ERHC Energy Inc (ERHE)

[RUBY1100]

ERHC FORM 10-Q is out August 9, 2006


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549

(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, 2006

|_| 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.
(Exact name of registrant as specified 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 principal executive offices, including zip code.)

[phone]
(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 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_|

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large Accelerated Filer |_| Accelerated Filer |X| Non-Accelerated Filer |_|

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes |_| 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 common shares outstanding as of August 1, 2006 was 714,178,528.


--------------------------------------------------------------------------------

TABLE OF CONTENTS

ERHC ENERGY INC.


PART I. FINANCIAL INFORMATION PAGE

Item 1. Financial Statements

Consolidated Balance Sheets at June 30, 2006 and September 30, 2005 3

Consolidated Statements of Operations for the Three and Nine Months
Ended June 30, 2006 and 2005 4

Consolidated Statements of Cash Flows for the Nine Months Ended June
30, 2006 and 2005 5

Notes to the Consolidated Financial Statements 6

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14

Item 3. Quantitative and Qualitative Disclosures about Market Risk 16

Item 4. Controls and Procedures 16


PART II. OTHER INFORMATION

Item 1. Legal Proceedings 18

Item 1A. Risk Factors 18

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 20

Item 5. Other Information 20

Item 6. Exhibits and Reports on Form 8-K 21

Signatures 21




2

--------------------------------------------------------------------------------

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ERHC ENERGY INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2006 AND SEPTEMBER 30, 2005

--------------------------------------------------------------------------------

JUNE 30, SEPTEMBER 30,
2006 2005
------------ ------------

ASSETS
Current assets:

Cash $ 41,380,773 $ 988,490

Prepaid expenses and other 1,699,328 32,093
------------ ------------

Total current assets 43,080,101 1,020,583


DRSTP concession fee 2,839,500 5,679,000

Furniture and equipment, net 13,801 20,627

Deferred tax asset 960,000 --
------------ ------------

Total assets $ 46,893,402 $ 6,720,210
============ ============

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:

Accounts payable and accrued liabilities $ 6,711,669 $ 195,823

Accounts payable and accrued liabilities, related party 2,271,975 2,064,675

Income taxes payable 3,000,000 --

Asset retirement obligation 485,000 485,000

Current portion of convertible debt 33,513 33,513
------------ ------------

Total current liabilities 12,502,157 2,779,011
------------ ------------

Commitments and contingencies:

Shareholders' equity:
Preferred stock, par value $0.0001; authorized
10,000,000; none issued and outstanding -- --
Common stock, par value $0.0001; authorized 950,000,000
shares; issued and outstanding 714,178,528 and 710,912,226,
at June 30, 2006 and September 30, 2005, respectively 71,418 71,091

Additional paid-in capital 89,516,332 83,584,956
Accumulated deficit (55,196,505) (79,407,711)

Deferred compensation -- (307,137)
------------ ------------

Total shareholders' equity 34,391,245 3,941,199
------------ ------------

Total liabilities and shareholders' equity $ 46,893,402 $ 6,720,210
============ ============




The accompanying notes are an integral part of these financial statements

3

--------------------------------------------------------------------------------

ERHC ENERGY INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2006 AND 2005

--------------------------------------------------------------------------------

THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
----------------------------- -----------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
General and administrative
Expenses $ 1,459,282 $ 233,704 $ 4,419,599 $ 1,887,760
------------- ------------- ------------- -------------

Other income and (expenses):
Interest income 538,269 10,537 569,937 18,240
Gain from settlement -- -- -- 252,310
Interest expense (461) (461) (1,382) (799,270)
Gain on sale of partial interest in
DRSTP concession -- -- 30,102,250 --
Loss on extinguishment of debt -- -- -- (5,749,575)
------------- ------------- ------------- -------------

Total other income
and expenses, net 537,808 10,076 30,670,805 (6,278,295)
------------- ------------- ------------- -------------

Income (loss) before benefit
(provision) for income taxes (921,474) (223,628) 26,251,206 (8,166,055)
------------- ------------- ------------- -------------

Benefit (provision) for income taxes
Current 300,000 -- (3,000,000) --
Deferred -- -- 960,000 --
------------- ------------- ------------- -------------
Total benefit (provision)
for income taxes 300,000 -- (2,040,000) --
------------- ------------- ------------- -------------

Net income (loss) $ (621,474) $ (223,628) $ 24,211,206 $ (8,166,055)
============= ============= ============= =============

Net income (loss) per common share -
Basic $ (0.00) $ (0.00) $ 0.03 $ (0.01)
============= ============= ============= =============
Diluted $ (0.00) $ (0.00) $ 0.03 $ (0.01)
============= ============= ============= =============

Weighted average number of shares
of common shares outstanding -
Basic 712,835,526 710,781,072 711,553,326 657,769,071
============= ============= ============= =============
Diluted 712,835,526 710,781,072 718,351,364 657,769,071
============= ============= ============= =============




The accompanying notes are an integral part of these financial statements

4

--------------------------------------------------------------------------------

ERHC ENERGY INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED JUNE 30, 2006 AND 2005

--------------------------------------------------------------------------------

2006 2005
------------ ------------
Cash Flows From Operating Activities
Net income (loss) $ 24,211,206 $ (8,166,055)
Adjustments to reconcile net income (loss) to net cash used by
operating activities
Depreciation expense 6,826 4,401
Deferred income taxes (960,000) --
Compensatory stock options 1,084,340 --
Gain from settlement -- (252,310)
Gain on sale of partial interest in
DRSTP concession (30,102,250) --
Amortization of beneficial conversion feature
associated with convertible debt -- 413,503
Amortization of deferred compensation -- 280,987
Loss on extinguishment of debt -- 5,749,575
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (1,667,235) (25,549)
Accounts payable and other accrued liabilities (1,287,904) 161,961
Current tax liability 3,000,000 --
Accrued officers' salaries -- (53,000)
Accounts payable, and accrued liabilities
related party 207,300 89,077
Accrued interest - related party -- 385,769
------------ ------------

Net cash used by operating activities (5,507,717) (1,411,641)
------------ ------------

Cash Flows From Investing Activities

Release of restricted cash -- 3,026
Proceeds from sale of partial interest in
DRSTP concession 45,900,000 --
Purchase of furniture and equipment -- (27,303)
------------ ------------

Net cash provided (used) by investing activities 45,900,000 (24,277)
------------ ------------

Cash Flows From Financing Activities:
Proceeds from line of credit, related party -- 2,500,000
Proceeds from convertible debt, related party -- 402,100
Repayment of convertible debt, related party -- (70,400)
------------ ------------

Net cash provided by financing activities -- 2,831,700
------------ ------------

Net increase in cash and cash equivalents 40,392,283 1,395,782

Cash and cash equivalents, beginning of period 988,490 20,272
------------ ------------

Cash and cash equivalents, end of period $ 41,380,773 $ 1,416,054
============ ============




The accompanying notes are an integral part of these financial statements

5

--------------------------------------------------------------------------------

ERHC ENERGY INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

--------------------------------------------------------------------------------

NOTE 1 - 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 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 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, 2005.

