10-K 1 form10k.htm ERHC ENERGY INC 10-K 9-30-2011 form10k.htm


U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
 
FORM 10-K
 
o
Annual Report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended September 30, 2011
 
OR
 
x
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period ended: __________________
 
Commission file number: 000-17325

Graphic 1
 
(Exact name of registrant as specified in its charter)

Colorado
 
88-0218499
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 
 
 
5444 Westheimer Road, Suite 1440, Houston, Texas
 
77056
(Address of Principal Executive Office)
 
(Zip Code)

713-626-4700
(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Exchange Act:  None

Securities registered pursuant to Section 12(g) of the Exchange Act: common stock

Check if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes o No x
 
Check if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes o No x
 
Check if the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
 
Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
 
Check if the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer.
Large Accelerated Filer o Accelerated Filer x Non-Accelerated Filer o
 
Check if the registrant is a shell company.  Yes o No x
 
The aggregate market value of the voting stock held by non-affiliates of the registrant on November 30, 2011 was $38,629,668

On November 30, 2011, the registrant had 737,518,835 shares of common stock issued and outstanding.
 


 
 

 

TABLE OF CONTENTS
 
 
PART I
PAGE
 
 
 
Item 1.
4
Item 1A.
15
Item 1B.
19
Item 2.
19
Item 3.
21
Item 4.
22
 
 
 
 
PART II
 
 
 
 
Item 5.
22
Item 6.
23
Item 7.
24
Item 7A.
27
Item 8.
28
Item 9.
54
Item 9A.
54
Item 9B.
54
 
 
 
 
PART III
 
 
 
 
Item 10.
55
Item 11.
59
Item 12.
65
Item 13.
66
Item 14.
66
 
 
 
 
PART IV
 
 
 
 
Item 15.
67
 
68


Forward-Looking Statements

ERHC Energy Inc. (the “Company”) or its representatives may, from time to time, make or incorporate by reference certain written or oral statements  which include, but are not limited to, information concerning the Company’s possible or assumed future business activities and results of operations and statements about the following subjects:
 
 
business strategy;
 
 
growth opportunities;
 
 
future development of concessions, exploitation of assets and other business operations;
 
 
future market conditions and the effect of such conditions on the Company’s future activities or results of operations;
 
 
future uses of and requirements for financial resources;
 
 
interest rate and foreign exchange risk;
 
 
future contractual obligations;
 
 
outcomes of legal proceedings including, without limitation, the ongoing investigations of the Company;
 
 
future operations outside the United States;
 
 
competitive position;
 
 
expected financial position;
 
 
future cash flows;
 
 
future liquidity and sufficiency of capital resources;
 
 
future dividends;
 
 
financing plans;
 
 
tax planning;
 
 
budgets for capital and other expenditures;
 
 
plans and objectives of management;
 
 
compliance with applicable laws; and
 
 
adequacy of insurance or indemnification.

These types of statements and other forward-looking statements inherently are subject to a variety of assumptions, risks and uncertainties that could cause actual results, levels of activity, performance or achievements to differ materially from those expected, projected or expressed in forward-looking statements.  These risks and uncertainties include, among others, the following:
 
 
general economic and business conditions
 
 
worldwide demand for oil and natural gas;
 
 
changes in foreign and domestic oil and gas exploration, development and production activity;
 
 
 
oil and natural gas price fluctuations and related market expectations;
 
 
termination, renegotiation or modification of existing contracts;
 
 
the ability of the Organization of Petroleum Exporting Countries, commonly called OPEC, to set and maintain production levels and pricing, and the level of production in non-OPEC countries;
 
 
advances in exploration and development technology;
 
 
the political environment of oil-producing regions;
 
 
political instability in the Republic of Chad, the Democratic Republic of Sao Tome and Principe and the Federal Republic of Nigeria;
 
 
casualty losses;
 
 
competition;
 
 
changes in foreign, political, social and economic conditions;
 
 
risks of international operations, compliance with foreign laws and taxation policies and expropriation or nationalization of equipment and assets;
 
 
risks of potential contractual liabilities;
 
 
foreign exchange and currency fluctuations and regulations, and the inability to repatriate income or capital;
 
 
risks of war, military operations, other armed hostilities, terrorist acts and embargoes;
 
 
regulatory initiatives and compliance with governmental regulations;
 
 
compliance with environmental laws and regulations;
 
 
compliance with tax laws and regulations;
 
 
customer preferences;
 
 
effects of litigation and governmental proceedings;
 
 
cost, availability and adequacy of insurance;
 
 
adequacy of the Company’s sources of liquidity;
 
 
labor conditions and the availability of qualified personnel; and
 
 
various other matters, many of which are beyond the Company’s control.

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

PART I

Item 1 – Business

Overview

ERHC Energy Inc., a Colorado corporation, (“ERHC” or the “Company”) was incorporated in 1986.

The Company is in the business of exploration and exploitation of oil and gas resources in Africa including its rights to working interests in exploration acreage in the Republic of Chad (“Chad”), in the Joint Development Zone (“JDZ”) between the Democratic Republic of São Tomé and Príncipe (“STP”) and the Federal Republic of Nigeria (“FRN or “Nigeria”) and in the exclusive economic zone of São Tomé and Príncipe (the “Exclusive Economic Zone” or “EEZ”).

ERHC's license interests now encompass both offshore and onshore opportunities in the West Africa region

In the JDZ ERHC has entered into partnership relationships with major international companies, Addax Petroleum Inc. and the Sinopec Corporation, who operate some of the license areas on behalf of ERHC.

The Company’s strategy in the JDZ and EEZ is to farm down its working interests to well established oil and gas operators for upfront cash payments and be carried for ERHC’s share of the exploration l costs.  This has already been done successfully on Blocks 2, 3 and 4 of the JDZ.

ERHC is now pursuing a similar approach for JDZ Blocks 5, 6 and 9 as well as in the EEZ.

Apart from its oil and gas exploration activities in Chad, the JDZ and the EEZ, ERHC is actively pursuing other oil and gas opportunities on the African continent.

These other opportunities also include the acquisition of significant equity stakes in other oil and gas exploration and production companies and therefore an indirect interest in the underlying exploration and production assets of such other companies.

CURRENT BUSINESS OPERATIONS

REPUBLIC OF CHAD

Award of Three Blocks in Chad to ERHC

On June 30, 2011 ERHC announced that after several months of negotiations between ERHC and the Government of Chad, three blocks for oil and gas exploration and development in Chad were awarded to the Company.  Management believes that the three blocks in Chad are of strategic importance because they diversify ERHC’s portfolio beyond the Gulf of Guinea, significantly increase the size of exploration acreage under the Company’s control and are onshore, in a country with proven production and reserves.
 

Graphic 2
 
Production Sharing Contract on ERHC’s Three Blocks in Chad

On July 6, 2011, the Company announced that it had signed a Production Sharing Contract (PSC) on the three oil blocks with the Government of Chad. A PSC is an agreement that governs the relationship between ERHC (and any future joint-venture partners) and the Government of Chad in respect of exploration and production in the Blocks awarded to the Company.  The PSC details, among other things, the work commitments (including acquisition of data, drilling of wells, social projects, etc.), the time frame for completion of the work commitments, production sharing between the parties and the Government, and how the costs of exploration, development and production will be recovered.
 

The PSC with the Government of Chad has an exploration term of up to 8 years.  ERHC has proposed a minimum work program covering the 8 years , with the Years 1-4 comprising of geological and geophysical (“G&G”) studies (including the acquisition of seismic data), Years 5-6 including an initial one well commitment and Years 7-8 including a second well commitment.  The minimum expenditure on the work program over the 8 years is $16 million.

The blocks covered by the PSC are onshore.  They promise to be cheaper and less technically challenging to explore than the Company’s offshore assets in the Gulf of Guinea. In the event of a commercial discovery, onshore blocks are typically capable of much faster development than deep offshore blocks, particularly in a case like Chad’s where there is already a well-established export route via an underutilized pipeline to the Atlantic port of Kribi in the Gulf of Guinea.

In the event of a discovery and commercial production from the Company’s blocks, the Company and any partners that have participated in the exploration  are entitled under the PSC to up to 70% of the net hydrocarbon production (less any production royalty) as cost oil, until all the costs for exploration and development have been recovered. Production royalty is 14.25% in the case of crude oil and 5% in the case of natural gas.

No guarantee can be given that there will be production in commercial quantities from the Company’s exploration acreage in Chad.

Graphic 3
 
Names and Sizes of ERHC’s Chad Blocks

The names of the blocks and the sizes of Company's respective interests are as follows:

Block
ERHC Interest
Net ERHC acreage
 
 
 
Manga
100%
6,477 square kilometers or 1,600,501 acres
 
 
 
BDS 2008
100%
16,360 square kilometers or 4,042,644 acres
 
 
 
Chari-Ouest III
50%
4,500 square kilometers or 1,111,974 acres

Chad Oil Background and Overview

Chad is one of the most exciting new areas for oil exploration and production in Africa.  The country covers almost 1,284,000 km2 and is situated in what has become a golden triangle of African oil production.  Chad is bordered in the North by Libya which has the largest crude oil reserves in Africa and is Africa’s second largest producer.  Nigeria, to the South, is Africa’s largest crude oil producer and has Africa’s largest reserves of natural gas.  Chad is bordered in the East by Sudan which is Sub-Saharan Africa’s third largest producer of crude oil.  Cameroon which borders Chad to the South West is also a net exporter of crude oil.
 

Chad is now amongst Sub-Saharan Africa’s most significant crude oil producers.  The country has proven oil reserves of 1.5 billion barrels with recent studies indicating that there is the potential for more discoveries. Production came on stream in 2003 when a consortium of Chevron, Esso E&P (Exxon) and PETRONAS brought the Meandrous field into production.  Production followed from the Komen and Bonobo fields in 2004 while the Nay, Moundouli and Maikeri fields went into production between 2005 and 2007.  In 2007, the Chinese National Petroleum Company (“CNPC”) began producing from the Mimosa and Ronier fields in the Bongor basin in South Western Chad.

