase of oil and gas concessions			(580,569	)			(1,410,708	)			(9,352,872	)
Proceeds from sale of partial interest in Kenya concession			4,731,608				-				4,731,608
Proceeds from sale of partial interest in DRSTP concession			-				-				45,900,000
Proceeds from U.S. Treasury bills			-				-				5,011,000
Purchase of U.S. Treasury bills and accrued interest			-				-				(5,011,000	)
Purchase of marketable equity securities			-				-				(1,350,000	)
Purchase of restricted certificate of deposit, and accrued interest			-				-				(2,317,182	)
Proceeds from sale of restricted certificate of deposit			2,186,182				-				2,317,182
Purchase of furniture and equipment			-				(236,382	)			(1,277,754	)
Net cash provided by (used in) investing activities			6,337,221				(1,647,090	)			33,358,086
Cash Flows From Financing Activities:
Debt origination costs			(86,400	)			-				(86,400	)
Proceeds from warrants exercised			-				-				160,000
Proceeds from common stock, net of expenses			-				1,540,178				10,316,727
Proceeds from line of credit, related party			-				-				2,750,000
Proceeds from non-convertible debt related party			-				-				158,700
Proceeds from convertible debt, related party			-				-				8,207,706
Proceeds from sale of convertible debt			561,500				-				9,581,437
Proceeds from bank borrowing			-				-				175,000
Proceeds from stockholder loans			-				-				1,845,809
Proceeds from stock subscription receivable			-				-				913,300
Repayment of shareholder loans			-				-				(1,020,607	)
Repayment of long-term debt			-				-				(223,021	)
Net cash provided by financing activities			475,100				1,540,178				32,778,651
Net increase (decrease) in cash and cash equivalents			1,545,624				(3,049,925	)			2,729,828
Cash and cash equivalents, beginning of period			1,184,204				7,665,990				-
Cash and cash equivalents, end of period		$	2,729,828			$	4,616,065			$	2,729,828
Non-cash investing and financing activities:
Unrealized gain (loss) on investment in Exile Resources		$	196,255			$	(37,625	)		$	(590,220	)
Non-cash debt origination costs		$	(16,667	)		$	-			$	(16,667	)

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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ERHC ENERGY INC.

A CORPORATION IN THE DEVELOPMENT STAGE

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION AND BUSINESS ORGANIZATION

The consolidated 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 financial position, results of operations and cash flows 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 accounting principles generally accepted in the United States of America, have been omitted pursuant to such rules and regulations, although ERHC Energy Inc. ("ERHC" or 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 fiscal year ended September 30, 2013.

Recent accounting pronouncements

There have been no recently issued accounting pronouncements that have had or are expected to have a material impact on the Company's consolidated financial statements.

NOTE 2 – FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company adopted new guidance as of October 1, 2008, related to the measurement of the fair value of certain of its financial assets required to be measured on a recurring basis. Under the new guidance, based on the observability of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:

●

Level 1 — Quoted prices in active markets for identical assets or liabilities.

●

Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or, other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

●

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

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

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

During the nine months ended June 30, 2014, the Company's investment in the common stock and warrants of OER, a Canadian oil and gas company that trades on the Toronto Stock Exchange (TSX) increased in value by $196,254 to $759,779. This increase in value is included as an increase in stockholders' equity in accumulated other comprehensive income (loss).

During the three months ended June 30, 2014, the Company issued a number of convertible notes payable, and identified derivatives related to these notes.  ERHC classifies its derivative liabilities as Level 3 and values them using the methods discussed in Note 5.  While the Company believes that its valuation methods are appropriate and consistent with other market participants, it recognizes that the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The primary assumptions that would significantly affect the fair values using the methods discussed in Note 5 are that of volatility and market price of the underlying common stock of the Company.

As of June 30, 2014, the Company did not have any derivative instruments that were designated as hedges.

The derivative liability as of June 30, 2014, in the amount of $391,352 has a level 3 classification.

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The following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities as of June 30, 2014:

		Derivative Liability
Balance, September 30, 2013		$	-
Increase in derivative value due to issuances of convertible promissory notes			361,155
Increase in derivative value attributable to tainted warrants			13,701
Change in fair market value of derivative liabilities on convertible notes due to the mark to market adjustment			7,730
Change in fair market value of derivative liabilities on tainted warrants due to the mark to market adjustment			8,766
Balance, June 30, 2014		$	391,352

NOTE 3 – OIL AND GAS CONCESSIONS

 

The following is an analysis of the cost of oil and gas concessions at June 30, 2014 and September 30, 2013:

		June 30, 2014				September 30, 2013
DRSTP concession		$	3,061,672			$	2,839,500
Chad concession			2,916,719				2,800,600
Kenya concession			-				326,073
Pending concessions in other African countries			84,339				71,630
		$	6,062,730			$	6,037,803

 

In October, 2013, the Company entered into a farm-out agreement with CEPSA Kenya Limited, an affiliate of Compañía Española de Petróleos, S.A.U., an international oil and gas company ("CEPSA").  Under the terms of this agreement, the Company assigned and transferred 55% of its participating interest in Kenya Block 11A to CEPSA.  Pursuant to the agreement, we received farm-in fee of $2,000,000, reimbursement of $2,175,966 of exploration costs incurred, and recovery of our capitalized concession costs of $555,642. In connection with this farm-out, we recognized a gain of $2,724,793, which includes $2,000,000 farm-in fee along with $495,224 exploration costs and $229,569 training and surface fees expensed during the year ended September 30, 2013.

