All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under instructions or are inapplicable and therefore have been omitted.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements
The accompanying notes are an integral part of these consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended September 30, 2015 and 2014 (As restated)
Note 1 – Summary of Significant Accounting Policies
General Business and Nature of Operations
ERHC Energy Inc. ("ERHC", the “Company”) is an independent oil and gas company formed in 1986, as a Colorado corporation. The Company’s current focus is to exploit its primary assets, which are rights to working interests in exploration acreage in the Republic of Kenya (“Kenya”), in the Republic of Chad ("Chad"), in the Joint Development Zone (“JDZ”) between the Democratic Republic of Sao Tome and Principe (“DRSTP”), in the Federal Republic of Nigeria (“FRN”) and in the exclusive waters of Sao Tome (the “Exclusive Economic Zone” or “EEZ”). The Company has formed relationships with upstream oil and gas companies to assist the Company in exploiting its assets in the JDZ as further described in Note 5. ERHC currently has no other operations.
Principles of Consolidation
The consolidated financial statements include the accounts of ERHC and its wholly owned subsidiaries, after elimination of all significant inter-company accounts and transactions.
Use of Estimates
The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period for the years then ended. Actual results could differ significantly from those estimates.
Concentration of Risks
ERHC primarily maintains its finances with seven financial institutions. From time to time the amount on deposit in one or all of these institutions may exceed federal insurance limits. The balances are maintained in demand accounts to minimize risk.
ERHC’s focus is to exploit its assets which are agreements with the Government of Kenya concerning oil and gas exploration in Kenya, with the Government of Chad concerning oil and gas exploration in Chad, with the DRSTP concerning oil and gas exploration in EEZ and with the JDA concerning oil and gas exploration in the JDZ. In the past, ERHC has formed relationships with Sinopec International Petroleum Exploration and Production Corporation Nigeria (“Sinopec”), and Addax Energy Nigeria Limited (“Addax Ltd.”) to assist ERHC in leveraging its interests in the JDZ. ERHC currently has no other operations.
Going Concern
The accompanying financial statements have been prepared on the basis that the Company will continue as a going concern which contemplates the realization of assets and the satisfaction of liabilities in the ordinary and usual course of business. As of September 30, 2015, the Company has a working capital deficit and negative cash flows from operating activities.
These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
The ability of the Company to continue as a going concern is dependent on raising additional capital to fund ongoing exploration projects and ultimately
on attaining future profitable operations. The Company is continuing with its plan to further seek new opportunity for farm-out its assets in Kenya, Chad and the Săo Tomé and Príncipe Exclusive Economic Zone. Management believes that the Company’s current
operating strategy will provide the opportunity for the Company to continue as a going concern as long as the Company continues to obtain additional financing; however there is no assurance that this will occur. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Cash Equivalents
ERHC considers all highly liquid short-term investments with an original maturity of three months or less, when purchased, to be cash equivalents.
Investment in Oando Energy Resources (OER)
The Company's investments in common stock and warrants are carried at market value. Both stocks and warrants are accounted for as available for sale securities, and changes in their fair value are recognized in other comprehensive income (loss).
Furniture, Fixtures and Equipment
Furniture, fixtures and equipment are stated at cost and include expenditures for renewals and improvements and capitalized interest. Maintenance and repairs are charged to current operations. When property is retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the respective accounts, and any gain or loss on disposition is included in income. Depreciation is provided principally on the straight-line method over the estimated service lives of the assets. In general, office furniture is depreciated over 7 years, office equipment over 5 years and computer equipment over 3 years.
Successful Efforts
ERHC uses the successful efforts method of accounting for oil and gas producing activities. Under this method, acquisition costs for proved and unproved properties are capitalized when incurred. Exploration costs, including geological and geophysical costs, the costs of carrying and retaining unproved properties and exploratory dry hole drilling costs, are expensed. Development costs, including the costs to drill and equip development wells and successful exploratory drilling costs to locate proved reserves are capitalized. Exploratory drilling costs are capitalized when incurred pending the determination of whether a well has found proved reserves. A determination of whether a well has found proved reserves is made after drilling is completed. The determination is based on a process that relies on interpretations of available geologic, geophysics, and engineering data. If a well is determined to be successful, the capitalized drilling costs will be reclassified as part of the cost of the well. If a well is determined to be unsuccessful, the capitalized drilling costs will be charged to expense in the period the determination is made. If an exploratory well requires a major capital expenditure before production can begin, the cost of drilling the exploratory well will continue to be carried as an asset pending determination of whether proved reserves have been found only as long as: i) the well has found a sufficient quantity of reserves to justify its completion as a producing well if the required capital expenditure is made and ii) drilling of the additional exploratory wells is under way or firmly planned for the near future. If drilling in the area is not under way or firmly planned, or if the well has not found a commercially producible quantity of reserves, the exploratory well is assumed to be impaired, and its costs are charged to expense.
In the absence of a determination as to whether the reserves that have been found can be classified as proved, the costs of drilling such an exploratory well is not carried as an asset for more than one year following completion of drilling. If, after that year has passed, a determination that proved reserves exist cannot be made, the well is assumed to be impaired, and its costs are charged to expense. Its costs can, however, continue to be capitalized if sufficient quantities of reserves are discovered in the well to justify its completion as a producing well and sufficient progress is made in assessing the reserves and the well’s economic and operating feasibility.
The impairment of unamortized capital costs is measured at a lease level and is reduced to fair value if it is determined that the sum of expected future net cash flows is less than the net book value. ERHC determines if impairment has occurred through either adverse changes or as a result of the annual review of all fields.
Development costs of proved oil and gas properties, including estimated dismantlement, restoration and abandonment costs and acquisition costs, are depreciated and depleted on a field basis by the units-of-production method using proved developed and proved reserves, respectively. The costs of unproved oil and gas properties are generally combined and impaired over a period that is based on the average holding period for such properties and the Company’s experience of successful drilling.
Impairment of Long-lived Assets
ERHC evaluates the recoverability of long-lived assets when events and circumstances indicate that such assets might be impaired. ERHC determines impairment by comparing the undiscounted future cash flows estimated to be generated by these assets to their respective carrying amounts. Impairments are charged to operations in the period to which events and circumstances indicate that such assets might be impaired. ERHC has evaluated its investments located in Republic Kenya, Republic of Chad and in its DRSTP concession fee in light of its 2003 Option Agreement (see Note 5 and there have been no events or circumstances that would indicate that such assets might be impaired).
Income Taxes
Income taxes are accounted for under the assets and liability method. Under this method, the deferred tax assets and liabilities are estimated based upon the difference between the financial statement and tax bases of assets and liabilities using tax rates in effect for the year in which the Company expects the differences to affect taxable income. The tax consequences of most events recognized in the current year’s financial statements are included in determining income taxes currently payable. However, because tax laws and financial accounting standards differ in their recognition and measurement of assets, liabilities, equity, revenues, expenses, gains and losses, differences arise between the amount of taxable income and pretax financial income for a year and between the tax bases of assets or liabilities and their reported amounts in the financial statements. Because the Company assumes that the reported amounts of assets and liabilities will be recovered and settled, respectively, a difference between the tax basis of an asset or a liability and its reported amount in the balance sheet will result in a taxable or a deductible amount in some future years when the related liabilities are settled or the reported amounts of the assets are recovered, which gives rise to a deferred tax asset. The Company must then assess the likelihood that the deferred tax assets will be recovered from future taxable income and to the extent the Company believes that recovery is not likely, the Company must establish a valuation allowance.
The Company estimates the provision for income taxes based on income before income taxes for each tax jurisdiction in which the Company has established operations. The Company does not provide incremental U.S. income taxes on un-remitted foreign earnings taxed at rates less than the U.S. tax rates as such earnings are considered permanently invested.
The Company follows the FASB guidance on accounting for uncertainty in income taxes which provides a financial statement recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. Under this guidance, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The guidance also extends to de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and income tax disclosures.
Net Loss Per Share
Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted loss per share is computed by dividing net loss by the weighted average number of shares outstanding, after giving effect to potentially dilutive common share equivalents outstanding during the period. Potentially dilutive common share equivalents are not included in the computation of diluted loss per share if they are anti-dilutive. Diluted loss per common share is the same as basic for all periods presented because the effect of potentially dilutive common shares arising from outstanding stock warrants and options was anti-dilutive. For the years ended September 30, 2015 and 2014, potential dilutive securities had an anti-dilutive effect and were not included in the calculation of diluted net loss per common share.