Chad began to export oil in 2004.  The export route is through the Chad-Cameroon pipeline completed in 2003 at a cost of over $3.7 billion.  The pipeline runs 1,000 km from Chad’s prolific Doba basin through Cameroon’s Logone Birni basin to the port of Kribi in the Gulf of Guinea with an estimated capacity of 225,000 bopd which is significantly larger than Chads current production which in 2010 averaged 12,900 bopd.  A new, 300 km pipeline has been constructed to transport crude oil from the Koudalwa field in the South Western Chari-Buguirmi region to the Djarmaya refinery.  The Djarmaya refinery, situated about 40 km North of N’Djamena, Chad’s capital, was built as a joint venture between CNPC and the Chadian state oil company, SHT.  The refinery became operational in July 2011 and has an initial capacity of 20,000 barrels of oil per day which is planned to rise to 60,000 barrels of oil per day.

ERHC has a 100% in the Manga Block which is north of Lake Chad, along the border with Niger.  The Company also has 100% and 50% interests respectively in BDS 2008 and Chari-Ouest Block 3 which lie next to the prolific Doba and Doseo Basin oilfields. In 2010, the Doba and Doseo Basin oilfields had an average production of 122,500 barrels of crude oil per day.  BDS 2008 is also bounded by the Bongor basin which hosts the producing Mimosa and Ronier fields.  Extensive exploration activity in the three basins has resulted in a large number of recent discoveries, including the Benoy-1 in Chari-Ouest Block 3 by the Taiwanese Company, OPIC. The Benoy-1 discovery, adjacent to ERHC’s license area, is estimated to have the potential for up to 9,800 barrels of high-quality, light crude per day and 1.2 million cubic feet of natural gas per day.

The Doba and Doseo basins are part of the Central African rift system.  They contain up to 10 km of non-marine sediments recording the complex tectonic and climatic evolution of the region from Early Cretaceous to the present Day. The Doba basin is within the oil-proved zone confirmed by the M’biku and Belanga Wells. The Doseo Basin is one of the tertiary –cretaceous Chad rift basins. The basin is bordered by the Central African Republic in the South and South East. Wells drilled in this basin include Kedini-1, Keita-1, Kibea-1, Kikwey-1 Maku-1, Nya-1, North Sako-1, Tega-1, Bambara-1 and Bona Kaba-1. These wells were drilled by Exxon and Conoco and all discovered hydrocarbons except for Keita-1 and Bona Kaba-1

Exploration Term

Under the PSC, ERHC is entitled to be issued an Exclusive Exploration Authorization over the Blocks for an initial period of five years which can be renewed for a further three years.  The Exclusive Exploration Authorization is to be issued by the Government of Chad by an Award Order issued by the Government Minister in charge of hydrocarbons of Chad.  The initial period of five years of the Exclusive Exploration Authorization begins to run from the date of the publication of the Award Order in the Journal Officiel (an official publication of the Government of Chad).

Proposed Work Program

ERHC has proposed a minimum exploration work program on the basis of the full 8-year exploration period subject to such modification as might be required, including bringing forward drilling where appropriate, as a consequence of exploration work undertaken during the initial 5-year period of the Exclusive Exploration Authorization.  ERHC’s proposed work commitments under the program cover the three blocks as a whole and are as follows:

Initial Work Phase (4 years)

The first two-year sub-period covers geological work including regional geology and field studies utilizing existing well logs and 2D seismic data, construction of regional structure isopach and facies maps and cross-sections at key formation tops, acquisition and studying of satellite seep data on a regional scope, organization of G&G database and basin evaluation and modeling to describe petroleum system and migration paths.    The sub-period also includes such geophysical work as the acquisition and study of available gravity and magnetic surveys to define the major structural elements, reprocessing of the existing 2D seismic data, interpretation of the existing 2D seismic data to prepare regional structure maps at key formations and tectonic horizons, acquisition of 2D seismic over the prospects and leads based on the outcome of gravity/magnetic  and 2D seismic interpretations and mappings, geophysical analysis to enhance the prospects, and acquisition of 3D seismic data over mature prospects.

The second two-year sub-period includes geological and geophysical work such as merging and editing the reprocessed 2D seismic data with newly acquired 3D seismic data, detailed interpretation and mapping of 3D seismic, generation, upgrading and prioritizing of drilling prospects.  During this period, the contractor shall also determine the most practical method of drilling applicable to the area, taking into account health, safety, environmental issues and other factors.
 

Graphic 4
 
Second Work Phase (2 years)

This period covers geological work including the conduct of play analysis to define charge, seal, trap, reservoir, timing, source and maturation.  It also covers geophysical work such as the acquisition and interpretation of seismic data over the prospective area to add to or enhance the prospect inventory.  One exploration well is expected to be drilled during this period.

Third Work Phase (2 years)

This period covers geological work including the re-evaluation of the maps and studies with respect to the information from the well, acquisition of 2D seismic data over the prospective area and upgrading and increasing of the prospect inventory utilizing the new seismic data. One exploration well is expected to be drilled during this period.

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

Background of the JDZ

In the spring of 2001, the governments of Săo Tomé & Príncipe and Nigeria reached an agreement over a long-standing maritime border dispute. Under the terms of the agreement, the two countries established the JDZ to govern commercial activities within the disputed boundaries. The JDZ is administered by the JDA which oversees all future exploration and development activities in the JDZ. The revenues derived from the JDZ will be shared 60/40 between the governments of Nigeria and Săo Tomé & Príncipe, respectively.
 
 
Origin of ERHC’s Rights in the JDZ

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 Joint Development Zone (“JDZ”) in exchange for exploration rights in the JDZ.  The Company additionally entered into an Administration Agreement with the Nigeria-São Tomé and Príncipe Joint Development Authority (“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.  Following the exercise of ERHC’s rights as set forth in the 2003 Option Agreement, the JDA confirmed the award in 2004 of participating interests to ERHC in JDZ Blocks 2, 3, 4, 5, 6 and 9 of the JDZ.  Subsequently, ERHC jointly bid with internationally renowned technical partners for additional participating interests in the JDZ during the 2004/5 licensing round conducted by the JDA.
 
ERHC’s Current Rights in the JDZ

The following represents ERHC’s current rights in the JDZ blocks:
 
JDZ Block
 
ERHC Original
Participating Interest
 
ERHC Joint Bid
Participating Interest
 
Participating
Interest(s) Assigned
 
Current ERHC
Retained Participating
Interest
 
 
 
 
 
 
 
 
 
2
 
30.00%
 
35.00%
 
43.00%
 
22.00%
3
 
20.00%
 
5.00%
 
15.00%
 
10.00%
4
 
25.00%
 
35.00%
 
40.50%
 
19.50%
5
 
15.00%
 
 -
 
 -
 
15.00% (in arbitration)
6
 
15.00%
 
 -
 
 -
 
15.00% (in arbitration )
9
 
20.00%
 
 -
 
 -
 
20.00%

The Original Participating Interest is the interest granted pursuant to the 2003 Option Agreement. ERHC has not assigned or transferred any of its participating interests in Blocks 5, 6 and 9.

Particulars of ERHC’s Participating Agreements in the JDZ

The following are the particulars of the Participating Agreements by which ERHC assigned some of its participating interests in JDZ Blocks 2, 3 and 4 to technical partners who are operating the Blocks and carrying ERHC’s proportionate share of costs in the Blocks until production, if any, commences from the Blocks:
 
Date of Participation
Agreement
Party(ies) to the Participation Agreement
 
Participating
Interest(s)
Assigned
 
 
Participating
Interest Assigned
Price
 
 
 
 
 
 
 
 
 
JDZ Block 2 - Participation Agreement - ERHC Retained Interest of 22.00%
 
 
 
 
 
 
 
 
 
 
 
 
March 2, 2006
Sinopec International Petroleum Exploration Production Co. Nigeria Ltd - a subsidiary of Sinopec International Petroleum and Production Corporation
 
 
28.67
%
 
$
13,600,000
 
 
 
 
 
 
 
 
 
 
 
 
Addax Energy Nigeria Limited - an Addax Petroleum Corporation subsidiary
 
 
14.33
%
 
$
6,800,000
 
 
 
 
 
 
 
JDZ Block 3 - Participation Agreement - ERHC Retained Interest of 10.00%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
February 15, 2006
Addax Petroleum Resources Nigeria Limited - a subsidiary of Addax Petroleum Corporation
 
 
15.00
%
 
$
7,500,000
 
 
 
 
 
 
 
 
 
 
 
JDZ Block 4 - Participation Agreement - ERHC Retained Interest of 19.50%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
November 15, 2005
Addax Petroleum  Nigeria (Offshore 2) Limited - a subsidiary of Addax Petroleum Corporation
 
 
40.50
%
 
$
18,000,000
 
 

Under the terms of the Participation Agreements Sinopec and Addax agreed to pay all of ERHC’s future costs for petroleum operations (“the carried costs”) in respect of ERHC's retained interests in the blocks. Additionally, Sinopec and Addax are entitled to 100% of ERHC’s allocation of cost oil plus up to 50% of ERHC’s allocation of profit oil from the retained interests on individual blocks until Sinopec and Addax Sub recover 100% of ERHC’s carried costs

On or about October 2, 2009, Sinopec International Petroleum Exploration and Production Corporation acquired all of the outstanding shares of Addax Petroleum Corporation

OPERATIONS IN THE JDZ

ERHC has working interests in six of the nine Blocks in the JDZ, as follows:
 
 
JDZ Block 2:  22.0%
 
 
JDZ Block 3:  10.0%
 
 
JDZ Block 4:  19.5%
 
 
JDZ Block 5:  15.0% (in arbitration)
 
 
JDZ Block 6:  15.0% (in arbitration)
 
 
JDZ Block 9:  20.0%
 
The working interest percentages represents ERHC’s share of all the hydrocarbon production from the blocks and obligates ERHC to pay a corresponding percentage of the costs of drilling, production and operating the blocks. These costs in blocks 2, 3 and 4 are currently being carried by the operators until production, whereupon the operators will recover their costs from the production revenues.

ERHC’s interests in the JDZ Blocks are in various stages of exploration. JDZ Blocks 2, 3 and 4 were the focus of an exploration campaign that concluded in January 2010. To date, no Production Sharing Contracts have been signed in either JDZ Block 5 or 6, and no operatorship has been awarded in JDZ Block 9.

In 2009, Sinopec and Addax, ERHC’s technical partners and operators in Blocks 2, 3 and 4 undertook an exploratory drilling campaign across the three blocks that was completed in January 2010. That drilling campaign was a coordinated effort made possible by two important transactions undertaken by Addax and Sinopec during 2009: (1) Addax’s acquisition of Anadarko Petroleum’s interest in Block 3, allowing Addax to become the operator in the Block 3 and (2) Sinopec’s acquisition of Addax.
 