GENERAL BUSINESS AND NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

ERHC Energy Inc. ("ERHC" or the "Company") is an independent oil and gas company. The Company was formed in 1986, as a Colorado corporation, and was engaged in a variety of businesses until 1996, when it began its current operations as an independent oil and gas company. The Company's goal is to maximize its value through exploration and exploitation of oil and gas reserves in the Gulf of Guinea offshore of central West Africa. The Company's current focus is to exploit its 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 has formed relationships with upstream oil and gas companies to assist the Company in exploiting its assets in the JDZ. The Company is currently exploring opportunities in other areas of the energy industry with emphasis in supply and trading.

Consolidated Financial Statements

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary after elimination of all significant inter-company accounts and transactions.

Use of Estimates

The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period for the quarters then ended. Actual results could differ significantly from those estimates.

Stock-Based Compensation

As more fully discussed below in Note 6, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 123R, Share-Based Payment effective October 1, 2005. The Company adopted the modified prospective transition method provided under SFAS No. 123R and consequently has not retroactively adjusted results for prior periods.

Reclassifications

During the year ended September 30, 2005, the Company corrected a 1,222,153 understatement in the number of shares of common stock outstanding that has consistently existed for many years. The shares were issued at a time when the stock had no significant value, accordingly, the correction of outstanding shares resulted in a $122 increase in common stock and a corresponding decrease in additional paid-in capital. All periods presented have been corrected to include these additional shares.

6

--------------------------------------------------------------------------------

ERHC ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

--------------------------------------------------------------------------------

NOTE 2 - GOING CONCERN

At September 30, 2005 the Company's registered independent public accountants included an explanatory paragraph in their audit report on the Company's financial statements. The primary reasons for the going concern paragraph related to recurring losses incurred by the Company and the fact that the Company's current liabilities exceed its current assets.

As described in Note 4 to the financial statements, during the quarter ended March 31, 2006, the Company received cash proceeds of $45,900,000 from the sale of participation interests in Blocks 2, 3 and 4 of the JDZ. Management believes that these proceeds will sustain the Company's operations for the foreseeable future and that they mitigate any going concern issues raised at September 30, 2005.

NOTE 3 - SAO TOME CONCESSION

In November 2005, ERHC Energy Inc. ("Company") entered into a participation agreement with Addax Petroleum (Nigeria Offshore 2) Limited ("Addax"), as subsequently amended, whereby the Company assigned to Addax a 33.3% participating interest in Block 4, leaving a 17.7% participating interest in Block 4 to the Company. In exchange, Addax paid the Company $1,350,000 on February 22, 2006, and an additional $16,650,000 ten days after the execution of a production-sharing contract for Block 4. Under the participation agreement ERHC will support Addax as operator, and Addax will pay all of the Company's future costs in respect of all petroleum operations in Block 4. Addax is entitled to the Company's share of cost oil until Addax recovers the Company's costs.

In February 2006, the Company entered into a participation agreement with Addax Petroleum Resources Nigeria Limited ("Addax Sub") whereby the Company assigned to Addax Sub a 15% participating interest in Block 3 of the JDZ, leaving a 10% participating interest in Block 3 to the Company. In exchange, Addax Sub paid the Company $500,000 on March 3, 2006 and an additional $7,000,000 ten days after the execution of a production-sharing contract for Block 3. Under this agreement, Addax Sub agreed to pay all of the Company's future costs in respect of petroleum operations in Block 3. Addax Sub is entitled to the Company's share of cost oil until Addax Sub recovers the Company's costs.

In March 2006, the Company entered into a participation agreement with Sinopec International Petroleum Exploration and Production Corporation Nigeria ("Sinopec"), and Addax Energy Nigeria Limited ("Addax Ltd."), whereby the Company assigned a 28.67% participating interest in Block 2 of the JDZ to Sinopec, and a 14.33% participating interest in Block 2 of the JDZ to Addax Ltd., leaving a 22% participating interest in Block 2 to the Company. In exchange, Sinopec paid the Company $13,600,000 ten days after execution of a production sharing contract for Block 2, and Addax Ltd. paid the Company $6,800,000 ten days after execution of a production sharing contract for Block
2. Under this agreement, ERHC will support Sinopec as operator, and Sinopec and Addax Ltd. will pay all of the Company's future costs in respect of petroleum operations in Block 2. Sinopec and Addax Ltd. are entitled to the Company's share of cost oil until they recover the Company's costs and Sinopec is to receive 6% interest on its future costs of (on costs up to $35,000,000) but only to the extent that those interest costs are covered by production.

NOTE 4 - DRSTP CONCESSION FEE

As described in Note 3, during the quarter ended March 31, 2006, the Company entered into production sharing agreements in Blocks 2, 3 and 4 under which they sold various participating interests for total cash proceeds of $45,900,000. The Company agreed to pay a $3,000,000 cash success fee ($1,500,000 was paid in March 2006 and the remaining $1,500,000 is included in accounts payable at June 30, 2006) to Feltang International Inc. ("Feltang"), a British Virgin Island company that was responsible for obtaining Sinopec's participation in Block 2. Under the agreement with Feltang, in addition to the cash payments, the Company also will issue 5,250,000 shares of common stock and warrants for 6,500,000 shares at $0.355 per share. The common stock was valued at $4,803,750 based on the quoted market value of the common stock on the date Sinopec signed the production sharing agreement. The warrants were valued at $5,154,500 based on a valuation using the Black-Scholes Option Pricing Model and the following assumptions; market price of $0.915, strike price of $0.355, volatility of 115%, interest rate of 4.42%, dividend yield of 0% and expected life of 4 years. Following is an analysis of the sale of the participating interests in blocks 2, 3 and 4.

