All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under instructions or are inapplicable and therefore have been omitted.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements
The accompanying notes are an integral part of these consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended September 30, 2016 and 2015
Note 1 – Summary of Significant Accounting Policies
General Business and Nature of Operations
ERHC Energy Inc. ("ERHC", the “Company”) is an independent oil and gas company formed in 1986, as a Colorado corporation. The Company’s current focus is to exploit its primary assets, which are rights to working interests in exploration acreage in the Republic of Kenya (“Kenya”), in the Republic of Chad ("Chad"), in the Joint Development Zone (“JDZ”) between the Democratic Republic of Sao Tome and Principe (“DRSTP”), in the Federal Republic of Nigeria (“FRN”) and in the exclusive waters of Sao Tome (the “Exclusive Economic Zone” or “EEZ”). The Company has formed relationships with upstream oil and gas companies to assist the Company in exploiting its assets in the JDZ as further described in Note 6.
ERHC is currently acquiring oil and gas properties in Texas. These US acquisitions are being carried on by and in the name of NewStar Oil& Gas Company, Inc., a wholly owned subsidiary of ERHC (“NewStar”). NewStar is incorporated under the laws of State of Texas. The focus of all acquisitions by Newstar will be producing or near-producing properties with significant upside potential.
Principles of Consolidation
The consolidated financial statements include the accounts of ERHC and its wholly owned subsidiaries, after elimination of all significant inter-company accounts and transactions.
Use of Estimates
The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period for the years then ended. Actual results could differ significantly from those estimates.
Concentration of Risks
ERHC primarily maintains its finances with seven financial institutions. From time to time the amount on deposit in one or all of these institutions may exceed federal insurance limits. The balances are maintained in demand accounts to minimize risk.
ERHC’s focus is to exploit its assets which are agreements with the Government of Kenya concerning oil and gas exploration in Kenya, with the Government of Chad concerning oil and gas exploration in Chad, with the DRSTP concerning oil and gas exploration in EEZ and with the JDA concerning oil and gas exploration in the JDZ. In the past, ERHC has formed relationships with Sinopec International Petroleum Exploration and Production Corporation Nigeria (“Sinopec”), and Addax Energy Nigeria Limited (“Addax Ltd.”) to assist ERHC in leveraging its interests in the JDZ. ERHC currently has no other operations.
Going Concern
The accompanying financial statements have been prepared on the basis that the Company will continue as a going concern which contemplates the realization of assets and the satisfaction of liabilities in the ordinary and usual course of business. As of September 30, 2016, the Company has a working capital deficit and negative cash flows from operating activities. The Company also has significant tax arrears which resulted from a deduction disallowance made by an IRS audit of ERHC’s 2006 return, which audit lasted nearly seven years and has been previously disclosed. There is an outstanding IRS lien imposed on ERHC in Harris County, Texas in consequence. Furthermore, the Company is in significant arrears of cash calls relating to the company’s proportionate share of drilling costs (beyond operator-carried expenses) on the Tarach-1 well in Kenya Block 11A. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent on raising additional capital to fund ongoing exploration projects and ultimately on attaining future profitable operations. The Company is continuing with its plan to further seek new opportunity for farm-out its assets in Kenya, Chad and
the Săo Tomé and Príncipe Exclusive Economic Zone. Management believes that the Company’s current operating strategy will provide the opportunity for the Company to continue as a going concern as long as the Company continues to obtain additional financin
g; however there is no assurance that this will occur. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The Company has restated its previously issued consolidated financial statements for the years ended September 30, 2015 and 2014 to reflect emergent developments related to income tax following the completion of an Internal Revenue Service tax audit of the Company’s 2006 tax return.
This restatement is necessitated by the Internal Revenue Service disallowing certain deductions on ERHC’s 2006 tax return. The disallowance resulted from stock based compensation expense that the Company had recognized as a deductible expense in its 2006 tax return. The disallowance was the outcome of an Internal Revenue Service audit of ERHC’s 2006 return, which audit lasted nearly seven years and has been previously disclosed. As such, the consolidated financial statements for the years ended September 30, 2015 and 2014 have been restated to properly reflect the tax liabilities that should have been recorded in 2006.
Cash Equivalents
ERHC considers all highly liquid short-term investments with an original maturity of three months or less, when purchased, to be cash equivalents.
Investment in Oando Energy Resources (OER)
The Company's investments in common stock and warrants are carried at market value. Both stocks and warrants are accounted for as available for sale securities, and changes in their fair value are recognized in other comprehensive income (loss).
Furniture, Fixtures and Equipment
Furniture, fixtures and equipment are stated at cost and include expenditures for renewals and improvements and capitalized interest. Maintenance and repairs are charged to current operations. When property is retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the respective accounts, and any gain or loss on disposition is included in income. Depreciation is provided principally on the straight-line method over the estimated service lives of the assets. In general, office furniture is depreciated over 7 years, office equipment over 5 years and computer equipment over 3 years.
Successful Efforts
ERHC uses the successful efforts method of accounting for oil and gas producing activities. Under this method, acquisition costs for proved and unproved properties are capitalized when incurred. Exploration costs, including geological and geophysical costs, the costs of carrying and retaining unproved properties and exploratory dry hole drilling costs, are expensed. Development costs, including the costs to drill and equip development wells and successful exploratory drilling costs to locate proved reserves are capitalized. Exploratory drilling costs are capitalized when incurred pending the determination of whether a well has found proved reserves. A determination of whether a well has found proved reserves is made after drilling is completed. The determination is based on a process that relies on interpretations of available geologic, geophysics, and engineering data. If a well is determined to be successful, the capitalized drilling costs will be reclassified as part of the cost of the well. If a well is determined to be unsuccessful, the capitalized drilling costs will be charged to expense in the period the determination is made. If an exploratory well requires a major capital expenditure before production can begin, the cost of drilling the exploratory well will continue to be carried as an asset pending determination of whether proved reserves have been found only as long as: i) the well has found a sufficient quantity of reserves to justify its completion as a producing well if the required capital expenditure is made and ii) drilling of the additional exploratory wells is under way or firmly planned for the near future. If drilling in the area is not under way or firmly planned, or if the well has not found a commercially producible quantity of reserves, the exploratory well is assumed to be impaired, and its costs are charged to expense.
In the absence of a determination as to whether the reserves that have been found can be classified as proved, the costs of drilling such an exploratory well is not carried as an asset for more than one year following completion of drilling. If, after that year has passed, a determination that proved reserves exist cannot be made, the well is assumed to be impaired, and its costs are charged to expense. Its costs can, however, continue to be capitalized if sufficient quantities of reserves are discovered in the well to justify its completion as a producing well and sufficient progress is made in assessing the reserves and the well’s economic and operating feasibility.
The impairment of unamortized capital costs is measured at a lease level and is reduced to fair value if it is determined that the sum of expected future net cash flows is less than the net book value. ERHC determines if impairment has occurred through either adverse changes or as a result of the annual review of all fields.
Development costs of proved oil and gas properties, including estimated dismantlement, restoration and abandonment costs and acquisition costs, are depreciated and depleted on a field basis by the units-of-production method using proved developed and proved reserves, respectively. The costs of unproved oil and gas properties are generally combined and impaired over a period that is based on the average holding period for such properties and the Company’s experience of successful drilling.
Impairment of Long-lived Assets
ERHC evaluates the recoverability of long-lived assets when events and circumstances indicate that such assets might be impaired. ERHC determines impairment by comparing the undiscounted future cash flows estimated to be generated by these assets to their respective carrying amounts. Impairments are charged to operations in the period to which events and circumstances indicate that such assets might be impaired. ERHC has evaluated its investments located in Republic Kenya, Republic of Chad and in its DRSTP concession fee in light of its 2003 Option Agreement (see Note 6 and there have been no events or circumstances that would indicate that such assets might be impaired).
Income Taxes
Income taxes are accounted for under the assets and liability method. Under this method, the deferred tax assets and liabilities are estimated based upon the difference between the financial statement and tax bases of assets and liabilities using tax rates in effect for the year in which the Company expects the differences to affect taxable income. The tax consequences of most events recognized in the current year’s financial statements are included in determining income taxes currently payable. However, because tax laws and financial accounting standards differ in their recognition and measurement of assets, liabilities, equity, revenues, expenses, gains and losses, differences arise between the amount of taxable income and pretax financial income for a year and between the tax bases of assets or liabilities and their reported amounts in the financial statements. Because the Company assumes that the reported amounts of assets and liabilities will be recovered and settled, respectively, a difference between the tax basis of an asset or a liability and its reported amount in the balance sheet will result in a taxable or a deductible amount in some future years when the related liabilities are settled or the reported amounts of the assets are recovered, which gives rise to a deferred tax asset. The Company must then assess the likelihood that the deferred tax assets will be recovered from future taxable income and to the extent the Company believes that recovery is not likely, the Company must establish a valuation allowance.
The Company estimates the provision for income taxes based on income before income taxes for each tax jurisdiction in which the Company has established operations. The Company does not provide incremental U.S. income taxes on un-remitted foreign earnings taxed at rates less than the U.S. tax rates as such earnings are considered permanently invested.
The Company follows the FASB guidance on accounting for uncertainty in income taxes which provides a financial statement recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. Under this guidance, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The guidance also extends to de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and income tax disclosures.
Net Loss Per Share
Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted loss per share is computed by dividing net loss by the weighted average number of shares outstanding, after giving effect to potentially dilutive common share equivalents outstanding during the period. Potentially dilutive common share equivalents are not included in the computation of diluted loss per share if they are anti-dilutive. Diluted loss per common share is the same as basic for all periods presented because the effect of potentially dilutive common shares arising from outstanding stock warrants and options was anti-dilutive. For the years ended September 30, 2016 and 2015, potential dilutive securities had an anti-dilutive effect and were not included in the calculation of diluted net loss per common share.
Stock-based Compensation
ERHC recognizes compensation costs resulting from the issuance of stock-based awards to employees and directors over the requisite period based on the fair value of each stock award on the grant date.
Recent Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update ASU 2015-03 “Simplifying the Presentation of Debt Issuance Costs” (ASU 2015-03). ASU 2015-03 changes the presentation of debt issuance costs in financial statements. Upon adoption of ASU 2015-03, debt issuance costs will be reported in the balance sheet as a direct deduction from the related debt liability rather than as an asset. The Company adopted ASU 2015-03 retrospectively during the year ended September 30, 2016. As a result, $19,664 and $61,710 of debt issuance costs recorded as direct deduction from the carrying amount of the outstanding debt at September 30, 2016 and September 30, 2015, respectively.
In March, 2016, the FASB issued ASU No. 2016-09,
Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.
For public business entities, the amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For all other entities, the amendments are effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted for any entity in any interim or annual period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period.
In March, 2016, the FASB issued ASU No. 2016-06,
Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments
(a consensus of the Emerging Issues Task Force). For public business entities, the amendments are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. For entities other than public business entities, the amendments are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.
In March, 2016, the FASB issued ASU No. 2016-07,
Investments—Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting.
Effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Earlier application is permitted.
In May, 2016, the FASB issued ASU No. 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients.
The amendments in this Update affect the guidance in Accounting Standards Update 2014-09,
Revenue from Contracts with Customers (Topic 606)
, which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by Update 2014-09). Accounting Standards Update 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
, defers the effective date of Update 2014-09 by one year.
In August, 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
(a consensus of the Emerging Issues Task Force). Effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period.
Reclassifications
Certain amounts in the financial statements as of and for the year ended September 30, 2015 have been reclassified to conform with the adoption. Such reclassifications have no impact on net loss, shareholders’ equity or cash flows as previously reported.
Note 2 – Restatement of Financial Statements
The Company has restated its previously issued consolidated financial statements for the years ended September 30, 2015 to reflect emergent developments related to income tax following the completion of an Internal Revenue Service tax audit of the Company’s 2006 tax return.
This restatement is necessitated by the Internal Revenue Service disallowing certain deductions on ERHC’s 2006 tax return. The disallowance resulted from stock based compensation expense that the Company had recognized as a deductible expense in its 2006 tax return. The disallowance was the outcome of an Internal Revenue Service audit of ERHC’s 2006 return, which audit lasted nearly seven years and has been previously disclosed. As such, the consolidated financial statements for the year ended September 30, 2015 has been restated to properly reflect the tax liabilities that should have been recorded in 2006.