The drilling campaign was completed in January 2010 with five wells drilled in the following locations and order:
 
 
The Kina-1 well in JDZ Block 4
 
 
The Bomu-1 well in JDZ Block 2
 
 
The Lemba-1 well in JDZ Block 3
 
 
The Malanza-1 well and Oki East-1 well in Block 4

The following is an analysis of activity that took place in each block in connection with the drilling campaign:
 


JDZ Block
 
Operator
 
Name of Well
 
Date Drilling
Began
 
Date Well
Completed
 
Rig/Vessel Used
 
 
 
 
 
 
 
 
 
 
 
2
 
Sinopec
 
Bomu-1
 
August 2009
 
October 2009
 
SEDCO 702
 
 
 
 
 
 
 
 
 
 
 
3
 
Addax Sub
 
Lemba-1
 
October 2009
 
November 2009
 
Deepwater Pathfinder
 
 
 
 
 
 
 
 
 
 
 
4
 
Addax
 
Kina-1
 
August 2009
 
October 2009
 
Deepwater Pathfinder
 
 
 
 
 
 
 
 
 
 
 
4
 
Addax
 
Malanza 1
 
November 2009
 
December 2009
 
Deepwater Pathfinder
 
 
 
 
 
 
 
 
 
 
 
4
 
Addax
 
Oki East-1
 
December 2009
 
January 2010
 
Deepwater Pathfinder

The following is a summary of results of the drilling campaign:

JDZ Block
 
Results of Drilling Released by Operators
 
 
 
2
 
The Bomu-1 well was drilled on time and within budget to a total depth of 3,580 meters resulting in the discovery of biogenic methane gas. As of September 30, 2011, the operator has not made any declaration of commerciality.
 
 
 
3
 
The Lemba-1 well was drilled on time and below budget to a total depth of 3,758 meters, biogenic methane gas was discovered in two sands.  As of September 30, 2011, the operator has not made any declaration of commerciality.
 
 
 
4
 
All wells were drilled on time and within budget to the planned depth.  Biogenic methane gas was discovered in multiple sands in both Kina well and Oki East well.  As of September 30, 2011, the operator has not made any declaration of commerciality.

General Information on Current Operations in Blocks 2, 3 and 4

The Joint Development Authority (JDA) has approved an extension of Exploration Phase 1 in Joint Development Zone (JDZ) Blocks 2, 3 and 4 until March 14, 2012. This JDA action is subject to final approval by the Nigeria-Săo Tomé & Príncipe Joint Ministerial Council. The extensions represent a commitment to comprehensive analysis of the findings so far in the first phase of exploration with a view to enhancing the decision-making on the exploration program. No guarantees can be given at that there will be any production in commercial quantities or production at all.

The extensions are important in the Company’s view as JDZ Blocks 2, 3 and 4 cover a combined 2,215 square kilometers an area that will require further technical analysis and additional wells to fully evaluate.

Of significance is the planned 2012 two well drilling campaign by Total and its partners in JDZ Block 1. ERHC does not hold interests in JDZ Block 1 but considers that the entry of one of the oil majors as the new operator of Block 1 will positively impact on exploration in the JDZ as a whole. Drilling in Block 1 could also provide potentially valuable information to assist the extended Exploration Phase 1 in Blocks 2, 3 and 4 in which ERHC holds interests.

ERHC and its technical partners have obtained very valuable information regarding the stratigraphy, sedimentology and structure of JDZ Blocks 2, 3 and 4 in the five-well drilling campaign undertaken between 2009 and 2010 where there are still more than a dozen additional prospects identified as potential exploration targets.

Management also understands that analyzing drilling results and incorporating them into the relevant geologic and fluid models takes time. Further, moving from field appraisal and development to production takes even more time. As has been the practice in the JDZ, accurate material information on the progress in the JDZ Blocks will emanate from the operators or the JDA.  ERHC will publish such information in a timely manner in accordance with ERHC’s contractual and regulatory obligations.
 
 
SAO TOME AND PRINCIPE EXCLUSIVE ECONOMIC ZONE (“EEZ”)

Background of the EEZ

An exclusive economic zone is an area beyond and adjacent to the territorial waters of a coastal nation which is subject to specific legal regimes established by international law.  In an exclusive economic zone, the coastal nation has sovereign rights established by international law to explore and exploit the natural resources in the zone.  The STP EEZ delineates an expanse of waters offshore Săo Tomé and Principe covering approximately 160,000 square km.  The EEZ is measured from claimed archipelagic baselines.  The territorial waters of STP extend to 12 nautical miles from the coast while the exclusive economic zone extends from the edge of the territorial waters to 200 nautical miles from the coast. The STP EEZ is the largest such zone in the Gulf of Guinea. Oceanic water depths around the two islands exceed 1,524 meters, depths that have only become feasible for oil production in the past few years; however, oil and gas are produced in the neighboring countries of Nigeria, Equatorial Guinea, Gabon and Congo.

Origin of ERHC’s Rights and in the EEZ

Under an agreement with the government of Sao Tome and Principe (“STP”) prior to the 2003 Option Agreement, ERHC was vested with the rights to participate in exploration and production activities in the EEZ.  These rights included (a) the right to receive up to 100% of two blocks of ERHC’s choice and (b) the option to acquire up to a 15% paid working interest in each of two additional blocks of ERHC’s choice in the EEZ.  In 2010, ERHC exercised its rights to receive up to 100% of two blocks of ERHC’s choice in the EEZ and was duly awarded Blocks 4 and 11 of the EEZ by the Government of STP.  ERHC will decide whether to take up the option to acquire up to a 15% paid working interest in each of two additional blocks of the EEZ when called upon to exercise the option by the Government of STP in accordance with the agreements which provide for the rights and option.

PSC Negotiations for the EEZ

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

The PSC negotiations between ERHC and the National Petroleum Agency of São Tomé and Príncipe (ANP-STP) opened on November 14, 2011 in Sao Tome. The PSCs pertain to ERHC’s 100 percent working interest in Blocks 4 and 11 of the São Tomé and Príncipe Exclusive Economic Zone (“EEZ”). ERHC’s management is looking to negotiate PSCs for the EEZ Blocks that will be attractive to potential joint venture partners. Discussions are continuing simultaneously with prospective operating partners for ERHC’s EEZ Blocks

Overview of ERHC’s EEZ Blocks

The Săo Tomé and Príncipe EEZ is a frontier region that sits south of the Niger Delta, and west of the Gabon salt basin, retaining similarities with each of those prolific hydrocarbon regions. The regional seismic database comprises approximately 12,000 kilometers of seismic data. Interpretation of that seismic data shows numerous structures that have similar characteristics to known hydrocarbon accumulations in the area.

EEZ Block 4 is 5,808 square kilometers, situated directly east of the island of Príncipe. The northeastern area near EEZ Block 4 contains a large graben structure, which is bound by the Kribi Fracture Zone.

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

On July 20, 2011 ERHC announced that it its ownership interest in Exile Resources Inc. ("Exile") stood at approximately 7.35%. Exile is a Canadian independent oil and gas company that trades on the Toronto Stock Exchange’s Venture Exchange under the symbol ERI. During the three months ended June 30, 2011, ERHC invested $1,350,000 in Exile stock in open market purchases. ERHC’s intention was to gain an indirect interest in Exile’s underlying oil and gas exploration and production assets as well as an ability to participate in the Exile’s decision making in respect of those assets.  ERHC has been particularly interested in Exile’s carried interest in the Akepo field in the Niger Delta, which is expected to begin producing later this year or in early 2012.
 
The Akepo field is located in the shallow waters of the southeastern area of Nigeria in OML 90. Exile Resources has 10 percent equity and up to a 17.5% economic interest in the field, with Oando Petroleum and Exploration Company (“Oando”) carrying its costs. Sogenal Ltd is the operator of the field. The Akepo-1STdiscovery is expected to produce between 2,500 and 3,000 barrels of oil per day when production begins.

On August 2, 2011 Oando and Exile announced an acquisition and financing transaction whereby Exile would acquire certain interests of Oando and pay for the acquisition by the issuance of shares of Exile. Subsequently, Oando and Exile reached a definitive agreement which is now subject to Exile shareholder approval. Oando is an oil and gas company that holds certain Nigerian and other exploration licenses and interests.  Oando’s assets include a 78% equity stake in Equator Exploration Limited which has various interests in the Gulf of Guinea including in the JDZ and the EEZ.

ERHC plans to attend a meeting of the shareholders of Exile on December 29, 2011 where consideration will be given to an arrangement (the "Arrangement") for:

(1) a share exchange of one new share of Exile for every 16.28 currently existing shares;
(2) the issuance to the shareholders of Exile of two share purchase warrants of Exile for every 16.28 shares of Exile held immediately prior to the Arrangement, one such share purchase warrant being exercisable to acquire one new share of Exile at an exercise price of Canadian $1.50 per share for a period of 12 months and a second such share purchase warrant being exercisable to acquire one new common share of Exile at an exercise price of Canadian $2.00 for a period of 24 months;
(3) the change of the name of Exile to Oando Energy Resources Inc. or such other name as may be acceptable to Industry Canada  and the Toronto Stock Exchange;
(4) the appointment of two new directors to Exile;
(5) a reduction of the stated capital of the issued and outstanding shares of Exile to Canadian $1.00 per share without any distribution to the shareholders of Exile and;
(6) the reverse acquisition and reorganization transaction of Oando E&P .

If the Arrangement and reverse merger/ reorganization is approved, there will subsequently be approximately 106,053,338 shares of Exile outstanding, with the current Exile shareholders holding 5,714,286 shares and Oando holding 100,339,052 shares. In that event, ERHC’s investment in Exile is expected to be approximately 419,165 shares based on the current 6,834,000 shares it holds.

AIM LISTING STATUS
 
ERHC and its advisers are currently reviewing the corporate due diligence carried out on the Company with a view to resolving any issues arising from the exercise. The due diligence exercise has covered ERHC’s history over the last 25 years but particularly since 1997. Completion of the review and successful resolution of any issues will clear the way for admission of ERHC to trading on AIM or such other international exchange as might be appropriate.
 