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

NOTE 4 – CONVERTIBLE DEBT

The Company had the following convertible debt outstanding at June 30, 2014:

Lender		Date of Agreement			Term (Months)				Annual Interest Rate					Face Value				Accrued Interest				Discount (c)				Deferred Debt Origination Costs Due at Maturity (d)				Net Convertible Note Payable				Note Derivative Liability (e)
JMJ Financial		4/15/2014	(f)			24				5.83	%	(a)		$	100,000			$	607			$	97,194			$	11,111			$	14,524			$	133,955
KBM Worldwide		4/24/2014				9				8.00	%				103,500				2,027				-				-				105,527				-
KBM Worldwide		6/26/2014				9				8.00	%				53,000				62				-				-				53,062				-
JSJ Investments		4/29/2014				6				12.00	%				100,000				2,038				-				-				102,038				-
Adar Bays		5/20/2014				12				8.00	%				52,500				472				50,782				-				2,190				90,224
LG Capital		5/20/2014				12				8.00	%				52,500				472				50,781				-				2,191				75,937
Redwood Fund III		5/15/2014				6				7.85	%	(b)			100,000				659				-				-				100,659				-
Vista Capital Investments		6/16/2014	(f)			24				5.83	%	(b)			50,000				6,056				43,936				5,556				17,676				68,769
														$	611,500			$	12,393			$	242,693			$	16,667			$	397,867			$	368,885

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(a)	Implied interest rate. The note is subject to a one time 12% interest charge unless repaid within 90 days

(b)	Implied interest rate. The note is subject to a one time 12% interest charge regardless of how long it has been outstanding

(c)	Net of amortization through June 30, 2014 of $7,307, charged to the period’s interest expense. Initial discounts, as based on the fair value of derivatives up to the settlement amount, were as follows: JMJ Financial - $100,000, Adar Bays - $52,500, LG Capital - $52,500, and Vista Capital - $45,000

(d)	Original Issue Discount due at maturity of the note

(e)

Includes a mark-to-market adjustment from inception through June 30, 2014 of $7,730, charged to the period’s interest expense. Fair values at inception were as follows: JMJ Financial - $128,008, Adar Bay - $92,164, LG Capital - $74,445, and Vista Capital - $66,538. See Notes 2 and 5 for more information

(f)

At June 30, 2014, convertible notes payable in the amount of $32,200 and associated derivatives in the amount of $202,724 had remaining maturities exceeding twelve months, and were accordingly classified as long term.  Principal and original issue discount on these notes in the amount of $166,667 is due in 2016.

The following table summarizes the proceeds from convertible notes payable through June 30, 2014:

Lender		Date of Agreement		Gross Proceeds					Transaction Cost				Net Proceeds
JMJ Financial		4/15/2014		$	100,000				$	10,000			$	90,000
KBM Worldwide		4/24/2014			100,000					10,000				90,000
KBM Worldwide		6/26/2014			50,000		(a)			5,000				45,000
JSJ Investments		4/29/2014			100,000					10,000				90,000
Adar Bays		5/20/2014			50,000					5,000				45,000
LG Capital		5/20/2014			50,000					5,000				45,000
Redwood Fund III		5/15/2014			100,000					10,000				90,000
Vista Capital Investments		6/16/2014			50,000					5,000				45,000
				$	600,000				$	60,000			$	540,000

(a)

Funds received in July 2014, but accrued at June 30, 2014 due to the terms of the note payable agreement

The following table summarizes conversion terms of the notes outstanding at June 30, 2014:

Lender		Date of Agreement		Conversion Rate		Calculation Period		Eligible for Conversion
JMJ Financial		April 15, 2014		Lesser of $0.06 or 60%		25 trading days prior to conversion		Immediately
KBM Worldwide		April 24 and June 26, 2014		61%		10 trading days prior to conversion		180 after the effective date
JSJ Investments		April 29, 2014		60%		20 trading days prior to conversion		180 after the effective date
Adar Bay		May 20, 2014		61%		10 trading days prior to conversion		Immediately
LG Capital		May 20, 2014		50%		20 trading days prior to conversion		Immediately
Redwood Fund III		May 15, 2014		50%		20 trading days prior to conversion		180 after the effective date
Vista Capital Investments		June 16, 2014		Lesser of $0.075 or 60%		25 trading days prior to conversion		Immediately

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The following table summarizes identified derivative associated with the convertible notes described above and their accounting treatment at June 30, 2014:

Issue Name and Date		Derivative(s) Identified and Accounting Treatment Implemented
JMJ Financial April 15, 2014		Variable conversion feature and reset provision. Recorded at fair value as of the inception date of note and as of each subsequent reporting date.
KBM Worldwide April 24, 2014 and June 26, 2014		Variable conversion feature and reset provision. To be reported at fair value after 180 days since the date of the notes and of each subsequent reporting date, starting in the first quarter of fiscal 2015.
JSJ Investments April 29, 2014		Variable conversion feature and reset provision. To be reported at fair value after 180 days since the date of the note and of each subsequent reporting date, starting in the first quarter of fiscal 2015.
Adar Bays May 20, 2014		Variable conversion feature and reset provision. Recorded at fair value as of the inception date of note and as of each subsequent reporting date.
LG Capital May 20, 2014		Variable conversion feature and reset provision. Recorded at fair value as of the inception date of note and as of each subsequent reporting date.
Redwood Fund III May 15, 2014		Variable conversion feature and reset provision. To be reported at fair value after 180 days since the date of the note and of each subsequent reporting date, starting in the first quarter of fiscal 2015.
Vista Capital Investments June 16, 2014		Variable conversion feature. Recorded at fair value as of the inception date of note and as of each subsequent reporting date.