The effect of the restatement on the September 30, 2015 consolidated financial statements as follows:
|
|
September 30, 2015 (As restated)
|
|
|
|
|
|
|
Adjustment
|
|
|
As Restated
|
|
Income tax payable
|
|
$
|
-
|
|
|
$
|
2,739,607
|
|
|
$
|
2,739,607
|
|
Total current liabilities
|
|
$
|
1,906,521
|
|
|
$
|
2,739,607
|
|
|
$
|
4,646,128
|
|
Total liabilities
|
|
$
|
1,909,395
|
|
|
$
|
2,739,607
|
|
|
$
|
4,649,002
|
|
Accumulated deficits
|
|
$
|
(99,498,316
|
)
|
|
$
|
(2,739,607
|
)
|
|
$
|
(102,237,923
|
)
|
Total shareholders’ equity
|
|
$
|
5,416,616
|
|
|
$
|
(2,739,607
|
)
|
|
$
|
2,677,009
|
|
Provision for income taxes
|
|
$
|
2,018,533
|
|
|
$
|
(2,018,533
|
)
|
|
$
|
-
|
|
Net loss
|
|
$
|
8,649,936
|
|
|
$
|
(2,018,533
|
)
|
|
$
|
6,631,403
|
|
Total other comprehensive loss
|
|
$
|
9,107,066
|
|
|
$
|
(2,018,533
|
)
|
|
$
|
7,088,533
|
|
Note 3 - Fair Value of Financial Instruments
Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Level inputs are as follows:
|
·
|
Level 1 Inputs—Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
|
|
·
|
Level 2 Inputs—Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.
|
|
·
|
Level 3 Inputs—Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity's own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.
|
Interest income on cash and cash equivalents is recognized as earned on the accrual basis.
Investments in equity instruments are accounted for as available for sale securities and reported at fair value, determined based on the quoted prices in an active market for identical assets and classified as Level 1 under the Accounting Standards Codification (“ASC”) Topic 825.
During the year ended September 30, 2016, the Company disposed its investment in the common stock of Oando Energy Resources, Inc. (“OER”), a Canadian oil and gas company that trades on the Toronto Stock Exchange (TSX).
During the year ended September 30, 2015, the Company’s investment in the common stock and warrants of OER, a Canadian oil and gas company that trades on the Toronto Stock Exchange (TSX) decreased in value by $457,130 to $211,699. This decrease in value is included as a decrease in stockholders' equity in accumulated other comprehensive income (loss).
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while ERHC believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. In determining fair value, the ERHC generally applies the market approach, which uses prices and other relevant data based on market transactions involving identical or comparable assets and liabilities. There have been no changes in the methodologies used at September 30, 2016 and 2015.
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of September 30, 2016 and 2015, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
September 30, 2016
|
Quoted Prices
In an Active
Market for
Identical
Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Derivative liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(770,854
|
)
|
|
$
|
(770,854
|
)
|
September 30, 2015
|
Quoted Prices
In an Active
Market for
Identical
Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities - Oando Energy Resources:
|
|
$
|
211,699
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
211,699
|
|
Derivative liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(725,898
|
)
|
|
$
|
(725,898
|
)
|
During the years ended September 30, 2016 and 2015, the Company issued a number of convertible notes payable, and identified derivatives related to these notes. ERHC classifies its derivative liabilities as Level 3 and values them using the methods discussed in Note 5. While the Company believes that its valuation methods are appropriate and consistent with other market participants, it recognizes that the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The primary assumptions that would significantly affect the fair values using the methods discussed in Note 3 are that of volatility and market price of the underlying common stock of the Company.
As of September 30, 2016, the Company did not have any derivative instruments that were designated as hedges.
The derivative liability for the years ended September 30, 2016 and 2015 of $770,854 and 725,898, respectively, classified as level 3.
The following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities as of September 30, 2016:
|
|
Derivative
Liability
|
|
|
|
|
|
Balance at September 30, 2015
|
|
$
|
725,898
|
|
Increase in derivative value due to issuances of convertible promissory notes
|
|
|
756,717
|
|
Decrease in derivative value due to convertible promissory notes converted to common stocks
|
|
|
(959,965
|
)
|
Change in fair market value of derivative liabilities on convertible notes due to the mark to market adjustment
|
|
|
248,204
|
|
|
|
|
|
|
Balance at September 30, 2016
|
|
$
|
770,854
|
|
The following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities as of September 30, 2015:
|
|
Derivative Liability
|
|
Balance at September 30, 2014
|
|
$
|
1,021,942
|
|
Increase in derivative value due to issuances of convertible promissory notes
|
|
|
1,480,777
|
|
Decrease in derivative value due to convertible promissory notes converted to common stocks
|
|
|
(2,907,064
|
)
|
Day 1 loss on derivative liabilities
|
|
|
1,024,292
|
|
Change in fair market value of derivative liabilities on convertible notes due to the mark to market adjustment
|
|
|
111,849
|
|
Change in fair market value of derivative liabilities on tainted warrants due to the mark to market adjustment
|
|
|
(5,898
|
)
|
|
|
|
|
|
Balance at September 30, 2015
|
|
$
|
725,898
|
|
Note 4 – Convertible Debt
The Company had the following convertible debt outstanding at September 30, 2016:
Lender
|
Date of
Agreement
|
|
Term
(Months)
|
|
|
|
|
|
Outstanding
balance
|
|
|
date
|
|
|
Deferred
debt
origination
costs
|
|
|
Discount
|
|
|
Note payable
|
|
|
Liability
|
|
JMJ Financial #4
|
3/9/2016
|
|
|
12
|
|
|
|
8
|
%
|
|
$
|
39,416
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
37,114
|
|
|
$
|
2,302
|
|
|
$
|
74,913
|
|
Adar Bay
|
3/10/2016
|
|
|
12
|
|
|
|
8
|
%
|
|
|
32,000
|
|
|
|
2,000
|
|
|
|
1,544
|
|
|
|
22,863
|
|
|
|
9,593
|
|
|
|
71,087
|
|
Union Capital #4
|
4/12/2016
|
|
|
12
|
|
|
|
8
|
%
|
|
|
50,000
|
|
|
|
1,732
|
|
|
|
2,126
|
|
|
|
-
|
|
|
|
49,606
|
|
|
|
-
|
|
Auctus Private Equity Fund
|
4/27/2016
|
|
|
12
|
|
|
|
10
|
%
|
|
|
54,250
|
|
|
|
2,318
|
|
|
|
1,839
|
|
|
|
46,757
|
|
|
|
7,972
|
|
|
|
137,157
|
|
Black Mountain Equities.
|
5/20/2016
|
|
|
12
|
|
|
|
8
|
%
|
|
|
51,500
|
|
|
|
926
|
|
|
|
4,131
|
|
|
|
-
|
|
|
|
48,295
|
|
|
|
-
|
|
Rock Capital #2
|
5/26/2016
|
|
|
12
|
|
|
|
10
|
%
|
|
|
55,125
|
|
|
|
529
|
|
|
|
5,950
|
|
|
|
-
|
|
|
|
49,704
|
|
|
|
-
|
|
Crown Bridge Partners
|
6/2/2016
|
|
|
12
|
|
|
|
8
|
%
|
|
|
53,500
|
|
|
|
1,407
|
|
|
|
1,678
|
|
|
|
45,232
|
|
|
|
7,997
|
|
|
|
143,932
|
|
Toledo Advisors
|
6/22/2016
|
|
|
12
|
|
|
|
10
|
%
|
|
|
63,000
|
|
|
|
1,726
|
|
|
|
2,396
|
|
|
|
59,309
|
|
|
|
3,021
|
|
|
|
168,812
|
|
LG Capital
|
8/23/2016
|
|
|
12
|
|
|
|
8
|
%
|
|
|
32,000
|
|
|
|
250
|
|
|
|
|
|
|
|
31,033
|
|
|
|
1,217
|
|
|
|
43,965
|
|
Auctus Private Equity Fund 2
|
9/22/2016
|
|
|
9
|
|
|
|
10
|
%
|
|
|
58,750
|
|
|
|
119
|
|
|
|
|
|
|
|
57,041
|
|
|
|
1,828
|
|
|
|
130,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
489,541
|
|
|
$
|
11,007
|
|
|
$
|
19,664
|
|
|
$
|
299,349
|
|
|
$
|
181,535
|
|
|
$
|
770,854
|
|
The Company had the following convertible debt outstanding at September 30, 2015:
Lender
|
|
|
|
|
|
|
|
|
|
Outstanding
balance
|
|
|
date
|
|
|
Deferred
Debt
Origination
Costs
|
|
|
Discount
|
|
|
Net
Convertible
Note Payable
|
|
|
|
|
Redwood Fund III
|
5/15/2014
|
|
|
6
|
|
|
|
12
|
%
|
|
|
$
|
40,000
|
|
|
$
|
5,918
|
|
|
|
4,500
|
|
|
$
|
15,867
|
|
|
$
|
25,551
|
|
|
$
|
114,005
|
|
Tonaquint, Inc
|
10/7/2014
|
|
|
12
|
|
|
|
22
|
%
|
(a)
|
|
|
98,177
|
|
|
|
46,416
|
|
|
|
15,098
|
|
|
|
16,700
|
|
|
|
112,795
|
|
|
|
128,566
|
|
Various
|
Various
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,340
|
|
|
|
-
|
|
|
|
(14,340
|
)
|
|
|
-
|
|
JMJ Financial #3
|
10/22/2014
|
|
|
24
|
|
|
|
5.83
|
%
|
|
|
|
8,900
|
|
|
|
5,556
|
|
|
|
5,000
|
|
|
|
11,582
|
|
|
|
-
(2,126)
|
|
|
|
27,375
|
|
LG Capital #2
|
10/23/2014
|
|
|
12
|
|
|
|
8
|
%
|
|
|
|
23,533
|
|
|
|
2,500
|
|
|
|
506
|
|
|
|
9,398
|
|
|
|
16,129
|
|
|
|
52,628
|
|
Cardinal Capital Group
|
11/6/2014
|
|
|
24
|
|
|
|
22
|
%
|
(a)
|
|
|
43,998
|
|
|
|
30,133
|
|
|
|
9,333
|
|
|
|
41,984
|
|
|
|
22,814
|
|
|
|
94,158
|
|
Rock Capital
|
2/6/2015
|
|
|
12
|
|
|
|
10
|
%
|
|
|
|
23,005
|
|
|
|
-
|
|
|
|
5,311
|
|
|
|
20,351
|
|
|
|
(2,657
|
)
|
|
|
67,377
|
|
Union Capital #3
|
2/17/2015
|
|
|
12
|
|
|
|
8
|
%
|
|
|
|
34,500
|
|
|
|
-
|
|
|
|
1,500
|
|
|
|
-
|
|
|
|
33,000
|
|
|
|
93,039
|
|
Adar Bay #2
|
2/19/2015
|
|
|
12
|
|
|
|
8
|
%
|
|
|
|
12,000
|
|
|
|
-
|
|
|
|
3,500
|
|
|
|
11,742
|
|
|
|
(3,242
|
)
|
|
|
39,280
|
|
LG Capital #3
|
3/10/2015
|
|
|
12
|
|
|
|
8
|
%
|
|
|
|
52,500
|
|
|
|
-
|
|
|
|
2,622
|
|
|
|
43,388
|
|
|
|
6,490
|
|
|
|
109,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
336,613
|
|
|
$
|
90,523
|
|
|
$
|
61,710
|
|
|
$
|
171,012
|
|
|
$
|
194,414
|
|
|
$
|
725,898
|
|
During the years ended September 30, 2016 and 2015, the Company issued an aggregate of 18,220,277 and 20,633,744 shares of common stock for conversion of convertible debts of $487,083 and $1,728,370; a gain of $56,020 and $0, and decrease in derivative value due to conversion of $959,965 and $2,474,418, respectively.
|
(a)
|
During the year ended September 30, 2015, the note was defaulted due to insufficient authorized common share to fulfill conversion request, additional interest accrual recorded due to interest rate increased to 22% from 12% related to the default.
|
The following table summarizes conversion terms of the notes outstanding at September 30, 2016:
Lender
|
|
Date of Agreement
|
|
Term Of Conversion
|
|
Eligible for
Conversion
|
|
|
|
|
|
|
|
JMJ Financial
|
|
March 9, 2016
|
|
Conversion Price shall be lesser of $0.06 or 60% of lowest trade price in the 25 trading days previous to conversion.
