ERHC FORM 10-Q
UNITED STATES ECURITIES 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 March 31, 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.)
(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 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).
<TABLE>
<S> <C> <C>
Large Accelerated Filer |_| Accelerated Filer |X| Non-Accelerated Filer |_|
</TABLE>
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 May 2, 2006 was 710,912,226.
<PAGE>
TABLE OF CONTENTS
ERHC ENERGY INC.
<TABLE>
<CAPTION>
Part I. Financial Information Page
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 2006
and September 30, 2005 3
Consolidated Statements of Operations for the Three and Six Months Ended
March 31, 2006 and 2005 4
Consolidated Statements of Cash Flows for the Six Months Ended
March 31, 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 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
Item 4. Controls and Procedures 13
Part II. Other Information
Item 1. Legal Proceedings 16
Item 1A. Risk Factors
Item 2. Unregistered Sale of Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ERHC ENERGY INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
March 31, 2006 and September 30, 2005
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31, September 30,
2006 2005
------------------- ------------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 45,384,771 $ 988,490
Prepaid expenses and other 134,625 32,093
----------------- ----------------
Total current assets 45,519,396 1,020,583
DRSTP concession fee 2,839,500 5,679,000
Furniture and equipment, net 16,076 20,627
Deferred tax asset 960,000 -
------------------- ------------------
Total assets $ 49,334,972 $ 6,720,210
=================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 8,255,965 $ 195,823
Accounts payable and accrued liabilities, related party 2,175,125 2,064,675
Income taxes payable 3,300,000 -
Asset retirement obligation 485,000 485,000
Current portion of convertible debt 33,513 33,513
------------------- ------------------
Total current liabilities 14,249,603 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 710,912,226 71,091 71,091
Additional paid-in capital 89,589,309 83,584,956
Accumulated deficit (54,575,031 ) (79,407,711 )
Deferred compensation - (307,137 )
------------------- ------------------
Total shareholders' equity 35,085,369 3,941,199
------------------- ------------------
Total liabilities and shareholders' equity $ 49,334,972 $ 6,720,210
=================== ==================
</TABLE>
The accompanying notes are an integral part of these financial statements
3
<PAGE>
ERHC ENERGY INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended March 31, 2006 and 2005
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended March 31, Six Months Ended March 31,
---------------------------------------- ---------------------------------------
2006 2005 2006 2005
------------------- ------------------- ------------------ -------------------
<S> <C> <C> <C> <C>
General and administrative
Expenses $ 1,727,524 $ 980,821 $ 2,960,316 $ 1,654,056
------------------- ------------------- ------------------ -------------------
Other income and (expenses):
Interest income 27,399 7,703 31,668 7,703
Gain from settlement - 252,310 - 252,310
Interest expense (461 ) (100,551 ) (922 ) (798,809 )
Gain on sale of partial interest in
DRSTP concession 30,102,250 - 30,102,250 -
Loss on extinguishment of debt - - - (5,749,575 )
------------------- ------------------- ------------------ -------------------
Total other income
and expenses, net 30,129,188 159,462 30,132,996 (6,288,371 )
------------------- ------------------- ------------------ -------------------
Income (loss) before benefit
(provision) for income taxes 28,401,664 (821,359 ) 27,172,680 (7,942,427 )
------------------- ------------------- ------------------ -------------------
Benefit (provision) for income taxes
Current (3,300,000 ) - (3,300,000 ) -
Deferred 960,000 - 960,000 -
------------------- ------------------- ------------------ -------------------
Total benefit (provision)
for income taxes (2,340,000 ) - (2,340,000 ) -
------------------- ------------------- ------------------ -------------------
Net income (loss) $ 26,061,664 $ (821,359 ) $ 24,832,680 $ (7,942,427 )
=================== =================== ================== ===================
Net income (loss) per common share -
basic $ 0.04 $ (0.00 ) $ 0.03 $ (0.01 )
=================== =================== ================== ===================
diluted $ 0.04 $ (0.00 ) $ 0.03 $ (0.01 )
=================== =================== ================== ===================
Weighted average number of shares
of common shares outstanding -
basic 710,912,226 661,143,285 710,912,226 631,263,070
=================== =================== ================== ===================