As of June 30, 2014, Company recorded the following deferred origination costs related to the convertible notes:

 

Lender		Date of Agreement		Transaction Costs				Deferred Debt Origination Costs Due at Maturity (b)				Legal and Other Debt Origination Costs				Initial Deferred Origination Costs				Amortization (c)				Net Deferred Debt Origination Costs
JMJ Financial		4/15/2014		$	10,000			$	11,111			$	-			$	21,111			$	996			$	20,115
KBM Worldwide		4/24/2014			10,000				-				3,500				13,500				2,447				11,053
KBM Worldwide		6/26/2014			5,000				-				3,000				8,000				73				7,927
JSJ Investments		4/29/2014			10,000				-				-				10,000				3,397				6,603
Adar Bays		5/20/2014			5,000				-				2,500				7,500				787				6,713
LG Capital		5/20/2014			5,000				-				2,500				7,500				787				6,713
Redwood Fund III		5/15/2014			10,000				-				-				10,000				840				9,160
Vista Capital Investments		6/16/2014			5,000				5,556				-				10,556				91				10,465
Various	(a)	Various			-				-				14,900				14,900				1,537				13,363
				$	60,000			$	16,667			$	26,400			$	103,067			$	10,955			$	92,112

 

(a)

An aggregate of lesser deferred debt origination costs

(b)

Original Issue Discount due at maturity of the note

(c)

Charged to the period's interest expense

(d)

At June 30, 2014, Net Deferred Origination Costs in the amount of $30,580 had remaining useful lives exceeding twelve months, and were accordingly classified as long term.

---

NOTE 5 – DERIVATIVE LIABILITIES

As described in Notes 4 and 6, the Company has identified embedded derivatives in notes payables and outstanding warrants.

The fair value of the embedded derivatives related to the convertible notes payable, comprising conversion feature with the reset provisions and the default provisions, at issuance and June 30, 2014 was determined using the multinomial lattice models that value the derivative liability based on a probability weighted discounted cash flow model.  These models are based on future projections of the various potential outcomes and utilize the following assumptions:

·

The stock price would fluctuate with the Company projected volatility;

 

·

Derivative convertible notes convert at 60% of the market prices;

 

·

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

 

·

The projected volatility curve for each valuation period was based on the historical volatility of the Company, ranging between 103% and 105%;

 

·

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

 

·

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

 

·

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

 

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

 

The fair value of the embedded derivatives related to the tainted outstanding warrants, comprising exercise feature with the full ratchet reset, at April 15, 2014 and June 30, 2014 was determined using the lattice models that value the derivative liability based on a probability weighted discounted cash flow model.  These models are based on future projections of the various potential outcomes and utilize the following assumptions:

·

The stock price would fluctuate with the Company projected volatility;

 

·

The stock price would fluctuate with an annual volatility. The projected volatility curve for each valuation period was based on the historical volatility of the Company, ranging between 103% and 105%;

 

·

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

 

·

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

 

·

No warrants have expired in this period ending June 30, 2014.

The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date and to fair value as of each subsequent reporting date which at June 30, 2014 was an aggregate of $391,352.

During the nine months ended June 30, 2014, the Company recorded an aggregate $16,496 loss on change in fair value of derivative liabilities and a $111,156 loss upon recognition of these derivatives. See Note 4 for more information.

---

NOTE 6 - STOCKHOLDERS' EQUITY

During the nine months ended June 30, 2014, the Company recognized compensation expense of $6,957 related to options granted to the Board of Directors in fiscal year 2012.  As of June 30, 2014, there are 4,150,000 fully-vested options outstanding; none of which are exercisable.  These options have a weighted average remaining term of 7.5 years and an intrinsic value of zero.

During the nine months ended June 30, 2014, there were no new warrants granted and none were exercised, cancelled or expired.  As of June 30, 2014, the Company has 13,777,729 outstanding and exercisable warrants with a weighted average exercise price and remaining term of $0.32 per share and 0.71 years, respectively.  Note 5 provides information on the derivative liability associated with the warrants tainted during the issuance of convertible notes discussed in Note 4.  During the nine months ended June 30, 2014, a $13,701 derivative liability, related to the tainted warrants, was recorded against the additional paid in capital.

During the nine months ended June 30, 2014, 344,828 shares of Company’s common stock with a market value of $20,001, were issued in reimbursement of financial consulting services provided to the Company.

NOTE 7 – COMMITMENTS AND CONTINGENCIES

Republic of Kenya Concession Fees and Other Financial Commitments

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

Beginning February 7, 2014 CEPSA Kenya Limited (CEPSA), an affiliate of Compañía Española de Petróleos, S.A.U, took over from ERHC as operator under the Production Sharing Contract for Block 11A with the Republic of Kenya.  ERHC and CEPSA entered into a Farm-out Agreement on October 7, 2013 (the “Agreement”) wherein ERHC transferred a majority participating interest and the operatorship in the Contract to CEPSA.  