An AIM listing may give ERHC access to a much larger pool of funds than the OTC Bulletin Board and to a market that has demonstrated long-standing affinity for West African oil and gas assets.
 
ACQUISITION OF OTHER OIL AND GAS EXPLORATION AND PRODUCTION ASSETS

Although ERHC is making considerable progress toward realizing the value of our oil and gas assets in Chad, the JDZ and the EEZ, it will be some time before any of these oil and gas assets begin to produce revenues. ERHC, therefore, seeks to identify and acquire assets with a shorter time horizon for revenue generation.
 
ERHC has identified and examined a large number of potential acquisitions and is actively in discussion regarding a number of potential exploration and production opportunities in Africa. Ultimately, ERHC seeks a portfolio of assets and companies from which it can derive significant strategic value. Securing such potential acquisitions will of course depend on the availability of adequate financing.
 
 
CURRENT PLANS FOR OPERATIONS

ERHC’s principal assets are its interests in Chad, the JDZ and the EEZ. ERHC has no current sources of income from its operations. In addition to the existing Participation Agreements in JDZ Blocks 2, 3 and 4, the Company hopes to enter into Participation Agreements in some or all of its other Blocks, but the timing or likelihood of such transactions cannot be predicted.  The Company believes that the Participation Agreements that it has entered into will be its primary source of future cash flow; however, the Company is exploring plans to generate operating income from new sources.  The Company plans to diversify its business activity by pursuing other growth opportunities which may include acquisition of revenue-producing assets in diverse geographical areas and forging strategic, new, business partnerships and alliances. To expand operations, ERHC is currently in negotiations for potential investments that would increase the Company’s presence in the African oil and gas industry and elsewhere. ERHC cannot currently predict the outcome of negotiations for acquisitions in Africa, or, if successful, their impact on the Company's operations.

PLANS FOR FUNDING OF POTENTIAL ACQUISITIONS

ERHC's future plans may be dependent on the Company's ability to attract new funding. On July 7, 2010, the Company filed a registration statement on Form S-3 with the U.S. Securities and Exchange Commission (SEC), utilizing a “shelf” registration process or continuous offering process. Under this shelf registration process, the Company may, from time to time, sell up to $50,000,000 of the securities described in the prospectus in one or more offerings
 
Under the shelf registration, the Company sold 9,090,910 common shares for total proceeds of $2 million on October 6, 2010, pursuant to a securities purchase agreement.  An equivalent of 6,818,183 warrants with a term of 5 years and an exercise price of $0.28 were also issued to the investors along with the common shares sold.  The Company also issued to the placement agent a total of 459,546 warrants which have an exercise price of $0.275 and a term of approximately 5 years.  The Company received net proceeds under the securities purchase agreement of $1,821,500.  The fundraising and its proceeds have been instrumental in the Company’s recent acquisitions.

UPDATES AND INFORMATION

ERHC’s website at http://www.erhc.com has accurate information about the Company’s operations, assets, and initiatives and a FAQ page that is frequently updated to address the latest questions.

The Company provides free of charge on our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable.

SEC’s Public Reference Room at 100 F Street NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers, including us, that file electronically with the SEC. The public can obtain any documents that we file with the SEC at h http://www.sec.gov after we electronically file such material with, or furnish it to, the SEC.
 
Item 1A.  Risk Factors

You should carefully consider the risks described below before making any investment decision related to the Company’s securities.  The risks and uncertainties described below are not the only ones facing the Company.   Additional risks and uncertainties not presently known or that the Company currently deems immaterial also may impair its business operations.  If any of the following risks actually occur, the Company’s business could be affected.

The Company has no sources of revenue and a history of losses from operations

The Company’s business is in an early stage of development.  The Company has not generated any operating revenue since its entry into the oil and gas industry and has incurred significant operating losses.   The Company expects to incur additional operating losses for the foreseeable future.

The Company has a limited operating history in the oil and gas industry

The Company’s operations have consisted solely of acquiring rights to working interests in Chad, the JDZ and the EEZ and entering into production sharing contracts.  The Company may not be the operator with respect to these contracts.  The Company’s future financial results depend primarily on (1) the ability of the Company or its venture partners to provide or obtain sufficient financing to meet their financial commitments in the production sharing contracts, (2) the ability to discover commercial quantities of oil and gas, and (3) the market price for oil and gas. Management cannot predict if or when the production sharing contracts will result in future wells being drilled or if drilled, whether oil and/or gas will be discovered in commercial quantities.

Financing may be needed to fund the financial commitments of the production sharing contracts

The Company’s failure or the failure of our venture partners to provide or obtain the necessary financing may preclude the continuation of exploration activities.

The Company may not discover commercially productive reserves in Chad, the JDZ or the EEZ

The Company’s future success depends on its ability to economically discover oil and gas reserves in commercial quantities in Chad, the JDZ and/or the EEZ. There can be no assurance that the Company’s planned projects in Chad, the JDZ or the EEZ will result in significant, if any, reserves or that the Company and its partners will have future success in drilling productive wells.

The Company’s non-operator status limits its control over oil and gas projects in Chad, the JDZ and the EEZ

The Company will focus primarily on creating exploration opportunities and forming relationships with oil and gas companies to develop those opportunities in Chad, the JDZ and the EEZ.  As a result, the Company will have only a limited ability to exercise control over a significant portion of a project’s operations and the associated costs of those operations in Chad, the JDZ or the EEZ.  The success of a future project is dependent upon a number of factors that are outside the Company’s control. These factors include:
 
 
the availability of future capital resources to the Company and the other participants for drilling additional wells;
 
 
the approval of the Company or other participants for determining well locations and drilling time-tables;
 
 
the economic conditions at the time of drilling, including the prevailing and anticipated price of oil and gas; and
 
 
the availability and cost of land based and/or deep water drilling rigs and the availability of operating personnel
 
The Company’s reliance on its consortium partners and its limited ability to directly control future project costs could have a material adverse effect on its future rates of return.

The Company’s success depends on its ability to exploit its limited assets

The Company’s primary assets are rights to working interests in exploration acreage in Chad, the JDZ and the EEZ under agreements with the Government of Chad, the JDA and DRSTP.  The Company’s operations have been limited to managing and sustaining its rights under these agreements.  The Company’s viability depends on its ability to exploit these assets. However, there is no assurance that it will be successful.

The Company is subject to Government Regulation over which it has no control

In the event the Company begins direct exploration and exploitation of hydrocarbons, it will be required to make necessary expenditures to comply with applicable health and safety, environmental and other regulations.
 

The oil and gas industry is subject to various types of regulations throughout the world. Legislation affecting the oil and gas industry has been pervasive and is under constant review for amendment or expansion. Pursuant to such legislation, numerous government agencies have enacted extensive laws and regulations binding on the oil and gas industry and companies engaged in this industry, some of which carry substantial penalties for failure to comply. Such laws and regulations have a significant impact on oil and gas exploration, production and marketing and midstream activities. These laws and regulations increase the cost of doing business and, consequently, will affect results of operations. In as much as new legislation affecting the oil and gas industry is commonplace and existing laws and regulations are frequently amended or reinterpreted, the Company is unable to predict the future cost or the impact of complying with such laws and regulations. However, the Company does not expect that any of these laws and regulations will affect its operations in a manner materially different from that in which they would affect other oil and gas companies of similar size and scope of operations.

Having interests outside the United States requires the Company to comply with United States laws and other laws in foreign jurisdictions related to pursuing, owing, and exploiting foreign investments, agreements and other relationships. The Company is subject to all such laws, including, but not limited to, the Foreign Corrupt Practices Act of 1977 (“FCPA”).

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 are engaged in exploring for crude oil and natural gas and acquiring crude oil and natural gas properties, resulting in significant competition for desirable exploratory and producing properties.  The companies with which the Company competes are much larger and have greater financial resources and technical expertise 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 if any 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 and other regulations.

The Company’s business interests are located outside of the United States which subjects it to risks associated with international activities beyond its control.

At September 30, 2011, the Company’s major assets are located outside the United States.  The Company’s primary assets are cash in various financial institutions and agreements with Chad, the DRSTP, the JDA and the EEZ, which provide ERHC with rights to participate in exploration and production activities in Chad and in the Gulf of Guinea off the coast of central West Africa.  Production is subject to political risks which are inherent in all foreign operations. The Company’s ability to exploit its interests in this area pursuant to such agreements may be adversely 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, termination, renegotiation or modification of existing contracts, tax laws (including host-country import-export, excise and income taxes and United States taxes on  foreign  subsidiaries)  and  changes  in the value of the U.S. dollar relative to the local currencies in which future oil and gas producing activities may be  denominated.  Changes in exchange rates may also adversely affect the Company’s future results of operations and financial position.

In addition, to the extent the Company engages in operations and activities outside the United States, it is subject to the Foreign Corrupt Practices Act (the “FCPA”) which, among other restrictions, prohibits U.S. companies and their intermediaries from making payments to foreign officials for the purpose of obtaining or keeping business or otherwise obtaining favorable treatment, and requires companies to maintain adequate record-keeping and internal accounting practices to accurately reflect their financial and other transactions with foreign officials.  The FCPA applies to companies, individual directors, officers, employees and agents.  The FCPA also applies to foreign companies and persons taking any action in furtherance of such payments while in the United States.  Under the FCPA, U.S. companies may also be held liable for actions taken by strategic or local partners or representatives.

The FCPA imposes civil and criminal penalties for violations of its provisions.  Civil penalties may include fines of up to $500,000 per violation, and equitable remedies such as disgorgement of profits causally connected to the violation (including prejudgment interest on such profits) and injunctive relief.  Criminal penalties for violations of the payments provisions could range up to the greater of $2 million per violation or twice the gross pecuniary gain sought by making the payment, and/or incarceration for up to 5 years per violation.  Moreover, if a director, officer or employee of a company is found to have willfully violated the FCPA books and records provisions, the maximum penalty would be imprisonment for 20 years per violation.  Maximum fines of up to $25 million may also be imposed for willful violations of the books and records provisions by a company.
 