diluted 716,288,841 661,143,285 713,462,341 631,263,070
=================== =================== ================== ===================
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE>
ERHC ENERGY INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended March 31, 2006 and 2005
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2006 2005
------------------ -------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income (loss) $ 24,832,680 $ (7,942,427 )
Adjustments to reconcile net income (loss) to net cash used by
operating activities
Depreciation expense 4,551 2,163
Deferred income taxes (960,000 ) -
Compensatory stock options 1,156,990 -
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 - 561,710
Loss on extinguishment of debt - 5,749,575
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (102,532 ) (46,720 )
Accounts payable and other accrued liabilities 256,392 156,171
Current tax liability 3,300,000 -
Accrued officers' salaries - (13,000 )
Accounts payable, and accrued liabilities
related party 110,450 81,236
Accrued interest - related party - 385,309
------------------ -------------------
Net cash used by operating activities (1,503,719 ) (904,790 )
------------------ -------------------
Cash Flows From Investing Activities
Release of restricted cash - 10
Proceeds from sale of partial interest in
DRSTP concession 45,900,000 -
Purchase of furniture and equipment - (25,955 )
------------------ -------------------
Net cash provided (used) by investing activities 45,900,000 (25,945 )
------------------ -------------------
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 44,396,281 1,900,965
Cash and cash equivalents, beginning of period 988,490 20,272
------------------ -------------------
Cash and cash equivalents, end of period $ 45,384,771 $ 1,921,237
================== ===================
</TABLE>
The accompanying notes are an integral part of these financial statements
5
<PAGE>
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
<PAGE>
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 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
<PAGE>
ERHC ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
Cost Cash Feltang Gain
Basis Proceeds Fees Loss
------------------- ------------------- ------------------ -------------------
<S> <C> <C> <C> <C> <C>
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
=================== =================== ================== ===================
</TABLE>
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. The Company recognized
consulting expense of $709,150 during the six months ended March 31, 2006
related to the fair value of these options. During the quarter ended March 31,
2006, two of the consultants elected to exercise 1,250,000 options, on a
cashless basis, for 950,140 shares and the Company recognized expense of
$508,500.
Note 6 - 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 mutual resignation of this employee in January 2006,
the 1,000,000 options due to vest August 1, 2006 have been cancelled.
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. No options were granted or exercised during the six months ended March
31, 2006.
8
<PAGE>
ERHC ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6 - Stock-Based Compensation, continued
<TABLE>
<CAPTION>
Three Months Six Months
Ended March 31, Ended March 31,
Description 2005 2005
------------------------------------------------------------------ --------------- ---------------
<S> <C> <C>
Net loss - as reported $ (821,359 ) $ (7,942,427 )
Plus: stock-based compensation expense determined
using the intrinsic value of the option at the
measurement date 497,960 561,710
Less: stock-based employee compensation determined
under fair value method for all awards granted to
employees (137,884 ) (245,363 )
----------------- -----------------
Net loss - pro forma $ (461,283 ) $ (7,626,080 )
================= =================
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 )
================= =================
</TABLE>
<TABLE>
<CAPTION>
Three Months Three Months
Ended March 31, Ended March 31,
Assumptions 2006 2006
------------------------------------------------------------------ --------------- ---------------
<S> <C> <C>
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%
</TABLE>
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 7 - 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.
9
<PAGE>
ERHC ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7 - Commitments and Contingencies , continued
Employment and Consulting Agreements
On January 23, 2006, Company entered into a finders fee agreement with under
which it agreed to pay a $3,000,000 cash finders 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. The Company has
accrued the remaining salary to be paid to Mr. Memon, less expenses related to
travel advances in the amount of $292,416.