|
|
180 after the effective dates
|
Adar Bay
|
|
March 10, 2016
|
|
Conversion price shall equal be 50% of the lowest trading price of the Common Stock as reported on the National Quotations Bureau OTCQB exchange which the Company’s shares are traded or any exchange upon which the Common Stock may be traded in the future, for the twenty prior trading days including the day upon which a Notice of Conversion is received by the Company.
|
|
On effective date
|
Union Capital
|
|
April 12, 2016
|
|
Conversion Price for each share of Common Stock equal to 40% of the lowest closing bid price of the Common Stock as reported on the National Quotations Bureau OTCQB exchange which the Company’s shares are traded or any exchange upon which the Common Stock may be traded in the future ("Exchange"), for the twenty prior trading days including the day upon which a Notice of Conversion is received by the Company (provided such Notice of Conversion is delivered by fax or other electronic method of communication to the Company after 4 P.M. Eastern Standard or Daylight Savings Time if the Holder wishes to include the same day closing price)".
|
|
180 after the effective date
|
Auctus Private Equity Fund, LLC
|
|
April 27, 2016
|
|
Conversion Price shall equal the lesser of (i) 55% multiplied by the lowest Trading Price (as defined below) (representing a discount rate of 45%) during the previous twenty-five (25) Trading Day period ending on the latest complete Trading Day prior to the date of this Note and (ii) the Variable Conversion Price
|
|
On effective date
|
Black Mountain Equities, Inc.
|
|
May 20, 2016
|
|
Conversion Price shall equal 60% of the lowest trade occurring during the twenty (20) consecutive Trading Days immediately preceding the applicable Conversion Date on which the Holder elects to convert all or part of this Note, subject to adjustment as provided in this Note.
|
|
150 after the effective date
|
Rock Capital
|
|
May 26, 2016
|
|
Conversion Price for each share of Common Stock equal to 50% of the lowest trading price of the Common Stock as reported on the National Quotations Bureau OTCQB exchange which the Company’s shares are traded or any exchange upon which the Common Stock may be traded in the future ("Exchange"), for the twenty prior trading days including the day upon which a Notice of Conversion is received by the Company or its transfer agent
|
|
180 after the effective date
|
Crown Bridge Partners LLC
|
|
June 2, 2016
|
|
Variable Conversion Price shall mean 50% multiplied by the Market Price (as defined herein)(representing a discount rate of 50%). “Market Price” means the lowest one (1) Trading Prices (as defined below) for the Common Stock during the twenty (20) Trading Day period ending on the last complete Trading Day prior to the Conversion Date.
|
|
On effective date
|
Toledo Advisors LLC
|
|
June 22, 2016
|
|
Conversion Price for each share of Common Stock equal to 50% of the lowest trading price of the Common Stock as reported on the National Quotations Bureau OTCQB exchange which the Company’s shares are traded or any exchange upon which the Common Stock may be traded in the future ("Exchange"), for the twenty prior trading days
|
|
On effective date
|
LG Capital
|
|
August 23, 2016
|
|
Conversion price shall equal be 60% of the lowest trading price of the Common Stock as reported on the National Quotations Bureau OTCQB exchange which the Company’s shares are traded or any exchange upon which the Common Stock may be traded in the future, for the twenty prior trading days including the day upon which a Notice of Conversion is received by the Company.
|
|
On effective date
|
Auctus Private Equity Fund 2
|
|
September 22, 2016
|
|
Conversion Price shall equal the lesser of (i) 55% multiplied by the lowest Trading Price (as defined below) (representing a discount rate of 45%) during the previous twenty-five (25) Trading Day period ending on the latest complete Trading Day prior to the date of this Note and (ii) the Variable Conversion Price
|
|
On effective date
|
The following table summarizes conversion terms of the notes outstanding at September 30, 2015:
Lender
|
|
Date of Agreement
|
|
Term Of Conversion
|
|
Eligible for
Conversion
|
|
|
|
|
|
|
|
Redwood Fund III
|
|
May 15, 2014
|
|
Conversion Price shall be 55% of the lowest traded price, determined on the then current trading market for the Company’s common stock, for 20 trading days prior to conversion.
|
|
180 after the effective dates
|
JMJ Financial
|
|
October 22, 2014
|
|
Conversion Price shall be lesser of $0.06 or 60% of lowest trade price in the 25 trading days previous to conversion.
|
|
180 after the effective dates
|
Tonaquint, Inc
|
|
October 7, 2014
|
|
Conversion price shall be 65% (the “Conversion Factor”) of the lowest intra-day trade price of Borrower’s common stock (“Common Stock”) in the twenty-five (25) Trading Days immediately preceding the Conversion .
|
|
180 after the effective date
|
LG Capital #2
|
|
October 23, 2014
|
|
Conversion price shall be 50% of the lowest trading price of the Common Stock as reported on the National Quotations Bureau OTCQB exchange which the Company’s shares are traded or any exchange upon which the Common Stock may be traded in the future, for the twenty prior trading days including the day upon which a Notice of Conversion is received by the Company.
|
|
180 after the effective date
|
Cardinal Capital Group
|
|
November 6, 2014
|
|
Conversion price shall equal the lesser of (a) $0.05 or (b) 60% of the lowest trade occurring during the twenty five (25) consecutive Trading Days immediately preceding the applicable Conversion Date on which the Holder elects to convert all or part of this Note, subject to adjustment as provided in this Note.
|
|
180 after the effective date
|
Rock Capital
|
|
February 6, 2015
|
|
Conversion price shall equal be 55% of the lowest closing bid price of the Common Stock as reported on the National Quotations Bureau OTCQB exchange which the Company’s shares are traded or any exchange upon which the Common Stock may be traded in the future ("Exchange"), for the twenty prior trading days including the day upon which a Notice of Conversion is received by the Company (provided such Notice of Conversion is delivered by fax or other electronic method of communication to the Company after 4 P.M. Eastern Standard or Daylight Savings Time if the Holder wishes to include the same day closing price).
|
|
180 after the effective date
|
Union Capital
|
|
February 17, 2015
|
|
Conversion price shall equal be 55% of the lowest closing bid price of the Common Stock as reported on the National Quotations Bureau OTCQB exchange which the Company’s shares are traded or any exchange upon which the Common Stock may be traded in the future ("Exchange"), for the twenty prior trading days including the day upon which a Notice of Conversion is received by the Company (provided such Notice of Conversion is delivered by fax or other electronic method of communication to the Company after 4 P.M. Eastern Standard or Daylight Savings Time if the Holder wishes to include the same day closing price).
|
|
180 after the effective dates
|
Adar Bay
|
|
February 19, 2015
|
|
Conversion price shall equal be 50% of the lowest trading price of the Common Stock as reported on the National Quotations Bureau OTCQB exchange which the Company’s shares are traded or any exchange upon which the Common Stock may be traded in the future, for the twenty prior trading days including the day upon which a Notice of Conversion is received by the Company.
|
|
180 after the effective date
|
LG Capital #3
|
|
March 10, 2015
|
|
Conversion price shall equal be 60% of the lowest trading price of the Common Stock as reported on the National Quotations Bureau OTCQB exchange which the Company’s shares are traded or any exchange upon which the Common Stock may be traded in the future, for the twenty prior trading days including the day upon which a Notice of Conversion is received by the Company.
|
|
180 after the effective date
|
Note 5 – Derivative Liabilities
As described in Notes 3 and 8, the Company has identified embedded derivatives in notes payables and outstanding warrants.
The fair value of the embedded derivatives related to the convertible notes payable, comprising conversion feature with the reset provisions and the default provisions, at issuance and September 30, 2016 and 2015 was determined using the multinomial lattice models that value the derivative liability based on a probability weighted discounted cash flow model. These models are based on future projections of the various potential outcomes and utilize the following assumptions:
|
·
|
The stock price would fluctuate with the Company projected volatility;
|
|
·
|
The Derivative Convertible Notes convert at
40%
to
60%
of the market prices;
|
|
·
|
An event of default would occur initially 0% of the time, increasing 1.00% per month until it reaches 10%;
|
|
·
|
The projected volatility curve for each valuation period was based on the historical volatility of the Company, ranging between 200% and 260%;
|
|
·
|
The Company would redeem the notes initially 0% of the time, and increase monthly by 1.00% to a maximum of 5.00%;
|
|
·
|
The holders of the notes would automatically convert the notes at the maximum of two times the conversion price if the Company is not in default, with the target conversion price dropping as maturity approaches; and
|
|
·
|
The Holder would convert the note early after 0-90-180 days and at maturity if the registration was effective and the Company was not in default.
|
As discussed in Note 4, the Company issued convertible notes payable that provide for the issuance of convertible notes with variable conversion provisions. The conversion terms of the convertible notes are variable based on certain factors, such as the future price of the Company’s common stock. The number of shares of common stock to be issued is based on the future price of the Company’s common stock. The number of shares of common stock issuable upon conversion of the promissory note is indeterminate. Due to the fact that the number of shares of common stock issuable could exceed the Company’s authorized share limit, the equity environment is tainted and all additional convertible debentures and warrants are included in the value of the derivative. Pursuant to ASC 815-15 Embedded Derivatives, the fair values of the variable conversion option and warrants and shares to be issued were recorded as derivative liabilities on the issuance date.
Note 5 – Derivative Liabilities, continued
The fair value of the embedded derivatives related to the tainted outstanding warrants, comprising exercise feature with the full ratchet reset, at September 30, 2016 and 2015 was determined using the lattice models that value the derivative liability based on a probability weighted discounted cash flow model. These models are based on future projections of the various potential outcomes and utilize the following assumptions:
|
·
|
The stock price would fluctuate with the Company projected volatility;
|
|
·
|
The stock price would fluctuate with an annual volatility. The projected volatility curve for each valuation period was based on the historical volatility of the Company, ranging between 101% and 103%;
|
|
·
|
The Holder would exercise the warrant as they become exercisable at target prices of two times
the higher of the projected reset price or stock price;
|
|
·
|
The Warrants with the $0.355; $0.28; and $0.275 exercise prices are fixed and not projected to adjust; and
|
|
·
|
The Feltang Warrants expired in the period ending September 30, 2014 without being exercised.
|
The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date and to fair value as of each subsequent reporting date which at September 30, 2016 and 2015 was an aggregate of $770,854 and $725,898, respectively.
During the years ended September 30, 2016 and 2015, the Company recorded an aggregate loss of $248,204 and $105,951 on change in fair value of derivative liabilities and $394,661 and $1,024,292 day 1 loss on embedded derivative upon recognition of these derivatives, respectively. See Note 2 for more information.
Note 6 – Oil and Gas Properties and Concession Fees
Following is an analysis of the cost of oil and gas properties and concession fees at September 30, 2016 and 2015:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
DRSTP concession
|
|
$
|
2,271,600
|
|
|
$
|
3,113,795
|
|
Chad concession
|
|
|
2,800,600
|
|
|
|
2,800,600
|
|
United States oil and gas properties
|
|
|
510,000
|
|
|
|
-
|
|
Pending concessions in other African countries
|
|
|
101,619
|
|
|
|
101,619
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,683,819
|
|
|
$
|
6,016,014
|
|
Republic of Kenya Concession Fees and Other Financial Commitments
On June 28, 2012, ERHC entered into a production sharing contract ("PSC") with the Government of the Republic of Kenya for certain onshore hydrocarbon exploration and production of Block 11A located in northwestern Kenya.
ERHC is also committed under the PSC to:
|
a.
|
pay surface fees of $60,000 per year and annual training fees of $175,000 per year during the initial exploration term of two years that started in the first quarter of 2013,
|
|
b.
|
spend at least $10,250,000 over the first two years on a minimum work program, and an additional $30,000,000 in each of the following two periods of two years each.
|
In October 2015, the Company reached an agreement with Kosmos Energy (NYSE: KOS), a leading independent oil and gas exp
loration and production company focused on frontier and emerging areas to transfer all ERHC's rights to Block 11 of the Săo Tomé and Principe Exclusive Economic Zone (EEZ) to Kosmos. The agreement has been approved by the National Petroleum Agency of Sao T
ome & Principe ("ANP-STP") as required in the requisite Production Sharing Contract ("PSC") for EEZ Block 11. The purchase price for the assigned interest consist of a fixed sum in the amount of $2.5 million signing fee, plus reimbursement for verifiable cost paid by the Company prior to July 1, 2015 subject to maximum amount of $1.5 million. In connection with this agreement, the Company received $4,000,000 and recognized a gain of $2,727,805 of reimbursement of exploration costs incurred during the six months ended March 31, 2016.