7

--------------------------------------------------------------------------------

ERHC ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

--------------------------------------------------------------------------------

NOTE 4 - DRSTP CONCESSION FEE CONTINUED

COST CASH FELTANG GAIN
BASIS PROCEEDS FEES LOSS
----------- ----------- ----------- -----------

Block 2 $ 946,500 $20,400,000 $12,958,250 $ 6,495,250

Block 3 946,500 7,500,000 -- 6,553,500

Block 4 946,500 18,000,000 -- 17,053,500
----------- ----------- ----------- -----------

Total $ 2,839,500 $45,900,000 $12,958,250 $30,102,250
=========== =========== =========== ===========




Upon sale of the participation interests, the Company removed the entire cost of the related Blocks due to the uncertainty surrounding their unproved interests.

NOTE 5 - SHAREHOLDERS' EQUITY

Under three consulting agreements with the Company, 1,750,000 options were granted to consultants on December 31, 2005. These options have an exercise price of $0.20 per share with no expiration date. Prior to June 30, 2006, these consultants elected to exercise 1,750,000 options, on a cashless basis, for 1,339,029 shares of common stock. Expense of $1,084,340 was recognized related to the fair value of these options during the nine months ended June 30, 2006.

NOTE 6 - INCOME TAXES

At September 30, 2005 the Company had a consolidated net operating loss carry-forward ("NOL") of approximately $63.6 million expiring through 2025. The Company had a deferred tax asset of approximately $21.8 million resulting from this NOL. The loss carry forwards are subject to certain limitations under the Internal Revenue Code including Section 382 of the Tax Reform Act of 1986. During the nine months ended June 30, 2006, the Company recognized a significant gain on the sale of various participation interests (see Note 4), which utilized a substantial portion of the current net operating loss carry-forwards. The net operating loss carry-forward was also adjusted to remove losses limited under
Section 382.

The composition of deferred tax assets and the related tax effects at June 30, 2006 and September 30, 2005 are as follows:

JUNE 30, SEPTEMBER 30,
2006 2005
------------ ------------

Net operating losses $ 3,410,000 $ 21,629,493

Accrual for asset retirement 164,900 164,900

------------ ------------

Total deferred tax assets 3,574,900 21,794,393
Valuation allowance (2,614,900) (21,794,393)
------------ ------------

Net deferred tax asset $ 960,000 $ --
============ ============




The $960,000 deferred tax asset represents the minimum NOL carryback claim from losses in the next two future years against the year ended September 2006 taxable income should no income be produced in future years.

The difference between the income tax benefit (provision) in the accompanying statement of operations and the amount that would result if the U.S. federal statutory rate of 35% were applied to pre-tax income (loss) for the three months and nine months ended June 30, 2006 and 2005, is as follows:

8

--------------------------------------------------------------------------------

ERHC ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

--------------------------------------------------------------------------------

NOTE 6 - INCOME TAXES CONTINUED

THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Income tax benefit (provision) at
federal $ 322,516 $ 78,270 $ (9,187,922) $ 2,858,119
statutory rate
Gain on sale of assets -- -- (59,243) --
Change in valuation allowance -- (74,270) 19,179,493 (883,263)
Expiration and adjustment of NOL's -- -- (11,952,328) --
Loss on extinguishment of debt -- -- -- (1,954,856)
Other (22,516) (4,000) (20,000) (20,000)
------------ ------------ ------------ ------------
Income tax benefit (provision) $ 300,000 $ -- $ (2,040,000) $ --
============ ============ ============ ============




NOTE 7 - STOCK-BASED COMPENSATION

During the year ended September 30, 2004, the Company issued options to purchase 3,000,000 shares of common stock to an employee as part of his initial compensation package. These options have an adjusted exercise price of $0.20 per share, with 1,000,000 options vesting on September 1, 2004, August 1, 2005 and August 1, 2006. Due to the resignation of this employee in January 2006, the 1,000,000 options due to vest August 1, 2006 have been cancelled. In June 2006, this former employee elected to exercise 2,000,000 options on a cashless basis for 1,927,273 shares.

Effective October 1, 2005, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 123R, Share-Based Payment, as interpreted by SEC Staff Accounting Bulletin No. 107. Prior to October 1, 2005, the Company had accounted for stock options according to the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, and therefore no related compensation expense was recorded for awards granted with no intrinsic value. The Company adopted the modified prospective transition method provided for under SFAS No. 123R, and, consequently, has not retroactively adjusted results from prior periods. Stock awards outstanding under the Company's current plans have generally been granted at prices which are equal to the market value of the Company's stock on the date of grant, generally vest over one year and bear no expiration date. Effective October 1, 2005, the Company began recognizing compensation expense ratably over the vesting period, net of estimated forfeitures. Due to the mutual resignation of an employee in January 2006 and the cancellation of the non-vested 1,000,000 options, the previously recognized expense in the first fiscal quarter of 2006 of $101,618 has been reversed. The Company currently has no non-vested employee options.

THREE MONTHS NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
DESCRIPTION 2005 2005
-------------------------------------------------------- ----------- -----------
Net loss - as reported $ (223,628) $(8,166,055)

Plus: stock-based compensation expense determined
using the intrinsic value of the option at the
measurement date (280,724) 280,987

Less: stock-based employee compensation determined
under fair value method for all awards granted to
Employees (96,847) (342,210)
----------- -----------

Net loss - pro forma $ (601,199) $(8,227,278)
=========== ===========

Basic and diluted net loss per share - as reported $ (0.00) $ (0.01)
=========== ===========

Basic and diluted net loss per share - pro forma $ (0.00) $ (0.01)
=========== ===========




9

--------------------------------------------------------------------------------

ERHC ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
--------------------------------------------------------------------------------

NOTE 7 - STOCK-BASED COMPENSATION

THREE MONTHS NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
ASSUMPTIONS 2005 2005
------------------------------------------- --------------- ---------------

Expected life (years) 5.00 years 5.00 years

Interest rate 3.47% 3.47%

Dividend yield 0.00% 0.00%

Volatility (Based on historical experience) 88.40% 88.40%




The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in subjective input assumptions can materially affect the fair value estimate, the actual value realized at the time the options are exercised may differ from the estimated values computed above.