The Company’s business interests are located in Chad and in the Gulf of Guinea offshore of central West Africa and are subject to the volatility of foreign governments

Our primary assets are located in Chad and in the Gulf of Guinea offshore of central West Africa. The Governments of Chad, Nigeria and the island nation of Sao Tome and Principe granted our participation interests in various concessions in their lands and offshore waters. The Governments of Nigeria and Sao Tome and Principe exist in a volatile political and economic environment and the Company is subject to all the risks associated with those governments. These risks include, but are not limited to:
 
 
Loss of future revenue and concessions as a result of hazards such as war, acts of terrorism, insurrection and other political risks
 
 
Increases in taxes and governmental interests
 
 
Unilateral renegotiation of contracts by government entities
 
 
Difficulties in enforcing our rights against a governmental agency because of the doctrine of sovereign immunity and foreign sovereignty over international operations
 
 
Changes in laws and policies governing operations of foreign-based companies, and
 
 
Currency restrictions and exchange rate fluctuations
 
Our foreign operations may also be adversely affected by laws and policies of the United States affecting foreign trade and taxation. Realization of any of these factors could materially and adversely affect our financial position, results of operations and cash flows.

The Company has filed suit to prevent tampering with its interest and any adverse ruling related to JDZ Blocks 5 and 6. This action could have a material adverse effect on ERHC’s business, prospects, operations, financial condition and cash flow.

On November 3, 2008, the Company filed a suit in Nigeria to prevent any tampering with its rights in JDZ Blocks 5 and 6 pending the outcome of arbitration over those rights. The lawsuit comes after the JDA and the Joint Ministerial Council (JMC) of the Nigeria-Săo Tomé and Príncipe JDZ failed to give a satisfactory response to the Company’s letters seeking clarification of the Company’s rights in JDZ Blocks 5 and 6 following media reports stating that the JMC had approved of the Company’s removal from the Blocks. The Company was awarded a 15 percent working interest in each of the Blocks in a 2005 bid/licensing round conducted by the JDA, following the exercise by ERHC of preferential rights in the Blocks as guaranteed by contract and treaty. The dispute is entirely contractual. The JDA and the Government of DRSTP 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 & 6 under the Company’s contracts with DRSTP which provide for the rights.  The Company contends that no such relinquishment has occurred and has sought recourse to arbitration accordingly.  In November 2008, the Company dispatched notices of arbitration for service on the JDA and the Governments of Nigeria and Sao Tome & Principe to commence arbitration in London. ERHC wants the London Court of International Arbitration to clarify that ERHC's interests in JDZ Blocks 5 and 6 remain intact. If the Company fails to prevail in its lawsuit or arbitration proceedings, there could be significant adverse effects on the Company’s future planned operations in JDZ Blocks 5 and 6. These adverse effects could include but not be limited to a loss of ERHC’s rights JDZ Block 5 and 6.  At this time, ERHC is unable to reasonably estimate the economic impact if the Company fails to prevail in its suit and arbitration.
 
The Company has previously been the recipient of requests for information and documents from the SEC, the DOJ and a U.S. Senate subcommittee.
 
The Company was the recipient of subpoenas from the Department of Justice and SEC in 2006 and from a U.S. Senate subcommittee in 2007 requiring ERHC to tender its corporate records from inception to the dates of the subpoenas to the respective bodies. ERHC’s attorneys, Akin Gump Strauss Hauer & Feld LLP, assisted ERHC in responding fully and completely to, and satisfying, all the subpoenas.

Subpoenas are requests for information and do not necessarily mean that any subsequent, further or other activity will result therefrom or occur in respect of the  Company or any individuals connected with the Company.
 

ERHC incurred substantial costs in responding to the subpoenas. Those costs consist primarily of legal fees paid to the Company’s legal counsel, Akin Gump Strauss Hauer & Feld LLP and document reproduction costs. These costs have had a significant negative impact on the Company’s cash flows from operations.   While no further subpoenas have been served on or similar requests made of the Company since, neither management nor its legal counsel can assess the magnitude of future cash requirements that could result if any further or other subpoenas were served. In a worst case scenario, the Company’s cash resources could be exhausted and the Company’s status as a going concern could also be brought into question.
 
The Company has limited sources of working capital

The Company believes that its working capital requirements for operations in 2012 will be approximately $4,800,000 based on maintaining operations at their current level and the generation of interest income at levels similar to 2011. Our consortium partners will pay all of ERHC’s future costs in respect of all operations in JDZ Blocks 2, 3 and 4 subject to total reimbursement upon production.

The Company is currently focused on acquiring and exploiting its interests in Chad, JDZ Blocks 2, 3, 4, 5, 6 and 9 and the EEZ but has no current source of income other than interest income from cash investments generated from the sale of participation interests in Blocks 2, 3 and 4 to Sinopec and Addax Ltd. The Company hopes to enter into participation agreements in Chad, JDZ Blocks 5, 6 and 9 and also in the EEZ, but the timing or likelihood of such transactions cannot be predicted.  The Company might be required to exercise further rights in EEZ in 2012, in which case it may be constrained to and incur significant capital cost in exercise of those rights.

In addition to normal working capital requirements, ERHC's interest in Chad will require the Company to make additional cash signature bonus payments of up to $5 million in 2012 and the Company estimates that it may incur additional costs of at least $1 million to implement its minimum commitments in the first year of the work program required by the Production Sharing Contract (“PSC”) signed with the Government of Chad. If the Company is unable to successfully negotiate participation agreements with operating and other partners in Chad and the EEZ, the Company's cash resources could be strained and the Company's future plans curtailed.
 

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.   A general economic downturn or a recession in the industry, will adversely impact the Company’s prospective future revenues, the value of its oil and natural gas exploration concession, as well as its ability to exploit its assets.

One shareholder controls approximately 43% of the Company’s outstanding common stock

Chrome Oil  (“Chrome”) beneficially owns approximately 43% of the Company’s 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 or a liquidity event.

The Company’s stock price is highly volatile

The Company’s common stock is currently traded on the Over-the-Counter (OTC) 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 regarding its stock price.

The Company does not currently pay dividends on its common stock and does not anticipate doing so in the near 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 foreseeable future. The Company intends to retain any earnings to fund its future operations.

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.

The Internal Revenue Service is currently conducting an examination of the Company’s tax returns.

The Internal Revenue Service is currently examining the tax returns for the Company’s 2005 and 2006 tax years.   If adjustments are required, the Company may be subject to taxes, penalties and interest and these could have a material adverse effect on ERHC’s operations, financial condition and cash flow.

Item 1B.  Unresolved Staff Comments

None

Item 2.  Properties

In 2011, the Company was awarded three blocks for exploration and exploitation of hydrocarbons in Chad and the Company is currently assessing the most economically beneficial means of exploiting these assets. All of the  Company’s properties are in the form of working interests which represent ERHC’s share of all the potential hydrocarbon production from the blocks awarded and obligates ERHC to pay a corresponding percentage of the costs of drilling, production and operating these blocks.  These costs in Blocks 2, 3 and 4 of the JDZ are currently being carried by the operators until production, whereupon the operators will recover their costs from production revenues. ERHC has working interests in Blocks 2, 3, 4, 5, 6, and 9 in the offshore JDZ.   ERHC also has working interests in Blocks 4 and 11 and rights to working interests in two additional blocks to be selected by ERHC in the EEZ. The subsistence of the company’s interests in JDZ Blocks 5 and 6, are currently the subject of arbitration between the Company, the JDA and the Governments of Nigeria and DRSTP.
 

Republic of Chad

ERHC holds working interests in three blocks for oil and gas exploration and development in Chad.

The names of the blocks and the sizes of Company's respective interests are as follows:

Block
ERHC Interest
Net ERHC acreage
 
 
 
Manga
100%
6,477 square kilometers or 1,600,501 acres
 
 
 
BDS 2008
100%
16,360 square kilometers or 4,042,644 acres
 
 
 
Chari-Ouest III
50%
4,500 square kilometers or 1,111,974 acres
 
Joint Development Zone
 
ERHC has interests in six of the nine Blocks in the Joint Development Zone (JDZ), a 34,548 sq. km area approximately 200 km off the coast of Nigeria and Sao Tome and Principe that is adjacent to several large petroleum discovery areas. ERHC’s rights in the JDZ include:
 
graphic 6
 
 
JDZ Block 2:  22.0%
 
 
JDZ Block 3:  10.0%
 
 
JDZ Block 4:  19.5%
 
 
JDZ Block 5:  15.0% (in Arbitration)
 
 
JDZ Block 6:  15.0% (in Arbitration)
 
 
JDZ Block 9:  20.0%
 
Sao Tome and Principe Exclusive Economic Zone

The Government of Sao Tome and Principe awarded ERHC rights to participate in exploration and production activities in Sao Tome and Principe’s EEZ. ERHC’s rights include the following:
 
 
EEZ Block 4: 100% and no signature bonus
 
 
EEZ Block 11: 100% and no signature bonus
 
 
The option to acquire up to a 15% paid working interest in additional two blocks of ERHC’s choice.
 
ERHC will be responsible for its proportionate share of exploration and exploitation costs in the EEZ blocks.
 
Corporate Office

The Company’s corporate office is located at 5444 Westheimer Road, Suite 1440, Houston, Texas 77056 pursuant to a lease that expires in December 2011.
 
 
Item 3.  Legal Proceedings

JDZ Blocks 5 and 6

Lawsuit
On November 3, 2008, the Company filed a suit at the Federal High Court in Nigeria to prevent any tampering with its rights in JDZ Blocks 5 and 6 pending the outcome of arbitration over the said rights. The suit came after the JDA and Joint Ministerial Council (“JMC”) of the Nigeria-São Tomé and Príncipe JDZ failed to give a satisfactory response to the Company’s letters seeking clarification on the Company’s rights in JDZ Blocks 5 and 6 following media reports stating that the JMC had approved of the Company’s removal from the Blocks.

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 exercise by ERHC of preferential rights in the Blocks as guaranteed by contract and treaty.  The dispute is entirely contractual. 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.

Arbitration
In November 2008, the Company dispatched notices of arbitration for service on the JDA and the Governments of Nigeria and São Tomé & Príncipe to commence arbitration in London. ERHC wants the London Court of International Arbitration to clarify that ERHC's interests in JDZ Blocks 5 and 6 remain intact.

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

São Tomé Claim

Mr. Angelo de Jesus Bomfim, a São Tomé licensed attorney is claiming against ERHC the sum of twenty six thousand ($26,000) U.S. dollars plus interest. The claim stems from an alleged retainer owed to Mr. Bomfim by the Company under an alleged retainer agreement entered into in 1998 between the Company and Mr. Bomfim, and alleged retainer services rendered thereafter between 1998 and 1999.  On November 14, 2011, lawyers handling the claim on behalf of the Company negotiated a $16,000 settlement, without admission of liability by ERHC, on the matter. .