The following is an analysis of the costs paid or incurred as of June 30, 2014:

 

a.

$310,000 as the entire signature bonus

b.

$2,175,966 as costs of airborne geophysical survey and quality control associated with it

c.

$459,138 as training and surface fees, as provided in the PSC

d.

$74,111 in advisers' and ancillary costs related to the PSC

Republic of Chad Concession Fees and Other Financial Commitments

On June 30, 2011, ERHC entered into a production sharing contract ("PSC") with Chad for hydrocarbon exploration and production.  During the 4^th quarter of 2013, the Ministry of Energy and Petroleum of Chad approved ERHC's application to voluntarily relinquish two of the three Blocks covered by the PSC.  The voluntary relinquishment proportionately reduces ERHC’s total signature-bonus obligations of $6,000,000 under the initial PSC to $2,000,000.

The following is an analysis of the costs paid or incurred as of June 30, 2014:

 

a.

$2,480,000 as the entire signature bonus along with related legal fees

b.

$260,872 as costs of seismic data and environmental impact study

c.

$446,979 as training, surface, meeting, and other fees, as provided in the PSC

d.

$210,000 as finders fee

e.

$3,749 in advisers' and ancillary costs related to the PSC

ERHC is also committed under the PSC to:

a.

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

b.

pay training and surface fees of approximately $250,000 per calendar year during the first validity period, and lasting for up to eight years. Fees for subsequent periods will depend on the exploration progress, the acreage retained by ERHC, and total payroll related to the production of oil and gas, should production commence.

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LEGAL PROCEEDINGS

JDZ BLOCKS 5 AND 6

Arbitration and Lawsuit

Since 2008, ERHC has had a pending law suit (in Abuja, Nigeria) and arbitration proceedings (in London, UK) against the JDA and the Governments of Nigeria and Sao Tome and Principe. ERHC wants the London Court of International Arbitration to clarify that ERHC’s minority interests in JDZ Blocks 5 and 6 remain intact. ERHC wants the court in Abuja to restrain the JDA and or the Governments from tampering with ERHC’s rights in the two Blocks pending the determination of the arbitration.

Suspension of Proceedings on the Arbitration and Lawsuit

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

ROUTINE CLAIMS

From time to time, ERHC may be subject to routine litigation, claims, or disputes in the ordinary course of business.  ERHC intends to defend these matters vigorously.  The Company cannot predict with certainty, however, the outcome or effect of any of the arbitration or litigation specifically described above or any other pending litigation or claims.

NOTE 8 – SUBSEQUENT EVENTS

 

Lender		Face Value				Interest Rate		Date of Agreement		Conversion Rate
Tonaquint, Inc.		$	115,000			12%		July 10, 2014		65%
Union Capital, LLC			69,000			8%		July 15, 2014		55%
Iconic Holdings, LLC			75,000			10%		July 16, 2014		60%
Auctus Private Equity Fund			58,750			8%		July 29, 2014		55%
		$	317,750

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Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the Company's unaudited consolidated financial statements (including the notes thereto) and Item 1A of Part II; "Risk Factors," included elsewhere in this report and the Company's audited consolidated financial statements and the notes thereto, Item 7; and  "Management's Discussion and Analysis of Financial Condition and Plan of Operations" and Item 1A, "Risk Factors" included in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2013.  The Company's historical results are not necessarily an indication of trends in operating results for any future period.   References to "ERHC" or the "Company" mean ERHC Energy Inc., a Colorado corporation, and, unless expressly stated or the context otherwise requires, its wholly owned subsidiary.

CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION

We are including the following cautionary statement to make applicable and take advantage of the safe harbor provision of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements made by us, or on our behalf.  This Quarterly Report on Form 10-Q contains forward-looking statements.  Forward-looking statements include statements concerning plans, objectives, goals, strategies, expectations, future events or performance and underlying assumptions and other statements which are other than statements of historical facts.  Certain statements contained herein are forward-looking statements and, accordingly, involve risks and uncertainties which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements.  Our expectations, beliefs and projections are expressed in good faith and are believed by us to have a reasonable basis, including without limitations, management's examination of historical operating trends, data contained in our records and other data available from third parties, but there can be no assurance that management's expectations, beliefs or projections will result or be achieved or accomplished.  In addition to other factors and matters discussed elsewhere herein, the following are important factors that, in our view, could cause actual results to differ materially from those discussed in the forward-looking statements: geopolitical instability where we operate; our ability to meet our capital needs; our ability to raise sufficient capital and/or enter into one or more strategic relationships with one or more industry partners to execute our business plan; our ability and success in finding, developing and acquiring oil and gas reserves; our ability to respond to changes in the oil exploration and production environment, competition, and the availability of personnel in the future to support our activities.

Overview

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

ERHC's strategy in Kenya and Chad is to perform exploration work and further establish the prospectivity of assets acquired through Production Sharing Contracts (PSCs) with the governments of both countries. ERHC intends to do this either in conjunction with partners or alone. ERHC has contracted a farm-out partner for its interests in Kenya, and is currently seeking for partners for its interests in Chad.  ERHC expects that such farm-in arrangements, if entered into, might lower the risk and cost of the exploration programs to ERHC.