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.
In January 2006, the Company entered into consulting agreements with two
individuals for each individual to receive payments of $15,000 per month for a
term of one year, cancelable upon 30 days written notice by either party.
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. One of the consultants elected to exercise his
750,000 options, on a cashless basis, in the quarter ended March 31, 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.
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.
10
<PAGE>
ERHC ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7 - Commitments and Contingencies , continued
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
See subsequent events for a description of proceedings by the U.S. District
Court of the Southern District of Texas, Houston Division.
Note 8 - 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 six months ended March 31,
2006 and 2005.
<TABLE>
<CAPTION>
2006 2005
------------------- ------------------
<S> <C> <C>
Non-cash operating and financing activities:
Stock issued in exchange for:
Accounts payable and accrued liabilities $ - $ 241,689
Prepaid expenses - 118,100
Accrued salaries - 36,400
Accrued interest - 84,852
Accrued interest, related party - 2,620,295
Non-cash investing and financing activities:
Stock to be issued for success fee 4,803,750 -
Warrants to be issued for success fee 5,154,500 -
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 - 587,368
</TABLE>
Note 9 - Subsequent Event
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 for
various records including, among other matters, documents related to
correspondence with foreign governmental officials or entities in Sao Tome and
Nigeria.
In April 2006, the Company entered into a consulting agreement with an
individual for payment of $15,000 per month for a term of one year, cancelable
upon 30 days written notice by either party.
11
<PAGE>
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 March 31, 2006 Compared with Three Months Ended March 31,
2005
During the three months ended March 31, 2006, the Company had net income of
$26,061,664, compared with a net loss of $821,359 for the three months ended
March 31, 2005. The primary reason for the $26,883,023 improvement in net income
for the three months ended March 31, 2006 is 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. Interest expense decreased by
$100,090 due to the conversion of substantially all debt to equity in the
quarter ended March 31, 2005. General and administrative expenses increased by
$746,703 for the three months ended March 31, 2006 as compared to the three
months ended March 31, 2005 primarily due to $616,195 in consulting charges in
the period for the fair value calculation of options issued to consultants.
During the quarter ended March 31, 2006, the Company generated $45,900,000 of
cash to support operations from the sale of participation interests in three
Blocks in the JDZ.
Six Months Ended March 31, 2006 Compared with Six Months Ended March 31, 2005
During the six months ended March 31, 2006, the Company had net income of
$24,832,680, compared with a net loss of $7,942,427 for the six months ended
March 31, 2005. The two primary reasons for the $32,775,107 improvement in net
income for the six months ended March 31, 2006 are: 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 six months ended
March 31, 2005 as the result of the issuance of shares in conjunction with the
Chrome debt restructuring. Interest expense decreased by $797,887 to the
conversion of substantially all debt to equity in the quarter ended March 31,
2005. General and administrative expenses increased by $1,306,260 for the six
months ended March 31, 2006 as compared to the six months ended March 31, 2005
primarily due to $616,195 in consulting charges in the period for the fair value
calculation of options issued to consultants and due to increased legal and
professional services related to the Company's negotiation of production sharing
contracts.