Backup Withholding Tax Claim by the Internal Revenue Service

On November 17, 2011, the Company received a proposed settlement from the IRS relating to backup withholding tax in its 2006 tax year in the amount of $60,505. The settlement includes additional taxes of $47,776 and interest of $12,729. The Company will consider the additional taxes in a carryback claim due to losses incurred subsequent to 2006.

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.
 

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

None.

PART II

Item 5.  Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

Market and Related Information

ERHC’s common stock is currently traded on the OTC Bulletin Board under the symbol “ERHE.”  The market for the Company’s common stock is unpredictable and highly volatile.  The following table sets forth the closing sales price per share of the common stock for the past three fiscal years.  These prices reflect inter-dealer prices, without retail mark-ups, markdowns or commissions, and may not necessarily represent actual transactions.

Stock Price Highs & Lows

   
High
   
Low
 
   
(Price per share)
 
Fiscal Year 2009
 
 
   
 
 
First Quarter
  $ 0.30     $ 0.11  
Second Quarter
    0.36       0.10  
Third Quarter
    0.72       0.29  
Fourth Quarter
    0.90       0.60  
                 
Fiscal Year 2010
               
First Quarter
  $ 0.73     $ 0.44  
Second Quarter
    0.75       0.35  
Third Quarter
    0.62       0.20  
Fourth Quarter
    0.42       0.20  
                 
Fiscal Year 2011
               
First Quarter
  $ 0.30     $ 0.14  
Second Quarter
    0.24       0.14  
Third Quarter
    0.17       0.08  
Fourth Quarter
    0.18       0.09  

As of November 30, 2011, there were approximately 2,202 stockholders of record.  The closing price of the common stock as reported on the OTC Bulletin Board on November 30, 2011 was $0.09. The Company has not paid any dividends during the last three fiscal years and does not anticipate paying any cash dividends in the foreseeable future.

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, 9,586,756 shares have been issued.

   
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
 
 
-
 
-
 
 
10,413,244
 
   
 
       
 
 
 
Equity compensation plans not approved by security holders
   
                         -
 
                         -
   
                                   -
 


Recent Sales of Unregistered Securities

The Company has issued the following unregistered securities:
 
 
During the first quarter of fiscal 2008, the Company issued an aggregate of 300,000 shares of common stock to the Company’s directors for services rendered in 2007.
 
 
During the second quarter of fiscal 2009, the Company issued an aggregate of 450,000 shares of common stock to the Company’s directors for services rendered in 2005 and 2008.
 
 
During the fourth quarter of fiscal 2009, the Company approved the issuance of an aggregate of 361,875 shares of common stock to the Company’s directors and non-management staff for services rendered in 2009.
 
 
During the third and fourth quarter of 2010, the Company issued 1,017,500 shares for 2010 to employees and directors, for services rendered in 2010.
 
 
During the fourth quarter of 2011, the Company awarded 525,000 shares for 2011 to directors, for services rendered in 2011.These shares were unissued at September 30, 2011.
 
With respect to the sale of the unregistered securities referenced above, all transactions were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.  No sales commissions were paid in connection with these transactions.

Issuer Purchases of Equity Securities

The Company has not repurchased any of its Common Stock.

Item 6. Selected Financial Data

The selected financial data of the Company presented below as of and for each of the five years in the period ended September 30, 2010, has been derived from the audited financial statements of the Company.  The financial statements as of and for the years ended September 30, 2011, 2010, 2009, 2008 and 2007 have been audited by MaloneBailey, LLP, an independent registered public accounting firm.  The data set forth below should be read in conjunction with the Company’s financial statements, related notes thereto and Management’s Discussion and Analysis of Financial Condition and Plan of Operations, contained elsewhere herein.

Statements of Operations Data
 
   
For the Years Ended September 30,
 
   
2011
   
2010
   
2009
   
2008
   
2007
 
                                         
Operating expenses
   
4,438,053
   
$
5,188,495
   
$
4,239,706
   
$
4,280,143
   
$
4,976,765
 
Interest expense
   
(922
)
   
(1,843
)
   
(1,843
)
   
(1,843
)
   
(1,843
)
Other Income (expense)
   
28,488
     
(1,040,473
)
   
(3,447,588
)
   
1,241,189
     
1,498,704
 
Benefit (provision) for taxes
   
-
     
-
     
-
     
(30,360
)
   
1,723,000
 
                                         
Net income (loss)
   
(4,410,487
)
 
$
(6,230,811
)
 
$
(7,689,137
)
 
$
(3,071,157
)
 
$
(1,756,904
)
                                         
Net income (loss) per share -
                                       
basic and diluted
 
$
(0.01
)
 
$
(0.01
)
 
$
(0.01
)
 
$
(0.00
)
 
$
(0.00
)
Weighted average shares of
                                       
common stock outstanding
   
738,284,321
     
723,439,691
     
722,794,828
     
722,182,831
     
720,966,165
 

Balance Sheets Data
 
   
September 30,
 
   
2011
   
2010
   
2009
   
2008
   
2007
 
                                         
Concession costs and fees
 
$
4,620,531
   
$
2,839,500
   
$
2,839,500
   
$
2,839,500
   
$
2,839,500
 
Total assets
   
19,748,238
     
23,007,470
     
28,859,825
     
36,880,422
     
39,854,641
 
Total liabilities
   
539,516
     
517,425
     
5,209,900
     
5,907,960
     
5,947,982
 
Shareholders’ equity
   
19,208,722
     
22,490,045
     
23,649,925
     
30,972,462
     
33,906,659
 
 

Item 7.  Management’s Discussion and Analysis of Financial Condition and Plan of Operations

Introduction

The following discussion and analysis presents management’s perspective of the Company’s business and, financial condition and its overall performance. This information is intended to provide investors with an understanding of our past performance, current financial condition and outlook for the future. 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 thereto included in this Form 10-K filing.  The Company’s historical results are not necessarily an indication of trends in operating results for any future period.

Reference is made to “Item 6. Selected Financial Data” and “Item 8. Financial Statements and Supplementary Data.”

CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION

This Annual Report on Form 10-K contains forward-looking statements.  Forward-looking statements include statements concerning plans, objectives, goals, strategies, expectations, future events or performance and underlying assumptions and other statements which are other than statements of historical facts.  Certain statements contained herein are forward-looking statements and, accordingly, involve risks and uncertainties which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements.  Our expectations, beliefs and projections are expressed in good faith and are believed by us to have a reasonable basis, including without limitations, management's examination of historical operating trends, data contained in our records and other data available from third parties, but there can be no assurance that management's expectations, beliefs or projections will result or be achieved or accomplished.  In addition to other factors and matters discussed elsewhere herein and the risks discussed in  Item 1A.  Risk Factors , the following are important factors that, in our view, could cause actual results to differ materially from those discussed in the forward-looking statements: geopolitical instability where we operate; our ability to meet our capital needs; our ability to raise sufficient capital and/or enter into one or more strategic relationships with one or more industry partners to execute our business plan; our ability and success in finding, developing and acquiring oil and gas reserves; our ability to respond to changes in the oil exploration and production environment, competition, and the availability of personnel in the future to support our activities.

Overview

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

ERHC has provided an in-depth background and current operations description under Item 1 of this Form 10-K and readers are encouraged to read that analysis in connection with  Management’s Discussion and Analysis of Financial Condition and Plan of Operations.

In recent years ERHC has been focused on identifying opportunities in West Africa that work to the strengths of its management team and leverage the experience gained through the Company's long term involvement in the JDZ and EEZ. During 2011, management interest in the region and its desire to diversify its asset base lead to the identification of opportunities in Chad. Management was particularly interested in Chad due to the fact that operations will be land based and certain regions of Chad have the infrastructure to support development in a shorter timeframe than can typically be achieved with an offshore development  .

Critical Accounting Policies

The Company has identified the policies below as critical to its business operations and the understanding of its results of operations.  The impact and any associated risks related to these policies on the Company’s business operations are discussed throughout this section where such policies affect the Company’s reported and expected financial results.  Management’s preparation of this Annual Report on Form 10-K requires it to make estimates and assumptions that affect the reported amount of assets and liabilities, and the disclosure of contingent assets and liabilities.  There is no assurance that actual results will not differ from those estimates and assumptions.

Concentration of Risks

The Company’s current focus is to exploit assets consisting of agreements with Chad, the DRSTP and JDA concerning oil and gas exploration.  The Company has developed internal capabilities and formed relationships with other oil and gas companies with the technical and financial capabilities to assist the Company in leveraging its interests in Chad, the EEZ and the JDZ.  The Company currently has no other operations.
 

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 investment in interests in Chad, its DRSTP concession, and its JDA fee in light of its 2003 Option Agreement and there have been no events or circumstances that would indicate that such asset might be impaired.

Recent Accounting Pronouncements

Following is an analysis of recent accounting guidance issued by the Financial Accounting  Standards Board ("FASB") resulting in changes to the Accounting Standards Codification ("ASC):

FASB ASC 350 - In September 2011, the FASB issued guidance regarding assessing whether it is necessary to perform goodwill impairment tests on a recurring basis.  The guidance permits an entity to first assess qualitative factors to determine whether it is “more likely than not” that the fair market value of a reporting unit is less than its carrying amounts as a basis for determining whether it is necessary to perform the goodwill impairment test.  The amended guidance is effective for annual and interim periods beginning after December 15, 2011, with early adoption permitted, including annual and interim goodwill impairment tests performed as of dates before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued.  ERHC has adopted this guidance it had no impact on the Company’s consolidated financial statements.
 
FASB ASC 220 - In June 2011, the FASB issued guidance to amend the presentation of comprehensive income to allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity.  The amended guidance is effective for annual and interim periods within those years beginning after December 15, 2011, and is to be applied retrospectively. ERHC adopted this guidance in the fourth quarter of fiscal year 2011 and adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

FASB ASC 820 - In May 2011, the FASB issued guidance to amend the requirements related to fair value measurement which changes the wording used to describe many requirements in GAAP for measuring fair value and for disclosing information about fair value measurements. Additionally, the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements. The amended guidance is effective for interim and annual periods beginning after December 15, 2011, and is applied prospectively. ERHC will adopt this guidance at the beginning of its first quarter of fiscal year 2012 and its adoption is not expected to have a material impact on the its consolidated financial statements.
 