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

 

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

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REPUBLIC OF KENYA

ERHC Kenya Acreage

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

 

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

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

In October 2013, ERHC concluded a farm-out agreement with CEPSA. The farm-out agreement was approved by the Government of the Republic of Kenya during the quarter ended March 31, 2014. Under terms of the agreement, ERHC transferred majority of its interest in Kenya Block 11A as well as operatorship to CEPSA. The entered farm-out agreement includes a carry and other considerations.

Kenya Operations Update

 

Upon successfully meeting all conditions required under the agreement, the farm-out agreement between ERHC and CEPSA went into effect on February 7, 2014, and the transfer of operations to CEPSA was completed at March 31, 2014.  During the month of January 2014, ERHC awarded a contract for a 2D seismic survey of at least 1,000 kilometers in the Block in compliance with the work program to BGP Kenya Limited. The 2D seismic program was designed to cover areas of interest resulting from structural mapping of prospective basins enabled by the airborne Full Tensor Gravity Gradiometry (FTG) survey of Block 11A completed in January 2014.  The FTG survey confirmed that the Lotikipi basin extends into Block 11A and significantly advanced the exploration team’s understanding of the internal structure of the Lotikipi rift basin and enabled the identification of the most prospective areas.  The work on the 2D seismic survey began in April 2014.  Upon completion of the 2D seismic program during the summer of 2014, ERHC and CEPSA will have satisfied the minimum work program requirements for the initial two-year exploration period under terms of the PSC.

Key Provisions of the ERHC's PSC on Block 11A

Exploration Term

The initial exploration period is two years from the effective date of the PSC. The effective date falls ninety days after the execution of the PSC.   The initial exploration period is extendable for two additional two-year exploration periods contingent upon fulfillment of the Company's work program and expenditure obligations under the PSC.

---

If not renewed, the PSC expires automatically at the end of the initial exploration period or at the end of any additional exploration period unless a commercial discovery is made before the exploration period expires.  In the case of a commercial discovery of crude oil in a relevant development area, the PSC will run for a development period term of 25 years.  In the case of a commercial discovery of natural gas in a relevant development area, the PSC will run for a development period term of 35 years.

Relinquishment and Surrender

The PSC provides for a mandatory surrender of 25% of the original contract area by the end of the initial exploration period to the Government of Kenya and 25% of the remaining contract area by the end of the first additional exploration period. . In the case of a commercial discovery of crude oil in a relevant development area, such development area is excluded from the original contract area for the purpose of surrender calculation.  Furthermore, ERHC may surrender an additional part of the contract area and such voluntary surrender shall be credited against the next surrender obligation.  The PSC will terminate in case of a surrender of the entire contract area.

Signature Bonus and Guarantees

The PSC requires a signature bonus of $310,000 which the Company paid in full as of September 30, 2012.  The PSC also requires the Company, upon entry into each exploration period, to provide a bank guarantee of 50% and a parent company guarantee of 50% of its full minimum work and expenditure obligations under the work program for each exploration period.

Proposed Exploration Work Program

The PSC with the Government of Kenya obliges ERHC to carry out the following minimum work program:

(A)	During the Initial Exploration Period of Two (2) Contract Years – Minimum Work and Expenditure Obligations:

•	Acquire and interpret 1,000 km2 of gravity and magnetic data (at a minimum cost of US $250,000) and

•	Acquire and interpret 1,000 Km/line of 2D seismic data (at a minimum cost of  US $10,000,000)

 

(B)	During the First Additional Exploration Period of Two (2) Contract Years: Minimum Work and Expenditure Obligations to:

 

•	Acquire 750 km2 high density of 3D seismic data (at a minimum cost of US $30,000,000), or

•	Drill one (1) well to a minimum depth of 3,000 m (at a minimum cost of US $30,000,000)

 

(C)	During the Second Additional Exploration Period of Two (2) Contract Years: Minimum Work and Expenditure Obligation to drill one (1) well to a minimum depth of 3,000m (with minimum expenditure of US $30,000,000).

However, if the Company satisfactorily completes the minimum work obligations without having spent up to the minimum expenditure, the Company will be deemed to have satisfied its obligations under the PSC.

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REPUBLIC OF CHAD

 

ERHC's Chad Acreage

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

During the year ended September 30, 2013, ERHC offered to novate the PSC by retaining only the BDS2008 Block and relinquishing the Manga and Chari Ouest III Blocks to the Chadian Government for efficiency and for greater ease in carrying out an accelerated work program.  The novation of the PSC has been approved by the Chadian Ministry of Energy and Petroleum. During the quarter ended March 31, 2014, the Company received the arrêté (decree) of the President of Chad giving presidential seal of approval to the Company’s retention of oil exploration Block BDS 2008 and its voluntary relinquishment of the Manga and Chari-Ouest III Blocks. The request was made to enable the Company to focus its resources on the highly prospective Block BDS 2008.

 

---

Chad Operations Update

 

ERHC has completed the Environmental Impact Assessment ("EIA") as a mandatory pre-condition to commencing data acquisition and the rest of the work program. In addition, ERHC completed the Environmental Impact Study ("EIS") and submitted the results of EIS to the Government of Chad for review, as required under the PSC.  The EIA has been completed and approved, and ERHC is advancing to the next step in its oil and gas exploration work program: an aero gravity/magnetic survey of BDS2008. The Company awarded the contract for this survey to Bridgeporth, Ltd (“Bridgeporth”) in June 2014, and the survey will commence during the third quarter of 2014, upon obtaining of the administrative approvals necessary for Bridgeporth to begin work. 