12
<PAGE>
Liquidity and Capital Resources
As of March 31, 2006, the Company had $45,384,771 in cash and cash equivalents
and positive working capital of $31,269,793. 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 March 31, 2006, is as
follows:
<TABLE>
<CAPTION>
---------------------------------------- -----------------------------------------------------------------------------
Payments due by period
---------------------------------------- -----------------------------------------------------------------------------
Total Less than 1 1 - 3 Years 3 - 5 Years More than 5
year Years
---------------------------------------- ---------------- ---------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Operating Leases $ 82,041 $ 42,804 $ 39,237 - -
---------------------------------------- ---------------- ---------------- ------------- -------------- --------------
Employment and consulting contracts 1,399,083 1,032,416 366,667 - -
for officers and directors
---------------------------------------- ---------------- ---------------- ------------- -------------- --------------
Total $1,481,124 $ 1,075,220 $ 405,904 - -
---------------------------------------- ---------------- ---------------- ------------- -------------- --------------
</TABLE>
Off-Balance Sheet Arrangements
At March 31, 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 March 31, 2006, the Company had short-term debt of $33,513 bearing interest
at 5.5% per year. The Company had other current liabilities of $14,216,090
(Including related party liabilities as follows: $112,313 owed to Chrome
Management, $218,311 due to Sir Emeka Offor, the Company's Chairman, $1,844,500
of stock-based compensation due to directors, and a liability of $292,416 due to
the Company's former CEO). Included in current liabilities is also a $3,000,000
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 March 31, 2006, the Company had accrued an income tax
obligation of $3,300,000 as a result of the net gain of the sale of
participation interests.
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.
13
<PAGE>
At March 31, 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 it 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 Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the Company's disclosure controls
and procedures as of the end of the 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)). The Company's Chief Executive Officer and Chief
Financial Officer have concluded that as a result of the material weaknesses, as
of the end of the period covered by this Quarterly Report on Form 10-Q, the
Company's disclosure controls and procedures were not effective.
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.
14
<PAGE>
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.
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 in
the first and second quarter of 2006, appointed:
|X| Additional independent directors
|X| Additional independent directors as members of the audit committee
|X| A financial expert as a director and as a member 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. The Company is also is the process of amending their Audit Committee
Charter to include the responsibilities of the financial expert and to ensure
independent directors fill all positions on the committee.
Accounting for Stock Issuances
The Company is implementing enhancements to its internal control over financial
reporting to provide reasonable assurance those errors and control deficiencies
in its accounting for stock issuances will not recur. These steps include the
engagement of independent financial reporting consultants for review of critical
accounting areas and disclosures and material non-standard transactions. 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.
15
<PAGE>
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.
16
<PAGE>
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 for
various records including, among other matters, documents related to
correspondence with foreign governmental officials or entities in Sao Tome and
Nigeria.
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. The
Company is opposing vigorously each of the claims discussed below and intends to
continue to do so unless an agreeable resolution may otherwise be secured with
regard to each such claim.
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 also may impair its business operations. If any of
the following risks actually occur, the Company's business could be harmed.
THE COMPANY HAS NO SOURCES OF REVENUE AND A HISTORY OF LOSSES.
The Company's business is at an early stage of development. The Company has not
generated any revenue since its entry into the oil and gas business and has
incurred significant operating losses. The Company has incurred net losses of
$11,270,478, $3,593,388, and $3,153,882 in fiscal years 2005, 2004 and 2003,
respectively. While the Company had net income of $26,061,664 for the second
quarter, equating to net income of $.04 per share during that period, this was a
one time gain from sale, and the Company expects to incur operating losses in
future periods.
THE COMPANY HAS A LIMITED OPERATING HISTORY IN THE OIL AND GAS BUSINESS.
The Company's operations to date have consisted solely of acquiring rights to
working interests in the JDZ and EEZ. The Company's future financial results
depend primarily on (1)) 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. Management cannot predict that the Company's future operations will be
profitable. In addition, the Company's operating results may vary significantly
during any financial period. These variations may be caused by significant
periods of time between discovery and development of oil or gas reserves, if
any, in commercial quantities.
THE COMPANY MAY NOT DISCOVER COMMERCIALLY PRODUCTIVE RESERVES IN THE JDZ OR EEZ.
The Company's future success depends on its ability to economically locate oil
and gas reserves in commercial quantities in the JDZ and EEZ. This is a region
in which no drilling operations have been conducted to date. There can be no
assurance that the Company's planned projects in the JDZ or EEZ will result in
significant, if any, reserves or that the Company will have future success in
drilling productive wells.