FASB ASC 350 - In December 2010, the FASB issued amended guidance concerning testing for impairment of goodwill where an entity has one or more reporting units whose carrying value is zero or negative.  The amended guidance requires the entity to perform a test to measure the amount, if any, of impairment to goodwill by comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill.  The Company is required to adopt this amended guidance for fiscal years or interim periods beginning after December 15, 2011.  The Company will adopt this guidance at the beginning of its first quarter of fiscal year 2012 but its adoption will have no impact on the Company’s consolidated financial statements or disclosures to those financial statements.

FASB ASC 805 - In December 2010, the FASB issued amended guidance concerning disclosures of pro forma information for business combinations.  The amended guidance requires that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period. The amended guidance also expands the supplemental pro forma disclosures to include a description of and the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings.   ERHC will adopt this guidance at the beginning of its first quarter of fiscal year 2012 and does not expect that adoption of the amended guidance will have an impact on the Company’s consolidated financial statements or disclosures to those financial statements.
 
 
Results of Operations

Year Ended September 30, 2011 Compared with Year Ended September 30, 2010

General and administrative expenses decreased from $5,156,778 in the year ended September 30, 2010 to $4,401,901 per 3100 in the year ended September 30, 2011.  This decrease was the result of an ongoing effort to reduce operating expenses and was due primarily to the following:
 
 
Reduced legal, accounting and consulting expenses related to the Company's business activities.
 
 
General reduction in operating costs due to cost control efforts
 
During the year ended September 30, 2011, the Company had a net loss of $4,410,487 compared with a net loss of $6,230,811 for the year ended September 30, 2010.  The reduction was due to the following:

In 2010, the Company recognized a provision for loss of $1,058,597 based on the Company's evaluation of certain restrictions that were placed on a financial institution where the Company had an investment in a Certificate of Deposit.  The additional provision increased the Company's 2010 net loss as compared to the year ended September 30, 2011. The Company also incurred certain costs in 2010, not repeated in 2011 related to a proposed listing on the Alternative Investment Market ("AIM") of the London Stock Exchange.

Year Ended September 30, 2010 Compared with Year Ended September 30, 2009

General and administrative expenses increased from $4,202,809 in the year ended September 30, 2009 to $5,156,778 in the year ended September 30, 2010.  This increase came despite an ongoing effort to reduce operating expenses and was due primarily to the following:
 
 
Expenses related to the Company's proposed listing on the AIM.
 
 
General increase in expenses related to evaluation of new acquisition opportunities.
 
During the year ended September 30, 2010, the Company had a net loss of $6,230,811 compared with a net loss of $7,689,137 for the year ended September 30, 2009.  The reduction was due to the following:

In 2009, the Company recognized a provision for loss of $4,234,317 when certain restrictions were placed on a financial institution where the Company had investments in Certificate of Deposit.  This provision was followed with an additional provision of $1,058,579, made during the year ended September 30, 2010, which reduced the asset to $-0-. The resulting reduction in loss during the year ended September 30, 2010 as compared to the year ended September 30, 2009 was partially offset by:
 
 
An increase in expenses related to evaluation of new acquisition opportunities during the year ended September 30, 2010
 
 
And a decrease in interest income from $421,729 in the year ended September 30, 2009 to $18,106 in the year ended September 30, 2010, due to a loss of interest income as the Company switched from interest bearing but not guaranteed deposit accounts to non-interest bearing accounts by the Federal Deposit Insurance Corporation.
 
PCS Negotiations

PSC negotiations between ERHC and the National Petroleum Agency of São Tomé and Príncipe (ANP-STP) commenced on November 14, 2011 in Sao Tome. The PSCs pertain to ERHC’s 100 percent working interest in Blocks 4 and 11 of the EEZ. ERHC’s management is looking to negotiate PSCs for the EEZ Blocks that will be attractive to potential joint venture partners. Discussions are continuing simultaneously with prospective operating partners for ERHC’s EEZ Blocks.

Liquidity and Capital Resources

As of September 30, 2011, the Company had $12,144,597 in cash and cash equivalents and US Treasury Bills and positive working capital of $12,411,565.   Management believes that this cash position should be sufficient to support the Company’s estimated annual  working capital requirements of $4,800,000 for more than 12 months.
 

In addition to normal working capital requirements, ERHC's interest in Chad may require the Company to make additional cash signature bonus payments of up to $5,000,000 in 2012 and the Company estimates that it may incur additional costs of at least $1,000,000 to implement the first year of its work program under the Production Sharing Contract with the Government of Chad. ERHC believes its current cash position will allow it to meet current obligations to the Government of Chad for the next twelve months as the Company endeavors to negotiate participation agreements to fully exploit these assets.

Off-Balance Sheet Arrangements

At September 30, 2011, the Company had no off-balance sheet arrangements.

Short –Term Obligations

As of September 30, 2011, the Company had a total of $539,519 in short-term obligations; it includes $114,184 in accrued Directors’ compensation.
 
Contractual Obligations and Commercial Commitments

The following table provides information at September 30, 2011, about the Company’s contractual obligations and commercial commitments.  The table presents contractual obligation by due dates and related contractual commitments by expiration dates.

Contractual Obligations
 
Total
 
 
Less Than 1 year
 
 
1-3 Years
 
 
3-5 Years
 
 
More Than 5 Years
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Chad license interest
 
$
20,000,000
 
 
$
6,000,000
 
 
$
2,000,000
 
 
$
12,000,000
 
 
$
-
 
Operating lease (2)
 
 
672,986
 
 
 
51,132
 
 
 
250,221
 
 
 
260,665
     
110,968
 
 
 
   
 
 
   
 
 
   
 
 
           
 
Total
 
$
20,672,986
 
 
$
6,051,132
 
 
$
2,250,221
 
 
$
12,260,665
   
$
110,968
 

 
(1)
This represents obligations under our PSC with Chad. The Company has a remaining commitment of $5,000,000 for its signing bonus and a minimum $15,000,000 commitment under a five year work program. This commitment must include annual expenditures of at least $1,000,000 and accordingly, the above analysis is prepared using the minimum commitment.

 
(2)
Lease obligations consist of operating lease for office space. Office lease represent non-cancelable leases for office space used in daily operations.

Contingencies and Legal Matters
 
For a detailed discussion of contingencies and legal matters, see “Item 3 “Legal Proceedings”.

Item 7A.  Quantitative and Qualitative Disclosures about Market Risk

The Company’s current focus is to exploit its primary assets, which are rights to working interest in the Republic of Chad, the JDZ and the EEZ under agreements with Government of the Republic of Chad, the JDA and the DRSTP respectively.  The Company intends to continue to form relationships with other oil and gas companies with operational, technical and financial capabilities to assist the Company in leveraging its interests in Chad, the EEZ and the JDZ.  The Company currently has no other operations.

At September 30, 2011, all of the Company’s operations were located outside the United States.  The Company’s primary assets are agreements with Government of the Republic of Chad, the DRSTP and the JDA, which provide ERHC with rights to participate in exploration and production activities in the Republic of Chad, and in Gulf of Guinea off the coast of 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 financial, economic and labor conditions, political instability, risk of war, expropriation, renegotiation or modification of existing contracts, tax laws (including host-country import-export, excise and income taxes and United States taxes on foreign subsidiaries) and changes in the value of the U.S. dollar relative to the local currencies in which future oil and gas producing activities may be denominated.  Furthermore, changes in exchange rates may adversely affect the Company’s future results of operations and financial condition.
 
Market risks relating to the Company’s operations result primarily from changes in interest rates as well as credit risk concentrations.  The Company’s interest expense is generally not sensitive to changes in the general level of interest rates in the United States, particularly because a substantial majority of its indebtedness is at fixed rates.

The Company holds no derivative financial or commodity instruments.
 

Item 8.  Financial Statements and Supplementary Data

ERHC ENERGY INC.
A CORPORATION IN THE DEVELOPMENT STAGE
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
Page(s)
Reports of Independent Public Accounting Firm:
 
 
 
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting as of September 30, 2011
29
 
 
Report of Independent Registered Public Accounting Firm on the Financial Statements for the Years ended September 30, 2011, 2010  and 2009
30
 
 
Consolidated Financial Statements:
 
 
 
Consolidated Balance Sheets as of September 30, 2011 and 2010
31
 
 
Consolidated Statements of Operations for the Years Ended September 30, 2011, 2010 and 2009, and for the period from inception, September 5, 1995,to September 30, 2011
32
 
 
Consolidated Statements of Comprehensive Income for the Years Ended September 30, 2011, 2010 and 2009, and for the period from inception, September 5, 1995,to September 30, 2011
33
   
Consolidated Statements of Shareholders’ Equity for the period from inception, September 5, 1995, to September 30, 2011
34
 
 
Consolidated Statements of Cash Flows for the Years Ended September 30, 2011, 2010 and 2009, and for the period from inception, September 5, 1995,to September 30, 2011
39
 
 
Notes to Consolidated Financial Statements
41
 
 
Financial Statement Schedules
 

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.
 
 
28

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
ERHC Energy Inc.
Houston, Texas

We have audited the internal control of ERHC Energy Inc. and its subsidiaries (collectively, the “Company”) over its financial reporting as of September 30, 2011 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Annual Report on Internal Control over Financial Reporting.” Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’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 generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, ERHC Energy Inc. and its subsidiaries maintained, in all material respects, effective internal control over financial reporting as of September 30, 2011, based on criteria established in the Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of ERHC Energy Inc. and its subsidiaries as of September 30, 2011 and 2010, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three years ended September 30, 2011, 2010 and 2009 and our report dated December 14, 2011 expressed an unqualified opinion on those consolidated financial statements.

Malone  Bailey,LLP
www.malone-bailey.com
Houston, Texas

December 14, 2011
 
 
29

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
ERHC Energy Inc.
Houston, Texas

We have audited the accompanying consolidated balance sheets of ERHC Energy Inc. and its subsidiaries (collectively the “ERHC’), a development stage corporation, as of September 30, 2011 and 2010 and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three years ended September 30, 2011, 2010 and 2009.  These financial statements are the responsibility of ERHC’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ERHC as of September 30, 2011 and 2010, and the results of its operations and its cash flows for each of the three years ended September 30, 2011, 2010 and 2009 in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of ERHC’s internal control over financial reporting as of September 30, 2011, based on criteria established in Internal Control – Integrated Framework    issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated December 14, 2011 expressed an unqualified opinion.