Focus Areas

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

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

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

 

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

Exploration Term and Work Program

ERHC has proposed a minimum exploration work program on the basis of the full 8-year exploration period subject to such modification as might be required following the exploration work undertaken during the initial 5-year period of the Exclusive Exploration Authorization.  The minimum expenditure over the initial 5 year period is $15 million. If ERHC elects to continue for a subsequent 3‑year period, an additional minimum expenditure of $1 million will be required.  ERHC would, however, also be obliged to drill an exploratory well.

Cost Recovery and Production Sharing

In the event of a discovery and commercial production from the Company's blocks, the Company and any partners that have participated in the exploration will be entitled to recover up to 70% of the net hydrocarbon production (less any production royalty) as cost of oil, until all the costs for exploration and development have been recovered. Production royalty is 14.25% in the case of crude oil and 5% in the case of natural gas.  No guarantee can be given that there will be production in commercial quantities from the Company's exploration acreage in Chad.

NIGERIA – SAO TOME AND PRINCIPE JOINT DEVELOPMENT ZONE ("JDZ")

Background of the JDZ

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

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NIGERIA – SAO TOME AND PRINCIPE JOINT DEVELOPMENT ZONE ("JDZ")

ERHC's Rights in the JDZ

In April 2003, the Company and STP entered into an Option Agreement (the "2003 Option Agreement") in which the Company relinquished significant prior legal rights and financial interests in the Joint Development Zone ("JDZ") in exchange for preferential exploration rights in the JDZ.  Following the exercise of ERHC's rights as set forth in the 2003 Option Agreement, the JDA confirmed the award in 2004 of participating interests ("Original Participating Interest") in each of JDZ Blocks 2, 3, 4, 5, 6 and 9 of the JDZ during the 2004/5 licensing round conducted by the JDA.  ERHC also jointly bid with internationally recognized technical partners for additional participating interests in the JDZ during the 2004/5 licensing round.  As a result of the joint bid, ERHC won additional participating interests ("Joint Bid Participating Interest") in Blocks 2, 3 and 4.  The following is a tabulation of ERHC's participating interests in the JDZ.

 

JDZ Block			ERHC Original Participating Interest			ERHC Joint Bid Participating Interest			Participating Interest(s) Assigned			Current ERHC Retained Participating Interest
2			30.00%			35.00%			43.00%			22.00%
3			20.00%			5.00%			15.00%			10.00%
4			25.00%			35.00%			40.50%			19.50%
5			15.00%			-			-			15.00% (in arbitration)
6			15.00%			-			-			15.00% (in arbitration )
9			20.00%			-			-			20.00%

ERHC's Participating Agreements in the JDZ

The following are the particulars of the Participating Agreements by which ERHC assigned some of its participating interests in JDZ Blocks 2, 3 and 4 to technical partners so that the technical partners would operate the Blocks and carry ERHC's proportionate share of costs in the Blocks until production, if any, commenced from the Blocks:

 

Date of Participation Agreement	Party(ies) to the Participation Agreement		Participating Interest(s) Assigned				Participating Interest Assigned Price
JDZ Block 2 - Participation Agreement - ERHC Retained Interest of 22.00%
March 2, 2006	Sinopec International Petroleum Exploration Production Co. Nigeria Ltd - a subsidiary of Sinopec International Petroleum and Production Corporation			28.67	%		$	13,600,000
	Addax Energy Nigeria Limited - an Addax Petroleum Corporation subsidiary			14.33	%		$	6,800,000
JDZ Block 3 - Participation Agreement - ERHC Retained Interest of 10.00%
February 15, 2006	Addax Petroleum Resources Nigeria Limited - a subsidiary of Addax Petroleum Corporation			15.00	%		$	7,500,000
JDZ Block 4 - Participation Agreement - ERHC Retained Interest of 19.50%
November 15, 2005	Addax Petroleum Nigeria (Offshore 2) Limited - a subsidiary of Addax Petroleum Corporation			40.50	%		$	18,000,000

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Under the terms of the Participation Agreements Sinopec and Addax agreed to pay all of ERHC's future costs for petroleum operations ("the carried costs") in respect of ERHC's retained interests in the blocks.  Additionally, Sinopec and Addax are entitled to 100% of ERHC's allocation of cost oil plus up to 50% of ERHC's allocation of profit oil from the retained interests on individual blocks until Sinopec and Addax Sub recover 100% of ERHC's carried costs.  On or about October 2, 2009, Sinopec International Petroleum Exploration and Production Corporation acquired all of the outstanding shares of Addax Petroleum Corporation.

 

ERHC's JDZ Acreage

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

 

●

JDZ Block 2:  22.0%

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JDZ Block 3:  10.0%

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JDZ Block 4:  19.5%

 

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JDZ Block 5:  15.0% (in arbitration)

 

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JDZ Block 6:  15.0% (in arbitration)

 

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JDZ Block 9:  20.0%

 

The working interest percentages represent ERHC's share of all the hydrocarbon production from the blocks and obligates ERHC to pay a corresponding percentage of the costs of drilling, production and operating the blocks.  Through Exploration Phase 1 in blocks 2, 3 and 4, these costs have been carried by the operators.  The operators can only recover their costs by carrying ERHC until production whereupon the operators will recover their costs from production revenues.