In October, 2013, the Company entered into a farm-out agreement with CEPSA Kenya Limited, an affiliate of Compañía Española de Petróleos, S.A.U., an international oil and gas company ("CEPSA"). Under the terms of this agreement, the Company assigned and transferred 55% of its participating interest in Kenya Block 11A to CEPSA. Pursuant to the agreement, the Company received farm-in fee of $2,000,000, reimbursement of $2,175,966 of exploration costs incurred, and recovery of capitalized concession costs of $555,642 for the year ended September 30, 2015. In connection with this farm-out, the Company recognized a gain of $239,515 during the years ended September 30, 2015.
In exchange for the transferred rights, CEPSA will carry the Company's proportionate share of obligations and financial costs under the terms and conditions outlined in the farm-out agreement. The agreement was approved in January 2014 by the Kenyan Government and from February 2014, CEPSA took over from ERHC as operator under the production sharing contract ("PSC") for Kenya Block 11A.
|
·
|
As of September 30, 2016, the Company was $8,876,853 in arrears of part of its proportionate share of drilling expenses for Kenya Block 11A and therefore in default from May 2016 of its obligation to CEPSA. The drilling expenses are for the Tarach-1 exploratory well which was completed on Kenya Block 11A in summer 2016.
|
|
·
|
The Tarach-1 well was always designed as an exploratory well. An exploratory well is drilled purely for information gathering (“exploration”) purposes in an area that is yet unproven with regard to petroleum resources. The site selection for an exploratory well is based on seismic data and other pre-drill geoscientific surveys.
|
|
·
|
Operator analysis of the results if the Tarach-1 well shows that it did not encounter any reservoirs. The operator has therefore classified Tarach-1 a dry well. The well has accordingly been plugged and abandoned
|
Republic of Chad Concession Fees and Other Financial Commitments
On June 30, 2011, ERHC entered into a production sharing contract ("PSC") with Chad for certain onshore hydrocarbon exploration and development. In September 2013, the Ministry of Energy and Petroleum of Chad approved ERHC’s application to voluntarily relinquish two of the three Blocks covered by the PSC.
The following is an analysis of the costs paid or incurred at September 30, 2016 and 2015:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Signature bonus
|
|
$
|
2,000,000
|
|
|
$
|
2,000,000
|
|
Advisers’ and ancillary costs related to the PSC
|
|
|
320,600
|
|
|
|
320,600
|
|
Legal fees and costs for the drafting and negotiation of the PSC, as provided in PSC
|
|
|
480,000
|
|
|
|
480,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,800,600
|
|
|
$
|
2,800,600
|
|
ERHC is also committed under the PSC to:
|
a.
|
spend at least $15,000,000 over the first five years on a minimum work program and at least an additional $1,000,000 over a further period of up to three years
|
|
b.
|
incur surface fees of $16,360 per calendar year during the first validity period starting on July 12, 2012, and lasting for up to eight years. Surface fees for subsequent periods will depend on the exploration progress as well as on the acreage retained by ERHC.
|
Sao Tome Concession
In April 2003, the Company and the DRSTP entered into an Option Agreement (the “2003 Option Agreement”) in which the Company relinquished certain financial interests in the JDZ in exchange for exploration rights in the JDZ. The Company additionally entered into an administration agreement with the Nigeria-Sao Tome and Principe JDA. The administration agreement is the formal agreement by the JDA that it will fully implement ERHC’s preferential rights to working interests in the JDZ acreage as set forth in the 2003 Option Agreement and describes certain procedures regarding the exercising of these rights. However, ERHC retained under a previous agreement the following rights to participate in exploration and production activities in the EEZ subject to certain restrictions: (a) the right to receive 100% working interest signature free bonus of two blocks of ERHC’s choice and (b) the option to acquire up to a 15% paid working interest in up to two additional blocks of ERHC’s choice in the EEZ. The Company would be responsible for its proportionate share of exploration and exploitation costs in the EEZ blocks.
The following represents ERHC’s current rights in the JDZ and EEZ blocks:
Block
|
|
ERHC
Original Participating Interest
|
|
|
ERHC Joint Bid
Participating
Interest
|
|
|
Participating
Interest(s)
Transferred
|
|
|
Current ERHC
Retained
Participating
Interest
|
|
|
Remaining
Cost Allocated
to Blocks
|
|
JDZ 2
|
|
|
30.00%
|
|
|
|
35.00%
|
|
|
|
43.00%
|
|
|
|
22.00%
|
|
|
$
|
-
|
|
JDZ 3
|
|
|
20.00%
|
|
|
|
5.00%
|
|
|
|
15.00%
|
|
|
|
10.00%
|
|
|
|
-
|
|
JDZ 4
|
|
|
25.00%
|
|
|
|
35.00%
|
|
|
|
40.50%
|
|
|
|
19.50%
|
|
|
|
-
|
|
JDZ 5
|
|
|
15.00%
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15.00% (in arbitration)
|
|
|
|
567,900
|
|
JDZ 6
|
|
|
15.00%
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15.00% (in arbitration)
|
|
|
|
567,900
|
|
JDZ 9
|
|
|
20.00%
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20.00%
|
|
|
|
567,900
|
|
EEZ 4
|
|
|
100.00%
|
|
|
|
-
|
|
|
|
-
|
|
|
|
100.00%
|
|
|
|
567,900
|
|
The Original Participating Interest is the interest granted pursuant to the Option Agreement, dated April 2, 2003, between DRSTP and ERHC (the “2003 Option Agreement”).
Under the terms each of the Participation Agreements Sinopec and Addax agreed to pay all of ERHC’s future costs for petroleum operations (“the carried costs”) in respect of ERHC's retained interests in JDZ blocks 2,3 and 4. Additionally, Sinopec and Addax are entitled to 100% of ERHC’s allocation of cost oil plus up to 50% of ERHC’s allocation of profit oil from the retained interests on individual blocks until Sinopec and Addax Sub recover 100% of ERHC’s carried costs.
The remaining $2,271,600 and $3,113,795 of cost related to the DRSTP concession, as shown on the Company's balance sheet at September 30, 2016 and 2015, respectively, relate to blocks 5, 6 and 9 of the JDZ, and the Company's EEZ blocks. Production Sharing Contracts are yet to be signed on block 4. As of September 30, 2016, blocks 5 and 6 are in arbitration (see Note 10).
United States Oil and gas properties
In September 2016, NewStar, a wholly- owned subsidiary of ERHC made its first acquisition, with purchase price of $510,000, of a small producing oil and gas well in Ganado, Jackson County, Texas. NewStar applied for and was granted an Operatorship License by the Texas Railroad commission.
Note 7 – Income Taxes
The composition of deferred tax assets and the related tax effects at September 30, 2016 and 2015 are as follows:
|
|
2016
|
|
|
2015
|
|
Net operating losses
|
|
$
|
15,013,370
|
|
|
$
|
10,932,812
|
|
Allowance for loss on deposits
|
|
|
-
|
|
|
|
1,443,651
|
|
Other
|
|
|
753,211
|
|
|
|
1,702,196
|
|
Total deferred tax assets
|
|
|
15,766,581
|
|
|
|
14,078,659
|
|
Valuation allowance
|
|
|
(15,766,581
|
)
|
|
|
(14,078,659
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
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 34% were applied to pre-tax loss for years ended September 30, 2016 and 2015, is as follows:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Income tax benefit at federal statutory rate
|
|
$
|
4,095,932
|
|
|
$
|
2,254,677
|
|
Change in valuation allowance
|
|
|
(1,687,922
|
)
|
|
|
(3,408,739
|
)
|
Expiration and adjustment of NOLs
|
|
|
(2,400,742
|
)
|
|
|
1,019,766
|
|
Stock compensation
|
|
|
-
|
|
|
|
(2,856
|
)
|
Other
|
|
|
(7,268
|
)
|
|
|
137,152
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
In preparing the Company’s consolidated financial statements, the Company assesses the likelihood that its deferred tax assets will be realized from future taxable income. The Company establishes a valuation allowance if it determines that it is more likely than not that some portion of the deferred tax assets will not be realized. Changes in the valuation allowance, when recorded, would be included in its consolidated statements of operations as a provision for (benefit from) income taxes. The Company exercise significant judgment in determining its provisions for income taxes, its deferred tax assets and liabilities and its future taxable income for purposes of assessing its ability to utilize any future tax benefit from its deferred tax assets. During 2016, the Company assessed the need for a valuation allowance against its deferred tax assets. The deferred tax asset valuation allowance was $15,766,581 as of September 30, 2016. The valuation allowance relates primarily to the net operating losses and various expense deductions for which a tax benefit is currently unavailable.
At September 30, 2016, the Company has Federal net operating loss carry forward of approximately $44,156,971. The federal loss carry forward expires on various dates through 2036.
Uncertainty in Tax Positions
On October 1, 2007, the Company adopted the guidance related to accounting for uncertainty in income taxes, which provides a financial statement recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. Under ASC 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and income tax disclosures.
The Company is subject to taxation in the United States and various foreign jurisdictions. Management has determined that the Company has no uncertain tax positions requiring recognition under ASC 740 as of September 30, 2016 and 2015.
Note 8 – Shareholders’ Equity
Common Stock
During the year ended September 30, 2016, 43,660 fractional shares issued to shareholders due to reverse split effective on January 5, 2016.
During the years ended September 30, 2016 and 2015, the Company issued 0 and 2,100 shares common stocks and recognized compensation expense of $0 and $8,400, respectively, related to service granted to the Board of Directors.
During the years ended September 30, 2016 and 2015, the Company issued an aggregate of 18,220,277 and 20,633,744 shares of common stock for conversion of convertible debts of $487,083 and $1,728,370; and recognized a gain on conversion of $56,020 and $0, and decrease in derivative value due to conversion of $959,965 and $2,474,418, respectively.
During the years ended September 30, 2016 and 2015, the Company issued of 0 and 928,254 shares of common stock to its related party for conversion of convertible debts of $0 and $250,000 and decrease in derivative value due to conversion of $0 and $432,646, respectively.
Stock Options
On January 6, 2012, the Board of Directors granted a total of 47,500 stock options to officers and board of directors members of the Company under the Company’s 2004 Stock Option Plan. The options vest over two years, are exercisable for a period of 2 years and have a $20 strike price. However, the options are only exercisable if the Company’s share price reaches $75 per share and remains consistently at or above that level for a period of one month. They have a grant-date fair value of $63,711 or $13 per share based on and independent valuation of the options using a lattice model and the following weighted average assumptions:
Risk free interest rate
|
|
|
0.25
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
Annual volatility
|
|
|
105.97
|
%
|
Exit/Attrition rates
|
|
|
2.00
|
%
|
Target exercise multiple
|
|
|
2.14
|
%
|
During the years ended September 30, 2016 and 2015, the Company recognized compensation expense of $0 and $6,957, respectively, related to the options grant as described above. As of September 30, 2016 and 2015, there are 0 and 41,500, respectively fully-vested options outstanding; none of which are exercisable.
Stock Warrants
On October 6, 2010, an equivalent of 68,182 warrants with a term of 5 years and an exercise price of $28 were issued to the investors along with the common shares sold. ERHC also issued to the placement agent a total of 4,596 warrants which have an exercise price of $27.5 and a term of approximately 5 years. At September 30, 2016, all warrants were expired. During the years ended September 30, 2016 and 2015, 68,182 and 4,596 warrants expired unexercised, respectively.
Stock Warrants Summary
Information regarding warrant, their respective changes and their weighted average exercise prices as of and for the fiscal years ended September 30, 2016 and 2015 are as follows:
Description
|
|
Warrants
|
|
|
Weighted
Average
Exercise Price
|
|
|
Market Price
Intrinsic Value
|
|
Balance at September 30, 2014
|
|
|
72,778
|
|
|
$
|
28
|
|
|
|
-
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired or cancelled
|
|
|
4,596
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2015
|
|
|
68,182
|
|
|
$
|
28
|
|
|
|
-
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired or cancelled
|
|
|
68,182
|
|
|
$
|
28
|
|
|
|
|
|
Balance at September 30, 2016
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
There was no unrecognized compensation cost for the above warrants as of September 30, 2016 and 2015.