Stock-based Compensation
ERHC recognizes compensation costs resulting from the issuance of stock-based awards to employees and directors over the requisite period based on the fair value of each stock award on the grant date.
Recent Accounting Pronouncements
There have been no recently issued accounting pronouncements that have had or are expected to have a material impact on the Company based on the financial statements.
Note 2 – Restatement of Financial Statements
The Company has restated its previously issued consolidated financial statements for the years ended September 30, 2015 and 2014 to reflect emergent developments related to income tax following the completion of an Internal Revenue Service tax audit of the Company’s 2006 tax return.
This restatement is necessitated by the Internal Revenue Service disallowing certain deductions on ERHC’s 2006 tax return.
The disallowance resulted from stock based compensation expense that the Company had recognized as a deductible expense in its 2006 tax return.
The disallowance was the outcome of an Internal Revenue Service audit of ERHC’s 2006 return, which audit lasted nearly seven years and has been previously disclosed.
As such, the consolidated financial statements for the years ended September 30, 2015 and 2014 have been restated to properly reflect the tax liabilities that should have been recorded in 2006.
The effect of the restatement on the September 30, 2015 and 2014 consolidated financial statements is as follows:
|
|
|
September 30, 2014 (As restated)
|
|
|
|
|
As Previously
|
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
Adjustment
|
|
|
As Restated
|
|
|
Income tax receivable
|
|
$
|
2,018,533
|
|
|
$
|
(2,018,533
|
)
|
|
$
|
-
|
|
|
Total assets
|
|
$
|
11,695,038
|
|
|
$
|
(2,018,533
|
)
|
|
$
|
9,676,505
|
|
|
Income tax payable
|
|
$
|
-
|
|
|
$
|
2,739,607
|
|
|
$
|
2,739,607
|
|
|
Total current liabilities
|
|
$
|
1,756,576
|
|
|
$
|
2,739,607
|
|
|
$
|
4,496,183
|
|
|
Total liabilities
|
|
$
|
2,065,190
|
|
|
$
|
2,739,607
|
|
|
$
|
4,804,797
|
|
|
Accumulated deficits
|
|
$
|
(90,848,380
|
)
|
|
$
|
(4,758,140
|
)
|
|
$
|
(95,606,520
|
)
|
|
Total shareholders’ equity
|
|
$
|
9,629,848
|
|
|
$
|
(4,758,140
|
)
|
|
$
|
4,871,708
|
|
|
Total liabilities and shareholders’ equity
|
|
$
|
11,695,038
|
|
|
$
|
(2,018,533
|
)
|
|
$
|
9,676,505
|
|
|
|
|
September 30, 2015 (As restated)
|
|
|
|
|
As Previously
|
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
Adjustment
|
|
|
As Restated
|
|
|
Income tax payable
|
|
$
|
-
|
|
|
$
|
2,739,607
|
|
|
$
|
2,739,607
|
|
|
Total current liabilities
|
|
$
|
1,968,231
|
|
|
$
|
2,739,607
|
|
|
$
|
4,707,838
|
|
|
Total liabilities
|
|
$
|
1,971,105
|
|
|
$
|
2,739,607
|
|
|
$
|
4,710,712
|
|
|
Accumulated deficits
|
|
$
|
(99,498,316
|
)
|
|
$
|
(2,739,607
|
)
|
|
$
|
(102,237,923
|
)
|
|
Total shareholders’ equity
|
|
$
|
5,416,616
|
|
|
$
|
(2,739,607
|
)
|
|
$
|
2,677,009
|
|
|
Provision for income taxes
|
|
$
|
2,018,533
|
|
|
$
|
(2,018,533
|
)
|
|
$
|
-
|
|
|
Net loss
|
|
$
|
8,649,936
|
|
|
$
|
(2,018,533
|
)
|
|
$
|
6,631,403
|
|
|
Total other comprehensive loss
|
|
$
|
9,107,066
|
|
|
$
|
(2,018,533
|
)
|
|
$
|
7,088,533
|
|
Note 3 - Fair Value of Financial Instruments
Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Level inputs are as follows:
|
|
·
|
Level 1 Inputs—Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
|
|
|
·
|
Level 2 Inputs—Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.
|
|
|
·
|
Level 3 Inputs—Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity's own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.
|
Interest income on cash and cash equivalents is recognized as earned on the accrual basis.
Investments in equity instruments are accounted for as available for sale securities and reported at fair value, determined based on the quoted prices in an active market for identical assets and classified as Level 1 under the Accounting Standards Codification (“ASC”) Topic 825.
During the year ended September 30, 2015, the Company’s investment in the common stock and warrants of OER, a Canadian oil and gas company that trades on the Toronto Stock Exchange (TSX) decreased in value by $457,130 to $211,699. This decrease in value is included as a decrease in stockholders' equity in accumulated other comprehensive income (loss). During the year ended September 30, 2014, the Company’s investment in common stock and warrants of OER increased in value by $107,877 to $$671,402. This increase in value is included as an increase in stockholders’ equity in accumulated other comprehensive income (loss). During the years ended the September 30, 2015 and 2014; the Company sold 800 and 0 share and recognized a loss of $2,573 and $0, respectively.
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while ERHC believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. In determining fair value, the ERHC generally applies the market approach, which uses prices and other relevant data based on market transactions involving identical or comparable assets and liabilities. There have been no changes in the methodologies used at September 30, 2015 and 2014.
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of September 30, 2015 and 2014, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
September 30, 2015
|
|
|
Quoted Prices
In an Active
Market for
Identical
Assets
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities - Oando Energy Resources:
|
|
$
|
211,699
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
211,699
|
|
|
Derivative liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(725,898
|
)
|
|
$
|
(725,898
|
)
|
September 30, 2014
|
|
|
Quoted Prices
In an Active
Market for
Identical
Assets
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities - Oando Energy Resources:
|
|
$
|
669,476
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
669,476
|
|
|
Derivative liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(1,021,942
|
)
|
|
$
|
(1,021,942
|
)
|
|
2-Year Warrants
|
|
$
|
1,926
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,926
|
|
During the years ended September 30, 2015 and 2014, the Company issued a number of convertible notes payable, and identified derivatives related to these notes. ERHC classifies its derivative liabilities as Level 3 and values them using the methods discussed in Note 5. While the Company believes that its valuation methods are appropriate and consistent with other market participants, it recognizes that the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The primary assumptions that would significantly affect the fair values using the methods discussed in Note 4 are that of volatility and market price of the underlying common stock of the Company.
As of September 30, 2015, the Company did not have any derivative instruments that were designated as hedges.
The derivative liability for the years ended September 30, 2015 and 2014 of $725,898 and 1,021,942, respectively, classified as level 3.
