10-Q 1 form10-q.htm ERHC ENERGY INC. 10-Q 12-31-2006 ERHC Energy Inc. 10-Q 12-31-2006


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

FORM 10-Q
 
(MARK ONE)
 
S QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended December 31, 2006

£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ________________

Commission File Number 0-17325
 
(Exact name of registrant as specified in its charter)

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

5444 Westheimer Road
Suite 1440
Houston, Texas 77056
(Address of principal executive offices, including zip code.)

(713) 626-4700
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes No £

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

The number of common shares outstanding as of February 1, 2007 was 718,988,982.
 



 

ERHC ENERGY INC.
 
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A CORPORATION IN THE DEVELOPMENT STAGE
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS
December 31, 2006 and September 30, 2006
 
   
December 31,
2006
 
September 30,
2006
 
             
ASSETS
           
Current assets:
           
Cash and cash equivalents
 
$
38,030,673
 
$
40,991,114
 
Prepaid expenses and other current assets
   
215,421
   
1,073,031
 
Deferred tax asset
   
-
   
480,000
 
Income tax receivable
   
749,000
   
-
 
               
Total current assets
   
38,995,094
   
42,544,145
 
               
DRSTP concession fee
   
2,839,500
   
2,839,500
 
Property and equipment, net
   
69,941
   
14,604
 
Deferred tax asset
   
480,000
   
480,000
 
Other assets
   
8,921
   
-
 
               
 Total assets
 
$
42,393,456
 
$
45,878,249
 
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
             
Current Liabilities:
             
Accounts payable and accrued liabilities
 
$
6,800,804
 
$
6,784,004
 
Accounts payable and accrued liabilities, related party
   
102,664
   
69,439
 
Accrued interest
   
5,494
   
5,023
 
Federal income taxes payable
   
-
   
3,013,147
 
Asset retirement obligation
   
485,000
   
485,000
 
Current portion of convertible debt
   
33,513
   
33,513
 
               
Total current liabilities
   
7,427,475
   
10,390,126
 
               
Commitments and contingencies:
             
               
Shareholders’ equity:
             
Preferred stock, par value $0.0001; authorized 10,000,000; none issued and outstanding
   
-
   
-
 
Common stock, par value $0.0001; authorized 950,000,000 shares; issued and outstanding 718,988,982 and 718,988,982 at December 31, 2006 and September 30, 2006 respectively
   
71,899
   
71,899
 
Additional paid-in capital
   
91,652,399
   
91,652,399
 
Losses accumulated in the development stage
   
(56,758,317
)
 
(56,236,175
)
               
Total shareholders’ equity
   
34,965,981
   
35,488,123
 
               
 Total liabilities and shareholders’ equity
 
$
42,393,456
 
$
45,878,249
 

The accompanying notes are an integral part of these unaudited consolidated condensed financial statements.
 
 
A CORPORATION IN THE DEVELOPMENT STAGE
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended December 31, 2006 and 2005 and for the Period from Inception,
September 5, 1995, to December 31, 2006

   
2005
 
2006
 
Inception to
December 31,
2006
 
                 
Operating costs and expenses:
                
General and administrative expenses
 
$
1,230,517
 
$
1,331,898
 
$
60,470,160
 
Depreciation, depletion and amortization
   
2,275
   
2,415
   
1,366,428
 
Write-offs and abandonment
   
-
   
-
   
7,742,128
 
                     
Loss from operations
   
(1,232,792
)
 
(1,334,313
)
 
(69,578,716
)
                     
Other income and (expenses):
                   
Interest income
   
4,269
   
543,632
   
1,693,267
 
Gain from settlement
   
-
   
-
   
252,310
 
Other income
   
-
   
-
   
439,827
 
Gain from sale of partial interest in DRSTP concession
   
-
   
-
   
30,102,250
 
Interest expense
   
(461
)
 
(461
)
 
(12,123,680
)
Loss on extinguishment of debt
   
-
   
-
   
(5,749,575
)
                     
Total other income and expenses, net
   
3,808
   
543,171
   
14,614,399
 
                     
Loss before benefit (provision) for income taxes
   
(1,228,984
)
 