THE COMPANY'S NON-OPERATOR STATUS LIMITS ITS CONTROL OVER ITS OIL AND GAS
PROJECTS IN THE JDZ OR EEZ.
The Company will focus primarily on creating exploration opportunities and
forming relationships with oil and gas companies to develop those opportunities
in the JDZ or EEZ. As a result, the Company will have only a limited ability to
exercise control over a significant portion of a project's operations or the
associated costs of those operations in the JDZ or EEZ. The success of a future
project is dependent upon a number of factors that are outside the Company's
areas of control. These factors include:
17
<PAGE>
o the availability of future capital resources to the Company and the
other participants to be used for drilling wells;
o the approval of other participants for the drilling of wells on the
projects; and
o the economic conditions at the time of drilling, including the
prevailing and anticipated prices for oil and gas.
The Company's reliance on other project participants and its limited ability to
directly control future project costs could have a material adverse effect on
its future expected rates of return.
THE COMPANY'S SUCCESS DEPENDS ON ITS ABILITY TO EXPLOIT ITS LIMITED ASSETS.
The Company's only assets are rights to working interest in exploration acreage
in the JDZ and EEZ under agreements with the JDA and DRSTP. The Company's
operations have been limited to sustaining and managing its rights under these
agreements. The Company's success depends on its ability to exploit these
assets, of which there is no assurance that it will be successful.
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 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 March 31, 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
STATUS OF PENDING LEGAL MATTER
It is impossible to predict what effect the matter pending in the U.S. District
Court of the Southern District of Texas, Houston Division, will have on the
Company and the price of its common stock. This pending action will likely cause
uncertainty in the marketplace, and could have an adverse effect on the
Company's business partners, its business operations, and the market for its
common stock.
18
<PAGE>
ONE SHAREHOLDER CONTROLS APPROXIMATELY 43% OF THE COMPANY'S OUTSTANDING COMMON
STOCK.
Chrome Oil Services Ltd. beneficially owns approximately 43% of the outstanding
common stock. As a result, Chrome has the ability to substantially influence,
and may effectively control the outcome of corporate actions that require
stockholder approval, including the election of directors. This concentration of
ownership may have the effect of delaying or preventing a future change in
control of the Company.
THE COMPANY'S STOCK PRICE IS HIGHLY VOLATILE.
The Company's common stock is currently traded on the Over-the-Counter Bulletin
Board. The market price of the Company's common stock has experienced
fluctuations that are unrelated to its operating performance. The market price
of the common stock has been highly volatile over the last several years. The
Company can provide no assurance that its current price will be maintained.
THE COMPANY DOES NOT CURRENTLY PAY DIVIDENDS ON ITS COMMON STOCK AND DO NOT
ANTICIPATE DOING SO IN THE FUTURE.
The Company has paid no cash dividends on its common stock, and there is no
assurance that the Company will achieve sufficient earnings to pay cash
dividends on its common stock in the future. The Company intends to retain any
earnings to fund its operations. Therefore, the Company does not anticipate
paying any cash dividends on the common stock in the foreseeable future.
THE COMPANY'S STOCK IS CONSIDERED A "PENNY STOCK."
The SEC has adopted rules that regulate broker-dealer practices in connection
with transactions 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
EXHIBIT NO. IDENTIFICATION OF EXHIBIT
10.9* Employment Agreement with Walter Brandhuber
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
*Filed herein
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
following persons, in the capacities and on the dates indicated below, have
signed this report.
ERHC Energy, Inc.
<TABLE>
<CAPTION>
Name Title Date
<S> <C> <C>
/s/ Walter Brandhuber President & Chief Executive Officer May 19, 2006
---------------------
Walter Brandhuber
/s/ Franklin Ihekwoaba Chief Financial Officer May 19, 2006
----------------------
Franklin Ihekwoaba
</TABLE>
20
</TEXT>
</DOCUMENT>
News 
Market Data 
Discover 