The following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities as of September 30, 2015:
|
|
|
Derivative
Liability
|
|
|
|
|
|
|
|
Balance at September 30, 2014
|
|
$
|
1,021,942
|
|
|
Increase in derivative value due to issuances of convertible promissory notes
|
|
|
1,480,777
|
|
|
Decrease in derivative value due to convertible promissory notes converted to common stocks
|
|
|
(2,907,064
|
)
|
|
Day 1 loss on derivative liabilities
|
|
|
1,024,292
|
|
|
Change in fair market value of derivative liabilities on convertible notes due to the mark to market adjustment
|
|
|
111,849
|
|
|
Change in fair market value of derivative liabilities on tainted warrants due to the mark to market adjustment
|
|
|
(5,898
|
)
|
|
|
|
|
|
|
|
Balance at September 30, 2015
|
|
$
|
725,898
|
|
The following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities as of September 30, 2014:
|
|
|
Derivative Liability
|
|
|
Balance at September 30, 2013
|
|
$
|
-
|
|
|
Increase in derivative value due to issuances of convertible promissory notes
|
|
|
752,832
|
|
|
Day 1 loss on derivative liabilities
|
|
|
392,220
|
|
|
Increase in derivative value attributable to tainted warrants
|
|
|
13,701
|
|
|
Change in fair market value of derivative liabilities on convertible notes due to the mark to market adjustment
|
|
|
(129,008
|
)
|
|
Change in fair market value of derivative liabilities on tainted warrants due to the mark to market adjustment
|
|
|
(7,803
|
)
|
|
|
|
|
|
|
|
Balance at September 30, 2014
|
|
$
|
1,021,942
|
|
Note 4 – Convertible Debt
The Company had the following convertible debt outstanding at September 30, 2015:
|
Lender
|
|
Date of
Agreement
|
|
Term
(Months)
|
|
|
Annual
Interest
Rate
|
|
|
Face Value
|
|
|
Accrued
Interest
|
|
|
Discount
|
|
|
Net
Convertible
Note Payable
|
|
|
Note
Derivative
Liability
|
|
|
Redwood Fund III
|
|
5/15/2014
|
|
|
6
|
|
|
|
12.00
|
%
|
|
$
|
40,000
|
|
|
$
|
5,918
|
|
|
$
|
15,867
|
|
|
$
|
30,051
|
|
|
$
|
114,005
|
|
|
Tonaquint, Inc
|
|
10/7/2014
|
|
|
12
|
|
|
|
22.00
|
%
|
(a)
|
|
98,177
|
|
|
|
46,416
|
|
|
|
16,700
|
|
|
|
127,893
|
|
|
|
128,566
|
|
|
JMJ Financial #3
|
|
10/22/2014
|
|
|
24
|
|
|
|
5.83
|
%
|
|
|
8,900
|
|
|
|
5,556
|
|
|
|
11,582
|
|
|
|
2,874
|
|
|
|
27,375
|
|
|
LG Capital #2
|
|
10/23/2014
|
|
|
12
|
|
|
|
8.00
|
%
|
|
|
23,533
|
|
|
|
2,500
|
|
|
|
9,398
|
|
|
|
16,635
|
|
|
|
52,628
|
|
|
Cardinal Capital Group
|
|
11/6/2014
|
|
|
24
|
|
|
|
22.00
|
%
|
(a)
|
|
43,998
|
|
|
|
30,133
|
|
|
|
41,984
|
|
|
|
32,147
|
|
|
|
94,158
|
|
|
Rock Capital
|
|
2/6/2015
|
|
|
12
|
|
|
|
10.00
|
%
|
|
|
23,005
|
|
|
|
-
|
|
|
|
20,351
|
|
|
|
2,654
|
|
|
|
67,377
|
|
|
Union Capital #3
|
|
2/17/2015
|
|
|
12
|
|
|
|
8.00
|
%
|
|
|
34,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
34,500
|
|
|
|
93,039
|
|
|
Adar Bay #2
|
|
2/19/2015
|
|
|
12
|
|
|
|
8.00
|
%
|
|
|
12,000
|
|
|
|
-
|
|
|
|
11,742
|
|
|
|
258
|
|
|
|
39,280
|
|
|
LG Capital #3
|
|
3/10/2015
|
|
|
12
|
|
|
|
8.00
|
%
|
|
|
52,500
|
|
|
|
-
|
|
|
|
43,388
|
|
|
|
9,112
|
|
|
|
109,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
336,613
|
|
|
$
|
90,523
|
|
|
$
|
171,012
|
|
|
$
|
256,124
|
|
|
$
|
725,898
|
|
During the years ended September 30, 2015 and 2014, the Company issued an aggregate of 20,633,744 and 0 shares of common stock for conversion of convertible debts of $1,728,370 and $0 and decrease in derivative value due to conversion of $2,474,418 and $0, respectively.
|
|
(a)
|
During the year ended September 30, 2015, the note was defaulted due to insufficient authorized common share to fulfill conversion request, additional interest accrual recorded due to interest rate increased to 22% from 12% related to the default.
|
The Company issued convertible notes payable that provide for the issuance of convertible notes with variable conversion provisions. Pursuant to ASC 815-15 Embedded Derivatives, the fair values of the variable conversion option and warrants and shares to be issued were recorded as derivative liabilities once the note becomes convertible on the 180 days after the effective date.
The Company had the following convertible debt outstanding at September 30, 2014:
|
Lender
|
|
Date of
Agreement
|
|
Term
(Months)
|
|
|
Annual
Interest Rate
|
|
|
Face Value
|
|
|
Accrued
Interest
|
|
|
Discount
|
|
|
Deferred Debt
Origination Costs
Due at Maturity(c)
|
|
|
Net Convertible
Note Payable
|
|
|
Note Derivative
Liability
|
|
|
JMJ Financial
|
|
4/15/2014
|
|
|
24
|
|
|
|
5.83
|
%
|
(a)
|
$
|
100,000
|
|
|
$
|
1,342
|
|
|
$
|
95,379
|
|
|
$
|
11,111
|
|
|
$
|
17,074
|
|
|
$
|
117,809
|
|
|
KBM Worldwide
|
|
4/24/2014
|
|
|
9
|
|
|
|
8.00
|
%
|
|
|
103,500
|
|
|
|
4,809
|
|
|
|
-
|
|
|
|
-
|
|
|
|
108,309
|
|
|
|
-
|
|
|
KBM Worldwide
|
|
6/26/2014
|
|
|
9
|
|
|
|
8.00
|
%
|
|
|
53,000
|
|
|
|
1,487
|
|
|
|
-
|
|
|
|
-
|
|
|
|
54,487
|
|
|
|
-
|
|
|
JSJ Investments
|
|
4/29/2014
|
|
|
6
|
|
|
|
12.00
|
%
|
|
|
100,000
|
|
|
|
10,126
|
|
|
|
-
|
|
|
|
-
|
|
|
|
109,792
|
|
|
|
-
|
|
|
Adar Bays
|
|
5/20/2014
|
|
|
12
|
|
|
|
8.00
|
%
|
|
|
52,500
|
|
|
|
1,530
|
|
|
|
48,234
|
|
|
|
-
|
|
|
|
5,796
|
|
|
|
81,401
|
|
|
LG Capital
|
|
5/20/2014
|
|
|
12
|
|
|
|
8.00
|
%
|
|
|
52,500
|
|
|
|
1,530
|
|
|
|
48,234
|
|
|
|
-
|
|
|
|
5,796
|
|
|
|
68,626
|
|
|
Redwood Fund III
|
|
5/15/2014
|
|
|
6
|
|
|
|
7.85
|
%
|
(b)
|
|
100,000
|
|
|
|
5,934
|
|
|
|
-
|
|
|
|
-
|
|
|
|
105,934
|
|
|
|
-
|
|
|
Vista Capital Investments
|
|
6/16/2014
|
|
|
24
|
|
|
|
5.83
|
%
|
(b)
|
|
50,000
|
|
|
|
423
|
|
|
|
43,441
|
|
|
|
5,556
|
|
|
|
12,538
|
|
|
|
60,785
|
|
|
Tonaquint, Inc
|
|
7/10/2014
|
|
|
12
|
|
|
|
12.00
|
%
|
|
|
115,000
|
|
|
|
3,100
|
|
|
|
104,979
|
|
|
|
-
|
|
|
|
13,121
|
|
|
|
152,002
|
|
|
Union Capital
|
|
7/16/2014
|
|
|
12
|
|
|
|
8.00
|
%
|
|
|
30,000
|
|
|
|
533
|
|
|
|
-
|
|
|
|
-
|
|
|
|
30,533
|
|
|
|
-
|
|
|
Iconic Holding, LLC
|
|
7/16/2014
|
|
|
12
|
|
|
|
10.00
|
%
|
|
|
75,000
|
|
|
|
1,562
|
|
|
|
69,626
|
|
|
|
-
|
|
|
|
6,936
|
|
|
|
67,480
|
|
|
Auctus Private
|
|
7/29/2014
|
|
|
9
|
|
|
|
8.00
|
%
|
|
|
58,750
|
|
|
|
1,082
|
|
|
|
-
|
|
|
|
-
|
|
|
|
59,832
|
|
|
|
-
|
|
|
KBM Worldwide
|
|
8/11/2014
|
|
|
9
|
|
|
|
8.00
|
%
|
|
|
53,000
|
|
|
|
712
|
|
|
|
-
|
|
|
|
-
|
|
|
|
53,712
|
|
|
|
-
|
|
|
Vista Capital Investments
|
|
8/26/2014
|
|
|
24
|
|
|
|
5.83
|
%
|
(b)
|
|
25,000
|
|
|
|
70
|
|
|
|
24,766
|
|
|
|
2,777
|
|
|
|
3,081
|
|
|
|
28,000
|
|
|
KBM Worldwide
|
|
9/2/2014
|
|
|
9
|
|
|
|
8.00
|
%
|
|
|
47,500
|
|
|
|
389
|
|
|
|
-
|
|
|
|
-
|
|
|
|
47,889
|
|
|
|
-
|
|
|
JMJ Financial
|
|
9/3/20114
|
|
|
24
|
|
|
|
5.83
|
%
|
(a)
|
|
50,000
|
|
|
|
108
|
|
|
|
47,948
|
|
|
|
5,556
|
|
|
|
7,716
|
|
|
|
58,046
|
|
|
JSJ Investments
|
|
9/8/2014
|
|
|
6
|
|
|
|
12.00
|
%
|
|
|
100,000
|
|
|
|
1,447
|
|
|
|
87,602
|
|
|
|
-
|
|
|
|
13,845
|
|
|
|
217,078
|
|
|
Macallan Partners, LLC
|
|
9/9/2014
|
|
|
12
|
|
|
|
10.00
|
%
|
|
|
120,000
|
|
|
|
690
|
|
|
|
113,806
|
|
|
|
-
|
|
|
|
7,218
|
|
|
|
164,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,285,750
|
|
|
$
|
36,874
|
|
|
$
|
684,015
|
|
|
$
|
25,000
|
|
|
$
|
663,609
|
|
|
$
|
1,016,044
|
|
|
(a)
|
Implied interest rate. The note is subject to a one time 12% interest charge unless repaid within 90 days
|
|
(b)
|
Implied interest rate. The note is subject to a one time 12% interest charge regardless of how long it has been outstanding
|
|
(c)
|
Original Issue Discount due at maturity of the note
|
The following table summarizes conversion terms of the notes outstanding at September 30, 2015:
|
Lender
|
|
Date of Agreement
|
|
Term Of Conversion
|
|
Eligible for
Conversion
|
|
|
|
|
|
|
|
|
|
Redwood Fund III
|
|
May 15, 2014
|
|
Conversion Price shall be 55% of the lowest traded price, determined on the then current trading market for the Company’s common stock, for 20 trading days prior to conversion.