Note 9 – Related Party Transactions
At September 30, 2016 and 2015, the Company had director compensations payable of $100,438 and $46,250, respectively, to non-employee directors.
On February 17, 2015, the Company entered into a convertible debt agreement with Chrome Oil Services, Limited,
significant
shareholder, for a principal amount of $250,000 with interest rate at 8% for 12 months. The debt is convertible into securities of the Company at a conversion price calculated as fifty five percent (55%) of the lowest trade price in the twenty (20) trading days previous to the conversion date. On February 19, 2015, the debt was converted into 928,254 shares of common stock and the Company recognized resolution of derivative liability of $432,646 in APIC conversion.
Note 10 – Commitments and Contingencies
Republic of Kenya Concession Fees and Other Financial Commitments
On June 28, 2012, ERHC entered into a production sharing contract ("PSC") with the Government of the Republic of Kenya for certain land based hydrocarbon exploration and production of Block 11A located in northwestern Kenya.
In October, 2013, the Company entered into a farm-out agreement with CEPSA Kenya Limited, an affiliate of Compañía Española de Petróleos, S.A.U., an international oil and gas company ("CEPSA"). Under the terms of this agreement, the Company assigned and transferred 55% of its participating interest in Kenya Block 11A to CEPSA. In exchange for the transferred rights, CEPSA will carry the Company's proportionate share of obligations and financial costs under the terms and conditions outlined in the farm-out agreement. The agreement was approved in January 2014 by the Kenyan Government and from February 2014, CEPSA took over from ERHC as operator under the production sharing contract ("PSC") for Kenya Block 11A.
|
·
|
As of September 30, 2016, the Company was $8,876,853 in arrears of part of its proportionate share of drilling expenses for Kenya Block 11A and therefore in default from May 2016 of its obligation to CEPSA. The drilling expenses are for the Tarach-1 exploratory well which was completed on Kenya Block 11A in summer 2016.
|
|
·
|
The Tarach-1 well was always designed as an exploratory well. An exploratory well is drilled purely for information gathering (“exploration”) purposes in an area that is yet unproven with regard to petroleum resources. The site selection for an exploratory well is based on seismic data and other pre-drill geoscientific surveys.
|
|
·
|
Operator analysis of the results if the Tarach-1 well shows that it did not encounter any reservoirs. The operator has therefore classified Tarach-1 a dry well. The well has accordingly been plugged and abandoned
|
Republic of Chad Concession Fees and Other Financial Commitments
On June 30, 2011, ERHC entered into a production sharing contract ("PSC") with Chad for certain onshore hydrocarbon exploration and development. In September 2013, the Ministry of Energy and Petroleum of Chad approved ERHC's application to voluntarily relinquish two of the three Blocks covered by the PSC.
As of September 30, 2016, ERHC has paid or incurred:
a.
|
$2,000,000 as the entire signature bonus
|
b.
|
$320,600 in advisers' and ancillary costs related to the PSC
|
c.
|
$480,000 as legal fees and costs for the drafting and negotiation of the PSC, as provided for in the PSC
|
d.
|
$190,872 as costs of Environmental Impact Study, as provided for in the PSC
|
e.
|
$448,000 on Aeromagnetic data acquisition survey, in fulfilment of work program obligations under the PSC
|
f.
|
$378,374 2014/2015 Training and Surface rental Fess, as provided in the PSC
|
Insurance recovery for loss on Certificates of Deposit
During the years ended September 30, 2010 and 2009, the Company recognized losses on certificates of deposit of $1,058,579 and $4,234,317 to record the certificates at their estimated net realizable basis, based on the fact that certain restrictions were placed on the investment and a receiver was appointed to take over the institution and the Company had filed an insurance claim for recovery of these losses. During the years ended September 30, 2016 and 2015, the Company recovered $0 and $1,046,862, respectively from its loss on certificate of deposit.
Legal Proceedings
JDZ BLOCKS 5 AND 6
Arbitration and Lawsuit
Lawsuit
The Company's rights in JDZ Blocks 5 and 6 are currently the subject of legal proceedings at the London Court of International Arbitra
tion and the Federal High Court in Abuja, Nigeria. The Company instituted both proceedings in November 2008 against the JDA and the Governments of Nigeria and Săo Tomé and Príncipe.
The Company seeks legal clarification that its rights in the two Blocks remain intact.
The issue in contention is contractual. The Company was awarded a 15 percent working interest in each of the Blocks in a 2004/5 bid/licensing round conducted by the JDA following the Company's exercise of preferential rights in the Blocks as guaranteed by contract and treaty. The JDA and the Government of STP contend that certain correspondence issued by a previous CEO/President of the Company in 2006 amount to a relinquishment of the Company's rights in Blocks 5 and 6 under the Company's contracts with STP which provide for the rights. The Company contends that no such relinquishment has occurred and has sought recourse to arbitration accordingly. It also filed the suit to prevent any tampering with its said rights in JDZ Blocks 5 and 6 pending the outcome of arbitration.
Proceedings on the suit and the arbitration are currently suspended while the Company pursues amicable settlement with the Governments of Nigeria
and Săo Tomé & Príncipe.
Routine Claims
From time to time, ERHC may be subject to routine litigation, claims, or disputes in the ordinary course of business. ERHC intends to defend these matters vigorously; the Company cannot predict with certainty, however, the outcome or effect of any of the litigation or investigatory matters specifically described above or any other pending litigation or claims. There can be no assurance as to the ultimate outcome of these lawsuits and investigations.
Operating Lease
ERHC leases office space at 5444 Westheimer Road, Houston, Texas. The lease for office space expires July 31, 2017. The lease calls for monthly base rent payments of $9,825 for approximately 5,200 square feet. During the years ended September 30, 2016 and 2015, ERHC incurred lease expenses of $129,470 and $117,895, respectively. The future remaining annual minimum lease payments under this lease are as follows:
Year Ended
September 30,
|
|
Amount
|
|
|
|
|
|
2017
|
|
$
|
110,968
|
|
2018
|
|
|
-
|
|
|
|
|
|
|
|
|
$
|
110,968
|
|
The Company also leases various office spaces located outside of the United States with terms ranging from 6 months to 6 years. Total rent expense under these leases for the years ended September 30, 2016 and 2015 amount to $87,045 and $159,177, respectively.
Note 11- Investment in Oando Energy Resources
During the year ended September 30, 2016, the Company’s investment in the common stock of Oando Energy Resources, Inc. (“OER”), a Canadian oil and gas company that trades on the Toronto Stock Exchange (TSX) was purchased by the majority shareholder of OER, pursuant to a shareholder approved buyout. As a result, the Company recognized and recorded a loss on available for sales securities of $844,521; received cash proceed of $502,906 and reclass $1,135,728 unrealized gain on available for sale equity securities in 2016.
Note 12 – Federal Income Tax Payable
During the year ended September 30, 2016, the Company restated its financial statements for the years ended September 30, 2015 and 2014 due to the Internal Revenue Service disallowing certain deductions on ERHC’s 2006 tax return. The disallowance resulted from stock based compensation expense that the Company had recognized as a deductible expense in its 2006 tax return. The disallowance was the outcome of an Internal Revenue Service audit of ERHC’s 2006 return and the Company recorded a tax payable of $2,739,607.
The Company is currently pursuing a reduction of its tax liability through statutory means as outlined in the Internal Revenue Code. At this point in the process, the IRS has not yet responded to the Company. As is standard, the lien that exists whenever a taxpayer owes taxes assessed to the Department of the Treasury, has been formally recorded.
Note 13 – Subsequent Events
During the three months ended December 31, 2016, JMJ Financial converted all principle balance plus accrual interest of $46,082 into 106,982,333shares of the Company’s common stocks.
During the three months ended December 31, 2016, Adar Bay converted all principle balance plus accrual interest of $75,025 into 95,357,668 shares of the Company’s common stocks.
During the three months ended December 31, 2016, Auctus Private Equity Fund, LLC converted debt amount of $29,405 into 162,099,000 shares of the Company’s common stocks.
During the three months ended December 31, 2016, Union Capital converted debt amount of $95,025 into 242,671,379 shares of the Company’s common stocks.
During the three months ended December 31, 2016, Rock Capital converted debt amount of $5,160 into 34,400,000 shares of the Company’s common stocks.
During the three months ended December 31, 2016, Toledo Advisors ,LLC converted debt amount of $5,262 into 52,621,900 shares of the Company’s common stocks.
Item 9.
|
Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
|
None.
Item 9A.
|
Controls and Procedures
|
Disclosure Controls and Procedures
We have established disclosure controls and procedures to ensure that material information relating to ERHC Energy, including its consolidated subsidiaries, is made known to the officers who certify ERHC’s financial reports and to other members of senior management and the Board of Directors.
Based on their evaluation, ERHC’s principal executive and principal financial officers have concluded that ERHC’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were ineffective as of September 30, 2016 to ensure that the information required to be disclosed by ERHC in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. Our officers also concluded that our disclosure controls and procedures are ineffective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control Over Financial Reporting
Management of ERHC is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act). ERHC’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.
Management, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of ERHC’s internal control over financial reporting as of September 30, 2016. 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 this evaluation, management, with the participation of the Chief Executive Officer and Chief Financial Officer, concluded that, as of September 30, 2016, our internal control over financial reporting was ineffective.
We noted the following deficiencies that we believe to be material weaknesses.
|
(i)
|
The Company’s system of internal controls failed to identify multiple journal entries that were identified by the Company’s external auditor.
|
Our conclusion related to the effectiveness of our controls is based solely on adjustments made by our external auditor as part of their yearend audit and not based upon any other control deficiencies within the entity.
Changes in Internal Control Over Financial Reporting
There were no changes in ERHCs internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the quarter ended September 30, 2016, that have materially affected, or are reasonably likely to materially affect, ERHC’s internal control over financial reporting.
Item 9B.
|
Other Information
|
None.
PART III
Item 10.
|
Directors and Executive Officers of the Registrant and Corporate Governance
|
The following are the Directors and Principal Executive Officer of the Company as of September 30, 2016:
Name
|
|
Age
|
|
Position
|
|
|
|
|
|
Howard Jeter
|
|
69
|
|
Director
|
Andrew Uzoigwe
|
|
73
|
|
Director
|
Friday Oviawe
|
|
54
|
|
Director
|
Peter C. Ntephe
|
|
49
|
|
Director, President and Chief Executive Officer
|
Ambassador (rtd.) Howard F. Jeter
Ambassador Jeter is the former interim President and CEO of the Leon H. Sullivan Foundation. He has also served as Executive Vice President of GoodWorks International, LLC, an international consulting firm focused on business facilitation and investment promotion for Africa and the Caribbean. A former career diplomat, Ambassador Jeter served for 27 years in the American Foreign Service and retired from the U.S. State Department with the rank of Career Minister. Ambassador Jeter was U.S. Ambassador to Nigeria, to the Republic of Botswana, and also served as Deputy Assistant Secretary of State for African Affairs, Director of West African Affairs, and Special Presidential Envoy to Liberia. Other diplomatic postings held by Ambassador Jeter include Namibia, Lesotho, Tanzania, and Mozambique. Ambassador Jeter holds a BA in Political Science from Morehouse College, a MA in International Relations and Comparative Politics from Columbia University, and a MA in African Studies from UCLA. He is a member of Phi Beta Kappa, the American Foreign Service Association, the Council on Foreign Relations, and the American Academy of diplomacy. Ambassador Jeter is a former Chairman of the U.S. Export-Import Bank’s Advisory Committee on Africa and a member of the Board of Directors of Africare and the Morehouse College Global Leadership Center. For the past two years, Ambassador Jeter has served as Chair of the Selection Panel for the Rangel Fellowship Program, a collaborative program administered by the State Department and Howard University and Senior Advisor to University of Denver’s International Career Advancement Program. Ambassador Jeter has received numerous awards and recognition for his work and service, including a Presidential Meritorious Award, State Department Superior Honor Awards, Senior Foreign Service Performance Awards, the Rainbow/Push Coalition International Peace and Justice Award, and the prestigious Bennie Trailblazer Award from Morehouse College.