(791,142
)
 
(54,964,317
)
                     
Benefit (provision) for income taxes:
                   
Current
   
-
   
749,000
   
(2,274,000
)
Deferred
   
-
   
(480,000
)
 
480,000
 
                     
 Total benefit (provision) for income taxes
   
-
   
269,000
   
(1,794,000
)
                     
Net loss
 
$
(1,228,984
)
$
(522,142
)
$
(56,758,317
)
                     
Net loss per common share - basic and diluted
 
$
(0.00
)
$
(0.00
)
     
                     
Weighted average number of common shares outstanding -basic and diluted
   
710,912,226
   
718,988,982
       

The accompanying notes are an integral part of the consolidated condensed financial statements.
 
 
A CORPORATION IN THE DEVELOPMENT STAGE
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended December 31, 2006 and 2005 and for the Period from Inception,
September 5, 1995, to December 31, 2006

   
 2005
 
 2006
 
Inception to
December 31,
2006
 
                  
Cash Flows from Operating Activities
                
Net loss
 
$
(1,228,984
)
$
(522,142
)
$
(56,758,317
)
Adjustments to reconcile net loss to
                   
net cash used by operating activities:
                   
Depreciation, depletion and amortization expenses
   
2,275
   
2,415
   
1,366,428
 
Write-offs and abandonment
   
-
   
-
   
7,742,128
 
Deferred income taxes
   
-
   
480,000
   
(480,000
)
Compensatory stock options
   
502,718
   
-
   
1,084,340
 
Gain from settlement
   
-
   
-
   
(252,310
)
Gain on sale of partial interest in DRSTP concession
   
-
   
-
   
(30,102,250
)
Amortization of beneficial conversion feature
                   
associated with convertible debt
   
-
   
-
   
2,793,929
 
Amortization of deferred compensation
   
-
   
-
   
1,257,863
 
Common stock issued for services
   
-
   
-
   
20,897,077
 
Common stock issued for settlements
   
-
   
-
   
225,989
 
Common stock issued for officer bonuses
   
-
   
-
   
5,015,000
 
Common stock issued for interest
                   
and penalties on convertible debt
   
-
   
-
   
10,631,768
 
Common stock issued for board compensation
   
-
   
-
   
1,976,548
 
Loss on extinguishment of debt
   
-
   
-
   
5,682,368
 
Changes in operating assets and liabilities:
                   
Prepaid expenses and others current assets
   
22,093
   
857,610
   
(275,421
)
Income tax refundable
   
-
   
(749,000
)
 
(749,000
)
Other assets
   
-
   
(8,921
)
 
(8,921
)
Accounts payable and other accrued liabilities
   
(8,095
)
 
17,271
   
(937,452
)
Accrued federal income taxes
   
-
   
(3,013,147
)
 
-
 
Accounts payable, and accrued liabilities, related party
   
73,742
   
33,225
   
102,664
 
Accrued interest - related party
   
461
   
-
   
-
 
Accrued retirement obligation
   
-
   
-
   
485,000
 
                     
Net cash used by operating activities
   
(635,790
)
 
(2,902,689
)
 
(30,302,569
)
                     
Cash Flows from Investing Activities
                   
Purchase of DRSTP concession
   
-
   
-
   
(5,679,000
)
Proceeds from sale of partial interest in DRSTP concession
   
-
   
-
   
45,900,000
 
Purchase of furniture and equipment
   
-
   
(57,752
)
 
(863,144
)
                     
Net cash provided (used) by investing activities
   
-
   
(57,752
)
 
39,357,856
 
 
The accompanying notes are an integral part of the consolidated condensed financial statements.
 