|
|
180 after the effective dates
|
|
JMJ Financial
|
|
October 22, 2014
|
|
Conversion Price shall be lesser of $0.06 or 60% of lowest trade price in the 25 trading days previous to conversion.
|
|
180 after the effective dates
|
|
Tonaquint, Inc
|
|
October 7, 2014
|
|
Conversion price shall be 65% (the “Conversion Factor”) of the lowest intra-day trade price of Borrower’s common stock (“Common Stock”) in the twenty-five (25) Trading Days immediately preceding the Conversion .
|
|
180 after the effective date
|
|
LG Capital #2
|
|
October 23, 2014
|
|
Conversion price shall be 50% of the lowest trading price of the Common Stock as reported on the National Quotations Bureau OTCQB exchange which the Company’s shares are traded or any exchange upon which the Common Stock may be traded in the future, for the twenty prior trading days including the day upon which a Notice of Conversion is received by the Company.
|
|
180 after the effective date
|
|
Cardinal Capital Group
|
|
November 6, 2014
|
|
Conversion price shall equal the lesser of (a) $0.05 or (b) 60% of the lowest trade occurring during the twenty five (25) consecutive Trading Days immediately preceding the applicable Conversion Date on which the Holder elects to convert all or part of this Note, subject to adjustment as provided in this Note.
|
|
180 after the effective date
|
|
Rock Capital
|
|
February 6, 2015
|
|
Conversion price shall equal be 55% of the lowest closing bid price of the Common Stock as reported on the National Quotations Bureau OTCQB exchange which the Company’s shares are traded or any exchange upon which the Common Stock may be traded in the future ("Exchange"), for the twenty prior trading days including the day upon which a Notice of Conversion is received by the Company (provided such Notice of Conversion is delivered by fax or other electronic method of communication to the Company after 4 P.M. Eastern Standard or Daylight Savings Time if the Holder wishes to include the same day closing price).
|
|
180 after the effective date
|
|
Union Capital
|
|
February 17, 2015
|
|
Conversion price shall equal be 55% of the lowest closing bid price of the Common Stock as reported on the National Quotations Bureau OTCQB exchange which the Company’s shares are traded or any exchange upon which the Common Stock may be traded in the future ("Exchange"), for the twenty prior trading days including the day upon which a Notice of Conversion is received by the Company (provided such Notice of Conversion is delivered by fax or other electronic method of communication to the Company after 4 P.M. Eastern Standard or Daylight Savings Time if the Holder wishes to include the same day closing price).
|
|
180 after the effective dates
|
|
Adar Bay
|
|
February 19, 2015
|
|
Conversion price shall equal be 50% of the lowest trading price of the Common Stock as reported on the National Quotations Bureau OTCQB exchange which the Company’s shares are traded or any exchange upon which the Common Stock may be traded in the future, for the twenty prior trading days including the day upon which a Notice of Conversion is received by the Company.
|
|
180 after the effective date
|
|
LG Capital #3
|
|
March 10, 2015
|
|
Conversion price shall equal be 60% of the lowest trading price of the Common Stock as reported on the National Quotations Bureau OTCQB exchange which the Company’s shares are traded or any exchange upon which the Common Stock may be traded in the future, for the twenty prior trading days including the day upon which a Notice of Conversion is received by the Company.
|
|
180 after the effective date
|
As of September 30, 2015, Company recorded the following deferred origination costs related to the convertible notes:
|
Lender
|
|
Date of
Agreement
|
|
Finder's Fees
|
|
|
Deferred Debt
Origination Costs
Due at Maturity
|
|
|
Legal and Other
Debt Origination
Costs
|
|
|
Deferred Debt
Origination Costs at
September 30, 2014
|
|
|
Additions
|
|
|
Amortization
|
|
|
Deferred
Debt
Origination
Costs at
September
30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JMJ Financial #1
|
|
04/15/14
|
|
$
|
10,000
|
|
|
$
|
11,111
|
|
|
$
|
-
|
|
|
$
|
18,896
|
|
|
$
|
-
|
|
|
$
|
18,896
|
|
|
$
|
-
|
|
|
KBM Worldwide #1
|
|
04/24/14
|
|
|
10,000
|
|
|
|
-
|
|
|
|
3,500
|
|
|
|
7,692
|
|
|
|
-
|
|
|
|
7,692
|
|
|
|
-
|
|
|
KBM Worldwide #2
|
|
06/26/14
|
|
|
5,000
|
|
|
|
-
|
|
|
|
3,000
|
|
|
|
6,247
|
|
|
|
-
|
|
|
|
6,247
|
|
|
|
-
|
|
|
JSJ Investments #1
|
|
04/29/14
|
|
|
10,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,562
|
|
|
|
-
|
|
|
|
1,562
|
|
|
|
-
|
|
|
Adar Bay
|
|
05/20/14
|
|
|
5,000
|
|
|
|
-
|
|
|
|
2,500
|
|
|
|
4,900
|
|
|
|
-
|
|
|
|
4,900
|
|
|
|
-
|
|
|
LG Capital
|
|
05/20/14
|
|
|
5,000
|
|
|
|
-
|
|
|
|
2,500
|
|
|
|
4,900
|
|
|
|
-
|
|
|
|
4,900
|
|
|
|
-
|
|
|
Redwood Fund III
|
|
05/15/14
|
|
|
10,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,438
|
|
|
|
-
|
|
|
|
2,438
|
|
|
|
-
|
|
|
Vista Capital Investments #1
|
|
06/16/14
|
|
|
5,000
|
|
|
|
5,556
|
|
|
|
-
|
|
|
|
9,860
|
|
|
|
-
|
|
|
|
9,860
|
|
|
|
-
|
|
|
Various
|
|
Various
|
|
|
-
|
|
|
|
-
|
|
|
|
52,500
|
|
|
|
25,596
|
|
|
|
18,700
|
|
|
|
29,956
|
|
|
|
14,340
|
|
|
Tonaquint, Inc #1
|
|
07/10/14
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
5,000
|
|
|
|
23,898
|
|
|
|
-
|
|
|
|
23,898
|
|
|
|
-
|
|