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

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

JDZ Operations Update

The JDZ partnership is currently assessing the data for possible new exploration play concepts in this area.

SAO TOME AND PRINCIPE EXCLUSIVE ECONOMIC ZONE ("EEZ")

Overview of ERHC's EEZ Blocks

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

ERHC's Rights in the EEZ

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

EEZ Block 4 is 5,808 square kilometers, situated directly east of the island of Príncipe.

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

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

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PSC Negotiations for the EEZ

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

Negotiations for a PSC between ERHC and the National Petroleum Agency of Săo Tomé and Príncipe (ANP-STP) opened on November 14, 2011 in Sao Tome.  Good progress has been made in several rounds of negotiations since then and a formal agreement on Block 11 is expected during the third quarter of 2014. Negotiations in regards to EEZ Block 4 are continuing.

EEZ Operations Update

In June 2014, ERHC and ANP-STP have concluded the final terms for the Production Sharing Contract for the “EEZ” Block 11.  The PSC contains three exploration phases spread over an eight-year period. The work program in the first 4-year phase commits ERHC to purchase and re-process existing data and then carry out an aeromagnetic survey over the Block. ERHC is also committed to acquiring 2,500 km of 2D seismic data during the first phase.  If, after the completion of Phase 1, ERHC chooses to continue its exploration work program, Phases 2 and 3 will last two years each with a well commitment during each phase.  The PSC for EEZ Block 11 will become effective in due course following the receipt of certain legislative and administrative approvals and the official Portuguese translation of the PSC.

As was the case in Kenya and earlier in the Joint Development Zone, management's intention is to bring a technically and financially capable operating partner onboard. The Company's discussions continue with several international oil companies about partnerships in EEZ Block 11. Some of those discussions are on the possibility of a 'right-to-earn' partnership where the operator commits to carrying only one aspect of the work program in return for a pre-determined interest in the PSC if the results of that aspect convince the operator to commit to the rest of the work program.

 

INVESTMENT IN OANDO ENERGY RESOURCES (FORMERLY EXILE RESOURCES)

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

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

As a result of the RTO, ERHC now holds 418,889 shares in the common stock of Oando Energy.  ERHC also holds warrants for 418,889 common shares exercisable within 24 months of the closing of the RTO at Cdn$2.00 per share.

CURRENT PLANS FOR OPERATIONS

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

PLANS FOR FUNDING OF POTENTIAL ACQUISITIONS

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

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The process of preparing financial statements requires that the Company make estimates and assumptions that affect the reported amounts of liabilities and stockholders' equity at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Such estimates primarily relate to realization of oil and gas concession assets and the valuation allowance related to deferred tax assets as of the date of the financial statements; accordingly, actual results may differ from estimated amounts. ERHC's estimates and assumptions are based on current facts, historical experience and various other factors we believe to be reasonable under the circumstances. The most significant estimates with regard to the financial statements included with this report relate to realization of oil and gas concession assets and the valuation allowance related to deferred tax assets.

These estimates and assumptions are reviewed periodically and, as adjustments become necessary, they are reported in earnings in the periods in which they become known.

RECENT ACCOUNTING PRONOUNCEMENTS

In preparing its financial statements and filings, the company considers recent guidance issued related to accounting principles generally accepted in the United States. The Company believes that there has been no new guidance since its most recent annual report on Form 10-K that have a significant impact on its financial statements.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2014 Compared with the Three Months Ended June 30, 2014

General and administrative expenses varied from $945,670 in the three months ended June 30, 2013 to $719,943 in the three months ended June 30, 2014.  The decrease was as a result of decreased expenditures on the work programs, mainly due to the Kenya farm-out.

During the three months ended June 30, 2014, ERHC issued convertible notes payable and recognized derivative liabilities associated with them. Included in interest expense is $111,156 of initial discount on derivative obligations related to the convertible notes, $7,307 of discount amortization, $6,393 interest accrued on the notes payable, and $9,418 of deferred debt origination costs amortization. For the three months ended June 30, 2014, we incurred a $16,496 loss on change in fair value of our derivative liabilities compared to a loss of $0 the same period last year.

During the three months ended June 30, 2014, the Company had a net loss of $1,127,165 compared with a net loss of $966,153 for the three months ended June 30, 2013.

Nine Months Ended June 30, 2014 Compared with the Nine Months Ended June 30, 2013

General and administrative expenses decreased from $2,802,983 in the nine months ended June 30, 2013 to $2,634,430 in the nine months ended June 30, 2014.  The decrease was as a result of decreased expenditures on the work programs, mainly due to the Kenya farm-out.

During the nine months ended June 30, 2014, ERHC issued convertible notes payable and recognized derivative liabilities associated with them. Included in interest expense is $111,156 of initial discount on derivative obligations related to the convertible notes, $7,307 of discount amortization, $6,393 interest accrued on the notes payable, and $9,418 of deferred debt origination costs amortization.  For the nine months ended June 30, 2014, we incurred a $16,496 loss on change in fair value of our derivative liabilities compared to a loss of $0 the same period last year.