MaloneBailey, LLP
www.malone-bailey.com
Houston, Texas

December 14, 2011
 
 
ERHC ENERGY INC.
A CORPORATION IN THE DEVELOPMENT STAGE
CONSOLIDATED BALANCE SHEETS
September 30, 2011 and 2010 

 
   
2011
   
2010
 
             
ASSETS
           
             
Current assets:
           
Cash and cash equivalents
  $ 7,137,151     $ 12,913,249  
United States Treasury bills
    5,007,446       5,000,958  
Investment in Exile Resources common stock
    524,346       -  
Prepaid expenses and other
    282,141       199,808  
                 
Total current assets
    12,951,084       18,114,015  
                 
Oil and gas concession fees
    4,620,531       2,839,500  
Furniture and equipment, net of accumulated depreciation of $160,225 and $136,804 at September 30, 2011 and 2010, respectively
    27,225       35,557  
Restricted certificate of deposit
    131,000       -  
Income tax receivable
    2,018,398       2,018,398  
                 
Total assets
  $ 19,748,238     $ 23,007,470  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
                 
Current liabilities:
               
Accounts payable and accrued liabilities
  $ 539,519     $ 471,506  
Accrued interest
    -       12,406  
Current portion of convertible debt
    -       33,513  
                 
Total current liabilities
    539,519       517,425  
                 
Commitments and contingencies:
               
                 
Shareholders' equity:
               
Preferred stock, par value $0.0001; authorized 10,000,000 shares; none issued and outstanding
    -       -  
Common stock, par value $0.0001; authorized 950,000,000 shares; issued and outstanding 738,933,854 and 729,319,944 shares at September 30, 2011 and 2010, respectively
    73,894       72,932  
Additional paid-in capital
    99,355,149       97,401,297  
Accumulated other comprehensive income
    (825,653 )     -  
Losses accumulated in the development stage
    (79,394,671 )     (74,984,184 )
                 
Total shareholders’ equity
    19,208,719       22,490,045  
                 
Total liabilities and shareholders' equity
  $ 19,748,238     $ 23,007,470  

The accompanying notes are an integral part of these consolidated financial statements
 
 
ERHC ENERGY INC.
A CORPORATION IN THE DEVELOPMENT STAGE
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended September 30, 2011, 2010, and 2009 and for the Period
From Inception, September 5, 1995, to September 30, 2011 


                     
(unaudited)
Inception to
 
   
Years Ended September 30,
   
September 30,
 
   
2011
   
2010
   
2009
   
2011
 
                         
Costs and expenses:
                       
General and administrative
  $ 4,401,901     $ 5,156,778     $ 4,202,809     $ 82,104,170  
Depreciation
    23,423       31,717       36,897       1,508,538  
Gain on sale of partial interest in DRSTP concession
    -       -       -       (30,102,250 )
Write-offs and abandonments
    -       -       -       7,742,128  
Total costs and expenses
    (4,425,324 )     (5,188,495 )     (4,239,706 )     (61,252,586 )
                                 
Other income and (expenses):
                               
Interest income
    15,620       18,106       421,729       4,844,983  
Gain (loss) from settlements
    12,868       -       365,000       130,178  
Other income
    -       -       -       439,827  
Interest expense
    (13,651 )     (1,843 )     (1,843 )     (12,144,242 )
Provision for loss on deposits
    -       (1,058,579 )     (4,234,317 )     (5,292,896 )
Loss on extinguishment of debt
    -       -       -       (5,749,575 )
                                 
Total other income and (expense)
    14,837       (1,042,316 )     (3,449,431 )     (17,771,725 )
                                 
Income (loss) before benefit (provision) for income taxes
    (4,410,487 )     (6,230,811 )     (7,689,137 )     (79,024,311 )
                                 
Benefit (provision) for income taxes:
                               
Current
    -       -       -       (1,330,360 )
Deferred
    -       -       -       960,000  
                                 
Total benefit (provision)for income taxes
    -       -       -       (370,360 )
                                 
Net loss
  $ (4,410,487 )   $ (6,230,811 )   $ (7,689,137 )   $ (79,394,671 )
                                 
Net loss per common share -basic and diluted
  $ (0.01 )   $ (0.01 )   $ (0.01 )        
                                 
Weighted average number of common shares outstanding - basic and diluted
    738,284,321       723,265,288       722,794,828          

The accompanying notes are an integral part of these consolidated financial statements
 
 
ERHC ENERGY INC.
A CORPORATION IN THE DEVELOPMENT STAGE
CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE LOSS
For the Years Ended September 30, 2011, 2010, and 2009 and for the Period
From Inception, September 5, 1995, to September 30, 2011 


                     
(unaudited)
Inception to
 
   
Year Ended September 30,
   
September 30,
 
   
2011
   
2010
   
2009
   
2011
 
                         
Net loss
  $ (4,410,487 )   $ (6,230,811 )   $ (7,689,137 )   $ (79,394,671 )
                                 
Other comprehensive income - loss on available for sale    securities
    (825,653 )     -       -       (825,653 )
                                 
Total costs and expenses
  $ (5,236,140 )   $ (6,230,811 )   $ (7,689,137 )   $ (80,220,324 )

The accompanying notes are an integral part of these consolidated financial statements
 
 
ERHC ENERGY INC.
A CORPORATION IN THE DEVELOPMENT STAGE
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Period from Inception, September 5, 1995, to September 30, 2011, (Unaudited for the
Period from Inception to September 30, 1998) 


               
Additional
                         
   
Common Stock
   
Paid-In
   
Accumulated
   
Subscription
   
Deferred
       
   
Shares
   
Amount
   
Capital
   
Deficit
   
Receivable
   
Compensation
   
Total
 
                                           
Balance at September 5, 1995
    -     $ -     $ -     $ -     $ -     $ -     $ -  
Common stock issued for cash
    884,407       88       -       -       -       -       88  
Common stock issued for services
    755,043       76       499,924       -       -       (500,000 )     -  
Net loss
    -       -       -       (3,404 )     -       -       (3,404 )
                                                         
Balance at September 30, 1995
    1,639,450       164       499,924       (3,404 )     -       (500,000 )     (3,316 )
Common stock issued for cash, net of expenses
    361,330       36       124,851       -       -       -       124,887  
Common stock issued for services
    138,277       14       528,263       -       -       -       528,277  
Common stock issued for equipment
    744,000       74       3,719,926       -       -       -       3,720,000  
Effect of reverse merger
    1,578,470       158       (243,488 )     -       -       -       (243,330 )
Amortization of deferred compensation
    -       -       -       -       -       72,500       72,500  
Net loss
    -       -       -       (728,748 )     -       -       (728,748 )
                                                         
Balance at September 30, 1996
    4,461,527       446       4,629,476       (732,152 )     -       (427,500 )     3,470,270  
Common stock issued for cash
    2,222,171       222       1,977,357       -       (913,300 )     -       1,064,279  
Common stock issued for services
    9,127,981       913       12,430,725       -       -       -       12,431,638  
Common stock issued for oil and gas leases and properties
    500,000       50       515,575       -       -       -       515,625  
Common stock issued for Chevron contract
    3,000,000       300       -       -       -       -       300  
Common stock issued for BAPCO acquisition
    4,000,000       400       499,600       -       -       -       500,000  
Contributed
    (100,000 )     (10 )     (99,990 )     -       -       -       (100,000 )
Amortization of deferred compensation
    -       -       -       -       -       177,500       177,500  
Net loss
    -       -       -       (16,913,052 )     -       -       (16,913,052 )
                                                         
Balance at September 30, 1997
    23,211,679     $ 2,321     $ 19,952,743     $ (17,645,204 )   $ (913,300 )   $ (250,000 )   $ 1,146,560  
 
The accompanying notes are an integral part of these consolidated financial statements
 
 
ERHC ENERGY INC.
A CORPORATION IN THE DEVELOPMENT STAGE
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Period from Inception, September 5, 1995, to September 30, 2011, (Unaudited for the
Period from Inception to September 30, 1998) 


               
Additional
                         
   
Common Stock
   
Paid-In
   
Accumulated
   
Subscription
   
Deferred
       
   
Shares
   
Amount
   
Capital
   
Deficit
   
Receivable
   
Compensation
   
Total
 
                                           
Balance at September 30, 1997
    23,211,679     $ 2,321     $ 19,952,743     $ (17,645,204 )   $ (913,300 )   $ (250,000 )   $ 1,146,560  
                                                         
                                                         
Common stock and warrants issued for cash
    1,124,872       113       972,682       -       -       -       972,795  
Common stock issued for services
    1,020,320       102       1,526,878       -       -       -       1,526,980  
Common stock issued for Uinta   acquisition
    1,000,000       100       1,999,900       -       -       -       2,000,000  
Common stock issued for Nueces acquisition
    50,000       5       148,745       -       -       -       148,750  
Common stock issued for accounts payable
    491,646       49       337,958       -       -       -       338,007  
Beneficial conversion feature associated with convertible debt
    -       -       1,387,500       -       -       -       1,387,500  
Receipt of subscription receivable
    -       -       -       -       913,300       -       913,300  
Option fee and penalty
    299,536       30       219,193       -       -       -       219,223  
Common stock issued for building equity
    24,000       2       69,998       -       -       -       70,000  
Amortization of deferred compensation
    -       -       -       -       -       125,000       125,000  
Net loss
    -       -       -       (11,579,024 )     -       -       (11,579,024 )
                                                         
Balance at September 30, 1998
    27,222,053       2,722       26,615,597       (29,224,228 )     -       (125,000 )     (2,730,909 )
                                                         
Common stock issued for cash
    397,040,000       39,704       2,062,296       -       -       -       2,102,000  
Common stock issued for services
    7,169,000       717       1,034,185       -       -       -       1,034,902  
Common stock issued for Uinta settlement
    7,780,653       778       2,541,161       -       -       -       2,541,939  
Common stock surrendered in BAPCO settlement
    (7,744,000 )     (774 )     (2,709,626 )     -       -       -       (2,710,400