NOTE 8 - EARNINGS PER SHARE

Basic earnings per share is computed on the basis of the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed on the basis of the weighted average number of shares plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock warrants.

Components of basic and diluted earnings per share are as follows:

THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ -----------------------------
DESCRIPTION 2006 2005 2006 2005
--------------------------------------- ------------ ------------ ------------ ------------
Weighted average shares
outstanding 712,835,526 710,781,072 711,553,326 657,769,071

Dilutive effect of options and
warrants outstanding 9,647,713 7,203,010 6,798,038 5,318,642
------------ ------------ ------------ ------------

Common stock and common
stock equivalents 722,483,239 717,984,082 718,351,364 663,087,713

Excluded due to anti-dilutive effect (9,647,713) (7,203,010) -- (5,318,642)
------------ ------------ ------------ ------------

Diluted common stock and
common stock equivalents 712,835,526 710,781,072 718,351,364 657,769,071
============ ============ ============ ============




10

--------------------------------------------------------------------------------

ERHC ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

--------------------------------------------------------------------------------

NOTE 9 - COMMITMENTS AND CONTINGENCIES

Contingencies

From time to time, certain potential obligations are presented to the Company that may have originated during periods not under existing management's control. These alleged obligations are generally for goods and services for which the Company has no record. The Company actively investigates these claims as they arise. All known material obligations of the Company have been recorded and reflected in the financial statements, 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.

Employment and Consulting Agreements

On January 23, 2006, Company entered into a finder's fee agreement with Feltang International ("Feltang'), under which it agreed to pay a $3,000,000 cash finder's fee to Feltang, for obtaining Sinopec's participation in Block 2. Under the agreement with Feltang, in addition to the cash payments, the Company also will issue 5,250,000 shares of common stock and warrants for 6,500,000 shares at $0.355 per share. See Note 4.

From August 1, 2004 until January 20, 2006, Mr. Ali Memon was the Company's President and Chief Executive Officer. Mr. Memon had a three-year employment agreement that originally included a base salary of $150,000 per year. On January 25, 2005, the Board of Directors approved an increase in Mr. Memon's salary from $150,000 to $200,000 per year for the remaining term of the contract, beginning January 1, 2005, and expiring July 31, 2007.

On January 20, 2006, by mutual agreement with the Board of Directors, Ali Memon resigned as Director and Chief Executive Officer of the Company. Under Mr. Memon's employment agreement, the Company has expensed the remaining salary to be paid to Mr. Memon, less costs related to travel advances in the amount of $304,993. This amount will be paid out through the remainder of the contract term.

On January 21, 2006, the Board of Directors appointed Walter Brandhuber as Director and Chief Executive Officer. Mr. Brandhuber's employment agreement is for a period of 36 months and provides for a base salary of $200,000 per year, payable monthly. Further, the employment agreement provides incentive compensation based on Board approval and on attainment of performance targets as mutually agreed between the Board and Mr. Brandhuber. See subsequent event, Note 9.

From January 2006 the Company's CEO utilized the services of two consultants at the rate of $15,000 per month. From April 2006 the Company's CEO utilized the services of another consultant at the rate of $15,000 per month. With the resignation of the CEO on July 24, 2006, the services of these consultants are currently being evaluated.

Effective January 1, 2005, the Company entered into consulting agreements with two individuals, which require payment of cash and issuance of options for a total of 1,250,000 shares of common stock upon completion of a full year of service which was met on December 31, 2005. These options have an exercise price of $0.20 per share and will vest immediately upon issuance and 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. These consultants elected to exercise their 1,250,000 options, on a cashless basis, during the six months ended June 30, 2006 (see Note 5).

Effective January 1, 2005, the Company entered into a consulting agreement with an individual which requires payment of cash and the issuance of options for a total of 500,000 shares of common stock upon a full year of service which was met on December 31, 2005 (This agreement was signed September 1, 2005, but was effective at January 1, 2005). These options have an exercise price of $0.20 per share and will vest immediately upon issuance and will have no expiration date. Either party may terminate this consulting agreement with 30 days notice. The options issued under this consulting agreement include provisions for cashless exercise. In the quarter ended March 31, 2006, the consultant elected to exercise his options on a cashless basis (see Note 5). This agreement was terminated in April 2006.

11

--------------------------------------------------------------------------------

ERHC ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

--------------------------------------------------------------------------------

NOTE 9 - COMMITMENTS AND CONTINGENCIES, CONTINUED

In August 2005, the Company entered into an agreement with a consulting group to identify and introduce to the Company oil and gas acquisition opportunities in Nigeria. The Company is required to pay a base fee of $1,000 per month. In addition the Company shall pay a success fee of $75,000 per successful acquisition, as defined. The agreement has a term of one year but expires immediately upon the 30 day written notice of termination by either party, without penalty to either party. This agreement was terminated in the quarter ended March 31, 2006 without payment of the success fee.

In August 2005, the Company entered into an agreement with a consulting group to identify and introduce to the Company oil and gas acquisition interests in oil/mining leases granted by the government of the Federal Republic of Nigeria. The Company is required to pay a base fee of $1,000 per month. In addition the Company shall pay a success fee of $80,000 per successful acquisition, as defined. The agreement also provides for the payment of legal fees per successful transaction, as defined. The agreement has a term of one year but expires immediately upon the 30 day written notice of termination by either party, without penalty to either party. This agreement was terminated in the quarter ended March 31, 2006 without payment of the success fee.

Operating Lease

The Company leases office space at 5444 Westheimer Road, Houston, Texas. The lease for office space expires February 2008. The monthly base rent payment is $3,567 based on approximately 1,900 square feet of office space. Upon expiration of its current lease, the Company expects to lease the same space or comparable space in the normal course of business.

Legal Proceedings

On May 4, 2006, a search warrant issued by the U.S. District Court of the Southern District of Texas, Houston Division, was executed on the Company seeking various records including, among other matters, documents, if any, related to correspondence with foreign governmental officials or entities in Sao Tome and Nigeria.