 
ERHC ENERGY INC.
A CORPORATION IN THE DEVELOPMENT STAGE
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended December 31, 2006 and 2005 and for the Period from Inception,
September 5, 1995, to December 31, 2006

   
 2005
 
 2006
 
Inception to
December 31,
2006
 
                  
Cash Flows from Financing Activities:
                
Proceeds from warrants exercised
 
$
-
 
$
-
 
$
160,000
 
Proceeds from common stock, net of expenses
   
-
   
-
   
6,955,049
 
Proceeds from related party line of credit
   
-
   
-
   
2,750,000
 
Proceeds from related party debt
   
-
   
-
   
158,700
 
Proceeds from related party convertible debt
   
-
   
-
   
8,207,706
 
Proceeds from convertible debt
   
-
   
-
   
9,019,937
 
Proceeds from note payable to bank
   
-
   
-
   
175,000
 
Proceeds from shareholder loans
   
-
   
-
   
1,845,809
 
Collection of stock subscription receivable
   
-
   
-
   
913,300
 
Repayment of shareholder loans
   
-
   
-
   
(1,020,607
)
Repayment of long-term debt
   
-
   
-
   
(189,508
)
                     
Net cash provided by investing activities
   
-
   
-
   
28,975,386
 
                     
Net increase (decrease) in cash and cash equivalents
   
(635,790
)
 
(2,960,441
)
 
38,030,673
 
                     
Cash and cash equivalents, beginning of period
   
988,490
   
40,991,114
   
-
 
                     
Cash and cash equivalents, end of period
 
$
352,700
 
$
38,030,673
 
$
38,030,673
 
                     
Supplemental Disclosure of Cash Flow Information
                   
                     
Cash paid for interest expense
 
$
-
 
$
-
       
                     
Cash paid for income taxes
   
-
   
3,013,147
       

The accompanying notes are an integral part of the consolidated condensed financial statements.
 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 1 - Basis of Presentation and Business Organization

The consolidated financial statements included herein, which have not been audited pursuant to the rules and regulations of the Securities and Exchange Commission, reflect all adjustments which, in the opinion of management, are necessary to present a fair statement of the results for the interim periods on a basis consistent with the annual audited financial statements. All such adjustments are of a normal recurring nature. The results of operations for the interim periods are not necessarily indicative of the results to be expected for an entire year. Certain information, accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the Company’s audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2006.

General Business and Nature of Operations and Significant Accounting Policies

ERHC Energy Inc. (“ERHC” or the “Company”) is an independent oil and gas company. The Company was formed in 1986, as a Colorado corporation, and was engaged in a variety of businesses until 1996, when it began its current operations as an independent oil and gas company.  The Company’s goal is to maximize its value through exploration and exploitation of oil and gas reserves in the Gulf of Guinea offshore of central West Africa. The Company’s current focus is to exploit its only assets, which are rights to working interest in exploration acreage in the Joint Development Zone (“JDZ”) between the Democratic Republic of Sao Tome & Principe (“DRSTP”) and the Federal Republic of Nigeria (“FRN”) and in the exclusive territorial waters of Sao Tome (the “Exclusive Economic Zone” or “EEZ”).  The Company has formed relationships with upstream oil and gas companies to assist the Company in exploiting its assets in the JDZ. The Company is currently exploring opportunities in other areas of the energy industry with emphasis in supply and trading.

Consolidated Financial Statements

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

Use of Estimates

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

Stock-Based Compensation

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

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

 
Note 2- Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities consisted of the following as of each balance sheet date:

   
 December 31,
2006
 
 September 30,
2006
 
             
Accrued success fee (See Note 4)
 
$
1,500,000
 
$
1,500,000
 
Accrued stock payable - success fee (See Note 4)
   
4,803,750
   
4,803,750
 
Accrued settlement payable
   
125,000
   
175,000
 
Accounts payable
   
372,054
   
305,254
 
               
   
$
6,800,804
 
$
6,784,004
 

Note 3 - Revision to Financial Statements

ERHC has revised its financial statements to report as a development stage company for the year ended September 30, 2006 and subsequent periods. Accordingly, the statements of operations and cash flows include inception to date amounts

Note 4- Sao Tome Concession

In November 2005, ERHC sold a 33.3% participating interest in Block 4 to Addax Petroleum (Nigeria Offshore 2) Limited ("Addax"). In exchange, Addax paid ERHC $18,000,000 in the second quarter of fiscal 2006. Under the participation agreement, Addax will serve as operator, and Addax will pay all of ERHC's future costs in respect of all petroleum operations in Block 4. Addax is entitled to ERHC's share of oil production until Addax recovers ERHC's costs.