Andrew Uzoigwe, Ph. D
Dr. Uzoigwe retired from Nigerian National Petroleum Corporation (“NNPC”), in 2002, where he served as the Group Executive Director (Exploration & Production), from 1999 until 2002. Prior to that position he served as Managing Director of NNPC’s subsidiary companies, Warri Refining and Petrochemicals Company and Eleme Petrochemicals Company Ltd. During his long tenure at NNPC, Dr. Uzoigwe also held several senior technical and management positions including Chief Engineer and Project Coordinator (Petrochemicals), and Group General Manager (R&D Division), prior to becoming a Managing Director of NNPC’s subsidiary companies. He started his career with Dow Chemical Company where he held various senior positions in its Walnut Creek Research Center and in its Specialty Chemicals Facility in Pittsburg, California. Dr. Uzoigwe has also served on the Governing Boards of the Raw Material Research and Development Council and the National Emergency Management Agency. Dr. Uzoigwe is a Registered Professional Mechanical Engineer and a Registered Professional Chemical Engineer in the State of California. He is a fellow of the Nigerian Society of Chemical Engineers and a Fellow of the Polymer Institute of Nigeria. He holds a Bachelor’s of Science in Mechanical Engineering and an MBA from the University of California at Berkeley. He also holds a MS and a Doctorate in Petroleum/Chemical Engineering from Stanford University California.
Friday Oviawe, CPA
Mr. Friday Oviawe is the Managing Partner/CEO of Jackson Friday CPA, LLC (“the Firm”). He has over 25 years of professional audit and accounting experience. The Firm is involved in providing tax, audit and accounting services to small and medium-sized companies. Prior to establishing the Firm, Mr. Oviawe worked at BDO, Seidman, LLP as a Senior Audit Manager in General Audit Services. Before joining BDO Seidman, Friday Oviawe was a Manager in the New York office of McGladrey & Pullen, LLP where he provided audit and business advisory services to middle market companies in both the private and public sectors and not-for-profit organizations including A-133 Audits. Before joining McGladrey & Pullen, Mr. Oviawe spent over six years with Mitchell & Titus, LLP. At Mitchell & Titus, he provided audit and business advisory services to fortune 500 companies as well as small and medium-sized companies. Mr. Oviawe is a Certified Public Accountant and a member of the American Institute of Certified Public Accountants (AICPA). Mr. Oviawe is a Chartered Accountant as well as a Chartered Banker. In addition, he holds Bachelors and Master’s Degrees in Finance from University of Nigeria, Nsukka and University of Lagos, Nigeria, respectively.
Peter Ntephe, Ph. D
Peter Ntephe was appointed Chief Executive Officer and elected Director of ERHC Energy in April 2010. He has been involved in the Company’s executive management, in various capacities, since 2001. His roles have included fundamental participation in the negotiation, securing and maintenance of all the Company’s oil and gas interests in sub-Saharan Africa. As Chief Executive Officer, he oversees the executive management of ERHC Energy and its subsidiaries, ensuring that the group’s strategic objectives are met. Under Dr. Ntephe’s leadership, the Company has more than doubled the size of acreage under its control and expanded its strategic focus to include onshore acreage which is comparatively cheaper and less complicated to explore than deep offshore acreage. The Company has also rapidly grown its in-house technical capabilities, enabling it to directly operate some of its onshore assets in a strategic shift from the non-operator model it previously ran. Dr. Ntephe has had a career spanning 26 years. In addition to his PhD from the University of London, he holds five other degrees including a Master of Science from the University of Oxford, a Master of Laws from the University of London and a Master of Science (Management) from the Brunel University, London. Dr. Ntephe has previously taught as adjunct faculty in the Business School of the American Intercontinental University, London. He is a member of the Association of International Petroleum Negotiators (AIPN) and the Committee on Oil and Gas Law of the International Bar Association.
Sylvan Odobulu, Vice President (Administration) and Controller
Sylvan Odobulu was promoted to Vice President - Administration in January 2012. He has been involved in the Company’s executive management as a Financial Officer and Controller from 2006 until 2011. Mr. Odobulu is responsible for identifying and developing new Sub-Saharan African indigenous upstream oil and gas interests and business opportunities through mergers and acquisitions. He played a leadership role in executing the successful Production Sharing Contract negotiations of ERHC’s portfolio assets in the Republic of Chad. He is an expert in local acquisition activities, management of government stakeholders and the integration of all development exploration activities at the regional level. In his role as Vice President - Administration, Mr. Odobulu is responsible for corporate wide treasury, human resource and internal controls. As Principle Accounting Officer, Mr. Odobulu is responsible for regulatory and disclosure compliance including preparation of financial statements and other requisite disclosure documents. Prior to joining ERHC and since 1999, Mr. Odobulu was employed by Ernst and Young LLP, serving in various capacities, most recently as an Accounting Supervisor. He holds a Master of Business Administration from Rice University's Jones Graduate School of Business, and a Bachelor of Science degree from the University of North Texas, majoring in Accounting. Mr. Odobulu is a member of the Association of International Petroleum Negotiators (AIPN) and Petroleum Accountants Society of Houston (PASH)
Compensation of Directors
The Company's Directors’ compensation program is designed to enhance the Company's ability to attract and retain highly qualified Directors and to align their interests with the long-term interests of the Company's shareholders. The program consists of both a cash component, designed to compensate independent Directors for their service on the Board and its Committees, and an equity component, designed to align the interests of independent Directors and shareholders.
The number of stock awards granted to each director during years prior to the 2012 fiscal year was determined by reference to the awards in an equal amount that would yield thirty to fifty percent of total compensation of each director. Stock awards in 2013 and 2012 were consistent in number of shares with 2011 and yielded reduced compensation based on a reduction in the Company's share price. In 2010 and 2009, based on the recommendations of Compensation Committee, the Company increased total compensations for Directors for serving on the Board. Stock awards to Directors are restricted shares under Rule 144 of the Securities Act of 1933, but they include no conditions for vesting.
On January 6, 2012, the Board of Directors granted a total of 3,000,000 stock options to directors of the Company under the Company’s 2004 Stock Option Plan. The options vest over two years, are exercisable for a period of 2 years and have a $0.20 strike price. However, the options are only exercisable if the Company’s share price reaches $0.75 per share and remains consistently at or above that level for a period of one month. During the second quarter of fiscal 2013, 600,000 options with a total amortized value of $4,023 were forfeited upon resignation of one of the directors of the Company.
Cash Compensation - During 2016, the basic annual cash retainer paid to each Director (other than the Board Chairman) was $20,000. Each Board member is paid a meeting fee of $1,500 per Board meeting attended.
The Chairman of the Audit Committee is paid an annual retainer of $10,000. The Chairman of the Compensation Committee is paid an annual retainer of $5,000. The Chairman of the Governance and Nominating Committee is paid an annual retainer of $5,000. Each member of the Audit Committee is paid an annual retainer of $3,125. Each member of the Compensation Committee is paid an annual retainer of $2,500. Each member of the Governance and Nominating Committee is paid an annual retainer of $2,500. In addition, each member of a Committee is paid a meeting fee of $1,500 per Committee meeting attended.
The following table sets forth information concerning total director compensation during the 2016 and 2015 fiscal years for each non-employee director as follow:
Name
|
|
Fees
Earned or
Paid in
Cash
|
|
|
Stock
Awards
|
|
|
Option
Awards
|
|
|
Non-Equity
Incentive Plan
Compensation
|
|
|
Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings
|
|
|
All Other
Compensation
|
|
|
Total
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Howard Jeter
|
|
$
|
36,625
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
36,625
|
|
Andrew Uzoigwe
|
|
|
36,625
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
36,625
|
|
Friday Oviawe
|
|
|
38,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
38,500
|
|
Peter Ntephe
|
|
|
10,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Howard Jeter
|
|
$
|
38,125
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
38,125
|
|
Andrew Uzoigwe
|
|
|
38,125
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
38,125
|
|
Friday Oviawe
|
|
|
40,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
40,000
|
|
Peter Ntephe
|
|
|
26,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
26,000
|
|
GRANTS OF PLAN-BASED AWARDS
No rule 144 awards were made to the Company’s directors in 2016.
It is expected that the directors will receive compensation in fiscal 2016.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
The following table reflects all outstanding equity awards held by the Company’s directors as of September 30, 2016:
Name
|
|
Option Awards
|
|
Stock Awards
|
|
|
|
|
|
|
|
|
|
Number of Securities Underlying
Unexercised Options
|
|
Equity
Incentive Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
(2)
|
|
Option
Exercise
Price ($)
|
|
Option
Expiration
Date
|
|
Number
of
Shares
or
Units
of Stock
That
Have
Not Vested
(#)
|
|
Market
Value of
Shares
or Units
of Stock
That
Have
Not Vested
($)
|
|
Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares,
Units or
Other
Rights
That Have
Not Vested
(#)
|
|
Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights
That Have
Not Vested
($)
|
|
|
|
Exercisable
|
|
Unexercisable
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peter Ntephe
|
|
|
|
—
|
|
|
|
525,000
|
|
|
|
75,000
|
|
|
|
0.20
|
|
1/6/2022
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Howard Jeter
|
|
|
|
—
|
|
|
|
525,000
|
|
|
|
75,000
|
|
|
|
0.20
|
|
1/6/2022
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Friday Oviawe
|
|
|
|
—
|
|
|
|
525,000
|
|
|
|
75,000
|
|
|
|
0.20
|
|
1/6/2022
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Andrew Uzoigwe
|
|
|
|
—
|
|
|
|
525,000
|
|
|
|
75,000
|
|
|
|
0.20
|
|
1/6/2022
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
(1)
|
The number in this column reflects the rule 144 options awarded in 2012 pursuant to the 2004 Plan that have vested, but are not exercisable due to other factors.
|
|
(2)
|
The number in this column reflects the rule 144 options awarded in 2012 pursuant to the 2004 Plan that have not vested as of September 30, 2016.
|
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company’s Directors and Executive Officers, and persons who own beneficially more than ten percent (10%) of the common stock, to file reports of ownership and changes of ownership with the Securities and Exchange Commission. Copies of all filed reports are required to be furnished to the Company. Based solely on the reports received and the representations of the reporting person, the Company believes that these persons have complied with all applicable filing requirements during the fiscal year ended September 30, 2016.
Corporate Governance
The Board of Directors has adopted a Code of Ethics to govern the conduct of all of the Officers, Directors and employees of the Company. In addition, the Board has adopted Charters for its Governance and Nominating Committee, Audit Committee and Compensation Committee. The Code of Ethics and Committee Charters, along with ERHC’s FCPA Policy and Whistleblower Protection Policy, can be accessed on the Company’s website www.erhc.com.
Director Independence
The Company’s Board of Directors is required to have a majority of independent directors and has adopted director independence guidelines based upon and as defined in the NASDAQ listing standards. The Company is not listed on NASDAQ and is not subject to the rules of NASDAQ but applies the rules established by NASDAQ to establish director independence. The Company’s Board of Directors periodically analyzes the independence of each director and has determined that the following directors meet the standards of independence under our Corporate Governance Guidelines and director independence guidelines, including that each member is free of any relationship that would interfere with his or her individual exercise of independent judgment: Messrs. Jeter, Uzoigwe, and Oviawe. No Director is deemed independent unless the Board affirmatively established his independence.
Audit Committee
The Company’s Audit Committee is constituted of Messrs. Oviawe (Chair), Jeter, and Uzoigwe. The ultimate responsibility for good corporate governance rests with the Board, whose primary role is oversight, counseling and direction to the Company's management in the best long-term interests of the Company and its stockholders. The Audit Committee, in accordance with its charter, has been established for the purpose of overseeing the accounting and financial reporting processes of the Company and audits of the Company's annual financial statements. As described more fully in its charter, the purpose of the Audit Committee is to assist the Board in its general oversight of the Company's financial reporting, internal controls and audit functions. Management is responsible for the preparation, presentation and integrity of the Company's financial statements; establishing and applying accounting and financial reporting principles; designing and implementing systems of internal controls; and establishing procedures designed to reasonably assure compliance with accounting standards, applicable laws and regulations. The Company's independent auditing firm is responsible for performing an independent audit of the consolidated financial statements in accordance with generally accepted auditing standards. In accordance with law, the Audit Committee has ultimate authority and responsibility to select, compensate, evaluate and, when appropriate, replace the Company's independent auditors. The Audit Committee has the authority to engage its own outside advisers, including experts in particular areas of accounting, as it determines appropriate, apart from counsel or advisers hired by management. All of the members of the Audit Committee meet the independence and experience requirements of the SEC. The Board of Directors determined that Mr. Oviawe qualifies as an “Audit Committee Financial Expert” as defined by the SEC.