With the guidance of the law firm of Akin Gump Strauss Hauer & Feld LLP, ERHC Energy continues to work with the U.S. Department of Justice in connection with the Department's investigation:

The Department of Justice agreed to ERHC's request to return to ERHC a complete copy set of all paper documents seized in the Government's May 4, 2006 search of ERHC's Houston office. ERHC has received a full copy set of these business documents.

ERHC filed suit in federal district court in Texas in June. The lawsuit sought to protect the company's attorney-client privileged documents and to allow ERHC counsel to determine the factual basis for the Justice Department's search warrant affidavit, which is currently under seal. Although the judge has now ordered that the affidavit remain under seal, his ruling requires the Justice Department to provide a neutral taint team to review all seized documents and to identify those that may be privileged. The ruling also provides the company with the right to challenge the Justice Department's privilege determinations in court.

The attorneys of Akin Gump Strauss Hauer & Feld LLP are also assisting in ERHC's response to a related U.S. Securities and Exchange Commission (SEC) subpoena issued on May 9, 2006. ERHC intends to comply fully with the SEC subpoena.

12

--------------------------------------------------------------------------------

ERHC ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

--------------------------------------------------------------------------------

NOTE 10 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Following is an analysis of non-cash operating and financing activities and non-cash investing and financing activities for the nine months ended June 30, 2006 and 2005.

2006 2005
----------- -----------
Non-cash operating and financing activities:
Stock issued in exchange for:
Accounts payable and accrued liabilities $ -- $ 301,132
Prepaid expenses -- 58,657
Accrued salaries -- 417,725

Accrued interest -- 84,850

Accrued interest, related party -- 2,620,295
Inducement to restructure convertible
debt and provide line of credit -- 5,749,575

Non-cash investing and financing activities:
Stock issued for conversion of non-related

party debt to equity -- 1,592,521
Beneficial conversion feature associated with

convertible debt -- 331,699
Exchange of convertible and non convertible

debt, related party -- 10,134,084
Stock issued to convert related party debt to
equity -- 12,634,084
Beneficial conversion feature repurchased -- 347,517
Repricing of options -- 165,000




NOTE 11 - SUBSEQUENT EVENT

Effective July 24, 2006, the company's Board of Directors accepted the resignation of Walter Brandhuber, chief executive officer and Franklin Ihekwoaba, chief financial officer. Effectively immediately, the Board of Directors has appointed Board Member Nicolae Luca, 46, as interim chief executive officer until a successor is named. Mr. Luca has served as a non-executive director of the company since February 2001.

The Company's Board of Directors has initiated an international recruitment search for a chief executive officer and a chief financial officer.

13

--------------------------------------------------------------------------------

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 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 its Form 10-K filing. The Company's historical results are not necessarily an indication of trends in operating results for any future period.

OVERVIEW

The Company's current focus is to exploit its only assets, which are rights to working interests in exploration acreage in the JDZ and the EEZ. The Company has entered into agreements with upstream oil and gas companies to jointly negotiate 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.

SALE OF PARTICIPATION INTERESTS

On November 17, 2005, the Company agreed to sell its 33.3% participating interest in Block 4 of the Joint Development Zone between Sao Tome & Principe and Nigeria ("JDZ") to Addax Petroleum (Nigeria Offshore 2) Limited for $18 million, leaving a 17.7% participating interest in Block 4 to the Company. This transaction was completed in February 2006.

On February 16, 2006, the Company sold its 15% participating interest in Block 3 of the JDZ to Addax Petroleum Resources Nigeria Limited for $7,500,000, leaving a 10% participating interest in Block 3 to the Company.

On March 2, 2006, the Company sold a 28.67% participating interest in Block 2 of the JDZ to Sinopec International Petroleum Exploration and Production Corporation Nigeria, and a 14.33% participating interest in Block 2 of the JDZ to Addax Energy Nigeria Limited for $13.6 and $6.8 million, respectively, leaving a 22% participating interest in Block 4 to the Company.

All of the sales proceeds were received by the Company during the quarter ending March 31, 2006, and such sale proceeds were accounted for as a $30,102,250 net gain from the sale of participation interest in the concession.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2006 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2005

During the three months ended June 30, 2006, the Company had a net loss of $621,474, compared with a net loss of $223,628 for the three months ended June 30, 2005. Interest income increased by $527,732 due to the significant cash balance maintained by the Company. General and administrative expenses increased $1,225,578 for the three months ended June 30, 2006 as compared to the three months ended June 30, 2005 for three primary reasons: 1) an increase of $637,720 in legal costs primarily related to fees incurred in the Justice Department investigation, 2) an increase of $280,724 for the accounting of employee stock options in fiscal 2005, and 3) increased travel and administrative expenses of doing business internationally.

14

--------------------------------------------------------------------------------

NINE MONTHS ENDED JUNE 30, 2006 COMPARED WITH NINE MONTHS ENDED JUNE 30, 2005

During the nine months ended June 30, 2006, the Company had net income of $24,211,206, compared with a net loss of $8,166,055 for the nine months ended June 30, 2005. The two primary reasons for the $32,377,261 improvement in net income for the nine months ended June 30, 2006 were: 1) a $30,102,250 net gain from the sale of participation interests in the three JDZ Blocks under production sharing contracts with various joint venture partners; and 2) a $5,749,575 non-cash loss on extinguishment of debt during the nine months ended June 30, 2005 as the result of the issuance of shares in conjunction with the Chrome debt restructuring. Interest expense decreased by $797,888 due to the conversion of substantially all debt to equity in the quarter ended March 31, 2005. General and administrative expenses increased $2,531,839 for the nine months ended June 30, 2006 as compared to the nine months ended June 30, 2005 primarily due to following: 1) approximately $1,023,000 related to the non-cash expense of recording consultant stock options; 2) approximately $889,000 in legal costs primarily related to fees incurred in the Justice Department investigation; 3) approximately $221,000 related to board of director compensation and travel expenses; and 4) increased travel and administrative expenses of doing business internationally.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2006, the Company had $41,380,773 in cash and cash equivalents and positive working capital of $30,577,944. Management believes that this cash position should support working capital needs for the next 12 months.