In February 2006, ERHC sold a 15% participating interest in Block 3 of the JDZ to Addax Petroleum Resources Nigeria Limited ("Addax Sub"). In exchange, Addax Sub paid ERHC $7,500,000 in the second quarter of fiscal 2006. Under this agreement, Addax Sub agreed to pay all of ERHC's future costs in respect of petroleum operations in Block 3. Addax Sub is entitled to ERHC's share of oil production until Addax Sub recovers ERHC's costs.

In March 2006, ERHC sold a 28.67% participating interest in Block 2 of the JDZ to Sinopec International Petroleum Exploration and Production Corporation Nigeria ("Sinopec"), and a 14.33% participating interest in Block 2 of the JDZ to Addax Energy Nigeria Limited ("Addax Ltd."). In exchange, Sinopec paid ERHC $13,600,000 and Addax Ltd. paid ERHC $6,800,000 in the second quarter of fiscal 2006. Under this agreement, Sinopec will serve as operator, and Sinopec and Addax Ltd. will pay all of ERHC's future costs in respect of petroleum operations in Block 2. Sinopec and Addax Ltd. are entitled to ERHC's share of oil production until they recover ERHC's costs and Sinopec is to receive 6% interest on its future costs, up to $35,000,000, but only to the extent that those interest costs are covered by production.

Related to the sale of the participating interest in Block 2, ERHC agreed to pay a $3,000,000 cash success fee ($1,500,000 was paid in March 2006 and the remaining $1,500,000 is included in accounts payable at December 31, 2006) to Feltang International Inc., a British Virgin Island company that was responsible for obtaining Sinopec’s participation in Block 2. ERHC also will issue to Feltang 5,250,000 shares of common stock and warrants to purchase 6,500,000 shares at an exercise price of $0.355 per share. The common stock was valued at $4,803,750 (included in accounts payable at December 31, 2006) based on the quoted market value of the common stock on the date Sinopec signed the production sharing agreement.
 
 
ERHC ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)                                                                                                                                                   

 
The following represents ERHC’s current rights in the JDZ blocks and the signature bonuses payable for each block:

JDZ Block #
 
Original Working Interest Percentage
 
Retained Interest
 
Signature Bonus Payable
 
 
 
 
 
 
 
2
 
30%
 
22%
 
Signature Bonus Free
3
 
20%
 
10%
 
Signature Bonus Free
4
 
25%
 
17.7%
 
Signature Bonus Free
5
 
15%
 
(a)
 
Signature Bonus Payable
6
 
15%
 
(a)
 
Signature Bonus Free
9
 
20%
 
(a)
 
Signature Bonus Payable
 
(a)
No contracts have been entered into as of the date hereof.

Note 5 - Income Taxes

At December 31, 2006 the Company had a consolidated net operating loss carry-forward (“NOL”) of approximately $10.1 million expiring through 2025. The Company had a deferred tax asset of approximately $3.4 million resulting from this NOL.  The loss carry-forwards are subject to certain limitations under the Internal Revenue Code including Section 382 of the Tax Reform Act of 1986. During the year ended September 30, 2006, the Company recognized a significant gain on the sale of various participation interests. This gain utilized a substantial portion of the Company’s net operating loss carry-forwards and such carry-forward were adjusted to remove losses limited under Section 382.

The composition of deferred tax assets and the related tax effects at December 31, 2006 and September 30, 2006 are as follows:

   
December 31,
2006
 
September 30,
2006
 
             
Net operating losses
 
$
2,930,000
 
$
3,410,000
 
Accrual for asset retirement
   
164,900
   
164,900
 
               
Total deferred tax assets
   
3,094,900
   
3,574,900
 
Valuation allowance
   
(2,614,900
)
 
(2,614,900
)
               
 Net deferred tax asset
 
$
480,000
 
$
960,000
 

The $480,000 deferred tax asset at December 31, 2006, represents the minimum NOL carry back claim from losses in the next two future years against the year ended September 2006 taxable income should no income be produced in future years. At December 31, 2006, $480,000 of the balance was reclassified to current income tax receivable.