During the nine months ended June 30, 2014, the Company had a net loss of $572,960 compared with a net loss of $2,886,822 for the nine months ended June 30, 2013.  The improvement in net loss resulted from the recognition of income on Kenya farm-out contract with CEPSA during the quarter ended March 31, 2014.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2014, the Company had $2,729,828 in cash and cash equivalents, and a working capital of $3,048,960.  Management believes that this cash position should be sufficient to support the Company's working capital requirements for more than 12 months.

OFF-BALANCE SHEET ARRANGEMENTS

At June 30, 2014, the Company had no off-balance sheet arrangements.

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DEBT FINANCING ARRANGEMENTS

At June 30, 2014, the Company had a total of $933,696 in short term obligations, including:

·

$100,500 in accrued executive bonuses related to acquisition of Chadian Blocks, deferred until the Blocks are monetized,

·

$180,476 of accounts payable,

·

$38,938 in accrued directors’ compensation,

·

$24,454 in deferred office rent,

·

$33,500 in accrued professional fees,

 

·

$24,000 in accrued officer vacation,

 

·

$365,667 in convertible note payables, net of discount and

 

·

$166,161 in derivative liability.

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

The Company's current focus is to exploit its primary assets, which are rights to working interests oil and gas exploration blocks in Kenya, Chad, the JDZ and EEZ under agreements with the  governments of Kenya, Chad, the JDA and the government of STP respectively.  The Company intends to continue to form relationships with other oil and gas companies with operational, technical and financial capabilities, to partner with the Company in leveraging its interests.  The Company currently has no other operations.

As of June 30, 2014, all the Company's exploration and production acreages were located outside the United States.  The Company's primary assets are agreements with Kenya, Chad, STP and the JDA which provide ERHC with rights to participate in exploration and production activities in Kenya, Chad, the EEZ and the JDZ in Africa.  This geographic area of interest is controlled by foreign governments that have historically experienced volatility of which is out of management's control. The Company's operations and its 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 that include financial, economic and labor conditions, political instability, risk of war, expropriation, renegotiation or modification of existing contracts, tax laws (including host-country import-export, excise and income taxes and United States taxes on foreign subsidiaries) and changes in the value of the U.S. dollar relative to the local currencies in which future oil and gas producing activities may be denominated.  Furthermore, changes in exchange rates may adversely affect the Company's future results of operations and financial condition.

Market risks relating to the Company's operations result primarily from changes in interest rates as well as credit risk concentrations.  The Company's interest expense is generally not sensitive to changes in the general level of interest rates in the United States, particularly because a substantial majority of its indebtedness is at fixed rates.

The Company holds no derivative financial or commodity instruments.

Item 4.

Controls and Procedures

The Company's  Chief Executive Officer and Principal Accounting Officer participated in an evaluation by management regarding the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of June 30, 2014.  Based on their participation in that evaluation, the Company's Chief Executive Officer and Principal Accounting Officer concluded that as of June 30, 2014, our disclosure controls and procedures are effective and ensure that the information required to be disclosed in the reports that ERHC files or submits under the Exchange Act, is accumulated and communicated to our management; including our principal executive and principal financial officers, to allow timely decisions regarding required disclosure under the Exchange Act. ERHC officers also concluded on June 30, 2014 that our disclosure controls and procedures are effective in ensuring that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms.

There was no change in the Company's internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the fiscal quarter ended June 30, 2014 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

LEGAL PROCEEDINGS

JDZ BLOCKS 5 AND 6

Arbitration and Lawsuit

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

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

Suspension of Proceedings on the Arbitration and Lawsuit

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

ROUTINE CLAIMS AND OTHER MATTERS

From time to time, ERHC may be subject to routine litigation, claims, or disputes in the ordinary course of business.  ERHC intends to defend these matters vigorously.  The Company cannot predict with certainty, however, the outcome or effect of any of the arbitration or litigation specifically described above or any other pending litigation or claims.

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Item 1A.

Risk Factors

Our operation and financial results are subject to various risks and uncertainties that could affect our business, financial condition, results of operations, and trading price of our common stock, including but not limited to, failing financial institutions.  Please refer to our annual report on Form 10-K for fiscal year 2013 for additional information concerning these and other uncertainties that could negatively impact the Company.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Submission of Matters to A Vote of Security Holders

None.

Item 5.

Other Information

None

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Item 6.

Exhibits

	Signatures
10.1*	Kenya Farm-out agreement, related to Block 11A, Kenya, dated October 7, 2013, by and between ERHC Energy Kenya Limited and CEPSA Kenya Limited (incorporated herein by reference to Exhibit 10.1 of Form 10-Q/A filed May 14, 2014)
31.1*	Rule 13a-14(a) Certification of the Chief Executive Officer
31.2*	Rule 13a-14(a) Certification of the Principal Accounting Officer
32.1*	Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Executive Officer
32.2*	Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Principal Accounting Officer
101.INS*	Instance Document
101.SCH*	XBRL Taxonomy Extension Schema Document
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document
	* Filed or furnished herewith.

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ERHC Energy Inc.

 

Name	Title	Date
/s/ Peter Ntephe	President	August 14, 2014
Peter Ntephe	Chief Executive Officer
/s/ Sylvan Odobulu	Vice President (Admin) and Controller	August 14, 2014
Sylvan Odobulu	Principal Accounting Officer

 

 

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