CONTRACTUAL OBLIGATIONS

A tabular disclosure of contractual obligations at June 30, 2006, is as follows:

-----------------------------------------------------------------------------------------------------------------
Payments due by period
-----------------------------------------------------------------------------------------------------------------
Total Less than 1 1 - 3 Years 3 - 5 Years More than 5
year Years
-----------------------------------------------------------------------------------------------------------------
Operating Leases $ 71,340 $ 42,804 $ 28,536 -- --
-----------------------------------------------------------------------------------------------------------------
Employment and consulting contracts
for officers and directors 688,161 663,161 25,000 -- --
-----------------------------------------------------------------------------------------------------------------
Total $ 759,501 $ 705,965 $ 53,536 -- --
-----------------------------------------------------------------------------------------------------------------




OFF-BALANCE SHEET ARRANGEMENTS

At June 30, 2006, the Company has no off-balance sheet arrangements that have or are likely to have a material current or future effect on its financial condition or results of operations.

DEBT FINANCING ARRANGEMENTS

At June 30, 2006, the Company had short-term debt of $33,513 bearing interest at 5.5% per year. The Company had other current liabilities of $12,502,157 (Including related party liabilities as follows: $162,313 owed to Chrome Management, $265,162 due to the Company's board of directors, $1,844,500 of stock-based compensation due to a director, and a liability of $225,000 due to the Company's former CEO). Included in current liabilities is also a $1,500,000 finders fee accrual due in cash to Feltang and a $4,803,750 liability to Feltang that will be satisfied upon issuance of 5,250,000 shares of common stock. Additionally, at June 30, 2006, the Company had accrued an income tax obligation of $3,000,000 as a result of the net gain of the sale of participation interests.

15

--------------------------------------------------------------------------------

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's first strategy is to exploit its only assets, which are rights to working interests in the JDZ and EEZ under agreements with the JDA and DRSTP. To achieve this strategy, the Company has formed relationships with other oil and gas companies with technical and financial capabilities to assist the Company in leveraging its interests in the JDZ. The Company also 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. The Company has succeeded in perfecting its interests in the 2001 Agreement with DRSTP or the 2003 Option Agreement and the Company is positioned to obtain sufficient financial and other resources to develop its interests.

At June 30, 2006, all of the Company's operations were located outside the United States. The Company's only assets are agreements with DRSTP and the JDA, which provide ERHC with rights to participate in exploration and production activities in the Gulf of Guinea off the coast of central West Africa. The governments that control these areas of geographic interest have historically experienced volatility, which is out of management's control, and the Company's ability to exploit its interests in the agreements in this area may be impacted by this circumstance. Furthermore, the future success of the Company's international operations may be adversely affected by risks associated with international activities, including economic and labor conditions, political instability, risk of war, expropriation, renegotiation or modification of existing contracts, tax laws (including host-country import-export, excise and income taxes and United States taxes on foreign subsidiaries) etc., may adversely affect the Company's future results of operations and financial condition.

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

The Company holds no derivative financial or commodity instruments, nor does it engage in any foreign currency denominated transactions.

ITEM 4. CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to management, including the Company's Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company's management, with participation of the Company's acting Chief Executive Officer and acting Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the quarter covered by this Quarterly Report on Form 10-Q. As described below under Management's Report on Internal Control Over Financial Reporting, the Company has identified material weaknesses in the Company's internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)).

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. The Company's internal control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of the Company's internal control over financial reporting as of September 30, 2005. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.

Based on our assessment and those criteria as of September 30, 2005, management concluded that the Company did not maintain effective internal control over financial reporting as of as a result of material weaknesses in (a) internal controls surrounding corporate governance, and (b) internal controls surrounding the accounting for common stock issuances.

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

The operations and activities of this company have essentially been focused and limited to (1) continuing efforts to secure its working rights in the JDZ and EEZ; (2) funding the associated contractual obligations related to securing its rights )primarily legal and technical support); (3) funding a limited office staff consisting of the CEO, the CFO and an administrative manager and associated rental obligations. With the exception of (1) above, these were no operational activities that required the institution of complex internal controls; however, but an appropriate level of internal controls were necessary to conform to rules and regulations to which the Company is subject.

The Company has now perfected its interests in the JDZ and is poised for full operations. Accordingly, the Company has made changes to its staff to add the skills necessary to achieve full operations.

16

--------------------------------------------------------------------------------

INTERNAL CONTROLS SURROUNDING CORPORATE GOVERNANCE:

As of September 30, 2005, the principal factors contributing to the material weakness in corporate governance were as follows:

|X| Inadequate number of independent directors. |X| Lack of independent audit committee. |X| Lack of audit committee financial expert.

If these weaknesses were not addressed, they could result in material misstatements of annual or interim financial statements that might not be detected, corrected or disclosed in a timely manner, or at all.

Following the recognition of the above material weaknesses above, the Company did the following in the first and second quarter of 2006:

|X| Appointed an additional independent director |X| Reconstituted the audit committee so that it was made up solely of independent directors
|X| Appointed a financial expert as a director and as head of the audit committee

INTERNAL CONTROLS SURROUNDING THE ACCOUNTING FOR TRANSACTIONS INVOLVING COMMON STOCK:

The principal factor contributing to the material weakness in the accounting for issuances of shares of common stock is based on:

|X| The existence of differences in the number of shares of common stock outstanding as reflected in the Company's accounting records and prior financial reports and the number reported by the Company's stock transfer agent that resulted in a change in previously issued financial statements at September 30, 2005.
|X| An error in accounting for conversion of debt to equity that occurred in fiscal 2005 and resulted in a $347,517 audit adjustment at September 30, 2005.

The Company's independent registered public accounting firm has audited management's assessment of the effectiveness of the Company's internal control over financial reporting as of September 30, 2005, as stated in their report which appears on page F-2 of the Company's September 30, 2005 Form 10-K under the heading, Report of Independent Registered Public Accounting Firm.

REMEDIATION PLANS FOR MATERIAL WEAKNESSES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

CORPORATE GOVERNANCE

The Company has retained an executive recruiting firm to aid them in a search of an independent financial expert to chair the audit committee. That effort was successfully completed in the quarter ended March 31, 2006, with an independent financial expert added to the Board and being appointed chair of the audit committee. Simultaneously, the Company reconstituted its audit committee so that it was made up entirely of independent directors (including the financial expert who was appointed the chair of the committee). The Company is also is the process of amending their Audit Committee Charter to strengthen the Committee's oversight function.