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 income (loss) for the three months ended December 31, 2006 and 2005, is as follows:
 
   
Three Months Ended December 31,
 
   
2006
 
2005
 
   
Amount
 
%
 
Amount
 
%
 
                    
                    
Benefit for income tax at federal statutory rate
 
$
268,988
   
34.0
%
$
415,948
   
34.0
%
Amortization of deferred compensation
   
-
   
-
   
(34,550
)
 
(2.8
)
Change in valuation allowance
   
-
   
-
   
(381,398
)
 
(31.2
)
Other
   
12
   
-
   
-
   
-
 
                   
   
$
269,000
   
34.0
%
$
-
   
-
%
 

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

 
Note 7 - Stock-Based Compensation

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

Note 8 - Earnings Per Share

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

Note 9 - Commitments and Contingencies

Contingencies

From time to time, certain potential obligations are presented to the Company that may have originated during periods not under existing management’s control.  These alleged obligations are generally for goods and services for which the Company has no record.  The Company actively investigates these claims as they arise.  All known material obligations of the Company have been recorded and reflected in the financial statements, but there is no certainty that all material claims have been presented to the Company nor have the benefits of available statutes of limitations been considered, should they apply.

Operating Lease

ERHC leases office space at 5444 Westheimer Road, Houston, Texas. The amended lease for office space expires December 2011. The monthly base rent payment was $3,567 based on approximately 1,900 square feet of office space and in December 2006, ERHC amended this lease to increase the office space to approximately 5,200 square feet at a monthly base rent payment of $8,920.

Legal Proceedings

On May 4, 2006, a Federal court search warrant sought various records including, among other matters, documents, if any, related to correspondence with foreign governmental officials or entities in Sao Tome and Nigeria. ERHC continues to cooperate with the U.S. Department of Justice (DOJ) investigation.

Related U.S. Securities and Exchange Commission (SEC) subpoenas issued on May 9 and August 26, 2006 also requested a range of documents. ERHC has responded to both subpoenas.

During October 2006, Lakeshore Capital Limited filed an arbitration claim against ERHC seeking $4,400,000 for the alleged value of 4,500,000 shares of ERHC common stock and for a warrant to purchase 1,500,000 shares at an exercise price of $.20 per share, including interest and costs.  Lakeshore claims it is owed this sum for services previously rendered under a contract with ERHC.  ERHC believes that Lakeshore’s claim is entirely without merit and intends to vigorously defend all Lakeshore claims.

 
From time to time, ERHC may be subject to routine litigation, claims, or disputes in the ordinary course of business for which the ultimate outcome, in the opinion of management, should not have a materially adverse effect on ERHC’s financial position.

Forward Looking Statements

This report contains forward-looking statements. These statements relate to future events or ERHC Energy Inc.’s (“Company” or “ERHC”) future financial performance and involve known and unknown risks, uncertainties and other factors that may cause ERHC or its industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by the forward-looking statements.

In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially.

Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, there can be no guarantee of future results, levels of activity, performance, or achievements. Moreover, neither the Company nor any other person assumes responsibility for the accuracy and completeness of these forward-looking statements. The Company is under no duty to update any of the forward-looking statements after the date of this report to conform prior statements to actual results.

Item 2.  Management’s Discussion and Analysis of Financial Condition and Plan of Operations

You must read the following discussion of the results of the operations and financial condition of the Company in conjunction with its financial statements, including the notes included in its Form 10-K filing.  The Company’s historical results are not necessarily an indication of trends in operating results for any future period.

Overview

ERHC reports as a development stage enterprise as there are currently no significant operations and no revenue has been generated from business activities. The Company was formed in 1986, as a Colorado corporation, and was engaged in a variety of businesses until 1996, when it began its current operations as an independent oil and gas company.  The Company’s goal is to maximize its value through exploration and exploitation of oil and gas reserves in the Gulf of Guinea offshore of central West Africa. The Company’s current focus is to exploit its only assets, which are rights to working interests in exploration acreage in the JDZ and the EEZ.  The Company has entered into production sharing agreements with upstream oil and gas companies in these JDZ Blocks. The technical and operational expertise in conducting exploration operations will be provided by the Company’s participating interest in oil and gas companies.