|
Union Capital
|
|
07/16/14
|
|
|
-
|
|
|
|
-
|
|
|
|
4,500
|
|
|
|
4,500
|
|
|
|
-
|
|
|
|
4,500
|
|
|
|
-
|
|
|
Iconic Holding, LLC
|
|
07/16/14
|
|
|
6,750
|
|
|
|
7,500
|
|
|
|
-
|
|
|
|
14,250
|
|
|
|
-
|
|
|
|
14,250
|
|
|
|
-
|
|
|
Acutus Private
|
|
07/29/14
|
|
|
5,250
|
|
|
|
-
|
|
|
|
6,250
|
|
|
|
10,292
|
|
|
|
-
|
|
|
|
10,292
|
|
|
|
-
|
|
|
KBM Worldwide #3
|
|
08/11/14
|
|
|
5,000
|
|
|
|
-
|
|
|
|
3,000
|
|
|
|
7,160
|
|
|
|
-
|
|
|
|
7,160
|
|
|
|
-
|
|
|
Vista Capital Investments #2
|
|
08/26/14
|
|
|
2,500
|
|
|
|
2,777
|
|
|
|
-
|
|
|
|
5,277
|
|
|
|
-
|
|
|
|
5,277
|
|
|
|
-
|
|
|
KBM Worldwide #4
|
|
09/02/14
|
|
|
4,500
|
|
|
|
-
|
|
|
|
2,500
|
|
|
|
6,540
|
|
|
|
-
|
|
|
|
6,540
|
|
|
|
-
|
|
|
JMJ Financial #2
|
|
09/03/14
|
|
|
5,000
|
|
|
|
5,556
|
|
|
|
-
|
|
|
|
10,556
|
|
|
|
-
|
|
|
|
10,556
|
|
|
|
-
|
|
|
JSJ Investments #2
|
|
09/08/14
|
|
|
10,000
|
|
|
|
-
|
|
|
|
2,000
|
|
|
|
11,759
|
|
|
|
-
|
|
|
|
11,759
|
|
|
|
-
|
|
|
Macallan Partners, LLC
|
|
09/09/14
|
|
|
-
|
|
|
|
12,000
|
|
|
|
-
|
|
|
|
12,000
|
|
|
|
-
|
|
|
|
12,000
|
|
|
|
-
|
|
|
Tonaquint, Inc #2
|
|
10/07/14
|
|
|
10,000
|
|
|
|
5,000
|
|
|
|
15,000
|
|
|
|
-
|
|
|
|
30,000
|
|
|
|
14,902
|
|
|
|
15,098
|
|
|
JMJ Financial # 3
|
|
10/22/14
|
|
|
5,000
|
|
|
|
-
|
|
|
|
5,556
|
|
|
|
-
|
|
|
|
10,556
|
|
|
|
5,556
|
|
|
|
5,000
|
|
|
LG Capital #2
|
|
10/23/14
|
|
|
5,000
|
|
|
|
2,500
|
|
|
|
2,500
|
|
|
|
-
|
|
|
|
10,000
|
|
|
|
9,494
|
|
|
|
506
|
|
|
Cardinal Group
|
|
11/06/14
|
|
|
-
|
|
|
|
8,500
|
|
|
|
6,500
|
|
|
|
-
|
|
|
|
15,000
|
|
|
|
5,667
|
|
|
|
9,333
|
|
|
KBM Worldwide #7
|
|
01/12/15
|
|
|
-
|
|
|
|
4,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,500
|
|
|
|
-
|
|
|
|
4,500
|
|
|
Rock Capital
|
|
02/06/15
|
|
|
-
|
|
|
|
1,000
|
|
|
|
4,500
|
|
|
|
-
|
|
|
|
5,500
|
|
|
|
189
|
|
|
|
5,311
|
|
|
Union Capital #3
|
|
02/17/15
|
|
|
-
|
|
|
|
1,500
|
|
|
|
4,500
|
|
|
|
-
|
|
|
|
6,000
|
|
|
|
4,500
|
|
|
|
1,500
|
|
|
Adar Bay #2
|
|
02/19/15
|
|
|
-
|
|
|
|
3,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,500
|
|
|
|
-
|
|
|
|
3,500
|
|
|
LG Capital #3
|
|
03/10/15
|
|
|
-
|
|
|
|
4,000
|
|
|
|
7,500
|
|
|
|
-
|
|
|
|
11,500
|
|
|
|
8,878
|
|
|
|
2,622
|
|
|
Vista #3
|
|
03/02/15
|
|
|
-
|
|
|
|
-
|
|
|
|
5,800
|
|
|
|
-
|
|
|
|
5,800
|
|
|
|
5,800
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
$
|
129,000
|
|
|
$
|
85,000
|
|
|
$
|
139,106
|
|
|
$
|
188,323
|
|
|
$
|
121,056
|
|
|
$
|
247,669
|
|
|
$
|
61,710
|
|
As of September 30, 2014, Company recorded the following deferred origination costs related to the convertible notes:
|
Lender
|
|
Date of
Agreement
|
|
Transaction
Costs
|
|
|
Deferred
Debt
Origination
Costs Due at
Maturity
|
|
|
Legal and
Other Debt
Origination
Costs
|
|
|
Initial
Deferred
Origination
Costs
|
|
|
Amortization
|
|
|
Net Deferred
Debt
Origination
Costs
|
|
|
JMJ Financial
|
|
4/15/2014
|
|
$
|
10,000
|
|
|
$
|
11,111
|
|
|
$
|
-
|
|
|
$
|
21,111
|
|
|
$
|
2,215
|
|
|
$
|
18,896
|
|
|
KBM Worldwide
|
|
4/24/2014
|
|
|
10,000
|
|
|
|
-
|
|
|
|
3,500
|
|
|
|
13,500
|
|
|
|
5,808
|
|
|
|
7,692
|
|
|
KBM Worldwide
|
|
6/26/2014
|
|
|
5,000
|
|
|
|
-
|
|
|
|
3,000
|
|
|
|
8,000
|
|
|
|
1,753
|
|
|
|
6,247
|
|
|
JSJ Investments
|
|
4/29/2014
|
|
|
10,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,000
|
|
|
|
8,438
|
|
|
|
1,562
|
|
|
Adar Bays
|
|
5/20/2014
|
|
|
5,000
|
|
|
|
-
|
|
|
|
2,500
|
|
|
|
7,500
|
|
|
|
2,600
|
|
|
|
4,900
|
|
|
LG Capital
|
|
5/20/2014
|
|
|
5,000
|
|
|
|
-
|
|
|
|
2,500
|
|
|
|
7,500
|
|
|
|
2,600
|
|
|
|
4,900
|
|
|
Redwood Fund III
|
|
5/15/2014
|
|
|
10,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,000
|
|
|
|
7,562
|
|
|
|
2,438
|
|
|
Vista Capital Investments
|
|
6/16/2014
|
|
|
5,000
|
|
|
|
5,556
|
|
|
|
-
|
|
|
|
10,556
|
|
|
|
696
|
|
|
|
9,860
|
|
|
Various
|
|
Various
|
|
|
-
|
|
|
|
-
|
|
|
|
33,800
|
|
|
|
33,800
|
|
|
|
5,693
|
|
|
|
28,107
|
|
|
Tonaquint, Inc
|
|
7/10/2014
|
|
|
10,000
|
|
|
|
-
|
|
|
|
15,000
|
|
|
|
25,000
|
|
|
|
1,102
|
|
|
|
23,898
|
|
|
Union Capital
|
|
7/16/2014
|
|
|
-
|
|
|
|
-
|
|
|
|
4,500
|
|
|
|
4,500
|
|
|
|
-
|
|
|
|
4,500
|
|
|
Iconic Holding, LLC
|
|
7/16/2014
|
|
|
6,750
|
|
|
|
-
|
|
|
|
7,500
|
|
|
|
14,250
|
|
|
|
-
|
|
|
|
14,250
|
|
|
Auctus Private
|
|
7/29/2014
|
|
|
5,250
|
|
|
|
-
|
|
|
|
6,250
|
|
|
|
11,500
|
|
|
|
1,208
|
|
|
|
10,292
|
|
|
KBM Worldwide
|
|
8/11/2014
|
|
|
5,000
|
|
|
|
-
|
|
|
|
3,000
|
|
|
|
8,000
|
|
|
|
840
|
|
|
|
7,160
|
|
|
Vista Capital Investments
|
|
8/26/2014
|
|
|
2,500
|
|
|
|
2,777
|
|
|
|
-
|
|
|
|
5,277
|
|
|
|
-
|
|
|
|
5,277
|
|
|
KBM Worldwide
|
|
9/2/2014
|
|
|
4,500
|
|
|
|
-
|
|
|
|
2,500
|
|
|
|
7,000
|
|
|
|
460
|
|
|
|
6,540
|
|
|
JMJ Financial
|
|
9/3/2014
|
|
|
5,000
|
|
|
|
5,556
|
|
|
|
-
|
|
|
|
10,556
|
|
|
|
-
|
|
|
|
10,556
|
|
|
JSJ Investments
|
|
9/8/2014
|
|
|
10,000
|
|
|
|
-
|
|
|
|
2,000
|
|
|
|
12,000
|
|
|
|
241
|
|
|
|
11,759
|
|
|
Macallan Partners, LLC
|
|
9/9/2014
|
|
|
-
|
|
|
|
-
|
|
|
|
12,000
|
|
|
|
12,000
|
|
|
|
-
|
|
|
|
12,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
109,000
|
|
|
$
|
25,000
|
|
|
$
|
98,050
|
|
|
$
|
232,050
|
|
|
$
|
41,216
|
|
|
$
|
190.834
|
|
Note 5 – Derivative Liabilities
As described in Notes 3 and 8, the Company has identified embedded derivatives in notes payables and outstanding warrants.