The Audit Committee members are not professional accountants or auditors, and their functions are not intended to duplicate or to certify the activities of management and the independent auditors, nor can the Audit Committee certify that the independent auditors are “independent” under applicable rules. The Audit Committee serves a Board-level oversight role, in which it provides advice, counsel and direction to management and the auditors on the basis of the information it receives, discussions with management and the auditors, and the experience of the Audit Committee's members in business, financial and accounting matters. Stockholders should understand that the designation of “an Audit Committee Financial Expert” is an SEC disclosure requirement related to Mr. Oviawe’s experience and understanding with respect to certain accounting and auditing matters. The designation does not impose on Mr. Oviawe any duties, obligations or liability greater than generally imposed on them as members of the Audit Committee and the Board, and this designation as an Audit Committee Financial Expert pursuant to this SEC requirement does not affect the duties, obligations or liability of any other member of the Audit Committee or the Board.
Item 11.
|
Executive Compensation
|
Compensation Discussion and Analysis
The following discussion and analysis of compensation arrangements of our named executive officers should be read together with the compensation tables and related disclosures set forth below. This discussion contains forward-looking statements that are based on our current plans, as well as considerations, expectations and determinations regarding future compensation programs. Actual compensation programs that we adopt may differ materially from currently planned programs as summarized in this discussion.
Overview
ERHC’s current business activity is to exploit its assets, which are rights to working interests in exploration acreage in the Republic of Kenya, the Republic of Chad, the JDZ between the DRSTP, and Nigeria and in EEZ of Sao Tome and Principe. The Company current business plan is based on attracting and retaining a limited group of highly qualified professionals. ERHC and its subsidiaries had 9 full-time employees at September 30, 2016.
At this time in our development, it is critical to retain and motivate our current employees, as well as attract new talented personnel to the Company, in order to continue to work on the implementation of our business plan. The Company offers a competitive compensation and benefits package to enable us to recruit new employees and retain our current employees. The same benefits are generally available to each of our employees regardless of position.
Compensation Philosophy and Objectives
Our executive compensation program and objectives are based on our need to attract and retain executives with the talent and experience necessary for ERHC to achieve its goal of fully developing its assets. ERHC competes with large energy companies that have substantially greater resources. Therefore, the Company must provide a total compensation package that is sufficiently competitive to attract and retain the required executive personnel. In determining a total compensation package, the Company does not rely on benchmarking to determine total compensation or any material element of compensation. Because we are a developing company, we sometimes use a combination of equity and cash as a compensation incentive. Our compensation and benefits include:
·
|
a base salary rate typically targeted at a level that is competitive in our market as determined by the Compensation Committee,
|
·
|
other equity awards, including equity grants to new hires to attract talented personnel and occasional grants of options/restricted shares to retain our talented employees, and
|
·
|
a comprehensive benefits package.
|
Since 2004, the equity portion of annual incentives has been paid primarily in restricted Company common stock. The incentive amount is generally converted to shares based on the closing price of the Company’s common stock on the date of grant.
Compensation Consultant
Each year, the Compensation Committee, working with independent compensation experts, evaluates the compensation earned by executive officers to assess if it is reasonable and adequate to retain the services of those executive officers and recommends to the Board of Directors appropriate compensation for the Named Executive Officers. The Board reviews such recommendations and then adopts compensation for the upcoming year. As the Company grows, it intends to explore more complex procedures for evaluating and fixing compensation for its executive officers.
Role of Compensation Committee and Executive Officers in Compensation Decisions
The Compensation Committee has the responsibility to review and approve annual compensation, including the competitiveness of the total compensation package, for the Chief Executive Officer and the Vice President (Administration) and Controller (collectively, the “Executive Officers”). The Compensation Committee endeavors to provide a compensation package for the Executive Officers that they believe is reasonable and competitive. Generally, the components of compensation provided to our Executive Officers are similar to those provided to our general employee population.
Base salaries, annual incentives and other equity awards for the Executive Officers are based on comparative industry salary produced by compensation consultant hired by the Committee. The Compensation Committee makes the final determination as to base salaries, annual incentives and equity awards for each of the Executive Officers based on Company performance and executive performance and their understanding of the employment market.
2016 Executive Compensation
Base Salaries
Base salaries for our Executive Officers and other employees are designed to be comparable to like positions in the marketplace from where we recruit. These competitive salaries are proposed by the Compensation Committee based on their familiarity with the current market for employees with similar qualifications.
Equity Awards
Overview
We may grant restricted stock, stock options and other equity-based awards to employees, consultants and non-employee directors under our 2004 Plan. As previously mentioned, our annual grants of equity awards are tied to the achievement of our annual performance objectives. Equity awards are also used for new hire incentives. We do not have a formal policy for the timing of granting equity awards but do not time equity awards to increase the economic value of the award to plan participants.
The Board has authorized the Compensation Committee to act on behalf of the Board in granting equity-based awards, including restricted stock and stock options, to eligible employees and consultants (other than Executive Officers).
We do not currently intend to grant stock or stock options except under limited circumstances, including stock awards granted to a director upon his or her initial election to the Board. Under the provisions of the 2004 Plan, stock awards or stock options cannot be granted at an exercise price of less than the closing price of a share of the Company’s common stock as reported on NASDAQ on the date of grant of such stock options. All equity grants to Executive Officers must be approved by the Compensation Committee or a subcommittee thereof. Stock options or stocks granted to members of the Board must be approved by the Compensation Committee.
Retention Plan
The Company does not have a formal retention plan in place.
Perquisites
Perquisites are not provided to our officers.
Benefits
We provide the same level of benefits to all of our employees and Executive Officers.
Accounting and Tax Implications
Our 2004 Plan is designed to grant stock awards that are performance-based compensation expense that is fully deductible for federal income tax purposes. When the awards vest or are otherwise includible in the taxable compensation of the affected executives, we may not be able to recognize current or future tax benefits that may otherwise be available to the Company related to such awards. We began expensing equity awards in 2006 in accordance with guidance issued by the Financial Accounting Standards Board. In general, the accounting rules did not impact the types of equity awards granted to plan participants.
COMPENSATION COMMITTEE REPORT
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K.
THE COMPENSATION COMMITTEE
Dr. Andrew Uzoigwe-Chairman
Ambassador Howard Jeter-Member
Mr. Friday Oviawe –Member
SUMMARY COMPENSATION TABLE
The following table sets forth the aggregate compensation awarded to, earned by or paid to the Company’s named executive officers for 2016 and 2015:
|
|
|
Salary
|
|
Bonus
|
|
Stock Awards
Authorized
and Issued
|
|
Stock Awards
Authorized
Unissued
|
|
Option
Awards
|
|
Non-Equity
Incentive Plan
Compensation
|
|
Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings
|
|
All Other
Compensation
|
|
Total
|
|
Name and
Principal Position
|
|
Year
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peter Ntephe (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief Executive Officer
|
|
2016
|
|
|
236,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
236,000
|
|
|
|
2015
|
|
|
236,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
236,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sylvan Odobulu (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vice President - Administration & Controller
|
|
2016
|
|
|
180,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
180,000
|
|
|
|
2015
|
|
|
180,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
180,000
|
|
|
(1
)
|
Mr. Ntephe is contracted through ERHC’s holding company, ERHC Energy Cayman Limited and is paid a salary of $236,000 per year for his services as CEO. Stock awards and other compensation were awarded for his service as a director from April 2010 when he was elected to the board.
|
|
(2)
|
Mr. Odobulu joined the Company in July 2006 as controller and is the Principal Accounting Officer. He was promoted to Vice President – Administration in January 2012, at which time his salary was increased from $162,000 to $180,000 per year.
|
GRANTS OF PLAN-BASED AWARDS
No rule 144 awards were made to the Company’s executive officers in 2016.
It is expected that the executive officers will receive compensation in fiscal 2016.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
The following table reflects all outstanding equity awards held by the Company’s named executive officers as of September 30, 2016:
|
Option Awards
|
|
|
Stock Awards
|
|
|
|
|
|
|
|
Name
|
Number of Securities Underlying
Unexercised Options
|
|
Equity
Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
(2)
|
|
Option
Exercise
Price ($)
|
|
Option
Expiration
Date
|
Number
of
Shares
or Units
of Stock
That
Have
Not
Vested
(#)
|
|
Market
Value of
Shares
or Units
of Stock
That
Have
Not
Vested
($)
|
|
Equity Incentive
Plan Awards:
Number of
Unearned Shares,
Units or
Other Rights
That Have Not
Vested (#)
|
|
Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights
That Have
Not Vested
($)
|
|
|
Exercisable
|
|
Unexercisable
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peter Ntephe
|
|
|
—
|
|
|
|
875,000
|
|
|
|
125,000
|
|
|
|
0.20
|
|
1/6/2022
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Sylvan Odobulu
|
|
|
—
|
|
|
|
656,250
|
|
|
|
93,750
|
|
|
|
0.20
|
|
1/6/2022
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
(1)
|
The number in this column reflects the rule 144 options awarded in 2012 pursuant to the 2004 Plan that have vested, but are not exercisable due to other factors.
|
|
(2)
|
The number in this column reflects the rule 144 options awarded in 2012 pursuant to the 2004 Plan that have not vested as of September 30, 2016.
|
OPTION EXERCISES AND STOCK VESTED
During fiscal 2016, no stock options were exercised by the Company’s named executive officers and no restricted stocks vested.
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE OF CONTROL
As of September 30, 2016, Company has entered into two employment or other agreements that include a change of control severance provisions with an executive officer, including the named executive officers. The Company’s employment agreements provide that certain officers are eligible for payments upon any termination without cause prior to expiration of the contract as described below under Employment Contracts.
Employment Contracts
The following is an analysis of the Company’s employment contracts with named executive officers at September 30, 2016:
Employee
|
|
Position
|
|
Date of
Agreement
Commencement
|
|
Date of
Agreement
Termination
|
|
Term of
Agreement
|
|
Monthly/Annual
Compensation
|
|
|
Estimated Cost if
Triggering Event
Occurred at
September 30,
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peter Ntephe
|
|
President and Chief Executive Officer
|
|
4/22/2015
|
|
4/21/2017
|
|
2 years
|
|
$
|
19,667 /236,000
|
|
|
$
|
472,000
|
|
Sylvan Odobulu
|
|
Vice President – Administration and Controller
|
|
7/3/2015
|
|
7/2/2017
|
|
2 years
|
|
$
|
15,000 /180,000
|
|
|
$
|
360,000
|
|
The above contracts contain the following (among other provisions):
An extension provision that at any time before the expiration of the primary term of the agreement that it may be renewed upon mutual agreement on the same terms and conditions contained in the current agreement herein or on such other terms and conditions as the Company and the employee mutually agree.
The employee's status as an employee of the Company terminates immediately and automatically upon the earliest to occur of: (i) his death or “Disability", (ii) his/her discharge by the Company "For Cause", (iii) his/her termination by the Company by notice or, (iv) the expiration, without renewal, of the employment term. Termination of the employment agreement with cause results in the Company having no further responsibility under the agreement.
For termination without cause for reasons of bankruptcy, insolvency, dissolution or liquidation of the Company, the Company is obligated to the employees for all amounts due during the remaining term of the employment agreement in either a lump sum or in the current monthly amounts for the remaining term together with all unpaid benefits awarded or accrued up to the date of termination.
If the employee is terminated without cause for other reasons, he/she is entitled to:
|
·
|
Within one month of commencement, 3 months of base salary
|
|
·
|
After 1 month but before 12 months – 12 months of base salary
|
|
·
|
After 12 months – 24 months of base salary
|
Annual paid vacation ranging from four to five weeks.
Relocation allowance in the event that the terms of employment require the employee to relocate from his or her city or country of residence.
Incentive compensation as approved by the Company's Board of Directors.
Mr. Ntephe became Chief Operating Officer (and began acting as interim Chief Executive Officer) in April 2008. In April 2010, Mr. Ntephe was appointed Chief Executive Officer and Executive Director. Mr. Ntephe is contracted in that capacity through ERHC’s holding company, ERHC Energy Cayman Limited.
Mr. Odobulu was employed by the Company in July 2006 and was placed under contract as shown above.