Sale of Participation Interests

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

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

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

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

 
Results of Operations

Three Months Ended December 31, 2006 Compared with Three Months Ended December 31, 2005

During the three months ended December 31, 2006, the Company had a net loss of $522,142, compared with a net loss of $1,228,984 for the three months ended December 31, 2005. Interest income increased from $4,269 in the three months ended December 31, 2005 to $543,632 in the three months ended December 31, 2006 due to the significant cash balance maintained by the Company as a result of proceeds from the sale of participation interests in the three JDZ Blocks under production sharing contracts with various consortium partners. General and administrative expenses increased from $1,230,517 in the three months ended December 31, 2005 to $1,331,898 in the three months ended December 31, 2006 due to two primary reasons: 1) legal expenses increased from $276,162 to $890,152, an increase of $613,990, primarily related to legal fees incurred in the Justice Department investigation, offset by 2) a decrease of $ 497,600 in financial consultant fees due to completion of the negotiations for the sale of participation interests in the three JDZ Blocks.


As of December 31, 2006 the Company had $38,030,673 in cash and cash equivalents and short-term investments and positive working capital of $31,567,619. Management believes that this cash position should support working capital needs for more than 12 months.

Contractual Obligations

A tabular disclosure of contractual obligations at December 31, 2006, is as follows:
 
   
Payments due by period
 
   
Total
 
Less than 1 year
 
1 - 3 Years
 
3 - 5 Years
 
More than 5 Years
 
Operating Leases
 
$
535,200
 
$
107,040
 
$
214,080
 
$
214,080
   
-
 

Off-Balance Sheet Arrangements

At December 31, 2006, the Company has no off-balance sheet arrangements that have or are likely to have a material current or future effect on its financial condition or results of operations.

Debt Financing Arrangements

At December 31, 2006, the Company had short-term debt of $33,513 bearing interest at 5.5% per year. The Company had other current liabilities of $7,393,962 (Including related party liabilities as follows: $62,313 owed to Chrome Management, $40,350 due to the Company’s board of directors, and a liability of $125,000 due to the Company’s former CEO). Included in current liabilities is also a $1,500,000 finder’s fee accrual due in cash to Feltang and a $4,803,750 liability to Feltang that will be satisfied upon issuance of 5,250,000 shares of common stock.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

At December 31, 2006, all of the Company’s operations were located outside the United States. The Company’s only assets are agreements with DRSTP and the JDA, which provide ERHC with rights to participate in exploration and production activities in the Gulf of Guinea off the coast of central West Africa. The governments that control these areas of geographic interest have historically experienced volatility, which is out of management’s control, and the Company’s ability to exploit its interests in the agreements in this area may be impacted by this circumstance. Furthermore, the future success of the Company’s international operations may be adversely affected by risks associated with international activities, including economic and labor conditions, political instability, risk of war, expropriation, renegotiation or modification of existing contracts, tax laws (including host-country import-export, excise and income taxes and United States taxes on foreign subsidiaries) etc., may adversely affect the Company’s future results of operations and financial condition.

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

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

 
Item 4. Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Principal Accounting Officer, as appropriate, to allow timely decisions regarding required disclosure.  The Company’s management, with participation of the Company’s Chief Executive Officer and Principal Accounting Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the quarter covered by this Quarterly Report on Form 10-Q. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2006.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 