ACCOUNTING FOR STOCK ISSUANCES

The Company is implementing enhancements to its internal control over financial reporting to provide reasonable assurance those errors and control deficiencies in its accounting for stock issuances will not recur. These steps include the engagement of independent financial reporting consultants for review of critical accounting areas and disclosures and material non-standard transactions. Until these changes are completed, weaknesses will continue to exist. Management presently anticipates that the changes necessary to remediate these weaknesses will be in place by the conclusion of the 2006 fiscal year.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

Except as otherwise discussed herein, there have been no changes in our internal control over financial reporting during the most recently completed fiscal quarter that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

17

--------------------------------------------------------------------------------

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On May 4, 2006, a search warrant issued by the U.S. District Court of the Southern District of Texas, Houston Division, was executed on the Company seeking various records including, among other matters, documents, if any, related to correspondence with foreign governmental officials or entities in Sao Tome and Nigeria.

With the guidance of the law firm of Akin Gump Strauss Hauer & Feld LLP, ERHC Energy continues to work with the U.S. Department of Justice in connection with the Department's investigation:

The Department of Justice agreed to ERHC's request to return to ERHC a complete copy set of all paper documents seized in the Government's May 4, 2006 search of ERHC's Houston office. ERHC has received a full copy set of these business documents.

ERHC filed suit in federal district court in Texas in June. The lawsuit sought to protect the company's attorney-client privileged documents and to allow ERHC counsel to determine the factual basis for the Justice Department's search warrant affidavit, which is currently under seal. Although the judge has now ordered that the affidavit remain under seal, his ruling requires the Justice Department to provide a neutral taint team to review all seized documents and to identify those that may be privileged. The ruling also provides the company with the right to challenge the Justice Department's privilege determinations in court.

The attorneys of Akin Gump Strauss Hauer & Feld LLP are also assisting in ERHC's response to a related U.S. Securities and Exchange Commission (SEC) subpoena issued on May 9, 2006. ERHC intends to comply fully with the SEC subpoena.

Between February and April, 2006, Lakeshore Capital Limited ("Lakeshore") issued written demands to ERHC requesting the issuance of 4,500,000 shares of ERHC common stock and a four year warrant to purchase 1,500,000 shares of ERHC common stock at an exercise price per share of $0.20, which Lakeshore contends is owed for contractual services previously rendered. ERHC has disputed the claim, believes any such claim lacks merit, and intends to vigorously defend any further legal recourse that Lakeshore may pursue. No litigation or arbitration proceeding has been initiated as of the date of this report.

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.

ITEM 1A. RISK FACTORS

You should carefully consider the risks described below before making any investment decision related to the Company's securities. The risks and uncertainties described below are not the only ones facing the Company. Additional risks and uncertainties not presently known or that the Company currently deems immaterial may also impair the Company's business.

THE COMPANY HAS HAD A HISTORY OF LOSSES.

The Company's business is at an early stage of development. Other than in the first quarter of 2006, the Company has not generated any revenue since its entry into the oil and gas business. The Company has incurred net losses of $11,270,478, $3,593,388, and $3,153,882 in fiscal years 2005, 2004 and 2003, respectively. While the Company had net income of $24,211,206 for the nine months ending June 30, 2006, equating to net income of $0.03 per share during that period, this was a one time gain.

THE COMPANY MAY NOT DISCOVER COMMERCIALLY PRODUCTIVE RESERVES IN THE JDZ OR EEZ.

The Company's operations to date have consisted solely of acquiring rights to working interests in the JDZ and EEZ. The Company's future financial results depend primarily on (1)) the ability of its partners to fund significant financial commitments in the production sharing contracts; (2) its ability to discover commercial quantities of oil and gas; and (3) the market price for oil and gas. In addition, the Company's operating results may vary significantly during any financial period. These variations may be caused by significant periods of time between discovery and development of oil or gas reserves, if any, in commercial quantities. There can be no assurance that the Company's planned projects in the JDZ or EEZ will result in significant, if any, reserves or that the Company will have future success in drilling productive wells

18

--------------------------------------------------------------------------------

THE COMPANY'S NON-OPERATOR STATUS LIMITS ITS CONTROL OVER ITS OIL AND GAS PROJECTS IN THE JDZ OR EEZ.

The Company will focus primarily on creating exploration opportunities and forming relationships with oil and gas companies to develop those opportunities in the JDZ or EEZ. As a result, the Company will have only a limited ability to exercise control over a significant portion of a project's operations or the associated costs of those operations in the JDZ or EEZ. The success of a future project is dependent upon a number of factors that are outside the Company's areas of control. These factors include:

o the availability of future capital resources to the Company and the other participants to be used for drilling wells;
o the approval of other participants for the drilling of wells on the projects; and
o the economic conditions at the time of drilling, including the prevailing and anticipated prices for oil and gas.

The Company's reliance on other project participants and its limited ability to directly control future project costs could have a material adverse effect on its future expected rates of return.

THE COMPANY'S COMPETITION INCLUDES OIL AND GAS CONGLOMERATES THAT HAVE SIGNIFICANT ADVANTAGES OVER IT.

The oil and gas industry is highly competitive. Many companies and individuals are engaged in exploring for crude oil and natural gas and acquiring crude oil and natural gas properties, resulting in a high degree of competition for desirable exploratory and producing properties. The companies with which the Company competes include conglomerates that are much larger and have greater financial resources than the Company.

VARIOUS FACTORS BEYOND THE COMPANY'S CONTROL WILL AFFECT PRICES OF OIL AND GAS.

The availability of a ready market for the Company's future crude oil and natural gas production depends on numerous factors beyond its control, including the level of consumer demand, the extent of worldwide crude oil and natural gas production, the costs and availability of alternative fuels, the costs and proximity of transportation facilities, regulation by authorities and the costs of complying with applicable environmental regulations.

THE COMPANY'S OPERATIONS ARE LOCATED OUTSIDE OF THE UNITED STATES WHICH SUBJECTS IT TO RISKS ASSOCIATED WITH INTERNATIONAL ACTIVITIES.