The fair value of the embedded derivatives related to the convertible notes payable, comprising conversion feature with the reset provisions and the default provisions, at issuance and September 30, 2015 and 2014 was determined using the multinomial lattice models that value the derivative liability based on a probability weighted discounted cash flow model. These models are based on future projections of the various potential outcomes and utilize the following assumptions:
|
|
·
|
The stock price would fluctuate with the Company projected volatility;
|
|
|
·
|
The Derivative Convertible Notes convert at
40%
to
60%
of the market prices;
|
|
|
·
|
An event of default would occur initially 0% of the time, increasing 1.00% per month until it reaches 10%;
|
|
|
·
|
The projected volatility curve for each valuation period was based on the historical volatility of the Company, ranging between 200% and 260%;
|
|
|
·
|
The Company would redeem the notes initially 0% of the time, and increase monthly by 1.00% to a maximum of 5.00%;
|
|
|
·
|
The holders of the notes would automatically convert the notes at the maximum of two times the conversion price if the Company is not in default, with the target conversion price dropping as maturity approaches; and
|
|
|
·
|
The Holder would convert the note early after 0-90-180 days and at maturity if the registration was effective and the Company was not in default.
|
As discussed in Note 4, the Company issued convertible notes payable that provide for the issuance of convertible notes with variable conversion provisions. The conversion terms of the convertible notes are variable based on certain factors, such as the future price of the Company’s common stock. The number of shares of common stock to be issued is based on the future price of the Company’s common stock. The number of shares of common stock issuable upon conversion of the promissory note is indeterminate. Due to the fact that the number of shares of common stock issuable could exceed the Company’s authorized share limit, the equity environment is tainted and all additional convertible debentures and warrants are included in the value of the derivative. Pursuant to ASC 815-15 Embedded Derivatives, the fair values of the variable conversion option and warrants and shares to be issued were recorded as derivative liabilities on the issuance date.
The fair value of the embedded derivatives related to the tainted outstanding warrants, comprising exercise feature with the full ratchet reset, at September 30, 2015 and 2014 was determined using the lattice models that value the derivative liability based on a probability weighted discounted cash flow model. These models are based on future projections of the various potential outcomes and utilize the following assumptions:
|
|
·
|
The stock price would fluctuate with the Company projected volatility;
|
|
|
·
|
The stock price would fluctuate with an annual volatility. The projected volatility curve for each valuation period was based on the historical volatility of the Company, ranging between 101% and 103%;
|
|
|
·
|
The Holder would exercise the warrant as they become exercisable at target prices of two times
the higher of the projected reset price or stock price;
|
|
|
·
|
The Warrants with the $0.355; $0.28; and $0.275 exercise prices are fixed and not projected to adjust; and
|
|
|
·
|
The Feltang Warrants expired in the period ending September 30, 2014 without being exercised.
|
The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date and to fair value as of each subsequent reporting date which at September 30, 2015 and 2014 was an aggregate of $725,898 and 1,021,942.
During the years ended September 30, 2015 and 2014, the Company recorded an aggregate loss of $105,951 and gain of $136,811 on change in fair value of derivative liabilities and $1,024,292 and $392,220 day 1 loss on embedded derivative upon recognition of these derivatives, respectively. See Note 3 for more information.
Note 6 – Oil and Gas Concessions
Following is an analysis of the cost of oil and gas concessions at September 30, 2015 and 2014:
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
DRSTP concession
|
|
$
|
3,113,795
|
|
|
$
|
3,113,795
|
|
|
Chad concession
|
|
|
2,800,600
|
|
|
|
2,800,600
|
|
|
Pending concessions in other African countries
|
|
|
101,619
|
|
|
|
91,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,016,014
|
|
|
$
|
6,006,235
|
|
Republic of Kenya Concession Fees and Other Financial Commitments
On June 28, 2012, ERHC entered into a production sharing contract ("PSC") with the Government of the Republic of Kenya for certain onshore hydrocarbon exploration and production of Block 11A located in northwestern Kenya.
ERHC is also committed under the PSC to:
|
|
a.
|
pay surface fees of $60,000 per year and annual training fees of $175,000 per year during the initial exploration term of two years that started in the first quarter of 2013,
|
|
|
b.
|
spend at least $10,250,000 over the first two years on a minimum work program, and an additional $30,000,000 in each of the following two periods of two years each.
|
In October, 2013, the Company entered into a farm-out agreement with CEPSA Kenya Limited, an affiliate of Compañía Española de Petróleos, S.A.U., an international oil and gas company ("CEPSA"). Under the terms of this agreement, the Company assigned and transferred 55% of its participating interest in Kenya Block 11A to CEPSA. Pursuant to the agreement, the Company received farm-in fee of $2,000,000, reimbursement of $2,175,966 of exploration costs incurred, and recovery of capitalized concession costs of $555,642 for the year ended September 30, 2014. In connection with this farm-out, the Company recognized a gain of $239,515 and $2,724,793, during the years ended September 30, 2015 and 2014, respectively.
In exchange for the transferred rights, CEPSA will carry the Company's proportionate share of obligations and financial costs under the terms and conditions outlined in the farm-out agreement. The agreement was approved in January 2014 by the Kenyan Government and from February 2014, CEPSA took over from ERHC as operator under the production sharing contract ("PSC") for Kenya Block 11A.
Republic of Chad Concession Fees and Other Financial Commitments
On June 30, 2011, ERHC entered into a production sharing contract ("PSC") with Chad for certain onshore hydrocarbon exploration and development. In September 2013, the Ministry of Energy and Petroleum of Chad approved ERHC’s application to voluntarily relinquish two of the three Blocks covered by the PSC.
The following is an analysis of the costs paid or incurred at September 30, 2015 and 2014:
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
Signature bonus
|
|
$
|
2,000,000
|
|
|
$
|
2,000,000
|
|
|
Advisers’ and ancillary costs related to the PSC
|
|
|
320,600
|
|
|
|
320,600
|
|
|
Legal fees and costs for the drafting and negotiation of the PSC, as provided in PSC
|
|
|
480,000
|
|
|
|
480,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,800,600
|
|
|
$
|
2,800,600
|
|
ERHC is also committed under the PSC to:
|
|
a.
|
spend at least $15,000,000 over the first five years on a minimum work program and at least an additional $1,000,000 over a further period of up to three years
|
|
|
b.
|
incur surface fees of $16,360 per calendar year during the first validity period starting on July 12, 2012, and lasting for up to eight years. Surface fees for subsequent periods will depend on the exploration progress as well as on the acreage retained by ERHC.
|
Sao Tome Concession
In April 2003, the Company and the DRSTP entered into an Option Agreement (the “2003 Option Agreement”) in which the Company relinquished certain financial interests in the JDZ in exchange for exploration rights in the JDZ. The Company additionally entered into an administration agreement with the Nigeria-Sao Tome and Principe JDA. The administration agreement is the formal agreement by the JDA that it will fully implement ERHC’s preferential rights to working interests in the JDZ acreage as set forth in the 2003 Option Agreement and describes certain procedures regarding the exercising of these rights. However, ERHC retained under a previous agreement the following rights to participate in exploration and production activities in the EEZ subject to certain restrictions: (a) the right to receive 100% working interest signature free bonus of two blocks of ERHC’s choice and (b) the option to acquire up to a 15% paid working interest in up to two additional blocks of ERHC’s choice in the EEZ. The Company would be responsible for its proportionate share of exploration and exploitation costs in the EEZ blocks.