On May 4, 2006, a search warrant issued by the U.S. District Court of the Southern District of Texas, Houston Division, was executed on the Company seeking various records including, among other matters, documents, if any, related to correspondence with foreign governmental officials or entities in Sao Tome and Nigeria. With the guidance of the law firm of Akin Gump Strauss Hauer & Feld LLP, ERHC Energy continues to work with the U.S. Department of Justice in connection with the Department’s investigation. The Department of Justice agreed to ERHC’s request to return to ERHC a complete copy set of all paper documents seized in the Government’s May 4, 2006 search of ERHC’s Houston office. ERHC has received a copy set of these business documents. ERHC filed suit in federal district court in Texas in June. The lawsuit sought to protect the company’s attorney-client privileged documents and to allow ERHC counsel to determine the factual basis for the Justice Department’s search warrant affidavit, which is currently under seal. Although the judge has ordered that the affidavit remain under seal, his ruling requires the Justice Department to provide a neutral “taint team” to review all seized documents and to identify those that may be privileged. The neutral taint team is charged with the responsibility to withhold from the investigating attorneys any documents that it believes to be privileged. The ruling also provides the company with the right to challenge the Justice Department’s privilege determinations in court. Since the ruling, ERHC has been in communication with the Justice Department regarding the Government’s compliance with the ordered taint team procedures, and regarding the Government’s ongoing investigation.

The attorneys of Akin Gump Strauss Hauer & Feld LLP are also assisting in ERHC’s response to a related U.S. Securities and Exchange Commission (SEC) subpoena issued on May 9, 2006, and to a second related subpoena issued on August 26, 2006. The subpoenas request a range of documents, including among others, all documents related to correspondence with foreign governmental officials or entities in Sao Tome and Nigeria as well as for personnel records (specifically, those regarding former CFO, Franklin Ihekwoaba) and other corporate records from the Company. ERHC has responded to both subpoenas. 

During October 2006, Lakeshore Capital Limited (“Lakeshore”) filed an arbitration claim against ERHC before the American Arbitration Association, seeking $4,400,000 for the alleged value of 4,500,000 shares of ERHC common stock and for a warrant to purchase 1,500,000 shares at an exercise price of $.20 per share, including interest and costs.  Lakeshore claims it is owed this sum for services previously rendered under a contract with ERHC.  ERHC has filed an arbitration response disputing Lakeshore’s claim and intends to vigorously defend itself in the arbitration and any other legal proceedings.

From time to time, ERHC may be subject to routine litigation, claims, or disputes in the ordinary course of business for which the ultimate outcome, in the opinion of management, should not have a materially adverse effect on ERHC’s financial position.


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

THE COMPANY HAS HAD A HISTORY OF LOSSES.

The Company's business is at an early stage of development. Other than in the first quarter of 2006, the Company has not generated any revenue since its entry into the oil and gas business. The Company reported net income of $23,171,536 in fiscal year 2006 and net losses of $11,270,478 and $3,593,388, in fiscal years 2005 and 2004, respectively. While the Company had net income in 2006, this income was the result of a one time gain.
 
THE COMPANY MAY NOT DISCOVER COMMERCIALLY PRODUCTIVE RESERVES IN THE JDZ OR EEZ.

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

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

 
·
the availability of future capital resources to the Company and the other participants to be used for drilling wells;

 
·
the approval of other participants for the drilling of wells on the projects; and

 
·
the economic conditions at the time of drilling, including the prevailing and anticipated prices for oil and gas.

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

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

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

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

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

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

At December 31, 2006, all of the Company's operations were located outside the United States. The Company's only assets are agreements with DRSTP and the JDA, which provide ERHC with rights to participate in exploration and production activities in the Gulf of Guinea off the coast of central West Africa. This geographic area of interest is controlled by foreign governments that have historically experienced volatility, which is out of management's control. The Company's ability to exploit its interests in the agreements in this area may be impacted by this circumstance.

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

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

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

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

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

 
THE COMPANY'S STOCK PRICE IS HIGHLY VOLATILE.

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

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

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

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

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


None 

Item 3. Defaults Upon Senior Securities

None

Item 4. Submission of Matters to a Vote of Security Holders

None


None


Exhibits

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

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

32.1* Certification Pursuant to 18 U.S.C Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2* Certification Pursuant to 18 U.S.C Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 

Reports on Form 8-K

None

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

ERHC Energy, Inc.


Name
Title
 Date
     
/s/ Nicolae Luca
Director and Acting President and
February 9, 2007
      Nicolae Luca
Acting Chief Executive Officer
 
     
/s/ Sylvan Odobulu
Controller (Principal Accounting Officer)
February 9, 2007
      Sylvan Odobulu
   

 
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