Securities Authorized for Issuance Under Equity Compensation Plans
In November 2004, the Board of Directors adopted a 2004 Compensatory Stock Option Plan pursuant to which it reserved 20,000,000 shares for issuance. This plan was approved at a special meeting of the stockholders of the Company in February 2005. Under this plan, 14,681,756 shares have been authorized.
|
|
Number of securities
to be issued upon
exercise of outstanding
options, warrants and
rights
(a)
|
|
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
|
|
|
Number of securities
remaining available for
future issuance under equity
compensation plans
(excluding securities
reflected in column (a) (c)
|
|
|
|
|
|
|
|
|
Equity compensation plans approved by security holders
|
|
|
4,150,000
|
|
|
|
0.20
|
|
|
|
5,318,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not approved by security holders
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Compensation Committee Interlocks Insider Participation
The Company’s Compensation Committee is comprised Messrs. Uzoigwe (Chair), Jeter and Oviawe. None of the members of the Compensation Committee has been or is an officer or employee of the Company, or is involved with a related transaction or a relationship as defined by Item 404 of Regulation S-K. None of the Company’s Executive Officers serves on the Board of Directors or compensation committee of a company that has an Executive Officer that serves on the Company’s Board or Compensation Committee. No member of the Company’s Board is an Executive Officer of a company in which one of the Company’s Executive Officers serves as a member of the Board of Directors or compensation committee of that company.
Item 12.
|
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|
The following table sets forth the ownership of the Company’s common stock as of September 30, 2016 by (i) each of the Company’s current Directors, (ii) the Company’s two most highly compensated officers as of the last fiscal year end, or September 30, 2016 (collectively, the “named executive officers”); (iii) each person who, to the Company’s knowledge, beneficially owns more than 5% of outstanding shares of the Company’s common stock; and (iv) all of the Company’s current Directors and named Executive Officers, as a group. As of December 31, 2016 there were 952,399,512 shares of common stock issued and outstanding.
To the Company’s knowledge, except as otherwise indicated in the footnotes to this table and subject to applicable community property laws, each shareholder named in the table has sole voting and investment power with respect to the shares set forth opposite such shareholder’s name.
Name and Address
|
|
Amount and
Nature
of Beneficial
Ownership (1)
|
|
|
|
|
|
Percent of
Class (1)
|
|
|
|
|
|
|
|
|
|
|
|
> 5% Shareholders:
|
|
|
|
|
|
|
|
|
|
Chrome Oil Services LTD (Sir Emeka Offor)
c/o No 22 Lobito, Wuse II
Abuja, Nigeria
|
|
|
2,931,111
|
(2
|
)
|
|
|
|
|
6.23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Chrome Energy, LLC (Sir Emeka Offor)
c/o No 22 Lobito Crescent, Wuse II,
Abuja, Nigeria.
|
|
|
1,033,057
|
(2
|
)
|
|
|
|
|
2.20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Sir Emeka Offor
228B Muri Okunola ST, PO Box 71898 Victoria Island
Lagos, Nigeria
|
|
|
4,006,218
|
(2
|
)
|
(3
|
)
|
|
|
8.52
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors and Named Executive Officers:
|
|
|
|
|
|
|
|
|
|
|
|
Peter Ntephe,
President and Chief Executive Officer (4)
|
|
|
650,837
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sylvan Odobulu,
Controller (4)
|
|
|
804,642
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Howard Jeter,
Director (4)
|
|
|
10,833
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Friday Oviawe,
Director (4)
|
|
|
5,467
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr. Andrew Uzoigwe,
Director (4)
|
|
|
11,133
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All directors and named executive officer as a group
(5 persons) (4)
|
|
|
1,482,962
|
|
|
|
|
|
|
3.20
|
%
|
*
|
Less than three percent.
|
(1)
|
At September 30, 2016, a total of 47,045,164 shares of our Common Stock were issued and outstanding.
|
(2)
|
Represents shares indirectly owned by Sir Emeka Offor, as a result of his ownership of, and exercise of voting and investment control over, each of Chrome Oil Services, Ltd. and Chrome Energy, LLC.
|
(3)
|
Includes 42,050 shares owned directly by Sir Emeka Offor.
|
(4)
|
Address c/o ERHC Energy, Inc., Suite 1440, 5444 Westheimer Road, Houston, TX 77056.
|
Item 13.
|
Certain Relationships and Related Transactions
|
Review, Approval or Ratification of Transactions with Related Persons
The Audit Committee of the Company is responsible for reviewing, approving or ratifying related party transactions, including any related-party transaction that the Company would be required to disclose pursuant to Item 404 of Regulation S-K promulgated pursuant to the rules and regulations of the SEC.
Policy
The Audit Committee, which consists solely of independent Directors, must review all “Related Person Transactions” as defined by Item 404 of Regulation S-K of the rules promulgated by the SEC. The Audit Committee will approve a Related Person Transaction only if it determines that the Related Person Transaction is consistent with the business interests of the Company. In considering the Related Person Transaction, the Committee will consider all relevant factors, including as applicable: (i) the Company’s business rationale for entering into the Related Person Transaction; (ii) whether the Related Person Transaction is on terms comparable to those available to third parties, or in the case of employment relationships, to employees generally; (iii) the potential for the Related Person Transaction to lead to an actual or apparent conflict of interest and any safeguards imposed to prevent such actual or apparent conflicts; and (iv) the overall fairness of the Related Person Transaction to the Company.
Procedure
Directors and executive officers are responsible for bringing a potential Related Person Transaction to the attention of the Chair of the Audit Committee.
Transactions in 2016 and 2015
None
Item 14.
|
Principal Accounting Fees and Services
|
Aggregate fees for professional services rendered by the auditors for the fiscal years ended September 30, 2016 and 2015, were as follows:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Audit fee
|
|
$
|
62,500
|
|
|
$
|
62,000
|
|
Tax fees
|
|
|
5,750
|
|
|
|
5,750
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
68,250
|
|
|
$
|
67,750
|
|
Audit fees
for the fiscal years ended September 30, 2016 and 2015 represent the aggregate fees billed for professional services rendered for the audit of the Company’s annual financial statements and review of financial statements included in its quarterly reports on Form 10-Q or services that are normally provided in connection with statutory and regulatory filings or engagements for those fiscal years.
Tax fees
for the fiscal year ended September 30, 2016 and 2015, represents the aggregate fees billed for professional services rendered for tax compliance, tax advice, and tax planning.
Audit Committee Pre-Approval Policies and Procedures
The Audit Committee on an annual basis reviews audit and non-audit services performed by the independent auditor. All audit and non-audit services are pre-approved by the Audit Committee, which considers, among other things, the possible effect of the performance of such services on the auditors’ independence. The Audit Committee has considered the role of M&K CPAS, PLLC in providing services to us for the fiscal year ended September 30, 2016 and has concluded that such services are compatible with M&K CPAS’s independence as the Company’s auditors.
PART IV
Item 15.
|
Exhibits and Financial Statement Schedules and Reports on Form 8-K
|
(32)Consolidated Financial Statements and Schedules:
|
1.
|
Consolidated Financial Statements: See Index to Consolidated Financial Statements immediately following the signature pages of this report.
|
|
2.
|
Consolidated Financial Statement Schedule: See Index to Consolidated Financial Statements immediately following the signature pages of this report.
|
|
3.
|
The following documents are filed as exhibits to this report:
|
EXHIBIT NO.
|
IDENTIFICATION OF EXHIBIT
|
Exhibit 3.1*
|
Articles of Incorporation
|
Exhibit 3.2*
|
Bylaws
|
Exhibit 4.1*
|
Specimen Common Stock Certificate.
|
Exhibit 4.2*
|
Form of Amended and Restated 12% Convertible Promissory Note, dated effective January 2001.
|
Exhibit 4.3*
|
Form of Amended and Restated 5.5% Convertible Promissory Note, dated effective January 2001.
|
Exhibit 4.4*
|
20% Convertible Promissory Note, dated January 31, 2001, in favor of Chrome.
|
Exhibit 4.5*
|
Term Loan Agreement, dated February 15, 2001, by and between Chrome and ERHC.
|
Exhibit 4.6*
|
Senior Secured 10% Exchangeable 10% Convertible Promissory Note, dated January 31, 2001, in favor of Chrome.
|
Exhibit 4.7*
|
Form of Warrant entitling Chrome to purchase common stock of the Company, exercise price of $0.40 per share.
|
Exhibit 10.1*
|
Option Agreement, dated April 7, 2003, by and between the Company and the Democratic Republic of Sao Tome and Principe (incorporated herein by reference to Exhibit 10.1 of Form 8-K filed April 2, 2003)
|
Exhibit 10.2*
|
Management and Administrative Services Agreement by and between Chrome Oil Services, Ltd. And the Company. (Incorporated by reference to Form 10-KSB filed September 24, 2001).
|
Exhibit 10.4*
|
Letter Agreement, dated November 29, 2004, by and between the Company and Chrome (incorporated herein by reference to Exhibit 10.1 of Form 8-K filed December 29, 2004).
|
Exhibit 10.5*
|
Promissory Note, dated December 15, 2004, made by the Company in favor of Chrome (incorporated herein by reference to Exhibit 10.2 of Form 8-K filed December 29, 2004).
|
Exhibit 10.6*
|
Promissory Note, dated December 15, 2004, made by the Company in favor of Chrome (incorporated herein by reference to Exhibit 10.3 of Form 8-K filed December 29, 2004).
|
Exhibit 10.7*
|
Employment Agreement with Ali Memon.
|
Exhibit 10.8*
|
Audit committee charter
|
Exhibit 10.9*
|
Employment Agreement with James Ledbetter
|
Exhibit 10.10*
|
May 21, 2001 Memorandum of Agreement made b/w DRSTP and ERHC
|
Exhibit 10.11*
|
March 15, 2003 Memorandum of Agreement made b/w DRSTP and ERHC
|
Exhibit 10.12*
|
April 2, 2003 Option Agreement b/w DRSTP and ERHC
|
Exhibit 10.13*
|
Administrative Agreement b/w Nigeria/DRSTP and ERHC
|
Exhibit 10.14*
|
Block 2 Participation Agreement March 2, 2006 b/w ERHC, Addax and Sinopec
|
Exhibit 10.15*
|
Block 2 Participation Agreement August 11, 2004 b/w ERHC and Pioneer
|
Exhibit 10.16*
|
Block 3 Participation Agreement February 16, 2006 b/w ERHC and Addax
|
Exhibit 10.17*
|
Block 4 Participation Agreement November 17, 2005 b/w ERHC and Addax
|
Exhibit 10.18*
|
Block 4 2nd Amendment to Participation Agreement March 14, 2006
|
Exhibit 10.19*
|
Block 4 3rd Amendment to Participation Agreement July 14, 2006
|
Exhibit 10.20*
|
Employment Agreement with Sylvan Odobulu
|
Exhibit 10.21*
|
Employment Agreement with David Alan Bovell
|
Exhibit 10.22*
|
Employment Agreement with Peter Ntephe
|
Exhibit 10.23*
|
Summary of Production Sharing Contract between the Republic of Chad and ERHC, dated June 30, 2011
|
Exhibit 10.24*
|
Novation of the Production Sharing Contract between the Republic of Chad and ERHC dated November 18, 2013 and a Decree of the President of the Republic of Chad dated September 24, 2013
|
|
Certification Pursuant to 18 U.S.C Section 1350, as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
Certification Pursuant to 18 U.S.C Section 1350, as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
Certification Pursuant to 18 U.S.C Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
Certification Pursuant to 18 U.S.C Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
In accordance with the Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on January 19, 2017, on its behalf by the undersigned, thereunto duly authorized.
ERHC Energy Inc.
|
|
By:
|
//s//Peter Ntephe
|
|
|
Peter Ntephe
|
|
|
President and Chief Executive Officer
|
|
|
//s//Sylvan Odobulu
|
|
|
Sylvan Odobulu
|
|
|
Principal Accounting Officer
|
|
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
|
|
Title
|
|
Date
|
//s// Howard Jeter
|
|
Director
|
|
January 19, 2017
|
Howard Jeter
|
|
Member Audit Committee
|
|
|
//s// Andrew Uzoigwe
|
|
Director
|
|
January 19, 2017
|
Andrew Uzoigwe
|
|
Member Audit Committee
|
|
|
//s// Friday Oviawe
|
|
Director
|
|
January 19, 2017
|
Friday Oviawe
|
|
Chairman Audit Committee
|
|
|
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