The following represents ERHC’s current rights in the JDZ and EEZ blocks:
|
Block
|
|
|
ERHC
Original Participating Interest
|
|
|
|
ERHC Joint Bid
Participating
Interest
|
|
|
|
Participating
Interest(s)
Transferred
|
|
|
|
Current ERHC
Retained
Participating
Interest
|
|
|
Remaining
Cost Allocated
to Blocks
|
|
|
JDZ 2
|
|
|
30.00%
|
|
|
|
35.00%
|
|
|
|
43.00%
|
|
|
|
22.00%
|
|
|
$
|
-
|
|
|
JDZ 3
|
|
|
20.00%
|
|
|
|
5.00%
|
|
|
|
15.00%
|
|
|
|
10.00%
|
|
|
|
-
|
|
|
JDZ 4
|
|
|
25.00%
|
|
|
|
35.00%
|
|
|
|
40.50%
|
|
|
|
19.50%
|
|
|
|
-
|
|
|
JDZ 5
|
|
|
15.00%
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15.00% (in arbitration)
|
|
|
|
567,900
|
|
|
JDZ 6
|
|
|
15.00%
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15.00% (in arbitration)
|
|
|
|
567,900
|
|
|
JDZ 9
|
|
|
20.00%
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20.00%
|
|
|
|
567,900
|
|
|
EEZ 4
|
|
|
100.00%
|
|
|
|
-
|
|
|
|
-
|
|
|
|
100.00%
|
|
|
|
567,900
|
|
|
EEZ 11
|
|
|
100.00%
|
|
|
|
-
|
|
|
|
-
|
|
|
|
100.00%
|
|
|
|
842,195
|
|
The Original Participating Interest is the interest granted pursuant to the Option Agreement, dated April 2, 2003, between DRSTP and ERHC (the “2003 Option Agreement”).
Under the terms each of the Participation Agreements Sinopec and Addax agreed to pay all of ERHC’s future costs for petroleum operations (“the carried costs”) in respect of ERHC's retained interests in JDZ blocks 2,3 and 4. Additionally, Sinopec and Addax are entitled to 100% of ERHC’s allocation of cost oil plus up to 50% of ERHC’s allocation of profit oil from the retained interests on individual blocks until Sinopec and Addax Sub recover 100% of ERHC’s carried costs.
The remaining $3,113,795 of cost related to the DRSTP concession, as shown on the Company's balance sheet at September 30, 2015 and 2014, relate to blocks 5, 6 and 9 of the JDZ, and the Company's EEZ blocks. Production Sharing Contracts are yet to be signed on block 4. As of September 30, 2015, blocks 5 and 6 are in arbitration (see Note 9).
Note 7 – Income Taxes
The composition of deferred tax assets and the related tax effects at September 30, 2015 and 2014 are as follows:
|
|
|
2015
|
|
|
2014
|
|
|
Net operating losses
|
|
$
|
10,932,812
|
|
|
$
|
8,753,206
|
|
|
Allowance for loss on deposits
|
|
|
1,443,651
|
|
|
|
1,799,584
|
|
|
Other
|
|
|
1,702,196
|
|
|
|
827,010
|
|
|
Total deferred tax assets
|
|
|
14,078,659
|
|
|
|
11,379,800
|
|
|
Valuation allowance
|
|
|
(14,078,659
|
)
|
|
|
(11,379,800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
The difference between the income tax benefit (provision) in the accompanying statement of operations and the amount that would result if the U.S. Federal statutory rate of 34% were applied to pre-tax income (loss) for years ended September 30, 2015 and 2014, is as follows:
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit at federal statutory rate
|
|
$
|
2,254,677
|
|
|
$
|
673,402
|
|
|
Change in valuation allowance
|
|
|
(3,408,739
|
)
|
|
|
(637,154
|
)
|
|
Expiration and adjustment of NOLs
|
|
|
1,019,766
|
|
|
|
(94,021
|
)
|
|
Stock compensation
|
|
|
(2,856
|
)
|
|
|
(9,166
|
)
|
|
Other
|
|
|
137,152
|
|
|
|
66,939
|
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
In preparing the Company’s consolidated financial statements, the Company assesses the likelihood that its deferred tax assets will be realized from future taxable income. The Company establishes a valuation allowance if it determines that it is more likely than not that some portion of the deferred tax assets will not be realized. Changes in the valuation allowance, when recorded, would be included in its consolidated statements of operations as a provision for (benefit from) income taxes. The Company exercise significant judgment in determining its provisions for income taxes, its deferred tax assets and liabilities and its future taxable income for purposes of assessing its ability to utilize any future tax benefit from its deferred tax assets. During 2015, the Company assessed the need for a valuation allowance against its deferred tax assets. The deferred tax asset valuation allowance was $14,078,659 as of September 30, 2015. The valuation allowance relates primarily to the net operating losses and various expense deductions for which a tax benefit is currently unavailable.
At September 30, 2015, the Company has Federal net operating loss carry forward of approximately $32,155,328. The federal loss carry forward expires on various dates through 2035.
Uncertainty in Tax Positions
On October 1, 2007, the Company adopted the guidance related to accounting for uncertainty in income taxes, which provides a financial statement recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. Under ASC 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and income tax disclosures.
The Company is subject to taxation in the United States and various foreign jurisdictions. The Company’s tax years for 2007 through 2014 are subject to examination by the tax authorities. The Company is currently under examination by the Internal Revenue Service for the 2006 tax year. Management has determined that the Company has no uncertain tax positions requiring recognition under ASC 740 as of September 30, 2015 and 2014.
Note 8 – Shareholders’ Equity
Common Stock
During the years ended September 30, 2015 and 2014, the Company issued 2,100 and 3,448 shares common stocks and recognized compensation expense of $8,400 and $20,001, respectively, related to service granted to the Board of Directors.
During the years ended September 30, 2015 and 2014, the Company issued an aggregate of 20,633,744 and 0 shares of common stock for conversion of convertible debts of $1,728,370 and $0 and decrease in derivative value due to conversion of $2,474,418 and $0, respectively.
During the years ended September 30, 2015 and 2014, the Company issued of 928,254 and 0 shares of common stock to its related party for conversion of convertible debts of $250,000 and $0 and decrease in derivative value due to conversion of $432,646 and $0 respectively.
Stock Options
On January 6, 2012, the Board of Directors granted a total of 47,500 stock options to officers and board of directors members of the Company under the Company’s 2004 Stock Option Plan. The options vest over two years, are exercisable for a period of 2 years and have a $20 strike price. However, the options are only exercisable if the Company’s share price reaches $75 per share and remains consistently at or above that level for a period of one month. They have a grant-date fair value of $63,711 or $13 per share based on and independent valuation of the options using a lattice model and the following weighted average assumptions:
|
Risk free interest rate
|
|
|
0.25
|
%
|
|
Dividend yield
|
|
|
0.00
|
%
|
|
Annual volatility
|
|
|
105.97
|
%
|
|
Exit/Attrition rates
|
|
|
2.00
|
%
|
|
Target exercise multiple
|
|
|
2.14
|
%
|
During the years ended September 30, 2015 and 2014, the Company recognized compensation expense of $0 and $6,957, respectively, related to the options grant as described above. As of September 30, 2015, there are 41,500 fully-vested options outstanding; none of which are exercisable.