At June 30, 2006, all of the Company's operations were located outside the United States. The Company's only assets are agreements with DRSTP and the JDA, which provide ERHC with rights to participate in exploration and production activities in the Gulf of Guinea off the coast of central West Africa. This geographic area of interest is controlled by foreign governments that have historically experienced volatility, which is out of management's control. The Company's ability to exploit its interests in the agreements in this area may be impacted by this circumstance.

The future success of the Company's international operations may also be adversely affected by risks associated with international activities, including economic and labor conditions, political instability, risk of war, expropriation, renegotiation or modification of existing contracts, tax laws (including host-country import-export, excise and income taxes and United States taxes on foreign subsidiaries) and changes in the value of the U.S. dollar versus the local currencies in which future oil and gas producing activities may be denominated. As well, changes in exchange rates may adversely affect the Company's future results of operations and financial condition.

THE COMPANY'S RESULTS OF OPERATIONS ARE SUSCEPTIBLE TO GENERAL ECONOMIC CONDITIONS.

The Company's revenues and results of operations will be subject to fluctuations based upon the general economic conditions both in the United States and internationally. If there were to be a general economic downturn or a recession in the oil and gas industry, the Company's future revenues and the value of its oil and natural gas exploration concession could be materially adversely affected. If there were to be a general economic downturn or a recession in the oil and gas industry, the Company's ability to exploit its assets in the JDZ and EEZ could be materially adversely affected

19

--------------------------------------------------------------------------------

ONE SHAREHOLDER CONTROLS APPROXIMATELY 43% OF THE COMPANY'S OUTSTANDING COMMON STOCK.

Chrome Oil Services Ltd. beneficially owns approximately 43% of the outstanding common stock. As a result, Chrome has the ability to substantially influence, and may effectively control the outcome of corporate actions that require stockholder approval, including the election of directors. This concentration of ownership may have the effect of delaying or preventing a future change in control of the Company.

THE COMPANY'S STOCK PRICE IS HIGHLY VOLATILE.

The Company's common stock is currently traded on the Over-the-Counter Bulletin Board. The market price of the Company's common stock has experienced fluctuations that are unrelated to its operating performance. The market price of the common stock has been highly volatile over the last several years. The Company can provide no assurance that its current price will be maintained.

THE COMPANY DOES NOT CURRENTLY PAY DIVIDENDS ON ITS COMMON STOCK AND DOES NOT ANTICIPATE DOING SO IN THE FUTURE.

The Company has paid no cash dividends on its common stock, and there is no assurance that the Company will achieve sufficient earnings to pay cash dividends on its common stock in the future. The Company intends to retain any earnings to fund its operations. Therefore, the Company does not anticipate paying any cash dividends on the common stock in the foreseeable future.

THE COMPANY'S STOCK IS CONSIDERED A "PENNY STOCK."

The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in "penny stocks". Penny stocks generally are equity securities with a share price of less than $5.00. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document prepared by the SEC that provides information about penny stocks and the nature and level of risks in the penny stock market. These disclosure requirements may have the effect of reducing the level of trading activity in any secondary market for a stock that becomes subject to the penny stock rules. The Company's common stock may be subject to the penny stock rules, and accordingly, investors in the common stock may find it difficult to sell their shares in the future, if at all.

ITEM 2. UNREGISTERED SALE OF 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

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

EXHIBITS

31.1* Certification Pursuant to 18 U.S.C Section 7241, as adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002

31.2* Certification Pursuant to 18 U.S.C Section 7241, 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




20

--------------------------------------------------------------------------------

REPORTS ON FORM 8-K

On August 1, 2006 the Company issued a letter to shareholders.

On July 24, 2006 the Company announced the departure of directors or principal officers and the appointment of new principal officers.

On June 29, 2006, the Company issued a press release disclosing a receipt of a subpoena from the Securities and Exchange Commission.

On May 4, 2006, the Company was the subject of a search warrant issued by the U.S. District Court of the Southern District of Texas, Houston Division, for various records including, among other matters, documents related to correspondence with foreign governmental officials or entities in Sao Tome and Nigeria.

Pursuant to the requirements of the Securities Exchange Act of 1934, the following persons, in the capacities and on the dates indicated below, have signed this report.

ERHC Energy, Inc.

Name Title Date
------------------ ------------------------------------ ---------------

/s/ Nicolae Luca Acting Chief Executive Officer/ August 9, 2006
------------------ Chief Financial Officer
Nicolae Luca

/s/ Sylvan Odobulu Controller August 9, 2006
------------------
Sylvan Odobulu




21

--------------------------------------------------------------------------------


EXHIBIT 31.1

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 7241)

I, Nicolae Luca, certify that:

1. I have reviewed this quarterly report on Form 10-Q of ERHC Energy Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;

5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting, which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

By: /s/ Nicolae Luca August 9, 2006
-------------------------------------------
Nicolae Luca
Acting Chief Executive Officer/Chief Financial Officer





--------------------------------------------------------------------------------


EXHIBIT 31.2

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 7241)

I, Sylvan Odobulu, certify that:

1. I have reviewed this quarterly report on Form 10-Q of ERHC Energy Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;

5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting, which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

By: /s/ Sylvan Odobulu August 9, 2006
------------------------------------
Sylvan Odobulu
Controller





--------------------------------------------------------------------------------


EXHIBIT 32.1

CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350) In connection with the accompanying Quarterly Report of ERHC Energy Inc. (the "Company") on Form 10-Q for the period ended June 30, 2006 (the "Report"), I, Nicolae Luca, Director and Acting Chief Executive Officer of the Company, hereby certify that to my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

By: /s/ Nicolae Luca August 9, 2006
-------------------------------------------
Nicolae Luca
Acting Chief Executive Officer/Chief Financial Officer





--------------------------------------------------------------------------------


EXHIBIT 32.2

CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350) In connection with the accompanying Quarterly Report of ERHC Energy Inc. (the "Company") on Form 10-Q for the period ended June 30, 2006 (the "Report"), I, Sylvan Odobulu, Acting Chief Financial Officer of the Company, hereby certify that to my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

By: /s/ Sylvan Odobulu August 9, 2006
------------------------------------
Sylvan Odobulu
Controller