Stock Warrants
On October 6, 2010, an equivalent of 68,182 warrants with a term of 5 years and an exercise price of $28 were issued to the investors along with the common shares sold. ERHC also issued to the placement agent a total of 4,596 warrants which have an exercise price of $27.5 and a term of approximately 5 years. At September 30, 2015, 68,182 warrants remain outstanding with an average exercise price of $28 per share and an average remaining life of 0.02 years. During the years ended September 30, 2015 and 2014, 4,596 and 65,000 warrants expired unexercised, respectively.
Stock Warrants Summary
Information regarding warrant, their respective changes and their weighted average exercise prices as of and for the fiscal years ended September 30, 2015 and 2014 are as follows:
|
Description
|
|
Warrants
|
|
|
Weighted
Average
Exercise Price
|
|
|
Market Price
Intrinsic Value
|
|
|
Balance at September 30, 2013
|
|
|
137,778
|
|
|
$
|
32
|
|
|
|
-
|
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Expired or cancelled
|
|
|
65,000
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2014
|
|
|
72,778
|
|
|
$
|
28
|
|
|
|
-
|
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Expired or cancelled
|
|
|
4,596
|
|
|
$
|
28
|
|
|
|
|
|
|
Balance at September 30, 2015
|
|
|
68,182
|
|
|
|
|
|
|
|
-
|
|
There was no unrecognized compensation cost for the above warrants as of September 30, 2015 and 2014.
Note 9 – Related Party Transactions
On February 17, 2015, the Company entered into a convertible debt agreement with Chrome Oil Services, Limited, majority shareholder, for a principal amount of $250,000 with interest rate at 8% for 12 months. The debt is convertible into securities of the Company at a conversion price calculated as fifty five percent (55%) of the lowest trade price in the twenty (20) trading days previous to the conversion date. On February 19, 2015, the debt was converted into 928,254 shares of common stock and the Company recognized resolution of derivative liability of $432,646 in APIC conversion.
Note 10 – Commitments and Contingencies
Republic of Kenya Concession Fees and Other Financial Commitments
On June 28, 2012, ERHC entered into a production sharing contract ("PSC") with the Government of the Republic of Kenya for certain land based hydrocarbon exploration and production of Block 11A located in northwestern Kenya.
In October, 2013, the Company entered into a farm-out agreement with CEPSA Kenya Limited, an affiliate of Compañía Española de Petróleos, S.A.U., an international oil and gas company ("CEPSA"). Under the terms of this agreement, the Company assigned and transferred 55% of its participating interest in Kenya Block 11A to CEPSA. In exchange for the transferred rights, CEPSA will carry the Company's proportionate share of obligations and financial costs under the terms and conditions outlined in the farm-out agreement. The agreement was approved in January 2014 by the Kenyan Government and from February 2014, CEPSA took over from ERHC as operator under the production sharing contract ("PSC") for Kenya Block 11A.
Republic of Chad Concession Fees and Other Financial Commitments
On June 30, 2011, ERHC entered into a production sharing contract ("PSC") with Chad for certain onshore hydrocarbon exploration and development. In September 2013, the Ministry of Energy and Petroleum of Chad approved ERHC's application to voluntarily relinquish two of the three Blocks covered by the PSC.
As of September 30, 2015, ERHC has paid or incurred:
|
a.
|
$2,000,000 as the entire signature bonus
|
|
b.
|
$320,600 in advisers' and ancillary costs related to the PSC
|
|
c.
|
$480,000 as legal fees and costs for the drafting and negotiation of the PSC, as provided for in the PSC
|
|
d.
|
$190,872 as costs of Environmental Impact Study, as provided for in the PSC
|
|
e.
|
$448,000 on Aeromagnetic data acquisition survey, in fulfilment of work program obligations under the PSC
|
|
f.
|
$378,374 2014/2015 Training and Surface rental Fess, as provided in the PSC
|
Insurance recovery for loss on Certificates of Deposit
During the years ended September 30, 2010 and 2009, the Company recognized losses on certificates of deposit of $1,058,579 and $4,234,317 to record the certificates at their estimated net realizable basis, based on the fact that certain restrictions were placed on the investment and a receiver was appointed to take over the institution and the Company had filed an insurance claim for recovery of these losses. During the years ended September 30, 2015 and 2014, the Company recovered $1,046,862 and $0, respectively from its loss on certificate of deposit.
Legal Proceedings
JDZ BLOCKS 5 AND 6
Arbitration and Lawsuit
Lawsuit
The Company's rights in JDZ Blocks 5 and 6 are currently the subject of legal proceedings at the London Court of International Arbitration a
nd the Federal High Court in Abuja, Nigeria. The Company instituted both proceedings in November 2008 against the JDA and the Governments of Nigeria and Săo Tomé and Príncipe.
The Company seeks legal clarification that its rights in the two Blocks remain intact.
The issue in contention is contractual. The Company was awarded a 15 percent working interest in each of the Blocks in a 2004/5 bid/licensing round conducted by the JDA following the Company's exercise of preferential rights in the Blocks as guaranteed by contract and treaty. The JDA and the Government of STP contend that certain correspondence issued by a previous CEO/President of the Company in 2006 amount to a relinquishment of the Company's rights in Blocks 5 and 6 under the Company's contracts with STP which provide for the rights. The Company contends that no such relinquishment has occurred and has sought recourse to arbitration accordingly. It also filed the suit to prevent any tampering with its said rights in JDZ Blocks 5 and 6 pending the outcome of arbitration.
Proceedings on the suit and the arbitration are currently suspended while the Company pursues amicable settlement with the Governments of Nigeria and Săo Tomé & Príncipe.
Routine Claims
From time to time, ERHC may be subject to routine litigation, claims, or disputes in the ordinary course of business. ERHC intends to defend these matters vigorously; the Company cannot predict with certainty, however, the outcome or effect of any of the litigation or investigatory matters specifically described above or any other pending litigation or claims. There can be no assurance as to the ultimate outcome of these lawsuits and investigations.
Operating Lease
ERHC leases office space at 5444 Westheimer Road, Houston, Texas. The lease for office space expires July 31, 2017. The lease calls for monthly base rent payments of $9,825 for approximately 5,200 square feet. During the years ended September 30, 2015 and 2014, ERHC incurred lease expenses of $117,895 and $117,895, respectively. The future remaining annual minimum lease payments under this lease are as follows:
|
Year Ended
September 30,
|
|
Amount
|
|
|
|
|
|
|
|
2016
|
|
$
|
131,638
|
|
|
2017
|
|
|
110,968
|
|
|
2018
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
$
|
242,606
|
|
The Company also leases various office spaces located outside of the United States with terms ranging from 6 months to 6 years. Total rent expense under these leases for the years ended September 30, 2015 and 2014 amount to $159,177 and $168,427, respectively.
Note 11 – Subsequent Events
On October 8, 2015, Adar Bays LLC, converted its total outstanding principal balance of $12,000 into 252,743 shares of the Company’s common stock.
Subsequent to September 30, 2015, Union Capital, LLC converted its total principal balance of $15,000 into 261,827 shares of the Company’s common stock.
Subsequent to September 30, 2015, the Company has reached an agreement with Kosmos Energy (NYSE: KOS), a leading independent oil and gas exploration and production company to transfer
all ERHC's rights to Block 11 of the Săo Tomé and Principe Exclusive Economic Zone (EEZ) to Kosmos. The agreement has been approved by the National Petroleum Agency of Sao Tome & Principe ("ANP-STP") as required in the requisite Production Sharing Contract
("PSC") for EEZ Block 11. In consideration for the transfer (Sale & Purchase Agreement), ERHC will be entitled to receive from Kosmos as follow:
|
|
·
|
A limited refund of verifiable past costs of which $1.5 million has been received to date.
|
|
|
·
|
Cash consideration of $2.5 million.
|
|
|
·
|
Further value consideration dependent on whether exploration (i) proceeds through seismic to drilling of wells and (ii) results in a commercial discovery and production.
|
On December 15, 2015, ERHCs' shareholders approved a proposal authorizing ERHCs' Board of Directors to effect a one hundred for-one reverse stock split of ERHC's common stock.
The reverse stock split took effect on January 15, 2016. The number of common stocks for periods presented in the consolidated financial statements has been retroactively adjusted to reflect the one-for-hundred reverse stock split.
